WHAT ARE CLOSING COSTS ?
The actual real estate sale transaction whereby monies are paid and ownership is transferred is most often referred to as “the closing” or “settlement”. A closing or settlement agent, usually a title company or an attorney, handles all of the documents and paperwork necessary to effectuate the transfer. The closing agent is a neutral party and treats both sides alike without favoring either.
This article pertains to residential closing costs – which are the costs associated with a common residential real estate transaction in Florida. Commercial closings have many of the same issues and expenses paid by the same parties as outlined below. But, because commercial transactions are generally not as heavily regulated, their costs and requirements differ and can depend greatly on the individual negotiation governing the specific transaction. This is not to imply they are any less expensive as many of the requirements do carry a significant cost.
On the other hand, residential real estate has many types of disclosures and all of the charges, including the detail for each, can be found on the itemized Settlement Statement also known as a HUD 1. It is required by law that each party receive a copy of the HUD 1 for review prior to the actual closing.
When To Start Counting
Many of the closing costs are computed on the number of days in a month or year. This raises the question: To whom does the actual day of closing “belong” ? In Florida the custom is that the day of closing belongs to the Buyer. Thus, unless agreed to otherwise, the Buyer’s charges will include the day of the closing.
The closing expenses paid by most Sellers are the state documentary stamps on the deed, the title insurance, the property taxes through the previous day of closing and the fees from the actual closing company. There is no law requiring that the Seller pay these expenses but in Florida, they are the customary charges to a Seller.
Documentary deed stamps are calculated on the sale price of the property as follows: Sale Price / 100 & rounded up x .70. This money is paid directly to the State of Florida. Example for Deed Stamps: Sale Price is $250,000. 250,000 / 100 x .7 or $1750.oo would be the cost of the stamps.
The title insurance premium is regulated by law and is paid to the title company. The purpose of title insurance is to insure against claims made on the title of the property being sold. With a few exceptions, each time the property is sold, a new set of stamps is paid and a new title insurance policy is issued.
The fees charged for the closing by the closing company can include: overnight courier fees, title search fees, recording fees, documentation preparation and a closing fee.
Bank Owned, REOs and Short Sales
It is not unusual for Bank Owned and REOs transactions to require the Buyer pay these customary Seller costs in addition to the customary Buyer closing costs. Short Sales may involve this as well, but at this time it is not as common.
Property Taxes Included as a Closing Cost
Since property taxes are paid in arrears from January 1st each year, the Seller is charged for its portion of the estimated taxes up through the day before closing. This money is actually given to the Buyer since it will be the Buyer who will have title to the property when the property tax bill comes and the Buyer will be billed for the entire amount. Essentially, the Seller is reimbursing the Buyer in advance for its portion of that bill.
Since in Florida the property tax bills are mailed for November first and can be paid anytime after November first, the ONLY time this reimbursement from Seller to Buyer would not apply is when a closing takes place after November 1st and the Seller has already paid the taxes. In essence, by paying before the year end, the Seller has prepaid its property taxes through the end of the year and thus the Seller would be reimbursed by the Buyer for the time Buyer will occupy the property until the end of that year.
For example: A. Closing Date July 1. Taxes estimated to be $1000. The Seller would reimburse the Buyer for the portion of the $1000 from January 1 of that year to June 30. – in this case $500.oo On November 1 the Buyer will receive the total property tax bill, add his or her own funds (the other $500) to the reimbursement received on July 1 and pay the bill since the Buyer has owned the property from July 1 through December 31 (assuming no other sales that year).
B. Closing Date December 1. Taxes are $1000 (no estimate - the bill has been received by then). The Seller paid the taxes on November 5. By doing so, the Seller has paid through December 31. Thus the Buyer at closing will reimburse the Seller $83.33 – the amount for December 1 through 31 (1000/12 x 1).
The typical closing costs to Buyers will vary depending upon financing. Those buyers paying cash will have far fewer closing costs than those obtaining any type of lender financing.
Three Main Components for Buyers’ Closing Costs
Generally, there are three main components to a Buyer’s costs: financing, pre-paid expenses and inspections and similar costs.
The Cost of Borrowing
Cash buyers will not have any costs associated with financing. Those obtaining financing will have lender fees, state documentary stamps on the promissory note, an intangibles tax on the promissory note, an additional title insurance policy to cover the lender and in some cases mortgage insurance. In addition, they may also incur discount points.
The lender fees vary from lender to lender. They are the fees the lender charges to process the loan.
The state stamps are paid to the State of Florida directly and calculated on the value of the promissory note as follows: Loan Amount / 100 & rounded up X .35 . The intangible tax is due on all promissory notes in Florida. It is calculated by taking the loan value and multiplying by .002.
For example: A $100,000 promissory note will have note stamps equal to 100,000 / 100 x .35 or $350 and an intangibles tax of 100,000 x .002 or $200.
The Lender’s Title Policy is much less expensive than the Owner’s Title Policy if obtained from the same carrier and covers the Lender in cases of claims on the title of the property on which the loan was made.
Mortgage insurance is obtained when the down payment is below a certain percentage threshold. It insures the Lender in cases of default by the borrower.
Pre Paid Expenses
The prepaid expenses are those that will be eventually incurred by the Buyer at some point as a result of ownership. Thus, these are an issue of cash flow versus additional cost. They include homeowner’s insurance, property taxes and prepaid interest.
Currently lenders are collecting about one year’s insurance premium plus two or three months. In addition they are collecting two to seven months of property taxes up front – depending upon the date of the closing.
Prepaid interest also varies with the date during the month the transaction closes. Interest is paid in arrears (after you “use the money” per se). To keep record keeping costs down, lenders prefer to keep all of their loans on the same billing cycle – usually calendar – due on the first, late on the 16th, etc. However, only a very small percentage of closings ever take place right on the first of a month.
Thus, to reconcile this and “reset” the borrower’s cycle – the lender will charge in advance the number of days’ interest from the date of the closing to the end of the month. From that point on, the borrower is on a monthly cycle.
For example: Closing Date the 10th of April. The interest portion of the loan payment is $600.00. The borrower will have to prepay for interest from the 10th to the 30th at a rate of 600/30 or $20 per day for a total of 21 days -- $420.00.
Inspections and Other Costs
Other costs incurred by Buyers can include a home inspection, a mold inspection, an appraisal, a survey, a termite inspection, a radon gas inspection, a lead paint inspection, the cost of copying HOA or COA documents and others. Generally Lenders will require some of these such as the appraisal and survey. Others such as a home inspection or mold inspection are at the option of the Buyer.
Disclosures and Review
Those borrowing funds for the purchase are also entitled to a Good Faith in Lending Statement from the lender. This gives you the good faith estimate from the lender as to all of the charges that will be associated with borrowing.
Prior to closing, whether you are our Seller or Buyer, we will review your HUD 1 with you prior to the closing to be sure it is both correct and that you understand all of the charges.
We accompany our Buyers and Sellers to their closings and will assist you through the entire process of buying that dream home or investment property – including the closing process.
This article contains general information regarding closing costs and calculations. The state stamps and taxes calculations were accurate at the time of writing as were the Florida customary method of which party pays which costs. However, lender standards, requirements and thresholds vary and can change at anytime with or without notice or cause. The reader should not rely on the lender standards, thresholds or requirements cited herein and should consult their financial advisor or planner, accountant and mortgage professional when contemplating taking out a home loan and mortgage.