After you and your local lender have established your credit worthiness and home buying budget, they will provide you with an "Approximate Loan Cost Illustration" or simply, "Loan Estimate". Since 2015, lenders have been required by law to supply this within 3 business days for most types of loans (HELOC's and reverse mortgages, among others, are excluded).
This estimate lets you, as a buyer, to easily compare lender costs, which the Consumer Financial Protection Bureau (CFPB) notes approximately 50% of American homebuyers DO NOT do. You just took a 15 minute survey to determine what breed of dog you are, and you don't have time to comparison shop for the biggest purchase of your life?
A good lender will provide a reality check on the true costs of finding and purchasing a home, including the cost of appraisals, home inspections including a sewer scope and radon test, and title searches. They will also answer some very important questions, like: Will your loan rate remain the same or change at some point through the process? What happens if you have a 30 day interest rate lock and the closing is pushed out to 40 days? How much cash will be required at closing? Are taxes and insurance paid outright or through escrow?
Many home buyers tell me, when I ask them about lender shopping, that they are just going with their personal or business banker. This is a mistake, and let me break down the math for you. Two weeks ago, I sat in on a closing for a couple with a stellar credit rating who had not shopped around. Their lender had charged them $3500 in buydown points, to get to the rate of 3.1%. In comparison, my first time home buying clients closed in the same timeframe at 2.8% with no buydown points. Both houses were in the $400K range. Total cost for each loan over 30 years turns out to be $584K vs. $562K, and if the $3K buydown points are rolled into the loan, that cost goes up to $589K, a difference of $27K.
Take my word for it and comparison shop. It will pay you dividends in the long run.
Key Terms
Estimated total monthly payments. This is how much you’ll pay each month for your loan. At minimum, your payment will Include loan principal and interest, but can also include property taxes, insurance, and possibly other fees like HOA dues. Here is what that could look like:
Estimated Monthly Payment
Principal & Interest: $1,576.53
Taxes: $225.00
Property Ins: $100.00
PMI/MIP: $76.48
Total Est. Payment: $1,978.01
Interest rate. How much interest you will pay the bank as a percentage of your loan. You should also pay attention to if this rate is fixed or variable. Don't get fixated on the lower of the two numbers, as the larger number, APR (Annual Percentage Rate), takes into account the real interest rate that you will be paying, taking into account PMI, closing costs, points, etc... Here is what that could look like:
Loan Program: Freddie 30F
Loan Term: 360 Months
Interest Rate: 2.500%
APR: 2.848%
Estimated cash to close. Self explanatory. Here is what that could look like:
Funds Required
Sales Price (purchase): $420,000.00
Pay-Off (refinance): $
Closing Costs: $3,329.25
Prepaids: $2,202.33
Total Loan Amount: -$399,000.00
HELOC/New 2nd: -$_______
EST CASH TO CLOSE: $26,531.58
Estimated Closing Costs
Homebuyers' eyes gloss over at this point, and so I have given as clear an explanation as possible for each. First, here is what it could look like:
Estimated Closing Costs
Underwriting Fee: $250.00
Processing Fee: $440.00
Discount Points: $498.75
Appraisal Fee: $650.00
Credit Report: $76.00
Tax Service: $60.00
Flood Certification: $12.50
Verify Employment: $40.00
Settlement/Closing: $400.00
Real Estate Closing: $170.00
Closing Protect Letter: $25.00
Lenders Title Ins: $525.00
State Tax Stamps: $42.00
Recording Fee: $140.00_______
EST CLOSING COSTS: $ 3,329.25
Underwriting Fee: $250-$350. This is the cost of putting the loan together. The underwriter is the final decision maker on your loan approval. The underwriting fee goes towards paying for the necessary staff to analyze your documentation and loan application and decide whether or not to approve your loan.
Processing Fee: $300-$900. Loan companies hire loan processors who are responsible for gathering all of the documentation required to close your loan. While your loan officer is concentrated on the customer-facing side of the business, the processor focuses on the behind-the-scenes work that goes into your loan.
Discount Points: 1 discount point = 1% of the loan amount. Discount fees (or discount points) are fees you pay your lender to lower your interest rate. This process is also known as “buying down the rate.”
Appraisal Fee: $500-$900. Double this if you need a quick turn around or have a large/unique house. The property being appraised is collateral for your mortgage so the lender will want to verify that the property’s value is comparable to similar property based on recent sales in your area.
Credit Report: $7-$60. The lender naturally wants to verify your good (or acceptable) credit rating.
Tax Service Fee: $70-$80. This fee goes to an independent service that monitors your payment of property tax for the lender. A municipality like a city or county can seize a home with past due taxes. Lenders obviously like to avoid that situation.
