Don't be surprised by closing costs
First-time homebuyers are sometimes surprised by the additional fees and costs of purchasing a home, above and beyond the purchase price. Whether certain fees and costs are paid by the buyer or the seller depends on several factors, including local custom, the contract for purchase and sale, and state and federal laws and regulations which require one party to pay certain fees (such as in the case of a VA loan). In general, a buyer obtaining a loan from a bank to purchase a property can expect associated closing costs of an additional 1-2% of the purchase price.
Typical closing costs that can be overlooked include:
Recording Charges: Certain documents need to be recorded in the Official Records of the county where the property is located in order to transfer the title out of one person or entity and into another, or to create a lien on the property to secure repayment of the loan. This document is the mortgage. Having these documents as a part of the public record lets everyone know who is the rightful owner of a particular property and who may be owed funds before the property can be sold to another person.
For Example: In Palm Beach County, Florida, the buyer typically pays the fees to have the deed and mortgage recorded. The fee is $10.00 for the first page and $8.50 for each additional page of a single document with an additional $0.60 for each legal description in the document. A typical mortgage is 20 pages long and a typical Deed is 2 pages long so the recording fees average $191.20 in Palm Beach County.
In other counties, the party who pays these fees may be different, and the fees can be negotiated by the parties in each individual transaction to best meet their needs.
Non-recurring Document Taxes: Most people know that there are property taxes charged by the government each year on real property (land, buildings, etc.). Many people don't know that there are also taxes charged on the documents that transfer the title to the property.
One such tax is the Florida Documentary Stamp Tax - The documentary stamp tax is a tax owed on almost all transfers of property, and is charged at rates based on the amount of consideration (or payment) for the transaction. The consideration on a Deed is typically the sales price and the tax rate is $0.70 per $100 of the sales price.
So the documentary stamp tax on a deed conveying property from Sammy Seller to Betty Buyer for a sales price of $100,000 is $700.00 (($100,000/100)*0.70).
If Betty Buyer is using a mortgage to pay for a portion of the purchase price, there will also be documentary stamp tax owed on the Mortgage. The documentary stamp tax rate for mortgages is $0.35 per $100 of consideration, with the consideration being the loan amount. If Betty is getting a $75,000 mortgage to purchase this property from Sammy, the documentary stamp tax on the mortgage is $262.50 (($75,000/100)*0.35).
In this example, the total documentary stamp tax paid would be $962.50. In Palm Beach County it is customary for the Seller to pay the documentary stamp tax on the Deed and the Buyer pays the taxes owed on their Mortgage.
In the example above, there is another tax paid on the mortgage when it is recorded. This tax is known as the Intangible Tax. The intangible tax rate is $0.002 per $1.00 financed. In the example above, Betty Buyer would also pay $150.00 in intangible taxes on her $75,000 mortgage ($75,000*.002).
Title Insurance Policies: Title insurance protects against financial loss from defects in the title to real property and from the invalidity or unenforceability of mortgages. A typical defect in title would be a clerical error in the public records, an unknown lien, or forged or defective deed. There are two policies issued in a typical financed transaction, the Owner's Policy which protects the Buyer once they are the owner of the property, and the Loan Policy which protects the lender. In most counties in Florida, the Seller pays for the Owner's Policy but in almost all cases the Buyer will need to pay for the Loan Policy for their lender. The rates are set by the Department of Insurance and are charged based on the amount of insurance coverage being purchased.
The premium rates in Florida are $5.75 per $1,000 of coverage for the first $100,000 of insurance and then $5.00 per $1,000 of coverage from $100,001 to $1 Million. There are other rates for larger purchases but for the purpose of this example (and the majority of transactions), these are the relevant rates.
Continuing the example with Sammy and Betty, the cost of the Owner's Policy in this example would be $575.00 (($100,000/1,000)*5.75). If the sales price was $150,000, the Owner's Policy premium would be $825.00 ((($100,000/1,000)*5.75)+($50,000/1,000)*5)).
You are probably guessing then that the Loan Policy should cost $431.25 (($75,000/1000)*5.75). This is a reasonable guess however there is a discount called the Simultaneous Issue Rate, which is applied whenever two policies are issued at the same time in the same transaction, which would be the case here because we are issuing an Owner's Policy to Betty and a Loan Policy to her lender. The simultaneous issue rate is $25.00 so the Loan Policy would only cost $25.00. There may also be some endorsements to the Loan Policy requested by the lender, which are issued for an extra charge (most frequently the Florida Form 9 and the 8.1 Environmental Protection Lien Endorsement). The cost for endorsements varies, with some being flat fees and others a percentage of the premium charged.
