You're finally wrapping up your home purchase. Congratulations. Before it's officially yours, though, you have one last hurdle: the mysterious process known as "closing" or "settlement." Open your wallet and hold onto your hat.
"Closing costs" — the catch-all term for a host of fees, taxes and charges — can total 2% to 6% or more of your purchase price — $4,000 to $12,000 on a $200,000 mortgage. That means you'll need to budget a chunk of money besides your down payment.
Costs vary by region and by what you negotiate. Buyers usually pay most fees, but sellers may pay some, too. Buyers often get lenders to contribute, too. Be aware, however, that lenders offering a "zero-closing-cost" loan usually charge a higher interest rate.
Closing starts when you sign a purchase contract. It ends about four to eight weeks later, at a closing meeting (or conference) where you sign papers on your loan; pay fees, taxes and services to finalize the sale; and receive the keys and deed to your new home.
Who's in charge?
A professional settlement agent orchestrates a closing. The agent files documents, pays taxes on your behalf, ensures every task is done and recorded in the time specified by law, and also may hire an appraiser, pest inspector and other professional services. The agent represents the buyer, the seller and the lender equally.
In some states, the agent must be an attorney. In others, it's an independent settlement or escrow company. (An escrow company is one licensed by the state to hold money and documents.) In many states, title companies — whose primary jobs are to make sure there are no claims on the property and to sell insurance guaranteeing that the title is clear — may be the settlement agent.
States' requirements vary:
The federal forms and rules used to disclose your loan costs and closing fees, however, are identical in every state:
Most of these fees are negotiable, and you can shop separately for many of them.
"The consumer has to open their eyes, because they can save a lot of money," Blaszyk says. "People spend more time shopping for a big-screen TV." Closing.com's closing costs calculator lets you plug in home-purchase information to get numerous estimates and quotes on closing services from providers near you.
By shopping aggressively, you might:
Start shopping for settlement services and for additional loan offers once you've made one mortgage-loan application. A lender must stick to its good-faith estimate for 10 days. "The bank or broker can't go back and make changes, which gives the borrower a chance to make comparisons," says Jeanne Stell, head of compliance for Allied Home Mortgage Capital Corp., a lending company.
Don't worry about hurting your credit score by making numerous loan applications. In "4 credit-scoring myths," personal finance guru and MSN Money contributor Liz Pulliam Weston says that your FICO score will register multiple inquiries in a 45-day period as just one inquiry. Applying is free, except maybe for the cost of pulling your credit report — about $15, tops. Lenders can't collect application or appraisal fees while you're comparison shopping.
Although recent changes in federal law make it harder for lenders to pad fees, you should still get expert help in reviewing offers and closing documents. "The key is getting somebody who is trained and who can comprehensively look at it for you," says Debra Pogrund Stark, a professor and real-estate law expert at John Marshall Law School in Chicago.
In advance, line up either of these:
Closing fees — a guide
There are three basic types of closing costs:
Here are the fees that can't be negotiated:
1. Lender fees
All lender fees are bundled into the GFE line labeled as "Origination fee."
To compare costs, everything you need to know is on a GFE, says Brian Sullivan, HUD spokesman. "If you compare origination charges and total settlement charges, it's going to be crystal clear which loan is cheapest," he says.
If you want to delve deeper, request explanations for each fee. They go by many names: administration, document preparation, processing, notary public, courier services and flood certification. Be dubious of vague categories or multiple fees with mysterious titles, such as a "loan tie-in" fee or a "sub-escrow" fee, mortgage insurance application fees and fees for "processing," "commitment," "application," administration," "document preparation," "origination" and "underwriting."
Lenders tend to inflate origination fees to protect themselves from variations in their final costs, Blaszyk says. That means there's room for a well-prepared buyer to negotiate.
2. Government fees
State and local government fees — including transfer fees, recording fees and property taxes — can be negligible or cost up to 3% of your loan amount.
3. Fees for third-party services
Courtesy of MSN Real Estate