Be ready for closing costs
Buying a house? After agreeing on the selling price, don't forget the cost of closing the deal. It may be a lot more than you expect.
The Real Estate Settlement Procedures Act of 1974 was intended to require the lender in a specific transaction to provide an estimate of the costs involved in the transaction, before the buyer has committed himself.
The lender must provide an estimate of the settlement costs and a copy of a Department of Housing and Urban Development booklet explaining the ''closing costs''; the reserve for taxes and insurance (if any) must be limited; and the lender may not require the use of a specific title-insurance company.
First-time buyers, however, may not be prepared for the amount of the closing costs or the variety of charges included therein. It helps if you know what to expect before the paper-work blizzard begins.
One of the line items, and often the largest, is the ''loan origination fee.'' Some observers see this fee, often known as ''points,'' or ''points plus a few hundred dollars,'' as gravy for the lender; in other words, a kind of incentive payment for the making of a loan.
This fee is supposed to cover, among other things, the cost of processing the loan papers, appraisal, credit check, and the like.
Then there are the escrow costs. Despite the frequently repeated legend that escrow fees are set by custom, and that the seller (or the buyer) must pay or usually does, they are in fact negotiable. The prudent investor negotiates these details at the same time the overall terms of a deal are established.
Escrow costs are usually a few hundred dollars. The same is true for title insurance. Another line item will likely be a credit report fee. Why the buyer/borrower has to pay for his own credit check when he is paying points-plus to the lender escapes some observers, but the line item will be there, debited to your side.
Along the same lines, an appraisal fee may be listed, further justifying any skepticism about the paying of points.
You'll also find a tax-service fee. A tax-service company will watch the delinquent tax records for any signs that you have missed a property tax installment. If you do, the company will notify the lender. Yes, you pay for this, too, in addition to the points-plus.
You will also wind up paying minor fees for recording service, notary service , and other tidbits. Notary service, in particular, is available free in numerous institutions. Further, it is easy to qualify to become a notary yourself, but it is considered bad form to notarize your own documents.
There also may be a pest-control-inspection fee, especially where local requirements insist upon inspection before transfer of title. There will be debits for liens, assessments, and other encumbrances that must, or should, be paid before transfer of title.
If any of these are news to you, be sure to verify their validity before the escrow company gives your money to cover them.
Other costs may be shown, such as an impound account for taxes and insurance. A lender may lend you $100,000 or more, but some will not trust you to pay the taxes and insurance premiums, even though the tax agency is probably using your fee to look over your shoulder at tax time.
Arrange your hazard insurance while the deal is in escrow; that is another line item.
The escrow people will prorate the current-year taxes so that the seller pays while he owns the property and you pay while you are the owner.
Usually the year is paid partly or completely in advance; here, the seller will likely be credited and you will be debited. If the current year has not been paid the seller will be debited for his share, and so will you.
Somewhere on the list will be an item called prepaid interest. Let's say your deal records on Oct. 15, and your first monthly payment is due Dec. 1 and will cover Nov. 1 through Nov. 30. What about the period from Oct. 16 through Oct. 31 ? If you answered another debit item, you're probably right.
In this example, 15 days' worth of interest will be debited from your account.
Depending on the day of recording and the day you want your first monthly payment due, the prepaid interest may cover as few as one and as many as 29 days. Some lenders will not charge 29 days of prepaid interest, but will credit your account for one day and have the first monthly payment due in 29 days.
Once you make your first monthly payment, all of these alternatives become identical.
A minor advantage may accrue to the lender if it collects prepaid interest in substantial amounts, but to the credit of one lender I know, it credited the buyer for two days and then scheduled the payment earlier.
Be prepared for the closing costs that will inevitably appear on your side of the escrow balance sheet. With a little planning, some of them can be minimized or eliminated.