Chapel Hill, Durham and Raleigh Real Estate

Understanding Closing Costs

There are certain standard costs associated with closing on the purchase of a new home. These costs are typically divided up between the buyer and the seller as spelled out in the sales contract.  We will assist you in negotiating these terms working diligently to not only get the sales price you want, but also to limit the amount of these closing costs for which you will be responsible.  We will also work closely with your mortgage professional to make sure the terms of the sales contract, and the costs you will pay, fit in with your specific financial goals and objectives and the mortgage plan you have chosen.

Once your Mortgage Consultant has discussed with you the appropriate mortgage plan and strategy to buy your new home, they will provide you with a written estimate of the costs you will likely incur, and an estimate of the total amount of cash you will need to buy your new home.  Keep in mind, this is an estimate.  Prior to your closing date, the attorney responsible for the closing of your home will prepare the final “HUD1 Settlement Statement” which will itemize the exact costs that you will incur at closing.

The Good Faith Estimate

By law, lenders are required to provide you with the Good Faith Estimate of Closing Costs within 3 days after formal loan application.  The estimate is based on certain known standard fees and costs as well as the Mortgage Consultant’s past experience.  The estimate will likely not include all costs because it is virtually impossible to know every single expense associated with the purchase.  Each property and circumstance is unique.  A skilled mortgage consultant, however, should be able to provide a reasonable estimate that is pretty close to the actual final total.

It is important to understand the nature of closing costs so that you can make an informed comparison as you shop around with various lenders.  Costs on the Good Faith Estimate are broken down into 3 general areas as follows:

Lender Specific Fees (sometimes referred to as…)

• Loan Origination Fee
• Discount Points
• Application Fee (sometimes covers the cost of other fees)
• Underwriting Fee
• Processing Fee
• Broker Fee
• Commitment Fee
• Tax Service Fee
• Flood Zone Cert Fee 
• Appraisal Fee
• Credit Report

These Lender Specific Fees may sometimes be described in other terms as well.  They are fees charged by the lender in connection with obtaining the mortgage loan.  These are the only fees that have the potential to be different between each lender.

Vendor Related Fees

• Attorney Closing
• Title Insurance
• Recording Fees
• Survey
• Termite Inspections
• Home Inspection
• Courier or Overnight Delivery Fees
• Home Warranty

These are fees that you pay to someone to render some sort of service to you in connection with the purchase, and this list is only a sample of some of the types of services and costs you may incur.  These fees have nothing to do with the mortgage lender.

Prepaid Expenses/Escrows

• Prepaid Interest
• 1st Year Homeowners Insurance Premium
• Escrows for Real Estate Taxes
• Escrows for Homeowners Insurance and/or Flood Insurance
• Prorations of Homeowners and/or Condo Dues
• Proration of any assessments

You are typically required to fund an escrow account at closing for the lender to begin collecting taxes and insurance for you so they can pay these costs for you annually.  You also must pay interest from the day of closing until the end of the month in which you close (prepaid interest).  You may also have to prorate some fees between you and the seller.  Again these fees will not vary between lenders.

When you add these three categories together, you have the total amount of costs related to buying the new home with a new mortgage.  The problem for most borrowers with comparing costs between lenders is they focus solely on the total, bottom line cost number.  This is not the appropriate comparison to make, however, and the problem has to do with the nature of the details of Good Faith Estimates.

Of the three categories of costs, Lender Fees, Vendor Related Fees, and Prepaid Expenses/Escrows, only Lender Fees will potentially vary in amount between each lender.  The other two categories, Vendor Related Fees, and Prepaid Expenses/Escrows will ultimately be the exact same cost at closing even though each lender will likely estimate the numbers differently.  It is also easy to manipulate these numbers, so it is important that you work with a mortgage professional who will provide you with reasonable numbers–even perhaps an estimate that is “padded” a little bit so you don’t have a bad surprise at closing.

So, how do you truly compare cost estimates and loan programs between lenders?  It’s easily confused but actually fairly simple.

You simply make sure that you compare only the Lender Specific Fees for each lender along with the basic interest rate for the same program and loan product for the same “lock period”.  The lock period is the time between the day your interest rate has been locked in and guaranteed up to and including at least the day of your closing or beyond.  Other factors are important of course.  Rates and Fees are only some.

What Information will be needed for the Loan application.

For all loans

Social Security Number, for borrower and co-borrower if any

Employment History
For the last two years, employment dates, addresses, salary.
Current pay stubs or W-2 forms.

Check and Savings Accounts and Certificates of Deposit
Location of bank accounts, account numbers and balances;
Address of bank if out of town
Last 3 months’ statements

Stocks, Bonds, and Investment Accounts
Broker’s name and address, description of stocks, bonds, etc.
Last 3 months’ statements or copies of stock certificates

Life Insurance Policies
Insurance company, policy number, face amount, cash value, if any

Retirement Plan
Approximate vested interest value
Copy of latest statement

Liabilities and Other Non-Mortgage Debt
Creditors names, addresses, account numbers
Monthly payments and balances

Other income information you may need

If you’re self-employed
Two years tax returns, profit and loss statements, both company and personal if separate.
Current balance sheet and profit and loss statement if more than two months into the new fiscal year, signed by CPA.

If you have income from:

Commission
Overtime
Bonus
Partnership
Rental Property
Trust
Notes Receivable
Interest/Dividends
You’ll need two years’ personal federal tax returns

If employed in family business

Personal federal income tax returns and all schedules for the past two years

If divorced or separated

Complete executed divorce decree and settlement agreement
Payment history of alimony/child support over the past 12 months, if it is a financial obligation.
If you choose to have this be considered as part of your income (you don’t have to), be prepared to provide 12 months canceled checks or bank statements reflecting income deposits.

If you own real estate

Name and address of all mortgage lenders for the past 24 months, account numbers, monthly payments and balances

If you’ve sold your home but not closed:

A copy of the sales contract

If you’ve sold your home, closed, and you will use the proceeds for your new down payment:

A copy of the HUD-1 Uniform Settlement Statement

If you rent

Name, address and phone number of landlords for the past 24 months

If you’re buying a home

Purchase sales contract or offer to purchase and all addenda
Furnish contract fully executed by buyer and seller

If a source of your down payment is a gift:

Name, address and relationship of donor.
Gift funds will be verified in both the donor and recipient’s accounts.
Note: Not all loan programs allow gifts to be part of your down payment.

For FHA Financing

Evidence of Social Security Number and photo identification

For VA Financing

DD214 and Certificate of Eligibility (COE may be ordered online by us)

For Construction/Perm Loan

Signed construction with cost breakdown, builder plan and specifications

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Colin A. Moody REALTOR®, Broker, RCA, CREN

P.S. Over 80% of my business is accomplished through my personal relationships with people like you. If you do not presently have a real estate professional in mind that you would refer, I would love to be that person. I promise to provide anyone you send me with excellent service before, during, and after the sale.

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Phone: 919-491-0739

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