Closing Cost FAQ’s
Closing Costs In addition to the down payment, you’ll also have to pay closing costs – Closing costs are miscellaneous fees charged by those involved with the home sale, including your lender, title company, surveyor, local government office, etc. These costs are significant, especially after you’ve already had to come up with a lot of cash for the down payment. Take a look at our Closing Costs FAQ’s to learn more about these costs.
- What are Closing Costs?
- Now that you have secured a mortgage loan and completed the necessary appraisal and inspections, it’s time to sign the documents and pay the closing costs that will make the house your legal property. How much will closing cost you? Typical closing costs run from 3 to 5 percent of your loan amount. In all likelihood, you have already paid some of these fees to pull credit reports, apply for the loan or, as earnest money, a prepaid portion of your down payment. All other unpaid fees and deposits come due at closing.
It is essential at closing to compare your settlement costs to the good faith estimate provided to you by your lender shortly after your loan was approved. Let it be your guide to flag unfamiliar entries or excessive charges. Also, be certain that the fees you have paid are reflected as credits, not debits, on your settlement documents. Otherwise, you could inadvertently pay them twice. There are four categories of closing costs:
- Lender fees: Lender fees help lenders cover their internal costs for originating a loan. These fees enable the lender to cover its expenses related to loan originator compensation, processing the loan, underwriting the loan, and preparing the documents for the loan. There are other costs that the lender incurs in completing a loan for a borrower. Lenders may also include administration or coordination fees to cover these additional costs.
- Third-party costs: Third-party costs are expenses paid to unrelated third parties include charges for attorneys, title search and insurance, homeowner’s or hazard insurance, flood certification, appraisal, termite and other inspections. Generally speaking, lenders have little control over fees set by third-party providers.
- Escrow and interest costs: These costs include advance payments into an escrow account to cover homeowner’s insurance, real estate taxes, loan interest and private mortgage insurance, if any. Escrow accounts also may hold interim interest, or the daily rate of mortgage interest you pay from closing through the end of that month.
- Government fees: Buying a home is not only a big investment, it is also a matter of public record. The property information and the loan information are required to be filed at the county courthouse or other local government recording office. These fees cover government fees including transfer taxes, deed recording, and state and local mortgage taxes.
- What are typical Lender Fees?
- Lender fees help lenders cover their internal costs for originating a loan. These fees enable the lender to cover its expenses related to loan originator compensation, processing the loan, underwriting the loan, and preparing the documents for the loan. There are other costs that the lender incurs in completing a loan for a borrower. Lenders may also include administration or coordination fees to cover these additional costs. Lender Fees can be broken into one or five categories:
- Application / Administration Fee: The application fee is charged by lenders to cover overhead and administrative costs associated with loan origination.
- Origination Fee: This is the main fee that a lender charges to make money on a loan. The origination fee is stated in “percentage of the loan amount”. For example, if you are refinancing $200,000 and the origination fee is 1.0%, the total origination fee would be $2,000 for your loan.
- Processing Fee: Mortgage lenders charge a processing fee to cover the cost of processing the loan. Processing a loan is the process of preparing a loan file for underwriting. In order to prepare a loan for underwriting, a processor will gather all of the required income and asset documentation, review the documents for accuracy and completeness, verify employment of the borrower, and verify the reported bank deposits.
- Underwriting Fee: Lenders charge an underwriting fee to cover the expense of underwriting, closing, and funding a loan. Underwriting a file requires a careful examination and review of a loan file. Underwriters are responsible for ensuring that the loan meets the requirements as set by investors and government sponsored entities such as Fannie Mae and Freddie Mac. This fee also covers other costs associated with Funding and Closing the loan.
- Loan Points: Discount or loan points are fees paid to a mortgage lender at closing in order to lower your mortgage rate. Each discount point generally costs 1.0% of the total loan amount and depending on the term of the loan, each point lowers your mortgage rate by one-eighth to one one-quarter of your interest rate. Although this fee is included in Lender Fees, the borrowers determine whether they want to purchase any discount points for the borrower’s own benefit.
- Flood Determination Fee / Certification: If your home is in a special flood hazard area where flood insurance is mandated, lenders cannot offer you a mortgage loan unless you buy flood insurance. Regardless, your lender may charge a fee to find out whether the home is in a flood hazard area. Flood insurance protects the lender if flooding damages or destroys your home.