Flood Certification Fee: Up to $25. Every home in the U.S. is either in a flood zone or not. The determination is based on FEMA flood maps. Lenders need to know whether or not your home is in a flood zone, and if it is, that flood insurance is available. Lenders won’t approve a loan that is in a flood zone, but doesn’t have specific flood insurance available.
Verify Employment Fee: $40-$50. Home loan lenders typically accept a debt-to-income ratio of 43% at most — meaning that all monthly bills, including credit card monthly payments, mortgage payments, car loan payments, etc. — must equal no more than 43% of a buyer’s gross monthly income. Part of the 2008-2010 housing crisis came about because the debt to income ratio was as high as 50%.
Settlement Closing Fee: $400-$600. This fee is paid to the settlement agent or escrow holder. Responsibility for payment of this fee can be negotiated between the seller and the buyer. Costs bundled under the Settlement Fee may include the cost of escrow, survey fees, notary fees, deed prep fees, and search abstract fees.
Real Estate Closing Fee: Cost varies.
Closing Protect Letter: $20-$50. A closing protection letter is a contract between a title insurance underwriter and a lender. In this agreement, the underwriter agrees to indemnify the lender for actual losses caused by certain kinds of misconduct by the closing agent.
Lenders Title Insurance: $300-$1500. This fee can vary widely as it’s based on the home’s value and geographic location as well as the loan amount. A title company’s job is to research all past claims on the home and ensure the title is “clear” — meaning no one can claim a right to the home. They also issue insurance in the event something was missed. There are two kinds of title insurance and you’ll need both when 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.
State Tax Stamps: 1/10 of 1% of the purchase price, so on a $420,000 home, the fee would be $42. Compare this to Delaware's 3% rate, which is 30 times higher!
Recording Fee: $40-$75. Charged to record documents with county government recorder.
Other possible costs include...
Lender’s Inspection fee: cost varies. Also know as a 442, this inspection is for newly constructed property to verify that construction is complete with carpeting and flooring installed.
Loan discount: cost varies. These are discount points, each equal to 1 percent of the loan amount, in addition to the loan origination fee.
Loan Origination Fee: cost varies. This is also called "points." Typically, the more you pay in points, the lower the interest rate.
Mortgage broker fee: They may also add in any broker processing fees in this area.
Administration fee: cost varies. Either this or an underwriting fee will typically be charged.
Appraisal review fee: $75-$150. An appraisal review is usually done on higher-valued properties.
Document preparation: around $200. Even though lenders now can draw up their own documents without paying document preparation firms, you’ll still pay this.
Warehousing fee: cost varies. This fee isn’t seen much anymore, but you may end up paying it – it’s the cost of a “warehouse” line of credit.
Wire transfer fee: cost varies. This is the cost to transfer funds from one account to another.
Items required to be paid in advance
Homeowner’s insurance: cost varies. You are usually required to pay the entire first year’s insurance premiums at closing.
Mortgage insurance: cost varies. Some first-time homebuyer programs still require the first year mortgage insurance premium to be paid in advance.
Pre-paid interest: cost varies. This is the interest that will accumulate between the day of closing and the day the first payment is due, usually the first of the following month.
Up front mortgage insurance premium: cost varies. This is 2.25 percent of the loan balance, normally added to the balance of the loan. It is charged on FHA purchases of single family homes or planned unit developments.
VA funding fee: cost varies. This is paid to the Veterans Administration for guaranteeing your loan.
Non-recurring closing costs
Closing/escrow/settlement fee: cost varies.
Courier fee: cost varies. This is the charge for sending documents back and forth between lender and borrower.
Home inspection: $350-500. This is an optional, but recommended, cost. Sewer scopes typically run an additional $150 and radon an additional $100.
Home warranty: $150-400. Also optional, a home warranty usually covers such items as the major appliances, should they break down within a specific time. Often this is paid by the seller.
Homeowner’s association transfer fee: These are getting ridiculous, and I've seen these range from $50 to $500. This is the cost to transfer the membership from the seller to the buyer.
Loan tie-in fee: cost varies. Usually charged by the closing agent, this is for services they provide in dealing with the lender.
Notary fees: around $40. This is to make the document signatures legal.
Pest inspection: around $75. This inspection tests for pests and problems such as wood rot and water damage.
Recording fees: $40-$75. Charged to record documents with county government recorder.
Sub-escrow fee: cost varies. The title insurance company usually charges this for dealing with the closing agent.
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Please feel free to reach out to me to discuss your move into or out of Northern Colorado. Thank you!
James Sack, REALTOR®
Coldwell Banker Residential Brokerage
1109 Oak Park Drive | Fort Collins, CO 80525
C: (970) 217-9705 | O: (970) 223-6500 | E: James.Sack@coloradohomes.com | W: www.JamesSack.com