Because buying a new home is a major investment, potential homeowners should make sure that they are doing their homework before they decide to make a purchase. Even though it is an exciting time for those who are looking for their dream home, this can also be a frightening experience for those who do not know what to expect. From identifying major problems in the home during a home inspection to gathering all of the info that a mortgage loan offer needs to approve the home loan, there are so many different things that must be done before the homeowner receives their key. In fact, there is a long laundry list of items that must be considered carefully. Some of the most crucial is when nearing closing. So, what is closing and what does it entail?
What is Closing?
Closing can be described as the final phase of the real estate process. It is when the buyer, the seller, attorneys and others who play key roles in this deal come to the table to solidify the terms of the sale. This meeting is set on a pre-established date (normally scheduled 2 weeks after the offer for the home or property has been accepted) and must be attended by all essential parties involved.
Everyone who attends must come well prepared with their part of these negotiations complete in order for the deal to be closed at this time. In short, this is when the seller of the property transfers possession to the buyer. Therefore, every detail of a clean transaction must be taken care of before the deal is complete. In general, every element of this contract must be covered properly including giving the appropriate amounts in checks, sending bank transfers and addressing all closing costs.
What are Closing Costs?
Before getting to closing, the buyer and the seller are normally presented with many different types of paperwork. From looking over forms that need to be filled out correctly to reviewing numerous contracts that will affect the overall deal, it is important for buyers to pay close attention to the costs. Especially, because they can add up quickly over time and they may see them again at closing time. So, what are the closing costs? Typically, closing costs can be described as a lengthy listing of fees, taxes, insurance costs and the like. Though these costs will vary from one closing transaction to another, the average costs adds up to approximately 3% to 6% of the mortgage. It is also important to note that the law governs the disclosure of these amounts since they have to be provided to the buyer at a specified time during the application process. Some of the common costs are listed below.
Homeowner’s and Hazard Insurance
In most states, the buyer of the new home is required to pay their first year of insurance premiums in advance. Therefore, this is also included as part of closing costs expenses. The primary purpose of this type of provision is to protect both the new home owner and the lender in the event that there is damage to the home.
Processing fees vary with each lender and entails paying the bank for their mortgage processing services. For instance, the buyers will be paying for the processing of their application, credit checks and other services that they offer. In general, these amounts may range from $400 – $500, based on the bank’s norm.
The appraisal fee is normally a staple in the closing process since banks will require an appraisal of the home before approving the loan. Which means, this is where independent appraisal agents provide these services at a specific costs to the buyer. Once the appraisal is complete, these costs are normally addressed at the closing table to ensure they are paid. Typically, these costs can be estimated at $300. Again, the amount charged varies based on the independent appraiser’s pricing.
The origination fee is an additional fee that the lender charges on top of other common application and processing fees. Specifically, when it requires additional work in preparing the loan. These fees are not always included in the closing costs. So, it is important for the buyer to discuss these fees and terms of payment with their lenders in advance.
Document preparation fee
The document preparation fee is included in all closings. This fee pays for all of the documents prepared in closing. It’s normally a flat rate or a percentage of the loan (occasionally add in as less than 1% ).
Attorney fees are also paid at closing. Since the services that they provide involves making sure everything is been done properly and according to the law, they play an all-encompassing role. For instance, they are responsible for reviewing contracts and ensuring all fees are collected during the closing process. These fees may also vary substantially based on the law firm’s pricing, which can range from $500 to $1500 and more.
Based on the timing, prepaid interest may also be included as a part of the closing costs. Which means, even though the first payment for the mortgage is not due until one month from the closing date, interest during this time is still accruing and must be paid. To avoid this type of payment at the closing table, some buyers will set the date of their closing on the end of the month.
When buying a new home, most first time buyers are not familiar with the meaning of closing costs nor what these associated costs include. Therefore, it is important that they are actively engaged in asking a lot of questions about the costs of the services provided during these time frames. Since some closings costs are standard and others are not, it is a good practice for potential home buyers to keep a record of what they are paying for in advance. Many of which can be embedded in services and fees charged by the mortgage company, real estate agents, attorneys, home inspectors, independent appraisal agents and others who have a stake in making sure the entire buying and selling experience runs smoothly.
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