Below are some of the costs you may incur. Some are one-time fees, while others recur over the life of the loan. When you first apply for your loan, you will receive a Good Faith Estimate of Settlement Charges and a booklet explaining these costs, to minimize surprises. Generally, you can expect closing costs to equal from 3 to 6 percent of your mortgage loan amount.
This is a one-time fee for an "appraisal," a statement of property value required on most loans. An independent fee appraiser makes the appraisal. Unique and more expensive homes usually have a higher appraisal fee.
This one-time fee covers the cost of your credit report, which is processed by an independent credit-reporting agency.
There may be a separate, one-time fee that covers preparation of the final loan papers, including the note and the deed of trust.
Often referred to as "points," one point is equal to one percent of the mortgage loan. As a rule, if you are willing to pay more in points, you will get a lower interest rate. Anything in addition to one point is referred to as "discount points."
The Title Company will charge fees for a policy of title insurance and escrow services, which may include charges for document preparation, notary fees, recording fees and a settlement of closing fee. These are all one-time charges. Local custom by county will dictate whether buyer or seller pays all or a portion of these fees.
Depending on the amount of your down payment (generally less than 20%), you may be required to pay a fee for private mortgage insurance, which protects the lender against loss due to foreclosure. You may also be required to place funds into a special reserve account (called an impound account) for PMI, which will be held by the lender.
Depending on the day of the month your loan closes, this charge may vary from a full month of interest to just a few days of interest. If your loan closes near the end of the month, you will have to pay only a few days of interest.
Based on the month you close, property taxes will be prorated between you and the seller. You may also be required to pay a full year’s hazard insurance (or homeowner’s insurance) premium in advance. In addition, you may also be required to place funds into a special reserve account (impound account) for taxes and insurance, which is held by the lender. You absolutely must have this to obtain a mortgage.
The "dwelling coverage" portion of your hazard insurance covers costs to completely rebuild your home, while the "liability coverage" protects you against accidents that occur on your property. "Personal Property Coverage" pays to replace your possessions and generally totals 50 to 75 percent of the dwelling coverage amount. Flood and earthquake insurance policies also are available and are recommended if you are in high-risk areas.
There are two title polices - a buyer’s policy, which protects the new homeowner, and a lender’s title policy that protects the lender against loss due to a defect in the title. These are both one-time fees.
The Good Faith Estimate
The Good Faith Estimate of loan closing costs are made pursuant to the requirements of the Real Estate Settlement Procedures Act (RESPA). These are estimated settlement costs which the buyer will be responsible for in conjunction with the settlement of the mortgage loan. There are two general categories of closing costs, non-recurring and recurring. Non-recurring closing costs are items that are paid once, while recurring costs are items paid repeatedly over the life of the loan.
This is a detailed summary of costs you may have to pay when you buy or refinance your home. They are listed in the order in which they should appear on a Good Faith Estimate you obtain from your mortgage lender. Elements of the Good Faith Estimate are: (Costs will apply differently to each homebuyer and are not particular in total to all homebuyers)
Non-Recurring Closing Costs Associated with the Lender:
Loan Origination Fee
Loan Discount Fee
Credit Report Fee
Lender’s Inspection Fee
Mortgage Broker Fee
Tax Service Fee
Flood Certification Fee
Other Lender Fees
Document Preparation Fee
Appraisal Review Fee
Items Required to be Paid in Advance
VA Funding Fee
Up Front Mortgage Insurance Premium (UFMIP)
Reserves Deposited with the Lender:
Homeowners Insurance Impounds
Mortgage Insurance Impounds
Non-Recurring Closing Costs not associated with the Lender:
Homeowner’s Association Transfer Fee
Refinancing Associated Costs
Loan Tie-In Fee
NON-RECURRING CLOSING COSTS ASSOCIATED WITH THE LENDER:
Loan Origination Fee: The loan origination fee is often referred to as "points". One point is equal to one percent of the mortgage loan. As a rule, if a borrower is willing to pay more in points, then the borrower will get a lower interest rate.
Loan Discount Fee: On a government loan, the loan origination fee is normally listed as one point or one percent of the loan. Any points in addition to the loan origination fee are called "discount points". On a conventional loan, discount points are usually lumped in with the loan origination fee.
Appraisal Fee: Since the property serves as collateral for the mortgage, lenders want to be reasonably certain of the value and they require an appraisal. The appraisal is used to determine if the price you are paying for the home is justified by recent sales of comparable properties. The appraisal fee varies, depending on the value of the home and the difficulty involved in justifying value. Unique and more expensive homes usually have a higher appraisal fee. Appraisal fees on VA loans are higher than on conventional loans.
Credit Report Fee: As part of the underwriting review, the mortgage lender will want to review the borrower’s credit history. The cost varies depending upon the type of report requested.
