Tuesday, October 6, 2015

What are “closing costs” and who pays them?

If you’ve ever been involved with a real estate transaction before than you have had this term many times. But many people wonder “What exactly are closing costs?”

Simply stated, closing costs are fees charged by lenders and third parties related to the purchase of the home. When a property is bought and sold there are many different people involved in the sale and everyone needs to be paid for their contribution. It’s really a matter of the many laws and legal requirements that apply to the sale of a home as well as the requirements of different lenders. The real estate industry is heavily regulated on the federal, state and local levels and this has created a huge number of requirements that equates to a lot of paperwork and documentation for both sellers and buyers.

At closing time both the buyer and the seller will incur expenses. Typically, the buyer will be paying for more items than the seller simply because many of these fees are related to obtaining a loan to buy the home. If the buyer is paying cash (not usually the case) they will have no loan related fees to pay. In the beginning of the buying process a “Truth in Lending” statement should be given to the buyer(s) and will provide them with an approximation of all of the costs that they will be responsible for at closing time.

Of course there are other expenses that need to be settled at the closing table including property taxes or homeowner association fees (if any). Usually these types of fees are prorated and the buyer should only be paying for the amount due at the time that they become the new owner. In other words, if you are purchasing the home near the end of the property tax period you will be required to pay the taxes due starting from the closing date. If there are 3 months left before the beginning of the next tax period the buyer will need to pay 3 months worth of taxes. It’s also possible that if your closing date is near the end of the month that the lender will ask for the 1st mortgage payment up front.

Below are some of the types of items that the buyer might see at the closing table if they are not paying cash for the home. It is important for the buyer to review these various fees with the lender to ensure that they understand what it is that they are paying for. This needs to be done before the actual closing so that there are no problems on that special day!
  • Appraisal fee
  • Origination fee
  • Pre-paid interest
  • Pre-paid insurance
  • Flood certification fee
  • Tax servicing fee
  • Credit report fee
  • Bank processing fee
  • Recording fee
  • Notary fee
  • Title insurance
In most cases the real estate commission is paid exclusively by the seller and is typically the biggest expense involved with selling a home. As I had mentioned earlier, the real estate industry is complicated and very heavily regulated by various government agencies. This is why both sellers and buyers should always seek the representation of a qualified agent. Trying to buy or sell a home without the proper guidance can be a daunting task and doing so without the assistance of someone that can guide you through the process step by step is not in your best interest.


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