FAQ About Closing Costs

What are Closing Costs?

Closing costs are any additional costs or fees paid at the time of closing that are in addition to the purchase price of the home. Michelle Earle, closer at South Oak Title in Birmingham, says, “Closing costs are specific fees that are standard at nearly every closing, including mortgage fees, title fees, settlement fees, and termite fees.”

There are also prepaid costs at closing. These prepaids include hazard insurance as well as prepaid interest and escrows.

Standard Closing Costs

While every real estate transaction is different, almost all transactions will include the same standard closing costs.

• Mortgage Costs: Mortgage costs are any fees that are associated with the loan. This amount will vary according to the lender and the type of loan, but mortgage costs usually include the mortgage origination fee, appraisal fee, tax service, flood certification, and credit report.
• Title Insurance Fees: All mortgage lenders will require a loan policy, but this policy only provides coverage to the lender. Homeowners should also purchase an owner’s policy to protect their own interests from hidden risks to the title. Title insurance fees will include the fees for the title search and exam and any curative work that’s required.
  
• Recording Fees: Legal documents such as the deed and the mortgage will be recorded in the county of sale after closing and will become part of the public record. Every county will have different recording fees, but these may include fees per page, indexing fees, and filing fees. There may be additional charges for items such as additional names, taxes on mortgages and deeds, and mental health fees.
  
• Settlement Fee: This fee covers the costs associated with closing the transaction. A settlement fee includes the fees for the closing attorney as well as any other closing or escrow fees.
  
• Document Prep Fee: All closings are filled with documents and paperwork, and there’s a cost to preparing all of these documents for closing. A document prep fee will include a closing protection letter, notary fees, deed preparation fees, and other courier fees.
• Termite Fees: A termite bond, which serves as insurance against termite damage, verifies that the home is termite free for one year.

Prepaids

• Homeowner's Insurance: Remember that homeowner’s insurance and title insurance are two separate types of insurance. Homeowner’s (or hazard) insurance covers damage to the home itself, and most lenders require homeowners to prepay for at least one year of coverage. Homebuyers may choose their homeowner’s policy provider and their coverage amount. This prepaid amount will go into an escrow account held by your mortgage lender.
• Prepaid Interest and Escrows: While most mortgage company fees are standard closing costs, there are also prepaid costs, including prepaid interest. Some individuals may also pay for private mortgage insurance (PMI) or prepaid points. Mortgage lenders can answer specific questions about these costs for your clients.

Who Pays for Closing Costs?

Who is responsible for paying closing costs? Michelle Earle says that it depends. “On the standard printed contract in Alabama, sellers are responsible for half of the title fees, half of the attorney fees, and the termite bond while the buyer is responsible for other closing costs. But other contracts give the option to manually check who will pay for what costs.”

The contract is the ultimate authority on who pays for the closing costs. “We aren’t sitting at the table with the buyer and seller as they negotiate, so the contract provides all of the instructions for us as we determine who is responsible for which costs at closing,” Earle explains.

When negotiating closing costs within the contract, it’s important for realtors to be specific and precise. Earle says, “If a specific amount of concessions (closing costs) are agreed upon and the intention is just that one number of closing, then the way it is put in the contract makes a big difference. If the seller agrees to pay $6000.00 of closing costs, that means $6000.00, period. But if you put $6000.00 in buyer’s closing costs then it would mean $6000.00 plus the sellers closing costs as indicated by the preprinted verbiage in the contract. One word makes a big difference.”

It’s also important for realtors to understand what the contract means by closing costs. Many people wrongly believe that these costs include any fees paid at closing; however, only the standard closing costs are considered true closing costs for contract purposes. “However, if someone only lists closing costs on the contract, I always ask if the intent was to include the prepaids as well,” Earle continues.

When negotiating closing costs, Earle also says that buyer’s agents should be careful not to leave money on the table. “I recently had a contract where the seller agreed to pay $6500 worth of closing costs, but there wasn’t $6500 in the CD. The mortgage company won’t let you pay more than is listed as prepaids and closing costs, and you can’t just credit the remainder to other costs. To prevent this, agents should get an estimate of closing costs from the mortgage company.”

Agents should also remember that there are limits to seller concessions. These limits depend on the size and type of loan, so always contact the mortgage lender for more information before negotiating a contract.

How do you Estimate Closing Costs?

You won’t know the exact dollar amount for closing costs until the CD (Closing Disclosure) is finalized, but you can get some good estimates.

• The lender should be able to give a general estimate of closing costs based on the amount and type of your loan.
• Title insurance fees are standard and regulated by the state. Alabama residents can use our rate calculator for an estimate of their title insurance fees according to purchase price.
• Your title and closing company can provide more information about their settlement fees and document prep fees.

No matter where you choose to close, your fees should be fairly similar. “While there’s a little variation among closing companies for the settlement fees and document prep, you’ll find that the rates stay really competitive across the board,” Earle explains.

The CD will provide detailed, accurate information about final closing costs. “The closing disclosure breaks down every cost that every party is paying. The lender requires a CD three days before closing, so we work hard to get this to agents before closing day. Whether you see the CD prior to closing or at the closing table, thoroughly review the document,” Earle says.

When reviewing the CD, ensure that all of the closing fees are within your expectations. If you’ve gotten estimates of the costs before closing, there shouldn’t be any surprises. But if there are some surprises or items that don’t make sense, agents should always ask questions. Earle says, “Even if you don’t see the CD until closing, attorneys are there to help so that we can get everything to where it needs to be.”

At South Oak Title and Closing, we love to serve as a resource for realtors and their clients. We’re always here to answer your general questions and provide further education about closing costs. Our closers are also available whenever you need them to answer specific questions about a particular contract. Contact us today for more information, or schedule a closing at a South Oak location near you today.