10 Common Closing Costs Escrow Deals with at Closings
As you probably know (and have to regularly explain to your clients), closing costs are the fees and expenses associated with the purchase or sale of the property that is payable at the time of closing. These costs include a variety of fees and are negotiated between the seller and the buyer. Closing costs can be confusing for both buyers and sellers.
To explain closing costs to your clients, provide them with a breakdown of the estimated costs for their specific transaction. Here is a list of the top 10 costs that are collected at closing to help your clients understand what fees they are responsible for and why they need to pay them.
1. Escrow fee
The escrow fee is a part of closing costs and it is the fee that the title or escrow company charges to handle the escrow for managing and allocating the funds placed in escrow at closing.
A payoff is a statement that tells us how much is owed for the mortgage or lien. It is built into a Payoff/Demand statement and the seller has to pay to remove those encumbrances. Depending on how the letter is requested, there might be a fee for the document generation as well.
3. Title insurance
An Owner’s policy, or Owner’s Policy of Title Insurance, protects the buyer’s interest in the home during and after the home purchase.
And then if the buyer takes a loan, the lender will often require, as a condition of the loan, that the buyer gets a Lender’s Policy, or Lender’s Title Insurance, to protect the lender’s security interests in the property.
4. Homeowners insurance premium
Homeowners insurance is the money you pay to your insurance company to keep your policy active and your property protected against any issues.
5. Mortgage/loan origination
The mortgage origination fee is the upfront fee owed to the lender for processing a loan. It covers a variety of things such as an application fee, processing, and underwriting of the loan.
6. Property Appraisal Fee
The Appraiser will charge a fee for assessing the fair market value of the property. The value is used to determine the property’s loan-to-value (LTV) ratio.
7. Property taxes
Escrow prorates the taxes, dividing the taxes and other credits between the seller and the buyer. The seller pays their part of the bill up until the closing, including the taxes that have not been issued yet. And the buyer pays from the close of escrow and beyond.
8. Recording fees
To transfer ownership, escrow has to record legal ownership transfer documents and different kinds of deeds. Escrow prepares those documents and the recorder’s office charges fees for the service.
When you record a deed, the county will require that you pay a transfer fee. Charged by the state or a local government, the transfer tax fee is assessed as a percentage of the sale price.
9. Home inspection & survey fees
Home inspection fees are paid to a certified home inspector to assess the property’s condition. Lenders might require the inspector to confirm the property is in good condition.
For example, in California, closing parties have to inspect the toilets, and make sure they’re up to code. To get that explicit sign-off, there has to be an inspection by the city. Typically the seller will have to pay for those home inspection fees, but it’s up for negotiation.
The mortgage survey identifies the major buildings on the property, such as the house, garage, etc. And whether it intrudes on any neighboring properties or vice versa.
A Lender may often require a survey because they will want a certain coverage on the lender’s policy that covers things that a survey might disclose. And a title insurance company will require that the parties get a survey to provide that coverage.
10. Home warranty
A home warranty protects the homeowner from major financial bills due to failure of certain appliances and systems.
There are many other closing costs that might appear at the home closing, such as HOA fees. Try to educate your clients about what closing costs are and who is responsible for paying them. Hopefully, this checklist helps you establish a more transparent process with your client.
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