Loan Fees: Betty Buyer will also be subject to fees from her lender. Some of the charges frequently seen include daily interest, homeowner's insurance premiums, private mortgage insurance, VA funding fees, escrow reserves, appraisal fees, credit report fees, and tax service fees.
Daily Interest is based on the interest rate for your mortgage and is collected at closing for any days between the day of closing and the first day of the next month. So if you close on your home on January 15th, there will be 17 days (the duration from and including January 15th through, but not including, February 1st) of daily interest collected at closing.
Interest begins to accrue on your loan the day you sign the papers and the money is transferred to the seller. In order to avoid your first mortgage payment being larger than the others, the interest for the period between the closing date and the first of the month is collected at closing.
In this example your first mortgage payment will be due on March 1st. But wait a second - if I am only paying interest through February 1st how come I don't make my first payment until March?!? The answer lies in how mortgage payments are calculated. When you make your mortgage payment on March 1st, you are paying the interest that has already accrued on the loan for February. The interest payments are always one month behind.
Homeowner's Insurance Premiums - Lenders require that borrowers carry insurance on the property to protect the lender's investment. The premiums for homeowner's insurance policies can vary greatly depending on several factors including: the age of the home, the materials and methods used to construct the home, the distance of the home from a Fire Station and Police Department, the distance of the home from bodies of water or the location of the home in relation to certain flood zones. It is important to involve a reputable insurance agent early in the process to ensure that the insurance premiums do not make the home unaffordable.
Private Mortgage Insurance - Certain loans require Private Mortgage Insurance, or PMI, to be paid. PMI covers the lender if you default on the payments. Depending on the terms of the loan, PMI can last until the equity in the home reaches at least 20% more than the principal balance on the loan or could be for the life of the loan. PMI fees vary from between 0.5% to 1.15% of the loan amount. PMI can be avoided by putting 20% down on the purchase or obtaining a VA loan, if you qualify.
VA Funding Fees - Although VA loans do not have PMI, most do require a funding fee to be paid at closing. The funding fee is around 2.15% of the loan amount and is designed to reduce the cost of these loans to taxpayers. Certain veterans are exempt from the funding fee, however, including disabled veterans and surviving spouses of veterans who died while in service, or from service-related disabilities.
Escrow Reserves - Many loans require the borrower to pay an extra amount in addition to the principal and interest payment each month to pay for their homeowner's insurance and property taxes. This extra amount is known as an escrow payment, since the funds are held in escrow (or trust) for the borrower to pay the bills when they come due. To calculate the escrow payment, divide the total homeowner's insurance and property tax bill by twelve, since there are twelve payments per year in most cases. Depending on the month the loan closes, these payments may be due before the lender can save enough of the borrower's money to pay them. To cover this, they collect a cushion of funds (the Escrow Reserve) from the borrower at closing, typically in the amount of 3 months worth of payments for each.
Appraisal Fees - In order to make sure that the loan is going to be a good investment, the lender requires an appraisal to be done to determine the market value of the home. The fees for an appraisal are typically around $400.00 but can vary depending on the location of the home. These fees are typically paid before the closing so it is important to be aware of the cost so you aren't blindsided.
Credit Report Fees - In order to determine whether a borrower is creditworthy, lenders run credit report checks on them. There are fees associated with getting these reports, though they are typicaly low with most being around $25.00. Before applying for a loan it is important to know your credit score. Some issues can be repaired to improve your credit score, which lowers the interest rate you can qualify for, which can make the home you decide to purchase more affordable in the long run.
Tax Service Fees - This is typically a one-time fee charged to the borrower and is usually around $25.00. The tax service fee is paid to a tax service agency, which provides the lender with the property tax bills as they become due to ensure that they are paid on time. Unpaid property taxes can result in a lien on the property, which in many cases has priority over the lender's mortgage, so it is important to the lender to ensure the taxes are paid on time.
Buying a home is one of the largest purchases the average person will make in his or her lifetime, and it is important to be fully informed of the relevant issues when making decisions about the purchase. It is best to go to the closing of your home with a full understanding of the costs involved, and that knowledge and preparation will make you feel much better about your choices. A good closing agent should also take the time before closing to explain the fees being charged to you and to answer any questions you may have. If you are planning on buying a home, or would like more information about any of the topics addressed in this blog, please feel free to reach out to me, either by phone at (561) 623-5302, or by email at email@example.com.