Closing Cost Explained
For Your Information
Closing Cost-Prepaids and other Information
Below is an overview of the types of closing costs you may incur on your loan. Some are one-time fees while others re-occur over the life of the loan. When you apply for your loan, you will receive a Good Faith Estimate of Settlement Charges and a booklet that will explain these costs in detail. I have tried to put all the fees I have encounter in my career but as time goes on I discover even more fees that pop up from time to time. As they do I will add those to this list. I hope the following will help you to understand how fees and mortgages work.
Loan Origination Fee: This fee covers the lender's administrative costs in processing the loan. A one-time fee often expressed as a percentage of the loan. The origination fee is typically 1% of the loan, but remember, you can obtain a loan with no origination fee and a slightly higher interest rate.
Loan Discount: Often called points, a loan discount is a one-time charge used to adjust the yield on the loan to what market conditions demand. One point is equal to 1% of the loan amount. Example a loan for $100,000 with one discount point would mean you will pay $1,000. A loan with two discount points would be a charge of $2,000. This fee is rare since interest rates are so low.
Appraisal Fee: This is a one-time fee that pays for an appraisal, which is a statement of property value viewed by the lender. The appraisal is made by an independent fee appraiser and can cost a standard $300 to $450 or much more depending on the home?s size and location.
Credit Report Fee: This one-time fee covers the cost of the credit report that is run by an independent credit reporting agency and is usually about $55-$75.
Title Insurance Fees: There are two title policies: a lender?s title policy (which protects the lender against loss due to defects on title) and a buyer?s title policy (which protects you). These are both one-time charges, but the one you usually pay as a buyer is about $50 to $300 depending on the amount of equity. I can tell you now the owner's title policy is very important. It is not required but in my opinion it should be. If a lender requires you, which they do, to buy title insurance to protect the lender, doesn?t it make sense to buy a title policy to protect your equity?
Lender's Inspection Fee: You normally find this on new construction and is associated with what is called a 442 inspection. Since the property is not finished when the initial appraisal is completed, the 442 inspections verifies that construction is complete with carpeting and flooring installed
Miscellaneous Title Charges: The title company may charge fees for a title search, title examination, document preparation, notary fees, recording fees, and a settlement or closing fee. These are all one-time charges and add up to about $200..
Lender Fees: Other lender fees include an underwriting fee, a flood certification fee, an amortization schedule fee, and other miscellaneous fees that should be disclosed by your mortgage lender at loan application. These fees vary dramatically from about $450 to $900
The Following are some examples of lender fees:
We put these in a separate category because they vary so much from lender to lender and cannot be associated directly with a cost of the loan. These are just some of the fees and we find different fees popping up from time to time. These fees generate income for the lenders and are used to offset the fixed costs of loan origination.. You will normally find some combination of these fees on your Good Faith Estimate.
A word of warning here: The law required lenders to give you a written good faith estimate however the law does not state that the good faith estimate must be accurate. Therefore many times the written good faith estimate will vary greatly.
Let me suggest that you demand a HUD settlement statement 48 hours prior to closing. If you find fees that are different or were not included on your written good faith estimate you will have the necessary time to negotiate those fees.
Document Preparation: Before computers made it fairly easy for lenders to draw their own loan documents, they used to hire specialized document preparation firms for this function. This was the fee charged by those companies. Nowadays, lenders draw their own documents but that fee remains as another profit point for the lender. This fee is charged on almost all loans and is usually in the neighborhood of $200.
Underwriting Fee: Once again, it is difficult to determine the exact cost of underwriting a loan since the underwriter is usually a paid staff member. This fee is usually in the neighborhood of $300 to $350.
Administration Fee: If an Administration fee is charged, you will probably find there is no Underwriting Fee. This is not always the case.
Appraisal Review Fee: Even though you will probably not see this fee on your Good Faith Estimate, it is charged occasionally. Some lenders routinely review appraisals as a quality control procedure, especially on higher valued properties. The fee can vary from $75 to $150.
Wire Transfer Fee: in the "olden days" lenders usually funded their loans with a check. Because of changes made in state laws to benefit banks and savings & loans, mortgage bankers mostly switched to funding by wire, which provided an excellent opportunity to add a new fee to the list of closing costs.
