Central Ohio Home Inspection Pros ®
Closing Costs & Information
Congratulations! You have decided to buy a
new home. This will help you take this big financial step by
describing the home buying, home financing, and settlement
process. Lenders and mortgage brokers are required by federal
law, the Real Estate Settlement Procedures Act (RESPA), to give
you this information. You should receive it when applying for a
loan, or within three business days afterwards. Real estate
brokers frequently hand out a booklet as well. You probably
started the home buying process in one of two ways: you saw a
home you were interested in buying or you consulted a lender to
figure out how much money you could borrow before you found a
home (sometimes called pre-qualifying). The next step is to sign
an agreement of sale with the seller, followed by applying for a
loan to purchase your new home. The final step is called
settlement or closing, where the legal title to the property is
transferred to you. At each of these steps you often have the
opportunity to negotiate the terms, conditions and costs to your
advantage. This will highlight such opportunities. You will also
need to shop carefully to get the best value for your money.
There is no standard home buying process used in all localities.
Your actual experience may vary from those described here. This
takes you through the general steps to buying a home, to
eliminate, as much as possible, the mysteries of the settlement
process.
Buying and Financing a Home
Role of the Real Estate Broker
Frequently, the first person you consult about
buying a home is a real estate agent or broker. Although real
estate brokers provide helpful advice on many aspects of home
buying, they may serve the interests of the seller, and not your
interests as the buyer. The most common practice is for the
seller to hire the broker to find someone who will be willing to
buy the home on terms and conditions that are acceptable to the
seller. Therefore, the real estate broker you are dealing with
may also represent the seller. However, you can hire your own
real estate broker, known as a buyers broker, to represent your
interests. Also, in some states, agents and brokers are allowed
to represent both buyer and seller. Even if the real estate
broker represents the seller, state real estate licensing laws
usually require that the broker treat you fairly. If you have
any questions concerning the behavior of an agent or broker, you
should contact your States Real Estate Commission or licensing
department. Sometimes, the real estate broker will offer to help
you obtain a mortgage loan. He or she may also recommend that
you deal with a particular lender, title company, attorney or
settlement/closing agent. You are not required to follow the
real estate brokers recommendation. You should compare the costs
and services offered by other providers with those recommended
by the real estate broker.
Selecting an Attorney
Before you sign an agreement of sale, you might
consider asking an attorney to look it over and tell you if it
protects your interests. If you have already signed your
agreement of sale, you might still consider having an attorney
review it. An attorney can also help you prepare for the
settlement. In some areas attorneys act as settlement/closing
agents or as escrow agents to handle the settlement. An attorney
who does this will not solely represent your interests, since,
as settlement/closing agent, they may also be representing the
seller, the lender and others as well.
*Please note, in many areas of the country attorneys are not
normally involved in the home sale. For example, escrow agents
or escrow companies in western states handle the paperwork to
transfer title without any attorney involvement.
If choosing an attorney, you should shop around and ask what
services will be performed for what fee. Find out whether the
attorney is experienced in representing home buyers. You may
wish to ask the attorney questions such as:
- What is the charge for negotiating the agreement of sale, reviewing documents and giving advice concerning those documents, for being present at the settlement, or for reviewing instructions to the escrow agent or company?
- Will the attorney represent anyone other than you in the transaction?
- Will the attorney be paid by anyone other than you in the transaction?
Terms of the Agreement of Sale
If you receive this information before you sign
an agreement of sale, here are some important points to
consider. The real estate broker probably will give you a
preprinted form of agreement of sale. You may make changes or
additions to the form agreement, but the seller must agree to
every change you make. You should also agree with the seller on
when you will move in and what appliances and personal property
will be sold with the home.
Sales Price
For most home purchasers, the sales price is the
most important term. Recognize that other non-monetary terms of
the agreement are also important.
Title
Title refers to the legal ownership of your new
home. The seller should provide title, free and clear of all
claims by others against your new home. Claims by others against
your new home are sometimes known as liens or encumbrances. You
may negotiate who will pay for the title search which will tell
you whether the title is "clear."
Mortgage Clause
The agreement of sale should provide that your deposit will be
refunded if the sale has to be canceled because you are unable
to get a mortgage loan. For example, your agreement of sale
could allow the purchase to be canceled if you cannot obtain
mortgage financing at an interest rate at or below a rate you
specify in the agreement.
