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Home Buying 101

Contracts and Closing

The Cost of Closing

You’ve found a home, negotiated successfully with the seller, and secured your financing. Now it’s time to close. But in addition to the purchase price, there are expenses due before or at closing that can add up. Settlement costs are typically paid by the buyer, but a motivated seller, or even a lender, may pick up some or all of these expenses as an incentive to get you to buy. Your lender will provide a Loan Estimate of the funds required, but here’s a rundown of some of the more typical fees you’ll owe and what they cover.

Origination Fee
This is the fee paid to a lender for processing a loan application, including notary fees, the lender’s attorney fees, and document-preparation fees. The fee is stated in “points,” or a percentage of the mortgage amount. One point is equal to 1%, so if you have a $100,000 mortgage, a point will be $1,000.

Loan Discount
This one-time, up-front charge by the lender lowers the rate of your mortgage. It is stated in “points,” the cost of a point being 1% of your loan.

Appraisal Fee
The lender requires a professional opinion of the market value of a property to ensure that the home is worth at least as much as the loan amount.

Credit Report Fee
When you apply for a loan, your lender orders a report of your credit history.

Lender’s Inspection Fees
Additional assurances are required by lenders in some states. These inspections are performed by licensed professionals who attest to the condition of the home. For example, they may inspect the property for termites.

Title
This legal document establishes the right of ownership, attesting that the title is free and clear for sale. Fees are charged by the licensed title company that performs a background search on the property and prepares the legal documents. Title insurance, for which you pay an additional one-time fee, protects you and your lender against future claims.

Private Mortgage Insurance
If your down payment is less than 20% of the purchase price, the lender may require mortgage insurance provided by nongovernmental insurers. The policy protects the lender against loss if you default.

Property Survey
The lender will often require a drawing that shows the legal boundaries of a property.

Recording and Transfer Charges
State or local tax is usually paid when the title passes from one owner to another.

You’ll receive a complete list of fees on your preliminary Closing Disclosure before closing. Keep in mind that you will also have to compensate the settlement agent, attorney, and/or your broker.

Settlement costs can vary, so don’t hesitate to shop around and ask questions. In some states the parties meet around a table to sign forms and transfer funds; in others it’s all handled by the escrow firm. If you’re meeting in person, be sure to bring a picture ID. And congratulations, you’re a homeowner!