Closing Costs? What Are Those?

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The topic today is closing costs. If you are a first time home buyer, this may be the first time you have heard the phrase. Closing costs are the fees charged by the lender and other service providers in order to get your mortgage closed. "What the heck," you might say. Isn't the down payment enough? The down payment actually benefits you, the buyer. That goes towards the purchase price of the home. However, in order to close a home legally, there is lengthy list of things that have

to happen such as underwriting, appraisal, credit reporting, title searches, upfront mortgage insurance or funding fees etc. These all factor into closing costs which can add significantly to the acquisition cost of the house.

I like to divide closing costs into three parts:

1) Lender fees-the lender fees are for underwriting and processing-the fees the lender requires to actually process and approve your loan. These are the only fees that the lender actually controls. In most cases these fees run around $800-$900

2) Third party fees: These are fees charged by third parties but required by lending such as the appraisal, credit report, up front mortgage insurance or funding fees, title fees. and recording fees. It is hard to quantify these fees as some of them are dependent on the size of the mortgage.

3) The last classification of fees is what is known as pre-paid fees. These fees are to set escrow accounts for the payment of insurance and taxes, and one year of home owner's insurance. Again, depending on taxes and the cost of insurance the cost of this portion of closing fees can vary wildly.

However, the good news is that your lender should be able to give you a fairly solid estimate of how much these fees will run This can be done based upon a specific loan amount with out an actual property using estimates for taxes and insurance . Once a property is identified and the loan process begins a form called the Loan Estimate is issued with the total fees disclosed. If any fees change during the course of the processing of the loan the borrower is notified by the receipt of a new loan estimate. Typically once fees are disclosed, there are no significant changes unless the loan program has to change for one reason or another. The final dollar amount that the borrower brings to closing should pretty closely resemble the dollar amount shown on the Loan Estimate.

As a part of the purchase negotiation, the borrower can ask the seller to pay for some or all of the closing costs. In many cases the seller is willing to do so, however, that could potentially add to the purchase price of the home.

The other thing that buyers need to be aware of is that closing costs don't vary widely from lender to lender. With increased scrutiny from the Consumer Financial Protection Bureau, the costs for these services can't have wild swings, either on the borrower's behalf (such as the lender paying for their costs without disclosure) or undisclosed increases in costs.

For the first time home buyer, familiarity with these costs and a plan to cover them is a critical part of the pre-approval process. Do not hesitate to call your lender for answers to any questions you may have.