Mortgage Mario

What are closing costs? What is a loan estimate?

Video Transcript

hey everyone this is mortgage Mario so I
want to walk you through an example loan
estimate and closing cost
um so I kind of have this set up for a
first time home buyer putting down only
three percent so a lot of first-time
home buyers just think hey I’m putting
down three percent that means kind of
this bottom Lane cash to close should
say 12 000 and they look at something
like this and they go oh my goodness
what is what is that what does all this
mean this is kind of um scary so I’m
kind of here break this down for you
just to make this seem a little bit less
intimidating to walk you through this um
essentially we can break it up section
by section so section A those are the
costs coming from the lender
um so really the best way to compare
closing costs from A lender would be
section A and then B you have all these
um third-party fees such as you know an
appraisal fee uh you have to get a
license appraiser to get out to the
subject property actually find out the
value of a property that’s kind of like
an average cost there for an appraisal
um if it’s new construction you may have
an extra fee for that as well you know
credit report and things of that nature
now if it wasn’t conventional you’d have
something called FHA upfront mortgage
insurance premium if it was FHA that’s
about 1.75 percent of the loan amount
that gets typically financed into the
loan amount or the VA or USDA so
anything that’s government-backed
um they’re more lenient in certain
regards like credit but they do have
that um upfront mortgage insurance
premium depending on which loan product
that is so
we’re all sure you’re gonna have
attorney a licensed attorney that’s
going to close on the mortgage so
um essentially you know they’ll have
their settlement closing fee
um other fees such as exam fee binder
um something called premium for lenders
coverage so that’s an insurance policy
that the attorney actually sells
um to the buyer and the event that if
they miss something on title search that
um the lender wouldn’t be held
accountable for uh paying for that and
so they also sell another policy called
uh called owner’s title policy uh which
you’re going to find in section H right
here which is similar but it’s for the
owners for the buyer so that’s actually
optional the government does not
actually mandate for the owner to pay
for that but if the title or the closing
attorney were to miss something on title
search and you were to get title and
there was a lien on the property or
mechanics lien is a very common reason
then in that case uh you could be held
accountable for uh paint being paint off
that that lien so that’s you know for a
400 000 house that’s kind of like an
estimate there of um what a closing
attorney would charge for that so it
seems like you know kind of too much
risk not enough reward if you’re to
waive that fee in my personal opinion
um so what we see here in section D is
kind of total loan cost so these are the
costs to get the loan you can tell kind
of the majority don’t really come from
the lender
um and also to get back to section a
um some letters charge origination
um some and actually you can pay
discount points to buy down the interest
rate so if you wanted a lower interest
rate uh you could actually pay discount
points to buy that down um depending on
how long you’re going to live in the
property and
um things like hey are there is there
gonna be a future refinance down the
road maybe rates will drop in the future
I’m going to refinance so you it may or
may not be a good idea to buy down a
rate just kind of depending on what the
Market’s going to do and how long you’re
going to live in the property obviously
you’re gonna live in the property for 30
years and you know rates are never going
to get any lower from where you know
you’re um speculating at the time with
interest rate then you may be better off
buying down the rate as low as possible
so again a loan officer can kind of
analyze that so
um now to get kind of to the other side
you’ll you will have things like taxes
um yeah I’m using Georgia because I’m uh
originally a lot of mortgages in Georgia
from Georgia so things like taxes and
then you have things like prepaids which
aren’t really necessarily a true cost
per se but essentially
you’ll pay up front for an entire year
of Homer’s insurance so if you were to
close on this you know uh and in May of
2023 that you’ll actually be paid for up
a year up front of
um prepaid home version Insurance
another thing called prepaid interest so
prepaid interest is essentially kind of
the time where your mortgage is a
mortgage limbo people think that when
they get a mortgage sometimes they’re
off the hook for for paying for a month
or so especially on refinances but
essentially if we’re to close in the
middle of May
um you’d have kind of 15 days until your
mortgage starts your mortgage would
start you know June and you always pay
for a month of behind so your first
mortgage payment you close the middle of
may actually wouldn’t be until July 1st
and you pay for June always a month
behind in that period of time where you
lived in the property and he actually
weren’t paying
um we’re paying a mortgage that at the
closing table that they’re going to
collect kind of that daily interest and
so that’s going to kind of depend on
your your loan amount and also your
interest rate is going to affect that
and then the amount of days that you’re
living in the property without actually
having a mortgage so this could this
could change it could be
um you know anywhere from one to um 31
days essentially so it’s towards the end
of the month it would be a lower number
towards the beginning of the month it
