What happens at closing?
If a purchase, at the closing ownership of the newly purchased farm is officially transferred from the seller to you. It may involve you, the seller, the real estate agent, your attorney, the lender's attorney, representatives from the title or escrow firm, and a variety of clerks, secretaries, and other staff. It is possible to have an attorney act on your behalf if you cannot attend the meeting (for example, if the farm is in another state). Closing can take as little time as an hour to sign all the forms and transfer ownership or it can take several hours, depending on the contingency clauses in the purchase offer (and any escrow accounts that may need to be set up).
Much of the paperwork involved in closing (or settlement) is done by attorneys and real estate professionals. You may be involved in some of the closing activities and not in others, depending on local customs and on the professionals with whom you are working.
Before you close on the farm property, you should have a final inspection, or walk-through, to make sure any repairs you requested have been made and that items which were to remain with the home/farm (drapes, light fixtures) are still there.
In most states, settlement is done by a title or escrow firm to which you forward all the materials and information along with the appropriate cashiers' checks, and the firm will make the necessary disbursements. The real estate agent or another representative of the title company will deliver the check to the seller and the house keys to you if applicable.
Statutory costs are expenses you would have to pay to state and local agencies even if you paid cash for the property and did not need to take out a farm loan. They include the following:
Transfer taxes are required by some localities to transfer the title and deed from the seller to you.
Recording fees for deed pay for the county clerk to record the deed and farm loan mortgage and change the property tax billing.
Pro-rated taxes such as school taxes and municipal taxes may have to be split between you and the seller because they are due at different times of the year. For example, if taxes are due in October and you close in August, you would owe taxes for 2 months while the seller would owe taxes for the other 10 months. Prorated taxes usually are paid based on the number of days (not months) of ownership. Some lenders may require you to set up an escrow account to cover these bills. If your lender does not require an escrow account, you may want to set up a special account on your own to make sure you have money set aside for these important, and large, bills.
Other state and local fees can include mortgage taxes levied by states as well as other local fees.
Third-party costs are expenses paid to others such as inspectors or insurance firms. You would have to pay many of these expenses even if you paid cash for the property. Examples of third-party costs are as follows:
Attorney fees: You will probably want to work with an attorney when buying a farm property. Attorneys usually charge a percentage of the selling price (three-fourths or 1 percent), but some may work for a flat fee or on an hourly basis.
Title search costs: Usually your attorney will do or arrange for the title search to make sure there are no obstacles (liens, lawsuits) to your owning the property. In some cases, you may work with a title company to verify a clear title to the property.
Homeowner's insurance: Most lenders require that you prepay the first year's premium for homeowner's insurance (sometimes called hazard insurance) and bring proof of payment to the closing. This insures that their investment will be secured, even if the house is destroyed. However, should the property be inclusive of a home, Farm Plus Financial does not require a you to prepay hazard insurance, nor do we keep monies in escrow for hazard insurance or taxes. Both costs are the buyers responsibility.
Real estate agent's sales commission: The seller pays the commission to the real estate agent. If one agent lists the property and another sells it, the commission usually is split between the two. It's important to keep in mind that even the commission is negotiable between the seller and the agent.
Finance and Lender Charges
Most people associate closing costs with the finance charges levied by mortgage lenders. The charges you pay will vary among lenders, so it pays to shop around for the best combination of mortgage terms and closing (or settlement) costs. You may have to pay the following charges:
Origination fee: These are fees for processing the mortgage application and may be a flat fee or a percentage of the mortgage.
Credit report: A credit report is always required when applying for a farm loan. Typically, credit reports are charged at $50.00.
Points: A point is equal to 1% of the amount borrowed. Points can be payable when the loan is approved (before closing) or at closing. Points can be shared with the seller--you may want to negotiate this in the purchase offer. Some lenders will let you finance points, adding this cost to the mortgage, which will increase your interest costs. If you pay the points up front, they are deductible in your income taxes in the year they are paid. Different deductibility rules apply to second homes.
Farm Plus Financial does not charge "points" as defined above. Farm Plus Financial does charge an origination fee. Contact a representative to learn more about farm loan programs and financing opportunities.
Lender's attorney's fees: Lenders may have their attorney draw up documents, check to see that the title is clear, and represent them at the closing.
Farm Plus Financial does not charge our customer for attorney fees.
Document preparation fees: You will see an amazing array of papers, ranging from the application to the acceptance to the closing documents. Lenders may charge for these, or they may be included in the application and/or attorney's fees.
Farm Plus Financial does not charge a document preparation fee.
