Important Settlement Terms to Know When Closing on a Home
Going to a closing and signing a contract on a new home can be confusing. Home buyers are usually required to sign a seemingly endless pile of documents, most of which are written in legalese. New Homes Month signals the start of a high building and buying season, and there are certain important settlement terms new homeowners should know about so that they can achieve the best possible result. We spoke to Real Estate Agents in the Wilmington area to gain insight into the important terms all new homeowners should be familiar with, which include:
Appraisal Fee: An appraisal is an estimate of the fair market value of your home. Jennifer Young of Wilmington- based Do Good Real Estate says “the appraisal fee is from the buyer to the lender. They will request the appraisal to make sure the loan amount and the value of the property make sense for the amount of mortgage being given.” An appraiser inspects the house and neighborhood to make an estimate based on the price of comparable houses and other factors. The appraisal provides no guarantee that the property is free of defect. The fee for this service may vary considerably depending on the specific characteristics of your house, however Ted Hardeen of Coldwell Banker Sea Coast Advantage says that in our market, the fee costs about $500.
Recording Fee: Because title is changing hands, the transaction must be recorded with your city, county or other branch of government. The fee covers administrative costs.
Attorney’s Fees: If the lender requires an attorney to draw up any of the settlement documents, you may be charged a fee — a flat amount or a percentage of the loan. If you hire a lawyer to assist with the settlement, you will have to pay an additional fee at or immediately following settlement.
Earnest Money: Earnest money is a deposit paid to a seller to show you are serious about buying a house. Young notes that the earnest money amount varies per transaction. Your receipt for this payment is called a binder. If you later buy the home, the earnest money is applied to your down payment. If not, the earnest money is returned, minus expenses for processing. “Earnest money is refundable up to a certain date,” Scott Cowan of Coldwell Banker Sea Coast Advantage says,”this gives buyers a chance to further inspect the property, get the loan process started, and make sure everything else is satisfactory during the initial phase of a home purchase.”
Escrow Fees and Accounts: Escrow involves having a third party hold funds and/or documents until you and the seller complete settlement. Depending on the circumstances of your loan, you may be asked to make monthly payments to an escrow account after you purchase your home. The money may be used to pay taxes, insurance and any other regular assessments as they fall due. Such accounts serve a similar purpose to withholding income tax from your paycheck — by putting aside money each month, you avoid large annual or semiannual payments. You may be charged a fee for the service. In some states, escrow accounts draw interest. Sometimes, escrow agents handle settlements. Rather than you and the lender meeting to sign all of the documents and transfer money, the agent works with you and the lender separately to ensure that everything is done properly. Once again, a fee is required for this service.
Loan Origination Fee: A lender will charge a fee for the cost of processing the loan, usually calculated as a percentage of the loan amount. “These fees are collected in order to pay for overhead and margin,” says Hardeen,”and can also be used to impact the rate on the loan.”
Property Survey Fee: You may have to pay to have your lot surveyed, especially if there is a question about the boundaries. The cost will depend on the complexity of the survey.
Settlement and Costs Between Buyer and Seller: Your builder may have already paid the annual property taxes on your new home or filled up your fuel tank. When title changes hands, you must reimburse the builder for a proportional share of the taxes, any fuel that remains in the tank, and any other prepaid costs.
Title Search and Insurance: A title search involves having someone look through public records to see if anyone else has a claim to your property. A lender does not want to lend you money only to learn in the event of foreclosure that somebody other than you has a prior claim to the property.
You will normally be required to purchase lenders’ title insurance to guard against a faulty title search as well as hazards that even the most thorough search will not reveal—such as a forged deed that does not transfer title, claim by a previously undisclosed relative of a former owner, or a mistake in the records. For a one-time premium at closing, title insurance will clear up title problems, pay the lender’s legal expenses for defending against an attack on title, or pay claims on property the lender may lose.
Loan Discount (Points): The largest of your settlement costs may be the points lenders require to make the yield on your loan more profitable. Cowan notes that “loan discount points are usually 1/8 of 1% (0.125) of the loan’s rate, so a 4.5% rate can be bought down 1/8 of 1%, so the rate becomes 4.375%.” Doing this allows the lender to accept cash up front, which is less risky for them, and gives the buyer a lower interest rate over the full term of the loan. “This is especially useful if the buyer plans to live in the property for more than 7-10 years,because it will save the buyer a lot of money on interest payments in the long run,” says Cowan.
This list of settlement terms is not all inclusive. Going over your settlement costs with your loan officer is extremely important and will clue you in to how much money you will need to close on your new home. “You will receive the Good Faith Estimate of Settlement Costs shortly after the loan application,” says Hardeen, “which will do a good job of itemizing all of the expected costs to complete the purchase on your home and mortgage loan, so there are no surprises.”