A Closer Look at Third-Party Fees
Most people don’t need to be told that buying a home is a big deal. Between a down payment, closing costs and being saddled with a sizable loan that’s going to take a while to pay off, there’s going to be a lot of cash flowing from the buyer’s wallet.
As a home buyer, to be better informed about where, exactly, your money is going, take a look at the types of services that go into the processing of home loans and the fees you’ll incur for these services. Borrowers should know the ins and outs of third-party fees in particular, as they make up a large chunk of the transaction’s closing costs.
When you’re preparing to close on a house, there are a lot of moving parts that need to be sorted before you get the keys. First, your lender needs to make sure all the paperwork is in order and that you and the property you plan on purchasing meet the requirements for them to approve your mortgage.
These are examples of where third parties come in. They assist the lender with many of the tasks related to the processing of a loan. Let’s take a closer look at what third-party fees are and where they come from.
What Are Third-Party Fees?
One part of the home-buying process, for example, is to have an appraiser evaluate the home and verify its market value, to ensure you’re taking out a loan for the appropriate amount. The lender also wants to ensure you’ll be able to continue to meet the requirements for your loan, so they’ll enlist a service to monitor your credit and provide alerts of any changes.
These third parties don’t perform these services for free; they charge the borrower for them. This is where your third-party fees come from. Third-party fees are included as part of your closing costs.
You can generally expect to pay 2% to 5% of your home’s purchase price in closing costs, so it’s a good idea to have some awareness of the kinds of things you’ll be paying for.
What Types of Third Parties Are Involved in my Mortgage?
A third party is any entity other than your lender that is involved in the processing of your loan. The parties you’ll deal with during this process vary depending on your situation.
Typically, in addition to your lender, you’ll also deal with a title company, an appraiser and any attorneys related to the sale of the home (if required in your state). If the property is in a federally designated flood zone, your lender will also require a flood certification, which adds on another third-party and fee.
What Do Third-Party Fees Cover?
Third-party fees won’t necessarily be the same for everyone and can vary by the type of mortgage you’re getting. In addition to the ones we’ve mentioned already, here’s a brief overview of some of the biggest third-party fees you may come across.
Title Company, Title Search or Exam Fee
This is a fee involving a search on your property’s records. A title company is going to take a peek at prior deeds, property, name indexes and many other things to make sure there aren’t any liens or problems when it’s time to transfer the ownership of the property into your name.
Title Insurance (Lender’s and Owner’s Policies)
These are two separate fees. The lender’s policy is to assure you own the home and that your mortgage is a valid lien; the owner’s policy is to protect you in case someone challenges your ownership. Your lender title insurance will likely make up the majority of your third-party costs.
A survey is done to make sure your property lines are accurate and that no one is encroaching on your new property.
The cost for the entire first year of homeowners insurance is usually required at closing. The policy goes into effect on your closing day.
A title company or attorney is required to oversee the closing of your home as an independent (third) party, and a fee is associated with this.
Why Are Third Parties Involved in my Mortgage?
Why bring in a bunch of outside entities to do all this? Because some things related to your mortgage need to be independently verified. None of these services can be done by the borrower or lender involved in the home loan process because it creates a conflict of interest, which is why third parties are involved in the first place.
With certain third-party services, you also have the option to shop around, potentially saving you money. In fact, the Consumer Financial Protection Bureau recommends that you shop for your title insurance and any other third-party closing services, as lenders will often default to providers they are affiliated with, which might not have the best rates.
We listed the major third-party fees you’ll likely have to pay, but depending on your circumstances, there may be others you’ll run into as well. Be sure to go over all your anticipated costs carefully with your lender before closing, so you know what to expect and if it’s necessary for you to do any shopping around for your third-party services.