by Don Dryburg
What Are Closing Costs?
After months of searching, you have finally found the house of your dreams. Now comes the closing! Closing is the exciting but anxiety-producing day when you meet with the representatives for the seller and the lender to sign paperwork transferring the property and agreeing to the financing terms of your mortgage. “Mortgage settlement” or “mortgage closing” is a complex process that requires buyers to pay a variety of expenses over and above the price of the property. As a general rule, settlement or closing costs are usually about 3% of the price of your home.1 You will need to bring to your closing sufficient funds to cover closing costs and your down payment.
Predatory Lending and Closing
At the Connecticut Fair Housing Center we assist people living in minority- and poverty-concentrated areas who are the victims of illegal predatory lending. Because closing on a house is such a stressful time, it is one of the key instances in the home buying process where predatory lenders take advantage of unwitting consumers. There are three classic ploys that predatory lenders frequently use at closing.
1. Excessive and/or new closing costs. Predatory lenders often pad the fees they charge borrowers for their own financial gain. That is why it is important for consumers to educate themselves about fair prices for closing costs. Predatory lenders also add new fees or increase previously disclosed fees at the last minute. Be prepared to walk away from the closing if you are being treated unfairly.
2. Bait and Switch. Some predatory lenders try to lure you in with a fantastic rate and then change the rate or other loan terms at the last minute. Some variation in the interest rate should be expected unless you lock in your rate.2 However, a significant increase in the interest rate, the sudden addition of a prepayment penalty, or the last-minute conversion of the loan to an interest-only, negative amortization, balloon, or adjustable rate mortgage (ARM) at closing could indicate that you are being taken advantage of by a predatory lender.3
3. Rushed Closing. Another infamous predatory lending technique is to rush the borrower through closing or hold the closing in a distracting location, such as a noisy restaurant. Demand that the closing be scheduled to allow you enough time to review the documents uninterrupted.
Closing Tips for the Savvy Consumer
Here are some tips to follow to avoid getting a predatory loan and to take the stress out of closing on your home. Please remember, however, this advice is general, and you should consider consulting with an attorney or a HUD-approved housing counselor if you have specific questions about your mortgage closing. (See Where to Find Help at the end of this article for attorney and counselor contact information.)
Come Prepared. The more you educate yourself about the closing process, the better equipped you will be to ensure you are getting a fair deal. Talk with a trusted advisor, a HUD-approved housing counselor, or your attorney. Go to a library or a bookstore and get a book on home buying. Carefully review the section on closing. Some on-line resources are available at:
You are entitled to ask questions about the settlement costs you will be charged. If your lender or broker cannot explain them, he is not doing his job, and he may be overcharging you. No question is a dumb question, and if the lender or broker makes you feel otherwise, take your business elsewhere.
Comparison Shop and Negotiate. Use the rule of three–go to at least three lenders. No later than three days after you submit your application, a lender or broker is required to give you an estimate of your closing costs on a form called the Good Faith Estimate. Don’t pay an application fee until you have received this form and you have chosen a lender!
The charges on the Good Faith Estimate should correspond to the charges on a form you will receive at closing (or twenty-four hours before closing) called the HUD-1 Settlement Statement (called a HUD-1A, if you are refinancing). The Good Faith Estimate itemizes the charges associated only with your loan. There will be additional settlement charges that relate to your purchase of the property itself, such as oil, water, and tax adjustments. The lender or broker must also give you a booklet explaining the costs in the Good Faith Estimate.
Compare the Good Faith Estimates offered by the three lenders, contrasting the itemized costs and the grand total. Many of the charges in the Good Faith Estimates you receive will vary considerably from lender to lender. Make the lenders compete for your business. Ask the lenders which charges will not change on the day of closing. Make the lender put this promise in writing.
When comparing rates, look at both the interest rate and the annual percentage rate (APR). The APR is a tool for comparing similar loan products at different interest rates and with different closing costs.4 The Good Faith Estimate and the APR together allow you to compare the rates and closing costs offered by the lenders you are considering.
Keep the original Good Faith Estimate you receive from the lender you ultimately choose. You are entitled to a final version of your HUD-1 or HUD-1A one day before your closing, but you must request it, and it is important that you do so. Inform the settlement agent that you will need this form the day before closing.
The night before closing, compare the final closing costs you are charged as listed on the HUD-1 or HUD-1A to the original estimate on the Good Faith Estimate. Compare these costs again during the closing itself. If any of the charges are significantly different, demand an explanation. If your lender has promised in writing to stand by his original estimate and fails to do so, you may want to consult an attorney.5
Know Your Rights
- You have the right to comparison shop!
