Settlement Costs
Total costs charged to the borrower that must be paid at closing, by the borrower, the home seller, or the lender. In dealing directly with a lender, settlement costs can be divided into the following categories: Fees paid to lender; Lender-controlled fees paid to third parties; Other fees paid to third parties; Other settlement costs. Fees Paid to Lender: Lender fees fall into two categories: those expressed as a percent of the loan and those expressed in dollars. Fees Expressed as Percent of Loan: These consist of points and origination fees. Origination fees are points in disguise. Reporting services that publish information on mortgage rates and points do not show origination fees, so lenders that charge an origination fee may appear to have lower fees. This is pure gamesmanship. The borrower's concern is the total of all charges expressed as a percent of the loan amount, whatever they are called. Lender Fees Expressed in Dollars: Some of the common lender fees expressed in dollars cover processing, tax service, flood certification, underwriting, wire transfer, document preparation, courier, and lender inspection. They are almost always itemized, a deplorable practice that goes back to the days when interest rates were regulated and lenders had to justify their fees in terms of reimbursement for costs. From the borrower's perspective, what these fees are called doesn't matter, and whether they are cost-justified doesn't matter. All that matters is their sum total, which borrowers should use in shopping. Shoppers take account of points in selecting a lender because lenders always report points alongside the interest rate. Dollar fees and origination fees, however, are not reported in the media and generally are not volunteered by lenders. For this reason, shoppers often fail to consider them in selecting a lender. Trying to negotiate them afterwards is usually fruitless. Shoppers should ask for dollar fees and should expect the lender to guarantee them through to closing. In contrast to guaranteeing a rate and points, which exposes a lender to market risk, there is virtually no risk in guaranteeing dollar fees. The same is true of an origination fee. Lender-Controlled Fees to Third Parties: These are fees for services ordered by lenders from third parties and include the costs of appraisals, credit reports, and (when needed) pest inspections. Lenders know the prices of these services and can easily guarantee them in addition to their own fees. Other Fees Paid to Third Parties: These fees are not controlled by and may not be known by the lender. The most important are title-related services and settlement services. If you are in an area in which it can pay to shop for them, you can do it after selecting the lender. Other Settlement Costs: These are a miscellany of charges, which require little vigilance by the borrower. Government charges, such as transaction taxes, are what they are; Per diem interest is interest for the period between the closing date and the first day of the following month. At worst, the lender might try to tack on an extra day or two; Escrow reserve is your money placed on deposit with the lender so the lender can pay your taxes and insurance; Hazard insurance is your homeowner's policy, which you purchase from a carrier of your choice. Good Faith Estimate (GFE): Under the Real Estate Settlement Procedures Act of 1974 (RESPA), lenders are required to
Popular Mortgage Terms
A mortgage on which the payment rises by a constant percent for a specified number of periods, after which it becomes fully-amortizing. ...
Housing expense plus current debt service payments. ...
A documentation option where the applicant's income is disclosed and verified but not used in qualifying the borrower. The conventional maximum ratios of expense to income are not ...
Points paid by a lender for a loan with a rate above the rate on a zero point loan. For example, a lender might quote the following prices: 8%/0 points, 7.5%/3 points, 8.75%/-2.5 points. ...
A second mortgage offered at preferential (subsidized) terms to those who qualify. For example, a labor union may offer members who are first-time home buyers a silent second to finance ...
The definition of affordability in real estate is simply a buyer’s capacity to afford a house. Affordability is usually expressed in terms of the maximum amount a buyer will be able ...
The number of days for which any lock or float-down holds. The longer the period, the higher the price to the borrower. ...
A lender that provides loans through mortgage brokers or correspondents. ...
A contract provision that adjusts the payment on an ARM periodically to make it fully amortizing. ...
Have a question or comment?
We're here to help.