Understanding Lender Fees and Other Closing Costs
Buying a home isn’t as simple as they make it look on TV. There is a lot that happens before and after you set your sights on your dream home. This includes finding the right lender, adjusting your budget and navigating all the fees associated with a mortgage loan. Closing costs, also known as settlement costs, are the fees you pay besides your down payment to facilitate the transaction.
Closing costs encompass dozens of potential fees which are assessed depending on your specific situation. Closing costs vary by location but expect to pay between 2% and 5% of the purchase price. Each lender should give you an estimate of your closing costs when they provide your loan estimate – allowing you to compare loan offers from several lenders to be sure you’re getting the best deal.
Here is a list of possible fees included in closing costs that you may encounter and what they mean:
Appraisal fee: Usually, mortgage lenders require a property appraisal before approving a home loan. The appraisal is used to determine the value of a home and calculate the loan amount as a percentage of the property value or loan-to-value ratio. The appraisal fee can cost between $300 to $400 or more, depending on location.
Credit report fee: In order to obtain a loan, lenders want to know your credit history. As a result, a credit report is routinely pulled by the lender and paid for by the homebuyer. According to the Consumer Financial Protection Bureau (CFPB), credit report fees are typically less than $30.
Flood certification fee: Lenders want to know if the property you are purchasing is in an area prone to flooding. If it is, expect to pay flood insurance as well. The flood certification fee is typically between $15 to $25.
Tax service fee: The lender needs to know that the property taxes are being paid in full and on time to avoid a tax lien. This fee certifies that you have paid your own property taxes and is assessed by the town or county, and can cost between $25-$50.
Underwriting fee: Underwriting fees are those associated with an underwriter reviewing your application and determining if the lender is willing to provide you with a loan and under what terms.
Origination fee: Underwriting, processing document preparation and funding fees may all be lumped into one charge called an origination fee. This is usually a percentage of your loan amount.
Processing fee: A processing fee is simply to cover the cost of processing the documentation related to your mortgage application. The processing fee can be between $300 to $1500.
Commitment fee: The lender can charge a borrower a commitment fee to keep a line of credit open, or to guarantee a loan for a future date. In many cases, borrowers can avoid paying this fee.
Application fee: Application fees are often paid to cover other costs noted above, such as appraisal, processing and underwriting fees. Some companies charge this fee to ensure that the borrower doesn’t go elsewhere. The cost for this can range between $25-$150.
Discount points: One way to reduce your interest rate is to pay discount points to your lender. Points are expressed as a percentage of the loan amount — one point equal to 1%.
Rate lock extension fee: Most rates are locked over a period of 30, 45, or 60 days. During that time your a protected against any increases. There may be delays in the underwriting process or on the seller’s end, and you could easily wind up going past the rate lock expiration date. To extend your rate lock, lenders will very likely charge a fee, and the amount will depend on how much extra time you need to close. Some lenders charge this fee while others do not. You may be able to negotiate with a lender to waive it if you need an extension if you can show the delay wasn’t your own fault.
Real estate commissions: Real estate commissions are usually paid by the seller for helping with the marketing, as well as finding a buyer for the house they are selling.
Inspection fees: Although not required, a home inspection and possibly a pest inspection are recommended. Both inspections should be conducted by licensed professionals, and serve as a safety measure for the borrower, to make sure that the home is structurally sound and free of any damage from insects or rodents. NAIC estimates the typical cost for an inspection to be $300 to $500. If a pest inspection is required, it could be $75 to $500.
Attorney fees: You may also have to pay an attorney to process and review your loan documentation depending on the state you’re in. Attorneys may charge by the hour or a flat fee, ranging from $500 to $1,500 depending on location.
Title fees: A title company makes sure the property you are buying is free of anything that could affect your ability to take ownership.You will pay lender’s title insurance, and possibly other fees like escrow, notary and courier fees associated with having your final documents signed, and recorded to transfer ownership.
Escrow payment: Escrow payments are used to pay for expenses like property taxes and various types of insurance coverages you may have, like homeowners insurance, flood insurance, and mortgage insurance. These payments are added to your monthly mortgage amount and will be calculated using documents from your closing, insurance company and local tax office. This cost will vary depending on the property taxes in your area and the insurance coverages that you have. It is also important to note that this amount is subject to change from year to year as property taxes and homeowner’s insurance rates rise or fall.
Negotiating loan closing costs
During the lending process, there will be opportunities to save on costs by shopping for vendors yourself or by negotiating costs down with your lender directly.
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“Closing costs are something that the broker or banker have more discretion than most people realize,” said Leisa Peterson, a certified financial planner at Wealth Clinic. “It never hurts to see if you can save on closing costs by asking for adjustments or discounts,” she added.
At the very least, ask the lender to explain and justify each fee they are charging. And if they seem to be charging fees that should cover the same thing, like an underwriting fee plus a loan processing fee, ask them if one can be waived or reduced.
Some fees will be nonnegotiable because they are imposed by a government entity or paid to a third party.
But “everything else is discretionary,” said Peterson.
Finding the right mortgage lender can be time-consuming but in the long run, your diligence and attention to the details of your closing costs may save you money. All lenders must provide you with a Loan Estimate within three days of completing the loan application. Use the Loan Estimate to compare costs, interest rates, and terms to select the lender that best suits your budget.