What is a Tax Service Fee? (with picture)

Definition

Simply put, a tax service fee is paid to the company that services the loan. The servicing company sets up an escrow account for the buyer and pays the buyer’s taxes and homeowners insurance from that account. You’re the one who puts the money in.

How Much Is the Tax Service Fee?

The tax service fee will vary depending on the lender and state you are closing in. These fees are often relatively minimal and can range from around $50 to just over $100.

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What fees are associated with a mortgage loan?

Common charges are labeled origination fees, application fees, underwriting fees, processing fees, administrative fees, etc. Points. Points are a charge you pay upfront to the lender. Points are part of the price of borrowing money and are calculated as a percentage of the loan amount.

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What fees does the seller have to pay on an FHA loan?

FHA loans allow sellers to cover closing costs up to six percent of your purchase price. That can mean lender fees, property taxes, homeowners insurance, escrow fees, and title insurance.

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What are escrow fees?

An escrow fee, or closing fee, is paid to the title company, escrow company, or attorney for conducting the closing of a real estate transaction. Typically, the title or escrow company oversees the closing as an independent party. In some states, a real estate attorney is required to be present so make sure to check your state’s requirements.

Who pays the escrow fee?

It depends. There are cases where the escrow fee is split between the parties and others where the buyer or seller handles it on their own.

When do you pay closing costs?

You pay closing costs at the end of the loan process — when the transaction closes.

One common misconception is homebuyers have to come up with thousands of dollars in upfront and out-of-pocket closing costs. This isn’t the case.

You also don’t pay them separately from your down payment. After you sign the final loan paperwork, the escrow company calculates all of the closing costs and adds that to your down payment amount, then subtracts any lender credits or seller-paid costs. That is the amount you’ll need to hand off to the escrow company. (You usually wire the money or bring a cashier’s check with you when signing your final loan paperwork.)

Third-party fees

Third-party fees are costs for services by other parties associated with your loan that aren’t your lender — for example, the title company and the appraiser.

Finding a title company that also has an escrow department is often less expensive than hiring two different companies.

These fees will be similar no matter which lender you choose. They’re not as important as comparison shopping lender fees, but you should still examine the fee amounts and ask about them. For example, some lenders work with more expensive title and escrow companies. But, for refinances you can shop around for your own title and escrow agent to bring the cost down.

Appraisal ($350-$500+)

Appraisers are professional home value estimators who determine the value of the home. (Your lender uses this value when evaluating your loan qualification.) Appraisals typically charge around $500 for their services. Though, expect to pay up to $1,000 if you’re purchasing a high-value home or unique property.

Pest inspection ($100-$500)

Some areas always require a pest inspection, though this isn’t common. Most areas only require one if there is evidence of pest infestation noted on the appraisal report.

Title report/title insurance ($300-$1,500+)

This fee can vary widely as it’s based on the home’s value and geographic location as well as the loan amount. A title company’s job is to research all past claims on the home and ensure the title is “clear” — meaning no one can claim a right to the home. They also issue insurance in the event something was missed.

There are two kinds of title insurance and you’ll need both when getting a mortgage. The lender’s title policy repays the bank that holds the loan in case the home is lost to a title claim. The owner’s title policy protects the owner.

Who pays for each policy varies. In some areas of the country, the seller pays the owner’s title insurance for the buyer, while the buyer typically pays the lender’s policy. Ask your real estate agent or lender if the seller is paying for the owner’s policy. If not, your title insurance costs could double.

For refinances, you won’t pay for an owner’s policy, since it was already purchased when you bought the home; you will be responsible to pay the lender’s policy on the new mortgage.

Escrow fee ($300-$700+)

The escrow company handles all the funds involved in the transaction. They make sure all parties pay and get paid appropriately. For example, at closing, the lender wires in loan funds and the buyer wires the down payment and closing costs. The escrow company then pays off any existing loans on the home, pays third-party service providers, and wires the rest of the funds to the seller. The escrow company also handles getting all of the loan documents signed and notarized.

The escrow fee (also known as the settlement fee or closing fee) is based on the loan amount and/or purchase price, so expect to pay more on higher cost homes.

