Mortgage 101 - Closing Costs and Good Faith Estimates

Home buyers who obtain a mortgage have to pay "closing costs". Closing costs is the general term used to describe the various fees and expenses paid in order to obtain a mortgage. As a general rule of thumb, closing costs are between 2 and 3 percent of the gross purchase price. In order to see a break down of closing costs, you need to get a "Good Faith Estimate" (GFE) from the lender(s) you’re working with or comparison shopping. A GFE shows all the closing costs line by line. It also shows you your estimated total monthly payment.

Here’s a sample Good Faith Estimate (click on picture to enlarge):

   

Note: If a lender drags their feet or gives you a hard time about providing you with a GFE, do not work with that lender.

Once you get the GFE, ask your lender to go over it with you in detail. You may also want to go over the GFE with your real estate agent to make sure you didn’t miss something and that the lender didn’t hide any fees.

In order to better understand the Good Faith Estimate prior to going over it with your lender/agent, here’s a list of some common items and their fees and what line they can be found on.

Items that must be paid in order to close the loan. Neither the lender nor broker have control over these charges:

• Title Settlement Fee - line 1101
• Title Insurance - line 1108
• State Recording Tax/Stamps - line 1203
• Property Tax Escrows - line 1004
• Hazard Insurance (Home Owner’s Insurance) Escrows - line 1001

Items that can change, but are associated with all lenders:

• Pre-paid Interest - line 901
• Underwriting Fee - line 811
• Processing Fee - line 810
• Flood Certification Fee - line 815

Items that are specific to the broker/lender:

• Origination Fee - line 801
• Discount Fee - line 802
• Broker Processing Fee - line 813
• Broker Administrative Fee - line 814

The last set of fees (specific to the broker/lender) are directly controlled by the broker/lender and can be negotiated. But understand that if these fees are reduced or waived, the interest rate usually goes up since the broker/lender has to make a profit somewhere. And remember…you get what you pay for.

When looking at GFE’s, don’t simply look at the bottom line. You must compare lender fees to lender fees as these are the only ones that the lender controls. Make sure there aren’t fees hidden among the title or state tax fees, a tactic used by some shady lenders out there.

Lenders are also responsible for quoting other fees involved with a mortgage loan. Since many of these are third party fees (title search, survey, etc), they are often under-quoted up front by a lender in order to make their bottom line appear lower. 

Important note: Lender’s Good Faith Estimates are not held to much of a standard by law. The total amount of closing costs listed on your GFE can vary greatly from what your actual closing costs are on settlement day. Unfortunately, you will probably not be able to back out of the purchase due to a change in closing costs and/or your interest rate (check with your agent/broker/lawyer for further guidance). That is why using a reputable lender with a proven track record and high customer satisfaction is so important.

For more about Good Faith Estimates and why you should be careful, read Lenders versus Mechanics.

Special thanks to Christopher Koegler of America Funding in Mclean, Virginia.