It’s no secret that the mortgage industry isn’t super transparent about closing costs. According to a recent report from ClosingCorp, more than half of home buyers surveyed were surprised by their closing costs. In recent years, regulations have tightened, forcing mortgage lenders to disclose these costs in loan estimates. Still, many home buyers still find themselves shocked when they see the the final numbers. Closing costs can add thousands to your bottom line.
To help you understand closing costs better, we’ve provided some useful background information and rounded up a list of common fees that tend to surprise homebuyers:
Background on Closing Costs
Closing costs are one-time fees related to your home purchase that are paid at closing. They typically add up to about 2 to 5 percent of the full loan amount, depending on your specific circumstances. There are two main types of closing costs:
- Lender and broker fees: Lender and broker fees are charged by most mortgage lenders. Think credit reports, application fees, loan origination fees, and broker fees. These fees are optional (Eave doesn’t charge them), and vary from lender to lender. By law, lender and broker fees, when added up, cannot exceed 3 percent of the total loan amount.
- Third-party fees: The second group of closing costs are third-party fees. These are charged on nearly all loans. Think unavoidable costs like property taxes, title transfer fees, homeowner’s insurance and the like. Many lenders fail to estimate third-party closing costs in their loan estimates and prequalification calculators because disclosing them isn’t required by law. Unfortunately, that lack of disclosure leaves borrowers surprised by these fees, and confused when they see a lender who actually includes them in an estimate (like Eave).
Here’s the deal: The vast majority of lenders hit you with estimated closing costs after you’ve already gone through the lengthy mortgage application process.
At Eave, we believe there should be more transparency in lending and less nickel-and-diming of buyers. Applying for a mortgage is stressful enough without having to worry about being saddled with extra fees at every turn. You deserve to have an idea of what your mortgage will really cost before you even decide to apply. And you should be given every important piece of information along the way. That’s why we charge zero lender fees and estimate closing costs and third-party fees for you before you even fill out an application.
With that said, here are some surprising fees you can expect to see pop up from lenders:
Lender and Broker Fees:
The following are some common lender and broker fees. Again, these are optional fees set by your lender. They cannot exceed 3 percent of the total loan amount when combined.
Loan Application Fee:
What it is: Many lenders charge a fee just for taking and processing your application. Compared to the cost of a mortgage, this is not a significant expense, but it’s another way the mortgage industry tries to squeeze you.
The cost: Varies, but expect to pay up to $500 (Eave does not charge an application fee)
Loan Origination Fee:
What it is: A loan origination fee is one of the biggest closing costs you’ll encounter when taking out a mortgage. Sometimes this fee is identified by one of its other monikers: the underwriting fee, the processing fee or the administrative fee. Whatever its name, this fee is the bread and butter of most mortgage companies. Loan origination means, quite simply, the creation of a mortgage. You might be wondering: why do lenders charge two separate fees for your application and loan origination? Your guess is as good as ours. At Eave, we don’t charge for either.
The cost: Lenders tend to charge around 1 to 2 percent of the final loan amount for an origination fee. This can add up to thousands of dollars, especially if you’re taking out a JUMBO mortgage. (Eave does not charge an origination fee).
Mortgage Broker Fee:
What it is: If you work with a mortgage broker, expect to encounter a mortgage broker fee. This fee is usually a percentage of the total loan amount.
The cost: Most brokers charge between 1 and 2 percent of the total purchase price of the house. (Eave doesn’t charge broker’s fees)
What it is: For buyers putting down less than 20 percent on a home, many lenders require private mortgage insurance (PMI). This insurance protects the lender in case you default on your mortgage payments. PMI tends to be a recurring annual fee, with the first year paid upfront at closing. Once you’ve paid off 20 percent of the home, PMI usually stops being required. Note that some lenders require you to prepay for PMI in one lump sum. Some lenders also charge application fees for PMI.
The cost: PMI ranges from 0.55% to 2.25% of the home purchase price
The following are some common third-party fees. You’ll be hard pressed to avoid them, no matter which lender you work with. However, it’s smart to work with a lender who’s at least upfront about these fees, so you can prepare for them, and won’t find yourself with sticker shock when it’s time to close.
Appraisal and Home Inspection
What it is: Before approving your financing, a mortgage lender needs to know how much the property you’re eyeing is actually worth. This is so your loan-to-value ratio can be properly calculated. Enter the appraisal. Most often, a neutral third-party appraisal company is brought in to determine the value of the property. Many lenders also require a home inspection, to make sure your new house is safe and structurally sound.
The cost: Anywhere from $300 to $1000
What it is: Some states require that a lawyer be present during closing transactions. Of course, everyone knows attorneys are not cheap, so this can add up quickly.
The cost: Varies widely depending on your location and the number of hours required by the attorney
What it is: Another unexpected cost new homeowners get hit with? Taxes. Home buyers typically pay for two months of county and city taxes at closing. You may also have to pay a transfer tax, which is basically the fee for transferring property ownership from one party to another.
The cost: Varies greatly depending on the location, but prepare to pay for two months of county and city taxes, plus various other tax fees
What it is: The majority of lenders require that you purchase homeowners insurance before closing. Many will ask you to prepay for a year of insurance before settling the purchase. This insures the property in case of unforeseen damage.
The cost: Depends on your home’s location and value, not to mention which insurer you choose
What they are: Unfortunately, the above list is not an exhaustive look at closing costs. There are many other miscellaneous third-party fees that may be associated with closing your mortgage. Most of these fees probably won’t break the bank, but they can sure add up. Other fees you might see on closing day include:
- Title Fees
- Title Insurance
- FHA, VA and USDA Fees
- Pest Inspection
- Flood Determination
- Survey Fee
- Assumption Fee
- Annual Assessments
- HOA Fees
- Escrow Fee
The cost: These fees can vary significantly depending on your circumstances
At the end of the day, the fees charged on your home loan will be specific to you, your property’s location, and the lender and settlement service providers you choose to work with. Never be afraid to ask your loan originator for an estimate of all your closing costs, and be certain to review your Loan Estimate carefully. Here at Eave, we pride ourselves on our transparency. One of our licensed loan originators would be thrilled to answer any questions you may have.
At Eave, we believe lending should be more transparent. That’s why we estimate closing costs and third-party fees for you upfront. You deserve to know what your mortgage will really cost. Visit our site to learn more.