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By Donna Robinson
Understanding the closing costs involved in your transaction is essential. For most new investors, this is one category that seems to be hard to pin down until we get to the closing table. If unforeseen costs arise at the table, it can make for a very bad day.
As an investor, the items involved in closing a transaction (also called “closing of escrow” in some states), will vary with the type of deal you are doing. Some of the details discussed here may not apply in every single closing scenario. The scope of this article is to discuss the typical closing and what you might expect.
First, remember that in a typical closing, the closing attorney works for the lender. If you are not experienced at this process, it is highly recommended that you have your own attorney look over your contracts BEFORE you get involved in a transaction. Once you have a property under contract, see to it that your attorney has evaluated the agreement to be sure you are protected adequately.
The number of new investors who are attempting to do deals without paying an attorney for legal advice is very disturbing. Many of these people are in such a hurry to get a deal that they are completely disregarding important legal considerations that could hurt them later on.
There are fees and costs that you must plan to pay for as part of a typical closing. If you are working with a lender, the lender can be a tremendous help in explaining those costs to you. But beware, even lenders will make mistakes, or forget items that may not appear until you get to the closing.
Usually, a certain amount of closing funds must be brought to the closing as “certified funds”. If you bring less than the required amount, the closing will be delayed or halted altogether. The closing attorney will only accept payments that meet the criteria given them by the lender. These details are usually spelled out in the loan application, but not always. You have to be diligent in making sure you have all your funds before closing.
Sometimes, if your credit is borderline, or the underwriting criteria for the loan is not quite there, the loan underwriter will require an additional amount in certified funds, or other documentation that must be brought to the closing. Unfortunately, this can happen the day before closing, or even that very day! It pays to stay on top of what’s happening all the way to the table.
Costs associated with a typical closing are negotiable between the buyer and seller at the time you sign the contract. You could ask the seller to pay 100% of the closing costs, and if you can get them to do that, you may only need whatever down payment, if any, that you are required to pay by the lender.
Of course a true no money down deal has the seller paying all the closing costs, while agreeing to no down payment. While this is possible it is usually not likely, as most sellers need some cash out of a sale. The key is how you come up with the cash.
When you get to your closing, the closing attorney will give you and the seller a settlement statement, also known as a HUD-1. This statement looks somewhat like a balance sheet, and will detail all the costs and payments associated with the transaction.
If you are fortunate enough to get seller financing, some of the typical closing costs and other transaction related fees might not be required. For example, if the seller has a survey that you are happy with, you may not want to pay for another one. Unless you elect to have an appraisal done, there will be no appraisal fee to pay, which is virtually always required with typical loans.
Some of the fees that you may have to pay at closing are Items payable in connection with the loan: Loan Origination Fee, Loan Discount Points, Appraisal Fee (usually paid before appraisal is done), and several other fees lenders may tack on.
Then there are the reserves that have to be paid up front to cover your future taxes and insurance. These are also called “pre-paids”, and are commonly known in Georgia as “escrow”. There may also be city, or county taxes, and annual assessments, such as neighborhood association fees. There is also mortgage insurance. Some loans require this to cover the risks associated with lower down payments.
Other fees are known as “Title Charges” and are associated with the work done to check on and insure a clear title. These may include the title examination, Attorneys fees, title insurance and several other associated fees, like document preparation.
It seems like everyone in the real estate business has a place to tack on a fee. Be sure you have read your settlement statement carefully and understand it. If you are not comfortable on your own, then you should bring your attorney to the closing, to ensure the details are correct. I recently had a closing where the attorney omitted my earnest money payment from the HUD-1. This meant that I was not getting credit for hundreds of dollars I had already paid to the seller. Fortunately we caught it at the closing table, and rather than owning additional money, I got some money back.
There are many potential fees and costs involved in real estate transactions, and you need to become familiar with them. Some should be regarded as a “must-have”, such as title insurance. (The lender may require that you purchase title insurance for them, as part of your closing costs, but this will not cover you in the event that the title is found to be defective later on).
Other fees, like private mortgage insurance should be avoided whenever possible. Again, seller financing can reduce these fees drastically, since there is not a mortgage lender involved. In any case, if you are not familiar with these items yourself, find a good real estate attorney and let them advise you as to what is best.
Remember that successful investors understand the details!
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