Explanation of Fees

Understanding closing costs and all fees is one of the most confusing parts of the loan transaction. While closing costs may seem like an un-absorbent amount, it is important to  remember that there are multiple parties involved in the loan process and each party has their own fee. Total cost loan cost are broken down into two sections, Closing Costs which are fees associated with obtaining a loan, and Pre Paid items which are fees associated with owning a home.

Pre Paid Items are items that lenders require to be paid in advance or at the time of closing. These may include accrued interest, mortgage insurance premiums, hazard insurance premiums, and property taxes. Lenders will collect accrued interest depending the day the loan funds, which can be anywhere from 0-30 days. All purchase transactions require one full years insurance premium up front along with two months of reserves. Refinance transactions will depend on the insurance policy renewal date. Insurance reserves can range from 2-14 months. Property taxes will depend on the funding date since taxes are paid twice a year; this can range from 2-8 months of reserves. Lenders require an extra two months of insurance and taxes in their reserve account at all times. These funds will be held in an escrow account and the lender will pay out taxes and insurance payments when they are due. While pre paid items are part of the total cost of a loan, these fees are not paid in conjunction with the loan process.

All closing cost and pre paid items should be disclosed on your Good Faith Estimate (GFE) and explained by your loan representative in detail. The closing fees reported on your GFE should be a direct representation of the fees on your HUD-1 Settlement Statement received at closing or at least within a 10% variance from your original GFE. Below is a list of the most common fees and descriptions.

Loan Origination Fee: the fee charged by a lender to cover the administrative cost of writing a mortgage. This is a roll up fee that will include the lenders processing, underwriting and any other lender related to the loan closing. An origination charge can show as a specific dollar amount or a percentage of your loan amount.

Discount Point: This is a one-time fee paid at closing and generally calculated to be equivalent to 1% of the total loan amount, discount points are paid to reduce the interest rate on a loan. Paying discount points is optional; whether this is the best option for you depends on whether you have the cash available and how long you will be in the loan for.

Appraisal: a third party fee charged by an appraiser to estimate the market value of the property. All loan transactions require an appraisal to verify the collateral value of the property being purchased or refinanced unless it is a streamlined loan process.

Credit Report: Covers the expense of running a credit report through a third party vender. All lenders require a credit report to be run in order to obtain loan qualification.

Tax Service Fee: a third party fee that is paid to the company that services your loan. The servicing company sets up an escrow account from which they will pay the property taxes and homeowners insurance when they are due. This is a one-time fee to set up and monitor your account.  

Processing Fee: is a lenders fee for compiling and maintaining your file throughout the loan process. Processing will order your credit report, appraisal, all verifications and set up title and escrow. Since this is a lenders fee it will show as an origination charge on your GFE. This will very from lender to lender as some charge only an underwriting fee and not a processing fee or a split of both.

Underwriting Fee: is a charge by the lender who underwrites you mortgage. If you are working with a bank they will often times have there own staff of underwriters. If working with a broker this will be sent to the specific lender they are trying to obtain a loan through. Since this is a lenders fee it will show as an origination charge on your GFE. This fee will very from lender to lender; some charge only a processing fee and not an underwriting fee or a split of both.

Flood Determination: a fee charged to determine if the property is located in flood zone. In the event that the property falls into a flood zone the buyer will be required to purchase flood insurance. This is a requirement of all properties and is a third party fee.

Lender Inspection Fee: is a fee that may be charged in the event the lender requires an inspection of the property. An inspection may be called for in the event of new construction or recent repairs to verify everything has been completed up to code before the lender will fund the transaction.

Settlement / Closing: is a third party fee paid to the settlement company for the preparation of loan documents. Often times this is referred to as an escrow fee. This fee will vary from company to company and will also depend on the loan amount. The higher the loan amount the higher the escrow fee. Be aware that escrow may have a number of other fees on top of the settlement fee like wire fees, document preparation fees, and courier fees. Some companies will quote one flat rate and other will break it down by line item. On purchase transactions the seller’s agent or builder will have the escrow company pre selected, whereas a refinance transaction will allow the borrower to select the vendor of their choice.

Document Preparation: is an escrow fee, some companies charge a separate fee for preparing legal documentation such as the note, deed of trust, and other loan and title documentation.

Notary Fee: is an escrow fee paid to a notary public a person who serves as a public official and certifies the authenticity of the required signatures on loan documentation. In most cases the escrow officer is a licensed notary public this is usually charged in the event of an out of office signing or courtesy signing.

Wife Fee: is a fee that can either be charged by the lender or escrow for the wiring of funds between the lender and escrow.

Courier Fee: is an escrow fee charged for the transportation of legal documents or other loan materials.

Title Insurance: is third party fee paid to obtain title insurance, which is required by the lender. Title insurance protects the lender against any claims that may arise from arguments about ownership of the property. The insurance policy will guarantee the accuracy of the title search protecting against any errors. Just like escrow fees, title fees will depend on the loan amount and very from company to company. The higher the loan amount the higher the title fee. On purchase transactions the seller’s agent or builder will have title pre selected whereas on a refinance transactions the borrower can select the vendor of their choice.

Recoding Fee: is a county fee charged for recording a deed with the appropriate government agency.

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