Buyers are often concerned and confused about closing costs -

Because different parties to a transaction identify closing costs in different ways, it's important for buyers to get an accurate idea of what it takes to close a real estate deal.

Let buyers know the categories and variables we're discussing today, then refer them to some local title companies or closing attorneys for a more detailed look.

...because it's generally considered a vague, catch-all term used in real estate deals.

Closing or settlement is the final step in a real estate trans-action. At closing, ownership is transferred from seller to buyer, funds are paid from buyer and lender to seller, and documents related to the sale and mortgage are recorded in the local city or county.

The phrase "closing costs" refers to what buyers pay

out of pocket at the closing table and is NOT included in the

purchase price, down payment, or mortgage loan amount.

There are closing costs on all-cash deals too, though obviously not the ones related to financing.

Depending on who you ask, some things are included in closing costs and some are not. This is the source of much of the buyer confusion because most of the charges are third party pass-throughs and can be categorized differently by various parties to the transaction.

Under the fairly new Integrated Disclosures rules, the old HUD-1 Settlement Statement is now part of the new Closing Disclosure for transactions using mortgage financing.

The Closing Disclosure reconciles the payment of funds that results in closing the transaction and transferring ownership. The closing title company or attorney then disburses funds to the parties as shown on the Closing Disclosure.

We discussed Integrated Disclosures and allowable variances from the initial Loan Estimate in an earlier edition. Check it out in the Newsletter Archives if you'd like.

Let's look at some closing expenses and see who receives them :

Lender Charges

- Origination, processing, and underwriting charges

- Points - prepaid interest used to "buy down" an interest rate

- Per diem interest (interest charged for the days after closing,

yet before the first scheduled mortgage payment)

Third-Party Service Provider Charges

- Property appraisal

- Survey and Elevation Certificate

- Credit report

- Insurance - property hazard, flood

(first full year's hazard insurance must be paid before or at closing)

- Title company or attorney fees for conducting settlement

- Title search, title insurance and endorsements

- Inspections - (home, well, septic, pest, flood cert, wind mit, etc)

- Real estate commissions (usually paid from seller's proceeds)

- HOA or Condo Association application and transfer fees

Government / Municipal Charges

(representative for Collier County, FL)

- Property taxes (pro-rated between buyer and seller by closing date)

- Documentary stamps on deed and mortgage

- Intangible tax on mortgage face value

- Public records recording charges

- Other transfer taxes depending on incorporated town or city

- CDD or MSTU pro-rations / payoffs (FL independent taxing areas)

Escrow Funding

- Monthly insurance and property tax payments are collected

and held in an escrow account by the mortgage servicer so

enough of the buyer/borrower's own money is available to

pay the next insurance and tax bills when they are due.

Failure to pay either one can place the loan in default, and

escrowing reduces the chance of non-payment.

Depending on the closing date, up to 4 months of tax

payments may need to be paid into escrow at closing.

Initial escrow funding for insurance is usually 2 months

of premium payments.

Important note: Insurance is paid in advance (for the coming year), while taxes are paid in arrears (for the past year). Due to this, lenders require proof of a full year's insurance payment before or at closing. This is in addition to initial escrow funding.

Some closing expenses are often Paid Outside Closing (POC) and may not show up on the Closing Disclosure. Examples of these are the :

- appraisal

- credit report

- home inspection

(not required, though highly recommended)

Although they may not be on the CD at closing, they are still costs to the buyer that are paid out of pocket and may have been shown on the initial Loan Estimate.

Closing costs cannot normally be included in the loan amount on purchases, which is why lenders need to know that buyers/borrowers have their own money available to pay them at the closing table. However, some government-insured programs do allow certain closing costs to be included in the loan amount.

Remember also that seller contributions or concessions to closing costs can help make a deal go through that otherwise may have stalled or failed. This is very common ground for negotiation between buyer and seller.

Here in South Florida, the choice of contract used to document and control the transaction can indicate whether the buyer or seller will pay for certain costs. Most notably these include documentary stamps on the deed and/or the owner's title insurance premium.

Refinancing borrowers may usually wrap these costs into the loan amount - as long as the overall Loan To Value (LTV) stays below the maximum ratio allowed for that loan program.

There are also programs marketed to the public as "No Closing Costs" loans. For these, the lender might pay for the appraisal, credit report, and settlement charges by the title company or attorney. In return, the buyer/borrower is charged a higher interest rate.

This is often where one's definition of closing costs comes into play. Escrows, first-year property insurance, and other

expenses are not considered closing costs by most lenders offering a NCC program.

And even though they are home-acquisition expenses, most closing costs are NOT tax deductible, they just add to the cost basis of the property when calculating gains at the time of future sale. Click here for a link to the IRS's Publication 530 which goes into detail, then consult your CPA or tax advisor.

RESPA, the Real Estate Settlement Procedures Act, is a Federal law administered by the CFPB that protects borrowers by requiring that they receive accurate disclosures and a GFE / Loan Estimate of transaction and closing costs within 3 days of loan application. Final closing costs cannot exceed certain allowable variances from those shown on the Loan Estimate.

However, I feel buyers should have the opportunity to learn about closing costs without having to make a full loan application. That's why I suggest first giving them the basics we're discussing in this newsletter, then have them get in touch with their lender and a local title company or closing attorney.

We'll go into other aspects of RESPA in another newsletter, though it's important to mention here that one of its main provisions is consumers' right to choose closing-related providers such as:

- Financing - Surveyors

- Title / closing services - Insurance companies

- Inspection firms

When your buyers have questions about transaction costs, give them a brief overview of the kind of closing costs they can expect on a property you show them.

You may not be able to give actual cost numbers, though you can now prepare them to discuss costs and fees with their lender and closing title company or attorney.

Working with well-informed buyers and sellers makes things so much smoother for everyone.