While some loans are government-backed and some are not, every home loan starts at a private bank or mortgage company. These are for-profit businesses, or at least non-profit credit unions that still have overhead costs like employees and bank branches. Therefore a big chunk of your closing costs will go toward paying these companies to handle your loan for you. Here are the fees you can expect from your lender.
Origination fee. 0-1% of the loan amount
The lender origination fee is part of the lender’s compensation for originating your loan, i.e. finding you as a customer and working the loan through to completion. This fee can vary widely because a lender can make money on the loan in other ways. For instance, one lender might charge zero origination fee, but give you a higher rate. Some lenders might give you zero origination and a low rate, but charge high processing and underwriting fees. Look at the whole picture and not just the origination fee.
Mortgage broker fee. 0-1% of the loan amount
This fee is essentially the same as an origination fee. It is charged by mortgage brokers, which are companies that do not lend money but shop various lenders for the best deal. A company should never charge both a mortgage broker fee and an origination fee.
Discount Fee. 0-2%+ of the loan amount
The discount fee is used to directly lower your rate. Unlike the origination fee, the discount fee may not go to the lender as profit. It has to be used to give you a lower rate.
Each rate that a lender offers you comes with either a credit or cost. Choose a rate low enough, and there will be a cost associated.
For example, your lender offers you two rates, 4.25% and 4.0%. The 4.25% rate comes with a $500 credit that your lender can use as profit or to give back to you to help with closing costs. The 4.0% rate does not have a credit but actually costs you $400 to obtain. The overall cost difference between the two loans is $900.
If you choose the 4.0% rate in this case, you will see $400 labeled as the discount fee. It’s a direct cost of obtaining that lower rate.
Typically it’s not worth paying a discount fee of much more than 1%. Most people have a mortgage for less than seven years, so paying exorbitant amounts to get the lowest rate possible usually does not pencil out.
Processing Fee. $300-$900
Loan companies hire loan processors who are in charge of gathering all the documentation required to close your loan. While your loan officer is concentrated on sales and finding more customers, the processor focuses on the behind-the-scenes work that goes into your loan. Not all companies charge a processing fee so take that into consideration when comparing lenders.
Underwriting Fee. $300-$900
The underwriter is the final decision maker on the loan. The underwriting fee goes toward paying for the necessary staff to put the final seal of approval on your application.
Application Fee/Commitment Fee. $100-$350
Sometimes the lender will charge an upfront, non-refundable deposit to take your application. It’s recommended that you avoid these lenders simply because you don’t want to lose that money if you find a better lender elsewhere. Sometimes, an application or commitment fee is not required upfront. In these cases, these fees are not all bad, but there are plenty of lenders who do not charge them.
Lock-in fee. $100-$300
Some companies charge a fee to lock in the rate on your loan.
Services ordered by the Lender
These are fees the lender collects for services they request for your loan.
Credit report fee. $20-$40
The lender will pull your credit when you apply for the loan. The credit reports are supplied by credit agencies that charge for the report, hence the fee. This is a vital part of the loan transaction because it gives the lender a snapshot of your credit history. The scores on the report affect your rate.
If your score is too low for any loan programs, your lender might try to raise your score through a rapid rescore process. This attempt to quickly raise your score can cost hundreds of dollars, but can be worth it if it gets you a better rate or helps you qualify.
Flood certification. $20
Every home in the U.S. is either in a flood zone or not. The determination is provided by a report based on FEMA maps. The lender has to determine that your home is not in a flood zone, and if it is, that flood insurance is available. The lender will not lend on a home that is in a flood zone but does not have specific flood insurance. See Flood Insurance section below.
Tax service fee. $50
This fee goes to a company that makes sure all tax liens are paid on the home. A municipality such as a city or county can seize a home with past due taxes. Lenders like to avoid that situation.
Wire transfer fee. $25
This fee pays for bank fees associated with wiring loan funds.
Courier fee/postage fee. $20-$30
Occasionally the lender has to have documents hand-delivered or overnighted by UPS or another similar company. This fee pays for those costs.
Upfront Fees by Loan Type
Government-backed loan types require an “upfront fee.” The name is misleading because you don’t actually have to come up with the cash up front. In fact, you don’t pay them out-of-pocket at all. They are rolled into your final loan amount.
Upfront fees are not technically closing costs. However, they do show up on the fee estimate you receive from your lender, so it’s good to be aware of them.
Conventional loans do not require an upfront fee. For everything else, a fee applies as follows.
USDA loans: A fee equal to 2.75% of the loan amount is due at closing.
FHA loans: require a 1.75% upfront fee.
VA loans: require a fee between 1.25% and 3.3% of the loan amount, depending on prior usage of the VA home loan benefit, down payment, and military status. Veterans disabled in the line of duty may be eligible for a fee waiver.
Third Party Fees
Third party fees are costs for services by other parties besides you or the lender. Examples are the title company and the appraiser.
These fees will be similar no matter which lender you choose. They are not as important in comparison shopping as the lender fees, but you should still examine the fee amounts and ask about them. For example, some lenders work with more expensive title and escrow companies, but on a refinance you can shop around for your own title and escrow agent to bring the cost down
Appraisers are professional home value estimators and determine the value of the home that your lender will use for qualification. They typically charge around $500 for their services. If you are getting a mortgage on a high-value home or unique property, expect to pay up to $1,000 or more on the appraisal.
