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Introduction:
On a typical house purchase the buyer can expect to pay the following closing costs: title insurance fees, hazard or homeowners insurance, possibly private mortgage insurance, prepaid quarterly taxes, escrows for taxes and insurance, survey fees, recording fees, home inspection fees, tax adjustments, loan origination fees, appraisal fees, credit report fees, loan processing fees, possibly discount points, flood certification fees, tax service fees, prepaid interest, and attorneys fees. That's over nineteen separate closing costs, not including the amount needed to buy the house. This website will help you understand these fees and the entire purchase process from pre-contract to post-closing. back to top 
The Lawyer's Role:
Your lawyer should be willing and able to explain all facets of the home-buying process in terms that you can understand. He or she should be diligent in reviewing and explaining all documents that the lender will have you sign, and he should, when appropriate call a lender on a fee. He should insert extra protection in the standard form realtor-drawn contracts, and if necessary, he should attempt to negotiate credits at closing for repairs found during the home inspection. He should return your calls promptly and he should be able to make sure that you close when you want to close.
There are more than ten (10) different parties involved in moving a purchase from start to finish: the buyer, the seller, the buyer's lawyer, the seller's lawyer, the mortgage broker or lender, the title company, the buyer's realtor, the listing agent (seller's realtor), the home inspector, the surveyor, the managing agent (for a condominium or co-operative), possibly a tenant at the property.
Your lawyer has two (2) primary responsibilities: (1) to serve as your watchdog with regard to lenders fees - to make sure that the deal being offered by your lender is the best that you can get, and (2) to drive your deal - i.e., to orchestrate the events so that you have a smooth purchase experience. back to top
Lending Sources:
Traditional Banks
Bank of America, Citi Bank, and Chase Bank all provide mortgage loans to customers. These goliaths are a good choice for many home buyers, but they might not have the flexibility in their lending criteria to lend to people whose payment history is a little irregular, or whose debt/income ratios are too high, or whose down payment amount is too low. See CLOSING COSTS below for a description of customary fees charged to borrowers.
Mortgage Brokers
Mortgage brokers aren't locked into any fixed underwriting criteria. If a borrowers payment history is a little irregular a mortgage broker may be able to find a lender who lends to borrowers with irregular payment histories. If the borrowers debt/income ratios are too high for a bank underwriter the mortgage broker may be able to find a lender who lends to borrowers with higher debt/income ratios.
Generally, the mortgage broker does not lend it's own money, even if the mortgage broker is also a licensed mortgage banker. The mortgage broker collects information from the borrower and submits it to a third-party lender for that lender's approval. The third-party lender makes the final decision on the loan and issues the loan commitment.
The broker customarily charges the borrower up front fees for its work and also gets paid at deal closing by the lender.
Generally, the costs for doing business with a mortgage broker are higher than the costs of doing business with a traditional bank. For instance an origination fee for "originating" the loan may be charged to a borrower by a mortgage broker. See CLOSING COSTS below for a description of possible fees charged by the lender or mortgage broker. back to top
Credit Unions:
Credit Unions are non-profit lending institutions whose primary purpose is to service their membership. Therefore the costs you will incur getting a loan from a credit union are significantly lower than the costs you would incur going to for profit entities like banks and mortgage brokers. Generally, Credit Union's also require less paperwork to process your loan request, and can issue a mortgage approval much faster then the other lending sources. back to top
Documents Lenders Are Required To Give You:
Good Faith Estimate of Settlement Charges (GFE)
Federal Truth-In-Lending Disclosure Statement (TIL)
All lenders are required to provide you with a one-page document called a Good Faith Estimate of Settlement Charges (closing costs), and a Truth-In-Lending Statement. The GFE lists your estimated closing costs. The TIL shows you your finance charges for the life of the loan, the APR (annual percentage rate) on your loan, the amount that you are financing, and the total of your payments over the life of the loan. Have the lender fax these to your attorney for his review before you sign them. back to top
The Mortgage Pre-Qualification Letter:
Whichever lending source you use the lender usually will issue you a pre-qualification letter. A pre-qualification letter gives you added credibility with Sellers. In essence, it states that a lender has run your credit and received some other preliminary information about your income and debt picture, and based on this limited information they feel that they should be able to loan you up to a certain stated dollar amount.
Don't mistake the pre-qualification letter for a mortgage commitment. The pre-qual letter is a quick review approval, conditioned on receipt of income, debt, and other documentation. A pre-qual letter is not a mortgage loan commitment. back to top
The Contract Of Sale:
There are a number of standard form real estate contracts in use by realtors in New Jersey - Coldwell Banker has their own form as does Weichert Realtors. Other realtors use the Association of Realtors standard form contract. back to top
Key Contract Provisions:
Deposit: Usually after having an offer accepted by the Seller, the Buyer puts down a $1000.00 deposit with the remainder of the deposit monies to follow after the attorney review period is over.
