Shopping for Closing Costs

One of the enduring myths about mortgage shopping is the idea that there is a large difference in closing costs between one lender and another.   The fact is that among lenders who are trying to be competitive, there is actually very little difference between one lender and another.   They tell you to shop for fees so that you will call them and give their Loan Rep (Salesman) a crack at you.

It is important to acknowledge that the costs in getting a mortgage loan that far exceed those in getting a credit card or car loan.   The dollar amounts involved are much larger and so is the risk, the potential for loss.   The process is inordinately complex and expensive, so lenders have to figure out a way of having the borrowers pay the costs associated with their loan.   The industry has chosen to make these all variable costs and charge borrowers for them as separate fees.   We in the industry call them “junk fees” or “garbage fees,” but they pay for real costs and someone has to pay them.

The Loan Processor assembles the data for the file, the application and credit report, the income and asset documentation, the purchase contract, the preliminary title report, the appraisal, and a lot more if the transaction is complicated.   It is easy for a file to be over an inch thick.   It takes time and skill to put this package together, and a lot more is problems are encountered.   A typical Processing Fee is about $350.

When assembled, the file is sent to the Underwriting Department where the borrowers’ characteristics and desires are compared with the lender’s guidelines.   In those cases where the loan has been pre-approved by FannieMae’s or FeddieMac’s computerized underwriting systems, the underwriter still has to make sure that the documentation asked for complies with there requirements.   The Underwriting Fee is also in the $350 range.

The other large fee is for preparing the loan documents.   On the old days, there was a simple note, a three page Deed of Trust, and a couple of other forms.   Today, the typical document package has over 50 forms and may run to 75 pages.   Someone has to prepare them and make sure that they are correct.   Borrowers are likely charged from $150 to $200 for the documents.

You will also be charged about $75 for a Tax Service contract that will notify the lender in case you don’t pay your property taxes. Also, the lender will order a Flood Certificate to determine if you are in one of the Flood Zone, in which case you’d have to pay flood insurance too. That cost is now pushing $1,000.   Add title fees and the closing agent’s fees and you have another $1,000 or more, and, of course, we’ve not talked about the appraisal fee, in the $300 range.

Annoying though they may be, all legitimate lenders charge about the same fees you are neither going to make them go away nor find a lender that doesn’t charge them.   So once you have found a lender you like that has reasonable fees, talk about rate and the points as they are far more important.   Saving one-eighth of a point on a $200,000 loan saves you $250, far more than the difference in other fees.

Beware of zero-cost loans where someone one pays those fees for you in exchange for a higher interest rate.   They’ll charge you about 25% interest on money they extend on your behalf.

Finally, let’s acknowledge that unscrupulous lenders fail to disclose all of their fees upfront and who pad the final documents with extraneous fees.   They are certainly out there, and you want to avoid them.   The problem is that the unscrupulous lenders aren’t going to come out and tell you what they are going to do. Rather, they intend to surprise you at the end when there’s nothing you can do about it. Shoppers who compare costs are going “go with the low bidder” may be in for a jolt as their shopping for low costs may have only identified the biggest liar.   If you find someone who has a bunch of extraneous fees in addition to those above, fees such as Administrative Fee, Funding Fee, Warehouse Fee and the like, move on.  

Again, the best way to shop for a loan is find a reputable person recommended by a friend who has used him or her.   Check their fees, for sure, but concentrate on the more important details.

Be careful out there.