What happens at closing?

At loan closing the ownership in your newly purchased house is legally transferred to you.  The different parties that will typically be in attendance at the closing:  Mortgage Broker, Home Seller, Listing Agent, Selling Agent, Title Closing Agent.  Closing can take as little time as an hour to sign all the forms and transfer ownership or it can take several hours, depending on the contingency clauses in the purchase offer (and any escrow accounts that may need to be set up). You do not want to be rushed when closing on your new home.

Before you close on the house, you should walk-through, to make sure any repairs you requested have been made and that items which were to remain with the house (drapes, light fixtures) are still there. This is when you must call attention to any problems or issues you see with the home that should not be present

You’ll need to bring cashiers’ checks for any costs you must pay, if you need to bring more than $10,000 then it must be wired to the title company (Indiana Specific Law).  The title company will make all disbursements to the various parties involved in the purchase of your new home. The real estate agent or another representative of the title company will deliver the check to the seller and the house keys to you.

Closing Costs and Property Taxes

Statutory costs are expenses you would have to pay to state and local agencies even if you paid cash for the house and did not need to take out a mortgage. They vary by state and county. They include the following:

Recording fee for mortgage

Pay for the county clerk to record the warranty deed, mortgage, note and change the property tax billing so that it is updated. This is done for home purchase and refinance transactions

Pro-rated taxes

County taxes are paid in arrears in Indiana so you will receive a credit from the seller at closing the taxes up until the day of closing.  In the case of state taxes, if taxes are due in October and you close in August, you would owe taxes for 2 months while the seller would owe taxes for the other 10 months. Prorated taxes usually are paid based on the number of days (not months) of home ownership that has transpired.

Impound Account

Escrow or impound accounts are created to insure that insurance and tax bills are collected. Whether impound accounts are required or not is based on the requirements of the loan. Not all loans require them, but a rate change may take place if they are not taken. If your do not set up an escrow account, you may want to set up a special account on your own to make sure you have money set aside when “lump-sum” tax and insurance bills arrive.

Third-Party Closing Costs

Third-party closing costs are expenses paid to others such as appraisers, title insurance company, home inspector. These expenses are required even if you pay cash for the house. Examples of third-party costs are as follows:

Attorney fees:

Attorney requirements vary by state. Most states do not require attorneys. Attorneys usually charge a percentage of the selling price (three-fourths or 1 percent), but some may work for a flat fee or on an hourly basis. If attorneys are required in your state, your realtor should have information that will help you answer your questions.

Title search costs:

The title company or your attorney will arrange for the title search to make sure there are no obstacles or encumbrances (liens, lawsuits) on the property. This is how the owner of the property is verified. Nothing could be worse than buying a home from somebody that didn’t actually own it!

Home owner’s insurance:

Most lenders require that you prepay the first year’s premium for home owner’s insurance (sometimes called hazard insurance) when you purchase a home. This helps to insure that their investment will be secured, even if the house is destroyed. For purchases you can typically pay the first year premium at closing.  In addition to the first year premium there will be an additional two months escrowed as a cushion in case of future increases.

Real estate agent’s sales commission:

The seller pays the commission to the real estate agent. If one agent lists the property and another sells it, the commission usually is split between the two. The commission is negotiable between the seller and the agent, as a buyer this is not something you need to worry about.

Finance and Lender Charges

Most people associate closing costs with the finance charges levied by mortgage lenders. The charges you pay will vary among lenders, you may have to pay the following charges depending on your lender.

Origination or application fees:

These are fees for processing the mortgage application and may be a flat fee or a percentage of the mortgage. Lakewood Lending Group does not charge application fees. You will pay points only if you are buying down your rate.

Inspections (termite, water tests):

In most purchase scenarios, a termite inspection is required. In many rural areas, lenders will require a water test to make sure the well and water system will maintain an adequate supply of water to the house (this is usually a test for quantity, not a test for water quality).

Points:

A point is equal to 1% of the loan amount borrowed. Points can help you buy the rate down and get a lower rate. Points are typically tax deductible, but different deductibility rules apply to second homes. Your tax advisor can clarify these points for you.

Document preparation fees:

You will see an amazing array of papers, ranging from the application to the acceptance to the closing documents. This fee covers the cost of drawing docs.

Property Survey:

Some lenders will require that the property be surveyed to make sure that no one has encroached on it and to verify the buildings and improvements to the property. This is only used under special circumstances as an appraisal is usually enough for most lenders.

Appraisals:

This is how the value of the home is verified. Recent comparable sales from local homes are used to gauge your home’s value.

Credit report:

A credit report is required on all purchase and refinance transactions. This is how the lender gauges your creditworthiness.

Private Mortgage Insurance:

If your down payment is less than 20%, many lenders will require that you purchase private mortgage insurance (PMI) for the amount of the loan. This way, if you default on the loan, the lender will recover lost monies. These insurance premiums will continue until your principal payments plus down payment equal 20% of the selling price, but they may continue for the life of the loan. Lakewood Lending Group has many solutions that do not require private mortgage insurance, with the best being a USDA Home Loan!

Release fees:

If the seller has worked with a contractor who has put a lien on the house and who expects to be paid from the proceeds of the sale of the house, there may be some fees to release the lien. Although the seller usually pays these fees, they could be negotiated in the purchase offer.

Escrow account:

An escrow account or impound account is a fund into which you will make monthly payments for taxes, homeowner’s insurance, and PMI (mortgage insurance, if required). The money to fund the escrow account is collected on a monthly basis and will pay your insurance and tax bills when they come due, May and November for Property Taxes, month of your purchase for homeowners insurance. The goal is to have these money put aside in small amounts every month versus having a large lump sum bill come due.

Prepaid interest:

Your first regular mortgage payment is usually due about 6 to 8 weeks after you close (for example, if you close in March, your first regular payment will be in May; the May payment covers the cost of borrowing money for the month of April). Interest costs, however, start as soon as you close. The lender will calculate how much interest you owe for the fraction of the month in which you close (for example, if you close on March 25, you would owe interest for 6 days). The odd days interest is is due at closing. In a refinance transaction you will owe money to your old lender. In the previous example you would owe 25 days to your old lender. In a refinance you are typically paying about one month’s worth of interest in the transaction every time you refinance. This is offset by the first month gap in which you will NOT make a mortgage payment immediately after refinancing.

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