As your Mortgage Professional, it is my job to walk you through the costs of closing your loan and answering your questions. Your estimated closing costs and prepaid expenses as well as an estimate of your monthly payment are spelled out in a document called the Good Faith Estimate.
GOOD FAITH ESTIMATE
You should receive a "Good Faith Estimate of Closing Costs" at the time your loan application is taken but not more than 3 days after your loan application is submitted according to federal law. When I prepare an estimate for you it is based on my past experience as well as those standard costs and fees that are typical and customary for your transaction. It is possible that not all costs will be included in your estimate because it is impossible to know about each and every cost and fee that applies to your particular situation. I will always review the "Good Faith Estimate" with you and answer all your questions. Buying a home is a big deal. You're spending a lot of money and taking on what is usually the single largest debt obligation you have ever had in your lifetime. That means there simply isn't any question that I would consider to be a dumb one!
Likely you will be talking with several lenders and trying to shop around for the best deal possible. Be very careful! When comparing closing costs and prepaid expenses between lenders it is very difficult to understand if you are truly getting the best deal. One of the biggest mistakes you can make is to simply focus on the bottom line total cost number estimated by each lender. This can be very misleading. Here's why and here's what you really need to know:
What makes it confusing for consumers is that the Good Faith Estimate is only just that; an "estimate". The total cost of obtaining your loan can be broken down into 3 general areas; "Items Payable in Connection with the Loan (otherwise known as Lender Fees)", Vendor Related Charges and Fees, and Prepaid Expenses and Escrows. What makes the estimate confusing is this; the Vendor Related Charges and the Prepaid Expenses and Escrows will be the same amount at closing no matter which lender you choose to do your loan! Unfortunately, each lender will probably give you a different estimate for each of these charges. This makes it very confusing for you. Don't be misled!
The only fees that may vary at closing are the "Lender Fees" and these are the only fees that are relevant for your comparison.
It is very possible to have 3 different Good Faith Estimates in front of you and the one that has the lowest Total Estimated Costs actually ends up being your highest closing cost loan when you get to the closing table.
So what do you do and what do you need to know? First, understand the 3 categories of fees:
LENDER FEES
These are the fees that may actually vary between lenders, so consequently, these are the fees that are truly important to look at closely and compare. Some common "lender fees" are:
Loan Origination Fee - Typically equal to 1% of the loan amount.
Discount Points - Optional and are paid to reduce the interest rate on your loan. Each "point" is 1% of the loan amount.
Appraisal Fee - Fee to determine the value of the property.
Credit Report - Fee to run your credit report.
Other "Junk Fees" - May be referred to as any of the following; Processing Fee, Underwriting Fee, Mortgage Broker Fee, Application Fee, Tax Service Fee, Flood Certification Fee, Commitment Fee, Funding Fee, and other various names. These fees are pure revenue to the lender. They could have other names as well but they are typically listed in the "800" series on your Good Faith Estimate.
VENDOR RELATED FEES
These fees are paid to various vendors for services rendered during the transaction. At closing, they will be the same cost no matter which lender you choose. Fees such as the cost of having a Survey done on the property, a Pest inspection, Title Insurance, Attorneys Fees, Recording Fees, and perhaps a Home Inspection.
PREPAIDS and ESCROWS
Prepaid and Escrows include escrows for Taxes and Insurance taken in advance to make sure the lender has enough money to pay your annual real estate tax bill and homeowners insurance premium when it comes due. Also, you need to pay for your first year of homeowners insurance in advance. The lender will also collect "prepaid interest" which is the interest payment due on your loan from the day you close your loan up until the end of the month in which you close. If you close on the last day of the month for instance, as is very common, you will incur 1 day of prepaid interest. Once again, these costs will be the same no matter which lender you choose. There may also be prorations of HOA Dues, and other prepaid items.
As I said, unfortunately, different lenders will provide you with different estimates of the costs of closing your loan making it very difficult to determine which lender has the best loan for you at the least cost. Here's what you do to eliminate the confusion:
Compare only the Lender Fees and the Interest Rate (APR can be misleading but that's another story!) that is offered on your loan for the same product to determine the best deal. Do not look solely at the total closing cost number as it can be misleading.
