Closing Costs Associated With a Mortgage Loan: How much money do I need?

There are many factors that contribute to the total “Cash to Close” associated with buying a home. There are two factors that contribute to the final figures, one is your down payment (minimum contribution) and the other is the sum of the closing costs.

The downpayment may vary depending on your loan scenario or loan product. A downpayment can start as low as 0% for VA and USDA loans and be much as you want beyond that. Typically we see downpayment figures from 3-20% of the purchase price. Your down payment is considered your minimum contribution. This means that regardless of any other factors (lender credits, seller concessions, etc.) you will be required to bring at least your down payment to the closing table to provide the equity into the property you are buying.

The mortgage closing costs and closing cost situation can vary dramatically. Closing costs in a standard purchase transaction in Florida will be anywhere from 2%-3%. Closing costs include the costs associated with getting the mortgage, government taxes, title fees, prepaids and escrows. We will describe each in length and options for minimizing the closing costs.

Costs Associated with Getting the Mortgage:

For every type of mortgage there will usually be some type of costs associated with getting a mortgage loan. The most common types of fees are underwriting fees, processing fees, discount points, appraisal reports, etc. These fees may vary by lender and mortgage professional.

Costs Associated with Title Work:

All lenders will require that a property being secured by a mortgage has clear title. There are closing costs associated with procuring title commitment and title insurance. These fees are specific to the deal and outline in the purchase and sales contract. In our area of Florida it is customary that the seller pays for a closing fee, a title search fee, and owner’s title policy. The buyer is left to pay for the lender’s title policy, Recording fees, sometimes a buyers’ closing fee (or courier, storage, document preparation fee). The seller will traditionally pick the title company and the title company selected will have a set list of fees that they charge. This set of closing costs is going to be the same regardless of the lender chosen since the terms are outlined in the contract.

It is common for title fees to be significantly more for foreclosures, short sales, and new construction contracts. When dealing in foreclosures and short sales it is very common for the seller (whether it be a bank or an individual) to require the buyer to pay for the majority of the closing costs. The seller may be already losing money on the property and will want to mitigate their losses as much as possible. In these scenarios there is often special contracts in which the seller outlines exactly what the buyer will pay in closing costs and it is often non-negotiable. When it comes to new construction contracts the same is true, the builder will use their own contracts that will often list the closing costs and have the buyer’s paying the bulk of the closing costs.

Government and Recording Related Fees:

The bulk of the closing costs will often come from state transfer taxes. The state charges fees related to the consummation of a mortgage and the transfer of the sale. In the state of Florida there are three different taxes that are charged when a transfer or property occurs in which mortgage is taken out.

1. Documentary Stamp Tax on the Deed Transferring Real Property is calculated at $0.70 for every $100 dollars of the sale price (all counties except Miami-Date, Florida Statute Section § 201.02(1)(a)). This is on all transfers of real property even if no mortgage is used to procure the purchase.

2. Promissory Note which is a document that specifies the amount owed and is calculated at $0.35 for every $100 dollars of the mortgage (Florida Statute § 201.08(1)(b)).

3. Intangible Tax which is calculated at $0.002 for every $1 dollar secured by the mortgage (Florida Statute § 199.133)

The party responsible for paying these transfer taxes is outlined in the purchase and sale agreement. Similar to above in scenarios of foreclosure, short sales, and new construction it is more likely that the buyer may have to pay all of the transfer taxes. In our area it is standard for the seller to bay the Documentary Stamp Tax on the Deed. This may not be the case for all contracts and areas, we recommend you ask your real estate agent what is customary in your area. The Transfer taxes will be the same with every lender.

In addition to the transfer taxes there will be fees related to recording the actual mortgage documents and deed with the state and county. These may vary slightly from lender to lender depending on the length of the mortgage document that is recorded and type of loan.

Escrows and Prepaids:

There are different options for escrows and prepaids. Some mortgages will require funds be placed into an escrow account to pay for taxes and insurance (as they become due). Some, not all, conventional loans will allow you to waive escrows. In this scenario the homeowner will be required to pay taxes and insurance as they become due. Escrow accounts are required for government loans (VA and FHA) and will typically include a “cushion” to cover any increases in taxes and insurance. It is standards for 2-3 months of insurance and 3-5 months of taxes be escrowed as a cushion. Escrow funds are still the borrower’s funds they are just held on their behalf.

