Credit Report
Closing costs consist of different components and are a necessary part of any purchase or refinance transaction. Fees include but are not limited to: Any origination and/or discount points, broker fee, appraisal fee, application fee, commitment fee, credit report fee, processing fee, underwriting fee, title insurance, title exam or abstract search, closing fee, doc preparation, interest per diem, escrow impounds, courier fee, recording fee, endorsements, mortgage state tax fee, city state tax fee, etc.
This list makes up the aggregate costs above and beyond any payoff for a refinance, and any loan amount for a purchase. Escrow impounds for taxes and insurance don't really count as closing costs, however most borrowers think of them as such anyway. Let's discuss these fees so borrowers can get a better sense of why these fees exist.
When doing any type of financing, there is usually an up front fee charged by the broker or the lending institution. This will either be the origination or the mortgage broker fee. Typically this fee is about 1% of the loan amount, however it can be more especially if more work than necessary is required for a particular loan situation. Many times customers will want to cut out this fee but if this number is 0%, then expect your rate to be higher. The fact is the lender or broker has to make money on the transaction. No one goes to work for free and the same goes in the lending industry. In order to pay the company bills, keep the lights on and for the loan originator to get paid they must make a profit. Simple enough, right? If you hear of a no closing cost loan, the rates should be about 1% - 2% higher than market rates. Keep that in mind. Ultimately, though having a seasoned mortgage consultant who really knows all the products and the numbers is worth their fee. In this tumultuous market, a mortgage broker who knows the parameters of all the different lenders and keeps up with the lightning fast changes, can make the difference between getting a loan approval and getting a denial.
Discount points are the costs incurred for choosing a lower than par rate. You can essentially buy down your rate with an up front fee. One discount point is 1% of the loan amount and lowers your rate anywhere from a quarter point to a half a point. In general, a cost analysis should be done before electing to buy down a rate. It's a good idea to know how many years it will take to recoup the extra cost of a discount point. Ask yourself "Does the additional cost justify a lower monthly payment that saves you $25 a month?" Be sure to discuss the tax ramifications as with your mortgage consultant as well.
There will need to be an appraisal fee which customers normally need to pay out of pocket when the appraiser comes to the door. It's usually paid by the customer at the time of service because if the loan falls through or the borrower decides not to close, a lender or broker will be responsible for paying the appraiser out of their pocket. Its really a cost of attempting to finance. Appraisals usually run between $300 $500, depending on the home value.
A processing fee is necessary for obtaining all the legal documentation needed to underwrite the file. Such documents include: title insurance, examination of title to make sure there are no liens or problems, wire instructions for the title company, indemnification letter for the title company, and any county tax certification to make sure there are no delinquent taxes. They usually order appraisals and review the appraisal before submitting to underwriting to ensure there are no potential problems. Processors also obtain a new homeowners insurance declaration with the new mortgagee information. And they must order an exact payoff from the current mortgage company for a refinance transaction. These are all legal documents and processors ensure there are no mistakes and are responsible for getting the appropriate agency to make any necessary corrections. Processors review asset and income documents and then calculate the income to make sure the documentation matches the income estimate to keep the loan in approved status.
There is also an underwriting fee that goes to the lender to review the file and verify all information before disbursing funds. An underwriter is keenly aware of their responsibility. They are obligated to evaluate and manage risk to the lender while at the same time producing a product, which is the extension of money. Only candidates who qualify are promoted out of underwriting with a final approval, and an underwriter is the official gatekeeper who guards the lender's security. It usually takes at least 3-4 underwriting reviews before a loan graduates to the closing department. Underwriters use many tools and databases to evaluate the veracity of documents and borrower identity and statements. They even review the appraisals and cross reference the values with public records to corroborate home values. This process of due diligence ultimately protects the consumer as it serves to verify data and to eliminate any fraud which saves the lender from potentially huge losses. Avoiding losses due to misinformation or fraud helps keep interest rates low and keeps the credit markets working.
Ancillary fees such as the credit report fee, application fee and commitment fees are optional. A credit provider charges the lender/broker a fee to provide credit information. Some lenders/brokers pass this fee along to the consumer and others absorb the fee as a cost of doing business. Additionally some lenders/brokers charge an up front application fee to begin working on a loan, while others do not. And a commitment fee is usually a fee charged to lock in a rate with a lender. Once a lender locks in a rate, they essentially put money into an escrow account and pay daily interest on that money. Therefore, it costs lenders to lock in a loan for a customer. If lenders and brokers charge a commitment fee, it's more likely the borrower will follow through with the loan and the lender will not lose that daily interest they pay on the capital in escrow.
Title fees include: title insurance, title exam or abstract search, doc preparation, wire fee and a closing fee. Title work is a necessary part of any mortgage as the lender will demand to see a clear title. Any title that has a lien will pre-empt the new mortgage and the lien/liens will assume a first lien position. No lender is willing to assume a second lien position as this will affect their bottom line in the event of a default. Therefore, a title search must be done to ensure a title is clean and has no liens. Any tax liens or delinquent taxes must be paid at or before closing. And a new title insurance policy must be issued. Many borrowers think that if they have already obtained title insurance on a previous financing that they should not have to pay for another. This is false and here is why: If you purchased a home three years ago and want to refinance your mortgage you could have had any number of liens placed against your home during the three year interval. Creditors place liens against a homeowner's title because when the homeowner goes to sell or refinance their home, the lien holder will get their money first. This is why a new lender will insist on clean title before issuing a new mortgage against collateral. You may be able to use the same title company as before and they should do a re-issue, which is cheaper than a new policy. In any event, it is the borrower's right to choose the title company and thus they can control this cost. Lenders and brokers are prohibited by law to mark up any third party fees. Title companies will usually charge a fee for issuing title insurance, researching your title, for preparing closing documents, a courier fee to send the documents back to the lender, a wire fee to send funds to the old mortgage company or seller and for a closing appointment.
There are a few government fees as well, depending on your municipality. Most every courthouse charges a recording fee to record the new deed of trust. Some states charge a state mortgage fee and some cities charge a city tax on new mortgages.
Lastly let's talk about escrows. Collecting taxes and insurance for a new mortgage is necessary in most cases. Some lenders will allow you to waive escrows and pay your own taxes and insurance if your new loan-to-value ratio is below 80%. But this is infrequent. Its inherently riskier for lenders to allow borrowers to pay their own taxes and insurance because a lot of homeowners who pay their own property taxes get behind -- especially in areas with high tax rates. Should a homeowner become delinquent on their property taxes, it quickly becomes a lien against title, and if the homeowner defaults on their mortgage Uncle Sam gets paid first. That cuts into the lender's bottom line. Therefore, most lenders will want to establish an escrow account for a new mortgagor upon closing.
How many months of taxes and insurance will you have to contribute at closing? This depends on if there are any delinquent taxes or insurance already, how often your taxes and insurance are paid and when they are due next. There is a formula.. Basically, the lender will pro-rate how many months you need to contribute up front to be able to pay the entire tax and insurance bill when it is due. All lenders will also add an extra 2 months of taxes and insurance as a buffer against any future escrow shortage. An escrow shortage frequently occurs when a tax assessment is done and property taxes go up.
There are state and federal laws that limit most of these fees. However, feel free to discuss the closing costs with your lender or broker. As long as the borrower does not have any false expectations of free services, there can and should be a forthright discussion about fees. All fees should be disclosed to a potential borrower within 3 days of an application. And remember most of your closing fees will be tax deductible in the year of the mortgage financing. So keep your closing documents!
