9-2-05
BY MIKE MCNAMARA
A new home is a tremendous financial responsibility and requires plenty of careful planning and budgeting. One important expense to consider when preparing to purchase is closing costs. This article will take a closer look at the various charges and expenditures you will encounter throughout the purchasing process.
The Good Faith Estimate
When you talk to a lender/mortgage consultant, they will usually prepare a Good Faith Estimate (GFE) of closing costs. Sometimes they will give the GFE to you right away; if not, they are required to mail it to you within three business days of application.
The GFE provides you with an honest approximation of the closing costs, down payment balances, prepaid expenses and all other charges you will be responsible for at closing. (Keep in mind the lender is only preparing an estimate of your costs based on his or her past experiences; final numbers might be slightly higher or lower.)
Let’s take a look at the items you will find on your GFE.
Processing Fees
Credit Report Fee – As part of the underwriting review, your mortgage lender will want to review your credit history. The credit report normally runs between $40-60, depending upon the type of credit report required by your lender.
Appraisal Fee – Since your property serves as collateral for the mortgage, lenders want to be reasonably certain of the value. The appraisal will determine if the price you are paying for the home is justified by recent sales of comparable properties. If you are buying a one bedroom for $160,000, but every other one bedroom on the block is going for $140,000, it might make it difficult to secure a mortgage. Appraisal fees vary depending on the property, but generally range from $300-$500.
Flood Certification Fee – Your lender must determine whether or not your property is located in a federally designated flood zone. Chances are it isn’t, but it’s going to cost you around $30 just to make sure.
Underwriting Fee – The underwriting process involves analysis of risk to the lender and setting of an appropriate rate and term for a mortgage. These proceedings are extensive and include an exhaustive examination of the homebuyer’s income, assets and credit history as well as the property being purchased. Underwriting fees range from $300-$600.
Document Preparation Fee – Before computers made it fairly easy for lenders to draw their own loan documents, they used to hire specialized document preparation firms for this function. This was the fee charged by those companies. Nowadays, even though lenders draw their own documents, the “doc prep” fee is charged on almost all loans and is usually in the neighborhood of $200.
Tax Service Fee – During the life of your loan you will be making property tax payments, either on your own or through your escrow account with the lender. (Head to last month’s article at www.performink.com for an explanation of escrows.) Since property tax liens can sometimes take precedence over a first mortgage, it is in your lender’s interest to pay an independent service to monitor property tax payments. This one-time fee usually runs between $70 and $80.
Day of Closing Fees
Settlement or Closing Fee – On the big day, all parties will meet at a title company and a “closer” will be assigned to your purchase. The settlement, or closing, fee covers the use of the facility and the consummation of the transaction, including delivery of the deed, financial adjustments, the signing of notes, and the disbursement of funds. The settlement fee should average $175-$200.
Title Insurance - In a nutshell, title insurance is necessary to protect you from losses that may arise from a property ownership dispute. Homes often go through several owners before a new buyer notices a fault, error or defect with the possession. For this reason, you will make a one-time payment of approximately $250 for title coverage.
Real Estate Attorney – Your attorney is there to review your sales contract, assist in closing proceedings and protect your interests throughout the purchasing process. He or she will be paid a flat fee of around $400 on the day of closing.
City and County Fees
The city and county will levy a couple of administrative fees—and one whopper. When you purchase your home, you will incur a recording fee of approximately $75 and an assignment fee of $30. Then there’s a charge called “city/county stamps.” For all properties bought in the City of Chicago, there is a one-time tax of $7.50 for every $1000 of your price. For example, if you buy a $200,000 home, you will incur a one-time “city/county stamps” tax of $7.50 x 200 = $1,500. It hurts me just typing it.
Prepaid Items
These items are not so much “fees” as they are standard homeowner expenses that are partially paid upfront. Mortgage interest, real estate tax escrows and homeowner’s insurance are considered “prepaid items.”
Let’s explore this topic a bit further.
Mortgage payments are usually due on the first of each month. Since loans can close on any day, a certain amount of interest must be paid at closing to get the interest paid up to the first. For example, if you close on the twentieth, you will pay 10 days of pre-paid interest.
With your tax escrows you have to deposit two months of taxes into the escrow account to start it up. If that money is still in your account at the end of the year, i.e. if your real estate taxes don’t go up over that time, the surplus will be refunded to you at the end of the year.
Finally, if you buy a single family home, you will normally pay the first year’s insurance at closing. (If you are buying a condo, your monthly assessments normally cover this insurance.)
The Final Bill
So what is the grand total for these various expenditures? If you are purchasing a $200,000 property, for example, you should expect your closing costs and prepaid items to land in the neighborhood of $3,500.
But don’t let these pesky closing costs scare you! If that $200,000 property appreciates only 5 percent in its first year, you have gained $10,000 in equity. Meanwhile, you and your realtor may be able to negotiate with the seller to have them absorb some or all of those closing costs. Finally, the lender will often cover these expenses if the buyer is willing to finance at a higher rate.
As always, feel free to call or e-mail me anytime with any home buying questions you may have. Also, please send me any comments or suggestions about this article and let me know if there are topics you would like to see discussed. Talk to you next month!
Mike McNamara has been an actor in Chicago for the past seven years in theatre, commercials, television and film. Mike is also a Mortgage Consultant and Loan Originator with West America Mortgage Company. He can be reached anytime at 773/398-0021 or McNamara310@aol.com.