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A lot of people are involved in the process of buying a house. They include the lender, appraiser, insurance company, your local government, Realtors, inspectors, and an attorney or title company.
Each of these parties charge fees for their service in processing, closing, and funding your mortgage loan. Part of your Loan officers responsibility is to explain to you what the services and costs are, and to give you an estimate of the total costs when you apply for a loan. Initially, this will come in the form of an Initial Fees Worksheet. This is only the initial estimate based on your initial inquiry to give you an idea of your total costs. This is not a Good Faith Estimate.
Once you decide to move forward with the lender, as part of their overall application disclosures, you will be given a document titled Good Faith Estimate of Closing Costs. This is based on the exact final transaction (exact house, purchase price, locked interest rate, property taxes, etc.). This document is required to be extremely close to your final costs you can expect at closing.
Lenders are not allowed to pad, or add onto the costs charged by other parties (like the appraiser), but rather simply pass on what those companies charge. The vast majority of closing costs go to third parties, not your actual lender. An exact breakdown and description of closing cost charges are at the end of this web page.
Lenders and brokers are required by Federal law, known as the Real Estate Settlement Procedures Act (RESPA) to give you a booklet called "Shopping for your home loan - HUD's Settlement Costs Booklet" when applying for a mortgage loan. If they didn't give you one, what are they trying to hide?
Shopping can be confusing. No matter what we're looking for -- from cars to refrigerators -- there's a built-in element of confusion. Why? Lack of knowledge. An unfortunate rule of thumb is that the less we know about something we need to buy, the more we can expect to pay for it.
Shopping for a mortgage in Minneapolis, St Paul, Rochester, Duluth, Madison, Milwaukee, or all of Minnesota, Wisconsin, or South Dakota is complex at best -- even for the savvy previous home owner. Daily rate changes, time-sensitive lock-in periods, points, lender's fees... plus the emotional element of probably the largest purchase any of us will ever make. Throw in to this already murky stew the ingredients of tricky rate advertising, commissions for every officer, agent and broker who is involved in your transaction, and the obscure differences between rates and fees. It's no mystery that many people settle for a mortgage that exceeds their monetary means out of sheer exasperation!
So, what can we do? The answer is education. If we know how to shop for a mortgage -- the questions to ask, the language to speak, the tools to employ -- we then possess the knowledge to secure the best deal.
The following is a simple primer to shine a light of clarity into the darker corners of mortgage lending. Read everything, familiarize yourself with the terminology -- and see how easy it is to secure the best possible mortgage with the lowest possible costs for you MN or WI home loan.
A common mistake shoppers make is to ask: "What's your best interest rate?." It is a logical question to ask, but it does not give the correct response most borrowers need to make a proper decision. Borrowers must understand both rates and fees. Rates are only half the answer to getting the best deal. It is possible end up with the lowest rate but not necessarily the best deal.
You see, all loans have closing costs, and all lender closing costs are essentially equal. They all have to collect and pass on the same third party fees, such as appraisal, credit report, title company fees, state taxes, escrows, etc. Next, all lenders have to pay Loan Officer, processors, underwriters, and more, so they all have essentially the same lender related costs, like loan origination fees, and processing fees.
How lenders disclose, label, and charge your closing costs can vary greatly, but you as the borrower will ALWAYS be paying them. Read my article on understanding how mortgage companies can disclose interest rates and closing costs to make one or the other appear better to you than maybe some other mortgage company
Simply put, the lowest rate & the lowest closing costs do not go hand-in-hand. NO LENDER can offer both together. I can give you rock bottom interest rates, but it will cost you in higher closing costs. I can give you very low, or even no closing costs, but that comes with higher interest rates. Good lenders typically quote their best rate in combination with covering all third party fees (appraisal, credit report, title company, state taxes, county recording fees, etc) with 1% origination.
CONFUSED? - here are a few other great articles to educate yourself:
Beware of the BAD Good Faith Estimate
Protecting yourself against mortgage scan and bad lenders
No closing cost loans - The real story
Best Interest Rate, or Lowest Closing Costs - Which is better?
Thinking of breaking a interest rate lock? - Why you might want to think again
Discount Points and Origination fees -- Convert these fees into dollar figures to better understand associated costs. For example: One point is 1% of the value of the loan. A discount point or origination fee of one point would equate to $1000 on a $100,000 loan.
