Closing costs
   HOME

TheInfoList



OR:

Closing costs are
fee A fee is the price one pays as remuneration for rights or services. Fees usually allow for overhead, wages, costs, and markup. Traditionally, professionals in the United Kingdom (and previously the Republic of Ireland) receive a fee in cont ...
s paid at the '' closing'' of a
real estate transaction A real estate transaction is the process whereby rights in a unit of property (or designated real estate) is transferred between two or more parties, e.g. in case of conveyance one party being the seller(s) and the other being the buyer(s). It can ...
. This point in time called the ''closing'' is when the
title A title is one or more words used before or after a person's name, in certain contexts. It may signify either generation, an official position, or a professional or academic qualification. In some languages, titles may be inserted between the f ...
to the property is conveyed (transferred) to the buyer. Closing costs are incurred by either the buyer or the seller.


Examples of typical closing costs

* Attorney (Lawyer) fees, paid by either or both parties, for the preparation and recording of official documents. The principals and/or
lender A creditor or lender is a party (e.g., person, organization, company, or government) that has a claim on the services of a second party. It is a person or institution to whom money is owed. The first party, in general, has provided some property ...
may each be represented by their own attorney. Typically required by institutional/commercial lenders to ensure documents are prepared correctly. *Title service cost(s), paid by either party according to the contract but by default seller may pay the majority, for
title search In real estate business and law, a title search or property title search is the process of examining public records and retrieving documents on the history of a piece of real property to determine and confirm property's legal ownership, and find o ...
,
title insurance Title insurance is a form of indemnity insurance predominantly found in the United States and Canada which insures against financial loss from defects in title to real property and from the invalidity or unenforceability of mortgage loans. Unlike ...
, and possibly other title services. In some cases the attorney may do the title search or the title service and attorney fees may be combined. Required by institutional/commercial lenders and often by the real estate contract. *Recording cost, paid by either party, charged by a governmental entity for entering an official record of the change of ownership of the property. Required by the
government A government is the system or group of people governing an organized community, generally a state. In the case of its broad associative definition, government normally consists of legislature, executive, and judiciary. Government is ...
for recording the deed. *Document or transaction stamps or taxes, paid by either or both parties depending on location (area of jurisdiction), charged by a governmental entity as an excise tax upon the transaction. Required by law. *Survey fee for a survey of the lot or land and all structures on it, paid by either party, to confirm lot size and dimensions and check for encroachments. Required by institutional/commercial lenders. *Brokerage commission, paid by the seller to a real estate broker, to compensate the broker(s) involved in the sale for their services in marketing the property, finding a buyer, and assisting in the negotiations. Brokerage commissions are usually computed as a percentage of the sale price, and are established in a
listing agreement A listing contract (or listing agreement) is a contract between a real estate broker and an owner of real property granting the broker the authority to act as the owner's agent in the sale of the property. If the broker is a member of the Natio ...
between the seller and the listing broker. The listing broker may offer buyer agents a portion of their commission as an incentive to find buyers for the property. Payment is required if real estate brokerage service was used. This is often one of the largest closing costs. *Mortgage application fees, paid by the buyer to the lender, to cover the costs of processing their loan application. In some cases, the buyer would pay the lender the application directly and prior to closing, while in other cases the fee is part of the buyer's closing costs payable at closing. * Points, paid by the buyer to the lender but may be reimbursed by the seller. Points are a form of pre-paid
interest In finance and economics, interest is payment from a borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is distin ...
, charged by the lender as an alternative to charging a higher rate of interest on the mortgage loan. One point equals one percent of the loan principal, and usually reduces the interest rate by 1/8% (0.125). *Appraisal fees, usually paid by the buyer (although occasionally by the seller through negotiation), charged by a licensed professional
appraiser An appraiser (from Latin ''appretiare'', "to value"), is a person that develops an opinion of the market value or other value of a product, most notably real estate. The current definition of "appraiser" according to the Uniform Standards of Pro ...
. Many lenders will require that an appraisal be performed as a condition of the
mortgage loan A mortgage loan or simply mortgage (), in civil law jurisdicions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners to raise funds for any ...
