No matter where you get your mortgage, you will have closing costs associated with your loan. There are a few rare exceptions to this, but generally speaking, you are going to be charged some fees to have your loan completed.
How much you have to pay varies. It depends on the amount of money you are borrowing, your interest rate, the loan program you are obtaining, the specific bank that is servicing your loan, the price of the property appraisal, and the price of your home owner's insurance.
Today, I will show you an example of the closing costs that would be associated with doing a standard loan for $150,000 at an interest rate of 6.5% fixed for 30-years. I will do my best to explain everything in detail and indicate which fees a mortgage company does or does not control. For first-time borrowers, a lot of this information may be hard to comprehend, so do not hesitate to ask your loan officer for details on this information:
Processing fee: $250
When you do a loan with my company, I have a loan processor that is responsible for making sure all of the paperwork is in order for your loan. They have to order the property appraisal, order the title examination for the property, request a copy of your home 0wner's insurance plan from your insurance agent, etc. This stuff all has to then be submitted to the bank that will be loaning you your money. As I have to pay this processor hourly, I charge $250 to cover that expense.
Credit Report: $11 (controlled by bank and lender)
When I take your loan application, I then request a copy of your credit report from the credit reporting agencies. I am charged $11 for this. Please keep in mind that any time you apply for a mortgage loan, a credit report must be pulled. However, reputable mortgage companies do not bill you for this unless you close the loan with them. If a company is trying to charge you an up-front fee just to apply for the loan, go somewhere else.
Underwriting Fee: $550 (not controlled by mortgage company, local bank may have control)
When your loan is submitted to the lender, they have an individual who is responsible for providing the final approval for your loan. That individual is known as an “underwriter”. These people work in high-stress situations and are generally paid pretty well. The lender charges you this fee to help cover the expense of paying the underwriter. Some lenders will refer to this as an "administration fee". It should be noted that some lenders do not charge an underwriting fee for certain loan programs. Wells Fargo is one example. If you do an FHA purchase loan with them, there is no underwriting fee associated with the loan (which translates into savings for you on your loan). However, lenders like this are the nice exception and not the norm, so in most cases, you can expect to have an underwriting fee on the loan.
Appraisal Fee: $200 - $400 (not controlled by mortgage company or bank, varies by appraiser)
When you purchase your home, the property must be appraised to verify that it is worth at least as much as the amount of money you are borrowing. Generally, an appraiser charges from $200 - $400 for this service. Most of the time, your lender will ask you to pay for this out of pocket ahead of time. Alternatively, you can give the lender a check for the appraisal fee that they will hold until your loan closes. If you close, they tear up the check and roll the fee in with your closing costs at closing. If you back out, they cash the check to cover the expense of the appraisal that was ordered, but not used.
Flood Certification Fee: $9 (not controlled by mortgage company, may be controlled by local bank)
When you select a property for purchase, the lender has to hire a company to verify that your future home is or is not in a flood-prone area. If it is, they require you to purchase flood insurance. The Flood Certification Fee is to cover the expense that the lender must pay the company to verify this information about the property. Please note that not all lenders charge this fee. In fact, most do not, but if you have one show up on your Good Faith Estimate, this is the explanation for why it is there.
Title Work: $550. Varies Widely By Title Company (not controlled by mortgage company or bank)
Essentially, when you begin a purchase or refinance transaction on a house, all lenders require that the title history of the home be searched. This is meant to protect the lender and the buyer. The title company is tasked with verifying that no tax liens have been instituted against the property by the federal or state government.
Why is this necessary?
If the federal, state, or county government imposes a tax lien against a property (as a result of the current owner not staying current on their income or property taxes), then they have first rights to any proceeds from the sale of that property. So if you have a property that has a tax lien against it, the bank does not wish to loan money against that property because if you default on the loan, the bank will not have first rights to the funds from the proceeds of selling that home. Instead, the tax lien would have to be paid first, and the bank gets whatever is left over, which puts them at risk of losing more money on a defaulted loan.
Generally, title companies have a few different fees they charge. These fees vary widely from company to company, but all are required to be summarized on your good faith estimate. Title companies must keep insurance similar to malpractice insurance that a doctor would carry. This protects them in the event of a mistake where they would incorrectly report that no tax liens exist against the property. If a loan defaults, and it comes to light that there are tax liens, even though the title company did not report those liens, the title company is held responsible for the loss to the lender. This insurance would pay for that loss.
For the purposes of this post, we will say that your title company charges will amount to $550.
Interest for 'x' number of days: $406.02. Varies by Closing Date, Loan Amount, and Interest Rate (not controlled by mortgage company or bank)
When you close on a loan, the lender always charges you for the interest that will be accrued between the day of the month that you close your loan and the last day of the month. This money is charged up front in the closing costs of your loan. For example, with the loan we are using in this example, interest accrues at the rate of $27.08 per day. If you close in the month of April, on the 15th day, that means there are 15 days remaining in the month. 15 x $27.08 = $406.02. You will be charged $406.02 for this at close.
Tax and Insurance Prepays: $425.00. Varies by Insurance premium, property tax rates, and, (with refinance transactions), the time of year loan is closed and the month that your insurance premium is normally due. (these fees are not controlled by the mortgage company or bank)
Assuming you are going to escrow your taxes and insurance (meaning that you pay them in in monthly installments, rather than a lump-sum annually or semi-annually), you will have to pre-pay a few months in advance for both taxes and insurance. On a purchase loan, the standard is 3 months. So if your monthly insurance premium is $70, you will be charge $210 at close in insurance pre-pays.. If your property taxes are $85 per month, you will be paying $215 at close (assuming you are also escrowing your property taxes).
Not all lenders require you to escrow, and I will discuss the benefits and disadvantages of escrowing in a future post. Additionally, the method for calculating your prepays is different for refinance transactions. I will discuss the difference in a future post.
So how much are closing costs on this loan?
Processing fee: $250.00
Credit Report: $ 11.00
Underwriting Fee: $550.00
Appraisal Fee $350.00 (approximately)
Flood Certification: $ 9.00 (in some cases)
Title Work: $550.00 (varies by title company)
Interest to month's end: $406.02 (varies by day of the month loan closes)
Tax and Insurance Pre-pays: $425.00 (varies by premium and tax rate)
Obviously, this is a lot of information to digest. If you are considering purchasing a home, I would advise that you print this off and look it over.
In my next post, I will address courses of action for situations where you are being charged fees other than what have been summarized on this post.