If you are going to obtain a mortgage loan, for whatever purpose (home purchase or refinance) you are going to pay closing costs...period. Let me clarify regarding a purchase of a home...the seller may pay some or even all the closing costs in a transaction, but it essentially works out to just lowering the purchase price of the home and reduces or eliminates the need for the buyer to come up with the cash or finance the closing costs.
While many mortgage lenders, brokers, bankers, advisors, or whoever may tell you that you can get a zero closing cost loan, the fact is, they simply don't exist. One way or another you are going to pay/incurr closing costs.
That said, there are many ways to pay those closing costs:
- On a purchase, the seller may agree to pay some or all of the closing costs which reduces your cash outlay for closing costs
- In most cases, you may opt to take a higher interest rate in order to reduce or eliminate closing costs
- You can pay the closing costs in cash, at the closing table, eliminating the need to pay finance charges on the closing costs
- You can normally opt to have the closing costs included or rolled into the loan itself, reducing your cash outlay at closing
The above list does not cover all the possible options, however, it covers the basic options. The other options will simply be some variation of those listed above.
Estimating the closing costs
Items that are part of, or considered closing costs include:
- Loan origination fee
- Lenders fee - if using a mortgage broker
- Credit report fee
- Appraisal Fee
- Processing Fee
- Wire transfer Fee
- Underwriting Fee
- Survey
- Title insurance
- Closing or Escrow fee
- Filing Fees
- Attorney Fees
- Pest inspection
- Recording and/or transfer fees
- Document Preparation
- Notary Fee
- Mailing or courier
Those are the major items that can be included as closing costs. Some are required, some are not. Some may be negotiable, others are not. Some will vary from lender to lender, lender to broker, broker to broker, or title company to title company, others will not.
Some items that are NOT considered closing costs, but need to be taken into consideration when trying to estimate any cash out of pocket or you loan size, include the followng:
- Pre-paid interest
- Mortgage Insurance Premium
- Hazard insurance (homeowners insurance premiums
- Reserves for payment of future property taxes, homeowners insurance, and mortgage insurance premiums
- Flood insurance premiums
- Property taxes that are due at the time of closing
Important Facts
- Title insurance is regulated by the state insurance commission, varies from state to state, and is not negotiable
- Flood insurance, if required (this is determined by the location of the propety, if it is in a flood zone) is not negotiable as to whether or not you need it, however, premiums are determined by whoever you choose as an insurance provider
- The fees which are charged by the title company you close with include, but are not limited to; recording fees, fed-ex or mailing fees, closing or escrow fees, document preparation, and attorney fees (where required), do vary from title company to title company.
- You have the right to choose the title company you close with - however, in a purchase transaction, in most cases, the seller has already established or set up preliminary escrow with a title company. That does not mean you can't demand that it be changed. Just keep in mind that the seller may not be willing to change the title company and your sales contract may/should state where the closing will take place. That still does not mean that you can't choose to change it, just expect some resistance
- In most cases, an appraisal is required - the only exceptions to this are normally small home equity lines of credit and/or very low Loan to Value loans. In either case, the lender will make the final determination if an appraisal is required
- It is a requirement that you be given a Good Faith Estimate of settlement charges within 3 days of applying for a mortgage loan - if you don't get one, automatically, make sure you ask for one
- You may only be charged the exact cost for the credit report and the appraisal
This article is simply trying to explain what closing costs are along with some specific facts about some general closing costs. It is just intended to give you an idea of what may be included as closing costs so you have a basic idea as to what to expect.
I would always suggest that you do some shopping around before deciding on a lender or broker to handle your mortgage transaction.
Obviously, the best source of good information is from friends and/or family members regarding someone or a company that they have used in the past. A referral to a good company or individual from someone you know and trust is normally the best place to start.
Ok, back to closing costs. It is imperative that when you are comparing costs from one company to another that you have all the facts and information straight from all companies that you are comparing. The Good Faith Estimate, in what you will normally utilize to compare costs. You simply need to make sure you are comparing "apples to apples."
This is often easier said then done.
The most important area of comparison when comparing lender to lender or broker to lender, or broker to broker, is the top portion of the Good Faith Estimate. The origination fee and below in the "Items payable in connection with loan" is the heading of the section - it is numbered as 800.
This is really the only section where the company you are dealing with has any real control over. Unfortunately, the confusion normally begins with the lower sections of the Good Faith Estimate and here's why;
1) Some companies will underestimate the Title Fees and recording fees
2) Some companies will try their best to give you accurate numbers for these other sections
Why do they do that?
Well, some will underestimate the costs simply to try to get your business. The unfortunate part about this, other than the outright lying, is that you will typically not find out about it until you are at the closing table. This is exactly what they are hoping for, taking the chance that you will figure it is too late to do anything about it and simply sign the documents.
Why can't they give you exact numbers?
For some items they can, while other fees are strictly dependant upon a third party and they simply have no control over those costs. However, any mortgage broker or lender that has been in this business for any length of time, can certainly do a good job of getting you very close in your estimates of closing costs.
