What are closing costs and how much will they be?

Summary

One of the areas of most confusion for borrowers is that of closing costs. I find that borrowers don't know what they are for, how they are determined, if they can vary from lender to lender, and if there is any help available to pay for them. In this article I will break down the different types of fees that could appear in your "Closing Costs".

by Christian Scully

So you’ve got your credit score where it needs to be, you’ve saved your downpayment funds, you’ve been pre-approved for a mortgage loan, you’ve found your dream house and you are about to put an offer in… but wait! Closing costs! Do you have enough extra funds to cover them or will you need to roll them into your loan? Wait, you can do that? 

Closing costs are exactly what they sound like: the costs associated with actually closing your loan and finalizing the transfer of property from the seller to you. They primarily consist of three things: loan origination charges, the settlement services that are needed to finalize your purchase or refinance and finally any pre-paid and/or escrowed funds.

​Let’s look at both of these in a bit more detail:

There may be origination fees charged by your lender.
​

Points - Also called "Discount Points". You may be charged points, depending on your interest rate and lender. It is essentially your cost to get the interest rate you are being offered. If you want an even lower interest rate, it will cost you more in points. One point equals 1% of the loan amount. 

Processing Fee - You may be charged a fee to cover the lender or broker's time spent processing your loan application. There is a lot of work done behind the scenes by the Processor to package the loan and get it approved by underwriting.

Underwriting Fee - You may be charged an underwriting fee to cover the time spent by the underwriter reviewing, analyzing and approving your loan application, adhering to strict standards set by the lender or government agency. 

​Broker Fee - If you are working with a broker, you may be charged a broker fee.

Application Fee - Some lenders may charge a fee to review your application. Please Note: The ONLY fee that a lender is allowed to charge a borrower before closing is for a credit report. If you are being charged an application fee just to submit your application you are being scammed and need to report the lender to the Consumer Financial Protection Bureau. 

​

Your lender requires settlement services that you cannot shop for.
​

There are a number of services required by lenders in order to transfer the property into your name and secure the transaction with a mortgage. Here is a common list of services and fees you may expect, depending on your type of loan: 

NOTE: All of the dollar amounts are only examples based on my experience originating loans in New England. They will be different in each state, and some cities and states have unique fees. They are to give you a rough idea of what to expect.
​

Appraisal:  $300-400 for single family; $600-800 for multifamily
You will either pay for your appraisal directly through an Appraisal Management Company - a company that contracts the individual appraiser to value your property - or you will pay for the appraisal at closing. If you are refinancing your home, ask your lender if your property is eligible for an appraisal waiver. 

Final Inspection Fee:  - $100-200
If the appraiser needs to return to the property for any reason, they will likely charge a re-inspection or final inspection fee. For example, if you are purchasing a home with an FHA loan, there are strict requirements that the home cannot have peeling paint and every stairway must have handrails, among other things. If any required item needs repair, the seller will need to coordinate the repairs and the appraiser will return to verify the repairs have been sufficiently completed. 

Credit Report: - $50-100
This fee covers your lender’s cost to request your credit report through a credit reporting agency.

Mortgage Insurance Premium (FHA Loans): 1.75% of the mortgage loan amount
If you are closing an FHA loan you will be charged a mortgage insurance premium. This fee goes to the government agency that is guaranteeing your loan to the lender, which is what enables these programs to provide financing to such a wide range of borrowers. Fortunately, this up front fee can be financed as part of the loan, so you don’t have to worry about coming up with the additional cash. 

Funding Fee (VA Loans): 1.4%-3.6% of the mortgage loan amount, depending on downpayment amount
Similar to the FHA Mortgage Insurance Premium, the VA Funding Fee is charged up front and can be financed into the loan.

Guarantee Fee (USDA Loans): 1% of the mortgage loan amount
Similar to the VA Funding Fee, the USDA Guarantee Fee is charged up front and can be financed into the loan.

Flood Certification: $8
This fee covers the lender's cost to obtain a certification that the subject property is not in a flood plain.

Verification of Employment (VOE): $50
This fee covers the cost to verify your employment, if your employer uses a 3rd party verification service.

MERS Registration Fee: $12
You may be charged a MERS fee, which covers the cost to register your loan in the MERS national mortgage database.

Tax Service Fee: $10-100 
You may be charged a Tax Service fee, which covers the lenders cost to research the property tax history and be sure all property taxes are up to date and paid.

