Please Initial Here
A buyer client I am currently working with had some questions about the amount of the estimated closing costs on the “Initial Fees Worksheet” provided by their mortgage broker. Two line items in particular…“Total Estimated Settlement Charges” and “Total Estimated Funds Needed to Close” and which one was the amount that was going to have to be brought to the closing table. The bottom of the “Initial Fees Worksheet” (which some lenders are using in addition to the new GFE or Good Faith Estimate) states, “THIS IS NOT A GOOD FAITH ESTIMATE. A Good Faith Estimate is provided pursuant to federal law upon the submission of a formal loan application with us. This “Initial Fees Worksheet” is provided for informational purposes ONLY, to assist you in determining an estimate of cash that may be required to close and an estimate of your proposed monthly mortgage payment.”
With the help of their mortgage broker, I explained that the charges are not the final amount because you don’t get that number until right before the closing because there are variables that won’t be determined until later in the process. One is how much the seller has already paid in property taxes or condo fees, since those are paid in advance and the buyer reimburses the seller for that amount. The interest rate you lock in comes into play too, among other things.
This particular buyer is approved for an FHA loan. The FHA or Federal Housing Administration provides mortgage insurance on loans made by FHA-approved lenders. One of the big benefits to FHA financing is that a buyer is allowed to put down a lower downpayment, currently 3.5%. The flip side to that is then two very similar sounding line items are now part of the transaction. There is MIP or Mortgage Insurance Premium required for most FHA loans. One of the trade-offs for the low downpayment is that the MIP is charged and broken out into an upfront premium that is spread out over the life of the loan and an annual premium. The Premium amounts are due to change on October 4 and here’s a detailed explanation of that. There is also PMI or Private Mortgage Insurance which is charged when a buyer puts down less than 20% for their downpayment. A good majority of first time buyers are charged PMI because they don’t have the 20%. Once 20% of the mortgage is paid off over time, the PMI will no longer be charged. The mortgage broker can help tell at what point in the process that may occur for a particular buyer.
So what may look on the surface like higher than expected closing costs are driven by a number of factors. Each buyer’s situation and financing scenario is different, it depends on credit score, amount of downpayment, type of loan, etc.
Beth is a practicing Realtor and Interactive Marketing Manager at Barrett & Company Real Estate in Concord, Massachusetts. She spends her days coaching home buyers and sellers through the intricacies of buying and selling property and training her fellow agents on the importance of and benefits to an online presence, most recently on Google+! Read more of her work on the Barrett Massachusetts real estate blog.
Leave a Comment