Helpful Definitions
Loan Origination: A one time fee charged by the lender for administrative costs associated with the loan. The charge is typically one percent of the mortgage amount.
Discount points: Each point is equal to one percent of the mortgage amount. By paying discount points, the interest rate on the loan can be reduced. For instance, 6% might be 0 discounts but by paying 1 discount point, you could possibly have a rate of 5.625%. Loan origination and discount points can be paid by either the buyer or seller.
Application Fee: Can vary from $400 to $500 depending on the lender – normally for the credit report and appraisal fee.
Appraisal Fee: Charged for a professional assessment of the market value of the property being purchased. The lender wants to be reasonably certain that the property is worth the loan amount.
Credit Report Fee: Charged by the lender to obtain a detailed account of the borrower’s credit history. This report is used to determine the amount of risk, if any, associated with lending money to a specific borrower.
Prepaid Interest: Simple interest computed on the mortgage amount from the day of closing to the last day of the month. For instance if the loan amount is $100,000 and the rate is 6%, the per day interest would be $16.44. ($100,000 x 6% = $6,000 divided by 365 days in a year = $16.44) If the loan is closed on the 15th day of a 30 day month, 16 x $16.44 would be $263.04.
Private Mortgage Insurance (PMI): Required by the lender when the borrower’s down payment is less than 20 percent of the property purchase price. In the event the borrower defaults on the mortgage, PMI protects the lender from financial loss. A percentage of the mortgage amount is included in the total monthly payment.
MIP is required on all FHA loans. The upfront premium can be paid at closing or financed in the loan and the renewal is figured in the monthly payment.
Hazard Insurance: Protects the homeowner and the lender against loss due to fire and natural disasters. The lender requires that the insurance be in effect at the time of closing, and that the first year’s premium is paid. Two month’s premium is also collected to establish an escrow account so the full premium will be available when the insurance is due the next year.
Property Taxes: The seller is responsible for the taxes from January 1 to the day of closing. Three months taxes are collected from the borrower at closing to go into the escrow account so the taxes can be paid when they become due.
Recording Fees: Fees charged to have the deed and mortgage recorded at the court house. This charge ranges from $50 to $75.
Closing Fees: Fee charged by the settlement agent or title company. The fee ranges from $300 to $400 depending on the company and the purchase price. This cost is normally split between the buyer and the seller.
Title Fees or Title Insurance: Covers the cost of the title search and other research related to the previous ownership of the property. It includes liens, variances, rights of way, encroachments, etc. and insures both the lender and the buyer. This fee is calculated using the purchase price, how long the seller has owned the property and the attorney’s title examination fee. The cost is usually split between the buyer and the seller and can range from a few hundred dollars to over $1000.
Survey Fee: Charged to supply the lender with an accurate accounting of the legal boundaries of the property for mortgage purposes.
The mortgage inspection survey is a visual inspection of the property to check for encroachments and easement violations.
A pin survey is done to place markers at actual boundaries of the property. The cost of a pin survey is usually $500 or more depending on the amount of work the surveyor has to do. As a general rule, the buyer pays the entire cost of a pin survey.
Document Preparation and Tax Service Fee: May be charged by some lenders for preparing papers if the costs are not already included in another service fee. This fee is usually $200 or more. The cost can be charged to either the buyer or seller.
Something Else: FHA allows the seller to pay up to 6% of the sales price for closing costs for the buyer. The buyer must come up with the down payment.
A wealth of online information is available to home buyers at www.pueblo.gsa.gov.
