Passing papers on a new home can be a strange and daunting process - especially for first-time buyers.
It's an exciting event - where the seller gets the money, and the buyer gets the home. But closings can also produce some anxious moments. The costs often loom ominously large and unpredictable - especially for people who have scraped and scrimped just for the down payment.
The damage usually looks even worse when the mortgage lender sends you the required closing-costs estimate - often in the thousands.
Not to worry. While closing costs can be steep, says Bob DeVasto, a loan officer at Great Western Mortgage in Reading, Mass., they average $1,500 to $1,700.
Those costs cover a myriad of reports to assure the lender, and you, that everything is clear and legal in the home purchase - that the seller actually owns the place and that it clears all inspections.
The closing finalizes the sale. It makes the house yours. You sign the loan agreement; the lender gives the money to the seller; and the seller signs the house over to you.
Most of the time.
A buyer of one $800,000 home near Boston discovered, on closing day, 48 gallons of oil and gasoline stored in the garage - hazardous waste.
At the closing, the seller's attorney waited, with the buyer on a cell phone to his wife, who was at the house while a waste company estimated the cost of the cleanup. Until they finished, the parties at the table could do nothing.
Real estate closings follow one of two procedures. Most states use escrow companies - a neutral company that holds the buyer's deposit and handles the details of closing. A few states require lawyers to oversee the paperwork.
Generally, buyers, sellers, and their agents sit down with an escrow agent or lawyer on closing day. (The lender hires the attorney; the borrower pays the attorney's fee.)
The escrow company provides all the legal documentation.
The buyer needs:
* A cashier's check for the balance of the down payment, plus the closing costs and any points to be paid on the mortgage.
* An insurance binder to prove the home is insured.
* A personal check for incidentals such as heating oil left in the tank.
The seller should bring:
* A deed to the property, obtained from the local city or county.
* Keys to the house.
* Certificates to prove the house meets fire, sewer, and other local codes.
* Receipts to verify recent mortgage, tax, water, and other payments.
Most closings take place at the escrow, title company, or lawyer's office. But some attorneys prefer the county courthouse or registry of deeds. All buyers and sellers - husbands and wives - need to show up or provide power of attorney for someone else to sign the papers.
Often, the seller will move out of the house before closing. Either way, the buyer is allowed a final check for required repairs and previously unseen problems, which offers one last chance to alter the sales price or make arrangements for repairs or cleaning.
In practice, few sales fall apart over such issues, says Massachusetts attorney Myron Goldenberg. Home-buying can be so emotional that if one party balks on an issue, the other often accommodates.
Even so, plenty of things can go wrong and delay the closing.
That's why attorney John Cronin recommends against selling one house and buying another the same day. "You get somebody sitting in your office with all their stuff on a truck outside," he says. "Then the closing gets delayed, and they don't have anywhere to live."
In states that use escrow companies, buyer and seller need not even meet. The seller can sign the papers ahead of time, and the escrow company holds them for the seller on the closing date.
Part of the reason home-buyers worry about closing costs, Mr. Goldenberg says, is that in today's flood of purchases and refinancings, banks often don't provide final numbers until the closing day.
Still, the exact amount should come as no surprise: The bank can tell you approximately how much you'll need shortly after it accepts your application.
Many lenders offer "no closing cost" loans at slightly higher rates. Others will roll the closing costs into the loan amount.
Little Costs Add Up
Closing costs can add thousands of extra dollars to the cost of your house. Yet many buyers still don't anticipate them or know what they're for. Here's a handy guide:
Appraisal: $250 to $300, so the bank knows the house is worth what you're paying for it.
Credit Report: $45, to convince the bank that you'll pay back the loan.
Tax Service fee: $70, to pay a company to check up on your property-tax payments. If you don't pay them, the bank will and charge them to you.
Flood certificate: $18.50, to pay a flood inspector to ensure you don't live in a flood zone - even if your house is on a hill.
Records fees: $50 to $60, to the local registry of deeds to transfer title to the property.
Title insurance: $2.50 per $1,000 of the mortgage, paid to the title insurance company. So if you borrow $100,000 to buy your house, you'll pay $250 up-front for the bank's title insurance.
Title search: $150 to $175, to the title company to make sure there are no outstanding liens on your property and no one else claims title.
Plot plan: $145, to search city or county records to ensure compliance with zoning laws, including how close the house, garage, shed, fence, etc. can sit to the property lines.
Escrow company or attorney fee: $400 to $500, to the person or company that manages all this money and makes sure everyone who needs to gets paid.
Other: Lenders may also add fees for processing, underwriting, or appraisal review, couriers, photos, and document preparation. These so-called "junk fees" are only worth paying if other fees have been reduced.
Total: $1,333.50 and up.