Just before escrow is closed, the buyer and the seller each receive a closing statement from the escrow officer. This statement lists the purchase price and all of the expenses associated with buying the property and how those expenses will be allocated between the buyer and the seller.
Expenses typically allocated to the seller include the broker’s commission, ½ of the escrow fees, recording fees for the loan payoff, seller’s title policy, and state or local revenue stamps, indicating the payment of any excise taxes.
Expenses typically allocated to the buyer, besides the purchase price, include ½ of the escrow fees, lender’s title policy, loan origination fee, loan commitment fee, appraisal of the property, recording fee for transfer of title, and possibly a fee for the credit report.
Many of the fees listed on the closing statement will have already been paid outside of closing (POC), directly to the service providers as well as other expenses typically associated with closing, such as credit report fees, loan application fees, appraisal fees, and other closing expenses. They remain listed for easy reference when the property is sold.
The final closing statement also has credits and debits, which are paid out of escrow on behalf of the party being debited. Any credit to the buyer is a debit to the seller, and vice versa.
Items that are typically credited or debited include the selling price, loan principal and associated points or fees, prepaid interest, earnest money deposit and any down payment, unpaid bills associated with the property, such as utility charges and taxes, and prepaid expenses such as property taxes, insurance, and other expenses; security deposits from any tenants; any remaining loan balance that the seller must pay, and the costs associated with property inspection and appraisal.
Right before the closing, the buyer will want to be sure that everything is in order. The buyer should inspect:
- the title evidence;
- the seller’s deed;
- proof that encumbrances have been removed;
- the survey showing the exact boundaries of the property;
- the results of any inspections, repairs, or alterations;
- and any leases that pertain to the property.
Most sales contracts allow the buyer to make a final inspection, or walk-through, of the property right before closing, usually with the broker, to ensure that the property has been maintained, that agreed-upon repairs were made, or that there were no other significant alterations of the realty that were not planned.
A survey is done so the buyer will know the exact boundaries of the property. The survey also shows the placement of buildings, driveways, fences, and other significant landmarks, and any encroachments from or to adjoining property. The buyer may rely on old surveys of the property, but usually the lender or title company requires a new survey. The sales contract may specify whether the buyer or seller pays for the survey.
Both buyer and seller will want to inspect the closing statement to ensure that everything is in order. The seller will also want to be assured that the buyer has the money to close the transaction.
If the seller has a mortgage or other liens, then he will have to obtain a payoff statement for each lien that lists the exact amount of money needed to pay off the mortgage or lien on the property as of the date of the closing. The payoff statement will include the remaining principal and interest, any prepayment penalties and the fee for issuing a certificate of satisfaction. The seller will receive credit for any reserves in escrow to pay for future taxes and insurance.
If the buyer is assuming the seller’s mortgage, the buyer should get a mortgage reduction certificate from the mortgagee. This certification will list the exact amount of the balance as of the closing date, the interest rate, and the date of the last payment.
The main purpose of pre-closing procedures is to ensure that everything is in order: surveys, property insurance, title insurance, title certificate, and the mortgage. The lender may also require that the buyer deposit money in an escrow account to pay for insurance and taxes for the property, to protect its collateral.
If you have any questions about your current or future real estate transaction, call our team of attorneys at the Kendrick Law Group and Champion Title & Closing to learn more or to obtain one of our customized closing guides.