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CLOSING /
SETTLEMENT TERMS and FORMS |
Settlement (or closing) is the process
which passes ownership of a property from seller to purchaser. Going to
settlement on a new home can be bewildering. Home buyers are usually
required to sign a seemingly endless pile of documents, most of which are
written in legalese.
Before you go to settlement, there are certain important items you should
know about so that you can achieve the best possible terms for yourself in
the transaction.
Ask a lender for a copy of the HUD pamphlet, Settlement Costs. Most lenders
are required to provide their loan applicants with a copy of this document
under the Real Estate Settlement Procedures Act (RESPA), but you will be
able to shop more wisely for settlement services if you have read the
pamphlet before you apply. It provides a good description of the settlement
process and explains most of the expenses you will encounter.
When you apply for a loan, the lender is required by law to provide you with
a good faith estimate of settlement costs. Shortly before settlement, you
will be told exactly how much you owe so that you can get a bank check. A
personal check is generally not acceptable. In some instances, you may have
money returned to you instead of having to pay.
Before you go to settlement, familiarize yourself with the following terms:
Appraisal Fee
An appraisal is an estimate of the fair market value of your home.
Appraisals help both the lender and the buyer to determine if the sales
price is consistent with the actual value. An appraiser inspects the house
and the neighborhood and makes an estimate based on the price of comparable
houses and other factors. The appraisal provides no guarantee that the
property is free of defects. Lenders insist on an appraisal to see how much
they could recover by selling your house if you default. The fee for this
service may vary considerably depending on the specific characteristics of
your house.
Attorney's Fees
If the lender requires an attorney to draw up any of the settlement
documents, you may be charged a fee - a flat amount or a percentage of the
loan. If you hire a lawyer to assist with the settlement, you will have to
pay an additional fee at or immediately following settlement.
Credit Report
The lender may charge a fee for investigating your credit history.
Earnest Money
Earnest money is a deposit paid to a seller to show you are serious about
buying a house. Your receipt for this payment is called a binder. If you
later buy the home, the earnest money is applied to your downpayment. If
not, the earnest money is returned, minus expenses for processing. Be sure
that you understand the refund procedures before you make a deposit.
Escrow Fees and Accounts
Escrow involves having a third party hold funds and/or documents until you
and the seller complete settlement. Depending on the circumstances of your
loan, you may be asked to make monthly payments to an escrow account after
you purchase your home. Money in the account may be used to pay taxes,
insurance, and any other regular assessments as they fall due. Such accounts
serve a similar purpose to withholding income tax from your paycheck; by
putting aside money each month, you avoid large annual or semiannual
payments. You may be charged a fee for the service. In some states, escrow
accounts draw interest.
Sometimes, escrow agents handle settlements. Rather than you and the lender
meeting to sign all of the documents and transfer money, the agent works
with you and the lender separately to ensure that everything is done
properly. Once again, a fee is required for this service.
Loan Origination Fee
A lender will charge a fee for the cost of processing the loan, usually
calculated as percentage of the loan amount.
Loan Discount (Points)
The largest of your settlement cost may be the "points" lenders require to
make the yield on your loan more profitable. A point is one percent on your
loan amount. If you are borrowing $50,000, one point equals $500. Points are
tax deductible if they are paid separately and not deducted from the loan
amount. For VA loans, you can be charged a maximum of one point, but the
number of points can be higher for FHA and conventional loans.
On a 30-year loan, each point that you pay reduces your interest rate by
roughly 1/8 of a percent. You may be faced with a choice between two
mortgages in which one has lower monthly payments but involves paying more
points up front. Annual percentage rate calculation include buyers' points,
so ask for the APR to help you make your assessment. Keep in mind that an
APR is calculated on the basis of the total life of the loan. For a 30-year
loan, the APR is a 30-year composite figure. If you sell your new home after
a few years, the average annual cost of your points will be much higher than
is reflected in the APR. If you plan to move soon, you might be better off
with a loan that has a slightly higher rate but fewer points.
Property Survey Fee
You may have to pay to have your lot surveyed, especially if there is a
question about the boundaries. The cost will depend on the complexity of the
survey.
Recording Fee
Because title is changing hands, the transaction must be recorded with your
city, county, or other appropriate branch of government. The fee covers
administrative costs.
State and Local Transfer Taxes
Some jurisdictions levy taxes on the transfer of property or on real estate
loans.
Settlement Costs Between Buyer and Seller
Your builder may have already paid the annual property taxes on your new
home or filled up your fuel tank. When title changes hands, you must
reimburse the builder for a proportional share of the taxes, any fuel that
remains in the tank, and any other prepaid costs.
Title Search and Insurance
A title search involves having someone look through public records to see if
anyone else has a claim to your property. A lender does not want to lend you
money only to learn in the event of foreclosure that somebody other than you
has a prior claim to the property.
You will normally be required to purchase lenders' title insurance to guard
against a faulty title search as well as hazards that even the most thorough
search will not reveal - such as a forged deed that does not transfer title,
a claim by a previously undisclosed relative of a former owner, or a mistake
in the records. For a one-time premium at closing, title insurance will
clear up title problems, pay the lender's legal expenses for defending
against an attack on title, or pay claims on property the lender may lose.
Lenders' title insurance does not compensate buyers for any legal expenses
they might incur, or the value of property they might lose. A separate
owners' title insurance is available to safeguard the buyer. Whether the
seller or the buyer pays for owners' title insurance depends on local
custom.
This list of settlement terms is not all-inclusive. You may also be charged
fees for notarizing documents and other miscellaneous items.
Once all the forms have been signed, you can move into your new home. But
before ending the settlement session, make sure that you have received or
will be sent copies of all the important documents, including:
Sales contract.
Land survey.
Warranties and instruction booklets from
manufacturers for equipment in the house.
All tax payment receipts.
Certificate of occupancy (required in some
areas).
Certificates from the health department for
plumbing and sewer installations (required in most areas).
Other certificates of code compliance (required
in most areas).
All insurance polices (some might be sent later
after they have been properly endorsed).
The note and deed to your property (which will
probably be mailed to you after being placed on record in your local
registry of deeds office).
Home maintenance and care instructions from your
builder.
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