Introduction
There are several areas that need to be checked when preparing for a
closing. Each party has a role to play; the agents, the buyer, the
seller, the lender, loan officer, and the closing attorney. Each
party adds a piece of the puzzle until at closing it all comes
together. There are many pieces and if one is missing, it can
adversely affect the closing.
Note- The closing statement will be referred to here as the "HUD",
which stands for Housing and Urban Development Form #1.
Sales Price
Always check lines 101 and 401 of the HUD to see if the price is
right. A sales price can often change for several reasons.
The price is changed after the contract is signed and before
closing, by agreement, and an addendum is executed. This is often
done when building costs of extras or closing costs into the sales
price.
Sometimes the house will not appraise and the parties have to
re-negotiate the sales price.
The parties re-negotiate who shall pay the closing costs. Items
found by the purchaser's inspector can cause another look at costs.
Check to see if the price matches what you have, and, if not, ASK
QUESTIONS. Never hesitate to ask questions. It could save time
later.
Earnest Money
It is important that you account for the earnest money. The total
amount paid by the purchaser should show on line 201. Make certain
that this amount is correct.
Purchasers sometimes pay an amount at the signing of the contract
(say $1000) and then agree to pay an additional amount later during
the loan approval/house completion process. Sometimes additional
amounts paid are applied to "overages", not earnest money.
Sometimes, the funds are supposed to be paid, but through mutual
error, they are not collected.
Example: $1000 paid at contract, with a stipulation that an
additional $500 to be paid at time of issuance of the Certification
of Occupancy, and an additional $500 paid at time of loan approval.
At closing, the earnest money is listed as $2000.00 per the
contract. However, in reality, the last $500 was never actually
collected since it was so close to closing and the earnest money
should be shown on HUD as $1500.00.
Earnest money can be paid in two ways -- to the seller directly or
to one of the agents. There is sometimes even a combination of the
two ways. Funds paid directly to the seller will be shown on line
501, Excess Deposit. Funds paid to the agent will be deducted from
the commission check and shown on lines 701 or 702.
Proration of Taxes
Sometimes the parties divide costs between them based on ownership
or possession. A standard example of this is the tax proration which
is on all HUD's. The parties divide the taxes based on the date of
ownership.
The date of the closing dictates how the proration is handled. If
the tax bill has not been issued yet for the calendar year, then
there will be a credit to the purchaser for the time the seller has
owned the property.
Example: For Gwinnett County property closing on June 30th, the
purchaser will receive a credit on lines 210/211 for the seller's
one-half share of the taxes. It is based on the date of Closing. A
closing on March 30th will result in a credit to the purchaser of
one-quarter of the taxes (the seller owing for 1/1 to 3/30 or about
1/4 of the year). The purchaser receives the credit and the sellers
proceeds are debited by subtracting the same amount on lines
510/511.
The proration is based on the attorney's best estimate of what the
tax bill will be for the current year. On existing homes, that would
be the last year's taxes. On new homes it is based on the condition
of the property as of January 1. All property taxes in Georgia are
based on the status of the property as of January 1. If it is a
vacant lot on January 1, but the house is built, completed and sold
on August 28th, the taxes are still based on the vacant lot.
If the tax bill has been issued for the current year, the attorney
will collect the tax bill (the FULL amount) from the seller and the
purchaser's share (say 8/28 through 12/31) will appear as a credit
to the seller on lines 406/407 and a debit to the purchaser on lines
106/107, which adds to the amount owed by the purchaser. With a new
home, it is always essential that the attorney and the parties have
some idea of the status of the property as of January 1. This will
aid everyone in estimating the prorations. A partially completed
house will be taxed on its January 1st percentage of completion.
The date when taxes are issued varies from county to county. Ask
your agent, loan officer or attorney for the tax due date for the
county in which your property is located.
Closing costs
Closing costs are fees charged by the lender in order to pay the
costs of processing the loan application. The interest charged by
lenders on the loan does not cover these cost incurred by the
lender.
Costs, just like interest rates and discount points, vary from
lender to lender. The loan officer furnishes the borrower with a
"Good Faith Estimate" at time of loan application. This will itemize
the charges on the closing.