Appraisal, credit report and county/state fees -- These fees do not vary greatly between lenders, but they do vary. Also, you should never ever pay an application fee! The most you should pay a lender 'up-front' is a credit report fee, and that should never exceed $55.00. Paying up-front for your APPRAISAL is also OK.
Miscellaneous lender charges (application fee, broker fee, funding fee, wire transfer fee, etc.) -- These are the categories where most lenders hide their fees.
Title/settlement charges-- Include title search, closing fee, survey, title insurance, etc. These fees are paid to a separate company from the lender, so in theory they should be excluded from a lender-to-lender comparison. You should keep in mind that these charges will need to be paid in connection with the loan.
Pick the program that best suits your needs.
Next, YOU choose the rate YOU want. By choosing the rate first you eliminate one giant shopping variable. You now can find out exactly which lender is charging you the least amount of money for the loan that you want.
Closing Costs and Lender Fee's. PAY CLOSE ATTENTION. Many lenders will give you a ridiculous number that has no bearing on your real total costs by saying "OUR closing costs" or "OUR lender fee's" are X amount. Ask instead for the "bottom line", the "total amount required to complete the transaction", or even "what is the exact penny I will need to bring to closing?" By asking in this manner, you eliminate 99% of the misleading games some lenders play in attempting to make their costs sound so much better than everyone else. Please review the actual closing cost information listed below. Read Beware of the Bad Good Faith Estimate for more details.
Ask the lender for a "Good Faith Estimate (GFE)" of settlement charges to verify if they are willing to put their pricing claim in writing. If they are not - RUN! Make sure to tell them you want ALL costs from ALL sources involved in the transaction listed on the estimate. You do not want anything listed TBD (to be determined).
Review each Good Faith Estimate very carefully, especially if the estimate does not look exactly like a real final settlement statement (known as a HUD-1). Double check to make sure that EVERY cost associated with your loan is listed. All REAL competitive estimates should be very close in total dollar amount! All Mortgages Unlimited Good Faith Estimates will ALWAYS include every single dollar required to complete the transaction.
Still Confused? Fax or call me a copy of the other lenders Good Faith Estimate. I will be happy to review it with you. If it is a good estimate, I'll be the first to tell you. If it is a bad estimate, I'll help you understand how and why it is a bad estimate.
Yes. In standard transactions, the difference between estimated and actual closing costs will vary. The rules require that lenders Good Faith Estimate be very close, with just a small tolerance for variation. Therefore any variances should not normally be a cause for concern. These small differences between estimated and actual costs are a common source of confusion and frustration for borrowers. The main reasons for the difference between the estimated and actual costs are as follows:
Different investors charge different fees for processing your loan application. Therefore, your choice of a loan product will determine the actual investors origination cost, administrative fees, etc. Since you normally receive the Good Faith Estimate before you lock in a loan, our fees can only be an estimates. But they should still be close.
Your prepayment amount may vary. On a purchase, you might have to prepay certain expenses. To protect the collateral on their loan against your house, most lenders require you to prepay a years worth of insurance, as well as some property taxes up front. These amounts will vary and depend on many things, including the type of insurance you choose. You will also have to pay "days of interest" depending on what day of the month you close. This amount can vary greatly. We usually have no idea what day of the month you will be closing, so these costs are only estimated.
When you close. Pre-paid tax escrows vary greatly depending on the month you close. If we originally estimated your closing for January 25th, but you really close March 5th, the differences could easily be several hundred dollars.
Other fees may vary depending on which investor provides services for your application. For example, different title companies and appraisers have slightly different fee schedules, although they should be very close.
In theory, no. In reality, Yes. As I just mentioned, the rules require the lenders estimate to be accurate within a small tolerance. But, there is something known as a Change of Circumstance rules which allow a lender to significantly change the original Good Faith Estimate.
You locked the interest rate
The loan amount changed (maybe you decided to put a bigger down payment)
The program changed (maybe you went from an FHA loan to a conventional loan)
The appraisal came in lower, so you needed to change the loan amount
There is only a small number of legitimate Change in Circumstance changes officially allowed, but we hear of some lenders abusing this rule. For example, a lender is NOT allowed to change your estimate simple because they incorrectly quoted a fee they should have quoted correctly. Fees can not change that are not a result of a legitimate Change In Circumstance.
There are essentially 4-ways to pay mortgage loan closing costs.
