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Settlement Costs

The line numbers correlate to the line numbers on the "Good Faith Estimate of Closing Costs" form.

Items Payable in Connection with Loan

The following fees are those required by a lender and/or mortgage broker to process, approve, and make the mortgage loan.

801. Loan Origination

This fee covers the lender's administration costs in processing the loan. Often expresses as a percentage of the loan, the fee will vary among lenders and from locality to locality. Generally the buyer/borrower pays the fee unless another arrangement has been made.

802. Loan Discount

Often called "points", a loan discount is a one-time charge used to adjust the yield on the loan to what market conditions demand. It is used to offset constraints placed on the yield by State or Federal regulations. Each "point" is equal to one percent of the mortgage amount. For example, if a lender charges four points on a $60,000 loan this amounts to a charge of $2400. Generally speaking, more points implies a lower interest rate. For example, a lender may offer the two following financing options: 8.500% with a 1 point loan fee, or, 8.250% with a two point loan fee.

803. Appraisal Fee

This charge, which may vary depending on the amount of work involved for the appraiser, pays for a statement of property value. The appraisal is sometimes conducted by a member of the lender's staff, and other times it is conducted by an independent appraiser. The lender needs to know if the value of the property is sufficient to secure the loan in the event a homeowner defaults on a mortgage. The appraiser inspects the house and the neighborhood, and considers sales prices of comparable homes and other factors in determining value. The appraisal may contain photos and other information of value to you. It will provide the factual data upon which the appraiser based the appraised value. The appraisal does not necessarily detect or discuss defects in the the property or title to the property. Most reasonable lenders and/or mortgage brokers will furnish a copy of the appraisal report to you. It is important that you discuss the availability of a copy of the appraisal, preferably before you have made payment of the appraisal fee.

804. Credit Report Fee

This fee covers the cost of the credit report, which shows how you have handled other credit transactions. The lender uses this report in conjunction with information you submitted with the application regarding your income, outstanding bills, and employment, in order to determine whether you are an acceptable credit risk and to determine how much money to lend you.

805. Lender's Inspection Fee

This charge covers lender's inspections, often constructed of newly constructed housing, made by a member of the lender's staff or by an independent inspector. Often a "review appraisal" will fall into this category.

806. Mortgage Insurance Application Fee

This fee covers processing the application for private mortgage insurance which may be required on certain loans.

807. Assumption Fee

This fee is charged for processing papers in cases which a buyer takes over payments of the existing loan.

808. Underwriting/Doc

This fee is paid to the lender and/or mortgage broker for originating and approving the loan.

900. Items Required by Lender to be Paid in Advance

You may be required to prepay certain items, such as per diem interest, mortgage insurance premiums, and hazard insurance premiums at the time of settlement.

901. Interest.

Lenders usually require that borrowers pay at settlement the interest that accrues on the mortgage from the date of settlement to the beginning of the period covered by the first monthly payment. For example, suppose your settlement takes place on April 16, and your first regular monthly payment will be due on June 1, to cover interest charges for the month of May. On the settlement date, the lender will collect interest for the period from April 16 to May 1. If you borrowed $60,000 at 12 percent interest, the interest item would be $303.30. This amount and the per diem charges will be entered on line 901.

902. Mortgage Insurance Premium.

Mortgage insurance protects the lender from loss due to payment default by the borrower. The lender may require you to pay your first premium or a lump sum premium covering the life of the loan in advance, on the day of the settlement. The premium may cover a specific number of months, a year in advance or the total amount. With this insurance protection, the lender is willing to make a larger loan, thus reducing your down payment requirements. This type of insurance should not be confused with mortgage life, credit life, or disability insurance designed to pay off a mortgage in the event of physical disability or death of the borrower.

903. Hazard Insurance Premium.

This premium prepayment is for insurance protection for you and the lender against loss due to fire, windstorm, and natural hazards. This coverage may be included in a homeowner's policy which insures against additional risks which may include personal liability and theft. Lenders often require payment of the first year's premium at settlement.

A hazard insurance or homeowner's policy may not protect you against loss caused by flooding. If your mortgage is Federally insured and your property is within a special flood hazard area identified by FEMA, you may be required by Federal law to carry flood insurance on your home. Such insurance may be purchased in participating communities under the National Flood Insurance Act.

1000. Reserves Deposited With Lenders.

Reserves (sometimes called "escrow" or "impound" accounts) are funds held in an account by the lender to assure future payment for such recurring items as real estate taxes and hazard insurance.

You will probably have to pay an initial amount for each of these items to start the reserve account at the time of settlement. A portion of your regular monthly payments will be added to the reserve account. RESPA places limitations on the amount of reserve funds which may be required by the lender. Read "Reserve Accounts" in this booklet for reserve calculation procedures. Do not hesitate to ask the lender to explain any variance between your own calculations and the figure presented to you.

1001. Hazard Insurance.

The lender determines the amount of money that must be placed in the reserve account in order to pay the next insurance premium when due.

1002. Mortgage Insurance.

The lender may require that part of the total annual premium be placed in the reserve account settlement. The portion to be placed in reserve may be negotiable.