Pests. Your lender will require a certificate
from a qualified inspector stating that the home is free from
termites and other pests and pest damage. You may want to
reserve the right to cancel the agreement or seek immediate
treatment and repairs by the seller if pest damage is found.
Home Inspection
It is a good idea to have the home inspected. An
inspection should determine the condition of the plumbing,
heating, cooling and electrical systems. The structure should
also be examined to assure it is sound and to determine the
condition of the roof, siding, windows and doors. The lot should
be graded away from the house so that water does not drain
toward the house and into the basement. Most buyers prefer to
pay for these inspections so that the inspector is working for
them, not the seller. You may wish to include in your agreement
of sale the right to cancel, if you are not satisfied with the
inspection results. In that case, you may want to re-negotiate
for a lower sale price or require the seller to make repairs.
Lead-Based Paint Hazards in Housing Built Before 1978
If you buy a home built before 1978, you have certain rights
concerning lead-based paint and lead poisoning hazards. The
seller or sales agent must give you the EPA pamphlet Protect
Your Family From Lead in Your Home or other EPA-approved lead
hazard information. The seller or sales agent must tell you what
the seller actually knows about the homes lead-based paint or
lead-based paint hazards and give you any relevant records or
reports.
You have at least ten (10) days to do an inspection or risk
assessment for lead-based paint or lead-based paint hazards.
However, to have the right to cancel the sale based on the
results of an inspection or risk assessment, you will need to
negotiate this condition with the seller.
Finally, the seller must attach a disclosure form
to the agreement of sale which will include a Lead Warning
Statement. You, the seller, and the sales agent will sign an
acknowledgment that these notification requirements have been
satisfied.
Other Environmental Concerns
Your city or state may have laws requiring buyers
or sellers to test for environmental hazards such as leaking
underground oil tanks, the presence of radon or asbestos, lead
water pipes, and other such hazards, and to take the steps to
clean-up any such hazards. You may negotiate who will pay for
the costs of any required testing and/or clean-up.
Sharing of Expenses
You need to agree with the seller about how
expenses related to the property such as taxes, water and sewer
charges, condominium fees, and utility bills, are to be divided
on the date of settlement. Unless you agree otherwise, you
should only be responsible for the portion of these expenses
owed after the date of sale.
Settlement Agent/Escrow Agent or Company
Depending on local practices, you may have an
option to select the settlement agent or escrow agent or
company. For states where an escrow agent or company will handle
the settlement, the buyer, seller and lender will provide
instructions.
Settlement Costs
You can negotiate which settlement costs you will
pay and which will be paid by the seller.
Shopping For a Loan
Our choice of lender and type of loan will
influence not only your settlement costs, but also the monthly
cost of your mortgage loan. There are many types of lenders and
types of loans you can choose. You may be familiar with banks,
savings associations, mortgage companies and credit unions, many
of which provide home mortgage loans. You may find a listing of
some mortgage lenders in the yellow pages or a listing of rates
in your local newspaper.
Mortgage Brokers
Some companies, known as mortgage brokers offer
to find you a mortgage lender willing to make you a loan. A
mortgage broker may operate as an independent business and may
not be operating as your agent or representative. Your mortgage
broker may be paid by the lender, you as the borrower, or both.
You may wish to ask about the fees that the mortgage broker will
receive for its services.
Government Programs
You may be eligible for a loan insured through
the Federal Housing Administration (FHA) or guaranteed by the
Department of Veterans Affairs or similar programs operated by
cities or states. These programs usually require a smaller down
payment. Ask lenders about these programs. You can get more
information about these programs from the agencies that run
them.
CLOs
Computer loan origination systems, or CLOs, are
computer terminals sometimes available in real estate offices or
other locations to help you sort through the various types of
loans offered by different lenders. The CLO operator may charge
a fee for the services the CLO offers. This fee may be paid by
you or by the lender that you select
Types of Loans
Loans can have a fixed interest rate or a
variable interest rate. Fixed rate loans have the same principal
and interest payments during the loan term. Variable rate loans
can have any one of a number of indexes and margins which
determine how and when the rate and payment amount change. If
you apply for a variable rate loan, also known as an adjustable
rate mortgage (ARM), a disclosure and booklet required by the
Truth in Lending Act will further describe the ARM. Most loans
can be repaid over a term of 30 years or less. Most loans have
equal monthly payments. The amounts can change from time to time
on an ARM depending on changes in the interest rate. Some loans
have short terms and a large final payment called a balloon. You
should shop for the type of home mortgage loan terms that best
suit your needs.
