What You Should Know About Closing Costs

A recording fee? Loan origination fee? Title search fee?

It used to be that home buyers found themselves overwhelmed with unexpected costs when they went to close on their home. But now, new regulations have been implemented to respond to the consumer’s need to better understand their loan options. Called Know Before You Owe, the federal mortgage disclosure rule was implemented by the Consumer Financial Protection Bureau on October 3 of this year.

According to Joe Houlihan, managing partner of Houlihan & O’Malley Real Estate Services, “Closing costs can amount from 2 to 5 percent of the cost of your new home. So, if you’re buying a home that costs, say, $500,000, you will have to factor in another $10,000 to $25,000, for example. The new regulations make these costs easier to review and understand, and eliminate any surprises at closing time.”

Houlihan’s best advice is to be prepared. Some of the closing costs you may be faced with are:

o Loan origination/application fee, charged by the lender for processing the loan paperwork;

o Attorneys’ fees – both yours and your lender’s;

o Survey fee for preparation of a current survey of the property’s legal boundaries. Note: lenders will often accept an older survey as long as there are no changes to the property;

o Fees for inspections required or requested by the lender or you;

o Discount points, paid in exchange for a lower interest rate;

o Appraisal fee;

o Title search fees to pay for a background check on the title to make sure there are no items such as unpaid mortgages or tax liens on the property;

o Title insurance premium;

o Pest inspection fee;

o Recording fee, paid to a city or county in exchange for recording the new transactions (including the mortgage);

o Underwriting fee, covering the cost of evaluating a mortgage loan application;

o Escrow deposit, which may pay for a couple months’ (or more) property taxes and private mortgage insurance;

To streamline and simplify matters, Know Before You Owe replaces four disclosure forms with two new ones that are easier to understand and use: the Loan Estimate and the Closing Disclosure forms. Any lender you are interested in receiving a loan from is now required to give you a Loan Estimate form once you provide the following: price of home, escrow (how much of a down payment is the borrower putting up when the contract is signed), borrower’s name and address, credit report, income of borrowers, and loan amount.

Borrowers no longer have to fill out a whole loan application form to receive a loan estimate, which makes it easier for them to shop around and compare loan offers from multiple lenders. “Consider talking to at least three lenders before choosing a mortgage so you can find the best deal with the lowest closing costs,” says Houlihan. “You can also ask a lender to match low closing costs offered elsewhere.”

The Closing Disclosure form should be provided to you by the lender a minimum of three days prior to closing; the form will include all of the costs you will incur in connection with closing on your mortgage. This gives you ample time to ask questions and make sure there aren’t major changes from the deal you were offered on the Loan Estimate form that the lender previously supplied. Buyers should review this form with their attorney before signing off on it. They should also keep in mind that they have to sign off on the Closing Disclosure form with their lender before the closing can be scheduled.

When comparing the Loan Estimate form to the Closing Disclosure form, Houlihan says, “Look for fees that seem repetitive or questionable, such as extra ‘processing’ fees for items that should be covered in the overall cost. In addition, be sure you’re not paying for a service that was not provided. For example, is your lender charging you a ‘courier’ fee for documents that were actually emailed rather than delivered in person?”

With the assistance of the new Know Before You Owe forms, a little care and due diligence, and some willingness to speak up for yourself, you can save on costs and be confident that you got a good deal. That’s a great way to start a new phase of your life.