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What happens at closing ?
At the closing, ownership of the newly purchased home is officially transferred from the seller to you.

Statutory Costs
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.

Third-Party Costs
Third-party costs are expenses paid to others such as inspectors or insurance firms.

Finance and Lender Charges
These are charges such as the origination and application fees, points, credit report and lender's attorney fees.

Other Up-Front Expenses
The major portion of other up-front expenses is the deposit or binder you make at the time of the purchase offer and the remaining cash down payment you make at closing.

The Real Estate Settlement Procedures Act (RESPA) The Real Estate Settlement Procedures Act (RESPA) contains information on the settlement or closing costs you are likely to face.

Truth in Lending
Mortgage lenders are required to give you a Truth in Lending (TIL) statement containing information on the annual percentage rate, the finance charge, the amount financed, and the total payments required.

Transfer Taxes
Transfer Taxes are required by some localities to transfer the title and deed from the seller to you.

Recording Fees
Recording fees for deed pay for the county clerk to record the deed and mortgage and change the property tax billing.

Pro-rated Taxes
Pro-rated taxes such as school taxes and municipal taxes may be split between the buyer and the seller because they are due at different times of the year. Prorated taxes are usually paid based on the number of days (not months) of ownership. Some lenders require an escrow account to cover these bills.

State and Local Fees
Other state and local fees can include mortgage taxes levied by states as well as other local fees.

Third-Party Costs

Third-party costs are expenses paid to others such as inspectors or insurance firms. You would have to pay many of these expenses even if you paid cash for the house. Examples of third-party costs are as follows:

Attorney Fees: Attorneys usually charge a percentage of the selling price (.75% or 1%), but some may work for a flat fee or on an hourly basis.

Title search Costs: A title search is done insure there are no liens or lawsuits tied to the property.

Homeowner's Insurance: Most lenders require that you prepay the first year's premium for homeowner's insurance.

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.

Finance and Lender Charges

The charges you pay will vary among lenders. You may have to pay the following charges:

Origination or Application Fees: These are fees for processing the mortgage application and may be a flat fee or a percentage of the mortgage.

Credit Report: Most lenders will require a credit report. This fee often is a part of the origination fee.

Points: A point is equal to 1% of the amount borrowed. Points can be payable when the loan is approved (before closing) or at closing. Points can be shared with the seller. Some lenders will let you finance points, adding this cost to the mortgage, which will increase your interest costs. If you pay the points up front, they are deductible in your income taxes in the year they are paid. Different deductibility rules apply to second homes.

Lender's Attorney's Fees: Lenders may have their attorney draw up documents, check to see that the title is clear, and represent them at the closing.

Document Preparation Fees: Lenders may charge for preparation of the loan documents, or they may be included in the application and/or attorney's fees.

Preparation of Amortization Schedule: Some lenders will prepare a detailed amortization schedule for the full term of your mortgage.

Land survey: Lenders may 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.

Appraisals: Professional property appraisers will compare the value of the house to that of similar properties in the neighborhood or community.

Lender's Mortgage Insurance: 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 his money. 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. The premiums usually are added to any amount you must escrow for taxes and homeowner's insurance.

Lender's Title Insurance: Even though there is a title search for liens and lawsuits, many still require lenders title insurance so that should a problem arise, they can recover their mortgage investment. This is a one-time insurance premium, usually paid at closing; it is insurance for the lender only, not for you as a purchaser.

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.

Inspections Required by Lender (termite, water tests): If a borrower applies for an FHA or VA mortgage, the lender will require a termite inspection. 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).

Prepaid Interest: Your first regular mortgage payment is usually due about 6 to 8 weeks after you close. 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.

Escrow account: Lenders often require borrows set up an escrow account into which they will make monthly payments for taxes, homeowner's insurance, and PMI (mortgage insurance, if required). The amount placed in this escrow account at closing depends on when property taxes are due and the timing of the settlement transaction.

Other Up-Front Expenses

In addition to the deposit and down payment, other up-front expenses can include the following:

Inspections: In addition to inspections required by the lender, a buyer may make the purchase offer contingent on satisfactory completion of some other inspections. These inspections might include: structural, water quality tests and radon tests.

Owner's Title Insurance: A buyer may elect to purchase title insurance so that if problems arises, you are not left owing a mortgage on a property you no longer own.

Appraisal Fees: A buyer may elect to hire their own appraiser, either before signing a purchase offer or after seeing the results of the lender's appraisal.

Money to the Seller: The buyer will need to pay for items in the house that they want and that were not negotiated in the purchase offer.

Escrow Account Funds: In the purchase offer, the buyer can request that the seller set up an escrow account to defray any costs of major cleanup, radon mitigation procedures, house painting, or other items. Also, if the buyer has not had a chance to try out appliances, furnaces or air conditioners they may request an escrow account to cover repairs if necessary.


The Real Estate Settlement Procedures Act (RESPA) contains information on the settlement or closing costs a buyer is likely to incur. Within 3 days of the time a buyer applies for the mortgage, the lender is required to provide you with a "good faith estimate of settlement costs," based on his or her understanding of your purchase contract. This estimate should provide a good idea of how much cash will be needed at closing to cover pro-rated taxes, first month's interest, and other settlement costs.

The act also requires lenders to give you an information booklet, Settlement Costs and You, written by the U.S. Department of Housing and Urban Development, which discusses how to negotiate a sales contract, how to work with various professionals (attorneys, real estate agents, lenders), and your rights and responsibilities as a home buyer. It also shows an example of the uniform settlement statement that will be used at your closing. One business day before the closing, buyers are entitled to see a copy of the Uniform Settlement Statement to see what the final costs will be.

Truth in Lending

Mortgage lenders are required to give borrowers a Truth in Lending (TIL) statement containing information on the annual percentage rate, the finance charge, the amount financed, and the total payments required. For adjustable rate loans, the "total payments" figure is estimated as a "worst case" scenario. The figure represents the payments you would make if your loan adjusted upward to the maximum rate allowed by annual and lifetime caps and then stayed there for the duration of the loan. The TIL statement may also contain information on security interest, late charges, prepayment provisions, and whether the mortgage is assumable. If a borrower has an adjustable rate loan, it may outline the limits on the adjustments (annual and lifetime caps) and give an example of what their next year's payment might be, depending on interest rates.

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