Items Required by the Lender to be Paid in Advance, Part 4 of Closing 101

AN EDUCATIONAL INITIATIVE OF THE AMERICAN LAND TITLE ASSOCIATION

Pre-Paids (Section 900 of the HUD-1 Statement)

There are certain items the lender may require you to pay at the time of closing or in advance of the actual closing date. These could include:

• Interest - Lenders usually require payment of loan interest from and including the day of closing through the end of the month of closing. After that, interest is accrued and paid as part of the monthly loan installments.

• Mortgage Insurance Premium - At the settlement, you may be required to pay your first year's mortgage insurance premium, or a lump sum premium that covers the life of the loan. This fee is payable to a Private Mortgage Insurance Company. If the loan is being federally insured (FHA) or guaranteed (VA), the mortgage insurance or funding fees for those government loan programs would be charged here.

• Hazard Insurance Premium - Oftentimes lenders require payment of one year's hazard insurance, commonly referred to as homeowner's insurance, against fire, windstorms and natural hazards. In order to bind the coverage, the premium is often paid in advance of closing.

• Flood Insurance - Depending on the location of your home, flood insurance may be required and payment of the first year's premium must be made in advance of closing.

Escrows/Impounds/Reserves (Section 1000)

Although the lender isn't required to provide an estimate of the reserves they will be collecting, it is important that you be aware of whether the lender will or will not be "escrowing" for taxes, mortgage insurance (if any), hazard and flood insurance. The use of an escrow/impound account to build up the funds needed to pay these items as they become due can often be a good way for borrowers to budget rather than having to pay these large sums out-of-pocket when they come due. Be sure to ask your lender in advance of closing how these items will be paid on a go-forward basis.

Title and Closing Charges (Section 1100)

These fees cover the administrative costs of a title search, title examination, issuance of the title commitment/binder and final title insurance policy(ies.) Also included would be charges for conducting the closing/settlement/escrow. You are free to select the company to conduct your closing/settlement/escrow, and to shop for the best pricing. Be sure to visit the Shopping for Title Insurance section of this site.

• Settlement/Closing Fee -A fee must be paid to a settlement agent who has prepared documents, calculated figures, and oversees proper execution of closing documents. This fee is often split between buyer and seller but can be negotiated as part of the sales contract.

• Abstract of Title, Search, Title Examination, Title Insurance Commitment or Binder - In order to ensure that there are no pre-existing problems with your property, a title insurance professional must perform a title search and produce documentation on the home's title. In some places, one or more of these charges will appear separately on the HUD-1 and in other places they may be included within the title insurance premium. When a mortgage loan is involved, there may also be added charges for special endorsements that will accompany the lender's title policy.

• Document Preparation - Some settlement agents charge for the cost of preparing legal papers such as the mortgage, deed of trust, note or deed and/or other loan and title documentation. If a lender charges a document preparation fee, it will typically appear in the Loan Fees/Direct Loan Costs section of the HUD-1.

• Notary Fee - Because there are legal documents involved, a licensed notary is required to acknowledge the fact that the proper people signed these official documents in their presence. Notaries often charge a fee for their services.

• Attorney fees - Both the homebuyer and the seller might have their own legal representation to prepare and record legal documents. Frequently, however, where an attorney is acting as a settlement agent, there may only be one involved in the closing. Who pays for those services is a matter of contract negotiation but is often handled like fees paid to any other settlement agent/title agent.

• Title Insurance - There are two kinds of title insurance policies: Loan and Owner's policies. The cost for the Loan Policy is based on the loan amount and the cost for the Owner's Policy is based on the sales price of the home. Who pays these one-time fees at closing varies from state to state. Ask your settlement agent how it is handled in your area. In some circumstances, discounts may be available (such as a "reissue rate" or "reissue credit") when the property has recently been insured by a title insurer. Be sure to ask if you are entitled to any discounts.

You also have the option of purchasing a policy with expanded coverage. It's called the Homeowner's Policy and it covers more things than the Owner's Policy. Ask your local title company for an explanation of the expanded Homeowner's Policy so you can decide which policy is the best one for you.