Closing costs and the mortgage home closing process

by Elizabeth Rosen, Contributor

The final step of the home buying process is closing the mortgage loan and paying the closing costs. It is important that you know what to expect at this time so you can ensure that everything goes smoothly.

Mortgage Loan Closing Costs

After you’ve found the perfect home and negotiated a purchase price with the seller, you will need to prepare for the closing costs that are associated with your mortgage loan.

Closing costs can range from 3% to 7% of the home’s purchase price. Closing costs are based on a number of factors, including the property’s location, the type of property, the condition of the property, the type of mortgage you get, and even the time of year you close.

There are a few different ways to pay the mortgage closing costs. Typically, they can be paid out-of-pocket at closing time or rolled into the total amount of your mortgage loan. In addition, many sellers are willing to negotiate closing costs in order to get their home sold, especially in a struggling real estate market.

Listed here are the most common closing costs associated with a home mortgage loan.

Loan Application Fee
The mortgage lender charges this fee to process your mortgage application and to check your credit report. It typically costs a few hundred dollars.

Loan Origination Fee (a.k.a. “origination points”)
The mortgage lender charges this fee for assessing and preparing your home loan. It may cover the costs of document preparation, lender’s attorney fees, notary fees, and other administrative expenses. The amount is usually expressed in terms of “points.”

Mortgage Points (a.k.a. “discount points”)
This is a one-time charge imposed by the mortgage lender, based on the total home loan amount. One mortgage point equals 1% of the loan amount. Note that in some cases, mortgage points may be tax-deductible.

Prepaid Interest
This refers to the amount of interest owed that will accumulate from the day you close the loan until your first monthly mortgage payment is due. Since your first regular mortgage payment is typically 6-8 weeks after closing day, your closing costs will include the amount of interest that accrues during the month in which you close.

Mortgage Insurance
Most mortgage lenders will require you to buy mortgage insurance through them if your down payment is less than 20% of the home’s purchase price. Mortgage insurance generally costs 0.5-1% of the total home loan amount.

Property Appraisal
The mortgage lender will hire a qualified property appraiser to estimate the home’s fair market value and pass the fee on to you.

Home Inspection
You will be charged another fee by the mortgage lender to cover the cost of a professional home inspection.

Homeowners Insurance
The mortgage lender will require you to get a homeowners insurance policy to protect your home and personal property from certain perils.

Title Search & Title Insurance
The mortgage lender will require a title search to be conducted before a new deed can be issued in your name. The title search will help determine if there are any legal problems associated with the property. Title insurance, on the other hand, protects you from future claims against your property.

Escrow Account
This is a reserve account which is required by most mortgage lenders. You will need to deposit money into an escrow account for property taxes and homeowners insurance into this account during the mortgage closing process.

Other Closing Costs
There are additional closing costs that you may be responsible for, depending on the home’s location, the type of dwelling you are purchasing, and the type of mortgage loan you obtain. These other closing costs include the following:

  • 3rd Party Mortgage Broker Fees — Applies if you choose to use a mortgage broker during the home buying and mortgage loan process.
  • FHA, VA, or RHS Fees (for government-backed loans)
  • Property Survey
  • HOA (Homeowners Association) Fees — Applies if you purchase a condominium or other community living unit.
  • Hazard Insurance — In some regions, it may be necessary to purchase extra homeowners insurance beyond the mortgage lender’s requirement (such as flood or wind insurance).
  • Mortgage Assumption Fees — Applies if you take over the home seller’s current mortgage.
  • Repair/Replacement Costs — If you end up having to repair or replace certain items in the home (such as appliances, flooring, or heating/cooling systems).

The Mortgage Home Closing Process

Once your mortgage loan has been officially approved, the next phase is mortgage closing (or settlement). There are many steps involved in the mortgage loan closing process, and while you can see the finish line up ahead, there are still some important things you have to do.

Just Before Closing Day

A day or so before you officially close the mortgage loan, you should give the home a final walk-through. This will help you make sure that the home is in the proper condition and no new damages have occurred.

The Parties Involved
Typically, the homebuyer and the seller will both have a small team of professionals to oversee the final transaction and make sure their client’s rights are being protected. The parties involved with mortgage closing will include some or all of the following:
• Homebuyer
• Home seller
Mortgage lender
Real estate agent
Attorney
• Closing agent
• Title company
• County Recorders Office

Closing Documents
It’s no secret that there’s a lot of paperwork involved with buying a home. There are many mortgage closing documents which will require your signature and a safe storage spot. The paperwork associated with your mortgage closing includes the following:

  • Good Faith Estimate (GFE)
  • HUD Settlement Statement
  • HUD Addendum
  • Truth-in-Lending Statement
  • Affidavit of Lien
  • Promissory Note
  • Documents related to survey (including Receipt of Survey and Disclosure)
  • Affidavit of Encroachment
  • Escrow Statement
  • Assumption Statement
  • Deed of Warranty
  • Deed of Trust (a.k.a. Mortgage Deed)
  • Proof of Title (from previous owner)
  • Property Assessor’s Statement
  • Statement of Prepayment
  • Insurance Certificate
  • Flood Zone Certificate (where applicable)
  • Termite Certificate

Closing Costs
At this time, you will be responsible for paying the mortgage closing costs (discussed earlier). They generally range from 3% to 7% of the home’s purchase price, so make sure you factor that into your budget when you first set out to buy a home. Your closing costs will likely include the following charges:

  • Loan Application Fee
  • Loan Origination Fee
  • Mortgage Points
  • Prepaid Interest
  • Mortgage Insurance
  • Property Appraisal
  • Home Inspection
  • Homeowners Insurance
  • Title Search & Title Insurance
  • Escrow Account

Transfer of Ownership
On settlement day, you will need to sign two important documents — the mortgage loan (the contract between you and the mortgage lender) and the deed (the document that transfers the title of the property from the seller to you). Once the deed has been signed, it is officially recorded at the local government office and you get to take the keys to your new home.