In the last time out, were only able to discuss just one of the important property asset sale or purchase transaction closing costs and by now I expect many particularly buyers to have gotten themselves acquainted with the loan origination fee which includes the processing and underwriting fee that may gulp between 0.5% to 1.0% of the total mortgage loan amount approved by a mortgagee to finance the purchase of a property.
Today, I would ensure prolixity is avoided as much as possible in this post to enable us cover as many property sale and purchase transaction closing costs as possible and without wasting much of your time.
Let’s quickly dive into the concluding part of closing costs that has to do with financing a property purchase with the conventional mortgage loan through a lender or a financial institution and hopefully if we have more time left we may discuss tax, insurance, important homeowners closing costs and other government related property purchase or sale transaction closing costs every buyer, seller and lender must have knowledge of and be prepared for.
I crave your indulgence to kick start this post with what is known as Credit Report that most times are generated by the credit bureaus of a country, they use details and information collected from individuals which are made available together with other important and relevant information needed to determine mortgage loan applicants creditworthiness to lenders, creditors and financial institutions alike.
This helps lenders, creditors and financial institutions facilitate the prequalifying process of an applicant for a mortgage loan approval as well as screen out applications that do not meet with the minimum requirement standards for a loan to be approved particularly when trying to purchase a property via the conventional mortgage loan arrangement.
In Nigeria, this process may not be isolated or expressed separately in the closing costs of a mortgage loan but is implicit in the mortgage closing costs and are customarily paid for by the applicant or the buyer.
Credit Report in an organized set up encourages and also helps individuals to improve and increase their creditworthiness as well as assist the people to take charge and be in control of their financial situations and predicaments.
Many buyers or investors are quite aware that most lenders, creditors and mortgage companies solely and heavily rely on healthy credit report to grant or approve loan to applicants in order to finance any type of property purchase, hence many people particularly buyers strive hard to improve their creditworthiness in order to qualify and have access to loan.
The next and very important property purchase closing costs I would love to discuss is the Prepaid Interest which is approximately thirty days. Many smart investors ensure and deliberately close escrow at the end of the month to reduce their upfront prepaid interest closing costs.
The prepaid interest is primarily the interest amount due at the closing of the property purchase transaction and it is paid to cover for the period of time in the month between the date the mortgagee closes the loan for the purchase of the property and the date the first mortgage loan repayment is due.
Let me expound on this for you to understand this concept of prepaid interest on mortgage loan. If your mortgage loan is closed on any date of the month then you are liable and subjected to pay prepaid interest for the remaining days in that month but you can reduce or completely avoid this prepaid interest closing cost by reducing the numbers of days and daily interest that accrues on your loan by making sure escrow is closed at the end of the month.
The prepaid interest on mortgage loan by a lender or a financial institution for the purchase of a property is usually paid for by applicants or the buyer as part of the property asset transaction closing costs and are expensed over the life of the loan so every buyer must consider prepaid interest seriously when making investment decisions.
Interestingly, I have almost forgotten about the most important closing cost of all which is essential to mortgage loan approval success and that is the initial investment down payment all applicants must have as deposit or earnest money to show their commitment and how much they value that investment.
Many people see this as a humongous problem in this part of the world particularly in Nigeria because of some erroneous beliefs and lack of financial knowledge and this explains why many people think mortgage loan in this part of the world is a debt trap and as a result many are afraid or scared of getting mortgage loan to finance or fund their great personal or business ideas.
Most times people think the banks are solely interested in the initial investment down payment or heavily rely on the collateral or both, this most time is false because the success of the investment, your commitment to ensure it is successful and of course how efficiently and effectively you are able to manage and control the investment productively and successfully supersede the mortgage loan itself.
lf we understand this mortgage framework properly and wholistically discern this from an optimistic point of view, you will see clearly that all your fears of not taking a chance or take advantage of the opportunity to invest in property is not welcome and not tenable in developed countries of the world.
There are mortgage loans at 0%, 3%, 6% 8% 10% 20% 25% and 30% downpayment made available to specific and categorized class of individuals and groups by serious minded government in accordance with their income, geographical location and societal class which encourages many to invest in real estate.
If you ask me, this is a very good way to loot government fund or in this case public funds for use by patriotic, reasonable and genuine private businesses, entrepreneurs and the general public or masses, who have good intentions of nurturing, growing and expanding their businesses, great ideas, creativity, initiatives which definitely can’t be achieved without creating job opportunities and employment exponentially for many.
Instead the system, permissiveness of government and our polity encourage looting of public funds meant for projects and infrastructure development into private pockets of political office holders and their cohorts, who save or hid the stolen funds in abandon building, sewage systems, burial grounds and cemeteries.
