The real estate business is saddled with a myriad of fees. I have opined that some parties, like lenders, escrow and title, seem to believe that if they can come up with a new name for some function that they already perform, their creativity should be duly rewarded by being able to charge anew for it.
Though people ask what "this or that" is for, they seldom remember the explanations. So, as a public service I offer the following glossary of some of the more common fees one is likely to see on Good Faith Estimates (GFE's) or at closings. As you scroll though these fees, don't be dismayed--you're not going to see all of them on a GFE. What you can expect to see (at the very least) are an underwriting, processing, escrow, title, and recording fees.
Different lenders and brokers use different names for the same item. All lenders and brokers are required to provide you with a Fees Worksheet (that detail the services you may be required to get and pay for in connection with your loan and what the Good Faith Estimate (GFE) used to look like), a GFE is basically the Fees Worksheet with the various services reformatted into collective groupings, a HUD-1 (Settlement Statement). In order to explicate their meaning and where said item is likely to be encountered, I have included the standard line item numbers used on these forms to the left of the entry.
Note: the only fee that goes to me or my company is a loan origination fee and most often that is paid by the lender. As I am not being paid these other fees I have minimal control over their imposition, but they are negotiable and it behooves buyers and borrowers to do precisely that.
ADMINISTRATION FEE- is another name for Underwriting Fee. It may include charges for underwriting, document preparation, or both. When an admin fee is charged, there should only be one of either (the Underwriting or Document Preparation) charged in addition to the Administration Fee, or there should be no other fees charged for underwriting or document preparation. If an Administration Fee is charged, you will probably find there is no Underwriting Fee, though, not always.
APPLICATION FEE- covers the initial cost of processing your loan request. Application fees are largely charged because of consumer comparison shopping. Costs associated with your loan are incurred from the minute your loan request is started. Charging application fees covers these fees in the event that a comparison shopping buyer does not close the loan with the lender. Often, the application fee is credited towards closing costs if you close the loan with the lender. If you do not close with the lender, the application fee is not refunded.
803APPRAISAL FEE - pays for an independent appraisal of the home you wish to purchase or refinance. The lender requires this opinion or estimate of the market value of the house to ensure that the house is worth the purchase price and to establish a Loan to Value (LTV).
APPRAISAL REVIEW FEE- Even though you will probably not see this fee on your GFE or Mortgage Loan Disclosure Statement (MLDS) it is charged occasionally. Some lenders routinely review appraisal as a quality control procedure, particularly on higher valued properties or in areas that have seen rapid price appreciation. This fee is in the neighborhood of $150.
COMMITMENT FEE/LENDER RATE LOCK- Most lenders charge a fee for a rate lock that extends beyond 60 days. Fees are charged against shorter term locks as well e.g., 15, 30 & 45-day locks, as well. The rule is the longer the lock, the higher the fee. The fees are usually a fraction of a point (1%) and are deducted from a broker's rebate (the amount the broker receives from the lender for placing the loan with them).
1111COURIER FEE - This fee is similar to the courier fee charged by other lenders, but covers the title company's or attorney's delivery costs. The fee is approximately $30.
804CREDIT REPORT - This fee covers the cost of a standard factual credit report.
CREDIT REPORT FEE- Lenders require a credit report. Your credit history is a part of the application documentation. As many as 70% contain errors, although usually minor in nature, but there are other times when judgments, collections, + charge-offs were paid but the credit report does not show them as satisfied.
DISCOUNT POINTS- A discount point is an one time charge by the lender to buy down the interest rate of your loan. If you are willing to pay one or two percent of the loan amount you can buy the interest rate down a half percent or so.
1105DOCUMENT PREPARATION FEE - Once underwriting has approved your loan, the legal and miscellaneous documents required at closing must be prepared. These documents include the mortgage note, deed of trust, Truth in Lending forms, and escrow instructions. Before the computer made it fairly easy for lenders to draw their own loan documents, they used to hire specialized document preparation firms for this function. This was the fee charged by those companies. Nowadays, lenders draw their own documents. This fee is charged on almost all loans and is usually in the neighborhood of $125-$150.
DOCUMENT FEE- A lender cost for drawing loan documents.
