How Much Is Your Home Worth?

Closing & Escrow Guide

Buying a home involves more than finding the right property and getting your offer accepted. Before you receive the keys, you will need to complete the escrow and closing process and pay various costs associated with finalizing the purchase.

Understanding Closing Costs

Closing costs are the fees and expenses associated with completing a real estate transaction. Some are mortgage-related, while others cover title services, government requirements, prepaid expenses, and other settlement services. The exact costs vary depending on the property, loan, and location.

  • Appraisal Fee: This covers the cost of having the property appraised. Depending on your lender, this fee may already have been paid during the loan application process.

  • Credit Report Fee: This covers the lender's cost of obtaining your credit report and may have been paid when you applied for your mortgage.

  • Loan Origination Fee: This covers the lender's costs for processing and originating the mortgage and is often calculated as a percentage of the loan amount.

  • Loan Discount Points: If you choose to pay points to reduce your mortgage interest rate, each point generally represents one percent of the total loan amount.

  • Title Insurance Fees: These may include the title search, title examination, title insurance, document preparation, and other title-related expenses.

  • PMI Premium: A lender may require private mortgage insurance when you make a smaller down payment. PMI protects the lender against losses associated with foreclosure. Depending on the loan terms, you may be able to request cancellation after building sufficient equity.

  • Prepaid Interest: This covers mortgage interest from the date of purchase until your first regular mortgage payment. The amount can vary depending on your closing date.

  • Escrow Accounts: Your lender may establish an escrow account to collect funds for future property taxes and homeowners insurance. The amount required depends on the property's taxes, insurance costs, and lender requirements.

  • Recording Fees and Transfer Taxes: Local or state governments may charge fees for recording purchase documents and transferring ownership of the property.

What Happens During Escrow?

Escrow is the period between signing the purchase agreement and completing the closing. It often lasts around 30 days, although the timeframe can be shorter or longer depending on the terms of the transaction.

An escrow or settlement company acts as an independent third party during this period. It may hold your deposit and coordinate many of the activities required to complete the transaction. Depending on the location and transaction, the deposit may instead be held by an attorney or in a broker's trust account.

Your deposit is generally applied toward the purchase price if the transaction closes. If the sale does not go through, what happens to the deposit will depend on the purchase agreement and circumstances surrounding the cancellation. Review these provisions carefully before signing the contract and consult appropriate legal counsel when necessary.

Important Escrow Steps

During escrow, you will need to complete several important tasks and satisfy the contingencies included in your purchase contract.

  • Important Escrow Steps : During escrow, you will need to complete several important tasks and satisfy the contingencies included in your purchase contract.

  • Complete the Home Inspection : Schedule a professional home inspection as soon as possible after signing the purchase agreement. If the inspection reveals significant problems, your inspection contingency may provide options depending on the terms of your contract.

  • Secure Your Financing : Continue working with your lender to complete the mortgage process within the timeframe specified in your financing contingency. If financing cannot be secured, review your options before the contingency deadline expires.

  • Review the Property Title : The seller generally needs to provide marketable title to the property. Work with an attorney or title professional to review the title report and identify any liens, claims, or other issues that could affect ownership.

  • Obtain Homeowners Insurance : Your lender will likely require homeowners insurance before closing. Start the process early, especially if the property requires additional coverage.

  • Arrange Utility Services : Contact local utility companies to arrange for electricity, water, gas, and other applicable services to begin when you take ownership of the property.

  • Schedule the Final Walk-Through : Complete a final walk-through shortly before closing. Make sure the property is in the agreed-upon condition, negotiated repairs have been completed, and fixtures or other items included in the purchase remain at the property.

  • Preparing for Closing : Closing typically involves signing numerous documents and providing funds for your down payment and applicable closing costs, so reviewing your estimated expenses in advance can help you understand how much you will need to bring to closing. Depending on the market and terms of the offer, some closing costs may be negotiable, and a buyer may be able to ask the seller to contribute toward certain settlement expenses. Once all contractual requirements have been satisfied, financing has been finalized, documents have been signed, and funds have been transferred, the transaction can officially close and ownership of the property is transferred to you. For information about the costs and requirements specific to your purchase, consult your real estate professional, lender, escrow or title company, and appropriate legal or tax professionals.