What are closing costs?
That’s a question most first-time home buyers ask. Many repeat buyers do, too.
Many home buyers don’t realize the kind of costs that can be associated with a mortgage. Whether a buyer selects a no closing cost mortgage or a more traditional mortgage option, all mortgages have the same closing costs. Many of these costs are for legal requirements.
So, what are the closing costs associated with a mortgage?
Appraisal of the Property
A State Licensed Appraiser is required to examine the property being used as the collateral for the loan. They evaluate market conditions based solely on other properties that have sold with similar features, in similar neighborhoods in close proximity to the subject. In a rapidly increasing market, appraised values can be on the low side because they are based on prior sales.
Title Insurance
Title insurance covers that there is what is known as “clear” Title at the time of purchase. Over time properties titles can become clouded by different liens that can be placed on them for a variety of reasons. Things like unpaid water bills, contractors or taxes can cloud a property title and without the title search and title insurance, those debts could become the responsibility of the new owner.
Processing & Underwriting Fees
Processing fees can include the purchasing of all of the information for the underwriter to review. Some of the verifications include compliance review, Flood verification, and life of loan guarantee, Property verifications with the city, Tax transcripts, Submission to Fannie or Freddie. The underwriter validates all of the information associated with the loan and makes the decision on loan approval.
Real Estate Brokerage
Fees paid to the real estate professionals representing the buyer and seller.
Origination Fees
Will vary depending on the loan program, this fee is to cover all of the other costs associated with providing the loan. Origination fees are normally expressed as a percentage of the total loan amount.
Pre-Paid Items
This word can be confusing. These are the costs for the first years homeowners insurance, escrow account set up (money held to pay future tax and insurance payments), prepaid interest (interest paid from the day of closing until the beginning of the following month) and tax prorations to the seller (reimbursement for taxes the seller has already paid). In most cases, the prepaid items total more than the closing costs.
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