Trying to break down exactly how much money you need at closing can be a difficult task. Despite increased mortgage regulations, cash to closing is often an ambiguous aspect associated with every deal. That is not to say that mortgage brokers or lenders are misleading with their fees, but the vast amount of each fee is often unknown. In addition to lending fees, there are property and insurance escrows that have to be accounted for. After all is said and done, what you think you need and what you actually need can potentially be off by thousands.
There is a difference between a fee and an expense. All of these are broken down on a good faith estimate or a proposed HUD settlement statement, but you should know the difference. Closing costs to your mortgage company, attorney or lender are considered fees. Conversely, prepaid taxes and insurance are both considered to be expenses. The difference is that fees may be negotiated and shopped around while your taxes are dictated by the town and fixed. As excessive as it may seem to have these expenses, they are yours and you cannot live in the house without them.
The issue that most buyers have is that they are prepaying for these items. If you want to escrow your taxes and insurance, your lender will need to hold it anywhere from two to six months to establish the escrow account. They will pay these items for you, but they never want to get caught in a situation where your taxes or insurances increases and they are short money. You will get any overages at the end of the year, but what usually happens is that they roll this money over into the account for the next year. You will end up getting that money back when you sell, but who knows when that will be.
As far as direct closing costs; you have various lender fees, an appraisal fee, attorney fees, title search, title insurance and miscellaneous recording fees. Since the mortgage industry revamped how they disclose loans in order to prevent against fraud and deception, the documents must be resubmitted and there is a three day waiting period. This has helped buyers understand what they are being charged and has eliminated fees being added at closing.
It sounds simple enough, but if you don’t understand where the fees on the estimate are going, ask your broker or lender to break them down for you. If there are fees added on that weren’t on the original estimate, notify your attorney and do not sign anything. Most of the fees today are based on the insurance or property taxes being adjusted to the exact date you close. That being said, there are still some unscrupulous people in the mortgage industry. If you aren’t comfortable, ask your attorney or realtor for clarification.
Mortgage closing costs and property escrows can add up very quickly. Before you make an offer, get an estimate in writing from whomever you are getting your mortgage from. The amount may shock you, but with today’s rules you should feel comfortable that any estimate you get today should be within 10% from what you will actually need at closing.