Why are closing costs on the rise?
Some lenders say the hike reflects the higher cost of doing business under new mortgage regulations that went into effect this year.
"The biggest reason (for the higher fees) is the additional regulations," says Dan Stevens, sales operation manager and vice president of National Bank of Kansas City. "The No. 1 at the moment is the qualified mortgage rule. That alone has really added additional man-hours to the mortgage approval process."
The qualified mortgage rule -- also known as QM or the ability-to-repay rule -- was implemented in January by the Consumer Financial Protection Bureau. The rule is simple in theory: It requires lenders to verify that a borrower can afford to repay the mortgage before a loan is approved.
But in practice, complying with the rule is costly to lenders and those costs are passed to the consumers, lenders say.
"Before, where you had an underwriter do five loans per day, now they are just doing two," says Brian Koss, executive vice president of Mortgage Network in Danvers, Massachusetts. "They are taking a forensic-style approach to underwrite a loan. You have to go through it with a fine-toothed comb."
Fear of lawsuits
Lenders are not required to meet the requirements of the QM rule, but if their loans meet the rule's standards, they gain legal protections against potential lawsuits.
"We had a lot of documentation relief in the past," Koss says. "Now you have to be able to defend your position five years from now and show why you gave this person a loan. We treat each file as a potential future court case."
No relief in sight
The higher costs are not likely to decrease in coming years, even after lenders adapt to the rules, lenders say. The additional staffing and software costs are probably here to stay, Stevens says.
Smaller lenders face even higher costs because they can't afford an in-house team to meet the requirements, so they pay third parties to do the work.
"We work with a consortium of lenders and we have seen some of them outsource a lot of the services needed to maintain compliance with government regulations," says Grant Moon, president of VA Loan Captain Inc., a loan referral company that specializes in mortgages for veterans. "That increases their costs and ultimately the consumer bears (them)."
Important to shop around
Consumers don't have to accept higher fees without a battle.
"Not everyone is raising their fees," Stevens says. "Even if the averages keep on going up, there are certainly some that are not. Shop around and don't settle for the first person you talk to."
Borrowers can start shopping for better closing costs even before they put in an application, says Rick Harper, director of housing and senior vice president of the Consumer Credit Counseling Service of San Francisco.
"Some of the biggest charges are the lenders' origination fees," he says. "Then you have your third-party fees. Call and ask, 'Can you give me an estimate of your closing costs?'" Harper suggests.
Look at the big picture
But that's just a starting point, Harper explains. Borrowers must look at the big picture, and not just the closing costs or interest rate, he says.
The best way to compare apples to apples is to look at the lender's Good Faith Estimate form. Lenders are required to provide borrowers with a GFE form within three days after an application is completed.
"And remember to compare the GFE with the actual charges before you close on the loan," he says.
There's more to a loan than the interest rate
Borrowers tend to focus more on the interest rate when shopping for a loan, ignoring the closing costs, Koss says. Because of the pressure to compete on rates, some lenders may try to attract borrowers with lower interest rates and charge higher closing costs to compensate the lower rate, he says.
That's why it's important to ask lenders to provide you with side-by-side comparisons of loan options, even as you try to negotiate costs.
"All fees are negotiable but usually it's a trade-off and it will have to come from somewhere, so be careful with what you ask for," Koss says.