You are über-excited. About to close on your first home, you are brimming with ideas for furniture, wallpaper, and the nursery. All you are waiting for is the call from your lawyer telling you how much money to bring to the settlement in certified funds. The phone rings, and she gives you the bad news. You feel like you have been kicked in the stomach, and your heart is sinking rapidly. You have to bring $2,500 more than you planned for. This is not fair; you are being railroaded. Where are these extra charges coming from? Who does business like this?

Working for more than a decade as a mortgage closing coordinator, I have seen scenarios like this time and again. Whether borrowers are short of cash, or their home insurance provider failed to name the lender as the mortgagee, or the title company found an old lien on the property that needs to be satisfied, surprises often come up in the conveyance of homes that can postpone a scheduled closing — and sometimes blow the deal altogether. As an independent notary signing agent, I have seen transactions adjourned for reasons as seemingly trivial as document recording fees. Who is to blame for these surprise issues that can scuttle a settlement? Nobody — and everybody.

Fees and Escrows

Federal law requires that lenders must disclose an estimate of their fees and the other costs associated with the transaction when the borrower applies. In addition to the loan application, for example, borrowers must sign a good faith estimate (GFE) and a truth-in-lending (TIL) disclosure. Together, these documents represent an honest approximation of how much the mortgage loan will cost. More often than not, I have heard borrowers complain that they were not told of many associated fees, such as title agency charges, bank attorney fees, and judgment discharge fees, to name a few. Although these expenses were disclosed on the GFE and TIL, the format of these government-issued documents makes understanding them a challenge. Here is where miscommunication sets in: Loan officers hear no complaints from the applicants, so they expect smooth sailing. Meanwhile, the applicants expect the loan officers to give them a reasonable heads-up on unexpected charges.

Even more than fees, escrows for property taxes and home insurance can pack a shocking wallop in terms of what the buyers must bring to the settlement. Since the property is the lender’s collateral, the bank often requires the home buyer to contribute to escrows that accumulate with each monthly payment. These monies are then disbursed by the bank when the premium or tax payment is due. In this way, the lender ensures that it does not lose its collateral to a house fire or a sheriff’s sale. Here is the kicker: You might have spent $1,200 for a year of insurance only to find out that the lender wants two months of insurance escrow payments at closing as a cushion. I have received an earful from angry loan officers and real estate agents over this type of requirement. Yes, the banks want your business, but they protect themselves, first and foremost.

Insurance and Title Issues

From hard experience, I learned that most home buyers think they are ready to close when they receive approval from their bank or finance company. This is a widespread assumption and very, very wrong. When a lender issues a loan commitment, it is telling the borrowers that they are qualified to borrow the money — that they are creditworthy. The property, however, may not qualify as collateral. Few of the institutions for which I worked would order a title search until after the loan was approved. Makes sense, right? Why waste money if the loan is going nowhere? Unfortunately, issues can come up. An old mortgage was never discharged. The certificate of occupancy does not match the appraiser’s report. A contractor placed a lien on the land for an unpaid bill. These matters must be resolved before the loan can close. Likewise, insurance declarations must list the lender as the mortgagee in precisely the language the lender dictates. The insured amount must be equal or greater than the loan amount or clearly state that the coverage includes guaranteed replacement. It is all infuriating for customers and insurance agents. I have no words of comfort. Sorry.

Lesson Learned

One factor that makes all the difference in the world is a good lawyer. Many home buyers I encountered were more interested in saving money than in securing their investment. Doing without an attorney is asking for trouble even if the loan closes successfully. Almost as bad is using a divorce lawyer or one who specializes in drunken driving defense. A dedicated real estate attorney can navigate the pitfalls and unexpected revelations that often come up as a home changes hands. From a lender perspective, the process proceeds much more smoothly.