October « 2010 « Home Loan Information

23Oct/100

What are closing costs?

It would be simple to say “closing costs” are the amount of money required to be brought to the closing table at the time of purchase or refinance. Oh that it were that simple yet it is not. In fact different agencies and organizations have different definitions for the same term. Perhaps we can do some good here and provide the true definition for the components of closing costs, establish which costs go where and which costs are negotiable.

If you want to say closing costs are the total fees you bring to the closing table that would include this list and maybe more in some cases:

Appraisal fee – to the appraiser
Pie Chart of Closing Costs
Credit score fee – to the credit bureau
Origination fee – to the loan officer
Funding fee – to the lender
Underwriting fee – to the lender
Processing fee – to the processing company
Broker fee – to the mortgage broker (if there is one)
Recording fee – to the county courthouse
Loan registration fee – to the state department of banking and finance
Title exam – to the title company/private investigator
Attorney fee – to the closing attorney
Attorney’s wire fee – to the attorney
Lender’s title insurance – to the title insurance company
Owner’s title insurance – to the title insurance company
Real estate taxes and escrow – to the state, county, city where due
Home owners insurance – to the owner’s insurance company
HOA fees – to the HOA/COA

Some of these fees are only closing costs because the lender, unless the borrower chooses to waive escrows of taxes, insurance and HOA, would be required to be paid over time anyway. In fact most HOAs require an initiation fee even if you are paying cash. That is the best way to think of closing costs as associated with purchasing a home anyway: which fees would exist even if there were no lender: attorney fees, recording fees, appraisal fee, home owner’s insurance, etc.

Two of the biggest fees associated with the purchase of a home are not considered closing costs and those are the down payment and the real estate broker fees. Brokerage fees are not considered a closing cost because they are added to the sales price and the seller pays them and down payment is going straight to the purchase of the home. If we counted down payment as a closing cost then someone paying cash would be considered to be paying 100% closing costs.

What about “no closing costs” loans? Simple. They don’t exist. The buyer or home owner who is refinancing pays the costs either in cash, from the proceeds of the loan, using a down payment assistance program, or by the lender increasing the rate enough to earn more in interest. None of those closing costs go away when they are required. The attorney doesn’t work for free, the appraiser doesn’t work for free, the loan officer, processor and underwriters do not work for free.

Hopefully understanding these fees and where they go will help you in your next purchase or refinance to understand the cost and how to better manage or prepare for your closing.

*The set of closing costs used for this chart are typical for a mortgage broker. They will vary from state to state and lender to lender … but not by much.

Good-faith estimates bring higher closing costs (sfgate.com)
Survey: Mortgage closing costs 37% higher (usatoday.com)
New rules limit too-low estimates of closing costs (knoxnews.com)
What are “seller concessions”? (kennycook.com)

I am a multi-year veteran of the industry who has served in the highest offices in the industry. I can help you get the best deals and avoid getting ripped off!
Contact form on this web site

Tagged as: closing costs, Credit score, Insurance, Loan, Origination fee, Real Estate, Refinancing No Comments

20Oct/100

What are “seller concessions”?

: Image by familymwr via Flickr

You may have heard the term seller concessions in conjunction with a home purchase. What is generally meant by that term is when the seller uses part of the proceeds of the sale to pay some of the costs of the loan for the buyer. Generally speaking government loans allow up to 6% (of the loan amount) in seller concessions and conventional loans allow up to 3%.

Seller concessions are intended to pay closing costs and pre-paids, not down payment. If the seller wishes to contribute more than the allowed maximum in lender allowed concessions the simple solution is to lower the sales price. In return this lowers the loan amount and the seller can still cover the closing costs and pre-paids (taxes, insurance, HOA escrows) from the proceeds of the purchase. The proceeds, in case you are wondering, come from the money going to the seller for the purchase of the home.

Plain math example:

Allowed seller concessions 6%
Closing costs 1.5%
Pre-paids 4.5%
Sales price $200,000
Loan amount $193,000
6% of $193,000 is $11,580
Cash to seller decreased to $181,420 ($193,000 – $11,580)
Cash from buyer $7,000 (down payment)

The seller cannot contribute (under most rules) to the down payment. Seller concessions can only go to closing costs and pre-paids. Check with your reputable lender and see what maximum concessions are and how they may be used for your particular loan program.

As a seller offering the max in concessions is a great way to attract buyers.

UPDATE: Taxes, insurance and HOA are NOT considered closing costs. Although they may be paid at the time of closing they are costs that would be required to be paid regardless of whether or not there is a loan. If you do not wish to escrow your taxes, insurance and HOA fees most lenders and most loan programs allow a “waiver of escrow” for a small increase in interest rate. The reason the interest rate increases is because loans without escrow accounts present a higher risk to the lender.

FHA Gets Tougher on Mortgages (online.wsj.com)

Tagged as: closing costs, down payment, Loan, Real Estate, seller concessions, seller contributions No Comments

18Oct/100

Dangers of shopping mortgage rates online

You’ve seen those ads touting some crazy low number like 2.125% home loans! The first thing I usually notice is there is no APR advertised on the same line and in the same font – federal violation. This is often my first hint this is a lead generation company and not an actual lender. Lead generations companies, so it seems, can advertise just about anything they like since they are not actually providing home loans. In my opinion those who buy leads from companies who advertise should be held equally accountable – not likely to make me popular among “the liars club”.

