By JOHN KUO
From mortgages to title changes, the process of buying a house typically comes with a lot of paperwork to navigate. And with paperwork often comes unexpected fees.
Once you find a lender you trust and a home loan you feel comfortable with, the next step is to educate yourself about the various fees associated with your loan. You may be able to find these closing costs, along with your estimated interest rate and monthly payment, in your loan estimate, which the lender must provide within three business days of receiving your application.
With a bit of planning, you might even be able to get rid of some of them or find more cost-effective alternatives. Read on to learn about some of the "hidden" costs typically associated with buying a home.
Appraisal fees. You'll usually need an appraisal -- an estimated value of the house you want to buy -- before you get a mortgage so lenders can calculate your loan-to-value ratio. Appraisals must be done by an objective third party and incur a one-time fee, so these generally aren't negotiable. Appraisal fees will vary depending on where you live and the size of your home, but you can expect to pay anywhere between $300 and $1,000.
Home inspection fee. In addition to your appraisal fee, you may have to pay a home inspection fee. Lenders may require a home inspection fee to confirm that your house is livable and structurally sound. You can expect to pay around $300 to $500 for a home inspection, but the exact figure will depend on your home and where you live.
Credit report fee. Though you can monitor your credit score with Credit Karma, which provides free credit monitoring of your Equifax and TransUnion reports, lenders will pull your credit report themselves and use their own risk-analysis models to determine your creditworthiness. Your credit score may affect your loan amount and interest rate.
Keep in mind that creditors will likely make a hard inquiry on your credit, which may affect your credit score. However, mortgage-related pulls within a 45-day period will typically count as one pull (for scoring purposes). Credit report fees may range from $30 to $50 per report, though some lenders cover the cost themselves.
Document preparation fee. It costs your lender time and money to provide you a loan estimate. This fee typically covers administrative and other costs for your loan. Document prep fees are typically $50 to $100 but may vary by lender.
Casey Fleming, author of "The Loan Guide: How to Get the Best Possible Mortgage," notes that document prep and other administrative fees aren't always set in stone, but they are real costs that lenders must eat themselves or build into your monthly fee.
"The processing fee may be negotiable," he says, though it might not always appear as a separate fee. "Lenders sometimes offer the option of building the underwriting fees into the price of the loan," Fleming explains.
HOA fees. HOA stands for homeowners' association. Some communities, especially those with condos and town houses, require you to join a homeowners' association, which helps pay for upkeep on common areas and the buildings. Your mortgage lender might list HOA fees, which you'll need to pay every month, in your loan estimate. Per the U.S. Census, typical condo association fees are $200 per month but tend to vary from property to property.
Loan origination fee. The loan origination fee is probably the largest single closing cost you'll encounter, as it's the primary way lenders make money. Lenders typically charge 1 percent of the total loan amount for the origination fee. For example, if you take out a $100,000 mortgage, the fee would be $1,000.
Title fees. When buying a home, the title will need to be transferred from the seller to the buyer, which can result in a variety of fees.
For example, you may need to pay a title search fee to the title company for doing a search of the property's records to ensure no one else has a claim to the property.
You may also have to pay your local recording office to record the real estate purchase so that it becomes a matter of public record. This recording fee can vary depending on where you live.
Additionally, lenders may require you to purchase lender's title insurance, which protects the amount they lend. You may also want to buy owner's title insurance, which is meant to help protect your financial investment in the home.
Warren Ward, a financial adviser based in Columbus, Ohio, helps negotiate mortgages on behalf of his clients. He offers up his own hometown as an example of how much a savvy homebuyer can save: "The cheapest title fee in Columbus is $150 lower than the most expensive. In a complete home purchase, that's a drop in the bucket, but I think most people would stoop to pick up three $50 bills if they were just lying there." Good point.
Private mortgage insurance. If your down payment is less than 20 percent of your home's purchase price, you might be required to get private mortgage insurance (PMI), which is meant to protect the lender in case you stop making payments on your loan. This is usually a recurring fee, but you may be able to cancel it after you've paid off more than 20 percent of your home.
Taxes. The exact taxes you pay at closing will depend on where you live. However, buyers often pay two months' worth of county and city property taxes at closing. Property taxes are usually paid in advance, so the buyer may need to reimburse the seller.
You may also be charged a transfer tax, which is imposed by the government on the passing of title to property. Transfer taxes vary by state and municipality, and may be split between the buyer and seller depending on their agreement.
"Junk" or "garbage" fees are excessive fees tacked onto your mortgage. Fleming notes that some lenders try to pepper their closing costs with so-called commitment fees, which are oftentimes not legitimate. If you see a fee that seems excessive or out of place, such as an application fee or mortgage rate lock fee, you should press your lender for more details.
Unsurprisingly, what some lenders call a "no-cost loan" is oftentimes too good to be true. You'll likely make up the cost through an increased loan amount or through an increased interest rate. Fleming and other experts note that you should thoroughly vet a "no-cost loan" before getting one.
If your home is your primary residence, you might be able to deduct all or part of the following costs come tax time:
- Interest paid at the time of purchase.
- Real estate taxes.
- Qualified mortgage insurance premiums.
Before making any deductions, you may want to check with an accountant or a financial adviser.
On average, closing costs are 2 to 5 percent of your total home purchase price. However, you should be able to find lower fees if you shop around or negotiate lower fees if you ask your lender. Buying a home is a complicated process. You'll have to tackle a lot of paperwork and cryptic fees, but you should never be afraid to ask your real estate agent or mortgage lender for help.
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