Mortgage Settlement Costs Origination Fees Title Insurance and More
(THIS WILL CHANGE STARING OCTOBER 1, 2015 A NEW PODCAST WILL BE ANNOUNCED WHEN ALL INFORMATION WILL BE AVAILABE)
The mortgage settlement process–sometimes called mortgage closing–can be confusing. A settlement may involve several interested parties and a variety of documents and fees. This will help you understand the steps involved in the settlement process. Although the focus here is on settlements for home purchases, much of the guidance will also apply if you refinance a mortgage.
Settlement costs can be high, so it pays to shop around for settlement services and negotiate with the home seller, your mortgage lender, and your real estate attorney or settlement agent. The less you pay in settlement costs, the more funds you will have to get started in your new home.
Negotiate the terms of your purchase
Customs and practices during settlement often vary regionally, with buyers and sellers free to negotiate which party pays certain fees. In slow-moving real estate markets, for example, the seller may agree to pay certain settlement costs including points or fees usually assumed by the buyer. In fast-moving markets, the buyer may have to agree to pay more costs to close the deal as an incentive to the seller of a property in great demand. Whatever you negotiate should be in writing and will become the basis of the sales contract. However, be careful: if some buyer’s costs are shifted to the seller, the price you pay for the property may increase if the seller wants to recoup those costs. You can reduce some costs by shopping around for settlement services. The more you know about the settlement process and related costs, the better your chances are for saving money at settlement time.
Because settlement practices vary significantly based on your locale, it is difficult to provide reliable estimates for costs that fit every settlement situation you may encounter. However, one rule of thumb for buyers is to figure that settlement costs will be about 3% of the price of your home. In some relatively high-tax areas of the country, however, 5% to 6% may be more common.
Some settlement costs, such as homeowner’s insurance, private mortgage insurance, or points, can be more expensive if your credit rating is low. Knowing your credit score, therefore, can help you understand how lenders will evaluate your applications and how that score may impact the cost of your mortgage loan and help you to anticipate your settlement costs. Your lender is required to give you a copy of your credit score as part of the settlement process. Make sure you get a copy of your score.
Understand the types of settlement costs
Most people associate settlement costs with mortgage loan charges. These fees and charges vary, so it pays to shop around for the best combination of mortgage terms and settlement costs. Mortgage-related costs that may apply to your loan include the following items.
Imposed by your lender or broker, this charge covers the initial costs of processing your loan request and checking your credit report.
Estimated cost: $65 to $640, including the cost of the credit report for each applicant Median cost: $365
Loan origination fee
The origination fee (also called underwriting fee, administrative fee, or processing fee) is charged by the lender for evaluating and preparing your mortgage loan. This fee can cover the lender’s attorney’s fees, document preparation costs, notary fees, and similar charges.
Estimated cost: $2,130 to $3,105 with a 5% down payment; $1,984 to $2,865 with a 10% down payment
Median cost: $2,734 with a 5% down payment; $2,537 with a 10% down payment
Points are a one-time charge that may be negotiated with the lender, usually to reduce the interest rate you pay over the life of your loan. One point equals 1% of the loan amount. For example, one point on a $100,000 loan would be $1,000. In some cases–especially in refinancing–points can be financed by adding them to the amount that you borrow. However, if you pay the points at settlement, they are deductible on your income taxes in the year they are paid (different deduction rules apply when you refinance or purchase a second home). In your purchase offer, you may want to negotiate with the seller to have the seller pay all or a portion of the points.
Estimated cost: 0% to 3% of the loan amount
Lenders want to be sure that the purchased property is worth at least as much as the loan amount. An appraisal fee pays for a determination of the value of the home and lot you want to purchase or refinance. Some lenders and brokers include the appraisal fee in the application fee; you can ask the lender for a copy of the appraisal. If you are refinancing and have a recent appraisal of the property, some lenders may waive the requirement for a new appraisal.
Estimated cost: $263 to $444
Median cost: $292
Lender-required home inspection fees
Lenders may require a termite inspection and an analysis of the structural condition of the property by an engineer or consultant. In rural areas, lenders may require a septic system test (if applicable) and a water test to make sure the well and water system will maintain an adequate supply of water for the house (this is usually a test for water quantity and not quality; your local health department may require a water quality test as well, but may do so outside the settlement process and with a separate payment). Keep in mind that such inspections are for the benefit of the lender; you may want to request your own inspection to make sure the property is in good/acceptable condition.
Estimated cost: $300 to $500
Your first regular mortgage payment is usually due about six to eight weeks after you settle (for example, if you settle in August, your first regular payment will be due on October 1; the October payment covers the cost of borrowing the money for the month of September). Interest costs, however, start as soon as you settle. The lender will calculate how much interest you owe for the part of the month in which you settle (for example, if you settle on August 16, you would owe interest for 16 days–August 16 through 31).