Let's look at an example:
I am in Texas. Although I do some loans outside of Texas, I am most familiar with Texas and the corresponding fees so I will use Texas as an example.
Being in Texas, I know, based on the size of your loan, how to estimate your title insurance policy and escrow fees (the title company charges). Since, as stated in my last post on closing costs, title insurance is state regulated and the very same amount at every single title company based on your loan size, I can tell you with good certainty what your title insurance costs will be. Additionally, I can give you a very close estimate on the title company closing costs. So, with that information, there is no excuse while I can't give you a very close approximation of all the fees associated with the title company.
Although the insurance and property taxes are not considered closing costs, they are still a very important part of the real estate transaction. And, again, the consumer is very concerned about their total cash outlay at closing, be it closing costs or pre-paid items. Therefore, I feel that it is essential that you get good information about these items as well on your Good Faith Estimate.
Getting back to the Texas example...I know, being in Texas, approximately what your homeowners insurance is going to cost and how many months of reserves are going to be required at closing. It is the same with property taxes. In Texas, for example, property taxes are always due in December (actually, they are not considered late until the end of January). So, for example, if you are refinancing your mortgage, in Texas, during the month of say, March and your first payment is not due until May 1st, then it will be required that the reserves for the taxes will be 5 months. The tax rates are published and are available, and besides that, I can estimate within a few hundred dollars, the actual property taxes on the property without knowing the exact caluclation for the city that the property resides in. If you simply use one of the higher tax rates in Texas for the estimate, then your estimate will be very close if not actually a little higher than the actual cost at closing. The other charges of the appraisal and a survey (if needed) are also costs that can be easily estimated very closely.
The bottom line is that any lender/broker should be able to give you very close estimates. As a matter of factly, there is no reason why the Good Faith Estimate should not be within a few hundred dollars of the actual costs and, hopefully, it is over-estimated so that the situation I spoke of earlier (coming to closing and finding out your costs are actually substanially higher) does not occur.
Unfortunately, there is nothing out there, as far as the law is concerned, that states that any Good Faith Estimate has to be within a certain dollar amount of the actual costs. At this time, you are having to rely on the person you are dealing with to give you good numbers. It has always been my practice to get my Good Faith Estimates as close as possible, and even over-estimating in cases where some costs are not known perhaps due to some unusual circumstances or not knowing, at this point in the process, if an item such as a survey will be required or not.
There is simply nothing to gain by under-estimating closing costs on the Good Faith Estimate. It tells the customer up-front, how much cash they are going to need, and saves any unnessessary aggrevation for the customer later, so why not get the numbers as close as possible?
On the other side of that issue, you are depending on someone to estimate the fees of a third party. As I hope I have made clear, while it is clearly not possible to get the exact numbers of the third party fees, it is surely very possible to get very close to the actual numbers. It simply takes some experience and a little bit of time. If you happen to get a loan officer, whether they work for a lender or a broker does not really matter, that is relatively new to the business, then they may not have the experience to get close to the actual numbers on their own. This is not an excuse at all, as there is surely someone there, who they work for, that has the experience to get the numbers close for you.
As of this writing, the best thing that you can do is gather the Good Faith Estimates of the companies that you have been talking to and do your best to make the comparisons accurate. With the information above, you should be able to work through the costs associated with the loan and discount those that you know will be very close, if not exactly the same, no matter who you decide to go with, and compare the remaining costs.
Once you have eliminated the essential "fixed costs" you can narrow your comparison down to the "variable costs" (for lack of a better term) for each companies Good Faith Estimate. One last note that is critical to comparison shopping is making a comparison regarding the rate and term of the loan along with the Good Faith Estimate to make your final decision. As stated in an earlier post, one company may offer you a better rate, but higher closing costs, while another is offering lower closing costs but a higher interest rate. That portion of the comparison is for another discussion and will be included in another post, however, the gist of that comes down to what situation works best for you.
Just remember that in all cases, you have the right to choose the title company, and, in most cases, even the appraiser (albeit with some limitations). If a company tries to tell you that you "must" use their title company to close the loan, you can choose to push the issue as there is no such requirement. To the contrary it is not lawful for anyone to force you to utilize any particular third party service. However, do keep in mind, that if you are buying a house, while you still have the same options of choosing the title company, alot of times it is simply easier to use the title company that has been designated either by the seller or the builder. That is not to say that you should not comparision shop other title companies if you feel strongly about it, all I am saying that in a purchase transaction it is typically easier to use the designated company (especially if buying a new home from a builder) as chances are they are already familiar with the property and have already obtained a preliminary title report on the property itself.
David Demko
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I have over 15 years of experience in the mortgage industry and have spent the last several providing information to consumers and businesses about the mortgage industry. In addition, I answer consumer credit questions and provide business consulting primarily to small businesses looking to become successful on the Internet. I can be contacted through any of the web sites listed above. I hope you find the articles interesting and informative and if you have any special areas of interest, please email me and I will put the information together for an article.
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