Interest Rate, Points & Other Fees
Often the price of a home mortgage loan is stated
in terms of an interest rate, points, and other fees. A point is
a fee that equals 1 percent of the loan amount. Points are
usually paid to the lender, mortgage broker, or both, at the
settlement or upon the completion of the escrow. Often, you can
pay fewer points in exchange for a higher interest rate or more
points for a lower rate. Ask your lender or mortgage broker
about points and other fees. A document called the Truth in
Lending Disclosure Statement will show you the Annual Percentage
Rate (APR) and other payment information for the loan you have
applied for. The APR takes into account not only the interest
rate, but also the points, mortgage broker fees and certain
other fees that you have to pay. Ask for the APR before you
apply to help you shop for the loan that is best for you. Also
ask if your loan will have a charge or a fee for paying all or
part of the loan before payment is due (prepayment penalty). You
may be able to negotiate the terms of the prepayment penalty.
Lender-Required Settlement Costs
Your lender may require you to obtain certain
settlement services, such as a new survey, mortgage insurance or
title insurance. It may also order and charge you for other
settlement-related services, such as the appraisal or credit
report. A lender may also charge other fees, such as fees for
loan processing, document preparation, underwriting, flood
certification or an application fee. You may wish to ask for an
estimate of fees and settlement costs before choosing a lender.
Some lenders offer no cost or no point loans but normally cover
these fees or costs by charging a higher interest rate.
Comparing Loan Costs
Comparing APRs may be an effective way to shop
for a loan. However, you must compare similar loan products for
the same loan amount. For example, compare two 30-year fixed
rate loans for $100,000. Loan A with an APR of 8.35% is less
costly than Loan B with an APR of 8.65% over the loan term.
However, before you decide on a loan, you should consider the
up-front cash you will be required to pay for each of the two
loans as well. Another effective shopping technique is to
compare identical loans with different up-front points and other
fees. For example, if you are offered two 30-year fixed rate
loans for $100,000 and at 8%, the monthly payments are the same,
but the up-front costs are different:
- Loan A - 2 points ($2,000) and lender required costs of $1800 = $3800 in costs
- Loan B - 2 1/4 points ($2250) and lender required costs of $1200 = $3450 in costs.
A comparison of the up-front costs shows Loan B
requires $350 less in up-front cash than Loan A. However, your
individual situation (how long you plan to stay in your house)
and your tax situation (points can usually be deducted for the
tax year that you purchase a house) may affect your choice of
loans
Lock-ins
Locking in your rate or points at the time of
application or during the processing of your loan will keep the
rate and/or points from changing until settlement or closing of
the escrow process. Ask your lender if there is a fee to lock-in
the rate and whether the fee reduces the amount you have to pay
for points. Find out how long the lock-in is good, what happens
if it expires, and whether the lock-in fee is refundable if your
application is rejected.
Tax and Insurance Payments
Your monthly mortgage payment will be used to repay the money
you borrowed plus interest. Part of your monthly payment may be
deposited into an escrow account (also known as a reserve or
impound account) so your lender or service can pay your real
estate taxes, property insurance, mortgage insurance and/or
flood insurance. Ask your lender or mortgage broker if you will
be required to set up an escrow or impound account for taxes and
insurance payments.
Transfer of Your Loan
While you may start the loan process with a
lender or mortgage broker, you could find that after settlement
another company may be collecting the payments on your loan.
Collecting loan payments is often known as servicing the loan.
Your lender or broker will disclose whether it expects to
service your loan or to transfer the servicing to someone else.
