Even those who do not own a home are hip to the fact that buying a house costs more than the home values alone. Even a purchaser who pays all cash must compensate other parties to the transaction. A big surprise to first-time home buyers is the number of fees involved in contracting, financing and closing on a new house. Consequently, prospective purchasers do well to consider all of the services and professionals that participate in property conveyance, recognizing that each represents a line item on the closing statement. The financial pill will still be bitter, but less of a shock.
Houses are usually listed for sale by realtors. Though some seek to avoid the expense with a "FOR SALE BY OWNER" sign on the front lawn, real estate brokers and agents have a better track record in moving properties. This effectiveness, however, comes with a price tag, otherwise known as the realtor's commission. This fee can reach six percent of the sales price and is ordinarily charged to the seller at closing. Yet if the buyer retains an agent to find a suitable home, then the commission is split between the two representatives and the buyer is responsible for half.
Fees for Financing
A mortgage is a product being sold by a bank or finance company. Such an entity can not give this product away for free or they are not long for the business. Accordingly, they charge money for the money in the form of interest. Still, interest only gets them part of the way in paying overhead and still earning a profit. The other revenue comes from fees. Many factors determine what fees you pay, and how high they are. The lender of choice, the vendors involved and whether or not a broker is employed are but a few:
- Application Fee -- generally covers initial expenses like the credit report and home values appraisal.
- OriginationFee -- usually about one percent of the loan amount, this fee is pure profit for the lender
- Title Fees -- pay for title insurance, searches, examinations etc. The lender policy is mandatory; owner policies, optional.
- Mortgage Insurance -- premiums for those whose equity falls below 20 percent.
- Settlement Fee -- is owed to the closing agent: attorney, escrow agent or title agency.
- Document Preparation -- or doc prep fee is charged by the lender separately or folded into another fee.
- Broker Fee -- goes to a broker if the loan was referred to the lender.
Legal and Misc. Fees
Home buyers who retain an attorney -- and everyone should -- can pay the fee for document review at or outside closing. The attorney can examine the loan documents prior to their execution in order to make sure they do not unnecessarily expose the buyer to unexpected legal ramifications. Other fees that show on the settlement statement include recording fees, which the settlement agent forwards to the county or other jurisdiction for proper documentation of the sale in the public register. A transfer tax might also be required, depending on the locale.
Other fees due from the buyer are either rolled into the settlement fee or enumerated specifically. Courier fees for document transport; notary fees for legal identification verification; home inspector fee -- if not paid in advance of closing; and home owner association (HOA)fees and dues. Property tax and insurance escrows are not fees but, if a reserve is required, they will add to the amount due from the buyer/borrower at closing.