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Young couple looking at credit reports and bills together.
While it’s not news that housing costs continue to be high across the country, one component of the closing costs for a new home is standing out because of its skyrocketing price: the credit report.
Rocket Mortgage reports that closing costs usually range from 3% to 6% of the total price of a mortgage (1) — that’s $12,159 to $24,318 for a $405,300 mortgage, the median sale price for homes in the U.S. according to data from the Federal Reserve (2).
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As part of applying for a mortgage, lenders typically pull what’s known as a “tri-merge” report, compiling the information from all three major credit bureaus in the U.S. The cost for this has risen between 40% to 50% in the last year, and Mortgage Bankers Association reports that this is “the fourth consecutive year of dramatic price increases” (3).
Here’s why the report price is adding barriers to the already tough-to-swallow cost of buying a home, and what you can do if you’re a prospective homebuyer to ensure a full understanding of loans, mortgages and the associated costs.
‘Burdening the mortgage system’
A tri-merge report gives potential lenders the ability to balance the info from the three reports against each other, ensuring they’re not missing critical info (4). This can be a benefit to a homebuyer if one of the reports features a lower credit score than the other two.
The reports themselves are not expensive — about $47.05, according to CNBC (5). However, the reports must be pulled twice, at the beginning of the application and again before the loan closes. This means the cost can be close to $100 for an individual, or $200 for a couple. Coming on top of so many heavy costs, this is one extra line item that many experts say is unnecessary.
The Mortgage Bankers Association (MBA) points to the lack of competition in the credit score market as the root of the problem, and has asked the Federal Housing Finance Agency (FHFA) to allow lenders who are considering giving a mortgage to a client with a credit score over 700 the option to pull a single report (3). CNBC notes that in the case where a lender pulls a report but the buyer doesn’t take the mortgage, the lender must cover the cost (5).
“Burdening the mortgage system with these costs — unconstrained by any market competition — has exacerbated ongoing housing affordability challenges,” the MBA wrote in their letter to the FHFA (3).
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Understanding the full price of buying a new home
In addition to the price of your mortgage, which will be affected by your credit score and general credit-worthiness, there are a range of costs associated with buying a new home that aren’t reflected in the sticker price.
Bankrate reports that while some mortgage lenders will roll these costs into your mortgage, the savings up-front can cost you more in the long-term by way of a higher interest rate or larger loan principal (6). To get the best price on the overall cost of your new home, you should be familiar with these fees and shop around if possible for a better deal:
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Application and credit fees for your loan application.
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Origination and underwriting fees for your mortgage, often 0.5% of the loan amount according to Bankrate.
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Home inspection fees, which are often mandatory for your mortgage application to be approved.
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Appraisal fees are often also mandatory for lenders to ensure they don’t offer more than the home is worth.
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Title fees are also usually 0.5% of the loan amount, and this process verifies that there are no encumbrances or liens on the title that could impact your purchase.
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Transfer tax is mandatory in most states, though the amount varies. This covers transferring the title from the seller to the buyer. For example, Smart Asset reports that New York state transfer tax is $2 for every $500 of property value, while Colorado charges a flat 0.01% (7).
Remember that closing costs aren’t chump change. If you’re putting a 20% downpayment on a $405,300 home, that’s $81,060, and your closing costs could be more than a quarter of that price. This may mean adding additional months or years to your downpayment savings timeline if you don’t want to face an even longer and larger mortgage.
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Article sources
We rely only on vetted sources and credible third-party reporting. For details, see our editorial ethics and guidelines.
Rocket Mortgage (1), (4); Federal Reserve (2); Mortgage Bankers Association (3); CNBC (5); Bankrate (6); Smart Asset (7)
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.