Demystifying Settlement Fees

Navigating the Costs of Closing a Real Estate Deal

If closing a real estate deal is like finishing a puzzle, then settlement fees are the last few pieces to fit in. But you shouldn’t wait until the end to figure out what they are! Settlement fees are the costs you pay for all the services you employed over the course of your real estate transaction, from Realtor commissions to Notary fees. These fees are due at closing and are commonly deducted from the Seller’s proceeds, and wrapped into the down payment or loan for the Buyer. The fees aren’t always well understood so let’s take a closer look.

The Buyer and the Seller have only a few settlement fees in common. Title Insurance is one of them. This fee is the price of purchasing an insurance policy that protects the Buyer and the lender in the case of unknown liens or false ownership claims on the property. It’s a layer of protection to ensure you are really purchasing a property that can be sold, from the person who has the right to sell it. It is required for financed sales and strongly recommended for all others.

Another shared fee is the Escrow fee. Escrow agents, and the attorneys employed by the escrow company, are the middle-men working to make sure everyone is playing by the rules and that both sides are treated fairly. This fee covers the cost of their services. There may also be additional fees for document preparation, FedEx fees, and notary costs if signing remotely. Prorations are the costs of taxes, HOA fees, insurance, sewer, and other ongoing costs of ownership that are computed and prorated to the date of sale. So, the Seller pays these costs up until the day before closing and the Buyer takes over on the day of closing. This ensures that each party is only paying for these items for the days they actually have ownership of the property.

In addition to the above fees the Buyer will cover the costs of financing or of their 1031 exchange, unless they are paying cash. Lender’s financing costs will include the Loan Origination fee. This is for the lender’s work in processing your loan application. Financing costs may also include the cost of the appraisal, a loan application fee, and the cost of points if you’ve decided to buy a lower interest rate.

The Seller's settlement fees are usually quite a bit more than the Buyer’s because the Seller has negotiated and will pay the cost of the real estate agent’s services. In Hawaii it is also customary for the Seller to pay for termite inspections, fumigation if necessary, survey or staking, conveyance taxes, and HOA documents. Unless these items were paid for out of pocket they will be included as a Seller’s settlement fee and deducted from the proceeds of the sale.

Depending on your situation there may be additional fees. A good REALTOR will make sure the Seller knows the costs of selling well in advance, and Lenders are required to disclose these fees to Buyers ahead of time too. When you submit your loan application, at the beginning of your escrow period, you should receive a good faith estimate from your lender. Seventy-two hours before you sign your final loan documents your lender must again provide you with an estimate of settlement costs on your Closing Disclosure (CD). This is law and it is to help ensure that buyers don’t come to the closing table and get surprised with fees at the last minute. Check your closing disclosure carefully, it is like checking your receipt after shopping.

Settlement fees might seem complex but by taking the time to understand what each fee is for, you can breeze through the closing process and complete your real estate deal with confidence. Just remember, your real estate agent and lender are your trusty sidekicks, guiding you through. If you don’t understand a fee, just ask for clarification.

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This information is provided by Dani Dooley for educational purposes only and may not be used as legal, business, or financial advice. Seek professional advise about your individual situation. Dani Dooley is a nationally recognized top producing Realtor in Kauai, Hawaii.  Follow @DaniDooley.Kauai.Realtor