Disclaimer I am not a lawyer, appraiser, builder, surveyor, structural engineer, public accountant, home inspector, geologist nor entomologist and am not qualified to give advice in these areas. The information is provided for your discussion with competent professionals. You should not base any decisions upon the comments below!
"A little learning is a dangerous thing" Alexander Pope
"Who are a little wise the best fools be" John Donne
It is a interesting concept "who pays closing costs". How many people bring a check to closing? Since the buyer is paying for the house, the buyer will be paying the closing costs either directly or indirectly when they are included into the price of the house. The real question, has the seller included the closing costs in the price of the house and if so how much. The convention exists in this area for many of the home being marketed for the sellers to include the closing costs in the asking price of the house. This becomes a matter of negotiations. Before making an offer learn what is included in the price of the house. If closing costs have been included, how much?
What are the closing costs
The following is a list of closing costs which can be expected to be paid by either the seller or the purchaser. These items are itemized on the HUD-1 Settlement Statement (pdf file) which is used in all transactions requiring a conforming loan. You can follow along on the sample HUD-1 form which can be printed. Some of the past HUD's remarks have been included but the comments I have made relate particularly to what you can possibly expect here in the local Montgomery area. A keyword index to the HUD website may be helpful to obtain further information on a particular subject. It should be noted that different services may be required by different lenders and different fees for the services which in some cases may be the same. Settlement costs can increase the cost of your loan, so compare carefully. Lenders are required to provide you a "truth in lending" statement disclosing all costs required for the loan.
The numbers pertain to the HUD-1 Settlement Statement as they appear on the reverse side of the form. Two columns are provided. The first column is for items paid from borrower's funds while the second column is for items paid from the seller's funds. Any amounts shown are my additions and reflect local closing costs using a closing attorney. There are also Closing Title Companies whose fees are similar. All in all the majority of the closing costs are determined by the mortgage lender but in all cases the borrower should ask what decisions they can make in determining the costs. The person who pays the closing costs will usually select the closing entities to include mortgage lender. All this is dependent upon the signed and agreed purchase contract between the two parties.
700. Sales/Broker's Commission: This is the total dollar amount of the real estate broker's sales commission, which is usually paid by the seller. This commission is typically a percentage of the selling price of the home and can range from 2.5% to 7%. In all cases this is a negotiated fee which the sellers or in some cases the buyers have agreed to pay (usually in a contract between the agent and the client) upon the sale of the property.
800. Items Payable in Connection with Loan: These are the fees that lenders charge to process, approve and make the mortgage loan:
- 801. Loan Origination: This fee covers the lender's administrative costs in processing the loan. Often expressed as a percentage of the loan, or a point (one point = one percent). The fee can vary among lenders. Generally, in this location the seller pays this fee, unless otherwise negotiated. The loan origination fee is generally 1% of the loan amount.
- 802. Loan Discount: Also often called "discount points," a loan discount is a one-time charge imposed by the lender or mortgage broker to lower the rate at which the lender would otherwise offer the loan to you. This is also called prepaid interest and may be tax deductible. Each "point" is equal to one percent of the mortgage amount. For example, if a lender charges two points on a $80,000 loan this would be a charge of $1,600.
- 803. Appraisal Fee: This charge pays for a valuation report made by an appraiser approved by the lender. This fee is dependent on the type of appraisal i.e. VA, FHA, or Conventional and can range from $325 to $400+
- 804. Credit Report Fee: This fee covers the cost of a credit report, which shows your credit history. The lender uses the information from a credit report to help decide whether or not to approve your loan and how much money to lend you. Costs from $17 to $55 depending on the lender. The credit report is different from a "local" files check and usually includes a composite report from two of the national reporting agencies which have been updated to include current information. If closing costs are paid by the seller this becomes a reimbursable expense for the buyer.
- 805. Lender's Inspection Fee: This charge covers inspections, made by employees of your lender or by an outside inspector. (Pest or other inspections made by companies other than the lender are listed at line 1302.). If the home has had termite damage the mortgage lender may require an inspection to insure the home has not sustained structural damage. This line could also reflect a reinspection by the appraiser to insure required repairs have been made.
- 806. Mortgage Insurance Application Fee: This fee covers the processing of an application for mortgage insurance.
- 807. Assumption Fee: This is a fee which is charged when a buyer "assumes" or takes over the duty to pay the seller's existing mortgage loan.
- COSTS INCLUDED (added to form) the numbers can vary from 808 - 811 and sometimes interchange with items 1300 - 1305 Additional Settlement Charges.
- 808. Mortgage Broker Fee: Fees paid to mortgage brokers may be listed here. Determine this amount, if any, with your mortgage broker/lender.
- 809. Tax Service Fee establishes the fee which sets up the escrow account for the mortgage lender approximately $75
- 810 Document Preparation Fee to Mortgage Lender, $100 - $300 depending on mortgage lender.