Perhaps this may be because of our corrupt leaders’ cupidity or probably they ran out ideas and lack of foresight to take us through the knowledge economy like the United State, United Kingdom and of course China.
Please don’t ask me if I will loot public fund for the rightful owners if I have the power to do so, anyways am kidding but you can just call that my double bluff.
However, on a more serious note, I believe patently that we can do same here in Nigeria to improve and help the people have a feel of what it is like to be in a democratic country, forgive me for boring you with this information because most time I get a little bit carried away and passionate about knowing what something could have been or ought to be and what we actually get. There is always a mismatched between my expectations and what I can actually get or act on.
Let’s get back to the issue at hand for us not to lose focus, As we all know, most properties are financed by mortgagees, who grant the applicant or buyer mortgage loan to purchase their choice property.
Most times loans are approved, accessed and achieved at the request of the mortgagees for the buyer to foot a certain percentage of the total cost of the property purchase price and this could be reasonably be between 6% to 30% in Nigeria depending on the platform facilitating the mortgage loan facility.
The initial investment downpayment is a sought of commitment on the part of the buyer making the investment to show his or her level of seriousness to purchase the property while the lender or the financial institution completes the remaining percentage of the total cost of the property based on the terms and condition or the contract agreed upon by all parties involved in the purchase transaction process.
Let me emphasize that downpayment is customarily paid for by the buyer in all cash property purchase deals even when financed through the conventional mortgage loan or in any other form of acquisition methods.
Many investors in Nigeria hardly know or understand the importance of property Disclosure Report and as a result experience and find themselves in unexpected and unfortunate circumstances with their new property purchase or transactions which may make them want to rescind the sale contract agreement or demand for refund of money from the seller which most times is near impossible.
The disclosure report is usually carried out on behalf of the seller at a fee in every property sale transaction and of course is paid for by the seller but are used by the buyer to extrapolate, simply put to form an investment opinion on whether to go on with the property purchase or back out of the transaction process.
It is a very useful report because it provides the buyer with an insight into what the buyer is getting into as well as delineates in details all what the buyer needs know about the property such as the operational state of all electrical and heating system; roof and structure of the building; water and sewer; all other systems like plumbing, air conditioner and mechanical.
The property disclosure report often times includes other stuffs like the home and title insurance, lien against property, inspection reports, easement and restrictions on the property, pending legal actions and of course if there are any known future problems that may affect the building.
I must stress disclosure report is very vital and critical to the success of any real estate investment, hence ensure the property you intend to purchase has a disclosure report generated and paid for by the seller as part of the property sale closing costs.
Let us quickly look at another unexpected closing costs some unscrupulous sellers may chivvy buyers into paying for if they envisage the buyer is inept and has no indepth knowledge of real estate transactions. The seller may want you as the buyer to pay for the Existing Loan Pay Off on the property as well as the Existing Loan Prepayment Penalty if there is any.
Let us say you want to purchase a property from a homeowner or seller, who is motivated to sell or probably selling due to threats of foreclosure from his or her lender or financial institution then you must be interested in finding out about the existing loan on the property.
It is also very important to ask questions in order to ensure there are no form of prepayment penalties on the existing loan on the property as well as the charges for the demand for the existing loan pay off. The buyer must make sure that the seller sort this out prior to putting pen on papers to signing the sale contract agreement.
The stark and naked fact is that in both cash down property sale transaction and the normal property purchase through mortgage loan financing, the seller is solely responsible for both the existing loan pay off on the property and the existing loan prepayment penalties if there is any on the property which must be cleared by the seller as part of his or her closing costs.
It might also interest you to know that most loans from lenders or mortgagees carry a Reconveyance Fee which is customarily paid for by the seller of the property purchased to completely take away any form of lien a lender or a financial institution might have on the owner’s property title when refinancing the property.
if you don’t understand what these concepts are all about, we shall discuss owner’s policy title and lender’s policy title later as we progress particularly on property insurance closing costs but for now let’s stride forward on reconveyance fee.
The reconveyance fee is most times charged by the title company of the property, the original mortgage holder or the mortgage bank to cover for their efforts and time in generating, processing and delivering the reconveyance and of course the cost of filing the reconveyance.
This takes us to the Loan Document Delivery Methods which hugely depends on delivery request method of the buyer and seller request. If the loan document delivery request method is via Courier or Express Mail then the party requesting this service is liable and subjected to courier of Express Mail Fee as part of the closing costs of the property sale or purchase transaction.