Warehousing Fee: This begins to border on the ridiculous. However, some lenders have a warehouse line of credit and add this as a charge to the borrower
Prepaid Fees: Items Required to be Paid in Advance
Prepaid Interest: Depending on the time of month your loan closes, this charge may vary from a full month?s interest to just a few days? interest. If your loan closes at the beginning of the month, you will probably have to pay the maximum amount. If your loan closes at the end of the month, you will only have to pay a few days interest.
PMI Premium: Depending on the amount of your down payment, you may have to pay an up front fee for mortgage insurance (which protects the lender against loss due to foreclosure). You may also be required to put a certain amount for PMI into a special reserve account (an impound account) held by the lender.
Beginning of the escrow account: Your lender will typically have an account where your property taxes and property insurance will be held. This account will be started with approximately taxes equal to two months in excess of the number of months that have elapsed this year. (If 6 months have passed, they will collect 8 months of taxes.) You property insurance will be collected one year in advance plus two months worth into your escrow account.
Pre-paid Interest: Mortgage loans are usually due on the first of each month. Since loans can close on any day, a certain amount of interest must be paid at closing to get the interest paid up to the first. For example, if you close on the twentieth, you will pay ten days of pre-paid interest.
Homeowner's Insurance: This is the insurance you pay to cover possible damages to your home and other items. If you buy a home, you will normally pay the first year?s insurance when you close the transaction. If you are buying a condominium, your Homeowners? Association Fees normally cover this insurance. Warning, this does not cover your contends on the condo. Make sure to have a separate policy issued covering your personal items.
VA Funding Fee: On VA loans, the Veterans Administration charges a fee for guaranteeing your loan. If you have not used your VA eligibility in the past, this is two percent of the loan balance. If you have used your VA eligibility before, it is three percent of the loan. If you are refinancing from a VA loan to a VA loan, it is three-quarters of a percent of the loan amount. Instead of actually paying this as an out-of-pocket expense, most veterans choose to finance it, so it gets added to the loan balance. This is why the loan balance on VA loans can be higher than the actual purchase amount.
A basic funding fee of 2.0 percent must be paid to VA by all but certain exempt veterans. A down payment of 5 percent or more will reduce the fee to 1.5 percent and a 10 percent down payment will reduce it to 1.25 percent.
All eligible Reserve/National Guard individuals must pay a funding fee of 2.75 percent. A down payment of 5 percent or more will reduce the fee to 2.25 percent and a 10 percent down payment will reduce it to 2.0 percent.
The funding fee for loans to refinance an existing VA home loan with a new VA home loan to lower the existing interest rate is 0.5 percent.
Veterans who are using entitlement for a second or subsequent time who do not make a down payment of at least 5 percent are charged a funding fee of 3 percent.
NOTE: For all VA home loans, the funding fee may be paid in cash or it may be included in the loan.
Up Front Mortgage Insurance Premium: (UFMIP) This is charged on FHA purchases of single family residences (SFR's) or Planned Unit Developments (PUDs) and is 2.25% of the loan balance. Like the VA Funding Fee it is normally added to the balance of the loan. Unlike a VA loan, the homebuyer must also pay a monthly mortgage insurance fee, too. This is why many lenders do not recommend FHA loans if the homebuyer can qualify for a conventional loan. However, condominium purchases do not require the UFMIP.
Mortgage Insurance: though it is extremely rare nowadays, some first-time homebuyer programs still require the first year mortgage insurance premium to be paid in advance. Most mortgage insurance (when required) is simply paid monthly along with your mortgage payment. Mortgage insurance covers the lender and covers a portion of the losses in those cases where borrowers default on their loans.
Reserves Deposited with Lender
If you make a minimum down payment, you may be required to deposit funds into an impound or escrow account. Funds in this account are your funds, and the lender uses them to make the payments on your homeowner?s insurance, property taxes, and mortgage insurance (whichever is applicable). Each month, in addition to your mortgage payment, you provide additional funds which are deposited into your impound account.
The lender?s goal is to always have sufficient funds to pay your bills as they come due. Sometimes impound accounts are not required, but borrowers request one voluntarily. A few lenders even offer to reduce your loan origination fee if you obtain an impound account. However, if you are disciplined about paying your bills and an impound account is not required, you can probably earn a better rate of return by putting the funds into a savings account. Impound accounts are sometimes referred to as escrow accounts.
