| It's the big day! The day to go to the title company office to sign on the dotted line, hand over a check and prepare to take ownership of your new home.
It's the day to pay those "closing costs," that accumulation of separate charges paid to different entities for the professional services associated with buying and selling real estate. And all too often, it's a day filled with questions, uncertainty and stress.
To help better understand the confusing subject of closing costs, some of the questions most commonly asked are answered below.
What services will I be paying for when I pay closing costs?
Typical fees paid from funds collected by the escrow agent are loan fees, real estate commissions, appraisal fees, escrow charges, advance payments (such as property taxes and homeowner's insurance), title insurance premiums, government charges, recording fees, charges for negotiated repairs and the like.
How much should I expect to pay in closing costs?
The amount will vary according to the price of the property being purchased and the size of the loan. Also, many charges are set independently by each professional involved in the process, so they will vary according to what professional (i.e., lender, appraiser, contractor, etc.) is used. Federal law (the Real Estate Settlement Procedures Act) requires that each person applying for a home loan be given an estimate of closing costs after submitting any new loan application. This disclosure provides a Good Faith Estimate of costs involved in the real estate transaction. An itemized list providing more accurate estimates is prepared by the escrow company and provided during the signing of final transaction documents. An itemized list of actual charges is mailed to both the buyer and seller after the final costs are paid and the transaction documents are recorded at the county recorder's office.
Can I pay for my closing costs in installments?
No. Upon the closing of escrow, many different parties will have fulfilled their responsibilities and be awaiting prompt payment. The escrow company must disburse money to those parties, pursuant to the escrow instructions, as soon as funds become available.
Will I be allowed to write a personal check to cover my closing costs?
Probably not. Except in rare cases, escrow agents will require payment in the form of a cashier's check made payable to the title company or in the form of a wire transfer. Providing a personal check will delay closing because the title company will not be able to accept it and will have to wait until receipt of cleared funds to be able to complete the escrow process. Also, a cashier's check issued by a bank in another state can delay closing if there are problems in verifying the validity of the check.
How much can I expect to pay for title Insurance?
This point is often misunderstood. Although the title company serves as a meeting ground and provides the primary link for all the parties in a transaction, only a small percentage of total closing fees are actually for title insurance protection and escrow services. The title insurance and escrow fees usually amount to less than one percent of the purchase price of the property, and less than 10 percent of total closing costs. Nonetheless, the title insurance policy—with the payment of only one premium—is good for as long as you and your heirs own the property.
Why are separate owner's and lender's title insurance policies issued?
Each policy serves a different function and protects a different party. The owner's title policy typically is purchased by the seller and provides a financial warranty to back up the promises that the seller makes when he conveys title through the deed he offers. Hence, this title policy provides the buyer a financial protection against the claims of others or certain defects in the title that could be found after the property is purchased. If the buyer were to suffer monetary damage as a result of such a defect, he could file a claim under his owner's title insurance policy.
The lender's title policy, also called an ALTA* extended policy, is purchased by the buyer to protect his lender in the event of certain defects or problems with the title that are not covered under the owner's title policy. Essentially, the lender's title policy is designed to help protect the enforceability of the lender's lien against the property and to protect the marketability of the lender's note, which is important should the lender decide to sell the loan to another lender or to an investor. If no loan is involved in the purchase of a given property, then no lender's title policy is required. It may be advisable, however, for the buyer to purchase an ALTA extended policy in his own name.
What does my title dollar pay for?
Unlike life and casualty insurance companies, title insurers operate under the theory that they can maximize profit and keep prices low by eliminating risks rather than just reducing risks. In order to eliminate title risks, those risks must first be identified.
The research that goes into identifying title risks is relatively labor intensive. Title companies spend a high percentage of their operating revenues each year collecting, analyzing, storing and maintaining official records regarding real property. The libraries of information that title companies build, called title plants, include records that date back more than a century. Each day, recorded documents are posted to these plants so that when a title search on a particular parcel is requested, the information is already organized for rapid and accurate retrieval.
With the aid of their extensive title plants, trained experts are able to identify the rights that others may have in a property, such as recorded liens, legal actions, disputed interests, rights of way or other encumbrances on the title. Hence, before completing a transaction, a buyer can attempt to clear, or eliminate, those encumbrances that he does not wish to assume.
The goal of title companies is to conduct such a thorough search and evaluation of public records that no claims will ever arise. Of course, we live in an imperfect world, where human error and changing legal interpretations make 100 percent risk elimination impossible. Hence, a premium is paid to title companies to cover all the costs of their title plants, office expenses, title professionals and the valid claims that do eventually arise.
Where can I go for more answers about title and closing costs?
Having helped a large number of clients in their transactions, I am knowledgeable about these costs. However, for detailed information, especially regarding prices and fees, it's necessary to contact a title company directly. Click
THIS LINK for a list of recommended title companies.
* American Land Title Association
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