Author’s note: This is a selection from my new book, How To Buy A Home and Not Lose Sex: Find the Best House, Make the Best Offer, and Keep Your Love Life, which you can purchase on Amazon by clicking here.
In the next few weeks I’m going to cover all the closing costs I can think of. In past weeks I’ve covered the down payment, the cost of a Realtor, earnest money deposits, prepaid closing costs, flood elevation certificates, insurance, escrows, and, of course, freaking out about closing costs! This week I’ll wig you out with a few more: title insurance and lender fees.
Title Insurance: Ugh! More Closing Costs!
Closings generally take place at a title-insurance office or an attorney’s office. In the case of new construction, they are sometimes held at the builder’s office.
The people that put all of the paperwork together, corral your funds from the bank, pay off the house for the seller, prepare the deed and file it with the clerk or courts, and generally put a bow on your closing charge a nominal fee (a few hundred dollars, usually) for doing this.
Well, some attorneys charge more than a few hundred dollars for doing this…
Anyway, these firms also issue the title insurance. What is title insurance?
In a nutshell: Title insurance pays you monetary compensation for a loss if it turns out that the seller didn’t have the right to sell (and someone else still has a right of ownership to the property), or, in some cases, if you are not able to use or access the property as intended.
In a more practical sense title insurance is used to ensure, as much as possible, that the seller has the right to sell the property before you buy it. It ensures that a chain-of-title search was done, and that there are no other sellers or owners lurking out there in the weeds with a legal claim to the property. If there are other legal owners out there after the fact, the title insurance will defend your claim.
There are two title-insurance policies issued at closing: an “owners” policy given to the buyer, and a “lenders” policy given to whoever is lending the money.
If it’s a cash deal and there is no lender, there is no lenders policy.
Depending on what state you live in, you could be paying for both the lenders policy and the owners policy. In my market, the seller pays for the owners policy (essentially putting the money where his mouth is and proving he has the right to sell it), and the buyer pays for the lenders policy.
In the Northeast, it seems to be common for the buyer to pay for both. I know this because I can’t tell you how many sellers I’ve had, originally from the Northeast, freak out about paying for it. “In New York, the buyer pays for it!” they say. And I say, “This ain’t New York; this is Florida.” Who pays for what is always specific to the market where you are buying or selling.
In new construction sales, the buyer almost always pays for both title-insurance policies.
In my state, the cost of title-insurance policies is based on the price of the home. Different states will have different forms of pricing, but I deal with a lot of customers who come in from different parts of the country, and nobody has remarked that the title insurance here is any higher or any lower than anywhere else.
There might also be a few hundred dollars tacked on for “endorsements,” which are basically riders that cover things the title insurance won’t reveal in a normal title search (zoning violations or homeowners-association violations, for example).
Some people complain about paying for the endorsements, but they are cheap compared to the cost of the home and really are something you want.
So with that in mind, in my market, as of this writing, an owners title policy would be around $1,400 on a home costing $200,000. The lenders policy is about half of that because of something called “simultaneous issue,” which basically is a discount you get because they are issuing the same policy twice. And the endorsements will be a few hundred dollars (they run about $125 each and in my market there are generally two or three added to the policy.
Note: Starting in August 2015, the “simultaneous issue” discount might go away for buyers. Here’s why: Per federal law, the closing paperwork has to jive with the original Loan Estimate given to the buyer. At the time the Loan Estimate is given the bank will estimate the lenders policy at the published rate (without the discount). If the two are different, then the bank may face severe penalties, so the buyer may not get the discount if they want the loan.
My understanding is that if the closing costs are lower than what the bank quotes at the time of Loan Estimate, then things can move forward without being synced or rewritten. However, the title people are telling me that giving the discount is an issue so I’ll defer to them right now until things shake out.
The discount is law in certain states. The discount is also very common. So there is every expectation that the discount will be worked out at some point, but it hasn’t happened yet and there is no time frame for it to be worked out, as of this writing.
Paying Money to Get Money: Lender Fees
There are the closing costs that your lender will charge (origination fees, tax service fees, points, etc.). In the business we call these “lender fees.”
At the start of this chapter I mentioned that closing costs run about 3%–4% of the purchase price when you have a loan. Well, it’s the lender fees that make up the lion’s share of those costs.
Current banking law states that origination fees (basically the fee to do the job) plus points (more on those in the “buying down the loan” section later in the book) can’t be more than 3% of the total loan amount.
Beyond origination fees, I am not going to detail all of the possible charges that a lender could add. They are different for every lender, and are called different things by every lender.
I am also not going to defend lender fees, but you do have to pay them to get a loan.
Before you go crazy, I have to ask you a question. Would you work for 60 days for just a few hundred dollars?
Well … your loan officer or mortgage broker will not see much of these lender fees. He will get paid, but it might be only a few hundred dollars per loan. And he’s probably been working with you for two months or more.
In light of that, if he’s been a good lender who answered your phone calls and emails, I reckon you got a bargain. If he was not so on-the-ball, you can at least take heart that he’s heading to Taco Bell instead of Ruth’s Chris after closing.
So how do you shop around to find lenders with the best closing costs?
I’ll cover something called “APR,” which is what you use to shop lender closing costs, in the next chapter.
If you are thinking about buying a home, please consider hiring myself and my team as your Realtors. We can help you find the best house and make the best offer. Contact me at Sean@StAugTeam.com or my partner Kate at Kate@StAugustineTeam.com.