Closing costs... explained: 3 tips for achieving best value

If homebuyers and refinancing homeowners want to achieve the very best value on closing costs, they should follow these three simple steps:

1. Shop mortgage terms

Since most mortgage lenders today all charge about the same in origination and ancillary charges (i.e., Processing Fees, Document Preparation Fees, Appraisal and Credit Report Costs, Tax Service Fees, Flood Certification Fees, etc.), it’s best to stay focused on the interest rate compared against loan term and payment of any discount points. For example, if you are in the hunt for a 30 year fixed rate without paying “Discount Points,” then compare the interest rate offered by several different lenders.

2. Shop title company settlement fees

While your real estate agent and/or mortgage lender may recommend or refer you to their preferred title company, the title company may not be providing you, the consumer, the best value since they are likely providing a financial benefit to the referral source (i.e., the real estate broker or mortgage company). This means that since the preferred title company is sharing some of its profits with the referral source, they are either charging you higher settlement fees or, at the very least, are unable to provide you lower settlement fees compared than customarily charged in the marketplace.

Thus, it is important that you shop for the best settlement fees among other locally established title companies. A simple Google search for will allow you to compare settlement fees among other local title companies. Be sure to make an apples-to-apples comparison since some title companies charge an all-inclusive flat fee while others itemize numerous charges such as: Settlement Fee, Title Search, Title Examination, Document Preparation/Processing, Notary Fees, Courier Fees, etc.

3. Shop title insurance rates

While nearly all jurisdictions regulate title insurance, which requires title insurance underwriters to file their respective rates, there is very little difference in title insurance premiums among various underwriters. However, while you are shopping for settlement fees with local title companies, check their title insurance rates and inquire as to whether you may be entitled to a “reissue rate” discount on the title insurance premiums to be paid at closing.

Typically, if your seller has owned the property for less than 10 years and possesses an owner’s title insurance policy, you should be entitled to either a partial or full reissue rate; depending on the amount of the existing coverage.

Agents can define 'settlement costs' in sales contract to protect clients

A closing at Federal Title last week resulted in a dispute between the buyer and seller over the definition of "settlement costs" that could have been avoided had the GCAAR Regional Sales Contract better defined the term.

I'll get to the language in just a moment real estate agents, but first let me tell you what the dispute was all about so your clients can avoid a similar situation at the settlement table.

In this case the seller had agreed to give the buyer a credit of $20,000 toward the buyer's settlement costs as per the GCAAR Addendum of Clauses paragraph #1. The contract provision read as follows:

"In addition to any other amount(s) the Seller has agreed to pay under other provisions of this Contract, the Seller shall credit the Buyer at the time of Settlement with the sum of $20,000 toward Purchaser’s settlement costs. It is the Buyer’s responsibility to confirm with his Lender, if applicable, that the entire credit provided for herein may be utilized. If Lender prohibits the Seller from payment of any portion of this credit, then said credit shall be reduced to the amount allowed by Lender."

Specifically, the 6-month Montgomery County, MD tax bill of $3,700 was itemized as a charge to the buyer on the HUD-1 Settlement Statement. This tax bill was required to be collected and paid at the time of closing as a requirement for recording the deed with the Montgomery County, MD clerk’s office. Further, this tax bill covered future taxes to the benefit of the buyer, covering the tax period of January 1-June 30, 2013.

In most cases, a lender will not allow any prepaid items (i.e., taxes, escrows, etc.) to be counted as settlement costs against the seller credit. However, in this case the lender allowed all settlement costs, including prepaid items, to be counted against the seller credit.

The seller argued that the $3,700 tax bill was not a "settlement cost" and thus, the credit should be reduced to $16,300. The buyer, on the other hand, argued that all items appearing on the HUD-1 Settlement Statement should be defined as "settlement costs" and that definition should include the prepaid taxes in this case since the payment of the taxes was a condition of closing – the taxes had to be collected by Federal Title and paid to Montgomery County, MD clerk’s office in order to record the deed.

Since "settlement costs" are not defined in the GCAAR Regional Sales Contract, the parties languished for a good length of time over the meaning and whether prepaid taxes should count against the seller credit.

How can real estate agents protect their homebuyers?

Agents would be well-advised in representing their client’s best interest to add their own definition of the term "settlement costs" to the GCAAR Regional Sales Contract. For example, if you are acting as a buyer agent where a seller credit exists, I would recommend adding an addendum or additional provision to the contract that reads:

"The parties understand and agree that "settlement costs," as the term is used throughout this entire contract of sale, shall mean all charges itemized and charged to the buyer on the HUD-1 Settlement Statement, including, but not limited to, prepaid and pro-rated taxes, escrow reserves, and prepaid interest, and as allowed by the buyer’s lender."

A title agent's response to 3rd-party 'vetting firms'

Recently an article appeared in the Washington Post by our colleague Harvey Jacobs about the influx of third-party "vetting" firms that seem to have capitalized on a jittery lending community.

For a fee, these so-called "vetters" claim they will conduct a due diligence investigation into the practices and procedures of a settlement service provider. Then they will assign a score to that settlement company as low-, medium- or high-risk.

The fee is picked up by the settlement company. In exchange, agents are promised preferential access to lenders, who use these index scores to determine if a settlement company is reputable or risky.