For prepaids it is standard to pay for the first year of insurance and any per diem interest at closing. Mortgages charge interest in arrears, meaning at closing you will pay the insurance for the month that you are closing in but typically skip a month before a payment is due (Ex: June Closiign results in an August first mortgage payment). For some loans you can opt to take an “early interest” payment meaning you to not bring extra taxes, insurance, and per diem interest to closing but your mortgage payment will be due the following month (Ex: June closing results in a July first payment)

Proration Items:

Depending on your property and when the closing occurs there may be many different proration items that may result in either a credit or a cost to the borrower.

• County Tax Prorations: In Florida taxes are paid in arrears. For the majority of the year the seller will credit (owe) the buyer their portion of the taxes at closing. Ex: A closing occurs on May 1st the seller will owe taxes for January 1 – April 30 to the buyer and the buyer will pay the annual taxes in November when they become due. If a closing occurs in November or December and the county taxes have already been paid for by the seller the buyer would owe for the November or December days that they own the house (cost to the buyer).

• HOA Dues: These can vary depending on when the closing occurs and what dues have already been paid. HOAs tend to be either in 12 month, 6 month or 3 month increments. The buyer would owe the seler the proration appropriate for the closing date and situation.

• CDD Fees (Community Development DIstrict): CDD Fees are collected with taxes put are charged in advance. In November of 2019 CDD dues for 2020 would be collected. In this case the buyer would owe CDD fees to the seller based on when the closing occurs. Properties located in CDD communities tend to have higher closing costs. The CDD dues result in higher taxes (meaning higher escrows required) and since they are paid in advance this is an added cost to the buyer on top of any other transaction on a property not in a CDD.

Miscellaneous Items:

There is a handful of items that may apply to some transactions but are not as common.

• HOA Transfer fee – fee charged by the HOA to process the ownership change

• Capital Contribution – less common than the HOA fee, this is an initial fee charged by an Condo/ Homeowners’ Association. This is a one time fee and often listed in the seller’s HOA disclosures.

• Municipal Lien Search – depending on the purchase contract this fee may be a seller’s responsibility or a buyer’s responsibility.

• Real Estate Transaction Fee – charged by the buyer’s real estate agent

• Survey Fee – purchase contract will designate who is responsible for the survey

Credits:

The buyer / borrower can sometimes get credits from the seller.

• Proration credits (explained above)

• Seller’s concessions, these credits are negotiated between buyer and seller and evident on either the purchase contract or addendums. The amount the seller may contribute is capped by mortgage guidelines (FHA = 6% purchase price, VA = 4% purchase price, Conventional = 3%). Seller’s credits can be used for closing costs and prepaids, NOT downpayment.

• Title Premium Adjustment, the buyer may receive credits from the seller towards the costs of the title policy. Again, this item is discussed in the purchase contract (lender’s title policy / owner’s title policy).

Items Paid for Prior to Closing:

Some items will be paid for during the mortgage process. These items are often:

• Appraisal Report

• Condo or Association Questionnaires

• Flood Insurance (sometimes lenders will require flood insurance is paid prior to closing)

• Inspections are NOT required for the mortgage process unless it is a WDO / Termite Inspection for a VA loan. Beyond this inspections will be done at the buyer’s discretion but are paid prior to closing.

• Surveys if you are responsible for the cost of a survey you may have to pay for it in advance (the title company will designate)

This is a GENERAL summary of what you should expect for closing costs associated with your mortgage loan. When you are ready to make an offer or start negotiating it is important to your mortgage professional and your real estate agent work closely to figure terms that work best for you. Seller’s may not always be willing to cooperate and make concessions but your mortgage professional can advise your real estate professional on if a deal is workable once they have pre approved you. Once you are ready to write and offer your mortgage professional should be able to give you an estimate on what the closing costs will be however they will not know the final number until the loan process is towards the end of the process. Many variables contribute to the closing costs (insurance cost, fees, etc) that are not known at the time of application.

If you would like to get pre approved please call us at CARBON CAPITAL.