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For decades, lenders used a Good Faith Estimate to explain closing costs to a home buyer. These estimates, called GFEs, contained recurring and non-recurring closing costs. Since the lender was not required to stand behind those numbers, they could be misleading and were inconsistent from lender to lender. In an effort to provide more disclosure to borrowers, effective January 1, 2010, the government standardized the Good Faith Estimates and added more pages.
Now, every lender is required to disclose accurate numbers.
While the recurring and non-recurring closing costs are clearly defined in the new GFE, some of the other things a borrower would like to know are not. For example, nowhere on the GFE does it spell out the borrower's monthly PITI mortgage payment. But that's the government for you.
Definition of Closing Costs
Some home buyers are shocked when they discover it costs more than the price of a home to buy it. When you buy a car, for example, dealers don't tack on fees and charge extra (except for sales tax) when buyers finance that vehicle. But buying a home is different.
While a buyer doesn't pay sales tax on a single-family residence or condo, a buyer does incur additional fees to get the loan and for processing the paperwork to buy a home. The closing costs run about 3% of the sales price when the home is priced over $200,000, and a higher percentage applies when the price of a home is less than $200,000.
- Impound / Escrow Accounts
Lenders may require that a buyer establish a reserve account held by the lender for future payment of taxes and insurance.
- Lawyers / Closing Agents
The individuals who prepare the closing documents and deed charge a fee. - Title Policies
Title companies charge to issue title insurance that protects the borrower and the lender.
Definition of Non-Recurring Closing Costs
Fees that are paid once and never again are called non-recurring. These fees are one-time charges for such items as:
- Title Policy
- Escrow or closing
- Appraisal
- Credit Report
- Notary
- Wire fees
- Courier / Delivery
- Attorney fees
- Endorsements
- Recording
- State, County or City Transfer Taxes
- Home Protection Plan
- Natural Hazard Disclosure
- Home Inspection
- Fees paid to the lender in conjunction with the loan on the HUD-1, line 800.
Definition of Recurring Closing Costs
Recurring fees are those charges that you will pay again and again. They include such fees as:
- Fire Insurance Premium
- Flood Insurance (if required in your area)
- Property Taxes
- Mutual or Private Mortgage Insurance Premiums
- Prepaid Interest
At the time of writing, Elizabeth Weintraub, DRE # 00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.
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