ENDORSEMENT FEE- Endorsements are used to change the coverage of the title insurance policy this fee insures the insured against loss or damage sustained by reason of lack of priority of the lien of the insured mortgage over any environmental protection lien.
1101ESCROW FEE - Cost charged by a third party that holds funds or documents on behalf of others and is subject to their instructions. Normally for a sale, the buyer and seller share this fee; each paying 50% of the total fee.
ESCROW/IMPOUND ACCOUNTS- The Escrow/Impound Account really functions as forced savings for the buyer to ensure that the insurance and taxes will be paid. A portion of your monthly mortgage payment includes monthly premiums for homeowner's insurance, taxes and private mortgage insurance (PMI), if applicable. The allotted portion of your monthly payment for theses items is placed in a escrow/impound account. The lender uses the money from the escrow/impound account to pay your insurance and taxes. Section 10 of the Real Estate Settlement and Procedures Act (RESPA) limits the amount of money a lender may require the borrower to hold in an escrow account for payment of taxes, insurance, etc. RESPA also requires the lender to provide initial and annual escrow account statements. At closing, depending on the size of your down payment, you may be required to deposit money into an escrow/impound account.
FLOOD CERTIFICATION FEE- Federal law requires flood insurance if the property is located in a flood zone. Normally, an independent company is used to research the FEMA maps to determine if the home lies in a flood zone. This one-time fee is for the life of the loan, as the FEMA maps are checked annually to determine if your property has moved into or out of a flood zone. If your property is reclassified at any time during the life of the loan, the lender will notify you whether or not you should drop or obtain flood insurance for your property.
GOOD FAITH ESTIMATE- Is an itemization of fees that one is likely to pay at closing. The three words; Good, Faith and Estimate are key. The lender focuses on the word Estimate, the buyer focuses on the word Good and Faith is what brings the two together. When buyers have confidence in the business practices of their lender, then the faith is strong because they know there will be few surprises at closing. The fact remains that the Good Faith Estimate is only an estimate and the actual fees may differ from the estimate at closing.
HOMEOWNER'S INSURANCE IMPOUND- If one's down payment is less than 20%, the buyer will be required to put 2 month's worth of the annual homeowner's insurance premium into an escrow account, otherwise the buyer will place 1 month into the account. The monthly mortgage payment will include 1/12 of the annual premium in the payment, which is kept in the escrow account until the annual premium is due. If one's down payment is less than 20%, the buyer will have a two-month "cushion" in the escrow account. Cushions are allowable but limited under RESPA; in other words, RESPA accepts the practice of the lender's wanting to cushion the escrow account, but limits the amount of the cushion to a reasonable amount.
1001HOMEOWNERS/HAZARD/FIRE INSURANCE - A buyer is required to pay a one-year premium for homeowner's insurance at or before closing (if one chooses to pay the insurance company directly, in which case, one brings proof of payment to closing (insurance declaration page). The lender requires that the buyer has homeowner's insurance to protect the collateral of the mortgage loan. Homeowner's insurance is then paid in monthly installments, included as part of one's mortgage payment. The lender places each monthly payment into an escrow/impound account. By the end of a year, the lender has collected the buyer's yearly premium and pays the annual premium when it is due.
INSPECTION FEE- This fee covers the cost of having the property inspected by an independent company to determine if the property meets current building standards and is in good condition.
805LENDER'S INSPECTION FEE - If the appraisal uncovers anything that needs to be repaired or fixed (the roof is the most commonly required repair) or if, during the appraisal, something is currently being repaired or completed (i.e., a pool), then an inspection is usually required by the lender.
802LOAN DISCOUNT - Often called "Points", a loan discount is a one time charge by the lender to buy down the interest rate. For example if the par price (wholesale interest rate is 5.25%) a borrower might be able to get a 5% interest rate for the life of the loan if they were willing to pay 1 point. (Each point is equal to 1 percent of the loan amount).
801LOAN ORIGINATION POINTS or 808 MORTGAGE BROKER FEE - About 70% of loans are originated through mortgage brokers. Wholesale lenders offer lower costs/rates to mortgage brokers than you can obtain directly, so you are not paying "extra" by going through a mortgage broker. Often you will get a lower interest rate and save time by having a broker shop for you. Many low-rate lenders are wholesale only and do not have retail divisions for the public. The loan origination fee is measured in "points". One point is equal to one percent of the mortgage loan.
