As a buyer, after shopping around for the best interest rates, a competent lender, a realtor you trust, and searching for the ideal home, it’s hard to believe that you still need to shop around for your settlement services. And for sellers, the anxiety, uncertainty of the process, and maintenance of your property may be enough to keep you awake at night. With so many moving pieces, it’s tempting to sit back and let someone else dictate who handles your settlement and title services.
That would be a mistake.
Closing Costs and Associated Fees Vary by State and by Provider
Regulations vary from state to state, so it’s a good practice to add settlement services to your list of things for which to shop around. Be sure to ask your lender and realtor detailed questions about closing costs and fees. Zillow estimates that your closing costs can be anywhere from 2-5% of the purchase price of your home. It comes as no surprise, therefore, that you can save big on settlement fees.
This past October, the Loan Estimate, which has stricter accuracy requirements replaced the Good Faith Estimate developed over 40 years ago. The Loan Estimate makes closing documents more accurate, clearer, and easier for buyers and sellers to understand. However, the price of this transparency and detail comes at a cost. While fees charged by lenders increased by 1.6% in 2016, you can keep costs under control by shopping around. According to interest.com, homeowners can save hundreds of dollars (the equivalent of your first Home Depot run!) on closing costs by finding the right vendor.
In many states, the buyer is responsible for all closing costs. In Tennessee, where closing costs on a $200,000 home average $2068, buyers are typically responsible for many closing costs, although your realtor may be able to negotiate shifting some of the responsibility onto the seller. Here’s a quick list of the kinds of fees that are included in this total:
- Application Fee
- Origination points
- Commitment fee
- Documentation preparation
- Broker or lender
- Processing
- Tax services
- Mortgage taxes
- Private Mortgage Insurance (PMI)
- Recording fees
- Attorney fees
- Credit reports
- Flood certifications
- Survey
- Courier services
- Settlement fees
- Title insurance
Payoff Schemes and Fee-For-Referral Incentives May Increase Settlement Costs
Even if you have a great relationship with your realtor, be sure to ask them if they receive any benefit from recommending potential vendors and services. While it may seem like the path of least resistance to accept your realtor’s or your bank’s recommendations for services, you may want to think twice. At the very least, you absolutely need to make sure that they are not receiving a benefit by “altruistically” referring services and vendors.
According to an article in The Washington Post, “In a typical marketing services agreement, a title company or lender agrees to pay a real estate broker or an individual agent fees for promotional assistance — say, by prominently displaying a title company’s brochures or actively making recommendations to home buyers about the benefits of using its services.” This kind of fee-for-service is not only unethical, but it violates the Real Estate Settlement Procedures Act (RESPA).
In 2015, the Consumer Financial Protection Bureau issued a prohibition on kickbacks and unearned fees as part of RESPA that states “Any person who give or accepts a fee, kickback, or thing of value (payments, commissions, gifts, tangible item or special privileges) for the referral of settlement business is in violation…”
No only that, but these third-party vendors may not be the best, nor the most affordable in the industry. Be sure to ask for recommendations and then research each and every vendor you work with throughout your closing process. The Post article goes on to note that significant amounts of cash may be on the line. In one case, a title agency was offered $15,000 by a brokerage firm in return for directing new title clients to the agency.
To learn more about reducing closing costs and what to look for in a settlement services provider, contact Rochford Law & Real Estate Title.