Mortgage Insurance
Private mortgage insurance and government
mortgage insurance protect the lender against default and enable
the lender to make a loan which the lender considers a higher
risk. Lenders often require mortgage insurance for loans where
the down payment is less than 20% of the sales price. You may be
billed monthly, annually, by an initial lump sum, or some
combination of these practices for your mortgage insurance
premium. Ask your lender if mortgage insurance is required and
how much it will cost. Mortgage insurance should not be confused
with mortgage life, credit life or disability insurance, which
are designed to pay off a mortgage in the event of the borrowers
death or disability. You may also be offered lender paid
mortgage insurance (LPMI). Under LPMI plans, the lender
purchases the mortgage insurance and pays the premiums to the
insurer. The lender will increase your interest rate to pay for
the premiums -- but LPMI may reduce your settlement costs. You
cannot cancel LPMI or government mortgage insurance during the
life of your loan. However, it may be possible to cancel private
mortgage insurance at some point, such as when your loan balance
is reduced to a certain amount. Before you commit to paying for
mortgage insurance, find out the specific requirements for
cancellation.
Flood Hazard Areas
Most lenders will not lend you money to buy a
home in a flood hazard area unless you pay for flood insurance.
Some government loan programs will not allow you to purchase a
home that is located in a flood hazard area. Your lender may
charge you a fee to check for flood hazards. You should be
notified if flood insurance is required. If a change in flood
insurance maps brings your home within a flood hazard area after
your loan is made, your lender or service may require you to buy
flood insurance at that time.
Selecting a Settlement Agent
Settlement practices vary from locality to
locality, and even within the same county or city. Settlements
may be conducted by lenders, title insurance companies, escrow
companies, real estate brokers or attorneys for the buyer or
seller. You may save money by shopping for the settlement agent.
In some parts of the country (particularly western states),
settlement may be conducted by an escrow agent. The parties sign
an escrow agreement which requires them to provide certain
documents and funds to the agent. Unlike other types of
settlement, the parties do not meet around a table to sign
documents. Ask how your settlement will be handled.
Securing Title Services
Title insurance is usually required by the lender
to protect the lender against loss resulting from claims by
others against your new home. In some states, attorneys offer
title insurance as part of their services in examining title and
providing a title opinion. The attorney's fee may include the
title insurance premium. In other states, a title insurance
company or title agent directly provides the title insurance.
Owners Policy
A lenders title insurance policy does not protect
you. Similarly, the prior owners policy does not protect you. If
you want to protect yourself from claims by others against your
new home, you will need an owner's policy. When a claim does
occur, it can be financially devastating to an owner who is
uninsured. If you buy an owner's policy, it is usually much less
expensive if you buy it at the same time and with the same
insurer as the lender's policy.
Choice of Title Insurer
Under RESPA, the seller may not require you, as a
condition of the sale, to purchase title insurance from any
particular title company. Generally, your lender will require
title insurance from a company that is acceptable to it. In most
cases you can shop for and choose a company that meets the
lenders standards.
Review Initial Title Report
In many areas, a few days or weeks before the
settlement or closing of the escrow, the title insurance company
will issue a Commitment to Insure or preliminary report or
binder containing a summary of any defects in title which have
been identified by the title search, as well as any exceptions
from the title insurance policy's coverage. The commitment is
usually sent to the lender for use until the title insurance
policy is issued at or after the settlement. You can arrange to
have a copy sent to you (or to your attorney) so that you can
object if there are matters affecting the title which you did
not agree to accept when you signed the agreement of sale.
Coverage & Cost Savings
To save money on title insurance, compare rates among various
title insurance companies. Ask what services and limitations on
coverage are provided under each policy so that you can decide
whether coverage purchased at a higher rate may be better for
your needs. However, in many states, title insurance premium
rates are established by the state and may not be negotiable. If
you are buying a home which has changed hands within the last
several years, ask your title company about a "reissue rate,"
which would be cheaper. If you are buying a newly constructed
home, make certain your title insurance covers claims by
contractors. These claims are known as mechanics liens in some
parts of the country.
Survey
Lenders or title insurance companies often
require a survey to mark the boundaries of the property. A
survey is a drawing of the property showing the perimeter
boundaries and marking the location of the house and other
improvements. You may be able to avoid the cost of a complete
survey if you can locate the person who previously surveyed the
property and request an update. Check with your lender or title
insurance company on whether an updated survey is acceptable.
RESPA Disclosures
One of the purposes of RESPA is to help consumers
become better shoppers for settlement services. RESPA requires
that borrowers receive disclosures at various times. Some
disclosures spell out the costs associated with the settlement,
outline lender servicing and escrow account practices and
describe business relationships between settlement service
providers.
