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Closing
cost
Real property in most jurisdictions is conveyed
from the seller to the buyer through a real estate contract. The
point in time at which the contract is actually executed and the
title to the property is conveyed to the buyer is known as the "closing".
It is common for a variety of costs associated with the transaction
(above and beyond the price of the property itself) to be incurred
by either the buyer or the seller. These costs are typically paid
at the closing, and are known as closing costs.
Examples of typical closing costs might include:
* Attorney (Lawyer) fees, paid by either or
both parties, for the preparation and recording of official documents.
The principals and/or lender may each be represented by their own
attorney. Typically required by institutional/commercial lenders
to ensure documents are prepared correctly.
* Title service cost(s), paid by either party
according to the contract but by default seller may pay the majority,
for title search, title insurance, and possibly other title services.
In some cases the attorney may do the title search or the title
service and attorney fees may be combined. Required by institutional/commercial
lenders and often by the real estate contract.
* Recording fees, paid by either party, charged
by a governmental entity for entering an official record of the
change of ownership of the property. Required by the government
for recording the deed.
* Document or Transaction Stamps or Taxes,
paid by either or both parties depending on location (area of jurisdiction),
charged by a governmental entity as an excise tax upon the transaction.
Required by law.
* Survey fee for a survey of the lot or land
and all structures on it, paid by either party, to confirm lot size
and dimensions and check for encroachments. Required by institutional/commercial
lenders.
* Brokerage Commission, paid by the seller
to a Real Estate Broker, to compensate the Broker(s) involved in
the sale for their services in marketing the property, finding a
buyer, and assisting in the negotiations. Brokerage commissions
are usually computed as a percentage of the sale price, and are
established in a listing agreement between the seller and the listing
broker. The listing broker may offer Buyer Agents a portion of their
commission as an incentive to find buyers for the property. Payment
is required if real estate brokerage service was used. This is often
one of the largest closing costs.
* Mortgage Application Fees, paid by the buyer
to the lender, to cover the costs of processing their loan application.
In some cases, the buyer would pay the lender the application directly
and prior to closing, while in other cases the fee is part of the
buyer's closing costs payable at closing.
* Points, paid by the buyer to the lender.
Points are a form of pre-paid interest, charged by the lender as
an alternative to charging a higher rate of interest on the mortgage
loan. One point equals one percent of the loan principal.
* Appraisal Fees, usually paid by the buyer
(although occasionally by the seller through negotiation), charged
by a licensed professional Appraiser. Many lenders will require
that an appraisal be performed as a condition of the mortgage loan.
The purpose of this appraisal is to verify that the sale price of
the property (upon which the underwriting of the loan is based)
is equal to or less than the fair market value of the property.
* Inspection Fees, usually paid by the buyer
(although occasionally by the seller), charged by licensed home,
pest, or other inspectors. Some lenders require inspections (such
as termite inspection) to verify that the property is in good condition,
which is necessary to assure that the property will retain the necessary
collateral value to secure the mortgage loan.
* Home Warranties, paid by either the buyer
or the seller. Warranties are available on resale homes insuring
major household systems against repair or replacement for the buyer's
initial year of ownership. Sellers will sometimes offer these warranties
as a marketing strategy, or buyers can elect to purchase them at
closing.
* Pre-paid Property Insurance, paid by the
buyer. Lenders will typically require that a mortgaged property
be insured at all times throughout the life of the mortgage, and
will usually require that the first full year's property insurance
premium be paid in advance by the buyer. If the buyer has not already
paid the insurance company directly, this would become another closing
cost payable at closing.
* Pro-rata property taxes, paid by the seller,
the buyer, or both. Most (but not all) jurisdictions assess taxes
on real property, which are usually payable at a specified date
annually. Since all but a tiny fraction of real estate transactions
close on a date other than this one specified annual date, most
transactions must include an adjustment to assure that both the
seller and the buyer end up paying their share of the annual property
tax, proportionate to the percentage of the year that each has ownership
of the property. Usually required by institutional/commercial lenders
and by the real estate contract.
* Pro-rata Homeowner Association Dues, paid
by the seller, buyer, or both. If the property is covered by a Homeowner
Association (HOA), the HOA will normally be funded by dues assessed
against each property owner. Again, since the ownership of the seller
and buyer are each fractional in the year of the transaction, there
must be an adjustment made so that each owner pays their proportional
share. Often required by institutional/commercial lenders and by
the real estate contract.
* Pro-rata Interest, paid by the buyer. The
monthly mortgage payment is calculated and payable on a specified
day each month. If the closing does not actually fall on that specified
date (which is usually the case), then an adjustment must be made
to calculate the interest on the loan for the number of extra days
until the first payment is due.
Other items in addition to the above may be
common in some jurisdictions, and some transactions may include
unusual or unique items as closing costs. In the United States ,
Federal law requires that all residential transactions financed
by a mortgage have all closing costs documented in detail upon the
standard HUD-1 form. This information must be provided to the principals
but does not have to be sent to the government. Instead a Declaration
or Statement by Buyer and/or Seller is often required to be provided
to the government office recording the deed. Form 1099-S may be
required to be sent to the United States Internal Revenue Service,
but Federal law does not allow a charge for this.
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