Are Lender Fees Included in Closing Costs?

Purchasing a home involves various financial obligations beyond the sale price and down payment. Homebuyers encounter numerous costs that finalize the property transfer and loan acquisition.

Understanding Closing Costs

Closing costs are fees and expenses paid by the buyer and seller at the culmination of a real estate transaction. Distinct from the down payment, these costs typically range from 2% to 6% of the total loan amount. They cover services required to process the mortgage loan and transfer property ownership. The exact amount varies based on the home’s price, location, and loan type.

Defining Lender Fees

Lender fees are a component of closing costs, assessed by the mortgage lender for originating and processing the home loan. These fees compensate the lender for evaluating the loan application and preparing documentation. Specific types and amounts vary among lenders but are standard.

Common lender fees include the loan origination fee, which covers administrative costs of setting up the loan, typically 0.5% to 1% of the loan amount (e.g., $1,500-$3,000 on a $300,000 loan). The underwriting fee covers the lender’s cost to assess borrower creditworthiness and loan risk, often 0.5% to 1% of the loan amount. Processing fees are also charged for managing the loan application and preparing it for underwriting and closing.

Discount points, also known as mortgage points, are another lender fee borrowers can pay to reduce their mortgage interest rate. One point typically costs 1% of the loan amount and can lower the rate by 0.125% to 0.25%. Paying for points prepays interest upfront for lower monthly payments, beneficial for long-term mortgage holders.

Other Closing Costs

Beyond lender fees, other expenses contribute to overall closing costs. These are typically paid to third-party service providers involved in the real estate transaction.

Appraisal fees are paid to a professional appraiser who determines the fair market value of the property, which is a requirement for most mortgage loans. Title insurance fees protect both the lender and the buyer against claims over property ownership. This includes a lender’s title insurance policy and an owner’s title insurance policy. Escrow fees are paid to a neutral third party, often an escrow company or attorney, who holds funds and documents until all conditions of the sale are met. These fees typically range from 1% to 2% of the home’s purchase price, or between $500 and $2,000 or more, depending on location and property value.

Attorney fees are incurred for legal services related to the transaction, such as reviewing contracts or preparing legal documents, and are mandatory in some states. These fees can range from $750 to $1,250 for standard closings, or from $500 to $3,000 or more for more complex situations. Recording fees are charged by local government agencies to officially register the transfer of property ownership and the mortgage deed in public records. These fees vary by county and the complexity of the documents, ranging from a few dollars to several hundreds. Prepaid expenses are also part of closing costs, though they differ from other fees as they cover future home-related costs that are paid in advance. Common prepaid items include property taxes, homeowners insurance premiums, and prorated mortgage interest for the period between closing and the first mortgage payment. These funds are often held in an escrow account managed by the lender to ensure timely payment of these recurring expenses.

Reviewing Your Loan Documents

Two primary documents provide information on fees: the Loan Estimate (LE) and the Closing Disclosure (CD). The Loan Estimate is a three-page form that lenders must provide within three business days of receiving a mortgage application. This document outlines the estimated interest rate, monthly payments, and an itemized list of all estimated closing costs, including lender fees and other third-party charges. It serves as a tool for borrowers to compare loan offers from different lenders.

Later in the process, typically at least three business days before the scheduled closing date, borrowers receive the Closing Disclosure. This five-page document presents the final terms of the mortgage loan and the precise, finalized closing costs. The Closing Disclosure should be carefully compared to the most recent Loan Estimate to identify any significant changes or discrepancies. While some minor variations are possible, federal regulations limit how much certain fees can increase between the Loan Estimate and the Closing Disclosure. Both documents are designed to provide transparency and empower borrowers to understand and verify all financial aspects before finalizing their home purchase.