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Closing and Settlement Costs

Closing and Settlement Costs

What are Closing and Settlement Costs?

With every purchase or refinance transaction, there will be closing costs. Closing costs can be paid by the buyer/borrower, or the seller, or the lender via closing cost credits and all of the following should appear on your Good Faith Estimate.

  • Points -Points are fees paid to buy down your rate. If you are paying points to receive a rate, it means that the rate is below par. Par rate is generally the rate you can get with 0 points. These fees are included on Line 1 of the GFE. Points are optional - you normally do not need to pay them unless you want to buy down your rate below par
  • Lender/Loan fees – These are fees such as underwriting, processing, tax service, flood cert, wire fees, appraisal fee, document fees, HOA condo cert fees. These fees are fees charged by the lender or lender affiliates and are related to obtaining the loan. These fees can be reduced if your lender pays for some or all of these fees by giving you a closing cost credit.
  • Broker compensation – this is the fee paid to the broker to originate the loan. These fees are included on Line 1 of the GFE, and on most of our loans, will be paid by the lender, not the borrower, so you don’t have to worry about paying any premium for our broker services
  • Escrow/Title fees – these are fees paid to the escrow and/or title company for their services and include all the closing agent settlement fees, all title companies fees, wire fees, courier/messenger fees, document preparation, and notary fees.
  • County or City Transfer Tax – this is a fee paid to the County Recorder to transfer the property from one party to another. In Southern California, this fee is often paid by the seller even though it is shown on the buyer’s GFE.
  • Prepaid Items – these are fees that need to be paid at closing, but are also recurring costs and not one time only fees. Examples are prepaid interest, homeowners insurance, and reserves for setting up your escrow account.Prepaids represent funds for the initial payment of interest on your loan. Prepaid interest varies depending on which day of the month you close. It covers the interest that accrues on your loan from your closing date until the last day of the month. Once your closing date has been selected, we will be able to provide you with the exact amount of prepaid interest required for your loan so you can plan accordingly.
  • Home insurance -You will also need to provide the initial premium for your homeowners insurance policy. In some cases this may include flood, earthquake or other insurance coverage as well. Finally, the last item that is usually prepaid is for property taxes.
  • Escrow Account Funds - This is an amount the lender requires you to deposit at closing to set up an “escrow account” to cover your future property tax and/or insurance payments. These are not fees, think of this as a “forced savings account” which, when established properly, will allow the lender to have sufficient funds to pay these bills for you when they come due. These costs will be the same regardless of the lender you choose. Prepaid reserves are always required whenever your mortgage payment includes property taxes and/or insurance with your monthly payment. Not all loans require an escrow impound account, however it is usually required if you have less than 10% down payment or 10% equity in the home.

Note: As taxes are due at various times, the deposit needed for taxes may vary from 2 to 8 months. The amount of the escrow reserves calculated will depend on the month you close and the month your 1st mortgage pmt starts. There is usually a 2 month cushion added into the reserve requirements in case of any rate increases.

Home Buyer Information - Shortsale

SHORTSALES – BUYING A HOME BELOW MORTGAGE VALUE

 

Short sales are properties being sold by the current owners for less than what they currently owe on the mortgage. The current owners' lender(s) must agree to the sale, so the process can take much longer than a regular home purchase. Sometimes as short as 30 days if the sellers started the process long before you became the purchaser, but often it can take several months, so when buying a shortsale, be prepared to wait.  You will not know when your transaction can close escrow until the shortsale lender(s) have responded and approved your transaction.   

REO PROPERTIES – BUYING A BANK FORECLOSURE

Real estate owned (or REO) properties have gone through a foreclosure and are now owned by the bank. These properties are often sold as is, so it's a good idea to get an inspection and to figure out the cost of any needed improvements before you buy.  You can find REO properties through your Real Estate Agent or through specific bank-owned websites. A few are shown below….  

Note:  It is highly recommended to find a real estate agent to write your offer for you on REO properties as well as on regular sales because they generally will have the experienced to know the correct channels to get your offer accepted.  You should expect some competition on purchasing many REO properties though, as they are generally priced to sell quickly and often generate multiple offers.

If you do not have a good Real estate agent, contact me for a referral in Southern California - San Diego, Orange County, Riverside County, or Inland Empire – Click to Contact Me

Home Buying Process

Buying a home is a detailed process. It is important to have proper representation for yourself when finding and negotiating the purchase price on the property, and even through the multiple steps after getting your offer accepted. Find an agent you trust and like to represent you.

Here are some steps you will experience AFTER you have found and negotiated your price:

  1. Once you have successfully negotiated a price for a property, escrow will be opened on the sale. In the State of California, escrow is opened through title companies or escrow companies. In other states, your closing may be conducted through a real estate attorney and title company. The average timeframe for a sale to close escrow is 30 – 45 days, and should be stated on your purchase contract.

