Media Coverage
Mortgage Matters
Closing Costs 101: Breaking down what all those fees, lingo mean
Column by Steve Rockefeller, The Virginian-Pilot, June 28, 2008
MARKETS SHIFT, MANY home buyers and sellers often face the mortgage industry’s version of “sticker shock” or value adjustments. When you’re buying a home and the seller is non negotiable, you need to be prepared to pay the closing costs. In general, closing costs are the fees and taxes associated with purchasing a home.
Depending on the loan, they can easily add up to thousands of dollars or typically 2.5 percent of the sales price including your escrow fees.
Under federal law, your mortgage lender must give you a written, good-faith estimate of your closing costs within three days of applying for a loan. However, this may soon change.
According to Jarett Shaffer, CEO of Shaffer Title in Virginia Beach, “Settlement expenses will soon become more transparent to the customer with the proposed legislative changes proposed by the Department of Housing and Urban Development.”
According to Shaffer, “HUD plans to modify its Real Estate Settlement Procedures Act as early as October of this year, requiring the lender’s good faith estimate to more accurate.”
Although the lender prepares the estimate, not all closing costs are associated with the lender. The lender is only estimating costs and is not required to list all potential costs. In fact, at application the lender does not know what all the costs will be. Good faith estimates are simply the lender’s educated guess, based on experience. You don’t want to be caught short on closing costs, so always anticipate the actual costs will be higher than the estimate.
Here’s a breakdown of typical closing costs:
Associated with lender
• Loan origination fee – The loan origination fee is usually referred to as “points.” One point is equal to 1 percent of the mortgage loan.
• Loan discount – On a government loan, the loan origination fee is normally listed as one point or one percent of the loan. Any additional points are called “discount points.” On a conventional loan, discount points are usually included with the loan origination fee.
• Appraisal fee – Since your property serves as collateral for the mortgage, lenders require an appraisal. The appraisal determines if the price you are paying for the home is justified by recent sales of comparable properties.
• Credit report – As part of the underwriting review, your mortgage lender reviews your credit history.
• Flood certification fee – Your lender must determine if your property is located in a federally designated flood zone. This is a fee usually charged by an independent service to make that determination.
• Document preparation or review fee – This fee is charged on almost all loans.
• Underwriting fee – This is a cost associated with underwriting the loan.
• Administration fee – If an administration fee is charged, you will probably find there is no underwriting fee.
• Appraisal review fee –Some lenders review appraisals as a quality control procedure, especially on higher valued properties.
Must be paid in advance
• Pre-paid Interest - Mortgage loans are usually due on the first of each month. Since loans can close on any day, interest must be paid at closing to get the interest paid up to the first. For example, if you close on the 20th, you will pay 10 days of pre-paid interest.
• Homeowner’s insurance – You will normally pay the first year’s insurance when you close the transaction.
• VA funding fee – On VA loans, the Veterans Administration charges a fee for guaranteeing your loan. Instead of paying this out-of-pocket, most veterans choose to finance it.
• Up front mortgage insurance premium – This is charged on FHA purchases of single family residences. Like the VA funding fee it is normally added to the balance of the loan. Unlike a VA loan, the home buyer must also pay a monthly mortgage insurance fee.
Not associated with lender
• Closing/escrow/settlement fee – Methods of closing a real estate transaction.
• Title insurance – Lenders also require it.
• Notary fees
• Recording fees
• Pest inspection – It’s usually paid by the seller.
• Home inspection
• Home warranty – This is an optional item.
• Loan tie-in fee – When charged, it is usually by a settlement agent.
• E-doc, or electronic document, fee – This may be charged by the settlement agent.
• Homeowner’s association transfer fee
This is not an all-inclusive list. If you have questions about closing costs, be sure to ask your lender.
Steve Rockefeller is vice president of SunTrust Mortgage’s Virginia Beach office. E-mail him at steve@mloans.com.