Homeowners Insurance Escrows: your lender will divide your annual premium by twelve to come up with an estimated monthly amount for you to pay into your impound account. Since a lender is allowed to keep two months of reserves in your account, you will have to deposit two months into the impound account to start it up.
Property Tax Escrows: How much you will have to deposit towards taxes to start up your impound account varies according to when you close your real estate transaction. For example, you may close in November and property taxes are due in December. Your deposit would be higher than for someone closing in May.
Mortgage Insurance Escrows: When required, most lenders allow this to simply be paid monthly. However, you may be required to put two months worth of mortgage insurance as an initial deposit into your impound account.
Earnest Money Deposit: So you will not be placed in an uncomfortable position when you purchase a property, an understanding of the earnest money deposit is important. At the time a written offer is initiated, you will be required by the seller to include a personal check, cashier?s check, or cash. The amount is normally deposited (cashed) into the designated company?s escrow account upon the acceptance, and it will remain in escrow until the time of closing. This amount is credited to you as a partial down payment and represents your intent to purchase the property. If the offer is not accepted, this amount is returned to you promptly. Depending on the price of the property, you should anticipate a minimum of a $1,000 earnest money deposit. Also, in the event that you do not qualify with a lender for a new loan, the earnest money is refunded to you, provided the sellers are given written notice regarding the lender?s disapproval, and provided you have supplied the lender with all documentation they have requested. Although earnest money is not required to make a contract legal it is the most understood therefore plan on placing an earnest money deposit. If you try to us a promissory note the seller will not think you are serious and you may loss your perfect house.
Title Insurance: When you purchase your home, you and the lender need a preliminary title commitment that will indicate exactly what recorded liens, encumbrances and recorded easements are currently in effect on the property. The title commitment will also indicate the vested owner of record and any restrictions on the use of the subject property. Title insurance is, for all practical purposes, required on all property in most states and is normally a seller?s expense. However, the buyer is required to also furnish the lender with a lender?s policy showing the lender as lien holder on that property. These charges will be incurred at the time of settlement as a part of your closing costs. When the purchase of the property is closed, and the title company has recorded the necessary documents, the title company will then issue a title insurance policy binder, which shows clear title to the subject property, to you and the lender.
Notary Fees: Most sets of loan documents have two or three forms that must be notarized. Usually your settlement or escrow agent will arrange for you to sign these forms at their office and charge a notary fee in the neighborhood of $40.
Recording Fees: Certain documents get recorded with your local county recorder. Fees vary regionally, but probably run between $40 and $75.
Pest Inspection: also referred to as a Termite Inspection. This inspection tests not only for pest infestations, but also other items such as wood rot and water damage. The inspection usually runs $75 to $125.00. If repairs are required, the amount to cover those repairs can vary. The seller will usually pay for the most serious repairs, but this is a negotiable item. Usually (not always) the pest inspection fee is paid by the seller of the home and is not normally reflected on the Good Faith Estimate.
Home Inspection: Since it is the homebuyer?s choice to obtain a home inspection or not, this cost is not usually reflected on a Good Faith Estimate. However, it is recommended. Keep in mind that the home inspector has a certain set of standards they use when inspecting a home, and those standards may be higher than required by local building codes. An example is that an inspector may note there is no spark arrestor on a chimney but the local building code may not require it. This sometimes leads to conflicts between buyer and seller. My warning, never never buy a home without a professional Home Inspection.
Home Warranty: This is also an optional item and not normally included on the Good Faith Estimate. A Home Warranty usually covers such items as the major appliances, should they break down within a specific time. Often this is paid by the seller but sometimes may not. A home warranty is like an insurance policy. It seems useless unless you have a claim then it becomes priceless. Make sure which ever warranty company you use has a reputation of paying their claims fast and someone easy to work with. Often the local representative can make this easy or very difficult.
Loan Tie-in Fee: Although this sounds like a lender fee, it is not. When charged, it is usually by a settlement agent (escrow, lawyer, etc) and is to compensate them for services they provide in dealing with the lender.
