Resident's Guide to Buying a Home and Using the Doctor's Loan
Explanation of Closing Costs / HUD
The HUD-1 is a form used by the closing attorney (also called the closing agent) to itemize all charges imposed upon a borrower and seller for a real estate transaction. It is a standardized legal document that gives each party a complete list of transactions. The statutes of the Real Estate Settlement Procedures Act (RESPA) require the form be used as the standard real estate settlement form in all transactions in the United States that involve federally related mortgage loans. It is important to understand that you should not assume that the closing agent is always correct. Mistakes happen. A friend of mine told me they'd been in more than one closing where an error was found. The HUD-1 is the best way to see any and all closing costs, but it is merely an estimate until you get closer to your closing date.
Once you have the best loan terms and the rate you want it is time to prepare for closing. This is a frustrating aspect of the process because you are so focused on choosing the right house and getting the best interest rate that you don't realize what you will need for closing. Personally, I would have liked to get a better idea of closing costs prior to submitting a contract, because I would have asked for more compensation from the seller. I will use the example of a $300,000 house using Bank of America's specifications:
1. Lender's Fees
One aspect of the closing costs includes the lender's fees. This total is comprised of any origination fee/discount fee, general lender fee, and possibly an appraisal fee. A discount fee of 1% is $3,000, which is in addition to a general lender fee of $912. Some lenders (not Bank of America) may charge an additional appraisal fee of approximately $400. Therefore, Total Lender's Fees would be approximately $3,912.
2. Total Prepaid Fees
This section covers the amount of interest that needs to be paid at the time of closing. Your payments are set up in a way in which your mortgage payment will pay the principal and interest for the previous month. In general, if you close on May 15th your first payment will not be due until July. The payment in July will cover the principal and interest accrued over the month of June. Unfortunately someone has to pay for the interest that will accrue from May15th to May 31st. So at closing you will prepay the interest for this time period so that your monthly payments are scheduled appropriately. As you can see, the prepaid interest is related to your interest rate and date of closing. The earlier you close in the month, the more you need to pay in prepaid interest. In my case, the prepaid interest came out to be $30 a day.
3. Total Reserves
This is by far the most confusing aspect of the closing costs, as most people who you ask really don't know exactly what it is and how much it is going to be. Lenders can require borrowers to keep a reserve, or excess balance in their escrow accounts to cover unanticipated increases in the following year's tax and insurance bills. This generally includes the property tax reserve and the hazard (property) insurance reserve. The amount required at closing usually depends on the lender and the state, but is typically equal to 2 months of escrow payments. For example, if your property insurance were $70 a month ($840 yearly) you would need to pay $140 in reserve at closing. In addition, if your property taxes are $200 a month ($2,400 yearly) you will need to have $400 up front at closing. Do not think this is actually going towards your property insurance and taxes. It is merely a reserve for the lender. On a side note, the reserve cannot be more than one-sixth of the total amount paid out of the account each year.
Also, there would be a reserve needed for your PMI payment as well, but in the case of the doctor's loan, that should not be included in your closing fees.
4. Total Title Charges
These are the charges that are directly related to the transfer of the title from the seller to the buyer. The HUD is the first place that you will actually see these specific charges listed. There are several aspects to the title charge so I will start from the top. The closing fee is the fee paid to the attorney or agent that completes your HUD-1 form (nothing is free). I was charged $175 and, from what I know, this is below average. The highest fee, and most important one, relates to the Title Search/Title Insurance. A title search is when a company checks to make sure there are no unpaid mortgages or tax liens on the property before you buy it. Title insurance is the purchase of the guarantee that what the title search company found is accurate. For example, let's say your property has changed hands many times and along the way someone forged a signature in transferring the title. Title insurance covers you for any legal claims that rise out of this problem. I know it seems like a rip off, especially if you are buying a new house. However, if you are getting a mortgage to pay for your house, the mortgage company requires title insurance so that their investment is covered. It protects the lender, but you pay the premium up front at closing. I believe that it is related to your actual loan amount (I was charged about $1,000). The document preparation and document delivery fees are my favorite charges of all. Basically they are junk fees that go to your settlement agent to finalize the legal papers. In my case, the total for these fees was $125.
5. Total Government Recording Charges.
Last but not least is the good old government that is going to take their cut off the top. These fees vary drastically by location so it is very difficult to give an estimate of what these fees will be. In general, these fees are levied by the state or county government to record and process your deed and mortgage in their records. The most significant fee is the transfer tax. The transfer tax is a tax on passing the title of property from one person to another. Think of it as a nominal fee charged for the seller to be able to transfer the title from their name over to your name within a particular city and state.
Written by: Randon T. Hall & Ben Rosenbaum, Copyright © 2008
