If you want a good answer, ask a good question.
That’s part of the confusion when asking about Closing Costs as they relate to a Real Estate transaction. Some Buyers that do not participate in this market regularly, or are from another state or country will inquire about costs from people that do participate regularly, and a seemingly simple question regarding Closing Costs will be answered from the perspective of the insider, to the potential dismay of the Buyer when reality sets in.
We will not let this happen to you!
Frequently, Buyers may not be aware of the various parties and charges that are involved in a Real Estate transaction, therefore they are not prepared when all of those entities begin to show their fees and charges. Particularly if they have asked a Lender this question and in response only receive Loan related costs.
Others may feel that Closing Costs only refers to certain aspects of the transaction based on experience or their own understanding.
This page is dedicated to addressing the question “What will it cost me?” In order to do this, we will interpret Closing Costs as any and all costs that may need to be included in a purchase transaction from the Buyer side.
All of these items will be shown on a settlement statement, either a form called a HUD-1 or if a loan is involved, a Loan Estimate and Closing Disclosure. The total of debits and credits will be added up and presented as one number to be paid at closing. Those items paid outside of closing, for instance at the time a service is preformed, will also be shown.
Keeping track of Credits and Debits can be confusing.
It may be helpful to remember Debits and Credits as follows: Credit = “Cool”, Debit = “Damn”
For instance, a Buyer Credit /Seller Debit scenario would see a Buyer saying “Cool” because they get money, and the Seller saying “Damn” because they pay. Obviously, the opposite is true as well for a Seller Credit/Buyer Debit.
Most of these costs can be paid by either party in a transaction and most Real Estate Purchase and Sale Agreements (Contracts) will specify which side, Buyer or Seller is to pay for the individual costs. Of course, many are negotiable regarding which side pays, and while some costs themselves are negotiable, others are set by state law or other guidelines.
Many of the costs described below are only applicable when there is a Mortgage Loan involved in the transaction. Absent any agreement to the contrary, most loan related costs will be paid by the Buyer. After all, it is their loan, not the Seller’s.
Lets start with a few simple statements.
- Purchase Price of the home is a known fact.
- The Purchase Price will dictate certain other costs (Title Insurance, Documentary Stamps).
- The Closing Date will dictate certain other costs (Proration’s, Prepaids, and Reserves)
In order to make it easier to follow, we will divide the costs up into different areas:
There will be Recording Fees for the Deed (and any Mortgages). If the Contract does not state which side pays for these, local custom will be used.
- $10 for the first page, $8.50 for all other pages.
- Recording of the Deed is typically paid for by the Seller and is 1 or 2 pages
- A Mortgage may be up to, or over 26 pages, and is typically paid for by the Buyer
State Documentary Stamps
The State of Florida also has three taxes, referred to as "Dos Stamps" that may or may not apply
- State Documentary Stamp on the Deed
- Calculated at $0.70 per $100 on the purchase price
- Typically, but not always paid by the Seller
- State Documentary Stamp on the Mortgage
- Not applicable if there is no loan.
- Calculated at $0.35 per $100 on the Mortgage Loan Amount
- Typically, but not always paid by the Buyer
- Intangible tax on any new mortgages
- Not applicable if there is no loan
- Not applicable if a mortgage is assumed
- Calculated at 0.002 x any new mortgage loan amounts
- Typically, but not always paid by the Buyer
Documentary Stamps taxes are payable to the County the property is located in. The Closing Agent will collect these monies at Closing into their Escrow Account and will disburse from that Escrow account to the appropriate entity after closing.
The Purchase Contract will generally stipulate who pays for what, but there are many versions of Contracts out there and not all include language clarifying who pays. Also, these items can be negotiated between Buyer and Seller.
Finally, absent any clarifying language in the Contract, a Title Agent will generally revert to what is typical in the local area. This can be different from area to area so it is important to note any contract language or local customs.
At the time of Closing certain items may have already been paid by the Seller. These can include:
- Local Property Taxes,
- Assessments and/or
- Association Dues
In this case, the portion of those monies that have already been paid by the Seller will be prorated, with the Buyer charged from the closing date until the appropriate ending date. This will appear as a Credit to the Seller and a Debit to the Buyer. In other words, the Buyer is repaying the Seller for any monies that have already been paid.
Note: since most, but not all of our Property Taxes are paid in arrears (that means that they are billed and paid after the use has occurred) the Buyer will be the one that receives the tax bill for the current year (unless the closing occurs after the taxes have been paid).
The Seller will actually Credit the Buyer for Property Taxes for the period of time they owned the property beginning on January 1st of the year of closing, through the day of closing. This may have the effect of lowering the Buyer’s costs slightly, depending on the time of year.
This cost can be estimated by dividing the tax bill by 365 days and then calculating the days each side owns the property.
If there is a tenant, any Rent payments will also be prorated to transfer any rents collected by the Seller to the Buyer for the remainder of the rental period.
In Florida, most Real Estate closings are handled by either Title Companies or Attorneys.
There are certain costs associated with the provision of these services and also for some of the services themselves.
Most but not all Contracts will specify who pays for these costs or how they are to be apportioned between Buyer and Seller.
There will generally be a Closing or Settlement Cost payable to the Closing Agent for their services. Settlement Services Costs can range anywhere from $350 to more than $500 depending on the complexity of the transaction.