Some months ago I wrote a post about this subject and even received a couple of phone calls from mortgage brokers, mostly out west, who would like to have done me bodily harm. We all know people in the industry who make outrageous claims they can very rarely deliver and weasel their way around the law by publishing a mult-paragraph disclaimer secreted away on some difficult to find asterisk centric page.

Even with the rates you see published by Zillow and BankRate, both reputable companies, you will often find the brokers and lenders who feed those companies the rates pushing it to the very lowest number possible to be achieved under the best circumstance on the best of days. Those rates never take into consideration anything except the best of circumstances and to really see the full picture one would need access to the qualifying factors – which are will hidden if published at all.

Understanding mortgage pricing is like understanding pricing for any other service: the higher the risk the higher the cost. Lenders base mortgage rate factors on credit score, loan amount, property type, and other factors due to the risk provided from those types of loans over the years. It’s no secret that the pool of borrowers of people with 720 or higher credit scores, 20% or more down payment and purchasing a single family home in the $200,000 range are less likely to miss a payment or default on the loan than the pool of borrowers with credit scores around 630 and 3.5% down on the same home. It’s just a fact of numbers.

So when you see interest rates advertised your first response should be doubt – and that will serve you well. If you have a middle credit score of 740 or higher, are paying at least 20% down on a home within the conventional mortgage limits for your area, you have a good income and ample assets then it is possible you will qualify for the rates you see advertised online.

BIG WARNING: There is a, an I use the term very loosely, “mortgage company” which advertises regularly on one of these type websites and their rates always seem about a full 1% lower than everyone else’s. Every day they take thousands of phone calls of people who do not qualify for those rates. Do yourself a favor – find a reputable lender who doesn’t use parlor tricks and flashy numbers to steal your trust. Hang up, call someone local and trustworthy, and give them your business.

ABOUT ONLINE LEAD COMPANIES: Most online lead companies will sell your information to 3 to 5 (or more) people. Even though the lead company may have advertised some obnoxiously low interest rate the company who purchases your lead is under no obligation to offer it. These mortgage brokers will pay as much as $50 or more for your phone number and you bet they are going to do whatever they can to get their money back. Don’t get me wrong, some of these lead buyers are the most honest and ethical people you will meet. Unfortunately many of the lead companies have neither honesty nor ethics.

Mortgages: Preventing Credit Score Dings (nytimes.com)
Benefit of higher credit score dwindles at top end (sfgate.com)
U.S. 30-year mortgage rates fell in week – Zillow (reuters.com)

Tagged as: Credit score, interest rates, Loan, Mortgage broker, Mortgage loan, mortgages No Comments

18Oct/101

An Appraisal is not an Inspection

: Image via Wikipedia

While eating dinner with my wife at one of our favorite Mexican Cantinas, which also happens to be less than a mile from home, we overheard two other diners discussing something we know quite a bit about. What caught my ears was when one of the ladies said to the other, “So she pulls into my driveway in her Porsche and gets out in a tight black dress and heels and I think to myself, ‘this girl is not dressed to crawl around in my attic and crawl space’.”

At first I thought maybe she was talking about a real estate agent but she continued, “I mean what kind of appraisers are these banks sending out these days? I could just imagine her crawling up on the roof and on ladders – she didn’t even have a ladder.”

It was at that point I realized she, like countless others, likely does not know the difference between an appraisal and an inspection. Chances are more people do not know the difference than do. In fact I run into it regularly in my own work when people say things like, “the guy didn’t check the outlets or water pressure or anything”.

In an effort to help the reader better understand let’s start with saying what the lender wants in almost every case in an appraisal not an inspection. There are some cases where the lender may ask for an inspection but in almost every case it is an appraisal. The difference? The appraiser tells the lender what they believe the actual worth/value of the property to be. The inspector tells the future home owner if there may be issues with the property that need to be dealt with now or may present an issue in the future.

Inspectors are there to find things like water leaks, bare wiring, code violations, etc.

Appraisers are there to tell the lender their estimation of the value of the property.

Then you get very confusing terms from people who should know better like “appraisal inspection”. There is also something called a Broker Price Opinion (BPO) which is neither and has no value when a loan is being considered.

Home Inspection or Appraisal: What’s the Difference? ASHI Sets the Record Straight for Homeowners and Buyers (eon.businesswire.com)
Hvcc Update!!!! It Hurts the Consumers & Our Economy!!! (annarborundressed.com)
The Ten Reasons People Can’t Sell Their Homes (247wallst.com)
What is a BPO? (Broker Price Opinion) (findwell.com)
All You Need To Know About Appraisals (apartmenttherapy.com)
Home Seller and Buyer Liability for a Home Inspection (brighthub.com)

Tagged as: Appraisal, Appraiser, Loan, Real Estate, Real estate broker/agent 1 Comment

Live Desk

Daily Rates for Qualified Buyers

	Today	Last Week
30 Year Fixed	3.59%	3.65%
15 Year Fixed	2.91%	2.89%
5/1 ARM	2.81%	2.57%
See more mortgage rates at Zillow.com

(Note: These are the lowest rates possible offered through advertisers and lead buyers at the company providing the data. They may require discount points.)