. The purpose of this appraisal is to verify that the sale price of the property (upon which the underwriting of the loan is based) is equal to or less than the
fair market value The fair market value of property is the price at which it would change hands between a willing and informed buyer and seller. The term is used throughout the Internal Revenue Code, as well as in bankruptcy laws, in many state laws, and by sever ...
of the property. *Inspection fees, usually paid by the buyer (although occasionally by the seller), charged by licensed home, pest, or other inspectors. Some lenders require inspections (such as
termite Termites are small insects that live in colonies and have distinct castes (eusocial) and feed on wood or other dead plant matter. Termites comprise the infraorder Isoptera, or alternatively the epifamily Termitoidae, within the order Blatto ...
inspection) to verify that the property is in good condition, which is necessary to assure that the property will retain the necessary collateral value to secure the mortgage loan. During a typical transaction in the United States, inspection fees are paid at time of service and not closing, however. *Home warranties, paid by either the buyer or the seller.
Warranties In contract law, a warranty is a promise which is not a condition of the contract or an innominate term: (1) it is a term "not going to the root of the contract",Hogg M. (2011). ''Promises and Contract Law: Comparative Perspectives''p. 48 Cambri ...
are available on resale homes insuring major household systems against repair or replacement for the buyer's initial year of ownership. Sellers will sometimes offer these warranties as a marketing strategy to give buyers "peace of mind", or buyers can elect to purchase them just prior to closing. *Private mortgage insurance (PMI), paid by the buyer but may be reimbursed by the seller. Lenders will typically require that a mortgaged property be insured if the
down payment Down payment (also called a deposit in British English), is an initial up-front partial payment for the purchase of expensive items/services such as a car or a house. It is usually paid in cash or equivalent at the time of finalizing the transactio ...
is less than 20 percent, and will usually require that the first full year's mortgage insurance premium (MIP) be paid in advance by the buyer. If the buyer has not already paid the insurance company directly, this would become another closing cost payable at closing. The buyer can request cancellation of PMI once their equity reaches 20 percent of the market value, and the lenders are required to automatically cancel the PMI once the equity reaches 22 percent by federal laws. *Pre-paid homeowner's property insurance, paid by the buyer in advance to protect the home against fire, earthquake, flood (normally a separate policy from other hazard insurance), theft, and other casualties. The lender will require this coverage. Flood insurance may or may not be required, depending on the location. *Pro-rata property taxes, paid by the seller, the buyer, or both. Most (but not all) jurisdictions assess taxes on real property, which are usually payable at a specified date annually. Since all but a tiny fraction of real estate transactions close on a date other than this one specified annual date, most transactions must include an adjustment to assure that both the seller and the buyer end up paying their share of the annual property tax, proportionate to the percentage of the year that each has ownership of the property. Usually required by institutional/commercial lenders and by the real estate contract. *Pro-rata homeowner association dues, paid by the seller, buyer, or both. If the property is covered by a
homeowners association A homeowner association (or homeowners' association, abbreviated HOA, sometimes referred to as a property owners' association or POA), or a homeowner community, is a private association-like entity often formed either ''ipso jure'' in a building ...
(HOA), the HOA will normally be funded by dues assessed against each property owner. Since the ownership of the seller and buyer are each fractional in the year of the transaction, there must be an adjustment made so that each owner pays their proportional share. Often required by institutional/commercial lenders and by the real estate contract. *Pro-rata interest, paid by the buyer but may be reimbursed by the seller. The monthly mortgage payment is calculated and payable on a specified day each month. If the closing does not actually fall on that specified date (which is usually the case), then an adjustment must be made to calculate the interest on the loan for the number of extra days until the first payment is due. Other items in addition to the above may be common in some jurisdictions, and some transactions may include unusual or unique items as closing costs. In the
United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territori ...
, federal law requires that all residential transactions financed by a mortgage have all closing costs documented in detail upon the standard HUD-1 form. This information must be provided to the principals but does not have to be sent to the government. Instead a declaration or statement by buyer and/or seller is often required to be provided to the government office recording the deed. Form 1099-S may be required to be sent to the
United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territori ...
Internal Revenue Service, but Federal law does not allow a charge for this.


References


External links


Global comparison of residential property transaction costs
Global Property Guide {{DEFAULTSORT:Closing Cost Real estate terminology