3-Day Attorney Review: In New Jersey the buyer's or the seller's attorney usually makes changes to the fill-in-the-blanks standard form contracts initially written up by the realtor. The changes made by the attorneys give the parties protections not mentioned in the standard contracts.
Home Inspection: After attorney review is over, the buyer customarily has a home inspection done by a licensed home inspector. The buyer should accompany the home inspector on the inspection. You will learn a lot about your future home. At this time if you want to conduct a radon inspection the inspector can place radon kits in the home to collect information on the levels of radon in the house.
Pest Inspection: At the same time that the home inspection is conducted, a pest inspection - wood destroying insect infestation inspection is done and a report is issued. The lending institution will want to see either that there is no evidence of the presence of a wood destroying insect at the premises or that if there is a wood destroying insect that treatment has been done and will continue. The lender insists on this report because they want to make sure that they protect their investment.
Additional Deposit: The contract usually provides for the additional deposit to be paid within 5-10 days after attorney review.
Mortgage Commitment: The contract usually provides for the mortgage commitment to be obtained within 30-45 days after attorney review is complete. back to top
The Mortgage Commitment:
After the lender has issued a pre-qualification letter the real mortgage processing work begins. The lender or the mortgage broker will ask you to sign a stack of documents so that they can verify your income, deposits, and other information. Once all the information is gathered your application is sent to a mortgage underwriter who actually decides on what conditions the lender will lend you money to buy your house. You will be issued a conditional loan commitment- meaning the lender is committing to loan you money if you satisfy the conditions that they have outlined. This document is signed by you and the lender. Before you sign it have it faxed to your lawyer for his review. back to top
Title Examination And Insurance:
Once the mortgage commitment has been issued a title examination of the property where your future home is located is ordered by your attorney. Approximately 5-7 days later the title company issues a report on the property. The title report contains a legal description of the property, and it shows outstanding mortgages and assignments recorded against the property. It also reports on New Jersey Superior Court and U.S. District Court judgments against the buyers name or sellers name. The title report reflects taxes, charges or assessments due on the property, and flood search and other information on the property. Finally, the report also shows the history of the chain of property ownership going back a number of years.
Your lawyer's job is to make sure that when you receive the property it is free and clear of all rights and claims of others which would affect your ability to sell the property in the future. When the title is cleared - the title company provides you with title insurance against claims of others in your property. back to top
The Closing:
The closings customarily take place in the office of the buyer's attorney. Each purchase transaction actually involves two (2) closings. The mortgage closing and the title closing. The mortgage closing is first, followed by the title closing. The entire transaction - all fees, and monies are accounted for on a document called the HUD-1 Uniform Settlement Statement. I have scanned in a sample completed HUD-1 for your review. back to top
Closing Costs:
Hazard or Homeowner's Insurance:
A lender will require that a buyer pre-purchase a full year's homeowner's insurance for the property prior to closing. See Page 2, Line 903 of the HUD-1 Settlement Statement.
Prepaid Interest:
The buyer pays interest at closing from the day of closing to the first day of the next month. See Page 2, Line 901 of the HUD-1 Settlement Statement.
Bank Escrows:
The lender will require prepayment of 3-5 months of property taxes and homeowners insurance and possibly mortgage insurance to be placed in an escrow account, which will be used to pay these expenses. See Page 2, Lines 1001 to 1003 of the HUD-1 Settlement Statement. Ask your lender how many months they escrow.
Loan Origination Fees:
See Page 2, Line 801 of the HUD-1 Settlement Statement Ask your lender if these are charged, and if so how much.
Discount Points:
See Page 2, Line 802 of the HUD-1 Settlement Statement. Ask your lender if these are charged, and if so how much.
Credit Report Fees:
See Page 2, Line 804 of the HUD-1 Settlement Statement The fee is usually under $20.00.
Tax Service Fees:
See Page 2, Line 808 - 811 of the HUD-1 Settlement Statement. This fee is paid to a third-party which services the payment of the property taxes. This fee is usually under $100.00.
Loan Processing Fees:
See Page 2, Line 808 - 811 of the HUD-1 Settlement Statement. Ask your lender if these are charged, and if so how much.
Flood Certification Fees:
See Page 2, Line 808 - 811 of the HUD-1 Settlement Statement. Ask your lender if these are charged, and if so how much.
Commitment Fee:
See Page 2, Line 808 - 811 of the HUD-1 Settlement Statement. Ask your lender if these are charged, and if so how much.
Private Mortgage Insurance (PMI):
Private mortgage insurance protects lenders and others against financial loss if a borrower defaults on his loan payments. Charges for private mortgage insurance are added to the borrowers monthly loan payment. PMI is usually required if the borrower's down payment is less than 20% of the home's value. The borrower will then pay PMI monthly until over time his loan balance falls to approximately 80% of the property value. Payment of PMI is usually canceled automatically or on demand of the borrower at this time. See page 2, Lines 902 and 1002 of the HUD-1 Settlement Statement.
