Understanding Closing Costs

There are certain standard costs associated with closing on the purchase of a new home. These costs are typically divided up between the buyer and the seller as spelled out in the sales contract.  Your real estate agent will assist you in negotiating these terms working diligently to not only get the sales price you want, but also to limit the amount of these closing costs for which you will be responsible.  Your agent will also work closely with your mortgage professional to make sure the terms of the sales contract, and the costs you will pay, fit in with your specific financial goals and objectives and the mortgage plan you have chosen.

Once your FM Lending Mortgage Consultant has discussed with you the appropriate mortgage plan and strategy to buy your new home, they will provide you with a written estimate of the costs you will likely incur, and an estimate of the total amount of cash you will need to buy your new home.  Keep in mind, this is just an estimate.  Prior to your closing date, the attorney responsible for the closing of your home will prepare the final "HUD1 Settlement Statement" which will itemize the exact costs that you will incur at closing.  FM Lending Mortgage Consultants are skilled in making sure you don't have any "surprises" at closing as we do our best to make sure your estimates are as accurate is possible. 

The Good Faith Estimate

By law, lenders are required to provide you with the Good Faith Estimate of Closing Costs within 3 days after formal loan application.  The estimate is based on certain known standard fees and costs as well as the Mortgage Consultant's past experience.  The estimate will likely not include all costs because it is virtually impossible to know every single expense associated with the purchase.  Each property and circumstance is unique.  A skilled mortgage consultant, however, should be able to provide a reasonable estimate that is pretty close to the actual final total.

It is important to understand the nature of closing costs so that you can make an informed comparison as you shop around with various lenders.  Costs on the Good Faith Estimate are broken down into 3 general areas as follows:

When you add these three categories together, you have the total amount of costs related to buying the new home with a new mortgage.  The problem for most borrowers with comparing costs between lenders is they focus solely on the total, bottom line cost number.  This is not the appropriate comparison to make, however, and the problem has to do with the nature of the details of Good Faith Estimates.

Of the three categories of costs, Lender Fees, Vendor Related Fees, and Prepaid Expenses/Escrows, only Lender Fees will potentially vary in amount between each lender.  The other two categories, Vendor Related Fees, and Prepaid Expenses/Escrows will ultimately be the exact same cost at closing even though each lender will likely estimate the numbers differently.  It is also easy to manipulate these numbers, so it is important that you work with a mortgage professional who will provide you with reasonable numbers--even perhaps an estimate that is "padded" a little bit so you don't have a bad surprise at closing.

So, how do you truly compare cost estimates and loan programs between lenders?  It's easily confused but actually fairly simple.

You simply make sure that you compare only the Lender Specific Fees for each lender along with the basic interest rate for the same program and loan product for the same "lock period".  The lock period is the time between the day your interest rate has been locked in and guaranteed up to and including at least the day of your closing or beyond.  Other factors are important of course.  Rates and Fees are only some.