You’ve found the home of your dreams and secured financing for your purchase. The final step in the home buying process is called the “settlement” or “closing,” where the legal title to the property is transferred to you.
Settlement practices vary from one locality to another. Settlements may be conducted by lenders, title insurance companies, escrow companies, real estate brokers or attorneys for the buyer or seller.
When you reach this part of the process, you’ll find there are various fees and closing costs involved in finalizing the deal. These costs vary from state to state and lender to lender. Some lenders offer you low percentage interest rates but higher fees. That’s why it’s important to understand what these fees are so you can find the loan best suited for you.
By law, a lender must provide you with a Good Faith Estimate within three days of submitting a loan application that lists the closing or settlement costs that are necessary to complete the home purchase.
The U.S. Department of Housing and Urban Development notes that the amounts listed on the Good Faith Estimate are only estimates. “Actual costs may vary. Changing market conditions can affect prices. Remember that the lender’s estimate is not a guarantee.”
Also you will learn what your annual percentage rate (APR) is. A document called the Truth in Lending Disclosure Statement will show you the APR and other payment information for loans. The APR takes into account not only the interest rate, but may also include the points, mortgage broker fees and certain other fees that you might have to pay.
The following are some of the fees and costs that might be listed on the Settlement Statement you will receive at the closing:
- Loan Origination Fee
This fee can vary depending on the amount of work involved in securing financing for you. It covers the lender’s administrative costs in processing the loan.
- Application, Credit Report and Appraisal Fees
The application fee is usually collected up front and may cover the cost of an appraisal and credit report. Alternatively, there may be a fee covering the cost of a credit report, which shows your credit history. An appraisal fee pays for the report made by an appraiser.
- Document Preparation Fees
This is a separate fee that some lenders or title companies charge to cover their costs of preparation of final legal papers, such as a mortgage, deed of trust, note or deed. While some lenders charge separately for document preparation fees, others include this amount in the application fee or in the attorney’s fees.
- Discount Points
A “point” is a fee that equals 1 percent of the loan amount (for example, 1 point on a $100,000 mortgage would be $1,000). Points are usually paid to the lender, mortgage broker, or both, at the settlement or upon the completion of the escrow. Often, you can pay fewer points in exchange for a higher interest rate or more points for a lower rate.
- Sales/ Broker’s Commission
This is the total dollar amount of the real estate broker’s sales commission, which is usually paid by the seller. This commission is typically a percentage of the selling price of the home.
- Mortgage Insurance
If you are putting less than 20 percent as a down payment, the lender may require you to purchase mortgage insurance. If a borrower can’t repay an insured mortgage loan as agreed, the lender may foreclose on the property and file a claim with the mortgage insurer for the losses. The premiums are typically paid from an escrow account annually or in a lump sum at closing. There may be a fee to cover the processing of an application for mortgage insurance.
- Pre-Paid Interest
A certain amount of interest may need to be paid to cover the gap between the date of your closing and the date when your first mortgage loan payment is due.
- Flood Certification
Your lender will want certification as to whether or not the home you are purchasing is located in a federally designated flood zone. The lender may require flood insurance.
- Pest Inspection
This is also referred to as a termite inspection and can cover wood rot and water damage.
- Lead-Based Paint Inspection
This fee covers inspections or evaluations for lead-based paint risk assessments, depending on the age of the property.
- Surveyor Certificate
Your lender may require you to obtain a surveyor certificate if the previous one conducted on the property is outdated. You will receive a copy of the certificate, which outlines the parameters of the property.
- Title Insurance
Title insurance is generally required to protect the lender from losses resulting from claims by others against the property. It can cover both the lender and the borrower against legal claims of ownership. It is usually paid for by the purchaser and the amount for the policy might be reduced if the property was owned for a short time by the previous owner and the company agrees to reissue the policy.
- Attorney’s Fees
Attorneys generally represent homebuyers and are sometimes present at, and facilitate, the closing. The attorney may collect all fees and pay the appropriate parties involved in the transaction the respective amounts, as well as record information with the government and notarize the closing documents. You may also be required to pay for legal services provided to the lender, such as an examination of the title binder.