What costs should I expect at the loan closing?
At the loan closing, you will be required to pay your down payment and other various closing costs and fees. Most of the closing fees are paid by the buyer, but some of the fees are prorated, by date, to the seller and the buyer. In order to be prepared to pay the closing costs, your Lender will send you a Loan Estimate (this form replaced the previously known Good Faith Estimate) in the initial disclosure package. The Lender is under rigid guidelines and tolerances when disclosing this form which requires specific information to be provided by the borrower.
Before you make long term decisions about the terms of your mortgage, such as locking in an interest rate, you should review the Loan Estimate (LE) to determine if there are previously unknown costs that may change your decision.
Typically, total closing costs will be from 2-6% of your mortgage amount and can include not only Lender Origination charges, but Appraisal, Credit Report, Title Services, Survey and Local and/or State Transfer Tax amounts. In addition, there can be Homeowners Insurance and Property Tax amounts to be pre-paid at closing. Although the LE is subject to change after initially disclosed, the Lender is required to issue you a Change of Circumstance (COC) form. This would be issued, for instance, if the appraisal comes in lower than anticipated and you were now required to have mortgage insurance, or if the rate is locked after the initial disclosure package was delivered.
Prior to closing the Lender is required to issue an Initial Closing Disclosure (CD). This is the draft copy of your Final CD which details your final costs and charges. The CD also shows differences between the original LE and the final CD.
At times, fees such as the application fee, credit report fee, or the appraisal fee may be required when the loan application is initially completed. Certain fees vary from lender to lender, but generally, taxes, appraisals, credit reports and title insurance should be comparable for all borrowers. Sometimes, your fees may be included in the mortgage amount, depending on the terms negotiated. But generally, the buyer comes prepared to pay the related fees at the time of the loan closing. Common closing costs and fees that you may expect are:
Lender Origination Charges: these usually consist of set amount Underwriting and Processing fees. Other terms are used but these fees go direct to originating lender.
Application Fee: usually required “up-front” and go to cover the cost of the appraisal and/or credit report, if not charged separately.
Credit Report Fee: requested by the lender in order to evaluate your loan application (generally obtained from a company that pulls consumer data from the three major credit reporting agencies: Equifax, Experian, TransUnion).
Appraisal Fee: used to obtain an independent appraisal of the home to be mortgaged; the appraisal is a factor in determining the amount the lender will loan.
Survey Fee: may be required. These verify the legal position of the home on the property and ensure that there has been no encroachment on the property. Existing surveys are often re-used and surveys are not required is several states.
Title Fees: charged for a detailed search of the historical records related to a property to ensure that the seller is legal owner, that there are no liens, restrictive covenants, outstanding judgments or other claims against the property (A certificate of title issued as a result of a title search does not necessarily protect against hidden defects which did not show up in the search – often the lender will require title insurance for protection against such claims).
Title Insurance: Always required by the lender for protection against hidden title defects; a lender’s policy only protects the lender – a buyer may also opt to purchase an owner’s title insurance policy. Sellers usually pay for the owner’s title policy.
Discount Points: optional payment (full or partial) to lower the interest rate (a point is 1% of the mortgage amount). This fee is paid to obtain a lower than market rate.
Recording or Transfer Fees: a small fee charged to cover the paperwork to record the home purchase and transfer ownership. Usually paid to the title company or closing agent.
Interim Interest: interest from the closing date to the end of the month.
Property Taxes: buyer’s prorated portion of state and local government property taxes already paid by the seller (such as annually paid taxes).
Escrow Account “Set-Up” Payments also called PrePaids: (often required by the lender) charges to cover costs or payments which will be due after the closing; escrow accounts are often set up to continue for the life of the loan, where a specified portion of the mortgage payment goes into escrow to cover certain on-going property related expenses and payments such as taxes and insurance.
How can I lower my costs?
Lender Credits: The lender can cover some of your costs by charging a higher interest rate
Seller Credits: The seller can pay for some/all of your closing costs. This is negotiated at the time the purchase contract is finalized. This is very customary on FHA, USDA and VA loans.