Closing costs can make a substantial dent in your pocket when you buy a home. That’s to be expected. But if things go wrong and the closing fails, what’s it going to cost you?
The costs involved in a closing are difficult enough to assess in advance, and it’s virtually impossible to know how much a failed closing will cost. But being aware of what you probably have to pay – and could lose – is a start.
Understanding Closing Costs
The actual amount of closing costs will depend on where you live, how much you’re paying for the house, and the mortgage you raise on the property. Even then it’s difficult to estimate the costs in advance, which is a challenge because anyone buying a home must have the money available at settlement.
For instance, a comparative study of closing costs in Georgia, based on various sources including the US Census Bureau (2015), bank rates, US government websites, and a five year US community survey, indicated that closing costs in ten counties varied from 1.6 to 2.1 percent of the value of the homes purchased. This assumed a 20 percent down payment and a 30-year fixed-rate mortgage.
So what costs do you have to pay for a closing? And which of these costs will you have to pay even if the closing fails?
Closing costs are linked to the mortgage you take out on the property and purchasers may choose between fixed-rate and adjustable mortgages. But, confusingly, lenders do not necessarily offer the same deal. For this reason, the Consumer Financial Protection Bureau (CFPB) suggests that people looking for loans get at least three estimates before they make a decision. This way they can compare how costs differ between lenders.
Closing costs are presented to purchasers by lenders on a mandatory Loan Estimate form on application for a mortgage. Only once you confirm that you want to proceed with the loan will the lender take the necessary steps to approve your loan. But even once your loan has been approved things can go wrong and a closing might fail – and it might not be your fault.
Actual Costs of a Residential Real Estate Closing
Generally, you will be charged origination fees by the lender, various third party fees, and taxes. There will also be fees for various services including home inspections. Some of these you can shop around for to ensure you get the best value for money. Others are pretty much cast in stone.
Loan costs include:
- Origination charges that essentially amount to commission paid to the person or business that originated the loan (a broker for example). This fee is often higher for those with low credit scores. Typically one percent of the loan will be charged. Sometimes lenders omit the fee to persuade borrowers to use their service.
- Origination points that borrowers pay to get a lower rate of interest by trading off points. As with origination fees, one percent of the loan amount is often charged.
- A commitment fee charged by some lenders (not brokers) to compensate them for their commitment to lend. This is one amount that a borrower is likely to lose if he or she doesn’t go ahead with the purchase, or if the closing fails for some other reason.
- Other origination fees might include document presentation, processing, underwriting, and a tax service.
There is a lot of other paperwork too, and a variety of services anyone buying a house cannot avoid. These include fees for:
- Appraisal required by banks and other lenders to ensure that the mortgage they are committing to will be covered by the value of the house. Appraisal fees generally range from $300 to $500.
- Home inspection to ensure that there isn’t any damage from pests, weather, or anything else. The purchaser can choose which company to use and can potentially save money by appointing who will do the job. Fees could be anything from $100 to $500. If a house fails the home inspection you could lose your deposit.
- Credit reports by credit reporting agencies. Banks will always require credit reports though they might not pay the charge on to the customer. These fees shouldn’t amount to more than $30 per report.
- Flood certification that might be required if the property is on or close to a flood plain. The Federal Emergency Management Agency (FEMA) charges between about $15 and $20 for this.
- Lender’s title insurance and title services that are fundamental to the process because the title deeds state who owns the property. Title service providers make sure the title is legitimate. Lenders commonly require borrowers to take out insurance on the title in case it’s found to be defective at some time in the future.
- Surveying the property to determine the boundaries and location of walls, fences, gas lines, and so on. Only required in some states, the cost is usually in the region of $100 to $400.
- Legal settlement and closing by an attorney. In Georgia, a licensed real estate closing attorney must do the closing. This attorney represents the lender but is paid by the purchaser.
It stands to reason that almost all the services mentioned must be completed and paid for before the closing can go ahead. If the closing fails this could cost the unsuccessful or latently unwilling purchaser a lot of money.
If you are buying a house in Georgia you should talk to a knowledgeable Peachtree City attorney who can advise you and make sure your interests are covered. There’s a lot that can go wrong, but a good attorney will help you avoid the pitfalls and in this way avoid a failed closing and unnecessary costs. Contact Slepian, Schwartz & Landgaard today to arrange a consultation.