Cash at closing out-of-pocket
Rolled into the purchase price (commonly known as Seller Paid Closing Costs)
Rolled into a slightly higher interest rate
A combination of any or all of these items
I don't like the term Seller Paid Closing Costs, because it implies the seller is paying your closing costs, so therefore they are free to the buyer. This is not true. Rather, seller paid closing costs is simply a way to pay your closing costs over time by rolling it into the purchase price, rather than have that out-of-pocket expense today. An example would be you offered $100,000 for the home, and asked the seller to pay $5,000 of your closing costs. If the seller agrees, the seller is actually netting $95,000 in their pocket ($100,000 minus $5000). This means you really could have bought the house for $95,000 if you paid your own closing costs. This means then you are financing the $5,000 over the length of the loan instead of paying it out of pocket today.
The same goes with increasing your interest rate to lower or eliminate your out-of-pocket closing costs today.
Early on in the process you may also be required to pay for a credit report and the appraisal. Those fees will be listed on your estimate, but you will also see where those prepaid items get credit back on your final documents.
Finally at closing, you will need to bring a cashiers check or do a bank wire transfer of your down payment and any closing costs. Your Loan officer will give you the exact amount needed a few days before the actual loan closing.
Closing Cost Expense Worksheet
- Assumes a MINNESOTA
These costs can be significantly LOWER. Lender can simply lower costs by increasing your
|1. Loan Origination Fee||1% of the loan amount for most loans. Believe me, you are paying this if it is on the estimate or not!|
|2. Discount "Points"||A percentage of the loan amount (i.e. - 1 "Point" = 1% of the loan amount. Points are monies paid up-front to lower your interest rate.|
|3. Credit Report||Normally $2.50 - $55.00. Depends on what type of credit you have. Average is about $20.00|
|4. Appraisal Fee||Normally anticipate about $350 for conventional loans and FHA loans. Higher for 2-4 unit properties. Higher for JUMBO loans.|
|5. Underwriting||Varies. Figure $350-$600. Typically Higher for FHA, VA.|
|6. Processing||Varies. Figure $300-$600.|
|7. Title Insurance||Varies, depending on type of loan (purchase/refinance), loan amount, etc. Lenders policy is required. Owners policy is optional. Call our loan officers or title company for exact quote.|
|8. Plat Drawing Inspection||$60.00|
|9. County Recording Fees||$50.00 or more.|
|10. Flood Certification||$20.00|
|11. Name and Assessment Searches||$24.00|
|12. ARM Title Insurance Endorsement Fee||$50.00|
|13. Mortgage Registration Tax / DEED / State taxes||$2.30 per $1,000 of the loan amount in
Check with your individual states for various deed taxes, transfer taxes, state and county taxes.
|14. Closing Fee.
This fee is paid to the title company.
|Normally about $275.00. See above. There are a lot more fees paid to the title company than the closing fee. NOTE: see #'s 7,8, 9, 11, 12|
|15. Misc. Fee's||Varies, but figure about $350.00. This includes things like courier fees, etc.|
Prepaid Interim Interest.
Also known as "Days of Interest"
|We recommend one full months interest be estimated. (Loan amount x interest rate = annual interest, divided by 12 months = monthly interest). Assumption: If closing occurs on the 20th of the month the buyer will be required to pay 10 days of interest at closing.|
Homeowners Insurance Premium
|An estimate of the annual premium may be computed by multiplying the purchase price by about $4.00 per one thousand. This is purchased separately, prior to closing. Contact your Insurance agent for quotes. NOTE: See item #19 also.|
|18. Private Mortgage Insurance Premium (PMI)||The amount varies depending down payment & loan program. The smaller the down payment, the higher mortgage insurance costs. Generally, PMI is not required if the buyer is making a 20% down payment. Contact your loan officer for a quote.|
|19. Homeowners Insurance||At least two months are collected at closing to open the escrow account for a purchase loan (maybe higher for a refinance). This amount is in addition to the one year policy paid for in advance by the buyer prior to closing on a new home.|
|20. Property Taxes||In most situations, at least two months, and up to 7 months of the annual property taxes must be escrowed to open the escrow account. The amount collected depends on what month you close your loan. In addition, any pro-rated taxes must also be considered. Please contact us to obtain the exact figure. Click here to determine how much tax escrow will be collected at closing!|
|21. Flood Insurance||This will be required if the property is located in a designated flood zone. The 1st year premium would be required along with at least two months estimated premium for the escrow account.|
|Equal Housing Lender||
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