While it’s not news that housing costs are high across the country, part of the closing costs for a new home stand out due to its sky-high rates: credit report.
Rocket Mortgage reports that closing costs typically range from 3% to 6% of the total mortgage price (1) — that’s $12,159 to $24,318 for a $405,300 mortgage, the median sales price for homes in the United States, according to Federal Reserve data (2).
As part of applying for a mortgage, lenders typically pull what’s known as a “tri-merge” report, gathering information from all three major credit bureaus in the U.S. Costs for this have increased by 40% to 50% in the past year, and the Mortgage Bankers Association reports that this is the “fourth consecutive rate increase” (3).
Here’s why report rates add hurdles to the daunting cost of buying a home, and what you can do if you’re a potential home buyer to ensure you fully understand the costs of loans, mortgages, and related expenses.
The Tripartite Consolidation Report enables potential lenders to balance information from the three reports against each other, ensuring they don’t miss important information (4). This can be an advantage to the home buyer if one report has a lower credit score than the other two.
The reports themselves are not expensive – about $47.05 according to CNBC (5). However, the reports must be pulled twice, at the beginning of the application and again before the loan is closed. This means the cost can be closer to $100 for an individual, or $200 for a couple. On top of the heavy costs involved, this is an additional line item that many experts consider unnecessary.
The Mortgage Bankers Association (MBA) points to a lack of competition in the credit score market as the root of the problem, and has asked the Federal Housing Finance Agency (FHFA) to allow lenders the option to purchase a single report on mortgages to buyers with a credit score over 700 (3). CNBC notes that in the event that the lender withdraws the report but the buyer does not purchase the mortgage, the lender must cover the cost (5).
The MBA wrote in its letter to the FHFA, “Burdening the mortgage system with these costs—unfettered by any market competition—has exacerbated ongoing housing challenges (3).
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In addition to your mortgage price, which is affected by your credit score and overall credit worthiness, there are a number of costs associated with buying a new home that aren’t reflected in the sticker price.
Bankrate reports that while some mortgage lenders will roll these costs into your mortgage, upfront savings can cost you more in the long run through higher interest rates or larger loan principals (6). To get the best price on the total cost of your new home, you should be familiar with these fees and shop around for the best deal if possible:
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Application and credit fees for your loan application.
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Origination and underwriting fees for your mortgage, usually 0.5% of the loan amount, according to Bankrate.
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Home inspection fees, which are often required to approve your mortgage application.
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Appraisal fees are also often mandatory for lenders to ensure they are not offering more than the home is worth.
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The title fee is also usually 0.5% of the loan amount, and this process verifies that there are no encumbrances or liens on the title that could affect your purchase.
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Transfer tax is mandatory in most states, although the amount varies. It covers the transfer of title from the seller to the buyer. For example, Smart Asset reports that New York State’s transfer tax is $2 for every $500 of property value, while Colorado charges a flat 0.01% (7).
Note that closing costs are not variable. If you put 20% down on a $405,300 home, that’s $81,060, and your closing costs could be more than a quarter of that price. This may add extra months or years to your down payment savings schedule if you don’t want to face an even longer and larger mortgage.
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Rocket Mortar (1), (4); Federal Reserve (2); Mortgage Bankers Association (3); CNBC (5); Banking (6); Smart Assets (7)
This article provides information only and should not be used as advice. It is provided without warranty of any kind.
