Rates & Fees
Purchase Loans: Explaining Your Estimated Closing Costs
by Nancy Osborne, COO of ERATE®
The costs of closing a real estate transaction generally include the following: Title & escrow fees, lender fees, points (an optional expense), appraisal fees, credit fees, insurance and taxes.
In a purchase transaction the party responsible for paying the big ticket closing costs, the title, escrow fees and transfer taxes, is determined contractually (refer to your purchase contract). Typically the party who pays is based upon the custom of the county in which the property is located. For example, one counties custom may require that the buyers of property pay the title, escrow fees and transfer taxes while another may require the seller to cover the expenses and yet another may require that the fees be split 50-50. When purchasing new construction and you are working with a builder, the builder may or may not pay your title, escrow fees and transfer taxes regardless of the county custom (depending upon prevailing market conditions). It is important to first know the custom of the county in which you are buying and to refer to your purchase contract to determine the fees you are responsible for and have agreed to pay.
In a refinance transaction no closing cost mortgage refinancing is common. This is not as common on a Purchase transaction.
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Title & Escrow Fees
Include both the owner's and the lender's policy of title insurance as well as the escrow fee. Title insurance protects both the buyer and lender by insuring a clear chain of title, that the persons with the legal right to convey title to your property are the ones who have actually done so. Also, some polices protect against the occurrence of fraud and forgery.
The escrow fee is a service fee charged by the title company for acting as an independent third party in facilitating your transaction and insuring that all parties to the transaction perform as contractually agreed to.
Other title fees include the fee to notarize your loan documents (the notary fee) the fee required to record your deed of trust with the county recorder's office (the recording fee), as well as miscellaneous drawing, courier and express mail fees.
You may call the title company handling your purchase, provide them with the purchase price and loan
amount you're requesting and they can supply you with an accurate fee quote based on the specifics of your transaction.
The flat fees that a lender charges to process and fund your loan fall under a variety of names and can generally be lumped into one category the industry refers to as "garbage fees". They include: underwriting, processing, administrative, document preparation and funding fees. Additional lender fees include wire, tax service fees and flood certification fees. These fees are charged by virtually all lenders and range from approximately $650-$850 in total fees charged.
Points generally fall into two categories, discount fees and origination fees. Discount fees are prepaid interest that a borrower elects to pay up front to buy down the interest rate down on the loan. An origination fee is also used to buy the interest rate down but is used to compensate the loan originator in the transaction, rather than accepting a higher interest rate where the lender funding your loan compensates the loan originator. A point is equivalent to 1% of the loan amount (i.e. one point on a $300,000 loan is $3,000).
The fee an appraiser will charge to inspect your property will depend on the type of property involved (i.e. single family vs. duplex to fourplex) and whether the property will be owner occupied or used as an investment property. The typical fee for a standard owner occupied single family tract home, condominium or townhouse is $300-$400. An investment property typically requires a rental survey and operating income statement to be completed with the appraisal and can add an additional $200-$300 to the cost of the appraisal. Also, if you are purchasing new construction, the appraiser may have to return to the property an additional time to complete a final inspection (referred to as a 442), to insure that construction has been completed as proposed. This fee might amount to an additional $75-$100.
The fees to check your credit (using three credit bureaus as lenders require) range from $25-$65 per person or per married couple. If your credit report has many inaccuracies on it, the costs to correct the errors could generate higher fees from the credit reporting company.
If you are buying a property that does not have a homeowner's association (typically found with condos or townhomes) which carries a master policy of homeowner's or hazard insurance, you will need to shop for such a policy on your own. The lender will require that a policy of homeowner's or hazard insurance be in place at the time the loan funds. The usual coverage requirement is for replacement cost coverage but this could vary amongst lenders. If your property is located in a geological hazard zone (i.e. quake or flood zone) the lender will ask that you have policies in place to cover these hazards as well.
Geological hazard zones are established by FEMA and the appraiser can determine whether your property is located in such a zone by referring to the most current FEMA geological hazard map. The real estate agents handling the transaction as well as the seller of the property should be aware of any hazard zone classifications.
Check with the insurance carrier or agent of your choice for a homeowner's or hazard insurance quote as well as a quote for quake coverage if you require it. Contact The National Flood Insurance Program at 800-638-6620 for a flood insurance quote if this coverage is needed.
Mortgage insurance may be required on your loan if only one lender is financing in excess of 80% of the value or purchase price of the home. This fee can be charged as a lump sum fee at closing or can be financed on a monthly basis. Mortgage insurance can also be avoided by choosing an 80-10-10 or 80-15-5 down payment strategy (see down payment options for further details).
In addition to property taxes, which are pro-rated at closing between the buyer and the seller, there are additional taxes which may be due at the time of sale. They include both county and city transfer taxes. Like title and escrow fees, the party responsible for paying the transfer taxes will be determined contractually and are typically based on county custom (although not all counties and cities assess transfer fees). Refer to your purchase contract to determine if they are required and who is responsible for paying them.
Once you have determined that the fees are required, you may contact your title company for a transfer tax quote. The taxes are based on the purchase price of the property and can range from $1.10 per $1,000 in purchase price for county transfer taxes and $3.30 per $1,000 for city transfer taxes. For example a home with a $300,000 purchase price would owe county transfer taxes of $330 and city transfer taxes of $990.
Nancy Osborne has had experience in the mortgage business for over 20 years and is a founder of both ERATE, where she is currently the COO and Progressive Capital Funding, where she served as President. She has held real estate licenses in several states and has received both the national Certified Mortgage Consultant and Certified Residential Mortgage Specialist designations. Ms. Osborne is also a primary contributing writer and content developer for ERATE.
"I am addicted to Bloomberg TV" says Nancy.