Mortgage loan transactions are governed by Federal regulations including the Truth in Lending Act and the Real Estate Settlement Procedures Act. When you apply for a mortgage loan, your lender will prepare what is called a "Good Faith Estimate" outlining the various closing costs associated with your loan. This includes both costs you will pay to the lender and other costs required but charged by others. Since the lender doesn't set the cost of items charged by others, the estimate is just that - an estimate or educated guess of what the costs will be. You should be aware that the actual costs may be more than estimated, but there are limits on the amounts some fees may increase.
The following is a description of the various costs you may encounter when purchasing a home, including one-time fees and fees that you will pay periodically as long as you own the home.
Origination Fee. Often referred to as "points," this is the amount the lender will charge you for providing the loan. One point is equal to one percent of the amount of the loan. This is a customary and fair fee for the lender's services and is usually 1%. On a government-guaranteed loan (FHA or VA), the origination fee is one point. Lenders may offer a lower interest rate if you are willing to pay more in points on the front end. Take time to do the math and decide what is best for you. While the up-front fee may seem steep, a lower interest rate over the life of your loan could save you thousands of dollars. On the other hand, if you're going to live in your house for six years or less (which is the national average), paying more up front may not be the best deal for you.
Processing/Underwriting/Administration/Document Preparation Fees. These fees are a combination of ancillary charges and lender fees that the lender incurs during the loan process, and must pass on to the Borrower to remain profitable. Fees can reach a cumulative total between $400 and $800.
Appraisal Fee. An appraisal of the value of the property you plan to purchase or refinance is customarily required since the property will serve as collateral for your loan. Lenders will require that an appraisal be done by a licensed appraiser to determine if the value of the home supports your loan request. In addition, VA and FHA loans require the appraiser to inspect certain items not necessarily associated with the value. The cost of an appraisal varies but should generally be in the $300 to $500 range.
Credit Report Fee. Your credit report and credit score are an important part of the loan process, and a lender will always review your credit before granting you a loan. Credit reporting agencies charge the lender a fee to provide credit reports. The fee is generally in the range of $50 to $100. Learn more about credit reports and credit scores. One word of caution if you are shopping around for a loan - especially online using a site that sends your information to several lenders: Most lenders will pull your credit report as soon as you provide your Social Security number. This can generate several inquiries on your report, which can lower your credit score.
Lender's Inspection Fee. This generally applies to new construction loans. Since the property is not finished when the initial appraisal is done, an inspection is performed after the loan is made to verify that construction is complete including installation of carpeting and flooring.
Tax Service Fee. Since liens resulting from non-payment of property taxes can sometimes take precedence over a first mortgage, your lender may employ an independent service to monitor property tax payments. If so, the fee, which is usually between $70 and $275, will be passed on to you.
Flood Certification Fee. If the property you plan to purchase is in a federally designated flood zone, you will be required to purchase flood insurance. This fee covers the lender's cost of making that determination, usually through the services of an outside source, of whether the property is in a flood zone.
Pre-paid Interest. Pre-paid interest is the amount of interest accrued from the time your loan closes to the date from which interest will be collected with your first payment. This usually happens when there are more than 30 days. For example, if your first payment is due on July 1 and your loan closes on May 15, you will owe 15 days of pre-paid interest to get the interest paid up to June 1.
VA Funding Fee. If yours is a VA loan, the Veterans Administration charges a fee for guaranteeing the loan — 2.15 percent of the loan balance for those using their VA eligibility for the first time. If you have had a previous VA loan, the fee is 3.3 percent of the loan. This amount is typically financed in with your loan amount.
FHA Insurance Premium. On FHA loans, the borrower is required to pay an up-front mortgage insurance premium of 2.25 percent of the loan balance, which can be financed by adding it to the loan balance. However, a monthly mortgage insurance fee is also charged on FHA loans.
Homeowner's Insurance. This type of insurance is purchased to cover any loss you might experience due to fire or other damage to the property and your possessions. Of course, homeowner's insurance is always good to have, but it is also something your lender will require that you provide, in an amount adequate to cover their interest in your property until the mortgage is paid. You will normally pay the first year's premium when you close on your loan.
Mortgage Insurance. In most cases, monthly mortgage insurance is charged if you are financing more than 80 percent of the value of the property. This insurance protects the lender in the event you default on your loan.
Escrow Payment. You may be required to deposit funds into an escrow or impound account. This money is yours, used by the lender to pay your annual homeowner's insurance premiums, property tax and mortgage insurance (if applicable). You will pay a certain amount into this account initially and then make monthly escrow payments along with your mortgage payment. The amount you pay initially is generally the amount owed for the first year of payments.
USDA Guarantee Fee/Annual Fee - These are government-insured loans that allow 100% financing in rural markets. There is a 2% financed Guarantee fee charged by USDA and can be amortized over the life of the loan. In addition USDA has an annual fee of .30%; this fee must be paid for the life of the loan, not only until the loan reaches 78% or less.
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