Costs That Can Increase on Your Houston Loan Estimate
Receiving your initial Loan Estimate (LE) is an exciting step, but it's crucial to understand that it is just that: an estimate. The TILA-RESPA Integrated Disclosure (TRID) rule, enforced by the Consumer Financial Protection Bureau (CFPB), categorizes closing costs into three groups based on how much they can change by your closing day. Understanding these categories is the key to avoiding sticker shock.
Fees with Zero Tolerance
These costs cannot increase at all from what is quoted on your Loan Estimate, unless you request a change to your loan terms. Any increase must be covered by the lender. This category provides the most protection for you as a borrower.
- Lender or Broker Fees: This includes the origination fee, points you pay to lower your interest rate, application fees, and underwriting fees. These are charges paid directly to the company arranging your loan.
- Transfer Taxes: These are state and local government taxes for transferring the property title. (The data, information, or policy mentioned here may vary over time.)
Fees with a 10% Cumulative Tolerance
This category includes third-party services that your lender requires and for which you use a provider from the lender’s approved list. The total cost of all fees in this group cannot increase by more than 10% from the LE to the final Closing Disclosure.
- Title Services: This covers the lender’s title insurance policy, title search, and other settlement services. For a home purchase in Houston, these fees are critical for ensuring the property has a clear title.
- Recording Fees: The cost charged by Harris County or Montgomery County to officially record the sale and mortgage documents. (The data, information, or policy mentioned here may vary over time.)
- Appraisal and Credit Report Fees: While the lender chooses the appraiser and credit reporting agency, these costs fall into this limited-increase category.
For example, if the LE estimated a combined $2,500 for title services and recording fees, the final amount on your Closing Disclosure for these specific services cannot exceed $2,750 ($2,500 + 10%).
Fees with No Tolerance Limit
These are costs that can change without any legal limit. This is often where homebuyers see the largest discrepancies, as they depend on choices you make or on factors outside the lender's control.
- Prepaid Interest: The interest that accrues from your closing date to the end of the month. This changes based on your final closing date.
- Property Taxes and Homeowners Insurance Premiums: Your initial escrow deposits are based on estimates. The actual cost is determined by the insurance policy you select and the final property tax assessment.
- Third-Party Services You Shop For: If your lender provides a list of title companies but you choose one not on their list, that fee has no tolerance limit. The same goes for your homeowners insurance provider.
Understanding Your Escrow Account Calculation
An escrow account, also called an impound account, is a savings account managed by your lender to pay your property taxes and homeowners insurance on your behalf. At closing, you must fund this account with several months' worth of these payments upfront, which significantly adds to your cash-to-close.
Calculating Property Taxes
Your lender’s initial estimate for property taxes is often based on the seller's current tax bill. However, after the sale, the local authority, like the Harris County Appraisal District, will reassess the home's value, often at the higher sales price. This leads to a higher tax bill.
- Example: A home in The Woodlands was previously assessed at $350,000, but you purchase it for $425,000. Your escrow calculation should be based on the new value. With a 2.1% tax rate, the annual tax bill jumps from $7,350 to $8,925. Your lender will collect a prorated amount at closing to ensure enough funds are available when the bill is due.
Calculating Homeowners Insurance
Lenders provide a general estimate for homeowners insurance on the LE, but the final premium depends entirely on the policy you choose. Factors like coverage limits, deductible amount, and even your credit score can dramatically alter the cost. Shopping for insurance early is the best way to get an accurate figure.
Lenders are also legally allowed to collect a cushion of up to two months of total escrow payments (taxes and insurance) to guard against unexpected increases. This adds to your initial deposit. (The data, information, or policy mentioned here may vary over time.)
The Critical Role of Your Interest Rate Lock
Your interest rate is not guaranteed until you formally 'lock' it with your lender. An unlocked rate is a 'floating' rate, subject to daily market fluctuations. If you receive an LE but delay locking the rate, and market rates rise, your final interest rate will be higher.
This has two major impacts:
- Higher Monthly Payment: A higher rate directly increases your principal and interest payment for the life of the loan.
- Increased Closing Costs: A higher rate means a larger daily interest charge, which increases the prepaid interest you owe at closing.
A rate lock secures your interest rate for a set period, typically 30 to 60 days. If your closing is delayed beyond this period for reasons within your control, you may have to pay a fee to extend the lock or accept the new, potentially higher, market rate.
Lender Fees vs. Third-Party Fees: Know the Difference
Clearly distinguishing between who you are paying is essential for understanding your closing costs. The fees are broken down into two primary types.
