Real Estate Guide

Buying Your Home - Questions and Answers
'Escrow & Closing Costs'

• What are closing costs?
• Who pays the closing costs?
• How can I save on closing costs?
• Why do I need a title report?
• Do I need Title Insurance?
• Where do I get more information about closing costs?

How can I save on closing costs?

Studies show that the closing costs can average 2 to 3 percent of a total home purchase price and are often more costly than many buyers expect. But there are some ways to save:

• Haggle! Negotiate with the seller to pay all or part of the closing costs. Most lenders will allow the seller to pay as much a 6% or more of the value of the purchase price toward buyer closing costs.
• Seek out a no-point loan. You, no doubt, will land a higher interest rate on the loan and may have to agree to suffer prepayment penalties, but if you're short on cash and can still qualify for a higher interest rate may find a no-point loan will significantly cut your closing costs.
• Get a no-fee loan. In reality there is no such thing. The lender simply charges you a higher interest rate and makes his money on the back end. However, if you're strapped for cash it you will save you on the amount of cash you need upfront.
• Get seller financing. This kind of arrangement usually does not entail traditional loan fees or charges and can include such arrangements as Land Contract, Rent to Purchase, and Rent with an Option to Purchase.  These arrangements give you more time to save for the upfront cash needed for the actual purchase.
• Shop and nit-pick. Look around for the best loan deal and then ask the lender to explain each and every fee in minute detail. If you're backed with good credit and hanker for a haggle, you can very often get the lender to reduce or even eliminate many of his fees. Third party fees such as appraisal, escrow and settlement fees may be more difficult to negotiate but you'd be surprised what you'll get simply by asking. The point is, most consumers, don't ask.

What are closing costs?

Closing costs are the fees for services, taxes or special interest charges that surround the purchase of a home. They include

• upfront loan points,
• title insurance,
• escrow or closing day charges,
• document fees,
• prepaid interest
• and property taxes.

Unless, these charges are rolled into the loan, they must be paid when the home is closed.

Bankrate.com researchers gathered closing cost information from 50 states and the District of Columbia. Click on your state for a fee-by-fee breakdown of the average closing costs for a mortgage in your area.

Who pays the closing costs?

Closing costs are paid by both the home seller or home buyer. It often depends on local custom and negotiations between the buyer or seller. In the Mahoning Valley, Ohio it is customary for buyer and seller to evenly split the actual escrow attorney fees, but each will have other charges assigned to them separately.

The buyer's fees will usually stem from the cost of processing the mortgage and may be as much as 3% of the value of the loan. The seller* (in Ohio) will customarily pay for the title search, the title warranty (sometimes called a 'binder'), and the transfer tax.

Sellers See >>

What Will You Net? for a interactive form that may be used to calculate an estimate of your net proceeds when selling a home.

Why do I need a title report?

As much as you, the buyer, may want to believe that the home you have found is perfect, a clear title report ensures there are no liens placed against the prior owners or any documents that will restrict your use of the property. 

A preliminary title report provides you with an opportunity to review barrier that would prevent clear title from passing to you.  When reading a preliminary report, it is important to check the extent of your ownership rights or interest. The most common form of interest is "fee simple" or "fee," which is the highest type of interest an owner can have in land.  Liens, restrictions and interests of others excluded from title coverage will be listed numerically as exceptions in the report.

You also may have to consider interests of any third parties, such as easements granted by prior owners that limit use of the property. Some buyers attempt to clear these unwanted items prior to purchase. 

A list of standard exceptions and exclusions not covered by the title insurance policy may be attached. This section includes items the buyer may want to investigate further, such as any laws governing building and zoning.

See also >> (Home Buyers) - Title Insurance

Do I need Title Insurance?

A title insurance policy is insurance against loss from defects in title  to real property (forgeries, encroachments, dower claims, etc.) ; and from invalid or unenforceable of mortgage liens.

It is meant to protect an owner's or lender's financial interest in real property against loss due to title defects, liens or other matters. It will defend against a lawsuit attacking the title as it is insured, or reimburse the insured for the actual monetary loss incurred, up to the dollar amount of insurance provided by the policy.

Typically the real property interests insured are fee simple ownership or a mortgage. However, title insurance can be purchased to insure any interest in real property, including an easement, lease or life estate. Just as lenders require fire insurance and other types of insurance coverage to protect their investment, nearly all institutional lenders will require title insurance to protect their interest in the collateral of loans secured by real estate. Some mortgage lenders, especially non-institutional lenders, may not require title insurance.

See also >> (Home Buyers) - Title Insurance

Where do I get information about closing costs?

• "Consumers Guide to Mortgage Settlement Costs," Federal Reserve Bank of San Francisco, Public Information Department, P.O. Box 7702, San Francisco, CA 94120 or call (415) 974-2163.
   
• The HUD-1 Form
   
• Your Settlement Costs, from the  Department of Housing and Urban Development (HUD).