- You have the right to ask questions!
- You have the right to request and receive a copy of your HUD-1 or HUD-1A Settlement Statement one day before closing. This form is your final statement of closing costs.
- You have the right to receive a Good Faith Estimate of the charges associated with the loan before you agree to it.
- You have the right to know which fees will not be refunded if you do not go through with the deal.
- If you are refinancing, you have the right to void the loan within three days. If you are refinancing and feel something was not quite right during your closing, you have three days to cancel, or rescind, your loan. Many legitimate lenders can quickly find financing for you within that time, should you decide to void your original loan. Under certain circumstances, you may be able to cancel your loan up to even three years later. To explore this option further, consider contacting an attorney.
- If you are getting an adjustable rate mortgage (ARM), you are entitled to a book that explains important details about this kind of loan.
- You have the right to say no at any point in the process. If your questions have not been answered, the deal seems too good to be true, or you change your mind, don’t sign the mortgage documents. You may lose your deposit, but at least you won’t be stuck with a bad loan for fifteen to thirty years!
- If you decide to use a mortgage broker, you have the right to have him explain how he will help you and how he will be compensated by you or the lender. If you are considering using a mortgage broker, compare his offer to that of at least two banks.6
- You have the right to a decision about a loan that is not based on your race, color, religion, national origin, sex, marital status, age, or whether any income is from public assistance.
- You have the right to know the reason your loan application was denied.
- You have the right to a booklet that explains your settlement or closing costs.
- You have the right to hire a lawyer who is representing only your interests and not those of the lender as well. Many borrowers don’t realize that the attorney they pay to come to the closing is representing them and the lender!
It is very difficult to get a true estimate of typical settlement charges, something consumers need, to determine if they are getting a fair deal. On www.firsttimehomebuyer.com you will find a chart that is an effort to pull together information from a variety of sources to provide a realistic sense of what settlement costs to expect. This list is not exhaustive, however, and your particular circumstance may mean that you are charged more or less than these estimates or that you incur additional charges not listed on the chart. Closing costs comprise origination, title, and closing fees.
Closing costs add up. The same survey that generated the itemized amounts included in the chart reported that the total average of closing costs in Connecticut for a $200,000 loan is $3,284.7 Because the estimate excludes certain charges, such as recording fees, escrow funds, and homeowner’s insurance, a more realistic total is $6,000 (or 3% of the amount borrowed). Closing costs are significant and unavoidable; however, by educating yourself, reviewing documents carefully, and comparison shopping, you can save significant amounts of money and avoid predatory lending traps.
Where to Find Help
Erin Boggs, Esq.8, is an attorney with the Connecticut Fair Housing Center in Hartford, Connecticut.
NOTES:
1 Under Connecticut law, costs associated with a loan called “prepaid finance charges” cannot exceed the greater of $2,000 or 5% of the loan amount of a first lien mortgage. Connecticut General Statute § 36a-498a. It is beyond the scope of this article to provide more details about this legal protection, but if your closing costs are particularly high, you may want to consult an attorney.
2 For more on rate lock-ins go to: http://www.federalreserve.gov/pubs/lockins/default.htm.
3 Explanations of these special types of loans are available at http://www.hud.gov/offices/hsg/sfh/buying/glossary.cfm.
4 The APR does not take all fees into account. For example, it does not include appraisal and document preparation charges. It is worth asking each lender you consider for a list of fees that are not included in the APR. In addition, if you are considering an adjustable rate mortgage, the APR does not represent the true cost of the loan.
5 If the terms of your loan change, for example the loan is changed to an adjustable rate mortgage, the lender must give you a new Good Faith Estimate. The lender does not have to give you a new Good Faith Estimate if the closing costs change in advance of issuing the HUD-1 or HUD-1A.6 Many mortgage brokers are responsible partners in the home buying process, but there are some bad apples!
7 All the average costs listed in the chart for a $200,000 total $3,907. This figure is greater than the total average cost because the individual costs listed are an average of those actually charged by lenders in each category and not all lenders impose all fees.
8 Erin Boggs is an attorney with the Connecticut Fair Housing Center, where she directs a program on predatory lending. She would like to thank Sharon Gowan of Fannie Mae and Andrew Pizor, Esq., of the Consumer Law Group for their substantive comments and Alyssa Torres, a second-year University of Connecticut Law School student, for her research assistance.
Typical Connecticut Closing Costs
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