- Understanding Closing Fees
Title Insurance costs may be broken down to two basic types. Fees paid to the settlement agent and fees paid to governmental entities.
The fees paid to governmental entities for recording the documents and taxes on the transfer and/or mortgage are standard fees charged the same by every settlement agent. These include document recording fees, which are typically a “per page” charge with a minimum charge for the first page, Transfer Taxes based on the property value and Intangible Taxes based on the amount of the mortgage loan(s) if any.
Fees paid to the settlement agent includes the Title Insurance Premium, a one-time charge based on the sale price of the property for an owner’s policy and upon the loan amount for a standalone lender’s policy, or a discounted loan policy for a loan policy “simultaneously issued” with an owner’s policy, plus applicable specialized endorsements. The fees also include a title search fee, and the settlement or closing fee. The Florida Department of Insurance requires that all other charges such as wire or overnight delivery be included in the settlement fee.
Charges for survey, or termite inspections, etc.; which are performed by outside parties are itemized separately.
- About Cashier Checks
A cashier’s check is a check guaranteed by a bank, drawn on the bank’s own funds and signed by a cashier or bank officer. Cashier’s checks are treated as guaranteed funds because the bank, rather than the purchaser, is responsible for paying the amount. However, the depositing bank is required to treat only cashier’s checks of $5,000.00 or less as cash; it may place a multi-day hold on checks greater than that amount. It is ironic that parties who used to rely on the safety of these checks now have to be more careful than ever. Parties accepting them can no longer simply assume that a cashier’s check is always just as good as cash.
Because they are treated as guaranteed funds by the bank, there are certain risks inherent in their use. For example, if cashiers checks are lost, stolen or misplaced, the issuing Bank CANNOT STOP PAY on them. Not being able to be stopped is one of the advantages that encourages parties to accept them. Under Florida law, banks are not required to replace lost or stolen cashiers checks for 90 days. So if something happens to your check between the bank and the closing office, your real estate deal will likely be dead. And, if the original check is presented to the bank later by a “holder in due course”, which basically means an endorsee who had no knowledge the check was lost or stolen and accepted it in good faith, then the bank has to pay it also, and will look to you for reimbursement for the double payment.
Cashier’s check fraud is one of the most popular crimes in the internet age. Technology has made them easy to counterfeit. Counterfeit cashiers checks are very common, and the staff at Mason Title has seen them several times. A quick Google Internet search will reveal the details of the scams, but here is a link to a recent counterfeit check scam in the Florida title industry:
Caution should be exercised both by the parties using cashiers checks and parties accepting them.
- Borrowers Escrow Accounts
An escrow account contains funds held by a lender for future payment of property taxes and applicable insurance, such as homeowner/hazard insurance, flood insurance, and/or mortgage insurance. Lenders utilize escrow accounts to ensure that the loan collateral is protected from losses resulting from tax sales for unpaid taxes or lack of insurance coverage due to unpaid premiums.
At closing, taxes for the current year are pro-rated, and the buyer pays up-front for a homeowners insurance policy for one year. The settlement agent collects the funds for the escrow account on behalf of the lender to pay future tax bills and insurance renewals.
The lender does not pay interest on the funds held in escrow, and the lender does not charge a fee to manage the account. Lenders perform annual analysis on the escrow account to prevent holding too much money, and the amount a borrower pays into the account each month can change to avoid accumulating overages or shortages.
The lender will generally calculate the tax escrow based on the tax bill used for prorations at closing. Sometimes, however, the tax assessment used for proration purposes is obviously much lower than future tax assessments will be; for example, files where prorated taxes were based on unimproved property, or prorated taxes were calculated with exemptions no longer applicable for the new buyer. In such cases, the settlement agent will calculate an estimated future tax bill based on formulas set forth by the taxing authority. The estimated future tax amount is then used to establish the escrow account.
Insurance escrows are based upon the annual premiums for the current year.
At closing, the settlement agent makes an initial deposit into the escrow account held by the lender to set it up. The borrower then continues to make ongoing monthly deposits into the account with each monthly mortgage payment. When taxes or insurance renewal premiums become due, the account will pay out these items, and a small cushion remains in the account going forward, to be adjusted as described above.
- Homeowners Associations
Many properties, particularly those in subdivisions, are subject to protective covenants restrictions. These covenants, often called Conditions, Covenants and Restrictions (CCR’s), outline rules and restrictions for the neighborhood or development. The goal of the covenants is to protect the integrity of the neighborhood and to preserve property values.
These covenants are recorded at the county courthouse, and everyone who buys property in the neighborhood after the covenants are recorded is subject to the covenants. Developers or neighbors often form homeowners associations to further the goals set out in the covenants, to collect dues from the property owners, to maintain common areas, and to enforce rules and regulations.
At closing, unpaid association dues from previous years are the responsibility of the seller. Association dues for the current year are prorated between the buyer and seller. Future dues are the responsibility of the buyer, and future dues are not typically held by the lender in an escrow account.
