Escrow & Closing Costs - Buying Your Home
Who pays the closing costs?
Closing costs are truly the obligation of the buyer as these are the combined “costs” for you to secure your loan. However, either buyer or seller can pay some or all of the closing costs.
What are closing costs?
Closing costs are all the fees and costs to obtain a loan, have an abstract of title done, and close the property. Depending on the state, a notary, attorney or escrow company may close the property. Some of these fees include charges by the lender originating your loan, appraisal, credit report, and the closing company’s fees.
** Note: Even though the Buyer pays for an appraisal as a closing cost, the appraisal is for the lender and they are only interested in knowing that the value of the property is “at least” what price is noted on the Buyer’s purchase agreement. The intent is not necessarily to determine the maximum amount of the property’s value.
What is Abstract of Title?
This is research by a professional as to what liens, mortgages or other encumbrances may be filed against a property. It is to ensure the Buyer is receiving a “Clear Title” on the home. For instance – if the seller failed to pay all of the monies owed a company that replaced the home’s roof, that company can file a lien on the house for the unpaid amount. If title was not researched, that lien is now on the Buyer’s home.
What are pre-paid items charged at the time of closing?
Basically, these are costs paid by the Buyer at closing that are not fees for obtaining and closing their loan. Examples of such would be monies to set up an escrow account if required by the lender and the first year’s homeowner’s insurance on the property.
Escrow accounts are generally required by a lender when a Buyer is borrowing more than 80% of the value of a home. This account is set up at closing with several months of homeowner’s insurance and property taxes. Then a portion of a house note goes into this escrow account each month and the lender pays for the insurance and taxes when they are due. In short, as the lender has greater risk with higher “loans to values”, they have a greater interest in knowing these items are paid timely. ** Note: Check often with whomever holds the note on your home, as it may be possible to have escrow removed once you reach a certain percentage of equity.