According to Bankrate.com’s recently announced 2011 Closing Costs Survey, Texas once again has the second-highest closing costs in the country, behind of all places, New York – ouch! While the nationwide average is $4,070 (up nearly 9% from last year), Texans pay $4,944 on average. This is the fifth year in a row we’ve had the dubious honor of being #2. I chatted recently with Marcus McCue, SVP of Guardian Mortgage Company about why our closing costs are so high and what, if anything, can be done about it.
Candy: What’s with all the fees going up up up?
Marcus: Several factors impact costs – some are in the lender’s control, and some aren’t. Assessed by the lender, the “Origination Charge” includes the lender’s costs to provide financing – like processing and underwriting fees.
Third-party fees include title, appraisal, postage/courier and survey charges. In Texas, the state’s Department of Insurance sets one overall fee for title insurance, title search and settlement services, so title agencies compete on service, not price. The standard owner’s title insurance premium (which protects the homebuyer) on the purchase of a $225,000 home purchase with an $180,000 loan is $1,450. Although the seller on resale contracts typically pays this premium, it is much higher than the $605 national average from the Bankrate.com survey. If you add the $240 lender’s title insurance premium (protects the lender) on the same loan, then the total title insurance premiums is a whopping $1,700.
Candy: According to the survey, origination fees went up by over 10% this year nationwide, why is that?
Marcus: Much of the increase is a result from the stricter mortgage regulations the government has imposed over the past year. More paperwork and regulatory compliance means more staff, which means higher costs. Even in areas where additional staff is not required, required software updates and revisions increase costs. Nearly all software vendors with products focused on the mortgage industry have made significant changes to become compliant to changing government requirements for disclosures, quality control and document revision. This additional cost for making these changes is passed on to the mortgage companies using the software, which then results in higher costs for borrowers.
Candy: What can a homebuyer do to reduce closing costs?
Marcus: First, make sure your lender goes over the Good Faith Estimate (“GFE”) with you carefully so you understand all the fees and where they are coming from. If you are reviewing more than one GFE, then check each lender’s “origination charge” against each other. Again, this is the cumulative total of the lender’s cost associated with providing the financing. This fee can vary greatly from lender to lender.
The “required services that we select” section of the GFE includes items that are required by the lender, but are solely selected by the lender. The most common of these fees are the appraisal, credit report, flood certificate or the upfront mortgage insurance premium on FHA financing. Charged by vendors selected by the lender, these costs are passed-through, so you may see differences from lender to lender. Because you are not able to provide the lender with other vendors for these services, you should consider these fees with the “origination charge” when deciding which lender has the best loan terms for you.
The “required services that you can shop for” section of the GFE includes things like pest inspection or the cost of a survey. Unlike the services the lender selects, you have some options here. These are again pass-through costs, but you can lower them by identifying a lower priced provider and making the recommendation to the lender. If you see a lot of variation among lenders on this item, it may be worth your while to source another provider.
In addition, if you are refinancing a loan within seven years of your last loan closing, you will qualify for a “re-issuance” credit on the owner’s title policy. You will have to pay a new premium for the title policy to be renewed and extended to the new loan, but this credit will reduce the cost of that new premium. This credit is on a sliding scale, with the largest credit being a 40% reduction of the premium if the refinance occurs within two years of the last closing. This credit is available from all title companies, so it does not require using the same lender or title company from the last closing.
Candy: Is there anything else that can be done to reduce closing costs?
Marcus: Obviously, the lenders have some control over their own fees. Last week Guardian Mortgage announced we joined the Lenders One Mortgage Cooperative of independent lenders. One of the big benefits of being part of a cooperative is collective buying power. These cost benefits from the cooperative will allow us to keep our costs lower than our competitors as they continue to increase their fees to accommodate those aforementioned changes with government regulations and compliance. In addition, we will be able to offer more services to our customers and provide better training to our staff. It’s exciting news for our customers and us.
If you have additional questions about your particular situation, feel free to contact Marcus McCue at (214) 473-7944, firstname.lastname@example.org or on facebook.