Sub-escrow Fee: When charged, the source of this fee is usually the title insurance company. It is usually to compensate them for activities in coordinating with the settlement agent (lawyer, escrow company, etc).
Courier Fee: Sometimes charged and deals with the costs associated with ferrying documents around between the lender, title, escrow, settlement, etc
Homeowner?s Association Transfer Fee: if you are buying a condominium or a home with a Homeowner?s Association, the association often charges a fee to transfer all of their ownership documents to you.
Transaction Fees: These are relatively new. They are fees charged by your agent and disgusted as helping your agent pay their cost of doing business. These fees are usually added to your HUD settlement statement and charged to you and they range from $300 to $500.
I would flat out refuse to pay any agent a transaction fee. This is just a way for the agent to make more money. The commissions earned should be sufficient. Ask upfront at your first meeting if the agent charges a transaction fee. These can also be called assistant fees, special one-time fees and so forth. If the agent will not waive the transaction fee look for another agent.
Termite Bond Transfer Fees: These are fees charged by the
Termite company to transfer the bond into your name. If the
Bond is transferable and often times they are not, the buyer usually a limited time to make that transfer. Generally the time is 30 days but I have seen some companies allow 60 days. The cost is from $75 to $250. Many times agent will put in your contract to buy a clause that the bond will be transferred to the buyer at no additional cost to the buyer. This can save you the cost of a new bond, which can run up to $2,000.
For the closing, you must bring a driver?s license and a cashier?s check made out to yourself. At the closing, you may sign the cashier?s check over to the Title Company or closing attorney. If the closing does not occur, you can deposit the cashier?s check back into your own account.
When Realtors or Builders Recommend a Lender
If your Realtor or builder makes a suggestion for a lender, be sure to talk to that lender. There are several reasons they make recommendations.
One reason Realtors and builders make suggestions is because they want to recommend someone reliable. Reliability is important to you, so that you don't end up with a horror story to tell. Reliability is also important to the seller, the agents, and everyone involved in your transaction because if the deal doesn't close, everyone walks away with nothing.
One word of warning. With the Internet so easy to get to and the Internet Lenders spamming you daily wanting your business, this warning is in order. I know of very few Internet loans that closed successfully without the buyer being very disappointed. There are good and there are bad lenders in the brink and mortar world as well as on the Internet. Just practice the same things we tell you when dealing with a brick and mortar Lender. The problems I have seen most frequently with Internet lenders are they are not familiar with the areas appraisers, attorneys, title companies and so forth and getting the loan to close on time can be a nightmare. In fact many times those loans are delayed several days and I have seen weeks. This is certainly a problem if you have your moving van backed up to your door waiting. I would deal with a local lender whose reputation in the community is good. That lender wants to keep that reputation untarnished. The typical Internet Lender will entice you with seemly low rates but many times you miss those high junk fees that make up for that low rate.
When agents and builders recommend lenders, they often develop a certain amount of "clout" in dealing with those lenders. This can help in a situation where you need to cut through "red tape" and get something done quickly.
When buying a new home, dealing with a recommended lender is often very important. This is because there are a lot of intricacies involved in new homes that do not exist when buying resale. If you "shop" around to find your own lender, you may end up with someone who quotes a great rate and is great with refinances or resales, but has no experience with new homes. This can lead to problems or delays.
Over the last ten years, real estate companies and builders have built up their own mortgage brokerages. "Bundled services" like this make sense because it adds another profit center to the company. This is useful because it helps real estate companies to offset higher commission splits with their agents.
In the early days of "bundled services," the loan officers and staff were often sub-par and the quality of service may not have been so great. Things have improved since then. However, because this is "captured business," sometimes these lenders don't have as much incentive to offer you great deals or lower rates. All you have to do is let them know you are "shopping rates" and they will probably work toward accommodating you as much as possible.
Never automatically disqualify a recommended lender, but be sure to ask questions about any relationships between the lending company and your builder or real estate agent's company. That will help you be more proactive on getting the best interest rate and the lowest costs.
Make sure to do a little shopping for yourself. By knowing the interest rates of the market and making sure your loan officer knows you are looking at rates from other institutions, you can use that as leverage to make sure you are obtaining the best combination of service and lowest rates.