Collateral Desktop Analysis Fee: $150
Often used for investment properties, you may be charged this fee if your lender wants to further verify and analyze any appraisal of the property, or if a standard appraisal was not required. 
​

You have the option to select your closing attorney, who will charge for the services they provide to complete the sale.
​

Title Search/Examination: $200-250
This is the attorney’s fee to examine the title for any potential issues that will need to be solved before closing. 

Settlement or Closing Fee: $500-800
This is the attorney’s fee for actually closing the loan with you, handling the paperwork, going back and forth with the funding department at the lender, and getting the correct documents to city or town hall. 

Deed/Mortgage Recording Fees: $150-250
Standard fees in your municipality to actually record the deed and mortgage.

State Tax/Stamp Fee: $10-20
This is a small tax on newly recorded deeds. In RI, for example, the current tax rate is .4% of the value of the property transferred.

Closing Protection Letter: $35
Insurance for the lender/buyer in the event of actual loss of funds due to the closing agent's mistake.

Document Preparation Fee: $50-75
This fee is exactly what it sounds like, and may be charged by your attorney to prepare all of your closing documents.

Lenders Title Insurance: $400-800
Your lender typically will require an insurance policy be purchased for them in case an issue with the title (someone else makes a claim to the property) in the future. Yes, they make you pay for this policy on their behalf.

Municipal Lien Fee: $50
The Municipal Lien Fee covers the municipal lien certificate that will be ordered from the city or town and certifies all of the property taxes and charges due on the subject property.

Courier / Wire / Email Fee: $25
This fee covers the mailing of loan documents and wiring of funds by the closing attorney.

Some settlement services fees are optional.

Owner's Title Policy: $300-$400
This policy is optional, you do not need to buy an owner's insurance policy. However, discuss this option with your attorney. It is often recommended. If it is important for the lender to have a title policy, it might be a good idea for you as well. It is protection for you as the borrower in case there is another claim to the title at any point in the future.
​

Pre-paid Items and Escrowed Funds

In order to protect their investment, your lender wants to be absolutely sure that the homeowners insurance and property taxes will be fully paid on time. Remember, when you purchase a house with a mortgage loan, your lender is agreeing to buy the house for you and you are purchasing the equity from them each month over the life of the loan. If you were to fall on difficult financial times and were unable to make your tax and insurance payments, two bad things could potentially happen.

First, if an accident happened and there was significant damage to the house and your homeowners insurance had been cancelled due to non-payment, your lender wouldn’t be protected and would lose money. For this reason, you are typically required to pay 1 full year of your insurance premium up front at closing, so the lender knows that it is all paid and nobody has to worry. In addition, an escrow account, basically a holding account in your name is created in order to hold extra funds for your next insurance premium payment in a year. 

Each month your mortgage payment will include 1/12th of your total annual mortgage premium. That money will go into your escrow account. By the time your initial policy is expired after your first year of home ownership, your escrow account will have saved up enough money to pay another full year’s insurance premium. And that’s the way the world goes round!

Property taxes are dealt with in a similar fashion. At closing, a few months worth of of tax payments will be collected and placed in your escrow account and when your quarterly tax payments are due, the lender will make them on your behalf. 

Depending on where you purchase your home, what the property tax rate is and how expensive your homeowners insurance is, your pre-paid items and escrows may well be a significant portion if not a majority of your total closing costs.

Don’t let the total closing costs scare you, because the prepaid items are things that you will have to pay in the future anyways! 
​

Anything else?

As you can see the closing costs primarily consist of service fees for things you need in order to close the loan, and things that you will end up paying in the future, collected in advance for you and the lender’s protection. It is important to recognize that these closing costs are going to be fairly similar from lender to lender, but vary depending on your geographic location. Fees will vary slightly depending on the attorney you choose to work with. The closing cost that will vary from lender to lender are the origination charges, so you'll want to pay close attention to those items and compare them directly on your Loan Estimates when you shop around. 

---

+ Better Tip
Borrowers that don’t have enough available cash to pay for closing costs should discuss seller credits with their realtor lender and lender credits with their lender. Depending on the loan program you are approved for there is a maximum amount that could be credited back to you by the seller at closing to pay for closing costs and pre-paid items. These are called seller credits. For example, if your offer on a property is going to be $250,000 - you are allowed to offer $255,000 with $5,000 in seller credits to go towards closing costs and prepaid items. It is the same offer, but allowing you to borrower more money as a way of financing your closing costs and avoiding the out of pocket expense. Keep in mind that the property will have to appraise for the full offer in order to be approved by the lender. Lender credits are a way the lenders can help you finance closing costs if the seller is unable to provide seller credits. In exchange for a paying a higher interest rate, the lender may be able to provide a credit that can be used to cover closing costs.