Prepaid Quarterly Taxes:
Statewide property taxes are due February 1, May 1, August 1, and November 1. If you close within sixty (60) days of a payment coming due the lender will require you to pay the next quarterly tax payment at closing.
Appraisal Fees:
In underwriting the loan the lender appraises the property being purchased. The buyer customarily is charged the fee for the bank appraisal. See Page 2, Line 803 of the HUD-1 Settlement Statement
Tax/Utility/Maintenance Adjustments:
Adjustments are made down to the day of closing for property tax payments, maintenance payments, if the property is a condominium or co-operative, and in some cases sewer or water payments. See Page 1, Lines 106 - 108; 210 - 212 (Buyer's Side) 406 - 408; 510 - 512 (Seller's Side) of the HUD-1 Settlement Statement.
Title Insurance Fees:
Title insurance rates are set by the state. There are actually two title insurance policies issued on a property - the lender's insurance - based on the amount of the loan and the owner's title insurance based on the purchase price of the property.
Note: If the seller has "back title" on the property that they can give to the buyer, the buyer may be able to get an even larger reduction in the cost for title insurance. This is because the title company can use the back title to reduce their search costs.
Lawyers Fees:
Lawyers charge a flat fee for residential real estate work. Some lawyers will charge one fee for title examination, another fee for document preparation, another fee for notary services, and another fee for closing. All of these potential fees are listed on the HUD-1 Settlement Statement. (See HUD-1 Lines 1101 - 1107). So don't be too impressed when you are told that somebody's closing fee is $500.00.
A good real estate lawyer more than earns his fee. He is working with you, resolving issues, answering your questions, and steering the deal for 30 - 60 or more days. Make sure that you have a written retainer agreement which explains what is and isn't covered in his or her fee.
Deed and Mortgage Recording Fees:
The recording cost for the mortgage is $30.00 for the first page and $10.00 for every additional page. The recording cost for the deed is $40.00 for the first page and $10.00 for every additional page. See Page 2, Line 1201 of the HUD-1 Settlement Statement.
Survey Fees:
The lender will require the buyer to pay for a survey of the property. The cost for a survey is $375.00 - $450.00. See Page 2, Line 1301 of the HUD-1 Settlement Statement.
Home Inspection Fees:
These fees are usually paid at the time that the inspection is performed. So on the HUD-1 they will be reflected as P.O.C. (Paid Outside Closing).The fees range from $275.00 - $450.00. back to top
The Mortgage Closing:
The mortgage closing is held for the purpose of the purchaser settling up with the lender. The purchaser gets the loan money from the lender (usually wired to the purchaser's attorney the day of the closing) and the lender secures this loan money by having the purchaser sign a note - in which the borrower promises to pay back the lender a certain amount in monthly principal and interest until the loan is satisfied and a mortgage - which is the lender's lien on the property - which remains until the note is paid off in full.
There are numerous other documents which the lender requires the borrower to sign at the mortgage closing. Some are notices and disclosures required to be given to the borrower by the Federal Government. Most of the documents are there to protect the lender. back to top
The Title Closing:
The title closing follows immediately after the mortgage closing. The seller's and their attorney, and the realtors, are all in attendance. This is where the legal title is transferred from seller to buyer, checks get cut, keys are exchanged, and the HUD-1 is reviewed and signed. The buyer pays the seller the contract price for the property and the seller gives the buyer the deed for their home. The deed is the document which gives you legal title to your home. back to top
Affidavit of Title:
The seller also presents an affidavit stating in essence, that the title that they are conveying is "good and marketable" - free of liens, judgments or other encumbrances.
Signing of HUD-1
Both parties - the buyer and seller review and sign the HUD-1. The property has been transferred and the deal is done. back to top
Post-Closing:
Deed:
Your lawyer will take the original deed and have it recorded in the county recording office. The county recorder will send it back to your lawyer who will send it on to you. The deed is usually 1-4 pages long. Again, the recording cost is $40.00 for the first page and $10.00 for every additional page.
Title Insurance:
After all documents have been recorded by your lawyer the title company will search the county records and if everything is in order they will issue title insurance to you. back to top
Links:
www.HUD.gov
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Disclaimer:
The information provided on this website is for general informational purposes and is not intended to be nor should it be construed as legal advice.
The information is provided to appraise the public of general information on the law. It is understood that no attorney-client relationship is entered into by sending, receiving or answering e-mail queries.
It is also understood that generally a retainer agreement must be read, understood and signed by an attorney and any prospective client before an attorney-client relationship is commenced. back to top
Contact Information
Phone: 1. 800. 274. 6180
E-mail: brian@itonlaw.com
Copyright © 2006 Brian D. Iton, Attorney at Law. All rights reserved.
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