NOTE - Closing costs are specific items on the HUD. Some borrowers/
purchasers may think that "closing costs" cover every "cost" needed
to be paid at closing. This is not the case and does not include
prepaid items, escrows, homeowners association dues or tax
prorations.
Closing Costs are in three sections of the HUD. Lines numbered 800
(except for 802, which are discount points) are closing costs
charged by the lender. Sometimes, if there are additional costs
which do not fit into lines 800, they will be itemized on lines
1303, 1304 and 1305.
Closing costs charged by the attorney will be shown in lines
numbered 1100. Attorney fees are paid to the attorney for handling
the closing. There may also be fees for the title examination (which
often are included in attorney fees and not itemized separately),
the title insurance company and tax reporting service.
Closing costs charged by the State of Georgia will be shown in
section 1200 of the HUD. NOTE- this is a bit tricky since the total
costs in lines 1201 and 1203 are shown in the columns on the right
but the total will also include charges by the state which are not
considered closing costs.
There may be a "Release" fee charged. This is a charge by the clerk
for marking the outstanding mortgage, which is being paid off by the
seller at closing, "Paid and Satisfied of Record". This charge is
not a closing cost but is a cost to the seller to satisfy his
mortgage.
On line 1203, the first fee is a "State tax/stamp" fee that says
"Deed". This is a transfer tax that is charged by the state and is
paid by the seller per the standard sales contract.
Title Insurance
Some of the costs quoted as part of the closing costs will be for
title insurance. The amount quoted will be for the Lender's Title
Insurance Policy to cover the title for losses up to the balance of
the loan. If you wish Owner's Title Insurance to cover the owner of
the property up to the value of the property, the cost will be in
addition to the cost of the Lender's Policy. The closing attorney
will handle this transaction and can give you more information about
this coverage.
Negotiating payment of closing costs
Part of the sale process involves determining who is going to pay
the closing costs. When buyer and seller negotiate the sales price
and the seller reduces the price, the seller will expect the
purchaser to pay the closing costs. Sometimes the sales price will
be negotiated and then raised to allow the seller to have the funds
to pay the closing costs for the purchaser.
Whoever is paying the costs, they will appear in their respective
column on the right side of the second page. The amount of the costs
can also be negotiated when the seller is paying.
Example: The seller may agree to pay all the costs, or just a
certain amount. It is not unusual for the seller in the negotiating
process to agree to pay part of the costs. This will appear in your
contract as "Seller will pay $1825.00 toward closing costs." When
the seller's contribution is limited, the attorney will charge the
seller up to that amount, and then all other costs will be charged
to the purchaser.
Sometimes the seller will agree to pay costs based on a percentage
of the loan amount.
Example: "Seller to pay closing costs not to exceed 2.5% ". The
attorney charges the seller until the costs reach 2.5% of the loan
and the balance of the charges will be in the purchaser's column.
NOTE -the percentage is based on the LOAN AMOUNT, and NOT the sales
price.
As a practical matter, if the parties expect the seller to pay for
specific items rather than just having the seller's contribution
applied at random by the closing attorney, the contract should
address that matter directly and specifically, or contact the
attorney's office prior to closing to direct how the seller's
contribution is to be applied.
Frequent Problems
1. Difference in Costs
If the costs are different from what was expected, the borrower is
entitled to expect an explanation. Compare the costs to what is
shown on the Good Faith Estimate. It is an estimate, and costs will
sometimes change for valid reasons.
Example: Borrower/purchaser decides during loan application process
to only put down 15%, not 20% down payment. At closing, there will
be private mortgage insurance fees due that were not on the Good
Faith Estimate because the borrower/purchaser changed his loan
program in mid-stream.
2. POC (Paid Outside Closing) Items
Borrowers are usually required to pay an application fee at time of
application to the lender. These funds are usually applied to pay
costs incurred by the lender and are shown on the HUD as POC-Paid
Outside Closing.
There can be several problems at closing with POC fees. Sometimes
the lender forgets to credit the borrower with all of the funds that
have been paid. The HUD will show $250 POC when the borrower paid
$275. This will require a phone call from the closing table to set
the matter right.
