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Buyer’s Closing Costs

When buying a new home, there are several fees that need to be taken into account. Buyers need to be aware of these fees, as lenders will want to be sure the buyers have the funds available to close.

Closing costs of a home vary and can range from 2-5% of the home’s sale price. Your lender will be able to give you an estimate, when applying for your mortgage.

Other fees that may not be included are those charged by the title or escrow company.

A Closing Disclosure (CD) is required to be provided to a buyer 3 business days before the closing date of the mortgage. The CD will also include items such as monthly payments, loan fees, loan terms, and any other outstanding charges. A buyer can compare this to the estimate provided by the lender at the application time.

Mortgage Fees

Loan origination fee: The amount the lender charges for for processing the mortgage application. The fee varies, but typically runs around 1% of the mortgage. This fee may be negotiated into the rate of the mortgage.

VA funding fee: This only applies to a VA loan. It is a fee charged to the veteran to close the loan, and can be paid in cash or rolled into mortgage. This amount is based veteran status, down payment, and whether they have had a VA loan before.

Appraisal: A fee paid for a licensed appraiser to determine the value of the property.

Attorney fee: This fee only applies when using an attorney within the transaction.

Discount points: These can be used to adjust the mortgage interest rate, and are considered prepaid interest. A point is 1% of the mortgage.

Lender’s title insurance: This covers the lender and allows the lender to hold an enforceable lien from title claims on the house.  It is usually issued with an owner’s title policy and is priced separately at closing.

Mortgage insurance: For most loans in excess of 80% of loan to value (LTV), they will require mortgage insurance to protect the lender from loss if the property in the event the property is foreclosed.  VA loans do not have this requirement. There are 2 parts for FHA. The 1st is a charge of 1.75% of loan amount. The 2nd is a monthly amount which is added to the payment.  Conventional loans typically collect the 1st month’s premium in advance, while subsequent amounts are rolled into the mortgage payment.

Recording fees: These are fees charged by the closing company for filing legal documents with the municipal or county recorders.  Theses documents include the mortgage and the deed.

Survey fees: This is not a typical fee in an ordinary real estate transaction. This fee is required by a lender, to verify property lines, shared fences and driveways, and to identify any other encumbrances.

Underwriting fee: This fee covers the lender’s research and determination for the mortgage package to meet the lender’s requirements.

Mortgage Escrow Fees

Property taxes: Lenders may require 2-3  months of taxes be held in escrow. These are typically paid 60-90 by the lender before they are due. They are prorated from the date of closing.

Property insurance: Insurance is pre-paid in advance, with the annual premium is due at closing.  The lender may also require 1 additional month, so that the premium may be paid 1 month prior to renewal.

Flood insurance: This fee only applies to lenders that require flood insurance on a home based on the assessed location in a flood zone or proximity to a flood zone.

Home Purchase Fees

Settlement fee: Upon the closing of the property, this fee is paid to the title, escrow company, or attorney that closes the transaction.

HOA Fee: This only applies to properties within a Home Owner Association (HOA). HOA fees are usually prepaid and are prorated at closing.

Owner’s Title insurance: This insures the buyer, clear and marketable title from the seller.  It serves the purpose of protecting the new owners’ interests if they are challenged.  It may not be required, but is recommended.

Pest inspection: This fee may not pertain in most transactions, but is performed by a licensed exterminator.

Property inspection: After the purchase agreement is signed, a professional home inspection is completed to determine the condition of the property.

Title search: This fee covers the title search of a property. It is a separate fee charged in addition to the premium for the title insurance.

Transfer taxes: Taxes to be collected by a government entity.

For more details, you can download a Closing Disclosure Explainer from the Consumer Financial Protection Bureau website.

What Is Mortgage Insurance and How Does It Work?

Mortgage insurance protects the lender in the event you default on the loan. In return, the lender agrees to provide a higher mortgage amount to cover the additional down payment needed. Mortgage insurance can be included in your new monthly payment, paid by the lender in return for a higher interest rate, or paid upfront. The rates used to calculate mortgage insurance are based upon debt-to-income ratio, credit, and how much down payment you will need to meet the 80% loan-to-value requirement, or 20% down.

