What are the actual costs in closing costs?

If you have even started thinking about buying a home, there is a good chance you’ve heard the term “closing costs,” but I know that many people have questions about what they are and how they are calculated.

I talked about closings and closing costs in previous posts, but here I’ll talk about what actually makes up the closing costs.

The “closing” on a house is a meeting between the buyer, seller, and lender when the house and money legally change hands.  At your closing, both the buyer and seller may pay closing costs. The Real Estate Settlement Procedures Act (RESPA) of 2010 changed how closing costs are shown.  Therefore, even if you have bought a house and been through a closing before, it’s probably a little different now.  RESPA was passed so that people buying houses could more easily compare “apples to apples” when it came to mortgage brokers by requiring different language and the same definition of terms. 

Below is an explanation of all of the different types of fees and costs that make up your final closing costs and where that money goes.

·         Loan Origination Charge – In short, this is the money to cover everything that the lender does to make sure you close on time and get your mortgage.  This fee is where most of the RESPA changes were made.  Before RESPA, many items listed in this section were shown separately, but today they are clumped under “loan origination fee.”

• Loan origination fee– The origination fee is sometimes shown as a percent (%) of your loan.  It is a tax-deductible cost.  It is the amount of money that you are paying the lender to do all of the work involved in deciding, making, and then supporting a loan.  
• Application fee – This is a fee that you pay to have the lender consider loaning money to you. 
• Processing fees – The processing fees are charged by the lender as a way to cover some of the costs of the work that goes into making a loan.  Lenders may have to make long-distance phone calls to verify your employment and speak with you, create files using office supplies, and maintain these.
• Underwriting fee – Like insurance, mortgages have underwriters.  This fee covers the costs associated with underwriting the loan.
• Funding fee – Typical on VA loans, the funding fee covers administrative costs similar to the processing fee. 

·       
 Title Services Fee – Like the “Loan Origination Charges”, RESPA affected the way these fees are listed as well.  The Title Services Fee is a new way to bundle the following group of fees:  

•      Document preparation fees– When you close on your house you’ll see that you sign a lot of pages of paper!  Three sets of copies are made of these papers, along with other sheets of office notes that you do not have to sign.  The document processing fees cover the costs associated with copying and mailing all paperwork.
•     Title/Abstract search – The title search helps make sure there are no problems with the title (see my previous blog post about titles.
•     Title examination/Title insurance binder– This is insurance that will protect the lender (and owner, if an owner policy is purchased) if anyone brings a lawsuit against the title on the house. 
•      Settlement fee – This covers the cost of the services by the closing agent for the closing.
•      Lender’s and buyer’s attorney – A lawyer typically works behind the scenes on many house closings and mortgages to make sure that everything is following current real estate law.

·         Survey fee – This money pays for someone to come and make sure the land or property you are buying has not been built on or taken over by the neighbors accidentally or on purpose.  This makes sure you know exactly what is yours and what belongs to your neighbor. 

·         Legal and recording fees or transfer fees – This money is sent to the country clerk and state to change the name of the owner (and person who owes money for the taxes) and record the sale price of the home in the official record. 

·         Property taxes– Property taxes are pre-paid by the seller.  When you buy the house, part of the closing cost is a “tax adjustment”.  This basically means that you are paying the seller back the amount of taxes that he or she has pre-paid.      

·         Per Diem interest – At closing, you will need to pay the interest on your loan from the closing date to the date the first payment is due.

·         Flood certification – Before you buy a home, the lender will make sure the home you are buying is not in a flood zone. The flood certification charges cover the costs to have an expert review where the property is located.