What Are Finance and Lender Charges?

By Liz Clinger Updated on 7/19/2017

Most people associate closing costs with the finance charges that are levied by lenders. The charges you pay will vary among lenders, so it's worth it to shop around for the best combination of mortgage terms and closing (or settlement) costs. 

These are some charges you may pay:

Origination or Application Fees

These are fees for processing the loan application and can be a flat fee or a percentage of the mortgage. 

Credit Report

If you are making a small down payment, that is, less than 25%, most lenders will require a credit report on you and your spouse or equity partner. This fee often is a part of the origination fee.

Points

A point is equal to 1% of the amount borrowed. Points can be payable when the loan is approved before closing or at closing. Points can be shared with the seller--you may want to negotiate this in the purchase offer. 

Some lenders will let you finance points, adding this cost to the mortgage, which increases your interest costs. If you pay the points up front, they are deductible on your income taxes in the year they are paid. Different deductibility rules apply to second properties.

Lender's Attorney's Fees

Lenders may have their attorney draw up documents, check to see that the title is clear, and represent them at the closing.

Document Preparation Fees

You will see an astounding amount of papers, ranging from the application to the acceptance to the closing documents. Lenders may charge for these, or they may be included in the application and attorney's fees.

Preparation of Amortization Schedule

Some lenders will prepare a detailed amortization schedule for the full term of your mortgage. They are more likely to do this for fixed mortgages than for adjustable mortgages.

Land Survey

Most lenders will require that the property is surveyed to make sure that no one has encroached on it and to verify the buildings and improvements to the property.

Appraisals

Lenders want to be sure the property is worth at least as much as the mortgage. Property appraisers will compare the value of the house to that of similar properties in the neighborhood or community.

Lender's Mortgage Insurance

If your down payment is less than 20%, many lenders will require that you purchase private mortgage insurance (PMI) for the amount of the loan. This way, if you default on the loan, the lender will recover his money. 

These insurance premiums will continue until your principal payments plus down payment equal 20% of the selling price, but they may continue for the life of the loan. The premiums usually are added to any amount you must escrow for taxes and homeowner's insurance.

Lender's Title Insurance

Even though there is a title search for any obstacle (liens, lawsuits), many lenders require insurance so that should a problem arise, they can recover their mortgage investment. This is a one-time insurance premium, usually paid at closing; it is insurance for the lender only, not for you as a purchaser.

Release Fees

If the seller has worked with a contractor who has put a lien on the house and expects to be paid from the proceeds of the sale, there may be some fees to release the lien. Although the seller usually pays these fees, they could be negotiated in the purchase offer.

Lender-Required Inspections (Termite, Water Tests)

If you apply for an FHA or VA mortgage, the lender will require a termite inspection. In many rural areas, lenders will need a water test to make sure the well and water system will maintain an adequate supply of water to the house (this is usually a test for quantity, not a test for water quality).

Prepaid Interest

Your first regular mortgage payment is usually due about 6 to 8 weeks after you close (for example, if you close in August, your first monthly payment will be in October; the October payment covers the cost of borrowing money for the month of September). 

Interest charges, however, start as soon as you close. The lender will calculate how much interest you owe for a fraction of the month in which you close (for example, if you close on August 25, you would owe interest for six days). In some cases, this is due at closing.

Escrow Account

Lenders will often require that you set up an escrow account into which you will make monthly payments for taxes, homeowner's insurance, and PMI (mortgage insurance, if necessary). The amount placed in this escrow account at closing depends on when property taxes are due and the timing of the settlement transaction. 

The lender should be able to give you a close approximation of these costs at the time you apply for your mortgage loan.