would be a higher number so not
um a true cost that’s where a lot of
lenders will just kind of when they show
estimates they’ll waive this essentially
you know when they initially show votes
because they know it really doesn’t come
from them it really just depends in the
beginning but it can be kind of
misleading When A lender doesn’t really
walk through things like prepaids and
then also to my next Point escrow so
um if you’re
doing a conventional loan and you’re not
a first time home buyer a lot of times
you actually have the option to wave
escrow typically first-time home buyers
or if you’re putting down a very small
amount around three percent things like
that a lot some sometimes you may have
to Escrow but essentially escrow is a
savings account to automate taxes and
insurance so again not really a true
cost this could just this number
completely depends as well and so it
really actually doesn’t come from the
um whatsoever but again a good loan
officer is going to really kind of walk
you through what this means and also you
know how this number could change
depending on the property you’re buying
depending on the homeowners insurance
depending on the the county the
properties in depending on when you
close on the property so for example
um a lot of times they’ll just want to
have a little bit extra going to and
it’s basically a savings account for
taxes and insurance so just they always
want a little bit of a cushion there so
when you pay your mortgage say you’re
closing this in the middle of April and
you get your first mortgage statement
July 1st you’ll see something called
escrow and so you’ll see that all these
funds in an escrow account so you can
only tap into that once you either
refinance or sell the property and the
loan service will write you a check but
basically they want to make sure you
have a little bit of money uh saved up
as a rainy day policy in the event that
hey what if your home version like the
lender is in control the loan servicer
doesn’t control Homer’s Insurance what
if what if you’re with you know
um you know some insurance company and
your insurance goes up for whatever
reason you make a claim on the roof you
know and you’re and it goes up or
something else causes a go up so they
want to make sure they have kind of a
cushion when they’re automating that
payment that they have a little bit of
reserves there
um kind of same thing with the county so
depending on when you close
is going to be kind of depending on how
much um escrow cushion but just take
note that you know if this was say two
thousand dollars higher it’s not like
you’re it’s really like money out of
your wallet it’s really just to kind of
help automate some things
um in your end of the day you’re gonna
pay whatever you in a year whatever you
owe to the homeowners insurance company
that’s what you’re gonna pay and same
thing with the county when
um the loan servicer picks up the check
from the tax assessor you know typically
during the end of the year with most
um they’re gonna pay whatever the tax
assessor uh tells them what to do and
whatever differential is left in the
escrow account that’s going to stay in
there just like a savings account that
like that’s not a cost so that’s
probably one of the more confusing
things when it comes to breaking down
closing costs
um so again that would just when you’re
kind of looking at a ballpark estimate
you don’t have a property or anything
like that just kind of take note that
that definitely can change and that’s
just gonna depend on the you know again
Homer’s insurance and the county you
could have city as well
um so that could depending on if you’re
in an area where it’s got city tax that
could be in there
um and then we did discuss title
under his policy and then what is this
HOA initiation so if you do join like an
association HOA or condo complex that’s
got an association a lot of times they
make you it’s kind of like joining a
country club that they make you actually
pay like an Initiation fee to be able to
join there so um that would be on your
final closing disclosure it should be in
the contract when you have a binding
purchase and sell agreement the loan
officer should put that in there
whatever is on the contract so
um again that’s kind of a third party
fee there so that could just depend
um obviously on the on the property so
this is kind of how you know you would
break it down on a loan estimate where
you kind of see the other costs those
are kind of the prepaids escrows taxes
things like that
um and initiation fees
um and then obviously this is kind of
section D’s you’re still a loan costs
and then and if you want to look at hey
what actually are the total closing
costs in this scenario well in this case
it’s almost about thirteen thousand
dollars just as a complete example so
although that you did have a you know
three percent down payment that
that goes straight into Equity the
property that’s not a cost as well that
that will reduce obviously your loan
um since it’s a 400 000 property went
down three percent
um that’s good you’ve got some ownership
and a property it’s good to put a little
skin in the game buying a house
um and so that’s not really a true cost
but you will have some fees on here
um to be able to kind of that’s a
one-time fee essentially to get in the
house that you’ll have to pay to be able
to make kind of the accounting equation
to work and to pay all the other real
estate professionals to properly conduct
their job to close on this
um transaction so
um essentially
um well you see here is some other
things on a transaction I left out here
so it wouldn’t be misleading on your
bottom dollar but essentially on a loan
estimate a closing disclosure you’ll put
