Common Questions About Closing

What happens at closing?
How much cash do I need?
What are closing costs?
Homeowner's insurance? I thought FHA insured my mortgage
What is an escrow account?
Do I have to have enough money saved to pay all these costs?
What is "RESPA"?

What happens at closing? - (Top)

Basically, you'll sit at a table with your broker (licensed individuals or firms that serve as mediator between buyer and seller) and your real estate agent, the seller's broker or agent-, the seller (usually), and a closing agent (usually a lawyer). The closing agent will have a stack of papers for you and the seller to sign. While he or she will give you a basic explanation of each paper, you should take the time to read each one completely and/or consult with your agent to make sure you know exactly what you're signing. After all, this is a large amount of money you're committing to pay for many years! Before you go to closing, your lender is required to give you a booklet explaining the closing costs, a "good faith estimate" of how much cash you'll have to supply at closing, and a list of documents you'll need at closing. If you don't get those items, be sure to call your lender BEFORE you go to closing. Never hesitate to ask questions.

You'll have to provide your paid homeowner's insurance policy and a receipt showing you have paid the premium, or a binder (a formal statement and deposit payment receipt that shows you agree to purchase insurance). The closing agent will then list the money you owe the seller (remainder of down payment, prepaid taxes, etc.) and then the money the seller owes you (unpaid taxes and pre-paid rent, if applicable). You should also bring some extra funds with you to cover any costs that may come up. The seller will provide proof of any inspections, warranties, etc.

Once you're sure you completely understand all the documentation, you'll sign the mortgage agreement. This means you agree that if you don't make your payments, the lender can sell your property and apply the sale profit to the amount you owe and add expenses. If it sells for less than the loan amount, you will still be responsible to pay the rest that is owed on the loan. You'll also sign a mortgage note, promising to repay the loan. The seller will give you the title to the house in the form of a signed deed.

You'll pay the lender's agent all closing costs and, in turn, he or she will provide you with a settlement statement of all the items that you have paid. The deed and mortgage will then be recorded in the state Registry of Deeds, and you will be a homeowner!

How much cash do I need? - (Top)

To find out how much cash you need, add up the items below and subtract them from the amount of the insured mortgage:

• Any up-front mortgage insurance premium (MIP)
• Pre-paid expenses and closing costs (described below)
• All non-realty items, repairs, etc., that cannot be financed into the loan, plus
• The required down payment.

On your FHA loan, the sum of these costs must equal at least 3% of the sales price.

What are closing costs? - (Top)

Closing costs are the various fees and charges you take on when you buy a home and obtain a mortgage. They also include various taxes and fees paid to the state and local government. Typical closing costs include:

• Items payable in connection with the loan: These are the fees that lenders charge to process, approve and make the mortgage loan. They include a loan origination fee, discount points, appraisal fee, credit report fee, and inspection fees.
• Items required by the lender to be paid in advance: These are certain items the lender may require to be pre-paid at settlement. They include items such as accrued (accumulated) interest, mortgage insurance premiums (MIP) and hazard insurance premiums.
• Escrow account deposits: These are deposits by the borrower to set up an escrow account for paying taxes and/or insurance, or other items. The law does not allow a lender to collect more than a certain amount.
• Title charges: Title charges may cover a variety of services performed by title companies and others.
• Government recording and transfer charges: The borrower or the seller pays these fees, or divide them, depending upon the sale agreement. The buyer usually pays the fees for legally recording the new deed and mortgage (line 1201). Property transfer taxes are set by state and/or local governments and can be very high. In some places these taxes are collected whenever property changes hands or a mortgage loan is made. There may also be charges for city, county and/or state tax stamps.
• Additional settlement charges: These include items such as a property survey, termite inspection, lead based paint inspection, and radon testing.

Homeowner's insurance? I thought FHA insured my mortgage. - (Top)

FHA mortgage insurance protects your lender against possible loss if you get into financial trouble and can't make your payments. It won't protect you against loss however, if you have a fire, an accident, or a robbery. That's why you need homeowner's insurance. Like anything else, it pays to shop around. The Federal Citizen Information Center has a lot of good advice about homeowner's insurance at consumeraction.gov/caw_insurance_homeowner_renter.shtml

What is an escrow account? - (Top)

FHA requires lenders to establish escrow accounts (funds are held in trust by an outside agent) and requires that borrowers make monthly payments to ensure that funds will be available to pay the following items when they come due:

• Real estate taxes
• Monthly mortgage insurance premiums
• Hazard insurance premiums (protection against fire, floods, etc.)
• Special assessments
• Ground rents

Lenders must also escrow (hold in trust) funds for those items that, if not paid, would create claims on the property with priority over the FHA-insured mortgage.

Do I have to have enough money saved to pay all these costs? - (Top)

Your personal savings can provide you with the cash you need to close your loan, but your own funds are not the only acceptable source for an FHA loan. You can also use cash gifts or money from a private savings club. HUD has no direct grant programs for down payment or closing cost assistance. However, HUD does provide funding to state and local governments for this purpose. To find out what programs you may qualify for, please contact your city, county or state government. You may wish to visit the following web site to find local housing programs in your state or local area: www.hud.gov/buying/localbuying.cfm. You can also find your state and local listings in the government (blue pages) of your local telephone directory.

Another source of help is the seller. As part of your negotiation to buy your house, the seller may agree to contribute some funds. The seller (or other interested third parties such as real estate agents, builders, developers or a combination of parties) may contribute up to 6% of the property's sales price toward your actual closing costs, prepaid expenses, discount points, etc. Even with such help, you still have to meet the 3% cash investment requirement.

What is "RESPA"? - (Top)

RESPA stands for the Real Estate Settlement Procedures Act, a federal law enforced by HUD that deals with closing costs and settlement procedures. RESPA does these things:

• Requires that consumers receive disclosures (shared information) at various times in the process of buying a home.
• Outlaws kickbacks that increase the cost of settlement services.
• Protects homebuyers and helps them to be better home shoppers.

For more information about RESPA, click here to visit www.hud.gov/offices/hsg/sfh/res/respa_hm.cfm (This will be a new link on fha.gov - not sure of what the web address will be).

Section L of the HUD-1 Settlement Statement. You also will find a sample of the HUD-1 form to help you to understand the settlement transaction.

When shopping for settlement services, you can use this section as a guide, noting on it the possible services required by various lenders and the different fees quoted by service providers. Settlement costs can increase the cost of your loan, so compare carefully.