Good Faith Estimate of Settlement Costs
RESPA requires that, when you apply for a loan,
the lender or mortgage broker give you a Good Faith Estimate of
settlement service charges you will likely have to pay. If you
do not get this Good Faith Estimate when you apply, the lender
or mortgage broker must mail or deliver it to you within the
next three business days. Be aware that the amounts listed on
the Good Faith Estimate are only estimates. Actual costs may
vary. Changing market conditions can affect prices. Remember
that the lender's estimate is not a guarantee. Keep your Good
Faith Estimate so you can compare it with the final settlement
costs and ask the lender questions about any changes. Servicing
Disclosure Statement. RESPA requires the lender or mortgage
broker to tell you in writing, when you apply for a loan or
within the next three business days, whether it expects that
someone else will be servicing your loan (collecting your
payments).
Affiliated Business Arrangements
Sometimes, several businesses that offer
settlement services are owned or controlled by a common
corporate parent. These businesses are known as affiliates. When
a lender, real estate broker, or other participant in your
settlement refers you to an affiliate for a settlement service
(such as when a real estate broker refers you to a mortgage
broker affiliate), RESPA requires the referring party to give
you an Affiliated Business Arrangement Disclosure. This form
will remind you that you are generally not required, with
certain exceptions, to use the affiliate and are free to shop
for other providers.
HUD-1 Settlement Statement
One business day before the settlement, you have
the right to inspect the HUD-1 Settlement Statement. This
statement itemizes the services provided to you and the fees
charged to you. This form is filled out by the settlement agent
who will conduct the settlement. Be sure you have the name,
address, and telephone number of the settlement agent if you
wish to inspect this form. The fully completed HUD-1 Settlement
Statement generally must be delivered or mailed to you at or
before the settlement. In cases where there is no settlement
meeting, the escrow agent will mail you the HUD-1 after
settlement, and you have no right to inspect it one day before
settlement.
Escrow Account Operation & Disclosures
Your lender may require you to establish an escrow or impound
account to insure that your taxes and insurance premiums are
paid on time. If so, you will probably have to pay an initial
amount at the settlement to start the account and an additional
amount with each months regular payment. Your escrow account
payments may include a cushion or an extra amount to ensure that
the lender has enough money to make the payments when due. RESPA
limits the amount of the cushion to a maximum of two months of
escrow payments. At the settlement or within the next 45 days,
the person servicing your loan must give you an initial escrow
account statement. That form will show all of the payments which
are expected to be deposited into the escrow account and all of
the disbursements which are expected to be made from the escrow
account during the year ahead. Your lender or service will
review the escrow account annually and send you a disclosure
each year which shows the prior years activity and any
adjustments necessary in the escrow payments that you will make
in the forthcoming year.
Processing Your Loan Application
Here are several federal laws which provide you with protection
during the processing of your loan. The Equal Credit Opportunity
Act (ECOA), the Fair Housing Act, and the Fair Credit Reporting
Act (FCRA) prohibit discrimination and provide you with the
right to certain credit information. No Discrimination. ECOA
prohibits lenders from discriminating against credit applicants
on the basis of race, color, religion, national origin, sex,
marital status, age, the fact that all or part of the
applicant's income comes from any public assistance program, or
the fact that the applicant has exercised any right under any
federal consumer credit protection law. To help government
agencies monitor ECOA compliance, your lender or mortgage broker
must request certain information regarding your race, sex,
marital status and age when taking your loan application.
The Fair Housing Act also prohibits discrimination in
residential real estate transactions on the basis of race,
color, religion, sex, handicap, familial status or national
origin. This prohibition applies to both the sale of a home to
you and the decision by a lender to give you a loan to help pay
for that home. Finally, your locality or state may also have a
law which prohibits discrimination. Frequently, there are
differences in the types and amounts of settlement costs charged
to the borrower -- for example, some borrowers are charged
greater fees for mortgages depending on their credit worthiness.
These differences may be justified or they may be unlawfully
discriminatory. It is important that you examine your settlement
documents closely and do not hesitate to compare your settlement
costs with those of your friends and neighbors.
If you feel you have been discriminated against
by a lender or anyone else in the home buying process, you may
file a private legal action against that person or complain to a
state, local or federal administrative agency. You may want to
talk to an attorney or you may want to ask the federal agency
that enforces ECOA (the Board of Governors of the Federal
Reserve System) or the Fair Housing Act (HUD) about your rights
under these laws.