down an earnest money deposit and that’s
that’s up to what the Realtors negotiate
and what you put your the buying real
estate agent puts on the offer when
making an offer on a property uh but as
a rule of thumb is basically it’s
usually one percent of the purchase
price so you’ll put down a one percent
earnest money deposit look at it as like
a deposit just for out of good faith
like hey I’m gonna do I’m gonna get an
inspection on the property I’m gonna do
my due diligence but I really mean
business I really want to buy this house
um and here’s here’s my deposit and so
that can be misleading because we if I
were to put that there that would make
your cash to close look four thousand
dollars cheaper
um so essentially kind of left that out
at any point before you make an offer
um or even during the due diligence when
you get an inspection on the property
something pops up on especially during
an inspection like hey the the roof’s
bad we need a new roof and it’s going to
cost seven thousand dollars well that
can be negotiated so you can get you can
get the seller to pay seven thousand
dollars or you can even make an offer
um you can even make an offer to say hey
I want I want buy I want the seller to
pay for ten thousand dollars of closing
costs so uh depending on the loan
product and depending on your Lund of
value what determines loan to value is
the down payment so basically just take
the down payment subtract by a hundred
so put down three percent your loan of
values can be 97 uh for example so kind
of depending what bracket you put in in
the loan product you can only put down
so much
um sellers concessions or out get so
many sellers concessions I should say or
seller paid closing costs is what those
are in layman’s terms and I believe in
this scenario be about three percent so
the maximum the seller can pay in that
scenario would be twelve thousand uh
dollars for
um seller pay closing costs so that
would obviously basically cover most of
the closing costs and then you’re
getting into a house with just a down
payment which goes towards the equity of
the property
um and then
you’re going to have seller proration uh
and so again uh title when they bounce
the final closing disclosure the closing
attorneys they’re they’re they in the on
the final closing disclosure that you
sign on which isn’t the same as a loan
estimate a loan estimate is a good faith
estimate from the lender uh forecasting
all the their fees and then also all the
third party fees in the transaction that
we just explain
um but when the title
um basically does title search and
everything so
they will do something called
salespiration for taxes and then you can
have that accounting of that I’m sitting
basically if like I use Cobb County in
Georgia for example taxes are due in
October I believe if you move in and you
close on this in May so we’ll stay close
to this in you know May so you the
seller lived there for four months so if
the seller lived in the property for
four months and you’re not you’re going
to pay property taxes in October of
2023. well it wouldn’t be fair that
you’re paying an entire year of property
um but this but you didn’t live there
for an entire year and the seller lived
there so the seller it’s kind of an
accounting equation and the seller will
actually pay you kind of their fair
share to make that work and so they
would multiply that by four months and
if you moved in halfway it would be more
um of May it would be 4.5 it’s kind of
what they multiply that by and that’s
how much the seller would actually give
you back towards closing
um in that scenario so that again your
closing costs is going to be dictated by
what when you move in and when the
county collects property taxes so
obviously when you’re talking to a loan
officer and you want hey I want to on
the you know you put a gun to their head
you want you want an on the penny exact
estimate I hope you can kind of
understand how that’s very difficult and
um that for to be able for a loan
officer to be able to come up with a
very transparent quote really a loan
officer their job is to be conservative
so you know if they want to tell you a
certain dollar amount they really should
kind of be overshooting some of these
third party fees or at least kind of
being around Market averages
um just so you know when you do get when
the when the closing attorney balances
the final closing disclosure and you see
what your final cash to close is when
every firm number is entered in well
that way it’s not undershot you always
want to overshot in a pre-approval
um type of a status when you don’t have
a property or else you’ll be kind of
saying dirty four-letter words to the to
the loan officer with if you’re short by
you know you end up having to pay five
thousand dollars more at the closing
table so you always want to maybe
slightly overshot so
um that’s basically
a fair breakdown remember if you’re
going you know USDA just certain
geographical eligible areas it could be
you know zero down but you would get hit
with that USDA uh funding fee that would
be financed into the loan amount VA is
awesome no private mortgage insurance on
on VA so we can go zero down no PMI
which is
um phenomenal
um and then unconventional you are going
to have something called private
mortgage insurance when you put down
less than 20 percent you know a private
mortgage insurance so in this case it’s
about 116.40 so things like credit score
um you know first time home buyer status
debt to income ratio things like that um
and then load amount and things of that
nature can affect
um PMI so
um just remember that’s kind of um you
know an estimate as well
um but yeah I hope this helps and have a
wonderful day

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