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Closing Costs Must Be Disclosed

Dear Marie: Dear Marie: This may sound silly, but I've been hesitant to buy a house because of a bad experience my parents had years ago. They were all set to buy and then, at the last minute, found out that there were extra charges they couldn't afford. It was a bad scene. How can I be sure that won't happen to me?

Your parents weren't the only ones who had problems. In 1972, the Department of Housing and Urban Development (HUD), made a nationwide study and found that closing costs for purchasing a home varied from less than 1% to 10% of the purchase price, due in part to kickbacks and undisclosed commissions being paid to various professionals involved in the closing.

Congress passed the Real Estate Settlement Procedures Act (RESPA) in 1974 to provide adequate disclosure of closing costs to prospective buyers who can then shop around in order to compare various closing costs.

Also, the law says that this information must be provided in a timely fashion so that consumers "are protected from unnecessarily high settlement (closing) charges caused by certain abusive practices that have developed in some areas of the country."

The reforms apply to all loans secured by a first mortgage on one-to-four family residences by any lender regulated by the Federal government (VA and FHA) as well as any lender whose deposits are insured by an agency of the Federal government (which means just about all lenders).

At the time of your loan application, the lender must provide a HUD booklet, "A Home Buyer's Guide to Settlement Costs", which provides advice on how to shop for professional services and on homeowner's rights and obligations.

Also, the lender must give the applicant a good faith estimate of all charges. The day before closing, the borrower has the right to inspect a Uniform Settlement Statement which itemizes the service fees charged by the lender.

Other items of importance to you: when a lender uses certain closing attorneys, title examiners or title insurance companies, the lender must explain the business relationships and give an estimate of their charges. It is against the law to receive secret kickbacks from them. Furthermore, a seller cannot require a buyer to buy insurance from any particular company. For more incormation on your rights, click here to consult HUD's excellent website.

A final note: many lenders require the borrower to pay funds into an escrow account maintained by the lender to cover future insurance and tax payments. Under RESPA, the lender, at closing, may require from the buyer only an amount sufficient to maintain that month plus two additional monthly escrow payments.

The purpose of these Federal law requirements is to ensure that most borrowers are quite aware of the amount of money they will have to bring to closing in order to prevent surprises. In fact, many real estate agents will do a good faith estimate before you even go out to look at houses. That way, both you and the agent know what price range homes to look at.

Marie S. Spodek, DREI, GRI is a highly regarded real estate educator and author. Her seminars have been attended by thousands throughout the U.S.

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