Mortgage  Question?
Why are closing costs lower than costs on Loan Estimate?

We are getting a USDA home loan and the lender is telling us that our actual closing costs will be lower than the closing costs figure on the Loan Estimate. Why would the lender tell us our closing costs will be lower than the closing costs figure on the Loan Estimate? We want to be prepared if we actually have to pay the higher closing costs.

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

It is difficult to answer your question without reviewing your Loan Estimate but there are several reasons why the closing costs figure presented on your Loan Estimate can be higher than the actual closing costs you are required to pay when your mortgage closes. The most likely explanation is that the upfront USDA guarantee fee (1% of your mortgage amount) is included as a closing cost but this fee is usually added to your loan amount which means you do not need to pay for it out of pocket when your loan closes. If you look at item B on page 2 of your Loan Estimate, the USDA guarantee fee should be listed as a closing cost under "Services You Cannot Shop For" which means the fee is included in calculating your closing costs.

However, ff you look at the bottom right of page 2 of your Loan Estimate under "Calculating Cash to Close" the second item listed should be "Closing Costs Financed (Paid from your Loan Amount)" and that figure should be negative and probably equals the USDA guarantee fee. The "Closing Costs Financed (Paid from your Loan Amount)" figure is negative because it is added to your loan amount instead of you paying that cost out of pocket at closing. This means that figure is subtracted from the cash you are required to pay to close your loan. So in some cases the "Estimated Cash to Close" listed on the Loan Estimate is less than "Estimated Closing Costs" listed on the Loan Estimate.

You can review both the "Estimated Closing Costs" and "Estimated Cash to Close" on the bottom of page one of the Loan Estimate to compare these two figures. In your case, your "Estimated Cash to Close" may be lower than your "Estimated Closing Costs" because the USDA guarantee fee is included in your loan amount. This could also explain the difference between the closing cost figure listed on your Loan Estimate and the cost figure quoted by your lender.

The other possible explanation why the closing costs figure on your Loan Estimate is higher than closing cost figure quoted by your lender or the actual closing costs you are required to pay is because your lender "padded" the estimated closing costs on the Loan Estimate. In some cases lenders provide conservative estimates of closing costs which means they may use higher estimates for costs such as the appraisal report, recording fees and other expenses. Additionally, some lenders use an earlier estimated closing date which increases the estimated prepaid interest that is included in your closing costs. The amount of prepaid interest you actually pay is not determined until your mortgage closes so using an earlier closing date means the lender is being conservative by using a higher estimated cost (but this does not mean you end up paying the higher cost). You may be asking why lenders would use conservative cost estimates and the reason is because if your actual closing costs exceed the closing costs listed on your Loan Estimate this can cause issues and delay your mortgage closing. It is best for lenders to be as accurate as possible when it comes to estimating closing costs but you would prefer your lender to be conservative rather than aggressive because your actual closing costs end up being lower than expected.

FREEandCLEAR offers a range of free resources on this topic that you can review including the following:

How to Use the Loan Estimate. We provide a thorough overview of how to use the loan estimate for a mortgage.

Loan Estimate Breakdown. Review our page-by-page, line-by-line breakdown of the Loan Estimate including example closing costs and fees.

How to Compare the Loan Estimate to the Closing Disclosure. We explain how you can compare the Loan Estimate you receive at the beginning of the mortgage process to the Closing Disclosure you receive at the end of the mortgage process to make sure your mortgage terms have not changed from application to closing.

USDA Home Loan Program Overview. Review our comprehensive overview of the USDA Home Loan Program including program eligibility requirements, borrower qualification guidelines and upfront and ongoing USDA guarantee fees.

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About the author

Harry Jensen, Mortgage Expert

Harry is the co-founder of FREEandCLEAR. He is a mortgage expert with over 45 years of industry experience. Over his career, Harry has closed thousands of loans for satisfied borrowers and now offers his advice and insights on FREEandCLEAR. More about Harry

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