In negotiating closing costs, the borrower and the loan officer will
calculate the total costs to be a certain amount or percentage. The
borrower needs to know if the closing costs collected and paid at
closing includes the POC items.
Example: Borrower pays $300 for application fee. Borrower is seeking
to limit closing costs to 2.5% At closing, the closing costs
actually come to exactly 2.5% but there is no reimbursement of the
$300 application fee because the $300 is over and above the 2.5%. In
other words, the total closing costs are 2.5% plus $300, but the
closing costs paid at closing are 2.5%. Whichever way it is being
handled needs to be disclosed so that the borrower knows what to
expect.
Finally, when the seller is paying the closing costs, the
purchaser/borrower will often expect to be reimbursed for the funds
the purchaser Paid Outside Closing since they are usually applied
toward the Appraisal Fee and the Credit Report. If the seller is
paying a set amount or percentage and the costs exceed what the
seller has agreed to pay, there may not be enough funds remaining
after the costs are charged to refund the purchaser for the POC
items.
Example: Seller is paying $2500 for closing costs and the purchaser
paid $250 POC. If costs charged at the closing come to $2500,
nothing is left over to reimburse to purchaser. If costs come to
$2400, then purchaser can be reimbursed but only up to $100 (to
bring the total charged to seller to $2500). If costs come to $2600,
then seller will pay $2500 and the purchaser will be charged the
additional $100 since the seller cannot be charged more than he
negotiated to pay ($2500).
3. Surveys
Surveys have gone through a "transition" over the last few years.
The standard contract calls for the parties to agree and designate
who is paying the cost of the survey.
Some lenders today are not requiring surveys. Obviously, there will
be no charge if there's no survey but there's also no survey for the
purchaser. It is always a good idea if the lender does not require a
survey to discuss the right of the purchaser to order and pay for a
survey on his/her own. Not only is this a good idea for every
property, but it protects everyone from possible liability in the
future should survey questions or problems later arise.
One other area of concern occurs when the builder is supplying his
own survey. The contract will call for the builder to be reimbursed
by the purchaser for the costs of the survey. The attorney needs to
know that the builder is supplying the survey so a duplicate survey
is not ordered, and the funds to be charged for the survey are on
the closing statement. The agent needs to inform the builder if no
survey is required by the lender because the builder will come to
closing expecting to be reimbursed, but the purchaser might not be
willing to pay for a survey that the lender does not require.
Escrow
All escrow items are set forth in section number 1000 of the HUD.
Many purchasers want to have their escrows waived but this is a
matter for them to discuss, (before closing), with their loan
officer. It is very, very rare for a lender in Georgia to waive
escrows. When it is done, it must be approved beforehand by the
lender, and it often will cost the purchaser/borrower something.
Sometime the cost is a quarter discount point, or a flat fee, or
even an eighth (1/8) increase in the interest rate. Any fees
required to waive escrows should be disclosed and discussed prior to
closing.
Escrows are established by the closing attorney. The insurance is
based on the policy provided by the purchaser but the taxes and the
upfront costs are established by the attorney. The number of months
set aside to pay the tax bill is determined by the due date of the
taxes in the county. In the metro area, tax bill due dates vary
greatly from county to county. If you have questions, feel free to
call the attorney's office to determine how much upfront escrow
costs will be due from the purchaser.
Aggregate Accounting Credit: As part of your escrow deposit, the
purchaser will receive an aggregate credit. This is determine by the
lender or the attorney to insure that the escrow account does not
create an "overage"; that is, a surplus of too much money in the
escrow account. This method is used to insure the minimum will be
collected and deposited into the escrow account while still having
enough funds to pay the tax and insurance statements as they come
due.
Prepaid Items
1. Pre-paid Interest
Interest must be paid on the new loan for the month in which the
purchaser is closing. If the closing is on the 30th of March, there
will be two (2) days of interest due. If it closes on the 5th, then
twenty-seven (27) are due.
The first payment is not due until the first of the following month.
