When you are purchasing or refinancing a home there are certain closing costs that you should expect to see on your closing statement (HUD settlement statement) and you should always get a preliminary estimate of these fees at the beginning of the loan process on a form known as a GFE or Good Faith Estimate.
Lenders are required to give a GFE to the borrower within 3 days of completing the loan application. While these numbers are considered estimates, they should be pretty close to the final numbers you will see at closing. In fact, these types of expenses are grouped by categories, some of which cannot change between the date of the GFE and closing date, except under special circumstances, and other categories, which can only change by 10%. Any fees charged in excess of the original estimates or greater than 10% of the original estimates may be required to be paid by the lender if they provided inaccurate estimates.
Let’s look a little further at the types of expenses you should expect to see on your GFE.
First there is the lender fee, which is typically referred to as the origination fee. This is one category that cannot change once quoted by the lender unless there is a valid “change in circumstances”. For instance, if the purchase price or loan amount changes at the request of the borrower, that may be considered a change in circumstances. Information that was not known at the time of the mortgage application through no fault of the lender may also be considered a change of circumstances.
In general, the origination fee is a percentage of the loan amount and represents compensation to the lender/broker. When using a mortgage broker, this amount is often paid directly by the lender to the broker, but may also be paid by the borrower to the broker. This fee will be disclosed on the GFE as well as on a Broker Agreement. Although the form of the broker agreement varies by state, this form typically will inform the borrower the amount of the compensation to the broker and whether it is being paid by the lender or by the borrower. This is also where you will see any credits offered to the borrower by the lender or any additional fees associated with obtaining a lower rate.
Required Services that the Lender Selects
The next category of fees is “Required Services that the Lender Selects”. This category includes appraisals, credit reports, flood certificates, etc. They are services that are provided by vendors that are selected by the lender. These fees cannot change by more than 10% from the originally quoted fees.
The third category is Title Services. This typically includes a closing fee paid to the title/escrow agent, title insurance which includes both a lender’s and owner’s policy, a title search fee and often miscellaneous fees for notaries, document preparation, etc. The party that selects the title company varies by state and even by locale within the state. For instance, in Florida, there are many areas where it is customary for the seller of the home to select the title company and pay for the owner’s title policy premium. In other areas, the buyer may select the title agent and pay all fees. Typically this is outlined in the buyer’s contract and should be understood upfront by both buyer and seller.
In a refinance transaction, title fees will be similar to those in a purchase. Even though there is an existing title policy issued upon purchase, a new title search must be performed and the policy must be re-issued. In many cases, if you provide your existing title policy to the title company, you will receive a discount referred to as a “re-issue rate”. This can save a good bit of money on the title fees. Title fees are also in a category of fees that cannot change by more than 10% from the original estimate.
Government Recording Fees and Transfer Taxes
The fourth category is government recording fees and transfer taxes. Documents must be recorded with the appropriate governing body which varies by state. Many states also have “transfer taxes” which are established fees relating to the transfer of property from one person to another. These vary widely by state but may include such things as documentary stamps on the mortgage and deed, intangible taxes, etc. In addition to fees imposed by the state, there may also be separate fees imposed by counties and municipalities within the state. Transfer taxes must be quoted precisely as they cannot change at closing except once again for unusual or unknown circumstances. There are many websites that provide calculators to determine the amount of these fees for each state, but your lender should be knowledgeable about the fees in the state where you are conducting business.
Services You Can Shop For
Another category of expenses is referred to as “Services You Can Shop For”. This category typically includes such things as surveys, pest inspections, etc. The borrower can typically select their own vendor to provide these services, therefore the lender is not held responsible for variances in these amounts at closing, but they should be able to provide you some reasonable estimates for these services. Then you may choose to use the vendors they suggest or shop for your own.
That covers all of the actual fees and expenses.
Prepaids and Escrows
In addition to these items, you should also be aware that you will need to bring money to closing for items referred to as Prepaids and Escrows. These are not really expenses, but costs of owning the property that you are required to pay for in advance. There are three types of these seen on the GFE:
- homeowner’s insurance
- daily interest charges
Homeowners insurance – when you purchase a home, the lender will require you to pay for the annual homeowner’s policy premium upfront at closing.
Escrows – in addition to the full homeowner’s policy premium the lender will also collect 2-3 months of the homeowner’s insurance policy to be held in escrow to ensure there is enough to cover payment of the policy when it comes due the following year. They will also collect 2-3 months of property taxes upfront for the same reason. Under certain circumstances, you can elect to pay your own insurance and taxes and not be required to escrow these items. This should be discussed with your lender. The lender periodically provides a reconciliation of funds collected and disbursed from this account and is required to refund any overages.
Daily interest charges – this represents interest from the date of closing your loan to the end of the month. For instance, if you close on the 20th of the month the lender will collect approx. 11 days of interest, while if you close on the 31st, they will collect only 1 day. The reason for this is that interest is paid in arrears. If you close on June 30th, your first mortgage payment will not be made until August 1st. The interest paid on that payment covers interest for the month of July. Therefore, if you closed on the 20th of June you would not have paid for interest for the remaining days of June between the 20th and 30th if you didn’t pay it at closing. This closes the gap between the closing date and the first mortgage payment.
Since these items are not fees charged by a third party, but merely the collection of items due for ownership of the home, they may vary from the amounts quoted.
The Main Thing
The main thing for borrowers to keep in mind is that they should receive a copy of the GFE early in the loan process and should make sure they have an understanding of the items included and who is responsible for paying them.
For more in-depth information about some of the specific closing costs we’ve mentioned, read our article titled: Home Loan Closing Costs.