- 811. Underwriting Fee to Mortgage Lender varies between $150 - $350 In obtaining a loan you usually encounter 3 distinct people. First the loan originator who usually works for a commission on the loans they originate. Second, the loan processor who is usually an hourly paid employee who insures the loan application along with all the necessary documentation is correctly prepared. Third the underwriter who is a salary employee or officer of the lending institution who commits the money for the loan. Three different people with different goals in establishing your loan. One tries to please you the public, the second a detail person making sure the t's and i's are crossed and dotted, and finally someone who represents the lending institution's interest.
900. Items Required by Lender to Be Paid in Advance: You may be required to prepay certain items at the time of settlement, such as accrued interest, mortgage insurance premiums and hazard insurance premiums.
- 901. Interest: Lenders usually require borrowers to pay the interest that accrues from the date of settlement through the last day of the month. Since mortgage loans are paid in arrears your next month payment is said to be "free". Your first payment will generally be due the following month on the 1st day of the month payable up to the 15th and late on the 16th. So if a house closes 20 September the buyer will pay 11 days of interest at closing, no payment in October, and the 1st full payment due 1 November.
- 902. Mortgage Insurance Premium (MIP) : The lender may require you to pay your first year's mortgage insurance premium or a lump sum premium that covers the life of the loan, in advance, at the settlement.
- 903. Hazard Insurance Premium: Hazard insurance protects you and the lender against loss due to fire, windstorm, and natural hazards. Lenders often require the borrower to bring to the settlement a paid-in-full first year's policy. Most often the first year's premium is paid at settlement. This insurance will not protect from flood damage or water damage caused by flooding.
- 904. Flood Insurance: If the lender requires flood insurance, it is usually listed here. Flood insurance is a national program with set rates based on the flood plain and home elevation. As noted before homes without flood insurance are not protected from flood water by their hazard insurance. Since the fees are set by the Govt. it usually does not matter where you obtain the flood insurance policy.
1000 - 1008. Escrow Account Deposits: These lines identify the payment of taxes and/or insurance and other items that must be made at settlement to set up an escrow account. The lender is not allowed to collect more than a certain amount. The individual item deposits may overstate the amount that can be collected. The aggregate adjustment makes the correction in the amount on line 1008. It will be zero or a negative amount. Therefore this amount generally reduces the final costs.
1100. Title Charges: Title charges may cover a variety of services performed by title companies and others. Your particular settlement may not include all of the items below or may include others not listed.
- 1101. Settlement or Closing Fee: This fee is paid to the settlement agent or escrow holder. Responsibility for payment of this fee should be negotiated between the seller and the buyer. Usually left blank.
- 1102-1104. Abstract of Title Search, Title Examination, Title Insurance Binder: The charges on these lines cover the costs of the title search and examination. Abstract update cost $85 - $125 if an abstract is provided for updating. If an abstract is constructed from start it could go as high as $300 based upon the number of documents which must be copied. Title examination is where the local attorneys insert their fees which may range from a low of $250 to a high of .5% plus of mortgage or purchase price.
- 1105. Document Preparation: This is a separate fee the title company or attorney charge to cover their costs of preparation of final legal papers, such as a mortgage, or deed. Costs vary and can range anywhere from 0 to $150 or more.
- 1106. Notary Fee: This fee is charged for the cost of having a person who is licensed as a notary public swear to the fact that the persons named in the documents did, in fact, sign them. Not usually used locally.
- 1107. Attorney's Fees: You may be required to pay for legal services provided to the lender, such as an examination of the title binder. Occasionally, the seller will agree in the agreement of sale to pay part of this fee. The cost of your attorney and/or the seller's attorney may also appear here. If an attorney's involvement is required by the lender, the fee will appear on this part of the form, or on lines 1111, 1112 or 1113. Locally there is no entry in the box with the attorney charging for a Title Examination. The attorney's fee for title examination can vary from $250 to .5% plus.
- 1108. Title Insurance: The total cost of owner's and lender's title insurance is shown here covering lines 1109, and 1110. Since the attorney is writing the policy he or she receives remuneration for the insurance policy. The cost of the title insurance varies between attorneys and in some cases where a low fee is offered in lines 1103 an addition to the cost of title insurance can offset the lower attorney fees.
- 1109. Lender's Title Insurance: The cost of the lender's policy is shown here. This is required by the mortgage lender to protect their mortgage amount and only that amount. A typical cost would be an $80 binder and $3.00 - $3.50 per thousand of the loan amount.
- 1110. Owner's (Buyer's) Title Insurance: The cost of the owner's policy is shown here. Since the cost of mortgage title insurance reflects an amount that reduces over time the cost of Owner's Title Insurance is higher because it insures the entire purchase price of the home which does not drop over time. If the policy is issued along with the mortgage title insurance the binder is reduced and the cost is approximately $4.00 per thousand on the purchase price of loan amount. Owner's title insurance is highly recommended when the purchaser is paying cash for the home or is putting down a large down payment. Again these fees are set by the attorney and should be investigated prior to selecting the closing attorney.
