Set with solid jobs, nice cars and a baby on the way, there was only one thing Liz and Wes Clayton were missing: the perfect house. They had no problem tracking down the ideal three-bedroom ranch in Fairfax, Va., negotiating a price or securing a loan -- it was the closing costs that left them less than settled.
"The only real problem we had came when we went to close the deal," says Wes. "Our closing costs were just astronomical. We really weren't prepared for that kind of bill."
The Claytons, like most first-time homebuyers, had no idea what goes into the settlement and closing process, including those pesky closing costs. Here's what you need to know to close the deal.
Step One: Negotiate a Price, Get a Loan, Enlist Escrow
How your closing works and what your closing costs are depends on what you're buying, the conditions of your purchase and what state you're buying in, says Alan J. Perlowitz, an attorney and managing partner with Chaves & Perlowitz LLP, a law firm that specializes in lender representation cases in New York City.
"When it comes to closing real estate transactions, there are a lot of moving parts that are contingent on what and where you're buying," he says. "The process is basically the same, but each state has its own laws regulating real estate closings."
Perlowitz adds that the closing process starts once the buyer and seller have agreed on a price, and the buyer has obtained a mortgage. From there, both parties -- as well as the lender, listing agent and selling agent -- enlist the help of a third party to ensure that the property is free and clear to be sold, and that the funds make it from buyer to seller.
"Escrow is the third-person mediator that orchestrates the closing of the transaction," explains Heidi Cassel, regional escrow administrator for the State of California. "We are the third party that makes sure that the property doesn't have any liens that could prevent it from getting sold free and clear, and that all the necessary documents get recorded in a timely manner."
Step Two: Show the Seller Your Fiscal Faith
Joshua Livingston, director of national sales for American Title Inc., in Omaha, Neb., adds that during the closing process, the buyer transfers some money -- anywhere from $500 to several thousand into a third-party escrow account. This part of the closing costs, commonly referred to as an "earnest money" deposit, ensures that the seller will take the property off the market as the property closing goes through.
"That money can be refunded if the sale doesn't go through," says Livingston. "It's pending on certain requirements that the seller has to address before the sale closes."
Step Three: Verify the Property
With an earnest money deposit in place and the property officially off the market, the next step in closing is to have a third party verify that both buyer and seller are meeting all their respective requirements. To ensure that the property is legally available, the agency handling the escrow, usually the title insurance company, organizes any necessary paperwork.
This involves verifying the state of the property (including surveys, deeds and inspections) and checking to ensure that no outside organizations have issued a lien against the property, claiming it as collateral against an outstanding debt on the seller's side. Once it's verified that the property is clear, the settlement agency issues title insurance, which officially declares the new buyer as the owner of the property and legally protects them against any mistakes that may have been missed.
With the title insurance and surveys in place, the only thing that's left to do is transfer the purchase price of the house and dole out closing cost fees to everyone involved in the transaction.
Step Four: Get the Cost Breakdown
In outlining the total closing cost of the transaction (including required surveys, inspections, lender fees, taxes, attorney fees and closing costs), a HUD-1 or final closing document (depending on the state the purchase is taking place in) breaks down how much each player gets out of the transaction. Drawn up shortly after the buyer gets a loan, the HUD-1 acts as a guide to paying for a new piece of property and will include an estimate of how much the buyer can expect to fork over in closing costs. (Buyers also can estimate their own closing costs by using an online calculator).
Vettner warns that the final closing statement isn't necessarily final. Since real estate transactions frequently involve surprise closing costs that neither the buyer nor seller can predict, fees on a HUD-1 or final closing document can vary by up to 10 percent.
"The buyer should expect to see fees for origination, fees for credit checks and underwriting, and fees to pay for the bank's legal costs," says Alan J. Perlowitz. "There are typically a lot of closing costs, but you should see everything on your HUD statement."
With fees disclosed, property analyzed and the loan approved, the buyer finally OKs the escrow agent to disburse the remainder of the purchase price and the seller hands over the deed to the property.
How to Prepare
The closing process is complicated and riddled with state-specific loopholes that can change the price and the time frame of the closing. To help expedite your closing, California escrow administrator Cassel recommends that first-time homebuyers spend several days (even weeks) organizing the necessary paperwork, that they stay in good communication with all parties involved and that they voice any questions they might have about the closing process or closing costs.
"Read the documents, know what you're signing," advises Cassel. "Buyers need to be clear on whether there are any restrictions, like saying that they can't paint their house a certain color. If there are home or community association dues, things like that. Clarify up front what you can and cannot do with your property."
In fact, an amazingly comprehensive list of questions that a first-time homebuyer should ask comes courtesy of the U.S. Department of Housing and Urban Development. Simply asking questions, doing outside research and comparing closing costs can put homebuyers vastly ahead, says Vettner.
"You'd be surprised on a housing transaction how many people show up and hand you money and have no idea of what's really going on," she says. "It's crucial that homebuyers understand what they're really getting into."
by Christina Couch