What Are Settlement Charges to Borrower?

Settlement charges represent costs incurred during a real estate transaction when obtaining a mortgage and purchasing a home. These charges are distinct from the down payment and are typically paid at the loan’s closing. They cover services and fees necessary to finalize the property transfer and secure the mortgage. Understanding these charges helps borrowers anticipate the total funds needed at closing.

Types of Settlement Charges

Settlement charges encompass several categories of fees. These charges ensure the loan is processed, the property’s title is clear, and all governmental and prepaid obligations are handled.

Lender-related fees

Lender-related fees are charged by the mortgage lender for processing and underwriting the loan. A loan origination fee compensates the lender for creating the mortgage and typically ranges from 0.5% to 1% of the loan amount. This fee covers processing, underwriting, and funding the loan.

Appraisal fees, ranging from approximately $300 to $700, cover the cost of a professional assessment of the property’s market value, which lenders require to ensure the loan amount is appropriate for the collateral. A credit report fee covers the cost of obtaining the borrower’s credit history.

Borrowers might also encounter discount points, which are prepaid interest that can be purchased to reduce the mortgage interest rate over the loan’s life. One discount point usually costs 1% of the total mortgage amount and can lower the interest rate by 0.125% to 0.25%.

Title and escrow fees

Title and escrow fees address the legal transfer of property ownership and the secure handling of funds. Title insurance has two main types: a lender’s policy and an owner’s policy. The lender’s policy is typically mandatory and protects the lender’s investment against future title defects. The owner’s policy, though optional, protects the homeowner’s equity.

Escrow fees, sometimes called closing agent fees, are paid to a neutral third party, such as a title company or attorney, to manage the closing process and ensure all conditions of the sale are met before funds are disbursed. These fees can range from 1% to 2% of the home’s purchase price or be a flat fee. Attorney fees are incurred if an attorney is involved in the closing, and notary fees cover the cost of authenticating signatures on legal documents.

Government recording and transfer fees

Government recording and transfer fees are taxes and charges levied by state and local authorities. Recording fees register the mortgage and deed with the local government, making the property transfer a public record. Transfer taxes, also known as deed transfer taxes or documentary stamp taxes, are one-time taxes imposed by state or local governments when property ownership changes hands. The cost of transfer taxes varies by location and is often calculated as a percentage of the property’s purchase price.

Prepaid items and escrow setup costs

Prepaid items and escrow setup costs are expenses paid in advance or reserved for future recurring payments. Prepaid property taxes cover the portion of taxes due from the closing date until the next tax payment period. Prepaid homeowner’s insurance premiums typically cover the first year of the policy, securing coverage from the moment of closing. Per diem interest is the daily interest accrued on the loan from the closing date until the end of the month, as mortgage payments usually begin on the first day of the following month. These prepaid amounts, along with an initial escrow deposit, are often held in an escrow account, which the lender uses to pay future property taxes and insurance premiums on the borrower’s behalf.

Reviewing Your Settlement Charge Disclosures

Borrowers receive documents to help them understand and review their settlement charges, facilitating transparency in the mortgage process. These disclosures allow for comparison and identification of any discrepancies.

The Loan Estimate (LE)

The Loan Estimate (LE) is an initial disclosure provided to the borrower by the lender within three business days of a loan application. This document estimates the loan terms and associated closing costs. Settlement charges are detailed in various sections of the LE:
Section A for origination charges.
Section B for services the borrower cannot shop for.
Section C for services the borrower can shop for.
Section E for taxes and other government fees.
Sections F and G for prepaid items and initial escrow payments.

The LE is a tool for comparing loan offers from different lenders, allowing borrowers to assess estimated costs before committing to a specific loan.

The Closing Disclosure (CD)

The Closing Disclosure (CD) is a final statement of all loan terms and costs, provided to the borrower at least three business days before the scheduled closing. This document supersedes the Loan Estimate and provides the definitive amounts due at closing. The CD’s structure mirrors the LE, with settlement charges organized into similar sections:
Section A for origination charges.
Section B for services the borrower did not shop for.
Section C for services the borrower did shop for.
Section E for taxes and other government fees.
Sections F and G for prepaid items and initial escrow payments.

The CD also includes a summary of the transaction for both the borrower and the seller.

Comparing the Loan Estimate and the Closing Disclosure

Comparing the Loan Estimate and the Closing Disclosure helps identify any significant changes in fees or terms from the initial estimate to the final figures. Certain fees have tolerance limits, meaning they cannot increase beyond a set percentage between the LE and CD. For example, lender-controlled fees, such as origination charges, generally have zero tolerance for increases. Other fees, like those for services the borrower cannot shop for, may have a 10% tolerance. Fees for services the borrower can shop for and prepaid items typically have no tolerance limits, meaning they can change without restriction. Large increases should prompt questions. Reviewing these documents and asking the lender or settlement agent about any unclear or incorrect items is important before signing.

Paying Settlement Charges at Closing

The final stage of the home purchase involves paying settlement charges at closing. This process requires specific payment methods and a final review of all financial documents.

Payment Methods

Common methods for paying settlement charges at closing include wire transfers or cashier’s checks. Personal checks are typically not accepted for large sums due to the need for immediate, guaranteed funds. Borrowers should arrange for these funds well in advance of the closing date to avoid delays.

Final Review and Disbursement

At closing, borrowers will conduct a final review of the Closing Disclosure and all other transaction documents. The amounts listed on the CD represent the definitive final charges due from the borrower. This is the last opportunity to confirm that all figures align with previous agreements and that no unexpected costs have appeared. Once all documents are signed and the required funds are received, the closing agent or attorney facilitates the disbursement of funds. This involves distributing the collected settlement charges to the appropriate parties, including the lender, title company, government entities for recording and taxes, and other service providers. This distribution ensures all parties are compensated for their services and that the property transfer is legally complete.