In the example above, regardless of whether it is closing on the 5th
or the 30th, the first payment will be due on May 1. This is because
interest is always paid in arrears. The amount that one owes stays
the same, but it can make a difference in cash flow and the cash
available to the purchaser.
2. Mortgage Insurance
Mortgage insurance is a type of insurance to insure the lender
against default by the purchaser. Most purchasers view this
insurance as money from which they derive no benefit except that it
does allow them to be approved for the loan. This insurance is
required on loans that are considered riskier than your standard
loans.
Mortgage insurance is required on all FHA loans and all conventional
loans which have a loan to value ratio of more than eighty per cent
(80%).
Example: On a $100,000.00 purchase, any loan of $80,000.00 or less
will not require mortgage insurance. Any loan above $80,00.00 will
require mortgage insurance. This is a mathematical computation and
cannot be waived.
The cost of mortgage insurance varies with the loan program and the
wishes of the borrowers. Choices are usually available and the
borrowers can choose a program based on their particular situation.
Only the lender can apply for this insurance, and the loan cannot be
approved until the mortgage insurance company has agreed to insure
the loan.
The loan officer needs to be certain that the costs of the mortgage
insurance has been disclosed on the Good Faith Estimate. The loan
officer will endeavor to hold these in line, but sometimes the
mortgage insurance companies will change their charges in order to
approve the loan. If there are any changes in the costs of mortgage
insurance, the borrower should be notified, with an explanation, as
soon as possible.
3. Insurance
All purchasers need to have insurance on their home before closing.
Generally, most lenders will require the coverage to be for at least
the loan amount. Sometimes lenders will accept less coverage if
there is a guaranteed replacement rider.
The borrower needs to notify the attorney of the amount of the
annual premium in order for the escrow account and the monthly
payment to be established. The borrower can pay the premium when
he/she picks up the policy or it can be collected at closing. Notify
the Attorney (or have the agent call the attorney) before closing
with this information.
The insurance policy must be at the closing. The lender must be
certain that the property is protected as of closing. Without proof
of insurance the closing will be halted.
Miscellaneous Matters
1. Termite letters
It is the seller's responsibility to provide a clear "termite
letter" at closing. It is the attorney's responsibility to insure
that the termite letter meets the lender's requirements.
Example: It must have NO active infestation, no damage from a
previous infestation, and must be dated within the last 30 days. Due
to lender concerns, it is a good idea to fax the termite letter to
the attorney prior to closing for the attorney to review.
It is NOT the seller's responsibility to provide a warranty or
guaranty against termites unless the standard contract has been
modified to require this. An inspection by a termite company within
30 days usually satisfies the seller's contractual obligations. If
there is a warranty/guaranty on the property already, then it is
usually transferable to the purchaser. An inquiry should be made of
the seller if the purchaser is interested.
Note-on new construction, the termite documents provided by the
builder usually DO include a guaranty.
Note-on FHA loans: There may be certain conditions on the termite
letter on an FHA loans which HAVE to be corrected, which would not
be corrected for conventional loans. If you are getting an FHA loan,
ALWAYS have the seller fax a copy of the termite letter to the
lender and the closing attorney for approval PRIOR to closing.
2. Homeowners Association
It needs to be ascertained before closing if the property is in a
Planned Unit Development (referred to as a PUD). If it is, then it
is required that the purchaser join the homeowners association. That
fact should be disclosed, probably even before writing the contract,
as well as the amount of the costs. All theses fees need to be given
to the attorney so they can be charged on the HUD, or a credit
given, as the case may be.
3. Allowances
Years ago, parties would contract for allowances to be given to one
another for repairs to the property or to pay for personal items,
like the refrigerator or microwave. Lenders view the allowances as
reductions in the sale price and therefore it affects the loan to
value ratio. Large allowances could turn an 80% loan into an 82%
loan and the nature of the transaction is changed considerably.
Therefore, Lenders will normally disallow such allowances.
IN CLOSING, remember that your best friend is the telephone. Feel
free to call the attorney or other parties/agents if you have
questions. It is always better to get too much information than too
little. The attorney, the loan officer and the agents would prefer
to have questions addressed before the closing, not later
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