Note: There are three different types of fees at closing: costs of getting a loan, charges for establishing and transferring ownership, and government costs.
Costs of Getting the Loan:
- Origination or application fees: These are fees for processing the mortgage application and may be represented by a flat fee or a percentage of the mortgage.
- Credit report: Lenders will require that the borrower’s credit be checked. They use this information to assess the risk of lending to the borrower. The fee for checking the credit report can sometimes be a part of the origination fee.
- Discount Points: A point is a unit of measurement equal to 1% of the loan value. Dis-count points can be paid when the loan is approved in order to buy down, or reduce the interest rate. These are not required.
- Document preparation fees: There will be an array of papers ranging from the application to the closing documents. Lenders may charge for these, or they may be included in the application and/or attorney fees.
- Preparation of amortization schedule: Some lenders will prepare a detailed amortization schedule for the full term of the mortgage. This more likely done for fixed mortgages than for adjustable rate mortgages.
- Appraisals: Lenders want to make sure the property is worth at least as much as the mortgage. Professional property appraisers will project an estimate of the home's value by comparing it to similar properties in the community. This is typically $400-450.
- Land Survey: At a minimum, the lender may require an independent verification from a surveying firm that the lot has not been encroached upon by any structures since the last survey conducted on the property.
- Private mortgage insurance: For conventional loans, if the down payment is less than 20%, many lenders will require that private mortgage insurance (PMI) be purchased by the borrower. This insures that the lender will recover his/her money if the buyer defaults on the loan. Insurance payments will continue until the equity in the home reaches 20-22% of its value.
- Inspection: In many rural areas, lenders will require a water test to make sure the well and water system maintain an adequate supply of quality water to the home. A lead based paint inspection might be required as well.
- Prepaid interest: The first regular mortgage payment is usually due about 6—8 weeks after closing. For example, if you close in August, your first regular payment will probably be in October. The October payment covers the cost of borrowing money for the month of September, but interest costs start as soon as closing is completed. The lender will calculate how much interest is owed for the fraction of the month in which the borrower closes.
- Title Search and Title Insurance: Lenders require a title search to ensure that the seller is the owner of the property and that the title is clear of any liens or judgments. A clear title means that there are no encumbrances on the title, such as liens filed by creditors in an attempt to collect unpaid bills. The buyer usually pays for the title search. Title insurance gives the buyer a marketable title which means that the insurance company will protect the lender or owner if there is a flaw in the title after the property has been purchased.
Charges for Establishing and Transferring Ownership:
- Homeowner’s (hazard) insurance: Most lenders require that the borrower prepay the first year’s premium for homeowner’s insurance. Proof of payment is typically required at closing.
- Real estate agent’s commission: The seller usually pays the commission to the real estate agent.
- Transfer taxes: A tax is sometimes required to transfer the title and deed from the seller to the buyer.
- Recording fees: These fees pay for the county clerk to record the deed/mortgage and change the property.
- Other state and local fees: These can include mortgage taxes levied by states as well as other local needs.
Now that you have a little heads up on what to expect, closing may end up being a positive experience for you (especially if the title company gives you a nice pen to keep). Just keep this list in mind, particularly as you shop around for lenders, and no one is going to pull the wool over your eyes!