I have to pay HOW MUCH at closing?!

[Marshall F. Graham]

I have to pay HOW MUCH at closing?!

By: Marshall F. Graham
Aulds Horne and White
www.auldshorneandwhite.com
marshall.graham@auldshornewhite.com
(318) 869-4444

March 8th, 2010

The recent changes to the Good Faith Estimate (GFE) were implemented to increase borrower disclosure, as well as make things “easier” to understand. Fannie Mae wanted to create a uniform GFE that all lenders could use to simplify the mortgage process, while also discouraging lenders from taking advantage of trusting borrowers. The majority of us within the real estate industry believe that the changes have led to anything but clarity, and have left borrowers asking, “What the heck is that fee for?!?”

Loan Origination Fee:
Loan origination fees, in the majority of cases, are equal to 1% of the total loan amount.

$200,000 Purchase Price
10% Down-Payment
= $180,000 Loan amount
Loan Origination Fee = $180,000 * .01 = $1,800

The loan origination fee covers the compensation of the loan officer and his assistants, pays the rent and utilities, compensates for office materials, as well as provides the owners with a profit. We at www.auldshorneandwhite.com are currently offering a fixed $1,000 origination fee, rather than the standard 1% variable!

Points:
A point is equal to 1% of the loan amount, yet is not considered a point, until it is over and above the origination fee. In other words, the first 1% fee is considered the origination fee, while any and all additional 1% fees are considered to be points.

$200,000 Purchase Price
10% Down-Payment
= $180,000 Loan amount
Loan Origination Fee = $180,000 * .01 = $1,800
1 Point = $180,000 * .01 = $1,800
Total lender fees = $3,600

Points are used to buy down the interest rate on a mortgage. Loan Officers use a tiered pricing matrix spreadsheet to determine what rates to offer a client. The client can then opt to pay one or more points to move into a better interest rate pricing tier. It is my opinion, that a client should not purchase points unless they have a very low credit score and/or are dealing with an investment property. Points in either situation may be considered, but certainly are not necessarily always required. One must utilize the break-even point equation to determine if purchasing points would be beneficial.

Appraisal Fee:
Comparable to the origination fee, the appraisal fee is how the appraiser makes his money. It is used to cover office expenses, as well as create revenue for the company. New appraisals are required by Fannie Mae on every purchase and refinance transaction. It does not matter if you are refinancing your loan with the same lender, who more than likely has the old one on file. You must have the property reappraised. Most appraisal fees for a standard appraisal in Caddo and Bossier Parish will run on average $450. Most appraisers will charge an added fee to appraise properties with unusually large square footage. If the appraised value is contingent upon required repairs, then the appraiser will generally charge a $100 to $150 trip inspection fee once the repairs have been met.

Credit Report Fee:

Every lender will order a fresh credit report on a client wishing to pursue a purchase or a refinance transaction. A fresh credit report is required by Fannie Mae whether you are a current client of the lender or not. The 3rd party credit reporting company will charge a fee of approximately $25 to $50 to the lender for this service. The lender does not count this fee as revenue, as this fee is sent directly to the reporting agency for their services. Many lenders will add other fees such as: wire transfer fees to this fee, since each is considered nominal.

Flood Certificate Fee:

Also a 3rd party fee, the flood certificate fee is used to pay for the services of a company, who determines whether or not the property in question lies within a flood zone. Comparable to tax assessment, flood plain maps are updated every four years. So, every property must be checked every time a mortgage transaction is pursued. If you are a resident of Louisiana, chances are, you are in a flood zone. This, however, doesn’t necessarily mean that you will have to pay flood insurance, because the Federal Emergency Management Agency, (FEMA), sets minimum elevation levels that they require flood insurance on. Flood certificate findings will be the same across all lenders and all 3rd party flood certificate companies. Comparable, flood insurance rates are set by the state, and are therefore the same from one insurance company to the next.

If a borrower is deemed in a flood zone, they can elect to pursue an elevation certificate. Elevation certificates generally cost about $300. The determining factor, as to whether or not a client has to pay flood insurance, is whether or not any portion of the physical structure of the home is considered below the minimum flood level set by FEMA. An elevation certificate pinpoints the exact elevation levels of the property, and can be used to receive a reduced flood insurance premium. No matter what, the borrower will be required to have flood insurance on their property prior to closing. The borrower can then elect to send the elevation certificate to FEMA. FEMA will review the elevation certificate to determine if a Letter of Map Amendment (LOMA) should be issued, which amends the flood map to remove a property from the requirement of the insurance. The LOMA document can then be sent to the lender to have the flood insurance removed from the escrow payment.

Since flood maps are ever changing, lenders are required to notify current serviced clients if or when they are deemed within a flood zone. If a current client is deemed within a flood zone, they must acquire flood insurance, which will be added to their escrow payment. If the borrower ignores the request from the lender, then the lender is required to add a “forced premium” to the escrow, which is later settled with the borrower.

Title Examination Fee:

The title examination fee is how the attorney makes his money. Comparable to the origination and appraisal fee, the title examination fee goes towards the costs associated with examining the title and document preparation, as well as pays the attorney for his time and services rendered.