       

            Exception shortsales:

      If the purchase involves a shortsale, you may need to wait longer to close escrow because this   means that the seller’s lender also needs to approve the deal in order for the transaction to go through. Shortsales can take anywhere from 30 days to 120+ days to get approved, depending on the lender(s) required to approve the shortsale. Usually escrow is not officially opened until the shortsale is approved by all the lenders the seller has a mortgage with.

       

  2. Your loan officer will update your file with the subject property information and provide a complete loan application package to sign, along with GFE, Itemization of closing fees, and list of documents required to complete your file for underwriting.
  3. Loan file will be sent to Registration and moved in line for Underwriting review.
  4. Do your home inspection ASAP after you have received accepted offer. Ideally we recommend waiting until AFTER home inspection to order appraisal - You want to be sure about moving forward with the purchase before paying for an appraisal. After you have completed your home inspection, review it thoroughly with your real estate agent so that you can put together any repair requests for the seller. These requests may or may not be agreed to, so you are still negotiating at this point.
  5. Appraisal – your appraisal can be ordered AFTER your loan has been registered and the lender disclosures have been sent to you. You will receive a copy of the appraisal after it is completed.
  6. Underwriting Dept completes file and issues loan approval with list of conditions required to clear file for loan documents. You will be notified of additional items you need to provide. These items may be more than what is shown on the pre-approval since the underwriter makes the final call on what is required for final loan approval.
  7. You will need to shop for a homeowners insurance policy to and let your loan officer and escrow officer know who will be issuing your policy for the property.
  8. Escrow will provide and estimated closing statement to show how much $$ you will need to close on the purchase. You should receive this estimate at least 1 week before closing. Only bank wires or cashiers checks paid to the escrow or title company will be acceptable for closing funds.
  9. Your file is cleared for docs, and the Closing Dept will email Final loan documents to escrow company. You will be contacted by escrow to arrange a loan signing with a notary. You will need to bring identification to the signing.
  10. Your signed loan docs will be returned to the lender, reviewed by the funder, and funds wired to the title company – can take 2-3 days after signing date if documents need to be overnighted.
  11. In San Diego County, the title transfer to the property will be recorded the next day after your loan has been funded. Other Counties may allow for same day recording if mortgage funds are received early enough.

A typical loan file from start to finish will take 21 – 30 days on conventional loans and 30-45 days on FHA or VA loans. Your loan rate can be locked anytime from the day you have signed your application package up until 7 days before closing.

Please contact your loan officer for any other additional questions.

Loan Programs

Conventional Loans

Today’s definition of a conventional loans are home loans which are not insured by the Federal government and come in 2 categories – conforming and non-conforming real estate loans.  
Most conventional loans are loans which qualify under Fannie Mae or Freddie Mac guidelines  and these are called conforming real estate loans. HUD dictates the maximum loan amount that are allowed under the conforming category.  Non-conforming loans are loans which are approved outside of these agency guidelines.  An example are Jumbo loans which do not meet Fannie Mae/Freddie Mac standards and allow for higher loan amounts.  Loan originators offering non-conforming loans either keep them for their own portfolios, collateralize them and issue their own securities, or sell them to entities other than Fannie Mae/Freddie Mac who manage them or securitize them.  

Non-Traditional Mortgages

So what is the definition of a Non-Traditional Mortgage? It is defined as ANY mortgage other than a 30-year fixed rate loan. Let’s explore these loans further.

Interest-Only Mortgages

An interest-only mortgage or loan enables borrowers to put off or defer payments of principal and pay only monthly interest on a mortgage for a given period of time. This type of loan usually offers one, three, five or 10-year designations.  After that time has been reached, the borrowers are required to pay down (amortized) mortgages at an accelerated rate. Some payment options, such as payment option ARMs, which will be discussed later) enable a borrower to choose the monthly payment structure that best suits their needs. Such choices include minimum payment, which are often lower than monthly interest payments, interest only, or amortizing. In some ways, these loans are similar to those provided by credit card companies, where minimum payments go mostly toward interest and do little to pay down principles on a loan.

Payment Option ARMs

A payment option ARM (adjustable rate mortgage) is one designed to enable borrowers to choose the amount paid every month. Payment options may range from interest-only payment, to a minimum payment lower than that, or a fully amortized payment. In the past, such options were only offered to individuals with a clear ability to repay loans as well as those who clearly showed their ability to manage risks and costs of such loans.

FHA-Insured Loans

FHA 203(b) Mortgage Insurance Program

The 203(b) mortgage insurance program provides insurance for fixed rate 30-year mortgages.  The mortgages may be written with a down payment of as little as 3.5%.    

