Closing costs are those fees that need to be paid by buyer or seller during the course of the transaction or at the time of closing the transaction (close of escrow). Buyer and seller, each has their own closing costs.

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Who pays for which closing costs is mainly determined by what is in the purchase contract, which in tern depends on what is customary in an area, as well as the negotiations between buyer & seller. The amounts of the closing costs to be paid depend on the fees charged by various service providers involved in the transaction, presence & amounts of transfer taxes, etc.

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Nonrecurring closing costs are those closing costs that are one-time fees, occurring at the time of close of escrow (closing). Examples of nonrecurring closing costs are credit report fees, termite inspection fees, home warranty fee, appraisal fee, title insurance, loan points, etc.

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Proration is the process by which expenses related to a property are prorated (divided) between the buyer and seller as of the date of close of escrow (closing). For example, based on the date of close of escrow (closing), the property taxes are prorated, where the seller is responsible for the period when seller was the owner and buyer is held responsible for the period beginning with the close of escrow. If seller has paid property taxes for a period that extends beyond close of escrow, a reimbursement from buyer to seller is arranged through escrow.

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An impound account is an account set up by a lender for payment of property taxes, hazard insurance and other recurring expenses such as mortgage insurance and flood insurance. An impound account is also known as an escrow account (different from escrow).

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Typically, an impound account has following prepaid recurring costs: Hazard insurance premium for 2 months, mortgage insurance premium for 2 months (if applicable), flood insurance premium for 2 months (if applicable) and property taxes for 6 months.

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Not necessarily! Usually loans with low loan-to-value ratio (higher down payment) do not have an impound account requirement. Also, in some cases the requirement of having an impound account is waived in return for additional closing costs charged up-front.

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HUD-1 is a document, usually prepared by the escrow holder or lender, that gives a detailed breakdown of the final closing costs paid by the buyer & seller.

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RESPA is a federal regulation that requires lenders to provide borrower a good faith estimate of closing costs within three business days from the time the borrower applied for the loan. RESPA also requires lenders to provide borrowers HUD-1 (a detailed breakdown of the final closing costs paid) at closing.

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