By James C. “Beau” Brincefield, Jr.
One of the most irritating problems people encounter when they buy or sell real estate is discovering unexpected costs on their settlement sheet when they are in the middle of the settlement itself.
It is human nature for people to be somewhat tense at settlement. Settlement usually occurs at a time when there are many pressures from many different directions affecting both the buyer and the seller and, frequently, the real estate and settlement agents as well.
When problems arise in a settlement it is usually necessary to resolve them immediately so that the loan can close and so that possession of the property can be transferred. This, of course, is the worst possible environment in which to cope with unexpected problems.
The most common surprise costs involve unexpected charges imposed by the lender who is financing the purchase of the property.
Too often, both buyers and sellers go to settlement without a clear understanding of all the charges the lender will impose on each of them. This occurs usually because the buyers, sellers and real estate agents involved have been lax in questioning the lender ahead of time.
Careful purchasers, sellers and agents will get from lenders written quotations, which disclose all the charges to be imposed at settlement.
Interest rates and points are obvious costs that almost everyone considers.
Not so obvious, however, are other charges which many – but not all lenders – impose. Far too often, these other charges are not disclosed with the interest rate and point quotes given by the lender.
And even as to points, the buyer and seller should check before settlement to make sure they know how many total points are being charged and how many points will be charged to each of them on the settlement sheet.
Appraisal fees and credit report fees are almost always charged by the lender to the borrower. These charges are not uniform among a lenders.
There is a wide variety of other charges that are imposed by some but not all, lenders.
For example, some lenders Charge anywhere from $50 to $250 for “document preparation” or “document review” regardless of who prepares the settlement documents and conducts the settlement.
In other words, the borrower may end up paying fees to the attorney or settlement agent for the preparation of documents and conduct of the settlement and may find charges from the lender on the settlement sheet for services that appear to duplicate those of the settlement agent.
Some lenders (and settlement agents) charge additional fees If the settlement must be postponed for any reason.
“Tax service” fees, “amortization schedule” fees, “inspection/compliance” fees, “photo” fees, “courier/delivery” ‘fees and even “warehousing” fees are all names that are used by different lenders to describe different fees they sometimes charge purchasers and sellers.
The moral of the dory is: you need to ask the lender to itemize all the charges to be imposed at settlement on both the Purchaser and the seller. Unless you do this, there is no meaningful way to compare the desirability of loans from competing lenders.
Borrowers should also realize that in Virginia and Maryland, there is virtually no regulation of mortgage brokers by the state.
They do not have to have insurance and they are not even required to have any assets.
Therefore, when comparing rates and terms of competing lenders, it is a good idea to get some, information about the lender, itself, as well.
The rates and terms quoted by Midnight Mortgage may look better than those of another lender in the community, but when you deal with established, reputable lenders you can at least depend on them to deliver on settlement day.
Sometimes, unexpected fees will be imposed by the settlement agent. In the Washington metropolitan area, settlements may be conducted by non-lawyers as well as by lawyers.
Non-lawyers are, of course, prohibited by law from rendering legal advice and legal services and they may not charge for same. Consequently, when you get a quote from a settlement agent (either lawyer or non-lawyer) you should know exactly what services the quote does and does not include.
Obviously, if you want the protection of an attorney to see that the title to the real estate and the settlement documents are legally sufficient and legally appropriate for your purposes, you have to go to a lawyer.
Builders sellers of newly constructed homes frequently try to get purchasers to agree to have settlement performed by an attorney designated by the seller. Sometimes the builder will even offer to pay some or all of the “closing” or “settlement” costs if the purchaser will settle with the seller’s attorney. This is a very dangerous situation for the buyer.
First, he must be careful to read the sales contract and understand exactly what is meant by the term “settlement” or “closing” costs. He needs to Itemize exactly which costs the builder will and will not pay at closing because not everyone agrees on what costs are included in these terms.
Second, the buyer needs to understand that the attorney designated by the seller is almost always going to be representing the seller’s interest and not the buyer’s interest at settlement. Even if he is not the seller’s attorney, it should be obvious that he is getting referral business from the seller and it is highly unlikely that he is going to represent or advise the buyer in any way that will operate against the interests of the seller.
A similar problem exists where real estate agents refer clients to settlement companies owned and operated by the agent’s own real estate company. These companies are not ‘authorized to practice law and, therefore, can’t give purchasers the protection of an attorney and – just like the seller’s attorney – the settlement companies are obviously not going to counsel or advise purchasers in any way that might cause any impediment to the deal closing. If the case does not close, the real estate agents don’t get a commission.
One last area of occasional problems involves the desirability and cost of title insurance. There are two basic types of title insurance, one for lenders, one for owners. Lenders will almost always require borrowers to purchase a lender’s title insurance policy. My law office almost always recommends that purchasers also buy an owner’s title insurance policy. There are many reasons for recommending the protection of both a lawyer and a title insurance policy at settlement.
A final tip for saving money at settlement: The interest on your new mortgage loan will be prorated to the date of settlement. Consequently, if the payment on your new loan will be, say $1,500 per month, and you settle on the second or third day of the month, you will have to pay advance interest of almost $1,500 in addition to your other settlement costs. If, on the other hand, you settle at or near the end of the month, your advance interest payment can be eliminated or greatly reduced.
Reprinted from The Journal, Friday, March 18, 1995.