Estimated cost: Depends on the loan amount, interest rate, and number of days since settlement (for example, a $120,000 loan at 6% for 16 days, about $220; a $142,500 loan at 6% for 16 days, about $375).
Private mortgage insurance (PMI)
If your down payment is less than 20% of the value of the house, the lender will usually require mortgage insurance. The insurance policy covers the lender’s losses if you do not make the loan payments. Typically, you will pay a PMI monthly along with each month’s mortgage payment. Your PMI can be canceled at your request, in writing, when you reach 20% equity in your home (based on your original purchase price) if your mortgage payments are current and you have a good payment history. By federal law your PMI payments will automatically stop when you acquire 22% equity in your home (based on the original appraised value of the house) as long as your mortgage payments are current.
Estimated cost: $50 to $100 per month
Some lenders will pay for LPMI–or lender’s private mortgage insurance–and, in turn, charge a higher interest rate to you. Unlike the PMI that you might pay, with LPMI there is no automatic cancellation of the insurance charge once you acquire 22% equity. To eliminate LPMI, you must refinance the loan, which in turn means carefully considering market interest rates and settlement costs at the time to see if refinancing would be advantageous to you, rather than keeping your current mortgage and its attendant costs.
FHA, VA, and RHS fees
The Federal Housing Administration (FHA) offers insured mortgages and the Veterans Administration (VA) and the Rural Housing Service (RHS) offer mortgage guarantees. If you are getting a mortgage insured by the FHA or guaranteed by the VA or the RHS, you will have to pay FHA mortgage insurance premiums or VA or RHS guarantee fees. As with PMI, FHA insurance premium payments will stop when you acquire 22% equity in your home. FHA fees are about 1.75% of the loan amount.1 VA guarantee fees range from 1.25% to 3.3% of the loan amount, depending on the size of your down payment (the higher your down payment, the lower the fee percentage).2 RHS fees are 2.00% of the loan amount.3
Your lender will require that you arrange for homeowner’s insurance coverage (sometimes called hazard insurance) at settlement. This insurance protects against physical damage to the house by fire, wind, vandalism, and other causes, and ensures that the lender’s investment in your purchase will be secured even if the house is destroyed. If you are buying a condominium, hazard insurance may be part of your monthly condominium fee; you may also want to secure insurance coverage for your home furnishings and valuables.
Estimated cost: $300 to $1,000 (Depending on the value of the home and the amount of coverage; you can expect a cost of about $3.50 per $1,000 of the home purchase price.)
Median cost: $744
Flood determination fee
If your home is in a special flood hazard area where flood insurance is mandated, lenders cannot offer you a mortgage loan unless you buy flood insurance. Regardless, your lender may charge a fee to find out whether the home is in a flood hazard area. Flood insurance protects the lender if flooding damages or destroys your home.
Estimated cost: $10 to $16 for the search (This is not the cost for the flood insurance; flood insurance, if required, would be in addition to your homeowner’s insurance and may cost from $500 to $5,925 depending on location and property value and loan balance.4 )
Median cost: $12
Escrow (or reserve) funds
Some lenders require that you set aside money in an escrow (or reserve) account to pay for property taxes, homeowner’s insurance, and flood insurance (if applicable). Lenders use escrow funds to ensure that these items/expenses are paid on time and to protect their interest in your home. With an escrow account, money is held by the lender or its agent, which then pays the taxes and insurance bills when they are due. At settlement, you may need to provide funds for this account, depending on when payments will be due. For example, if you buy your home in August and property taxes are due the following January, you will need to deposit funds into your escrow account at settlement so that you can cover tax payments when they are due in January.
Property Survey costs
Lenders require a property survey to confirm the location of buildings and improvements on the land you are purchasing. Some lenders require a complete (and more costly) survey to ensure that the house and other structures are legally where you and the seller say they are.
Estimated cost: $84 to $600
Median cost: $154
Other miscellaneous settlement costs
Depending upon the location and type of property purchased–and the extra settlement services you or your lender request–you may also have to pay some of the following fees and assessments.
Assumption fee. If you are assuming (or taking over) an existing mortgage, the lender may charge a fee.
Estimated cost: Depends on the lender, but will range from several hundred dollars to 1% of the amount of the loan you are assuming.
Prorated expenses between the seller and the buyer. In your purchase contract, you may agree to split some costs with the seller to cover your respective periods of ownership during the overarching calendar year or tax period, such as prorated property taxes. Some of these expenses may involve large amounts: for example, annual condominium fees, homeowners’ association fees, water bills, and other lump-sum service charges.
