Last week, this blog discussed a series of frequently asked questions regarding the process of real estate closing. However, in the weeks or months leading up to the closing, there are a number of tasks that must be completed to ensure the closing goes smoothly.
Indeed, once a buyer chooses a property he or she wishes to acquire, the process of negotiating the provisions of the purchase may begin. Inexperienced buyers often believe that the only issue to be settled is the final purchase price for the property, but that is just one of many terms to be agreed upon.
Next to the purchase price, perhaps the most important aspect of any real estate deal is the amount and allocation of closing costs. Closing costs are the miscellaneous fees and expenses charged by people (like your real estate agent) and entities (such as your title company) involved in the real estate transaction. On average, closing costs are approximately 2-5% of the purchase price of the property, but can be lower or higher depending on the circumstances of the purchase.
Closing costs generally fall into two categories, non-recurring and recurring. Non-recurring costs are one-time charges for things such as title examination, notary fees, attorney fees, recording fees, and inspection fees. Recurring costs are those that must be paid continually such homeowner’s insurance, property taxes, and, in some cases, private mortgage insurance.
As stated above, the amount and allocation of closing costs are important issues to consider when negotiating the purchase of a property. Certain closing costs, such as title exam fees, are variable depending on the lender or broker being used. Accordingly, many buyers shop around for lenders that offer them not only a good mortgage rate but also low closing costs.
Federal law, specifically the Real Estate Settlement Procedures Act, requires that a lender provide a borrower with a “Good Faith Estimate” (“GFE”) of the amount of closing costs within three business days of the application for the loan. The GFE must include an itemized list of fees and costs associated with the loan. Although the final closing costs may be different from the GFE, they may not vary by more than 10% from the amount stated in the GFE.
In addition the amount of closing costs, it is important to understand how they will be allocated between the purchaser and seller. Generally, the buyer pays any closing costs related to their mortgage loan, and the seller typically covers the various fees related to the transfer of the property. In most cases, however, closing costs are negotiable and buyers and sellers alike often ask that the other party pay the closing costs as a term of the sale.
For buyers, it is important to consult with the lender before negotiating an offer that involves the seller paying closing costs because the lender may not permit it or limit the amount the seller can pay.
If you have questions regarding the calculation, allocation, or amount of closing costs involved in the purchase of real estate, or need additional information about real estate transactions, contact the experienced real estate attorneys at The Slater Firm, Ltd. today.