June 23, 2016
It takes a hefty wad of money to get a mortgage. It’s typical for all the fees associated with securing a mortgage—called Closing Costs-to add up to 2% or more of the loan. That’s a stiff $4,000 or so on a $200,000 mortgage.
Some very good news is that beginning in the fall of 2015 a new federal regulation requires lenders to give all prospective buyers a Loan Estimate within a few days of receiving a loan application. We have the Consumer Financial Protection Bureau to thank for this! The even better news is that this three-page document is very easy to understand; it’s a huge improvement over the confusing loan docs of years past.
The Loan Estimate means you can make an easy apples-to-apples comparison of mortgage options from different lenders before you decide which lender you want to work with.
Not all the fees are mandatory; you should try and negotiate some fees down or get them waived. This annual Closing Cost survey breaks down fees by state. It’s worth comparing your regional norm to what a lender is proposing on the loan estimate, and challenging anything that seems out of line.
What To Negotiate:
1. Origination fee. Some banks charge a fee to make the loan. This is typically a percentage of the loan amount. Say 0.5% or 1%. (This is separate from discount points you can opt to pay to reduce your interest rate.)
2. Home Insurance. If you’re a first-time buyer be sure to do your own shopping around for a policy; chances are you can do far better than a “forced” policy a lender provides.
3. Escrow for Property Tax and Insurance. Some lenders will insist that you prepay these costs to them and they will handle the payments. That’s more typical with lower-down payment loans. I don’t like this at all. First off, you’re prepaying. Second, I want you to be in charge of these payments, so you can be 100% sure they are made on time. See if you can get this requirement waived.
3. Title Insurance. There are two types of title insurance: one protects the lender and one protects you. And you pay for both. Your lender will typically work with just one provider; but there’s nothing stopping you from shopping around for a better deal from other title insurance companies.
Hold onto your Loan Estimate. At least three days before your mortgage deal is scheduled to be completed-called “the closing”-the lender must send you a Closing Disclosure document. This will have all the info from the Loan Estimate, plus some additional information. You should carefully compare all the costs and challenge any fees listed in the closing document that are now higher than what was listed in the original Loan Document.