Estimated cost: Depends on the agreement between the seller and the buyer.
Inspection costs/fees. As a buyer, if you make your purchase offer contingent on the results of a home inspection–such as testing for structural damage, water quality, and radon gas emissions–you will have to pay for these inspections.
Estimated cost: Costs vary regionally.
Escrow account funds. In the purchase contract, you can request that the seller set up an escrow account to cover any costs for repairs, radon mitigation, house painting, or other items. For example, if you do not test all the appliances (for instance, if you buy in the summer, you may not test the furnace), you may request an escrow account to cover repairs if they are needed in the future. The seller may agree to split the costs with you, in which case you would need these funds at settlement. Sellers sometimes offer home warranties in lieu of these arrangements and as an enticement to buyers. These warranties typically cover repairs or the replacement of plumbing and heating, major appliances, and other home systems not covered by other home insurance policies.
Estimated cost: Depends on cost of repairs and agreement between seller and buyer.
Fees paid to find a lender. As a borrower and buyer, you may work with a mortgage broker or other third party to secure a mortgage loan. For example, you may want to work with a broker to find a loan with nonstandard terms or conditions. Brokers arrange transactions rather than lend money directly; in other words, they find a lender for you.
Brokers will generally contact several lenders regarding your application, but they are not obligated to find the best deal for you unless they have contracted with you to act as your agent.
Estimated cost: Depends on agreement with the broker and often is a percentage of the loan amount.
Learn about charges to establish and transfer ownership
The goal of a title search is to assure you and your lender that the seller is the legal owner of the property and that there are no outstanding claims or liens against the property that you are buying. The title search may be performed by a lawyer, an escrow or title company, or other specialist.
Title searches can be time- and labor-intensive. Public real estate records can be spread among several local government offices, including surveyors, county courts, tax assessors, and recorders of deeds. Liens, records of deaths, divorces, court judgments, and contests over wills–all of which can affect ownership rights–must also be examined.
If real estate records are computerized, the title search can be completed fairly quickly. In some cases, however, the title search may involve visiting courthouses and examining other public records and files, which is more time-consuming.
Estimated cost: Costs vary regionally.
Most lenders require a title insurance policy to protect the lender against an error in the results of the title search. If a problem arises, the insurance covers the lender’s investment in your mortgage.
The cost of the policy (a one-time premium) is usually based on the loan amount and is often paid by the buyer. However, you may negotiate with the seller to pay all or part of the premium.
The title insurance required by the lender protects only the lender. To protect yourself against title problems, you may want to buy an “owner’s” title insurance policy. Normally the additional premium cost is based on the cost of the lender’s policy, but it can vary based on your locale.
Some advice on keeping title insurance costs low: if the house you are buying was owned by the seller for only a few years, check with the seller’s title company. You may be able to get a “re-issue rate,” because the time between title searches was short. As well, if you are refinancing, you may be able to get a “re-issue rate” on your title insurance. The premium is likely to be lower than the regular rate for a new policy. If no claims have been made against the title since the previous title search was done, the insurer may consider the property to be a lower insurance risk.
Usually, you will have to buy title insurance from a company acceptable to your lender. However, you can still shop around for the best premium rates (which can vary depending on how much competition there is in a market area). If you decide to buy an “owner’s title policy,” look for one with as few exclusions from coverage as possible. Exclusions are listed in each policy, and if a policy has many exclusions–that is, situations under which the insurer will not pay for your title problems–you may end up with little/scant coverage.
Estimated cost: The cost of title services and title insurance varies by state. For example, a lender’s policy on a $100,000 loan can range from $175 in one state to $900 in another. In some states, the price can even vary by county.
Settlement companies and others settlement agents
Settlements are conducted by title insurance companies, real estate brokers, lending institutions, escrow companies, or attorneys. In most cases, the settlement agent provides a service to the lender, and you may be required to pay for these services. You can also hire your own attorney to represent you at all stages of the transaction, including settlement.
In some regions, all parties involved in the sale–the buyer; the seller; the lender; the real estate agents; attorneys for the buyer, seller, and lender; and representatives from the title firm–may meet to sign forms and transfer funds. In other regions, settlement is handled by a title or escrow firm, which collects all the funding, paperwork, and signatures and makes the necessary disbursements. This firm delivers the check to the seller and the house keys to you.
Estimated cost: Costs for settlement services vary widely, depending on the services provided. Regardless of the way settlement is handled in your region, shop around and ask for information on all services provided and all fees charged.
