Closing Costs Part 2 – Title Charges

In the second installment of my series on closing costs, I will tackle title charges.  Generally speaking, when you buy or sell a home, the closing of the transaction takes place at a title company.  The title company has two main roles: 1. escrowee and 2. issuing title insurance.  As escrowee, the title company receives funds from the buyer and lender and disburses the money at the end of the closing based on the parties instructions.  Title insurance insures the buyer’s clear title to the property.    Title companies don’t work for free, so there are some costs associated with the services they provide.

Escrow/Settlement Fee

This fee is for the title company’s escrow services, and if there is a lender involved, for the closer to be the eyes and ears of the lender at the closing table.  The amount of the fee depends on the purchase price of the property, and it generally runs between $1,100 and $1,900.  The buyer pays this charge unless it is a cash transaction, in which case the parties split the charge.

Owner’s Title Policy

The owner’s title insurance policy is purchased by the seller. To produce a title insurance policy, the title company first conducts a title search to determine any title defects in the public record.  Things such as mortgages, easements, mechanics liens, outstanding judgments, etc., are considered unpermitted title defects and must be removed by the seller prior to or at closing to pass clear title to the buyer.  In other words, if after the closing someone knocks on the buyer’s door claiming that the property is really theirs, the buyer has insurance to cover the costs of defending the claim and any losses sufferred as a result.  The cost of the policy is based upon the purchase price, and it ranges from $1,200 to $3,000.  The title company will also perform a second search on the day of the closing, for which it charges each side approximately $125.

Loan Policy

The loan policy is similar to the owner’s title insurance policy, except that it is insures the buyer’s lender from losses suffered as a result of title defects.  The buyer pays the cost of this policy, which generally costs around $500.  The lender may request coverage in addition to the standard loan policy in the form of endorsements, which generally cost an additional $150-$200 each.

Closing Protection Letters

Illinois law requires that the title company issue a closing protection letter to the buyer, seller and lender.  The letter offers protections to the parties in addition to those offered in the owner’s title policy and loan policy.  Specifically, if the closing funds or documents are lost due to fraud or negligence, the parties have a financially solvent entity (the title compay) from whom to recover.  The cost of this letter is $25 for the buyer and lender (both paid by the buyer) and $50 for the seller.

Chain of Title

The lender requires a 24-month “chain of title” report from the title company.  The purpose is to determine how many times the property has been conveyed over the preceding two years.  Several conveyances for steadily increasing amounts in a short period of time is one indication of mortgage fraud, and the lender may not fund the loan if it sees that kind of pattern.  The cost of the chain of title is $250 and is paid by the buyer.

“Junk Fees”

This is my description, not the title company’s.  The title company receives and sends a number of wire transfers, for which it charges roughly $40 each.  In addition, the title company will receive a loan package via email, which the closer will print for the buyer’s signature.  For this service, the title company will charge approximately $40.

There are additional costs which appear on the title invoice, which are collected by the title company, such as transfer taxes, recorder’s fees, etc.  Those are not what I would consider “title charges,” and I will cover those in a couple weeks.

You may be thinking to yourself, “Gee, that’s all great, but how do I figure out the title costs with any specificity?”  The good news, is that I have a tool provided by my friends at Citywide Title that will give you a fairly precise breakdown of all of the closing costs.  Please contact me at patrick@loftus-law.com or at 773-632-8330 to request a breakdown!  To see what my clients have to say about me, please visit me at avvo.com.

Estimate Your Closing Costs – Part 1

If you have ever bought or sold a home, you know that there are all sorts of charges that you incur in addition to the purchase price, which are known to most as “closing costs.”  We all know about them, but estimating the final number can be elusive if you are not familiar with the process.  In the next four emails, I am going to shed some light on calculating the closing costs, so that you can better understand what the home is really going to cost you as a buyer or what you can expect to walk away with as a seller.

Real Estate Taxes

The real estate tax credits at closing are only two, maybe three, line items on the settlement statement, but they are so significant that they deserve to be discussed all by themselves.

In Cook and the collar counties, real estate taxes are paid in arrears.  That means you are always paying last year’s tax bill.  On the closing date, there will always be taxes owed by the seller that have not yet been billed by the county.  Once the sale closes, the buyer will be responsible for paying those future tax bills.  The customary way to handle this problem is for the seller to give the buyer a credit at closing to cover those tax bills.  It is more secure that asking the seller for a reimbursement when the bills are issues and less cumbersome than putting money in an escrow to pay the bills.

The real estate tax credit is generally based off of the last known tax bill, which is then increased by 5%-10%.  The credit is prorated through the closing date.

As an example, let’s say that you close the sale of you home on February 15, 2016, which is the 46th day of 2016, and your 2014 tax bill was $5,000.  The 2015 bills are not out yet, so this is the last known tax bill.  If the tax credit is based on 105% of the last tax bill, your tax credit looks like this:

2015 – $5,000 x 1.05 = $5,250

2016 – $5,000 x 1.05 / 366 * 46 = $659.83

If the closing is a little later in the year, and the first installment taxes have been paid, the credit is reduced by the amount already paid by the seller.

In Cook County, once the second installment tax bill is issued, usually in July, that amount is used to calculate the tax credit.  In collar counties, the full year tax bill is issued all at once, usually in May.  Additionally, if taxes are owed at time of closing, that amount will be paid directly from the closing proceeds, in which case the amount paid is deducted from the real estate tax credit.

Importantly, real estate taxes can be very complicated.  Your attorney must conduct research to ensure that the credit contemplated in the contract is appropriate.  If the property assessment has jumped significantly (which happened in Chicago in 2015), an alternate method of calculating the credit is necessary to arrive at a fair figure.  Likewise, if there has been a successful appeal of the assessment, the credit should be reduced accordingly.  Choosing the wrong real estate attorney who is not familiar with real estate tax related issues can cost you thousands!

It is crucial to have the right professionals in place to protect you from coming up short come real estate tax time.  If you have questions about real estate taxes, or any other real estate matter, as always, you can contact me at patrick@loftus-law.com or 773-632-8330.  To see what my clients have to say about me, please visit me at avvo.com.