For many, purchasing a home is a lifelong dream. However, buying a house is a complicated undertaking that raises a great deal of legal and financial liability. In fact, the costs and challenges associated with closing on a home are too great of a burden for many Americans to shoulder. For these unfortunate individuals, homeownership may be impossible. A skilled real estate lawyer can help you manage closing costs and surmount all of the legal and financial barriers to homeownership.
Buying a Home Involves a Lot of Paperwork
House hunting can be a lot of fun, but any real estate purchase inherently involves a great deal of documentation. Once someone finds a piece of property he or she likes, the potential buyer may want to formalize the preliminary terms of the sale using a letter of intent. If the sale moves forward, these terms may be formalized in a purchase and sale agreement. However, property is not legally transferred until a deed is properly executed and recorded in the new owner’s name, so there’s a lot of legal legwork to be done even after the terms of the sale have been finalized. This is particularly true when buyers require financing to help them purchase their new home.
Most homeowners take out a mortgage to finance real estate purchases. A mortgage is a special type of financing arrangement available for real estate purchasers of appropriate creditworthiness, and it requires a great deal of paperwork. Even after a potential buyer is approved for a mortgage, it can only be finalized after the parties execute a series of agreements, consents, and waivers. The home purchase itself is only finalized at closing, which often only comes after the parties have gone through a series of negotiations, inspections, and forms of written agreements.
Real Estate Closing
From start to finish, home purchases require the execution of a suite of documents. The last of these documents are signed at closing, which typically must occur by an agreed-upon closing date. Exactly what homebuyers are required to do at closing varies by jurisdiction, but more often than not the documents executed at closing include settlement statements, deeds or other security interests, bills of sale, promissory notes, and the assignment of any legal obligations that run with the land.
Real estate closing processes can be incredibly complicated, and homebuyers face many potential pitfalls along the way. Home inspections may uncover previously-unknown structural issues, or properties may be encumbered by liens or other title issues that the sellers were unaware of. Any of these issues could potentially torpedo a home purchase that was negotiated for months, particularly if the parties to the sale are not represented by a real estate lawyer. And as if the closing process itself isn’t enough for the typical homebuyer to handle, closing also requires the final payment of all fees and costs associated with the purchase.
While homebuyers are busy counting their coins to make the down payment, it’s easy to forget that closing costs represent a significant portion of a home purchase. Closing costs are fees and other expenses associated with a real estate purchase. They must be paid in addition to the home’s purchase price, and they can add up to substantial amounts. The costs that homebuyers must pay at closing vary based on the facts and circumstances of the purchase, but closing costs often include:
- Local property tax prepayments
- Escrow or settlement fees
- Title company fees
- Attorney fees
- Inspection fees
- Appraisal fees
- Underwriting and other insurance-related fees
- Costs associated with real estate financing, such as credit report fees, loan origination fees, a lender’s appraisal fees, mortgage insurance fees, and other costs
Altogether, closing costs
Many of these closing costs are set by law, particularly when loans are backed by a government entity like the Veterans Administration or the Federal Housing Administration (“FHA”). Depending on the circumstances of your home purchase, closing costs can really rack up. On average, American home buyers pay between 2 and 5 percent of the purchase price of their home in closing costs. In some cases, closing costs are nonnegotiable. However, in most cases, home buyers can get help footing the bill for their closing costs through a closing cost credit.
At M&A Law Firm, P.C. our skilled attorneys can help negotiate closing costs credits in your favor since national and local laws determine the maximum amount of a closing cost credit a Buyer may receive on certain types of loans. For example, loans insured by the FHA at a 90 percent LTV allow sellers to contribute up to six percent. Other laws, such as the Real Estate Procedures Closing Act, require lenders and real estate brokers to provide Good Faith Estimates of the loan-related closing costs. For instance, let’s say you’re a Buyer and you are approved for an FHA loan towards a $100,000 piece of property. If your attorney negotiates a $10,000 closing cost credit, it is likely you would not receive the entire credit amount and the Seller would not be legally obligated to provide that credit. This is because the lender makes the final determination of the amount of the credit per FHA guidelines. Additionally, the Contract, in most instances states that if the Lender does not allow the entire amount of the negotiated closing cost credit, the Seller would only be required to provide the amount that the Lender has permitted. At M&A Law Firm, P.C. we understand these complexities and negotiate these clauses towards our clients benefit.
Closing Cost Requirements and Restrictions
The 2008 financial crisis devastated the American economy. Millions of families lost their homes, and financial markets spun into turmoil. Much of the damage done was due to improper financial practices, and following the Great Recession Congress passed a suite of laws designed to improve fairness and transparency in real estate financing arrangements.
Following Congress’s lead, the Consumer Financial Protection Bureau (“CFPB”) passed a set of new rules regarding the documentation mortgage applicants receive at closing. These “Know Before You Owe” rules help home buyers avoid surprise closing costs when it comes time to wind down the extensive process of purchasing a home. For example, federal regulations now require lenders to provide formal
Loan Estimates to mortgage applicants that clearly spell out the amount of money they are borrowing and how they can expect this to impact closing costs.
Among other things, Loan Estimates break down the fees required by the lender or other known third parties so that mortgage applicants can shop around. This process helps make sure that home buyers understand the closing costs that they are expected to pay after finalizing the terms of the sale, as well as whether any costs may increase after closing. However, the final list of closing costs is not disclosed to the home buyer until closing. At this time, the lender provides a Closing Disclosure that finalizes the closing costs due when the purchase is finalized.
By law, mortgage lenders must provide a Loan Estimate to borrowers within three days of receiving a mortgage application. Likewise, they must provide a Closing Disclosure within three days of closing. The closing costs on the Closing Disclosure are final, and the three-day notice period gives home buyers the opportunity to accommodate any unexpected adjustments in closing costs listed in the Loan Estimate. This mandatory notice period prevents home buyers from getting an unpleasant surprise when it comes time to pay closing costs, but it’s always wise to work with a good real estate lawyer before writing a check for any closing costs that come due. The knowledgeable attorneys at M&A Law Firm, P.C. are up-to-date on all of the rules and requirements that regulate closing costs, so be sure to get good legal advice about your closing costs before it’s time to sign the deed.