Closing Costs 101: A Comprehensive Guide to Understanding and Reducing Your Expenses
When you finally save up enough for the down payment, you think you're all set to buy a house. But then you hear about closing costs. Closing costs are fees charged by the mortgage lender and other third parties that you pay when you sign the loan. While you're signing a stack of paperwork, checks are flying across the room, and the fees are rising. From 2021 to 2023, median closing costs grew by more than 36%, according to the Consumer Financial Protection Bureau.
This is the ultimate guide to closing costs, from each type of fee to how much you can expect to pay.
Closing Costs: Mortgage Lender Fees
Lender fees are among the most important fees to shop before you get to the closing table. They're a long list of charges and some of the most expensive you'll pay.
Application Fee
In marketing pitches, lenders practically beg for your business. Then, they charge you a fee to apply for a loan. It's like buying a ticket for the privilege of doing business with them. And if they reject your application, you'll still pay the fee—thank you very much. Not all lenders charge an application fee, so put that on your list of things to look out for. If you are charged, it's likely to be a few hundred dollars.
Credit Report Check Fee
Mortgage lenders have you cover the cost of pulling your history from a credit reporting bureau. The CFPB puts credit report fees on its list of "junk fees," saying recent expenses have risen by 25% to 400%. Credit report check fees for joint applicants have traditionally been under $50. However, some lenders are charging as much as $100 to $150. You cannot shop credit reports or negotiate this fee.
Origination Fee
The origination fee is one of the most expensive single fees among all closing costs. Typically 0.50% to 1% of the loan amount, it is one charge you can negotiate with your lender. And it's worth the time and effort, considering 1% of a $350,000 mortgage is $3,500. However, you only want to see if you can get an origination fee lowered or completely eliminated once you have a solid interest rate offer from the lenders you are price shopping. Otherwise, they might reduce your origination fee and raise your interest rate to maintain a profit margin.
Processing Fee
A processing fee is another nuisance charge you can attempt to negotiate off the list of closing costs. Lenders can charge whatever they want since it is not a singular fixed cost. If you see a processing fee on your Loan Estimate (which we’ll cover later), it could be hundreds of dollars.
Underwriting Fee
Underwriting is the term given to the process of determining if a loan application will be approved. It is the cost of doing business if you are a mortgage lender. So, charging an underwriting fee is another one of those "it could be anything" closing costs. Realtor.com estimates underwriting fees could range from $400 to $600. That's a guess as good as any, we suppose.
Closing Costs: Third-Party Fees
Now to the closing costs that make more sense. These third-party fees are for taxes, insurance, or vendors who provide services—most of which are required in the issuance of a mortgage. Some fees are set by mortgage program guidelines and are not negotiable. Others are chosen from a list of approved vendors that you can compare to find the lowest cost. The official Loan Estimate you receive from each lender will specify the services you can and cannot shop for.
Appraisal Fee
An appraisal is an assessment of the home by an independent, third-party professional who puts together a written opinion of the property value. You want the appraised value to come back equal to or greater than the price shown on your purchase contract. If an appraisal is lower than the offer price, you've got some decisions to make. One choice is to renegotiate the asking price with the seller. Another is to walk away from the contract. According to the National Association of Realtors, the typical appraisal fee was $500 in both 2022 and 2023. You cannot shop for or negotiate the appraisal fee.