1200. Government Recording and Transfer Charges: These fees may be paid by you or by the seller, depending upon your agreement of sale with the seller. The buyer usually pays the fees for legally recording the new deed and mortgage (line 1201). Transfer taxes, which in some localities are collected whenever property changes hands or a mortgage loan is made. Where this may be high in some states Alabama does not add a sales tax to the purchasing of property. City, county and/or state tax stamps may have to be purchased as well (lines 1202 and 1203). The total of these fees add anywhere from $150 to $250. Charges are made for each page of the mortgage document that is recorded along with local tax stamps and release documents.
1300. Additional Settlement Charges: Items not included in lines 808 - 811 can appear in this location as some of these listed below can appear up in the 800 series.
- 1301. Survey: The lender may require that a surveyor conduct a property survey . This is a protection to the buyer as well. Usually the buyer pays the surveyor's fee, but sometimes this may be paid by the seller. Survey fees generally amount to $225 unless large acreage is involved or the land is surveyed by Metes and Bounds.
- 1302. Pest and Other Inspections: This fee is to cover inspections for termites or other pest infestation of your home. Approximately $75 - $125 unless a home treatment is required which could easily add $800 - $1,500.
- 1303-1305. Lead-Based Paint Inspections: This fee is to cover inspections or evaluations for lead-based paint hazard risk assessments and may be on any blank line in the 1300 series along with the following additional charges:
- Flood certificate under $20.
- Express mail fee $15 -$30.
- Courier Service $25.
1400. Total Settlement Charges: The sum of all fees in the borrower's column entitled "Paid from Borrower's Funds at Settlement" is placed here. This figure is then transferred to line 103 of Section J, "Settlement charges to borrower" in the Summary of Borrower's Transaction on page 1 of the HUD-1 Settlement Statement and added to the purchase price. The sum of all of the settlement fees paid by the seller are transferred to line 502 of Section K, Summary of Seller's Transaction on page 1 of the HUD-1 Settlement Statement. Paid Outside Of Closing ("POC"): Some fees may be listed on the HUD-1 to the left of the borrower's column and marked "P.O.C." (Paid Outside of Closing). Fees such as those for credit reports and appraisals are usually paid by the borrower before closing/settlement. They are additional costs to you. Other fees such as those paid by the lender to a mortgage broker or other settlement service providers may be paid after closing/settlement. These fees are usually included in the interest rate or other settlement charge. They are not an additional cost to you. These types of fees will not be added into the total on Line 1400. However, if the seller is paying the closing cost and the buyer has paid these closing fees, the buyer will be reimbursed for these fee on the front side of the HUD-1.
RENTALS & RENTING
What to Expect
Air University Schools on Maxwell Air Force Base provides a very large number of officers/students requiring annual rentals. This factor, along with other short term employment in the area, help to create a somewhat inflated rental market. The military schools start during July and August. September would be a renters market with homes not already rented looking forward to a cold winter unless rented. Renters start looking for rental properties in early spring or just after Easter for the summer. So if you wait until June, most of the better properties have been taken.
An investor has the goal of obtaining 1% of the value of the house as monthly rent. This would be optimum and many owners will take less.
Where to Look
For more information with additional ideas on renting, link to the poplar local area renting, rentals housing page which is a part of this web site.
INSPECTIONS, INSPECTORS, & ADVISERS
There are any number of people who will be involved in the purchasing of your house. Some of these are required by the mortgage company, others are highly recommended. All add costs to the closing of the home but as one considers the cost vs the potential loss, a little insurance is a good thing.
- Appraiser produces the appraisal which provides the mortgage value for the house. There are 3 different types of appraisals including; VA, FHA, and Conventional.
- Termite Inspection (which also includes other wood destroying insects like powder post beetle and wood rot). Mortgage companies will usually require but highly recommended if they do not. Major house damage throughout the USA is caused by termites. The Alabama Cooperative Extension has a number of information pages on pests found in Alabama. In this area the subterranean termite is the major focus of attention but in the future the Fomosan termite in making inroads starting at its introduction in Mobile. Just search the site using the word termite and you will find a host of valuable information. And thanks to Lisa for suggesting an excellent site for further understanding the powder post beetle with excellent pictures and description of the damage they can cause.
- An attorney should provide a Title Examination. To further protect "good title" Title Insurance for the Mortgage Company AND Owners Title Insurance (if requested) are issued by the attorney.
- Structural Engineer can be requested to ascertain structural problems and foundation concerns.
- Home Inspection performed by a home inspector who determines the serviceability or is it working inspections on the systems of the home which may include, plumbing, heating/air, electrical, appliances and roof. Insure you know what the inspector will be inspecting, qualifications of inspector, the costs, and what type of report will be rendered. A professional home inspection can run anywhere from $75 to $350. (link for state approved home inspectors ). This would go up if a lead assessment is accomplished or a moisture determination for homes with Exterior Insulation Finish System, E.I.F.S. (i.e. Dryvit) also called Synthetic Stucco construction. For additional comments on E.I.F.S. read my "Thoughts on E.I.F.S. " An additional page has been added to this site further explain the role of the Home Inspector.
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INVENTORY OF HOMES, CHOOSING AN AGENT
3 - HOUSE
PAYMENT, QUALIFYING FOR A LOAN
4 - CLOSING COSTS,
INSPECTORS, & ADVISERS
5 - ARTICLES AND