LOAN TIE-IN FEE- Although this sounds like a lender fee, it is not. When charged, it is usually by a settlement agent (escrow, lawyer, etc) and is to compensate them for services they provide in dealing with the lender.
1106NOTARY FEE - Before the mortgage deed of trust can be recorded at the court house, the signature of the borrowers must be notarized. An individual certified as a Notary Public witnesses the signature of recordable documents as true and correct.
PMI APPLICATION FEE- If your down payment is less than 20% and are not incurring a 2nd mortgage, you will be required to have Private Mortgage Insurance (PMI). When processing your loan, two "loan packets" need to be prepared, one for the lender's underwriter and one for the PMI underwriter. You may be charged a fee for this additional processing. Historically, most buyers/borrowers have preferred to have a 2nd mortgage over paying for mortgage insurance because with the latter, the cost is no longer tax deductible.
PMI IMPOUND- Private Mortgage Insurance (PMI) protects the lender in the event that the borrower defaults on the mortgage loan. It is usually required if the borrower's down payment is less than 20%. The borrower has to deposit 1-month's worth of PMI premiums into the escrow account, depending on the lender.
Property Tax Impounds: These depend on three factors:
* In which state the property's located and when the taxes are due
* Whether the property taxes are paid in arrears or in advance
* The month in which the transaction closes
In California, property taxes are paid semi-annually, with one payment in arrears and one in advance. A borrower's monthly mortgage payment includes 1/6 of one's semi-annual property tax. Therefore, the borrower needs to deposit the number of month's worth of property taxes into the escrow account that will yield 6 months worth of property taxes in the account at the time that property taxes are due.
PREPAID INTEREST- Renters pay their rent in advance, but homeowners pay their mortgages in arrears. Since mortgage loans are usually due on the first of each month, the interest is the amount that has accrued for the previous 30 days. Since loans can close on any day, a certain amount of interest must be paid at closing to get the interest paid up to the first. The only interest that you prepay at closing is the interest that will accrue from the date of your closing to the end of the month. For example if one closes on the twentieth, the buyer will pay ten days of pre-paid interest. The buyer's first mortgage payment is on the 1st of the second month after closing; so, if one closes sometime during the month of January, one's first mortgage payment is on March 1st. Note: This example is based on a purchase loan. For a refinance, there is a period of rescission which means that the loan actually closes on midnight of the 3rd business day after closing.
810PROCESSING FEE - This fee covers the cost of packaging + gathering the loan information necessary to submit your loan application to the lender. This includes employment and depository information (w-2s, bank statements, verifications, etc.), ordering credit reports, appraisals and surveys (if required) and other necessary documentation (divorce decrees, bankruptcy filing and discharge, etc.); whatever supporting documentation and information is required by the lender's underwriting department to create the true picture that supports your loan application. A broker must submit all this paperwork according to the lender's requirements.
1201RECORDING FEE - The Recording Fee is charged for recording the deed and mortgage at the local court house. Usually the fee is based on the number of pages recorded. The deed of trust is typically five pages and the mortgage loan note is typically two pages. The number of pages recorded will vary due to the number of riders along with the deed of trust and the mortgage loan note. "Rider" is a contractual term which refers to a legal document which in and of itself carries little meaning, but must be coupled with other documents to have meaning; hence, the name, rider, as the document must "ride" with another document to have meaning. Typical riders include the Planned Unit Development rider, which explains the CC&R's associated with the purchased property; the Adjustable Rate rider, which details the adjustments to the interest rate for an adjustable rate mortgage; or the Environmental Endorsement rider, that stipulates that the owner of the property is responsible for damage to the environment that occurs from activities on the property while owned by the individual(s).
REFINANCE INTEREST- When one closes a refinance transaction there is typically outstanding interest due on the old loan. For example, if one closed on January 10th (and you'd made your January mortgage payment) there would be 10 days of interest due on the old loan and 20 days of prepaid interest on the new loan. Your first payment on the new loan would be on March 1st since would have already pre-paid all of January's interest when you closed the refinance transaction.