1003-1004. City/County Property Taxes.

The lender may require a regular monthly payment to the reserve account for property taxes.

1005. Annual Assessments.

This reserve item covers assessments that may be imposed by subdivisions or municipalities for special improvements (such as sidewalks, sewers or paving) or fees (such as homeowners association fees).

1100. Title Charges.

Title charges may cover a variety of services performed by title companies and others and include fees directly related to the transfer of title (title examination, title search, document preparation) and fees for title insurance, legal charges, which include fees for lender's, seller's or buyer's attorney or the attorney preparing title work and fees for settlement agents and notaries. The specific charges discussed in connection with lines 1101 through 1109 are those most frequently incurred at settlement. Due to the great diversity in practice from area to area, your particular settlement may not include all of these items or may include others not listed. Ask your settlement agent to explain how these fees relate to services performed on your behalf. An extended discussion is presented in "Securing Title Services" earlier in the booklet.

1101. Settlement or Closing Fee.

This fee is paid to the settlement agent. Responsibility for payment of this fee should be negotiated between the seller and buyer, at the time the sales contract is signed.

1102-1104. Abstract or Title Search, Title Examination, Title Insurance Binder.

These charges cover the costs of the search and examination of records of previous ownership, transfers, etc., to determine whether the seller can convey clear title to the property, and to disclose any matters on record that could adversely affect the buyer or the lender. Examples of title problems are unpaid mortgages, judgment or tax liens, conveyances of mineral rights, leases, and power like easements or road right-of-ways what could limit use and enjoyment of the real estate. In some areas, a title insurance binder is called a commitment to insure.

1105. Document Preparation.

There may be a separate document fee that covers preparation of final legal papers, such as a mortgage, deed of trust, note, or deed. You should check with the settlement agent to see that these services, if charged for, are not also covered under some other service fees.

1106. Notary Fee.

This fee is charged for the cost of having a licensed person affix his or her name and seal to various documents authenticating the execution of these documents by the parties.

1107. Attorney Fees

You may be required to pay for legal services provided to the lender in connection with the settlement, such as examination of the title binder or sales contract. Occasionally this fee can be shared with the seller, if so stipulated in the sales contract. If a lawyer's involvement is required by the lender, the fee will appear on this part of the form. The buyer and seller may each retain an attorney to check the various documents and to represent them at all stages of the transaction including settlement. Where this service is not required and is paid for outside of closing, the person conducting settlement is not obligated to record the fee on the settlement form.

1108. Title Insurance.

The total cost of owner's and lender's title insurance is shown here. The borrower may pay all, a part or none of this cost depending on the terms of the sales contract or local custom.

1109. Lender's Title Insurance.

A one-time premium may be charged at settlement for a lender's title policy which protects the lender against loss due to problems or defects in connection with the title. The Insurance is usually written for the amount of the mortgage loan and covers losses due to defects or problems not identified by title search and examination. The borrower may pay all, a part or none of this cost depending on the terms of the sales contract or local custom.

1110. Owner's Title Insurance.

This charge is for owner's title insurance protection and protects you against losses due to title defects. In some areas it is customary for the seller to provide the buyer with an owner's policy and for the seller to pay for this policy. In other areas, if the buyer desires an owner's policy he or she must pay for it.

1200. Government Recording and Transfer Charges.

These fees may be paid either by the borrower or seller, depending upon your contract when you buy the home or accept the loan commitment. The borrower usually pays the fees for legally recording the new deed and mortgage (line 1201). These fees, collected when property changes hands or when a mortgage loan is made, may be quite large and are set by State and/or local governments. City, county and/or State tax stamps may have to be purchased as well (lines 1202 and 1203).

1300-1301. Additional Settlement Charges, Survey.

The lender or the title insurance company may require that a surveyor conduct a property survey to determine the exact location of the home and the lot line, as well as easements and rights of way. This is a protection to the buyer as well. Usually the buyer pays the surveyor's fees, but sometimes this may be handled by the seller (line 1301).

1302. Pest and Other Inspections.

This fee is to cover inspections for termite or other pest infestation of the home. This may be important if the sales contract included a promise by the seller to transfer the property free from pests or pest-caused damage. Be sure that the inspection shows that the property complies with the sales contract before you complete the settlement. If it does not you may wish to require a bond or other financial assurance that the work will be completed. This fee can be paid either by the borrower or seller depending upon the terms of the sales contract. Lenders vary in their requirements as to such an inspection.Fees for other inspections, such as for structural soundness, are entered on line 1303.

1400. Total Settlement Charges.

All the fees in the borrowers column entitled "Paid from Borrower's Funds at Settlement" are totaled here and transferred to line 103 of Section J, "Settlement charges to borrower" in the SUMMARY OF BORROWER'S TRANSACTION on page 1 of the HUD-1 Settlement Statement. All the settlement fees paid by the seller are transferred to line 502 of Section K., SUMMARY OF SELLER'S TRANSACTION on page 1 of the HUD-1 Settlement Statement.

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