Closing Costs – What They Include…And What They Might Not
by Christopher Carter
“Closing Costs” is often regarded as a vague, catch-all term that can bring on quite a few buyer questions. Different parties to a real estate sale identify transaction costs in different ways, so it’s very important for buyers and sellers to have an accurate and complete idea of what’s involved in closing a Florida residential real estate deal…and how much it is going to cost.
Closing or settlement is the final step in either a financed or an all-cash real estate transaction. At closing, money is paid from buyer (and lender) to seller, ownership is legally transferred from seller to buyer, various transaction fees are paid, and documents related to the sale and mortgage are recorded in the local city or county.
The phrase “Closing Costs” refers to charges and fees that buyers and sellers pay either out-of-pocket or as a settlement statement debit, and are NOT included in the purchase price, deposit, down payment, or mortgage loan amount.
Depending on who you’re asking, some charges paid in relation to a real estate sale are included in the term Closing Costs and some are not. This is a source of much buyer confusion because most of those charges are third party pass-throughs and can be categorized differently by various service providers to the transaction.
Real estate agents, lenders, title companies, attorneys, the IRS, and anyone else who has an effect on a real estate deal may all have different definitions of Closing Costs.
As you read through this article, keep in mind that whether or not a transaction-related cost is openly called a Closing Cost, any charge or fee outside of the contract’s sale price is still money the buyer or seller has to pay!
Let’s look at some charges associated with closing a real estate transaction, according to who receives them :
Lender Charges (Buyer paid when using financing)
- Origination, processing, underwriting charges
- Credit report (POC – see below)
- Points – prepaid charge used to “buy down” an interest rate
- Per diem interest (charged for the days after closing, yet before the first scheduled mortgage payment)
Third-Party Service Provider Charges (Buyer and/or Seller separately paid)
- Property Appraisal
- Survey and Elevation Certificate
- Property insurance – hazard, flood, windstorm (first full year insurances must be paid before or at closing – POC)
- Title company or attorney fees for conducting settlement
- Title search, title insurance
- Inspections (home, pest, flood zone certification, wind mitigation – POC)
- Real estate commissions (usually from seller’s proceeds)
- HOA / Condo Association application, transfer, estoppel fees
- HOA / Condo Association assessments (pro-rated between buyer and seller per closing date)
Government and Municipal Charges (Buyer and/or Seller separately paid)
- Property taxes (pro-rated per closing date)
- Documentary stamps (“doc stamps”) on deed and mortgage (State transfer taxes)
- Intangible tax on mortgage face value
- Public records recording charges – to County where property is located
- Other transfer taxes depending on incorporated town or city
- CDD or MSTU pro-rations and payoffs (Florida independent taxing areas)
Escrow Funding(Buyer paid)
- When mortgage financing is used for the purchase, partial homeowners insurance and property tax payments are collected with the monthly mortgage payments and held in an escrow account by the mortgage servicer. This is so enough of the buyer/borrower’s own money is available to pay the next insurance and tax bills when they are due. Failure to pay either one can place the loan in default, and escrowing reduces the chance of non-payment.
- Depending on the closing date, 2 to 6 months of tax payments may need to be paid into escrow at closing. Initial escrow funding for insurance can be 2-3 months of premium payments.
Important note: Insurance is paid in advance (for the coming year), while taxes are paid in arrears (for the past year). Because of this, lenders require proof of a full year’s property insurance premium payment before or at closing. This is in addition to initial escrow funding.
Some out-of-pocket buyer costs are Paid Outside Closing (POC) and may not show up on the preliminary settlement statement.
Examples of POCs include :
- Credit report
- First year’s insurance
- Home inspections (not required, though highly recommended)
(POCs are also referred to as “prepaids” by some people, mainly because they don’t want them categorized as “Closing Costs”)
Closing costs cannot be included in the loan amount on purchases, which is why lenders need to know that buyers have their own money available to pay these costs at closing. Some government-insured programs (FHA, VA) do allow a few specific (not all) costs to be included in the loan amount.
On a standard rate-and-term refinance for the same owner, normal closing costs can usually be wrapped into the loan amount.
Here in Florida, the choice of contract (and which boxes are checked) used to document and control the transaction will indicate whether the buyer or seller agrees to pay for certain negotiable costs. Most notably these include doc stamps, Owners Association special assessments, and the owner’s title insurance premium.
However, just about everything in a Florida real estate deal is open to negotiation between the buyer and the seller!
It is important to understand that either the buyer or the seller can select the transaction’s closing title company or attorney, depending on what has been agreed in the signed contract. It is also fully acceptable (and often preferable) for each side to have its own separate settlement agent.
There we are, a quick outline of closing costs aimed at helping buyers and sellers better understand what it takes to close a residential real estate transaction in Florida. Your closing title company or attorney will be happy to give you details and projected costs for your purchase or sale.