Fixed Lender Fees
These are the charges for the lender's services in creating and managing your loan. They are non-negotiable once quoted on the LE and fall under the 'zero tolerance' rule.
- Origination Fee: A charge to cover the lender's administrative costs, often expressed as a percentage of the loan amount.
- Processing and Underwriting Fees: The costs for gathering your documentation and having an underwriter approve your loan file.
- Points: An upfront fee paid to reduce your interest rate.
Variable Third-Party Fees
These fees are for services provided by other companies, not your lender. Your lender coordinates these services, but the cost can vary. These typically fall into the 10% or unlimited tolerance categories.
- Appraisal Fee: Paid to a licensed appraiser to determine the home’s market value.
- Title Insurance & Settlement Fee: Paid to the title company to ensure the property title is clear and to handle the closing transaction.
- Credit Report Fee: The cost for pulling your credit history from the major bureaus.
- Flood Certification Fee: Paid to determine if the property is in a flood zone.
How to Challenge a Fee on Your Closing Disclosure
You have the right to question every single charge. At least three business days before your closing date, you will receive your final Closing Disclosure (CD). This is your last chance to catch errors.
- Compare Line by Line: Sit down with your most recent Loan Estimate and your Closing Disclosure. Go through each fee, one by one.
- Identify Discrepancies: Note any fee that has increased. Check which tolerance category it falls into. Did a lender fee increase? That's a red flag. Did the sum of your 10% tolerance fees increase by more than 10%?
- Contact Your Loan Officer Immediately: For a home in The Woodlands, if you see the title fee jumped by 15%, call or email your loan officer right away. Do not wait until closing day.
- Request an Explanation and Correction: Ask for a clear, written explanation for the increase. If it's a violation of the tolerance rules, demand that the lender issue a credit to cover the difference. A legitimate 'changed circumstance', such as a change in your loan amount or a low appraisal, is one of the few reasons a zero-tolerance fee can be revised.
Decoding Prepaid Interest on Your Closing Statement
Prepaid interest often confuses buyers. It is not your first mortgage payment. It is the interest that accumulates on your loan from the day you close through the last day of that month. Your first full mortgage payment will be due on the first of the following month.
The calculation is straightforward:
(Loan Amount x Interest Rate) / 365 = Daily Interest Cost
Daily Interest Cost x Number of Days Remaining in the Month = Total Prepaid Interest Due at Closing
- Example: You have a $400,000 loan at a 6.5% interest rate.
- ($400,000 x 0.065) / 365 = $71.23 per day.
- If you close on May 15th, there are 17 days left in May (including the 15th). Your prepaid interest is $71.23 x 17 = $1,210.91.
- If you close on May 28th, there are only 4 days left. Your prepaid interest is $71.23 x 4 = $284.92.
Closing later in the month reduces your prepaid interest charge but does not change the total interest paid over the life of the loan.
Common Junk Fees to Spot on Texas Loan Estimates
While most lenders are transparent, some may try to pad their profits with duplicative or unnecessary charges known as 'junk fees'. Always question fees that seem redundant.
- Application Fee: Most reputable lenders roll this into the origination charge.
- Separate Processing and Underwriting Fees: These should ideally be combined into a single, clear 'origination fee'. Charging for them separately can be a way to inflate costs.
- Courier or Document Preparation Fees: In the digital age, these are often considered a standard cost of doing business and should not be a separate line item.
- Rate Lock Fee: A standard 30-day rate lock should be free. Fees should only apply for extended lock periods (e.g., 90+ days for new construction). (The data, information, or policy mentioned here may vary over time.)
Never be afraid to ask, 'What is this fee for, and is it negotiable?'. A good lender will provide clear answers.
Navigating the numbers on your Loan Estimate is the first step to a confident home purchase. If you're ready for a transparent mortgage process without surprises, our strategists can help you secure a fair deal. Apply now to get started with a team you can trust.
Author Bio
David Ghazaryan is the expert mortgage strategist and founder behind iQRATE Mortgages. With a mission to fund home loans that traditional banks won't touch, David specializes in helping clients with unique financial situations, including those recovering from foreclosure or bankruptcy. He expertly crafts smart, strategic, and stress-free mortgages by leveraging a vast network of over 100 lenders to secure competitive rates for investors and homebuyers alike. Praised for exceptional customer service, David has helped hundreds of families with a 97% satisfaction rate, guiding them to the mortgage they deserve.