Speaking as an owner of an established title company, I am in support of these vetting companies spawned by the CFPB's Bulletin 2012-03. First, as Mr. Jacobs notes, we will simply pass along the costs to the consumer (yes, the consumer will pay more). Second, since we are a well established company, these new requirements will serve to heighten the barrier to marketplace entry for our prospective competitors; hence, limiting the number of competitors such that we would be able to extract an un-challenged premium from our clientele.

Now, speaking as someone advocating for the consumer and a healthier marketplace, I oppose these new requirements. These private vetting companies specifically cite the CFPB Bulletin and the Dodd-Frank Act as predicates to the requirements under their business model.

The $2 billion in title company fraud cited by a "concerned industry insider" in response to Mr. Jacobs's article occurred under current regulatory schemes which include

  1. Issuance of closing protection lenders/insured closing letters to lenders
  2. State licensing codes established in all 50 states
  3. Criminal background checks and fingerprint record requests
  4. Successful completion of state-mandated license examinations
  5. Annual continuing education requirements
  6. Appointment application requirements from the title agent's respective title underwriter
  7. Mandatory errors and omissions coverage
  8. Fidelity and surety bond coverage requirements
  9. Annual escrow audits and quality control reviews performed by the agent's respective title underwriter
  10. Unfair trade practices and other consumer protection statutes
  11. State-mandated escrow and quality control audits.

As you can see, the title industry is already one of the most heavily regulated industries and, to consider the title industry's handling of over $1 trillion in assets per year, the $2 billion in fraud previously cited pales in comparison to other industries.

You will never "regulate out" bad actors in any industry.

These new requirements are a mere act of redundancy. The quality control processes contemplated by these vetting companies are already being performed by state insurance departments and licensed title insurance underwriters.

They serve no useful purpose other than to squeeze more money out of the transaction at the expense of the consumer and at the risk of stifling competition in the marketplace.

A healthy marketplace encourages competition, and competition encourages more transparency and innovation. CFPB should immediately issue further guidance to its bulletin to address the redundancy and unnecessary nature of these budding third-party vetting companies.

Closing costs in Florida

When purchasing a home in Miami or anywhere else in South Florida there are numerous fees, costs and expenses which get allocated between the buyer and the seller on the closing statement (or HUD-1 Settlement Statement).

These items are called closing costs and are typically allocated according to local custom or are, at times, negotiated between the buyer and the seller. Below is a list of the typical closing costs paid by both the buyer and the seller in a typical residential real estate transaction in Miami and South Florida.

It is advisable for a buyer or a seller to engage the services of an experienced Florida real estate attorney prior to signing the purchase and sale contract to not only review the terms of the contract, but also to make sure that these various closing costs are properly allocated between the buyer and the seller in the contract.

Buyer closing costs

Customary buyer closing costs include:

  • Down payment
  • Title insurance
  • Documentary stamps on the note
  • Intangible tax on the mortgage
  • Loan fees
  • Prepaid interest
  • Inspection fees
  • Appraisal
  • Survey fee
  • Mortgage insurance
  • Hazard insurance

Seller closing costs

Customary seller closing costs include:

  • Loan payoff
  • Broker's commission
  • Documentary stamps on the deed
  • Prorated real property taxes
  • Title search fee
  • Lien search fee

As a highly experienced Florida real estate law firm and title company, Federal Title continually guides both buyers and sellers regarding the proper allocation of closing costs and makes sure that what the parties contracted for is properly reflected on the closing statement at the time of closing so that there are no surprises on the day of closing.

Why choosing a local title company is better

After 16 years of handling real estate closings, I could easily provide 100 examples of why a borrower, whether a homebuyer or a refinancing homeowner, should choose a local title company rather than allowing a national "out-of-town" title company to handle your real estate closing. But allow me to just give you 3 simple and basic reasons.

1. Duty of Care

In reviewing title work over the years, I have witnessed countless cases of national title companies failing to release paid mortgages/liens from a homeowner’s title records, only to be cleaned up by our office – a local title company.

In addition, I have often dealt with faulty deeds, unpaid real estate taxes, and other improper filings by the national title companies due to the national title company’s failure to understand or adhere to local laws and customs.

These mistakes leave the homeowner with defective title and often present hardship to the homeowner when attempting to re-sell or refinance their property. As a hometown title company, Federal Title & Escrow Company has a vested interest in maintaining healthy and accurate local real estate records

2. Performance

National "out-of-town" title companies often dispatch an inexperienced, non-attorney, notary public to your home or place of business to conduct the closing. In contrast, when you choose Federal Title & Escrow Company, as a local title company, you get an experienced and licensed real estate attorney to conduct your closing for the same (or often less) closing fee – get a quote and compare.

3. Accountability

A local "hometown" title company has a reputation to defend and must answer to the local community in order to preserve that reputation. Their business relies on referrals from the community which includes neighbors, friends, family, real estate agents, and local lenders.

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Our blog contains general information only, not intended to be relied upon as, nor a substitute for, specific professional advice. Rate tables and figures that appear on our blog are deemed reliable but not guaranteed. For current rates & policies, refer to our Quick Quote and Consumer Guide. We accept no responsibility for loss occasioned to any purpose acting on or refraining from action as a result of any material on our blog.