This is applicable to all form of property purchase acquisition methods and the essence of using courier or express mail service is to expedite the delivery process which often times takes between one to three business days depending on the distance. It also afford parties in the property sale and purchase transaction process the opportunity to track, insurance coverage, package pick up as well as signature proof of loan documents delivery.
Similarly, all parties or individual involved in a property purchase or sale transaction may request or decide to use an Electronic Email Loan Document Delivery method for reasons best known to them.
I must clearly state here that any loan documents delivery request by either the buyer or seller via an electronic email delivery using the internet are usually sent at the buyer’s peril and most financial institutions only use this medium with a very strict policy, terms and condition to protect the interest of their organization in the event of any unexpected circumstances.
Most financial institutions if not all believe that internet is an unsecured public domain and for this reason they can not guarantee the parties involved in the property purchase transaction process of unlawful interception by unscrupulous individuals, non and mis delivery of the loan document sent using the internet email service.
Hence the buyer or the seller is on his or her own in the event of any loss or damage to the loan documents as a result of using this delivery method and this includes any extra cost or expenses incurred by the buyer or seller. Most financial institutions have shifted and taking away this liability off their shoulder.
Although the request of loan documents delivery via electronic email using the internet might be cheap but also has got a lot of risk involved so be wary of this.
This brings us to what is known as the Mortgage Satisfaction Fee, In every real estate sale transaction process and as part of the closing costs of a property purchase, the lender or mortgagee is expected to sign and file a document known as the satisfaction of mortgage documents with the land registry.
The aim of filing the mortgage satisfaction documents with the land registry is not only to update the property deed for a clear title to the property but also to acknowledge that the buyer or the mortgage loan applicant has fully paid the mortgage loan as well as to ascertain that the the mortgage is no more and not a lien on the property.
The mortgage satisfaction fee is customarily paid for by the seller as part of the property sale transaction closing costs and it covers for the buyer or the borrower’s lien release fee be it in cash property sale transaction deal or through the conventional mortgage loan financing of property purchase.
My penultimate closing cost fee for discussion in this post would be a combined set of fees charged by lenders, financial institutions or mortgagees as part of mortgage loan fees but are charged on special mortgage loan facility and only when it is applicable to the transaction particularly when refinancing or assuming an existing mortgage on a property.
These mortgage loan fees consist of the assumption fee customarily paid for by the buyer to the mortgagee for the ability to take over a property with an assumable mortgage, this fee is usually about 1% of the total outstanding principal balance left on the buyer’s loan mortgage account.
Also, we have what is called the balloon reset fee which present the parties with the opportunity to reset the mortgage interest rate based on the current interest rate on a balloon mortgage which usually carries automatic reset every five years.
Often times a flat fee is charged as subordination fee as part of the property purchase transaction closing costs when you refinance or add a second mortgage to the initial or the principal mortgage loan.
The subordination is a non refundable fee or payment made for a legal agreement between all parties involved in the credit transactions and it places the first mortgage debt ahead of the second mortgage loan debt in priority for repayment collection from the debtor.
I must warn that there is a lot to learn and understand by buyers on mortgage assumption liability and risk when assuming an existing mortgage on a property, this is beyond the scope of this post and before it escapes my mind I must stress that you don’t have to pay for the bank’s loan origination fee if you are charge the mortgage assumption fee.
I wont be able to touch all real estate transactions closing costs that are tax, insurance, important and necessary homeowners closing costs and other government related property purchase closing costs as earlier promised but I would leave you with one more closing costs before I call it a day on this topic.
The last property purchase closing costs I would leave you with is the Wire Transfer Fee. This may not be strange to anyone because we all get involved in business transactions and also make cash transfers to make payment for various transactions we do.
The wire transfer fee is charged by the banks involved or handling the property sale or purchase transaction payments on behalf of either the buyer or the seller. The banks provide an effective, efficient and secure platform to send money or make payments from the buyer or lender’s bank account to the seller’s bank account via a wire transfer at a fee known as wire transfer fee.
The wire transfer fee is charged by the banks involved in the purchase for the money or cash transfer service and paid for by the either the buyer or lender at the sending end depending on who is sending the money while the seller must pay its bank for the same service at the receiving end.
This wire transfer fee is applicable in all forms of property acquisition methods and the wire transfer charge depends on the amount transferred and of course the policy of the bank.
Let’s call it a day here and am really sorry for not being able to touch all what I promised at the beginning of this post but definitely you will find all the real estate sales transaction closing costs in my new book on real estate investing titled Demystifying Real Estate Investing.
The book is about how you or anyone can invest in real estate with remarkable aplomb by applying the principle of purpose-driven real estate investing with some level of creativity, innovations coupled with essential skill-set required for real estate investing success.
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