If you meet all the income and debt level requirements, your lender will give you what is know as a pre-approval letter. This letter tells the seller of a home and their real estate agent that you have an approval for a specific loan amount. If that amount is equal to or more than the cost of the home you are trying to purchase then the seller and their agent may take you more seriously. Without the pre-approval letter they may feel you are wasting their time.
Now it's time to discuss just how much this mortgage will cost you. Mortgage closing costs are the payments you make when you begin to finalize your home purchase. While some costs will vary by state, county or city, keep in mind that there are other costs determined by law as well as the lender. In addition to those costs, there are some other closing costs you can expect. However, these costs should never come as a surprise to you. By law, lenders are required to provide you with a Good Faith Estimate of all costs in advance of going to closing as well as what you can expect to pay on the mortgage. As a rough estimate, you can expect closing costs to be somewhere between three-to-seven percent of the price of the home.
Some costs that you will find on the Good Faith Estimate include:
- Points - Each point represents one percent of the loan amount. If you have chosen to pay points on your loan in order to reduce your interest rate, or you are required to by the terms of your loan, you must pay them at closing.
- Loan Origination Fee - Your lender charges you these fees for processing your mortgage and handling paperwork. These fees usually range from one-to-two percent of the loan amount.
- Private Mortgage Insurance - You may be required to have private mortgage insurance if your down payment was less than 20 percent. This insurance protects the lender if you default on your loan.
- Escrow Deposits for Taxes - In most cases, the Title Company or Mortgage Company will hold these funds until after settlement to pay taxes on the property. Length and terms vary from state to state.
- Title Insurance - Title insurance protects the buyer and the lender in the event that someone else has a deed or a lien on ownership of the property. This amount is determined based on the amount of the loan.
- Appraisal Fees - In most cases, if a lender is providing a loan for a home they will require an independent appraisal of the home to assess the value of it. This fee is paid to the appraiser. While the buyer usually pays for this the seller can also pay.
- Title Company Closing (escrow fees) - The title company is paid this service for handling the closing. Their fees will vary.
- Property Survey - This is conducted to ensure that the property boundaries are correct. The lender may require this before granting the loan.
- Homeowner's Insurance - This protects the physical house in the event of fire or some other event that damages or destroys the home. This amount will vary considerably depending on the value of the home and will be paid for by the buyer.
The fees listed above are generally standard. Depending on your lender other fees may include: credit report fee, recording fees, a home inspection and transfer taxes. Depending on the location, you may also have to pay for flood or disaster insurance.
Keep in mind that not all closing fees are mandatory. Some are negotiable so ask for discounts. In some cases, you may even be able to get the purchaser to pay them, split them or have the lender waive them. Your real estate agent should be able to guide you through the process and save you money.