SUB ESCROW FEE- A charge for a service provided by the title company which assures the buyer, seller, and lender that the loans/mortgages/liens of record have been paid off through escrow and properly released. It is the title companyís responsibility to physically pay off any loans against your home while you are refinancing or selling your property. The title company arranges for the new lenderís loan proceeds and loan documents to be picked up before escrow closes. The new loan funds are used to payoff the loans of record at the close of escrow.
The sub escrow fee charged by the title company is required by the Department of Insurance. Because of this requirement, the fee charged is generally a break even charge to simply reimburse the title company for the labor involved in calculating the loan payoff, and other necessary tasks within the payoff process.
SUBMISSION FEE- This fee covers the cost of submitting the loan to prospective lenders.
SURVEY FEE- States differ in whether or not they require a survey of the home's property. The survey determines whether the property associated with the home is within property lines and that the property lines have not been crossed by other structures.
809TAX SERVICE FEE - Covers the service that a company provides to verify that the property tax payment sent to the assessor's office was credited to the correct parcel.
It's immaterial whether you pay the property tax directly or the lender pays it from an escrow account; on the front of every single tax bill from every single assessor's office in the nation is the following statement: Tax Collector Not Responsible if paid on wrong parcel. The only way to know if a clerical error has occurred (short of tax foreclosure) is if there is a service that checked for payment. The one time fee is for the life of the loan.
TITLE ENDORSEMENT FEE- Endorsements are used to change the coverage of the title insurance policy. ALTA policies and other forms of title insurance policies provide adequate coverage for a majority of the "simple" real property transactions. If the transfer of title is not "simple," the policy coverage needs to be added by endorsement to tailor coverage to meet the home ownerís, the sellerís and/or the lenderís needs.
1108TITLE INSURANCE FEE - Even though there is a title search performed to establish the seller's legal right to sell the property, there may be hidden defects or clouds on the title which an examination of the records could not reveal. For instance, the previous owner could have incorrectly stated his marital status, resulting in a possible claim by his legal spouse. Other problems include things like fraud, forgery, defective deeds, mental incompetence, confusion due to similar or identical names, and clerical errors in the records. These defects can arise after the buyer has purchased one's home and jeopardize one's right to ownership. Title insurance protects against any tax liens, unpaid mortgages, or judgments missed in the research of the history of title on the property. If a claim is made against one's property, title insurance will, in accordance with the terms of one's policy, assure the buyer of a legal defense and pay all court costs and related fees. Also, if the claim proves valid, the buyer will be reimbursed for one's actual loss up to the face amount of the policy.
There are two types of title insurance: owner's title insurance and lender's title insurance. The owner's policy protects you, the buyer. The seller usually pays for the owner's title insurance policy. The lender policy protects the lender, or rather, protects the lender's collateral for the mortgage loan and benefits the lender. The buyer pays for the lender's policy. Title insurance is a one-time charge. It is non-transferable, even for a refinance. In the event of a refinance, lender's title insurance is still required, but usually at a reduced rate. This fee varies with the loan.
811UNDERWRITING FEE - This fee is to insure that the loan meets governmental guidelines, Secondary Market guidelines and insure loan commitment. Most lenders will not lend funds unless they are sure that the loan can be sold in the Secondary market and/or meets their Portfolio Guidelines. Underwriters verify that your supporting documentation corroborates the information given on your loan application, i.e., that your appraisal is consistent with comparables, or that your liabilities are consistent with your income level, etc.
WAREHOUSING FEE- Some lenders have a warehouse line of credit in order to fund loans at closing time. This is more common in specialty lending.
1112WIRE FEE - When your loan funds, it is a common practice for a lender to wire the funds to the settlement provider (escrow holder, title company, or attorney). This is a fast and efficient way to transfer funds in a transaction where time is crucial. The receiving account charges a nominal fee for the wire transfer of $10 to $50.
812WIRE TRANSFER FEE - Mortgage lenders generally wire the funds to the escrow company handling the loan closing. Funds are wired through the Federal Reserve System and go through commercial banks that are members of the Federal Reserve Bank. Usually banks charge mortgage lenders a fee for the wire transfer service in the range of $50 to $75.
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