Prompt Action/Notification of Action Taken
Your lender or mortgage broker must act on your
application and inform you of the action taken no later than 30
days after it receives your completed application. Your
application will not be considered complete, and the 30 day
period will not begin, until you provide to your lender or
mortgage broker all of the material and information requested.
Statement of Reasons for Denial
If your application is denied, ECOA requires your
lender or mortgage broker to give you a statement of the
specific reasons why it denied your application or tell you how
you can obtain such a statement. The notice will also tell you
which federal agency to contact if you think the lender or
mortgage broker has illegally discriminated against you.
Obtaining Your Credit Report
The Fair Credit Reporting Act (FCRA) requires a
lender or mortgage broker that denies your loan application to
tell you whether it based its decision on information contained
in your credit report. If that information was a reason for the
denial, the notice will tell you where you can get a free copy
of the credit report. You have the right to dispute the accuracy
or completeness of any information in your credit report. If you
dispute any information, the credit reporting agency that
prepared the report must investigate free of charge and notify
you of the results of the investigation.
Obtaining Your Appraisal
The lender needs to know if the value of your
home is enough to secure the loan. To get this information, the
lender typically hires an appraiser, who gives a professional
opinion about the value of your home. ECOA requires your lender
or mortgage broker to tell you that you have a right to get a
copy of the appraisal report. The notice will also tell you how
and when you can ask for a copy. RESPA Protection Against
Illegal Referral Fees ESPA was enacted because Congress felt
that consumers needed protection from "... unnecessarily high
settlement charges caused by certain abusive practices that have
developed in some areas of the country." Some of the practices
Congress was concerned about are discussed below. Most
professionals in the settlement business provide good service
and do not engage in these practices.
Prohibited Fees
It is illegal under RESPA for anyone to pay or
receive a fee, kickback or anything of value because they agree
to refer settlement service business to a particular person or
organization. For example, your mortgage lender may not pay your
real estate broker $250 for referring you to the lender. It is
also illegal for anyone to accept a fee or part of a fee for
services if that person has not actually performed settlement
services for the fee. For example, a lender may not add to a
third party's fee, such as an appraisal fee, and keep the
difference.
Permitted Payments
RESPA does not prevent title companies, mortgage
brokers, appraisers, attorneys, settlement/closing agents and
others, who actually perform a service in connection with the
mortgage loan or the settlement, from being paid for the
reasonable value of their work. If a participant in your
settlement appears to be taking a fee without having done any
work, you should advise that person or company of the RESPA
referral fee prohibitions. You may also speak with your attorney
or complain to a regulator.
Penalties
It is a crime for someone to pay or receive an
illegal referral fee. The penalty can be a fine, imprisonment or
both. You may be entitled to recover three times the amount of
the charge for any settlement service by bringing a private
lawsuit. If you are successful, the court may also award you
court costs and your attorneys fees.
Private Lawsuits
If you have a problem, the best place to have it fixed is at its
source (the lender, settlement agent, broker, etc.). If that
approach fails and you think you have suffered because of a
violation of RESPA, ECOA or any other law, you may be entitled
to sue in a federal or state court. This is a matter you should
discuss with your attorney.
Government Agencies
Most settlement service providers are supervised
by a governmental agency at the local, state and/or federal
level, some of which are listed in the Appendix to this Booklet.
Your states Attorney General may have a consumer affairs
division. If you feel that a provider of settlement services has
violated RESPA or any other law, you can complain to that agency
or association. You may also send a copy of your complaint to
the HUD Office of Consumer & Regulatory Affairs.
Servicing Errors
If you have a question any time during the life of your loan,
RESPA requires the company collecting your loan payments (your
service) to respond to you. Write to your service and call it a
qualified written request under Section 6 of RESPA. A qualified
written request should be a separate letter and not mailed with
the payment coupon. Describe the problem and include your name
and account number. The service must investigate and make
appropriate corrections within 60 business days.
Contents
PATCH
Independent Home Inspections, LLC
Serving Columbus and Central Ohio
Rick A. Harrington
13514 Falmouth Ave
Pickerington, Ohio 43147
(614) 565-4962
(614) 768-1190 fax
