Throughout the process of securing a home loan and buying a home, you will encounter a series of costs outside just your down payment. Costs that accrue during the mortgage process and outside of the principal and interest on your home loan are called closing costs.
Mortgage closing costs can be roughly divided into four categories:
- Lender Fees
- Third-Party Fees
- Prepaid Items
- Escrow Account Funds
Each category is important to a successful closing, and protects both you and your lender. Buying a home is an exciting investment and an important step in your life. The costs in each category are designed to help minimize risk associated with such an investment.
Your mortgage lender will require certain fees to process, approve, and fund your loan. These are often the most straightforward loans, and you should know what to expect upfront. At Chris Doering Mortgage, you can sit down with us to understand what sort of lender fees you can expect, and talk through the entire mortgage process.
Underwriting: This is the process by which the lender determines your loan eligibility. This fee covers the lender’s cost for underwriting your loan application.
Government Recording: The lender must record the mortgage with the county recorder’s office in order to protect its collateral interest in your property. This fee covers the cost of recording your mortgage.
Processing: This fee reflects the cost of having loan processors put together your loan. At Chris Doering Mortgage, these people are experts and work hard to make sure your loan goes through smoothly.
These are fees that are charged by third parties in connection with the processing of your loan – the people who assess your future home’s value, the legal experts, and others. These fees will typically change very little from lender to lender.
Appraisal: In order to assess the value of the property, an appraiser goes to your future home to determine that value. This is paid for in advance by the buyer. The appraisal management company chooses the appraiser, not the lender, in accordance with regulation.
Flood Certification: The lender needs to make sure your property is not located in a flood zone. This fee reflects the cost of obtaining a report from FEMA.
Closing/Settlement: This is what the title or closing agent charges for managing the closing of your loan and making sure that your note and deed are properly filed.
Owner’s Title Insurance: The title insurance policy protects the buyer of a property against financial loss due to title defects or liens. In Florida, the property seller typically covers this cost.
Lender’s Title Insurance: The title insurance policy protects the lender against title defects or liens. The buyer typically covers this cost.
Transfer Taxes: This is a tax imposed by the government on the passing of title to property from one person to another. The cost of transfer taxes is often split between the buyer and the seller. The buyer’s portion is often higher.
These are certain items, such as interest and homeowners insurance, that you are required to prepay at closing. These items will not change from lender to lender.
Interest: The amount of interest that accrues from the date of your loan’s funding to the end of the month when the funding occurred. For example, if your loan was funded on June 10, the prepaid interest should reflect 20 days to cover the period from June 11 to June 30. Since your first mortgage payment on September 1st will cover the interest from August; in order to be all caught up, the interest from the month of closing needs to be paid upfront. It is industry best practice to use 15 days as an estimate, since the exact date of your loan closing is still unknown.
Homeowner’s Insurance: Lenders require that borrowers purchase homeowner’s insurance, also known as hazard insurance. The lender will require an upfront payment at closing to cover a full year’s premium of homeowner’s insurance, as required by the policy provider.
Escrow Account Funds
Lenders require an initial escrow deposit to start your escrow account. Escrow accounts are set up to pay property-related expenses, such as property taxes and homeowners insurance. The lender will break them down into monthly installments and include them as part of your monthly mortgage payment.
Property Taxes: The exact amount you’ll need to deposit into your escrow account at closing varies depending on your closing date.
Homeowner’s Insurance: In addition to the upfront payment at closing to cover a full year’s premium of homeowner’s insurance, the lender also requires that some funds be deposited into your escrow account at closing to cover your monthly homeowner’s insurance.
Mortgage Insurance: Mortgage insurance protects the lender from a potential borrower default. It is typically required by the lender when you put less than 20% down to purchase your home. This is usually estimated at two months of your monthly mortgage insurance payment.
What Can I Expect in Closing Costs?
The short answer is that it depends.
Some of these fees are standard and set, either by your lender or third parties. Others depend on factors such as when you’re securing your loan, the value of your home, and more.
Typically, closing costs will fall between 2-5% of the purchase price of your home, although anywhere between 1-8% is not uncommon. Again, that percentage will depend on the purchase price of your home, and is not set by any party – it is determined by the accrued total of each closing cost.
At the onset of the mortgage process, Chris Doering Mortgage will give you a “Good Faith Estimate” (GFE) so that you know what to expect, and can plan for it. We’ll also sit down with you one-on-one to get a sense of what you’re looking for, explain the process, and help you make the decisions that will give you the best possible mortgage experience and get you into your future home.