- Mortgage Insurance
Private Mortgage Insurance (PMI) is an insurance policy that protects the lender in the event that the borrower defaults on the loan. Lenders generally require PMI on loans where the loan to value ratio exceeds 80%, or, in other words, the buyer’s downpayment (including permitted secondary financing) on the purchase is less that 20%.
In the event of foreclosure, the PMI company compensates the lender for certain losses incurred. PMI insurance offers no protection to the buyer. The PMI premium is generally added to the borrowers monthly mortgage payment.
In obtaining an FHA loan, borrowers pay for the full mortgage insurance premium (MIP) in advance which is itemized on the settlement statement at closing. Borrowers obtaining VA loans will not pay PMI or MIP; however, the Department of Veterans Affairs charges a similar VA Funding Fee which is also itemized on the settlement statement.
- Property Taxes
Property owners are obligated to pay city, county, and/or state ad valorem taxes. Nonpayment of such taxes will result in a lien on the property. The county tax assessor periodically determines the value of the property, and taxes are assessed on the appraised value of the property. There may be exemptions such as Homestead for which the property owner can apply to reduce the tax bill.
At closing, the seller is responsible for paying delinquent property taxes for previous years. Taxes for the current year are prorated between the buyer and seller on the settlement statement. Generally, the lender requires the settlement agent to establish an escrow account to pay taxes for future years.
In calculating taxes for closing, the settlement agent will base pro-rations upon the current year’s tax bill. If the tax bill for the current year has not been issued, the pro-ration of taxes will typically be based upon the previous year’s tax bill. The amount of the charge to one party and the credit to the other is determined by dividing the annual tax bill by 365 (for the daily amount) and then multiplying that amount by the number of days before closing (for the seller) and after closing (for the buyer).
In closings involving new construction, the current tax bill may be dramatically less than future tax bills are expected to be. This happens because the most recent tax assessment was likely based on unimproved property. The tax assessor will eventually reassess the property and base taxes on the improvements. In such cases, the settlement agent will use the current lower tax bill for pro-rations between the buyer and seller, and use an estimated future tax amount to establish the escrow account.
- Termite Letter
A termite letter is an inspection report which shows the existence of active or previous infestation of subterranean termites and other wood-destroying organisms. The inspection report is a standard state form which reveals whether there is any earth-to-wood contact on the property, if there were any areas of the structure that were not inspected, and if it appears that any previous termite treatment has been performed. The inspection letter often contains exclusions of liability printed on the back.
Most lenders require a termite letter dated within 30 days of the date of closing, indicating that the improvements are free from active infestation and damage. Depending on the type of loan, lenders may have heightened requirements concerning the termite letter. As soon as the termite inspection is performed, the buyer should ensure that his lender receives a copy of the report. The contract generally places the burden of supplying this letter on the seller.
A termite bond is a contract between a property owner and a termite treatment company which addresses future termite infestations. There are two basic types of termite bonds: a re-treatment bond and a repair bond. A re-treatment bond obligates the termite company to retreat the property in the event that a future termite infestation is detected. A repair bond not only obligates the company to retreat the property if termites are found, but also to repair any damage caused by the infestation. Generally, a dollar amount limit for the repairs is specified in the bond.
A survey is a drawing prepared by a registered land surveyor, after a physical inspection, that depicts the property boundary lines, size and improvements, as well as set-back lines, easements and encroachments. More sophisticated surveys can show topography and water flow, the elevation of any structures on a property in relation to the maximum 100-year flood zone, and the location of any septic and drain lines.
In preparing a survey, surveyors begin at a fixed point and trace the border of the property using a metes and bounds description. A metes and bounds description is comprised of numerical distances measured in degrees, minutes and seconds combined with a directional calls, such as Northeast or Southwest. If the property is in a platted subdivision, an organized division of a larger property into lots, the survey will show its Lot/Block designation as shown on the recorded plat of that subdivision, and the recorded plat shows the mete and bounds description.
Surveys used to be a common lender requirement for closing, but now many lenders do not specifically require a new survey for their loans. However, they do require survey coverage on their loan policies of title insurance (deletion of the standard exception to coverage for matters of survey) and issue of a Florida Form 9 endorsement to the loan policy, which gives certain affirmative assurances with regard to matters of survey. Florida law requires that the granting of survey coverage and issuance of the Florida Form 9 be underwritten; that is evaluated for risk of loss or damage based on specific facts or information before granting the coverage. For lenders, the coverage may be given by several methods which include new surveys, reviews of prior surveys, affidavits, etc, depending on the specific circumstances.
Purchasers need a survey to become aware of any encroachment or violation that currently exists on the property. Additionally, in order to make certain improvements to the property, such as a fence or swimming pool, a buyer will need to be aware of existing setback lines and easements. A new survey is always a good idea for the purchase of a new or existing home.