• PMI (Private Mortgage Insurance): This insurance can be paid upfront or financed into your mortgage. Once you reach 78% loan-to-value, refinance, or reach the mid-point of your mortgage, this insurance will go away. If you own a multi-family home or investment property, these rules differ, and you may want to talk with your loan officer about those options.
• LPMI (Lender-Paid Mortgage Insurance): This option is when the lender pays for your mortgage insurance and in return, you agree to pay a higher interest rate where the premiums are built in.
• MIP (Mortgage Insurance Premium):  If you’re applying for an FHA mortgage, you pay part upfront and the remainder is financed into your mortgage payment. If you are not able to pay any part upfront, it too can be financed into your mortgage payment. It’s important to note, for FHA loans, MIP would last for the term of the loan if you purchased or refinanced your home on or after June 3, 2013 and you had a down payment of less than 10%.

Bottom line: Remember, in addition to mortgage insurance, there are several ways to purchase a home without a 20% down payment. If you are interested in exploring mortgage insurance as an option, talk with your loan officer to see which types work best for you.

Source: Mortgage Market Guide

Credit and How It Works

Credit is one of the main components lenders will utilize to qualify borrowers for most types of financing such as mortgages, cars, or credit cards. Once you have enough credit established, credit scores are generated based on your payment history. Higher scores are a result of timely payments, and lower scores result from late or missed payments. The higher your credit score, the more likely it is to get approved for a loan with more favorable terms. For mortgages, higher credit scores can qualify for lower down payment options and lower interest rates whereas for lower credit scores, the opposite is true.

Typically, lenders prefer to see 12 to 24 months of payments to one or more major credit providers such as a mortgage, car loan/lease, Visa, or MasterCard. Store credit cards will carry less weight. If you are new to establishing a credit rating, you may want to start applying for credit with a major credit provider such as a Visa or Discover Card. Initially, your credit limits may be lower, but they will gradually increase over time with a good payment history. In some cases, a creditor may request you add a co-signer or co-borrower if you don’t have a lot of established credit.

Additional components included on a credit report that can have an adverse effect are:

Public records: This area will report public items such as bankruptcies, foreclosures, or tax liens.

Collection accounts: The most common collections are medical bills or other bills that a bill collector or creditor can place on your report for past due payments.

Charge offs: These will occur for credit cards that have fallen beyond the window of repayment. The remaining balance will show as an arrearage which will adversely affect your credit and your scores.

Credit inquiries: Inquires pulled in a certain timeframe usually won’t hurt your credit score, however, multiple inquires over longer periods of time could affect your credit. Excessive inquiries can cause a red flag for lenders looking to provide financing for you.

Bottom line: Establishing a credit history is not hard, but it takes a little time to build. Start with one or two credit cards, make timely payments, and build from there.

Source: Mortgage Market Guide

What Is Mortgage Insurance and How Does It Work?

Mortgage insurance protects the lender in the event you default on the loan. In return, the lender agrees to provide a higher mortgage amount to cover the additional down payment needed. Mortgage insurance can be included in your new monthly payment, paid by the lender in return for a higher interest rate, or paid upfront. The rates used to calculate mortgage insurance are based upon debt-to-income ratio, credit, and how much down payment you will need to meet the 80% loan-to-value requirement, or 20% down.

Below describes common types of mortgage insurance:

• PMI (Private Mortgage Insurance): This insurance can be paid upfront or financed into your mortgage. Once you reach 78% loan-to-value, refinance, or reach the mid-point of your mortgage, this insurance will go away. If you own a multi-family home or investment property, these rules differ, and you may want to talk with your loan officer about those options.
• LPMI (Lender-Paid Mortgage Insurance): This option is when the lender pays for your mortgage insurance and in return, you agree to pay a higher interest rate where the premiums are built in.
• MIP (Mortgage Insurance Premium):  If you’re applying for an FHA mortgage, you pay part upfront and the remainder is financed into your mortgage payment. If you are not able to pay any part upfront, it too can be financed into your mortgage payment. It’s important to note, for FHA loans, MIP would last for the term of the loan if you purchased or refinanced your home on or after June 3, 2013 and you had a down payment of less than 10%.

Bottom line: Remember, in addition to mortgage insurance, there are several ways to purchase a home without a 20% down payment. If you are interested in exploring mortgage insurance as an option, talk with your loan officer to see which types work best for you.

Source: Mortgage Market Guide