Every real estate transaction will have closing costs involved, whether you are the Buyer or the Seller. If you know what the closing costs are, it is easier to understand what those fees are and there are no surprises at closing! A great explanation of what the closing costs are has been prepared by Martly Sharp of Zions Bank in Sandy, Utah.
The Mystery of Closing Costs Explained
By Marly Sharp
Whether it's your first closing or you're a 'seasoned pro,' virtually no one buys or sells property without help from one or more real estate-related services. Costs can include fees for brokers, lenders, surveyors, attorneys, title companies, and others who are involved in the purchasing transaction.
Altogether, the total costs of these various services become your actual closing costs.
When you close a transaction, your closing costs will be detailed in a HUD-1 settlement statement that includes seven categories. The borrower (buyer) pays everything in the Paid from Borrower's Funds column. The seller pays the costs listed in the Paid from Seller's Funds column. A notation next to each charge indicates who receives the monies.
Before the Closing
Three business days before the closing you should receive a good faith estimate of the settlement charges. Since these charges are just an estimate, the final charges may vary. One business day before the closing, call and request a copy of the actual settlement statement. Carefully study the statement and call the title company (or the attorney who will be handling the closing) if you have any questions.
The first category in the settlement statement is Sales/Broker's Commission. This is the commission that is paid to the real estate agent, usually by the seller, and is often a percentage of the selling price. It may be the largest settlement charge so ensure that it's properly calculated and that it includes any negotiated discount.
The next category of costs, Items Payable to Connection with Loan, is usually paid by the borrower (buyer) and includes the loan origination fee (if any), as well as fees for the appraisal, credit reports, inspection, and private mortgage insurance (PMI). You may often see lower fees for couriers, processing, administration and flood certification. These amounts add up, so verify that they match the estimated charges and ask questions if anything puzzles you.
The third category, Items Requested by Lender to be Paid in Advance, includes prepaid interest on the loan, a mortgage insurance premium and a hazard insurance premium. These costs are usually paid by the buyer.
Reserves Deposited with Lender, the fourth category, represents money placed in an escrow account to pay taxes to the city, county, and other taxing entities, such as the school district, etc. the buyer is usually responsible for these fees.
The fees itemized in the fifth category, Title Charges, are often split between the buyer and the seller. They may include charges for title search, title insurance, document preparation, notary fees, attorney's fees, and other fees such as escrow fees, fees for tax certificates, and fees for messengers or couriers.
Government Recording and Transfer Charges, the sixth category, includes costs associated with recording the title change at the courthouse. The recording fees, the costs for tax stamps and deed release, and other fees are usually paid for by either the buyer or the seller.
The seventh and final category, Additional Settlement Charges, is where you'll find costs for additional surveys, pest inspections, various treatments, home warranties, and repairs - almost anything agreed upon by the buyer and the seller that will be paid for by one or the other at closing.
Remember that closing costs can be negotiable. You are entitled to ask for an explanation of any fee and/or request to have the fee removed or paid by someone else.
Closing costs may vary by state and region, according to tradition and practice. Inquire about the specifics in your area by contacting your local mortgage representative.
Marly Sharp is Loan Center Manager for Zions Bank, Sandy, and a member of the Affiliates Advisory Board.
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