Pest inspection. $100-$50
Some areas always require a pest inspection. Most areas will only require one if there is evidence of pest infestation noted on the appraisal.
Title Report/Title Insurance. $300-$1,500+
This fee can vary widely based on the home’s value and geographic location. The loan amount also affects the cost.
Why do you need title insurance? It protects you against claims that someone else has rights to your home. Say you purchase a home and six months later someone shows up on your doorstep with a title deed dated 1850. If that person wins in court, the home is theirs.
Enter the title company. Their job is to research all past claims on the home and make sure title is “clear”, meaning no one can come claim a right to the home. They also issue insurance in case they missed something.
Within title insurance there are two kinds, both of which you will need if you are getting a mortgage. The lender’s title policy repays the bank that holds the loan in case the home is lost to a title claim. The owner’s title policy protects the owner.
Who pays which policy depends on local customary practice. In some areas of the country, the home seller pays the owner’s title insurance for the buyer. The buyer typically pays the lender’s policy. Ask your real estate agent or lender if the seller is paying for the owner’s policy. If not, your title insurance costs could double.
If you are refinancing a home, you will not pay an owner’s policy, since that was paid when you bought your home. You will be responsible to pay the lender’s policy since you are opening a new mortgage.
Tip: using a title company that also has an escrow department is often cheaper than selecting two different companies.
Escrow fee/Settlement fee/Closing fee. $300-$700+
The escrow company handles all the funds involved in the transaction. They make sure all parties pay and get paid appropriately. For instance, at loan funding, the lender wires in loan funds and the home buyer wires in the down payment and closing costs. The escrow company pays off any existing loans on the home, pays third party service providers, and sends a wire to the home seller for the rest.
Escrow also handles getting all the loan documents signed by all parties and notarizing necessary documents.
The escrow fee is based on the loan amount and/or purchase price so expect to pay more on higher cost homes.
Tip: using a title company that also has an escrow department is often cheaper than selecting two different companies.
Notary Fee. $100-$150
The escrow company will not usually charge you an extra loan doc signing fee if you sign in their office. However, if you choose to sign somewhere else like your home, they might charge a fee to send a notary (a signer who can notarize documents) to you.
Closing Protection Letter (CPL). $50
This is a fairly rare fee that is required when the escrow company is not associated with the title company. It’s a letter that makes the title company responsible if the escrow does not distribute funds appropriately.
Survey fee. $400+
Occasionally the title company needs to determine property lines. A survey is required in this case, but this situation is fairly rare.
Attorney fees. $400+
Some states require an attorney to be involved in negotiating the sales contract and seeing to a timely closing. Most transactions should not need attorney involvement since it increases cost and complexity. If your state requires one, shop around for an inexpensive attorney. No need to break the bank for this service.
Government Processing Charges
Each county has its own charges to record the home’s transfer of ownership.
Recording fee. $20-$250
This fee is determined by the county in which the property is located. Each time a home is bought and sold, the county records the details of the transaction and the new owner’s information for tax purposes. The process of recording also solidifies your legal ownership of the property so this is a very useful fee to pay!
Transfer taxes. Fee varies.
Some states tax home purchases and refinances, i.e. any transfer of real estate from one owner or Mortgage Company to another. The cost can be substantial, as some areas require a percentage of the new loan amount or home price.
Prepaid items are costs associated with owning your home that the lender requires you to pay in advance. For instance, a lender collects one year of homeowner’s insurance premiums upfront to guarantee the home is insured.
These are not really closing costs since you would have to pay for these items whether or not you have a mortgage. But they do add to the cash you will need to close the loan so they are good to keep in mind. Prepaid closing costs can really add up. For instance, if property taxes are $300 and the lender collects six months’ worth, that’s $1,800 for that one item. Factor in these potentially big costs when you are looking to buy.
Homeowners insurance. $400-$1,000+
As mentioned above, the lender needs your home to be insured at all times with an adequate homeowner’s insurance policy, also known as hazard or fire insurance. The lender will collect at least one year’s premium at loan closing and pay the insurance company. The amount of this fee depends on the value of your home, amount of insurance coverage, and the yearly premium.
Flood insurance. $300-$1,000+
Flood insurance is required if the home is in a flood zone as determined by your flood certification. Like the homeowner’s insurance policy, the lender needs to ensure the policy is paid for the first year when the loan closes.
Tax reserves. $500-$5,000+
This cost can vary widely based on the home’s property taxes and the time of year the loan closes compared with when the county collects taxes.
Some counties collect property taxes twice per year, April and October for example. The lender needs to collect enough to pay the upcoming tax installment. The lender will collect anywhere from three to eight months of taxes to cover the first tax payment.
The cost is somewhat offset because the seller will be responsible for taxes up until the day the loan closes and the home officially belongs to you.
Mortgage insurance. $100-$700+
If you have a conventional mortgage (non-FHA, -USDA, or -VA) that requires mortgage insurance, the lender will collect at least two months’ worth of the premiums.
Prepaid Daily Interest Charges. $100-$2000+
You prepay interest on your loan from the day your loan closes to the end of the month. For example, if you close on the 15th of the month, you prepay 15 days of interest in advance. If your loan funds toward the end of the month, this charge will be small. If near the start of the month and you have a big loan amount, the charge could be substantial