How do you determine what costs have been added to your mortgage amount?

By Harry Jensen, Trusted Mortgage Expert with 45+ Years of Experience

Edited by Michael Jensen, Mortgage and Finance Guru

Updated October 20, 2020

To determine what costs or fees have been added to your mortgage amount you should review your Loan Estimate, which outlines your key mortgage terms including your interest rate and closing costs. The lender is required to provide a Loan Estimate within three business days of you submitting your loan application. The Loan Estimate should help you understand why your mortgage amount increased compared to the property purchase price and if the higher loan amount is justified.

Review What is a Mortgage Loan Estimate

Although you typically cannot add standard closing costs such as lender fees to a mortgage used to buy a property there are several exceptions to this guideline.  These exception cost items may increase your loan amount, even if the property seller is paying for all or part of your closing costs.

For example, if you are paying FHA or USDA mortgage insurance or a VA funding fee upfront, then these charges can be added to your loan amount if you do not want to pay for them yourself.  Additionally, if you decide to pay discount points, the cost of the points may also be added to your loan, although this is relatively unusual.

Adding closing fees to your mortgage amount is also known as financing the costs because you pay for them over time as you pay back your loan.  The alternative to this approach is paying for the costs out of pocket, which means you need to contribute more of your personal funds to close your mortgage.

Returning to your question, if the seller is paying for closing costs then this figure should definitely not be added to your mortgage amount but rather deducted from the sale proceeds they receive. For example, if you are buying the home for $110,000 and the seller has agreed to pay for $4,000 in closing costs, then $4,000 should be subtracted from the amount of money the seller receives after paying off their current mortgage and any other closing fees they are responsible for such as the property transfer tax, if applicable.

In most cases the property seller is also responsible for paying all realtor or real estate agent commissions including the fees for the property buyer's realtor or agent. For example, if your agent is supposed to receive 3% of the purchase price and the seller's agent is supposed to receive a 2% commission, then the seller usually pays the total 5% commission, which is also deducted from the property sale proceeds. You can review your offer to purchase agreement to confirm which party is responsible for paying real estate commissions.

If the seller is responsible for paying the commissions then these fees should not be added to the purchase price or loan amount as this is effectively having the buyer pay for these costs, even if the buyer receives a rebate for part or all of the costs.

This is because if you add extra costs to your mortgage amount, then you pay interest on those costs over the term of your loan. For example, if you have a 30 year mortgage and your loan amount is increased from $110,000 to $116,000, then you pay interest on an extra $6,000 for 30 years, which ends up costing you a lot of money in the long run.

As I recommended above, take a close look at your Loan Estimate to understand the difference between your mortgage amount and the property purchase price. If you are satisfied after reviewing the Loan Estimate then you can move forward with the transaction.

If you believe a mistake has been made and fees have been incorrectly added to your loan then you should immediately attempt to correct the issue or renegotiate the terms of the property purchase. If you cannot come to an agreement that is satisfactory then you should cancel the mortgage.

If you believe that your lender has made an error and is unwilling to correct it, we recommend that you contact other lenders in the table below to understand how they would handle your unique situation.  We advise you to contact multiple lenders as qualification guidelines vary plus shopping for your mortgage enables you to find the best loan terms.

Sources

“Learn about loan costs.”  CFPB.  Consumer Financial Protection Bureau, 2017.  Web.