Lenders Title Insurance:

Lender’s title insurance and owner’s title insurance confuse more borrowers than all the other GFE fees combined, so I will do my best to shed some light on the myths of the title insurances. Lenders title insurance protects the lender against any and all title disputes and/or liens placed on the property that were for whatever reason not found by the title attorney prior to the loan closing. Many times a lien was placed on the neighbor’s house incorrectly, so it was not noticed on the title search. It also protects the lender from liens placed on the property after the loan closing that were a result of a previous owner’s lack of payment. The insurance not only protects against the lien’s themselves, but covers any and all legal fees required to resolve the issue. The most common liens that title insurance protects from are tax liens.

Lenders title insurance is required by all states on any and all mortgage transactions. Though each state is different, the state of Louisiana sets the rates for the title insurance premiums. So, all title companies should offer the same premium for each specific property. Lenders title insurance must be purchased on a refinance even if a borrower recently purchased the property, because the insurance protects the lender from liens and/or judgments placed on the property while under ownership of the borrower. The borrower will generally receive a “substitution rate” on the title insurance, which can equate to a 40% reduction in the premium. Typically, these lower rates are offered on properties that were purchased less than 10 years ago.

Title insurance must be purchased on newly constructed properties as well. In this scenario, title insurance protects the lender from liens on the land, as well as liens placed on the new property by subcontractors that were not paid for their services by the general contractor for the construction of the new home.

The premiums issued by the state are based on the amount of the mortgage. So, lenders title insurance does not protect the full appraised value of the home, but rather the amount of the 1st mortgage lien on the property.

Owners Title Insurance:

Owner’s title insurance fills the void left by the lenders title insurance by insuring the borrower’s equity within the property up to the estimated value of the home. In other words, if a lien is placed on the property that is large enough to encroach into a borrower’s equity, then owner’s title insurance would be used to ensure that the equity in the home is protected. Therefore, as a borrower’s equity increases within a property, so does his need for owners title insurance. If an owner does not have a mortgage and holds title to the property, then all of his equity is at risk against any and all previous liens.

Under new Fannie Mae GFE rules, the Owner’s title insurance premium must be disclosed upfront. However, the coverage is considered optional. A borrower does NOT have to include the coverage. Lenders and/or real estate agents should be cautious in deterring borrowers from obtaining the insurance, or risk the possibility of being personally liable for a lawsuit, if a back lien or judgment is later found. If a client asks about the owner’s coverage, the correct answer should be to define what the coverage is for, and refer them to the title attorney, so that they together can determine if the coverage would be beneficial for them.

If the seller of the property previously purchased owners title insurance, then it will benefit him to disclose this to potential buyers when listing the property. With the policy in hand, the attorney does not have to search the title prior to the date of the owners policy, since the owners policy ensures protection on any liens or judgments till the date of issuance. The purchaser can then request an owner’s title policy “reissue rate”, for a fraction of the cost of a full policy.

Recording Fees:

Recording fees are the fees charged by each individual city to record the transaction deed in their courthouse. Therefore, the fees will be different for each property, depending on the city the property is located in. City courthouses charge a per page fee, so the summation of the recording fees depends on how many pages are necessary to place the lien on the deed. Recently, Bossier City implemented a font size fee if the font on the paperwork is too small. Depending on how many pages your mortgage is, or whether or not a HUD or PUD rider is required, recording fees can vary between a couple dollars to a couple hundred dollars.

Pest Inspection Fee:

A fee that is only required on purchase transactions, a pest inspection is conducted on every property to ensure that the home does not contain termites etc. Typically, pest inspections cost between $85 and $150. Nothing more is needed, unless the inspector finds that the home is currently infested, or at one point was. If the property currently has termites, then an additional charge will be added to rid the infestation. Whether or not the property currently contains termites, a home inspector/engineer report may be required to ensure that the damage caused by the termites does not affect the property structurally.

Tax Service Fee:

The tax service fee is a 3rd party fee that is used to pay for the services of a tax monitoring company to keep track of the lender’s servicing portfolio to ensure that taxes are being paid. Lenders have a strong interest in keeping track of the payment of taxes, since a tax lien can cause a home to be taken over by the government and sold at auction.

Junk Fees:

The following fees that show up on a GFE are typically considered lender junk fees. Junk fees are fees that are not necessarily required to perform the loan, but are unnecessary fees the lender will add to turn an additional profit. It is important to note that these fees are not considered junk fees unless there is also a loan origination fee present. In other words, junk fees are any fees over and above the standards 1% origination fee that the lender uses to increase the profitability of the loan.

The following are all examples of common junk fees found on a Good Faith Estimate:

1. Processing Fee
2. Document Preparation Fee
3. Underwriting Fee
4. Application Fee
5. Administration Fee
6. Translation Fee
7. Messenger Fee

By: Marshall F. Graham
Aulds Horne and White
www.auldshorneandwhite.com
marshall.graham@auldshornewhite.com
(318) 869-4444