4 Closing Costs You Can't Shop Around for When Buying a New Home
by Christy Bieber | Updated July 19, 2021 - First published on June 25, 2021
Make sure your lender offers a fair price on these services you can't shop around for.
Home buyers need to be prepared to pay a number of closing costs before they can take ownership of their new property.
It can get very expensive to cover the transaction costs associated with purchasing a new home as closing costs can add up to between 2% and 5% of the home's value (and this doesn't even include the down payment).
In some cases, buyers can try to reduce their closing costs to keep their expenses as low as possible. You can do this by shopping around for services such as pest inspection companies or title companies. But unfortunately, there are four key closing expenses that you generally aren't allowed to comparison shop for and you just have to accept your lender's cost.
Here's what they are.
1. Appraisal fees
Mortgage lenders typically require that a new home be appraised before they will give you a loan for it. Lenders want to know what an expert believes a home's fair market value is so they can determine how much they are willing to lend you to buy the property. The fair market value matters because the home is supposed to be collateral guaranteeing the loan -- so lenders don't want to lend more than a set percentage of its value.
Appraisals can cost several hundred dollars. And unfortunately, you are not permitted to choose your own appraiser or to shop around for the appraiser offering the lowest price. That's because of strict regulations in place for most loans, which require lenders to order appraisals from appraisal companies or management firms.
These rules are intended to reduce fraud in the lending industry by ensuring lenders don't pick appraisers that provide favorable home valuations just to allow lenders to close more mortgages. The downside for buyers is that if their preferred mortgage lenders get appraisals done by a professional who charges a lot of money, buyers have no choice but to foot the expensive bill.
2. Credit reporting fees
Lenders are going to pull your credit report to check your credit. You can't shop around and pay a lower fee for this because lenders have a standard credit reporting agency they work with, and that agency charges a set fee.
Credit reporting fees shouldn't be very expensive, though -- they are generally well under $50. But still, some lenders do charge more than others and it's worth paying attention to how much your lender will charge to check your credit.
3. Flood determination fees
Lenders have an interest in learning about the property that is going to guarantee the loan. And one of the things they want to know is whether or not the property is in a flood zone. If it is, the lender will likely want you to buy flood insurance. Lenders will request a flood determination both to protect their own assets, and because doing so may be required by the FDIC when the bank is making a new loan.
Home buyers generally need to pay for a professional determination of what flood zone their property is in. You can't shop around for this service either since it has to be performed by authorized professionals trained in assessing the likelihood of flood damage.
4. Tax monitoring and tax status research fees
It's imperative to ensure there's no outstanding tax debt on a property that is being purchased because otherwise a tax lien could be placed on the home. As a result, lenders use tax services to make sure homeowners have kept property tax payments up to date.
Again, there's no shopping around for this because lenders have established relationships with tax professionals that provide this service.
Since you can't try to get the best price on these four fees, you'll need to find out how much your lender will charge for them and make sure you have the money ready. And remember, the fees can sometimes vary by lender. So even though you can't directly call appraisers or flood inspectors to see who offers the best rate, you can take these costs into account to decide which lender offers the overall best loan terms.
While interest rates and costlier fees, such as loan origination charges, may be more important in deciding which lender to choose, these required closing costs are just one more thing to think about when deciding which lender is right for you.
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