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Loan Estimate

Your lender is required by the Federal Real Estate Settlement Procedures Act to provide you with an official loan estimate at closing. The estimate is supposed to be provided to you within three days of applying for a loan. This requirement is satisfied if the loan estimate is mailed within three days.

The closing fees—also called settlement costs—cover almost every expense associated with your home loan, and the lender must disclose all of them on the loan estimate. Because closing costs typically amount to 3%-5% of the sale price, it is best to wait until you receive the loan estimate before committing to a loan. Smart shoppers obtain loan estimates from two or more lenders, compare their costs, and ask questions about any large discrepancies.

Here are some of the fees you'll find on a loan estimate.

  • Origination
  • Discount
  • Property appraisal
  • Credit report
  • Lender's inspection
  • Mortgage insurance application
  • Assumption
  • Mortgage broker fee
  • Tax related service fee
  • Application
  • Commitment
  • Rate lock
  • Processing
  • Underwriting
  • Wire transfer
  • Settlement, closing or escrow fee
  • Abstract or title search
  • Title examination
  • Document preparation
  • Notary
  • Attorney
  • Title insurance
  • Recording
  • City/county tax stamps
  • Transfer tax
  • Survey
  • Pest inspection
  • Condominium application
  • Prepaids for interest, hazard insurance, property taxes, and mortgage insurance and flood insurance

It's Just an Estimate

The loan estimate is just that: an estimate. The lender directly controls some of the fees, and those are the ones you should pay the most attention to when comparing. Some services are performed by third parties, and those fees usually don't vary much from lender to lender. Other expenses are somewhat under your control (you could hire someone else to do the title examination, for example, but make sure the lender approves of your choice beforehand). Finally, there are taxes and government fees that should be the same regardless of the lender.

Lender-Controlled Fees

The fees that the lender controls, and which are most subject to negotiation, are origination, discount, credit reporting, assumption, mortgage broker, tax related service, application, commitment, rate lock, processing, underwriting, and wire transfer fees.

If a fee seems vague or questionable, ask about it. Some mortgage companies include so-called junk fees that you can eliminate or reduce.

Third-Party Fees

Some fees cover services that the lender typically shops for. The lender is supposed to pass these fees directly to you, without marking them up. These third-party fees include the settlement, closing, or service fee; appraisal; abstract or title search; title examination; document preparation; notary; attorney; and title insurance.

You don't have a lot of negotiating room on these fees, but if one is much higher than the comparable fee on another loan estimate you received, ask for an explanation.

Fees for Services You Can Shop For

There is some overlap here with the third-party fees mentioned above; specifically, the attorney's fees or settlement, closing or service fees. In some states the closing is done by attorneys, and in other states the closing is done at a title office. Either way, you can shop for a less expensive closing-service provider. You also are expected to shop for homeowners insurance instead of taking the lender's estimate as gospel.

Nonnegotiable Stuff

Your local and state governments will charge recording fees, tax stamps, and transfer taxes. There's not much you can do to negotiate those. On the other hand, they should not vary from lender to lender.

Be Skeptical

Lenders, especially those that are huge and operate nationwide, often have trouble estimating title insurance and government fees. Scrutinize these line items because the lender with the smaller estimate for title insurance or government fees might be inaccurate. National lenders have particular trouble estimating the buyer's cost for title insurance—not because they estimate the price wrong, but because of varying customs regarding who pays what. In one county the seller might customarily pay for title insurance, while in the adjoining county the custom is for the buyer to pay for title insurance.

Remember, you can always negotiate with the home seller to have them split or pay outright some of the closing costs, points, or fees. You don't have to follow the customs of your area.