Closing Costs and Credits

Closing Costs

Closing costs are expensive and can range anywhere between 2%-5% of purchase price. They are normally broken into several components:

Lender

Application Fee: This fee covers the cost for the lender to process your application. Before submitting an application, ask your lender what this fee covers. It can often include things like a credit check for your credit score or appraisal as well. Not all lenders charge an application fee, and it can often be negotiated.

Origination Fee: This covers the lender’s administrative costs. It’s usually about 1 percent of the total loan but you can sometimes find mortgages with no origination fee.

Underwriting Fee: This also goes to your lender, covering the cost of researching whether or not to approve you for the loan.

Appraisal: This is paid to the appraisal company to confirm the fair market value of the home. Attorney Fee: This pays for an attorney to review the closing documents on behalf of the buyer or the lender. This is not required in all states.

Credit Report: A Tri-merge credit report is pulled to get your credit history and score. Your credit score plays a big role in determining the interest rate you’ll get on your loan.

Loan Discount Points:“Points” are prepaid interest. One point is one percent of your loan amount. This is a lump sum payment that lowers your monthly payment for the life of your loan.

Private Mortgage Insurance (PMI): If you’re making a down payment that’s less than 20% of the home’s purchase price, chances are you’ll be required to pay PMI. If so, you may need to pay the first month’s PMI payment at closing.

FHA Up-Front Mortgage Insurance Premium (UPMIP): If you have an FHA loan, you’ll be required to pay the UPMIP of 1.75% of the base loan amount. You are also able to roll this into the cost of the loan if you prefer.

VA Funding Fee: If you have a VA loan, you may be required to pay a VA funding fee at closing (or you can roll this fee into the cost of the loan if you prefer). This is a percentage of the loan amount that the VA assesses to fund the VA home loan program, however some borrowers are exempt from this fee. The percentage depends on your type of service and the amount of your down payment.

Title Company

Closing Fee or Escrow Fee: This is paid to the title company, escrow company or attorney for conducting the closing. The title company or escrow oversees the closing as an independent party in your home purchase. Some states require a real estate attorney be present at every closing.

Title Company Title Search or Exam Fee: This fee is paid to the title company for doing a thorough search of the property’s records. The title company researches the deed to your new home, ensuring that no one else has a claim to the property.

Courier Fee: This covers the cost of transporting documents to complete the loan transaction as quickly as possible.

Lender’s Policy Title Insurance: This is insurance to assure the lender that you own the home and the lender’s mortgage is a valid lien, and it protects the lender if there is a problem with the title. Similar to the title search, but always a separate line item.

Owner’s Policy Title Insurance: This is an insurance policy that protects you in the event someone challenges your ownership of the home. It is usually optional.

Escrow (prepaids held by Title Company)

Escrow Deposit for Property Taxes & Mortgage Insurance: Often you are asked to put down two months of property tax and mortgage insurance payments at closing.

Prepaid Interest:Most lenders will ask you to prepay any interest that will accrue between closing and the date of your first mortgage payment.

Property Tax: Typically, lenders will want any taxes due within 60 days of purchase by the loan servicer to be paid at closing.

Government

Recording Fees: A fee charged by your local recording office, usually city or county, for the recording of public land records.

Transfer Taxes: This is the tax paid when the title passes from seller to buyer.

Others

Survey Fee: This fee goes to a survey company to verify all property lines and things like shared fences on the property. This is not required in all states.

Home Inspection: You will likely get your own home inspection to verify the condition of a property and to check for home repairs that may be needed before closing.

Home Owners Association Transfer Fees: The Seller usually will pay for this transfer which show that the dues are paid current, what the dues are, a copy of the association financial statements, minutes and notices. The buyer should review these documents to determine if the Association has enough reserves in place to avert future special assessments, check to see if there are special assessments, legal action, or any other items that might be of concern. Also included will be Association by-laws, rules and regulations and CC & Rs.

Flood Determination or Life of Loan Coverage: This is paid to a third party to determine if the property is located in a flood zone. If the property is found to be located within a flood zone, you will need to buy flood insurance. The insurance, of course, is paid separately.

Lead-Based Paint Inspection:Covers the cost of evaluating lead-based paint risk.

Pest Inspection: This fee covers the cost to inspect for termites or dry rot, which is required in some states and required for government loans. Repairs can get expensive if evidence of termites, dry rot or other wood damage is found.

Closing Credits

Congrats on successfully securing closing credits! As you can see, there are many fees associated with closing. If you still have “extra” closing credits, try to work with the title company to fully utilize the amount as most lenders (at least the ones that sell to the GSEs) are restricted from applying the credit as part of “down payment,” resulting in a forfeit of unused credits. In the past, I’ve been creative with my credits and have used them to:

Buy down points (reduce mortgage rate)

Pay extra months of property taxes

Pay extra months of homeowner’s insurance

Prepay HOA fees