Notary fee ($100-$150)

The escrow company won’t usually charge you an extra fee if you sign your final loan documents at their office. However, if you choose to sign elsewhere like your home, then they may charge a fee to send a notary (a signer who can notarize documents) to you.

Closing protection letter (CPL) ($50)

This fee is only required when the escrow company is not associated with the title company and not common. It’s a letter stating that the title company is responsible if the escrow company doesn’t distribute funds appropriately.

Survey fee ($400+)

Occasionally, the title company needs to determine property lines. A survey is required in this case, but isn’t common.

Attorney fees ($400+)

Some states require an attorney to be involved in negotiating the sales contract and facilitating a timely closing. If your state requires one, shop around for an inexpensive attorney — it’s mostly a formality, so no need to break the bank.

How Does a Tax Service Fee Work?

Before approving your mortgage, your lender will want to conduct a thorough assessment of the property’s tax history and upcoming bills to protect the lender’s claim to the collateral. Part of this process involves a title search, which is often handled for the lender by a title company. Kukwa said that the title search could turn up outstanding property tax bills that would need to be cleared before closing on the house can continue. Unpaid property taxes could mean the taxing government could have a right to the property, which could jeopardize the lender’s claim to it if you were to default on your loan.

Once the title company determines that there are no outstanding property taxes, it calculates how much property tax is likely to be owed in the coming months. Your lender will use that amount to assess a tax service fee that will cover the property tax bills for a short period immediately after the home purchase, such as two or three months.

After the initial period covered by the tax service fee, your mortgage payments will usually include payments into escrow, Kukwa said. The lender then will pay out these amounts on your behalf when property taxes are due.

Process

Most mortgage contracts allow the lender to make tax payments on behalf of the borrower should the borrower fail to make them. If you don’t make the payments, the lender can step in, make them for you and then add the amount to the mortgage with additional penalties and fees. It can also take the more aggressive step of placing a lien on your property and beginning foreclosure.

How to negotiate your closing costs

When you apply for a loan, don’t assume that the lender will give you its best offer right away. If you don’t negotiate, you may get a worse deal than someone with identical credit and income might have gotten by shopping around. We cover some tips to strengthen your negotiating position.

Before you make an offer

Before you make an offer on a house, shop for rates from multiple lenders. By shopping early, you can get information on rates and closing costs from multiple lenders. Having this information will give you a leg up when you’re ready to negotiate on each aspect of the loan.

While you’re shopping, let the lender know that you’re looking for the best rates, and that you’re also looking at closing costs. Ask the loan officer whether the lender has rate-matching guarantees or other flexible pricing options. At this point, you won’t be specifically negotiating any loan terms, you’ll just be getting a feel for which lenders are most likely to budget on their offers so you know who to turn once you’re ready to put down an offer on a house.

After the seller accepts your offer

While buyers pay most of the closing costs, you can attempt to negotiate for some concessions from the seller (or credits) after they’ve accepted your offer on the house. For example, you may ask the seller to pay an appraisal fee or a title transfer fee. It’s not common for sellers to pay closing costs, so ask your real estate agent about best practices in your area before you start asking for concessions.

After you get a loan estimate

When you have an accepted offer on a home, you’ll want to get loan estimates from a few lenders. Once you have a written loan estimate, negotiations can start in earnest. Talk to loan officers from multiple banks and ask whether they have room to reduce or eliminate certain fees.

Tell the loan officers about offers from other lenders. Negotiating the best deal may take a few hours or even a few days, especially if you have two or more lenders competing for your business. However, the discussions you have with your loan officers could save you some serious cash when it comes time to close.

Once you’re certain you have the best deal, let the lender know that you’re ready to move forward with them. Normally, the loan officer will let you lock in a rate at that point. Once your rate is locked in, you won’t have much room for negotiation after that— aside from a few small fees such as attorney’s fees — at closing.

Should you roll your closing costs to avoid fees?

If you’re OK with paying a higher interest rate (and a higher monthly payment), you could also consider a no-closing-costs loan. This type of mortgage is available from certain banks and credit unions and allows you to close your mortgage with little to no closing costs paid upfront.

Be aware that these types of mortgages rarely waive your closing costs altogether, and instead roll your closing costs into your mortgage in the form of a higher interest rate or extra monthly payments towards the end of your mortgage. It’s a good idea to consider all your options to save money.

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