- What are typical Third Party Costs?
- Third-party costs are expenses paid to unrelated third parties include charges for attorneys, title search and insurance, homeowner’s or hazard insurance, flood certification, appraisal, termite and other inspections. Generally speaking, lenders have little control over fees set by third-party providers. Some of the primary Third Party Costs include the following:
- Lender’s title insurance: Lender’s title insurance is protection against loss arising from problems connected to the title to your property. Mortgage lenders will always require title insurance and fees will vary depending upon the size of the loan, the property location, and the title company used by the lender.
- Homeowner’s Insurance: Sometimes called Hazard 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.
- Appraisal Fee: The appraisal is required to determine the fair market value of the home. A home appraisal is always required by a lender before loan approval is given, to ensure that the mortgage loan amount is not more than the value of the home and property. The lender also wants to be certain the pre-qualified the Loan-to-Value ratio remains intact.
- Settlement / Closing Fee: A fee must be paid to a settlement agent, typically a title company, that will prepare documents, calculate figures, and oversee proper execution of closing documents.
- Home Inspection Fee: When homes are sold an inspection is often recommended and in some cases the contract may even be contingent upon an acceptable inspection report. This fee covers the cost of an inspector to check the dwelling for any structural problems or issues related to termites, structural, or any other potential problems with a home.
- Survey Fee: Lenders and title insurers often require a surveyor to conduct a survey of your property to define the property size and boundaries and to see if any part of the building or other improvements are “encroaching” on a neighbor’s yard — or the other way around. They are also looking to see if there are any setback violations or other material matters that are considered problematic.
- Attorney Fee: Both the homebuyer and the seller might have their own legal representation to prepare and record legal documents. Frequently, however, where an attorney is acting as a settlement agent, there may only be one involved in the closing. In some states, including Texas, an attorney is required to review all purchase and refinance transactions prior to closing.
- What are typical Escrow and Interest Costs?
- Lenders typically require that you set aside money in an escrow account to pay for property taxes, homeowner’s insurance, and flood insurance (if applicable). Lenders use escrow funds to ensure that these items/expenses are paid on time and to protect their interest in your home. With an escrow account, money is held by the lender or its agent, which then pays the taxes and insurance bills when they are due. At settlement, you may need to provide funds for this account, depending on when payments will be due. For example, if you buy your home in August and property taxes are due the following January, you will need to deposit funds into your escrow account at settlement so that you can cover tax payments when they are due in January.
- Homeowner’s Insurance: Sometimes called Hazard Insurance, this is the insurance you pay to cover possible damages to your home and other related items. Lenders require that all homes with a mortgage be covered by a Homeowner’s Insurance policy.
- Property Taxes: Most jurisdictions assess taxes on real property, which are usually payable at a specified date annually. Since all but a tiny fraction of real estate transactions close on a date other than this one specified annual date, most transactions must include an adjustment to assure that both the seller and the buyer end up paying their share of the annual property tax, proportionate to the percentage of the year that each has ownership of the property.
- Private Mortgage Insurance (PMI): If your down payment is less than 20% of the value of the house, the lender will usually require mortgage insurance. The insurance policy covers the lender’s losses if you do not make the loan payments. Typically, you will pay a PMI premium monthly along with each month’s mortgage payment. Your PMI can be canceled at your request, in writing, when you reach 20% equity in your home (based on your original purchase price) if your mortgage payments are current and you have a good payment history. By federal law your PMI payments will automatically stop when you acquire 22% equity in your home (based on the original appraised value of the house) as long as your mortgage payments are current.
- What are typical Government Fees?
- Buying a home is not only a significant investment, it is also a matter of public record. The property information and the loan information are required to be filed at the county courthouse or other local government recording office. Some common fees associated with the public record include the following:
Recording Fees: This is a fee paid to a local governmental entity to record the mortgage or deed of trust, and title documents, in an official registry. The fee is whatever the entity charges. While it varies from jurisdiction to jurisdiction, it is not negotiable anywhere.
Transfer Taxes, Document or Transaction Stamps: These are government charges based on the amount of the mortgage and, often, also on the purchase price. Depending on your location, there could be a city, county or state tax involved, or some combination.