This is the 2nd post in a series for first time buyers - Closing costs

In my last post for first time buyers I explained earnest money deposits, closing costs, the subject of this brief are often a similar mystery for new buyers. During the "no money down" past few years I've had to explain to folks that even though a down payment isn't needed there are still up front costs associated with the home purchase. These costs appear to be a down payment but are very different. Closing costs are the fees and money held in escrow required to get a home financed and the title transferred and recorded. Unlike a down payment, closing costs are in addition to the home's price.

The majority of closing costs stem from the home loan. Lenders often require insurance, interest, tax and other items to be paid ahead or held in escrow. This is done to decrease risks to the lender and since the golden rule applies, the golden rule being he who owns the gold make the rules, home buyers play along. If buyers paid cash the closing costs would be far less, attorney's fees for title search and transfer mainly.

Many of the fees talked about here are technically not closing costs but since you may have to pay them at closing I've included them anyway:

1. Lenders and Mortgage Brokers charge a loan origination fee. Normally there is an underwriting or commitment fee as well. Beware of junk fees, your agent will be able to help you spot them and possibly have them waived.
2. Prepaid interest - Because you won't make a payment just yet but the lender loses the use of their money they charge interest starting the day you take possession of your home up until the end of the month (the first payment period), IE if you close the home on the 15th you'll pay interest for each day through the last day of the month. The money is due at closing.
3. Prepaid insurance - Lenders typically require a paid in advance insurance policy on the home or money for premiums held in escrow
   
4. Taxes- Lenders and/or the county government may require payment to be held in escrow or paid at closing. Taxes will normally be prorated so the seller pays their share and the buyer pays theirs.
   
5. The title company or closing attorney is paid a fee to verify the title is clear, and record the paperwork at the courthouse. Title insurance is issued to protect the lender's interest.
6. The appraisal, the wood destroying organism inspection, any certifications by licensed contractor or structural engineer will be due at closing if not paid prior.
7. Pending governmental assessments (for sewer, sidewalk, street work, etc.) may be required to paid in full by municipalities and/or the lender.
8. Home owners associations dues may be required to be prepaid. They are typically prorated just like property taxes.

If it seems terribly complex, don't worry you're normal, it is complex. These concepts are some of the hardest to grasp for students taking the licensing courses to become a real estate agent. The simple rule is this, count on paying as much as 4 percent of the sales price for closing costs and if you need a sub-prime loan, which is getting harder and harder to find, the closing costs may very well exceed 4 percent. Most of the costs technically belong to the buyer but sometimes, as is often the case when buying real estate in Fayetteville NC (my local market) sellers help pay them.

Caveat emptor, Let the buyer beware, local markets vary, so buyers should seek buyer's representation from a real estate agent specializing in the area the home is located when constructing an offer. IE., in the Fayetteville NC real estate market sellers traditionally paid some or all of the buyers closing costs. A buyer unfamiliar with that fact, making an offer without knowledgeable representation might end up paying an extra 4 percent for the home.

 

Copyright 2007 Ron Allen Fayetteville NC real estate all rights reserved