What Will It Cost?
How much money do I need to close on my house over the down payment amount?
Traditionally the lending community issues a Good Faith Estimate to summarize all the costs associated with the loan. It is a requirement that a lender, prior to submitting a loan, discuss all the specific potential costs associated with your loan. I have often found that these documents make more sense when reviewed after a clear understanding of where the money goes and what it is buying you! Here is a general road map to guide you. Let’s follow the money….
There are two primary sources to get a loan:
- Banks / Financial Institutions (Credit Unions, Savings and Loans are included in this category).
- Mortgage Brokers
Banks/Financial Institutions offer loan products specific to their institutions. They have loan officers who are their employees. They may or may not offer all loan products as the institution chooses to carry a specific loan product line. The bank pegs specific rates for each product daily. The institution lends you the money.
Mortgage Brokers are the loan officers of a multitude of lending institutions. They are independent agents; they do not work for any specific lender. This gives the mortgage broker the flexibility to shop loans and rates and match them to their clients. Mortgage brokers choose from a vast array of interest rates and products in the marketplace. The institution that gives you your loan is your lender.
All loan officers are compensated for their work. Some are paid by charging the borrower a fee or a percentage of the loan amount – commonly known as points. Some do not charge the borrower points but rather are paid by the lender. If paid by the lender the mortgage broker must disclose the amount to the borrower however the banker is not required to do so.
Most lenders charge a flat fee to give you your loan. This can vary from $500 to $1500 with the $775 – $1000 range depending on the institution most common.
Most purchases and refinances require an appraisal of the value of the property. The appraiser is the “eyes and ears” of the lender. They are independent licensed third parties who evaluate the value of the property as well as its condition. The appraiser evaluates actual closed sales prices of comparable properties in the vicinity to derive value. The appraisal is usually the buyer’s expense. Single Family Residences can run anywhere from $350 to $500 depending on the property location and size.
Escrow and Title
Escrow is the independent third party that handles the money in your transaction. No money changes hands until all the requirements of the purchase contract and loan have been met. Escrow charges fees commensurate to the loan amount and the extent of the work required. The services include document preparation, notary services, and dispersing funds. In Northern California it is customary to split this expense between buyer and seller.
Title Insurance –Owner’s Policy – Is a vehicle to safeguard the seller is the legitimate owner of the property being sold. In northern California it is customary that this cost is split between buyer and seller The Lenders title policy safeguards the lender of any defects in the chain of ownership. Customarily the buyer pays for this as it is required by the lender.
Some inspections could be required by the lender based on the specific loan product and the features of the house you buy. The most common are: pest inspection – Inspection of the property to ascertain if any termite infestation or fungus exists. Septic inspections and certification checks for proper functioning of a septic system and leach field or a well inspection and water potability test to verify the well is working and the water drinkable.
All properties with a mortgage are required to carry Hazard Insurance. Coverage for a full year is required to be pre paid. The buyer chooses their own carrier and agent and once the property sale closes the escrow agent pays for the policy from the buyers closing funds.
If you do not put 20% down on your loan you will be required to have mortgage insurance and pro-rata pay your annual taxes and hazard insurance in your house payment. The lender will establish what is called an impound account where these pre payments are held in safekeeping and paid out as the tax and hazard bills come due. On average the lender will require 6 months of future taxes and 3 months of hazard insurance payments to set up the account at the close of the purchase or refinance.
Once your lender funds your loan you start to pay interest on your loan. At closing the lender will charge you interest to the end of the month.
Many of these costs vary based on the purchase price of your house and /or the loan amount. Now with the basic understanding that the closing funds have two components…the actual costs of transacting the loan and the funds that are necessary to establish an impound account (called prepaids) your understanding of the Good Faith Estimate will be easy to follow!