There will also usually be a charge for Title Insurance
The amount for Owner’s Title Insurance in Florida is set by law and will be the same anywhere in Florida.
This cost is calculated based on price. Starting with $5.75 per $1000 up to $1,000,000, with small reductions to the rate above $1 Mil.
If there is a loan involved, the Lender will require a 'Lender’s Title Policy' covering the Lender in the amount of the loan.
There is acknowledgement that for policies written at the same time and on the same property the Buyer/Borrower should not pay the full price for both policies. A lender may also require certain endorsements be made to the Title Policy. The Lender policy is typically a fraction of the Owner's Title policy price due to what is referred to as Simultaneous Issue (ance) of both policies, and the endorsements may run into a couple hundred dollars at most.
There may be charges for Notary services, a Title search and a Municipal Lien search. There may also be wire transfer or courier fees if the transaction requires these services.
Notary charges, Wire Transfer and Courier fees are usually $25-$30 each
Liens searches can run to a couple hundred dollars.
Again, the Contract will usually state who pays for what.
OTHER VENDORS and ENTITIES
This is a sample of some typical vendors that may be required or used in a transaction. The Costs associated with each will be determined by the individual entity and inmost cases, the Buyer can select the providers. This is an opportunity to shop pricing and services.
Some of these may be paid from Escrow at closing, others may require payment at the time the services are provided, and are therefore shown on a Settlement statement as Paid Outside of Closing or ‘POC’.
May also appear in the Loan Section, generally paid in advance of closing at the time of service. Depending on the type of Appraisal and the type of property, this cost can run from $350 to $1000
If a party wishes to have their own attorney (who is not the Closing Agent) review the documents. The amount will be determined between you and your attorney.
Depending on the complexity of the site, and any Buyer requested options (Elevation Certificate, monuments etc.) these may run from $400 to over $1000.
Generally required to be paid at the time of service. Depending on the size of the home and any other services ordered (pool, drywall etc) may run from $350 to $700
Wood Destroying Organism [WDO] Inspection
Historically referred to as a termite inspection, this can generally be done for $50-$100. If a loan is involved it will probably be required by the lender, and if not it is highly recommended to perform one.
Only when there is a Homeowner or Condominium association.
These are required to be paid to each Association for them to prepare the proper Statement of account needed for the transfer of ownership.
Generally, these are paid in advance of Closing, and the Contract may or may not state who pays for it.
They can run from $100 to $200, each.
Don't forget about homeowner's insurance. Rates will vary based on things like deductibles, special riders etc. There are also Flood Insurance and Wind Insurance to consider. There is no way to estimate this cost, but many lenders will use 75% of the property tax bill when estimating annual insurance during loan workups, and we have found that to be as good a rule of thumb as any to use as a starting point.
These costs can be considered in three parts:
- Loan Origination Costs
Loan Origination Costs
These will be driven by the Lender and unless otherwise stated in the Contract are paid by the Buyer. These can include things like Loan Origination Fees, Discount Points, Buy Downs, a Credit Report, Flood Certification, underwriting, appraisal (usually POC), and any other fees that the lender or specific loan requires. They will be shown on a Loan Estimate.
These are items required by the lender to be paid in advance, and are generally limited to:
- Interest (your first payment will probably not be due for over a month and Interest is paid in Arrears (a/k/a after you have had the use of the money), and the banks never miss the ability to charge interest for the use of the the money from the Closing date until the first payment is made) This is generally a lower number, obviously depending on the loan amount and the date Closing occurs.
- Homeowner’s Insurance, which the banks want to see paid for in some cases for the entire next year.
- Mortgage Insurance, which may or may not apply.
These are the funds needed to initially set up an escrow account for your loan, (if your loan includes an escrow account). This is a one-time charge at the start of the loan.
Depending on the specific loan scenario and lender there can be many or few costs associated with the loan.
These costs, depending on the time of year, are generally 2-3 months’ worth of Homeowner’s Insurance and Property Taxes.
There is frequently a credit involved to the Buyer as well, called an Aggregate Adjustment. This is because the bank must show how they are setting up the escrow Account, but they are not permitted to hold more than the minimum amount stated elsewhere in the loan documents.
So they will show the initial set up and then credit back to the Buyer an amount that leaves them compliant with the minimum reserve amount.
If your loan touches the Federal Government in any way, (most loans do) your lender is required to follow guidelines set out by the Consumer Financial Protection Bureau [CFPB] call TILA-RESPA Integrated Disclosure [TRID]. Your lender will provide you with a Loan Estimate that details these costs when you begin the process.
This Loan Estimate will be compared to the final Closing Disclosure that is used at Closing and there are certain fees that cannot change and others that cannot change beyond a predetermined amount. This is to prevent any last minute add on charges.
In a cash deal, or with a small private lender, the Closing Costs may be memorialized on a HUD-1 Settlement Statement or another document that shows the costs.
First time Buyers, and those Buying for the first time in Florida may not be familiar with what impact local customs and contract language may have on the costs associated with a purchase.
Even experienced Buyers that may not have purchase recently may not be familiar with what the current contracts state regarding costs and who pays them.
This is particularly true when there is a loan involved. The Mortgage loan process and the documents that accompany loans have evolved since the days when one could walk into their local bank and sign for a mortgage.
We are here to walk people through the process , particularly when it comes to the various costs associated with a transaction.
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Drop us a line today for a free consultation!