Lender’s Inspection Fee: This is generally associated with 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 inspection verifies that construction is complete with carpeting and flooring installed.
Mortgage Broker Fee: About seventy percent of loans are originated through mortgage brokers and sometimes the points associated with the loan are listed here instead of under Loan Origination Fee. They may also add in any broker processing fees in this area. The purpose is to clearly indicate how much is being charged by the wholesale lender and how much is charged by the broker. Wholesale lenders offer lower costs/rates to mortgage brokers than you can obtain directly, so you are not paying "extra" by going through a mortgage broker.
Tax Service Fee: During the life of the loan the borrower makes monthly property tax payments, either on one’s own or through an impound account with the lender. Since property tax liens can sometimes take precedence over a first mortgage, it is in the lender’s interest to pay an independent service to monitor property tax payments.
Flood Certification Fee: The lender must determine whether or not the property is located in a federally designated flood zone. This fee is usually charged by an independent service to make that determination.
Flood Monitoring: From time to time flood zones are re-mapped. Some lenders charge this fee to maintain monitoring on whether this re-mapping affects the property.
OTHER LENDER FEES:
Document Preparation Fee: 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. Now lenders draw their own documents and a fee is charged on almost all loans.
Underwriting Fee: A fee is charged for the cost of underwriting the loan.
Administration Fee: If an Administration fee is charged, then generally there will not be a fee for underwriting.
Appraisal Review Fee: Even though a borrower will probably not see this fee on a Good Faith Estimate, it is charged occasionally. Some lenders review appraisals as a quality control procedure and charge for the activity.
Warehousing Fee: This is rarely charged, however, some lenders have a warehouse line of credit and add this as a charge to the borrower.
ITEMS REQUIRED TO BE PAID IN ADVANCE:
Prepaid 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 of the month.
Homeowner’s Insurance: This is the insurance paid to cover possible damages to the home and other items. Normally the first year’s insurance is paid at the close. When purchasing a condominium, the Homeowner’s Association Fees normally cover this insurance.
VA Funding Fee: On VA loans, the Veteran’s Administration charges a fee for guaranteeing the loan. Based upon the use of the borrower’s VA eligibility, the fee is either two or three percent of the loan balance. Instead of paying for this as an expense, commonly it is financed into the loan balance.
Up Front Mortgage Insurance Premium (UFMIP): This is charged on FHA purchases of single family residences or Planned Unit Developments and is 2.25% of the loan balance. Like the VA Funding Fee it is normally added to the balance of the loan.
Mortgage Insurance: Though rare, some first time homebuyer programs require the first year mortgage insurance premium to be paid in advance. Most mortgage insurance is simply paid monthly along with the mortgage payment. Mortgage insurance covers the lender and covers a portion of the losses in those cases where borrowers default on the loan.
RESERVES DEPOSITED WITH THE LENDER:
Homeowners Insurance Impounds: The lender will divide the annual premium by twelve to determine the estimated monthly payment to the impound account. Since the lender is allowed to keep two months of reserves in the account, the borrower will need to deposit two months' premiums into the impound account in the beginning.
Property Tax Impounds: This amount varies according to when the real estate transaction closes and when the taxes are due.
Mortgage Insurance Impounds: When required, lenders allow this premium to be paid monthly. However, a borrower may be required to put two months' worth of mortgage insurance payments as an initial deposit into the impound account.
NON-RECURRING CLOSING COSTS NOT ASSOCIATED WITH THE LENDER:
Closing/Escrow Fee: The fees associated with the closing.
Title Insurance: Title Insurance assures the homeowner that they have clear title to the property. The lender also requires it to insure that their new mortgage loan will be in first position.
Notary Fees: Most loan documents have multiple sets that must be notarized.
Recording Fees: Certain documents are recorded with the local County Recorder’s Office.
Pest Inspection: This is also referred to as Termite Inspection. This inspection tests for pest infestations and other items such as wood rot and water damage. If repairs are required, the amount to cover those repairs is usually covered by the seller, but it is a negotiable item. Usually the pest inspection fee is paid by the seller and is not normally reflected on the Good Faith Estimate.
Home Inspection: Since it is the homebuyer’s choice to obtain a home inspection, this cost may not be reflected on the Good Faith Estimate. However, it is highly recommended.
Home Warranty: This is an optional item. 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.
Homeowner’s Association Transfer Fee: When 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 the buyer.
REFINANCING ASSOCIATED COSTS:
Interest: When closing the transaction on a refinance, there may be outstanding interest due on the old loan.
Reconveyance Fee: This fee is charged by the existing lender when they "reconvey" their collateral interest in the property back to the borrower through recording of a Reconveyance.
Demand Fee: The existing lender may charge a fee for calculating payoff figures.
Sub-Escrow Fee: This fee is actually charged by the Title Company.
Loan Tie-In Fee: This fee is charged by the Escrow Company.