Closing cost
Real property in most jurisdictions is conveyed from
the seller to the buyer through a real estate contract.
The point in time at which the contract is actually executed
and the title to the property is conveyed to the buyer
is known as the "closing". It is common for
a variety of costs associated with the transaction (above
and beyond the price of the property itself) to be incurred
by either the buyer or the seller. These costs are typically
paid at the closing, and are known as closing costs.
Examples of typical closing costs might include:
* Attorney (Lawyer) fees, paid by either or both parties,
for the preparation and recording of official documents.
The principals and/or lender may each be represented by
their own attorney. Typically required by institutional/commercial
lenders to ensure documents are prepared correctly.
* Title service cost(s), paid by either party according
to the contract but by default seller may pay the majority,
for title search, title insurance, and possibly other
title services. In some cases the attorney may do the
title search or the title service and attorney fees may
be combined. Required by institutional/commercial lenders
and often by the real estate contract.
* Recording fees, paid by either party, charged by a
governmental entity for entering an official record of
the change of ownership of the property. Required by the
government for recording the deed.
* Document or Transaction Stamps or Taxes, paid by either
or both parties depending on location (area of jurisdiction),
charged by a governmental entity as an excise tax upon
the transaction. Required by law.
* Survey fee for a survey of the lot or land and all
structures on it, paid by either party, to confirm lot
size and dimensions and check for encroachments. Required
by institutional/commercial lenders.
* Brokerage Commission, paid by the seller to a Real
Estate Broker, to compensate the Broker(s) involved in
the sale for their services in marketing the property,
finding a buyer, and assisting in the negotiations. Brokerage
commissions are usually computed as a percentage of the
sale price, and are established in a listing agreement
between the seller and the listing broker. The listing
broker may offer Buyer Agents a portion of their commission
as an incentive to find buyers for the property. Payment
is required if real estate brokerage service was used.
This is often one of the largest closing costs.
* Mortgage Application Fees, paid by the buyer to the
lender, to cover the costs of processing their loan application.
In some cases, the buyer would pay the lender the application
directly and prior to closing, while in other cases the
fee is part of the buyer's closing costs payable at closing.
* Points, paid by the buyer to the lender. Points are
a form of pre-paid interest, charged by the lender as
an alternative to charging a higher rate of interest on
the mortgage loan. One point equals one percent of the
loan principal.
* Appraisal Fees, usually paid by the buyer (although
occasionally by the seller through negotiation), charged
by a licensed professional Appraiser. Many lenders will
require that an appraisal be performed as a condition
of the mortgage loan. The purpose of this appraisal is
to verify that the sale price of the property (upon which
the underwriting of the loan is based) is equal to or
less than the fair market value of the property.
* Inspection Fees, usually paid by the buyer (although
occasionally by the seller), charged by licensed home,
pest, or other inspectors. Some lenders require inspections
(such as termite inspection) to verify that the property
is in good condition, which is necessary to assure that
the property will retain the necessary collateral value
to secure the mortgage loan.
* Home Warranties, paid by either the buyer or the seller.
Warranties are available on resale homes insuring major
household systems against repair or replacement for the
buyer's initial year of ownership. Sellers will sometimes
offer these warranties as a marketing strategy, or buyers
can elect to purchase them at closing.
* Pre-paid Property Insurance, paid by the buyer. Lenders
will typically require that a mortgaged property be insured
at all times throughout the life of the mortgage, and
will usually require that the first full year's property
insurance premium be paid in advance by the buyer. If
the buyer has not already paid the insurance company directly,
this would become another closing cost payable at closing.
* Pro-rata property taxes, paid by the seller, the buyer,
or both. Most (but not all) jurisdictions assess taxes
on real property, which are usually payable at a specified
date annually. Since all but a tiny fraction of real estate
transactions close on a date other than this one specified
annual date, most transactions must include an adjustment
to assure that both the seller and the buyer end up paying
their share of the annual property tax, proportionate
to the percentage of the year that each has ownership
of the property. Usually required by institutional/commercial
lenders and by the real estate contract.
* Pro-rata Homeowner Association Dues, paid by the seller,
buyer, or both. If the property is covered by a Homeowner
Association (HOA), the HOA will normally be funded by
dues assessed against each property owner. Again, since
the ownership of the seller and buyer are each fractional
in the year of the transaction, there must be an adjustment
made so that each owner pays their proportional share.
Often required by institutional/commercial lenders and
by the real estate contract.
* Pro-rata Interest, paid by the buyer. The monthly mortgage
payment is calculated and payable on a specified day each
month. If the closing does not actually fall on that specified
date (which is usually the case), then an adjustment must
be made to calculate the interest on the loan for the
number of extra days until the first payment is due.
Other items in addition to the above may be common in
some jurisdictions, and some transactions may include
unusual or unique items as closing costs. In the United
States , Federal law requires that all residential transactions
financed by a mortgage have all closing costs documented
in detail upon the standard HUD-1 form. This information
must be provided to the principals but does not have to
be sent to the government. Instead a Declaration or Statement
by Buyer and/or Seller is often required to be provided
to the government office recording the deed. Form 1099-S
may be required to be sent to the United States Internal
Revenue Service, but Federal law does not allow a charge
for this.
