When your originator receives an accepted purchase contract, it triggers the need to comply with RESPA.  One of the requirements is to provide you with a Good Faith Estimate (GFE) that contains an estimate of the fees and costs associated with your loan.  Some of these fees differ depending upon the entity providing the GFE, but we'll cover most of the major categories and fees and how they are estimated.

There are several series, or groups, of fees broken down on the GFE.  It is not necessary to understand the grouping of these fees, but I will reference the series to help those of you who are examining your GFE.  I will also assume that the originator is familiar with the typical charges in the county/state of the property.  Charges may differ tremendously from state to state.  Originators who deal with multiple states may not be fully aware of the local charges and may not provide accurate estimations.

The 800 series:

The origination and discount fees are based on the program and rate listed on the top of the GFE and reflect the pricing of the date of the GFE.  These fees should be very accurate because they are based on information that is updated regularly.

The appraisal fee is an estimate based on typical charges in your area.  This fee may not be completely accurate as there may be additional charges for travel time, extra work based on property value, size, or type, etc.  Also, the cost is dependent upon a 3rd party to the transaction, thus it is not always very accurate.

Processing and underwriting fees should not be off by more than about a $200-300.  These are based on the charges of the originator's company and/or the end lender's fee.  If you are dealing with the lender, they should be completely accurate.  If you are dealing with a broker, the underwriting fee will be typical of the lenders the broker deals with and may be off by a few hundred dollars depending upon the lender that is ultimately chosen.

Other fees (Administration, Broker Fee, etc) should be completely accurate as they are controlled by the broker/lender.

1100 Series

The title charges are going to be an estimate based on typical title fees in your state.  More often than not, the seller is choosing the title company, thus the total of these fees may be several hundred dollars off.  It would not be uncommon for the estimate to be $400-500 off.

1200 Series

These fees should be very accurate as they are based on known charges by government entities. 

900 Series

These fees should be highly accurate as long as the closing date is met. 

1000 Series

These charges should be highly accurate.  The establishment of an escrow account is based on the due dates for each item and the month in which the loan is closed. 

The total charges should not cause your disclosed APR to be more than 0.125% different than the actual APR.  Primarily the agencies who oversee originators are concerned with under disclosure of fees and so you may find that some will over-estimate to be safe and alleviate the need for constant updating of the GFE.

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When obtaining financing for real estate, whether for a purchase or a refinance, estimated closing costs are determined by your lender. In fact once you've provided a loan officer with a complete loan application, they have by law, three days to get you a good faith estimate representing the loan they are proposing.

Estimated closing costs between various lenders will vary substantially which is why it is a good reason to get a couple estimates from competing lenders. A competent and experienced broker with a completed application is capable of completing a good faith estimate and determining closing costs. Closing costs will vary depending on the size of the loan, the third party servicers you choose to utilize (title, escrow) and your loan officer's fee for service. Be careful if your lender tells you they are not charging you anything - I don't know anyone that works for free and there are ways to mask commission earned.

There are specific costsassociated with every loan. Namely title insurance, escrow or attorney fees, and underwriting fees. How these fees are represented and broken down on independent good faith estimates is where it can get confusing. Escrow fees could include: doc preparation, notary, courier fees, etc... or they may be listed in a single lump sum. This rule is true for both title and underwriting fees as well. Regardless of how the fees are represented, the final number should be over estimated, not under estimated. For this reason having a good faith come in high, or for more than you expected does not suggest you are getting taken advantage of, but rather the broker is doing their diligence to ensure you have been properly informed. These third party fees listed above, will vary between companies but are all close to one another in nature - what I have not discussed yet is the fee for service the originating agent is making for issuing the loan.

The agent's fee for service is what many people misunderstand. A loan officer can make money by selling you a higher intererst rate than you qualify for. This is one way of reducing closing costs, it is also an easy way for borrowers to be taken advantage of. This type of commission known as yield spread or rebate, is paid by the lender to the originating agent. Many people when reviewing different good faith estimates do not realize that yield spreadexists; and if I plan on making yield spread as my fee for service, my good faith estimate will come in substantially lower than someone that is charging you on the front end. The difference between the two will be the interest rate. You would inadvertently be accepting a higher interest rate than the market could offer you by closing with the lender offering the lower costs - why - because they are making yield spread which requires them selling you a higher rate which in turn results in the lender paying them the rebate. Because markets and rates change constantly throughout the day, it can be difficult evaluating the difference in cost. What I recommend - agree on your loan officer's fee for service beforehand, that way how it is made, on the front end in origination, on the back end in rebate, or sideways a combination of both - it doesn't matter, one point charged on the front, on the back, or between the two, still equates to one point in commission. Once their fee for service is agreed to, you can accurately evaluate the remaining closing costs.

As for prepaid items/reserves- these include taxes, insurance, and mortgage insurance (if you have it). The number of months in reserves that is collected at closing will depend on what month it is, and where you fall in relation to the billing cycle associated with taxes, and insurance. An established impound account must have enough capital in it to pay the bills when they come due, so if a 6 month tax bill is due in two months, you will need to deposit 4 months of reserves into the account to establish it at the time of financing. This rule is true for the taxes and mortgage insurance as well. In addition borrowers should expect to pay home owners insurance and property taxes due inside of escrow if they are financing close to the end of the billing cycle. If you tax or insurance bill is due within three months expect to pay your taxes and insurance due inside of escrow when closing.

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