Ask for estimates of settlement costs first

At various points in the loan application process, you are entitled to estimates of the costs and fees associated with arranging your mortgage and completing the settlement process.

"Good faith estimate" (GFE)

With such a long list of potential charges at settlement, it is important to know which ones will apply to your purchase. The Real Estate Settlement Procedures Act (RESPA) requires your mortgage lender to give you a "good faith estimate" of all your expected closing costs within three business days of the submission of your loan application, whether you are purchasing or refinancing the home. Although called a good faith estimate, it is important to note that your actual expenses at closing may be somewhat different. The standardized GFE form lists which costs will change prior to settlement and the maximum amount by which they are allowed to change. If you are purchasing the home, a booklet provided by your broker or mortgage lender, Buying Your Home: Settlement Costs and Helpful Information, explains the role of the good faith estimate in the settlement process.

Truth in Lending information

For home purchases, the lender is required under the Truth in Lending Act to provide a statement containing "good faith estimates" of the costs of the loan within three business days after receiving your application. This estimate will include your total finance charge and the annual percentage rate (APR). The APR expresses the cost of your loan as an annual rate. This rate is likely to be higher than the stated contract interest rate on your mortgage because it takes into account discount points, mortgage insurance, and certain other fees that can add to the cost of your loan. When refinancing your mortgage, you will receive truth-in-lending disclosures before you settle. Until you receive those disclosures, the creditor and other parties cannot charge you fees related to your loan application, except for a fee for obtaining your credit history.

"HUD-1/HUD-1A" statement

When you purchase a home or refinance your mortgage, RESPA also requires the lender to give you a copy of your HUD-1 or HUD-1A Settlement Statement the day before you go to settlement, if you request it. This final statement of settlement costs will show all the fees and charges you will be expected to pay at settlement. The HUD-1 also states the initial terms of the loan, including the monthly amount due.

The revised HUD-1 is designed for easy comparison with your good faith estimate. Most costs in the "800" to "1300" series of the HUD-1 form are labeled with the corresponding section of the GFE for reference. Included in the HUD-1 are comparison charts for the estimated costs provided on the GFE and actual costs paid at closing. These will be completed by the settlement agent for you before closing with information provided by your lender.

Fees paid outside of settlement/closing

Some fees may be listed on the HUD-1/HUD-1A and marked as "Paid Outside of Closing" (or POC). You will pay some of these fees, such as for credit reports and appraisals, before settlement. Other fees, such as your direct payments to a mortgage broker, you will pay at settlement. Payments by other parties, for example, from the lender to the mortgage broker, also may be marked as POC.

Sample Settlement Costs

Because costs may vary from one area to another and from one lender to another, the following example is an estimate only. This example is based on a $200,000 home with a 5% or a 20% down payment. Excluding reserves for property taxes and down payment, settlement costs for the 5% down payment loan vary between $6,235 and $19,930 (median cost $13,030); settlement costs for the 20% down payment loan vary between $5,800 and $18,440 (median cost $11,585). Your costs may be higher or lower than the examples below.