FEATURES of FHA financing:

  1. Low Down pmt - 3.5% rate
  2. Low rates
  3. Primary residences only
  4. Can be for First Time Home Buyers OR repeat buyers
  5. FHA Loans types available: 30 yr fixed, 15 yr fixed, ARMS
  6. Can be combined with housing programs 
  7. Readily available program from all lenders since it is backed by the Federal government, so less risk for lender
  8. Upfront MI premium – 1% of the base loan amount is added to reach the total loan amt. This amount is the upfront fee charged by FHA to obtain this loan. Can be added to the loan OR paid for by borrower or seller.
  9. Monthly MI premiums – The MI rate is 1.15% of loan amt for monthly MI with loans < 5% down. The MI rate drops to 1.10% of loan amt with loans having 5% down or more.
  10. FHA maximum  loan limits varies between counties and states are found here:  https://entp.hud.gov/idapp/html/hicostlook.cfm
  11. Can allow for energy efficient improvements to be financed into the mortgage - within FHA policy parameters.

FEATURES of FHA 203K financing:

  1. Up to 35K of home improvements can be financed into the mortgage

FEATURES of FHA Streamlined Refinance:

  1. Refinance program for borrrowers with a current FHA loan – must be current on loan payments
  2. No appraisal requirement available
  3. No income verification (paystubs, W2s, tax returns) required
  4. Verbal Employment verification is required to show still employed
  5. For eligibility, NET benefit of refinance MUST be at least 5% of PIMI pmts (Principle + Interest + MI pmts)

Other Financing Options and Loans

There are a variety of options when it comes to loans and financing. Fixed rate, adjustable rate mortgages, home equity loans, bridge and construction loans, fixed rate, negative amortization and rural and farm property loans are just a handful of the types of financing options that are available to home buyers as well as business owners.

The most common types of alternative financing options and loans for consumers today include but are not limited to:

  • Home Equity Loans
  • Construction loans
  • Rural and Farm Property loans
  • Fixed rate
  • Alternative financing
  • Negative amortization loans

Home Equity Loans

Home Equity Financing is  a common option among many consumers who wish to receive a 2nd mortgage on their home. Home equity financing can come in 2 forms – as a fixed rate home equity loan OR variable rate home equity line of credit.

A home equity LOAN is similar to a fixed rate conventional loan – your rate is fixed for the life of the loan and commonly is amortized over 30 yrs.

A home equity line enables a homeowner to be approved for a certain amount of credit, which is most often based on a maximum of 80% of the appraisal value of the home.  Lenders used to offer higher than 80% LTV, but have reduced this maximum in recent years due to declining home values. Interest pmts are usually a minimum of the interest only pmt but it is recommended for a borrower to pay more in order to pay down the principle..Using a home equity credit line is much like using a credit card. Homeowners will be able to borrow up to the amount allowed by the loan, repaying the loan according to predetermined interest rates and charges. The interest rate is usually based on prime rate plus a margin and when prime rate changes, the interest can change accordingly. To curb this insecure feature, many mortgage lenders also offer an option to convert variable interest rates to fixed rate loans.

Get Pre-Approved

Getting pre-approved for financing is a simple but very important step in a home purchase. In order for a seller to be assured that you are a qualified buyer for their property, they will want to see that you have been pre-approved forfinancing when you submit your offer to them.

Click here for the steps to receive a Mortgage Pre-approval Letter (Mortgage Loan Process - Step 1) and also for Final Loan Approval after you get your offer accepted (Mortgage Loan Process -Step 2).

Before calling a mortgage loan agent to qualify you, you should have the following list of items ready so that you can provide the information when asked.

ITEMS REQUIRED FOR MORTGAGE FINANCING:

Salaried employees

  • last 2 paystubs and 2 yrs W2s
  • last 2 mths bank stmts to verify the down pmt and closing fees
  • retirement accounts (if applicable)
  • last 2 yrs tax returns required only upon request by underwriter
  • List of current debts and monthly pmts
  • If refinancing: copy of current mortgage stmt, copy of property taxes, insurance premiums, and HOA dues

Self-employed or sales/commissioned employee

  • Last 2 yrs personal tax returns including all schedules - Federal 1040 and K1s/Corp returns, if applicable
  • If 2010 return not filed yet, will need copy of tax extension
  • last 2 mths bank stmts to verify the down pmt and closing fees
  • retirement accounts (if applicable)
  • List of current debts and monthly pmts


Special Circumstances – other income verification

  • Previously divorced – copy of divorce decree verifying alimony or child support pmt or income may be required
  • Social Security – copy of benefits stmt, direct deposits into banking acct OR tax return to show receipt of social security
  • Rental income – lease agreements OR tax returns (Schedule E)
  • Military borrowers – require LES to show BAS, BAH and other income

Special Circumstances – other asset verification

  • Proceeds from sold property – copy of FINAL closing statement from escrow and copy of funds deposited into banking acct
  •  IRA funds, 401K loan acceptable for down pmt – must show documentation of withdrawal and transfer of funds into banking acct
  • Gift funds – signed gift letter and copy of giftor’s bank stmt showing they have the funds in their bank acct to give borrower

American Pacific Mortgage | 4275 Executive Square, Suite 1050, La Jolla, CA 92037

Phone: +1-858-552-2550 x220 | Direct: +1-858-775-7390 | E-Fax: +1-858-435-4316