Consider state and local government fees and taxes
In some parts of the country, transfer and recording fees are low. In other parts of the country, costs of transfer fees, recording fees, and property taxes collected by local and state governments may be as much as 3% of the loan amount. Some of these fees, such as the recording fee and transfer fee, are one-time fees. Although there is no way to avoid paying these fees and taxes, you may be able to negotiate with the seller to assume some of these costs. But remember, you must include these terms in the purchase offer for the property.
Funds to cover property taxes may go into an escrow account. The amount you will need depends on when property taxes are due and the timing of the settlement. The lender should be able to give you an approximation of these costs at the time you apply for the mortgage.
Understand “all-in-one” pricing of settlement costs
Some lenders have bundled most of their settlement costs into a single price. Generally, bundled arrangements combine the following fees:
“application origination, underwriting and processing points, pest inspection,
appraisal, credit reports, lender’s attorney, flood certification, title search
and title insurance recording and fees for other tax services.”
This “all-in-one” price, however, does not include all of the fees charged at settlement. You will also need funds for the following:
prepaid interest (based on the day of the month you settle) mortgage and transfer taxes (determined by your state or local taxing agency) private mortgage insurance (if needed) homeowner’s (hazard) insurance flood insurance (if needed), and reserve (or escrow) funds for property taxes and homeowner’s insurance
Ask for estimates of settlement costs
At various points in the loan application process, you are entitled to estimates of the costs and fees associated with arranging your mortgage and completing the settlement process.
“Good faith estimate” (GFE)
With such a long list of potential charges at settlement, it is important to know which ones will apply to your purchase. The Real Estate Settlement Procedures Act (RESPA) requires your mortgage lender to give you a “good faith estimate” of all your expected closing costs within three business days of the submission of your loan application, whether you are purchasing or refinancing the home. Although called a good faith estimate, it is important to note that your actual expenses at closing may be somewhat different. The standardized GFE form lists which costs will change prior to settlement and the maximum amount by which they are allowed to change. If you are purchasing the home, a booklet provided by your broker or mortgage lender, Buying Your Home: Settlement Costs and Helpful Information5, explains the role of the good faith estimate in the settlement process.
Truth in Lending information
For home purchases, the lender is required under the Truth in Lending Act to provide a statement containing “good faith estimates” of the costs of the loan within three business days after receiving your application. This estimate will include your total finance charge and the annual percentage rate (APR). The APR expresses the cost of your loan as an annual rate. This rate is likely to be higher than the stated contract interest rate on your mortgage because it takes into account discount points, mortgage insurance, and certain other fees that can add to the cost of your loan. When refinancing your mortgage, you will receive truth-in-lending disclosures before you settle. Until you receive those disclosures, the creditor and other parties cannot charge you fees related to your loan application, except for a fee for obtaining your credit history.
When you purchase a home or refinance your mortgage, RESPA also requires the lender to give you a copy of your HUD-1 or HUD-1A Settlement Statement the day before you go to settlement, if you request it. This final statement of settlement costs will show all the fees and charges you will be expected to pay at settlement. The HUD-1 also states the initial terms of the loan, including the monthly amount due.
The revised HUD-1 is designed for easy comparison with your good faith estimate. Most costs in the “800″ to “1300″ series of the HUD-1 form are labeled with the corresponding section of the GFE for reference. Included in the HUD-1 are comparison charts for the estimated costs provided on the GFE and actual costs paid at closing. These will be completed by the settlement agent for you before closing with information provided by your lender.
Fees paid outside of settlement/closing
Some fees may be listed on the HUD-1/HUD-1A and marked as “Paid Outside of Closing” (or POC). You will pay some of these fees, such as for credit reports and appraisals, before settlement. Other fees, such as your direct payments to a mortgage broker, you will pay at settlement. Payments by other parties, for example, from the lender to the mortgage broker, also may be marked as POC.
Sample Settlement Costs
Because costs may vary from one area to another and from one lender to lender, the following example is an estimate only. This example is based on a $200,000 home with a 5% or a 20% down payment. Excluding reserves for property taxes and down payment, settlement costs for the 5% down payment loan vary between $6,235 and $19,930 (median cost $13,030); settlement costs for the 20% down payment loan vary between $5,800 and $18,440 (median cost $11,585). Your costs may be higher or lower than the examples below.
Note: “–” = not applicable
- May be a dollar amount or a percentage.
- Depends on interest rate, the day of the month that settlement takes place, and the amount borrowed. The example assumes that there are 16 days left in the month and that the interest rate on the loan amount is 6%.
- These are the fees if using $3.50 per $1,000 of purchase price as an estimate.
- Varies greatly and depends on local tax rates.
- Costs may very regionally.
- Visit http://www.taxadmin.org/fta/ to find your state’s tax department.
- These items vary depending on your agreement with the seller.
All figures are estimated and the Good Faith Estimate from the lender/title company are those that will apply.