Homebuyers are often shocked to learn the number of costs included with the closing of a loan. The bulk of mortgage closing costs are related to third party charges accrued by the lender and passed on to the borrower. Because all fees (mortgage fees included) are settled at the closing table, they are all referred to as closing costs.
On average, closing costs account for 2-5% of the home’s sale price (this percentage can vary drastically depending on the circumstances) and usually include the following:
- Obtaining a credit report
- Evaluation of the property to be purchased and the borrower
- Title search and title insurance
- Loan origination fees (the processing of paperwork)
- Home inspections and appraisals
- Escrow deposit
- Documenting the transaction in city/county records
The homebuyer almost always pays the majority of closing costs. Sometimes lenders will advertise mortgage loans without closing fees, but buyers should be leery of such advertisements. If a bank is offering a loan without fees, borrowers should be aware that fees are likely included in the structure of the mortgage.
It’s important for buyers to be aware of the amount of closing costs they will be expected to pay because it affects the amount needed to purchase the home. Lenders are required by the federal government to provide an estimate (Good Faith Estimate or GFE) of the closing costs once the homebuyer applies for a loan. GFE laws state that the final settlement cannot deviate from the estimate given by more than 105% (or not at all on certain loan products).
One tip on how to determine the individual costs from the sum total of the closing cost is to have your lender add up the lender costs (which are the costs he/she estimates on page 2 of the GFE form), as well as provide you with the loan interest rate for which you are qualified. This is a great way to determine which lender is offering the best deal.
For example: If Lender A estimates their lender costs will be $5000 for a 45-day loan lock at 3%, find out how much Lender B estimates for a 45-day loan lock at 3% for your specific credit profile and compare the two estimates.
To read more about mortgage lending and the new regulations that will take effect on January 1, 2014, consumerfinance.gov is a great resource.