Preparation of amortization schedule: Some lenders will prepare a detailed amortization schedule for the full term of your mortgage. They are more likely to do this for fixed mortgages than for adjustable mortgages.
Upon request, we provide complimentary amortization schedules for prospective farm loan customers or seasoned farm loan customers. Call and we'll be happy to provide one free of cost.
Land survey: Most lenders will require that the property be surveyed to make sure that no one has encroached on it and to verify the buildings and improvements to the property.
Very rarely will a new land survey be required. If a property has been altered or divided and a land survey has not been recorded since alteration, it'll be necessary to obtain this document.
If necessary, this cost would be incurred by customer, and if a purchase it may be negotiated as a cost to the seller.
Appraisals: Farm Loan providers want to be sure the property is worth at least as much as the farm loan. Professional rural property appraisers will compare the value of the house to that of similar properties in the neighborhood or community.
This fee is always paid by the customer in association with loan closing fees.
Lender's title insurance: Even though there is a title search for any obstacle (liens, lawsuits), many lenders require insurance so that should a problem arise, they can recover their mortgage investment. This is a one-time insurance premium, usually paid at closing; it is insurance for the lender only, not for you as a purchaser.
Release fees: If the seller has worked with a contractor who has put a lien on the property and who expects to be paid from the proceeds of the sale of the property, there may be some fees to release the lien. Although the seller usually pays these fees, they could be negotiated in the purchase offer.
Escrow account: Lenders will often require that you set up an escrow account into which you will make monthly payments for taxes, and homeowner's insurance. The amount placed in this escrow account at closing depends on when property taxes are due and the timing of the settlement transaction. The lender should be able to give you a close approximation of these costs at the time you apply for your mortgage loan.
Farm Plus Financial does not require our customers to establish an escrow account for these purposes. Payment of homeowners insurance, and taxes are the customers responsibility.
Other Up-Front Expenses
The major portion of other up-front expenses is the deposit or binder you make at the time of the purchase offer and the remaining cash down payment you make at closing. In addition to the deposit and down payment, other up-front expenses can include the following:
Inspections: In addition to inspections required by the lender, you may make the purchase offer contingent on satisfactory completion of some other inspections. These inspections might include: structural, water quality tests and radon tests. You and the seller will need to negotiate these fees.
Owner's title insurance: You may want to purchase title insurance for yourself so that if problems arise, you are not left owing a mortgage on a property you no longer own. A thorough title search (going back to 1900 if necessary) is often assurance enough of a clear title.
Appraisal fees: You may want to hire your own appraiser, either before you sign a purchase offer or after seeing the results of the lender's appraisal.
Money to the seller: You will need to pay for items in the house that you want and that were not negotiated in the purchase offer. Such items may include appliances, light fixtures, drapes, or lawn furniture and also fuel oil and propane left in tanks.
Escrow account funds: In the purchase offer, you can request that the seller set up an escrow account to defray any costs of major cleanup, radon mitigation procedures, house painting, or other items. Also, if you have not had a chance to try out some appliances (the furnace if you buy in the summer or the air conditioner if you buy in the winter), you may request an escrow account to cover repairs if necessary.
Depending on the purchase offer contract and contingency clauses, you may find you have some expenses immediately upon moving in. For example, suppose your purchase offer contract has a clause making the purchase contingent on a satisfactory structural inspection, and the inspector determines that the house will need a new roof. You could negotiate to have the seller arrange for the work to be done, but this will probably delay the closing date--and you may have to agree to a higher price for the house or to cover some of the expenses of the new roof. Or you and the seller may be able to split the cost of a new roof, put on after you move in, using estimates from a contractor of your choice, each of you putting funds into an escrow account for the new roof. Or the seller may be willing to reduce the sale price of the house by an amount you think is fair. In either case, shortly after moving into your new home, you will need cash for a new roof.
Time investment: An often overlooked major up-front cost in buying a new farm property is the time investment. The average farm purchaser/investor spends a large amount of time in pursuit of the right property. In addition to shopping for a farm, you also spend time trying to find the best farm loan and an attorney who will assist you with the legal issues in purchasing a farm property.
How much time you spend looking for a farm, a farm loan, and an attorney depends on your location and resources. You will spend less time if you know what you want in a property and know how much you can afford, and working with real estate agents will help narrow the choices. How many farm loan providers are in your area or offer farm loans in your area? You can reduce time costs in farm loan shopping by keeping an eye on advertisements and use of the internet to search for the best deals. Firms who provide farm loans on a national basis and advertise via the internet tend to offer the most competitive farm loan products which may be attributed to the fact they compete on a national basis. Shopping via the internet may save a significant amount of time as well.