Bank Fees
Bank-paid Fees
|
Borrower-paid Fees (if applicable)
|
| Origination Fee |
Mortgage Tax |
| Appraisal Fee |
Owner’s Title Insurance |
| Tax Servicer Fee |
Survey |
| Flood Inspection Fee |
Recording Fees for Deed, POA, Satisfactions, etc. |
| Lender’s Title Insurance |
Mortgage Insurance |
| Lender’s Attorney Fee |
Title Closer Pickup Fee or Gratuity |
| Departmental Searches |
Tax Arrears / Payment to Title Co. for Future Tax |
| Recording Fees for the Mortgage and Consolidation Agreement, if applicable |
Initial Escrow Deposit for Taxes, Insurance and Private Mortgage Insurance, as applicable |
Protect your Escrow Deposit
You’ve
made an offer on a property, the seller has accepted, and you’re ‘in
contract. Now it’s time to put your money where your mouth is, as the
saying goes.
At this stage of the game, the buyer puts a deposit into an
escrow account (it is
not
given directly to the seller). The more serious you are, the more of a
deposit you’ll put up, usually maxing out at 3 percent of the
agreed-upon price. As a
listing agent, I’m always skeptical of a buyer who puts down a small deposit of, say, $500 or $1,000.
The deposit is a good-faith gesture to the seller, indicating you’re
serious about buying their home. Once deposited, this money can’t be
moved or touched without written consent from both buyer and seller.
Upon the close of escrow, the
earnest money deposit is applied to the balance of the down payment.
That doesn’t mean you can’t get your deposit back — or lose it, if
you aren’t careful. From the time you put up the deposit until you close
escrow, a lot can happen.
Here are the top 3 ways to protect your deposit.
1. Get to know the property during inspection.
Every house, no matter if it’s a 100-year-old Victorian or a modern marvel, should have some type of
home inspection before it’s sold. Your contract should include a “contingency” for such an inspection, to protect you from unwittingly buying a money pit.
In an older home, the inspector will look at the foundation, the roof, and everything in between. You can have specialized inspectors go through the property as well, such as a heating, ventilation and air conditioning (HVAC) specialist, a pool inspector, a termite inspector, or a structural engineer, if the property merits it. Even in a new condo, you’ll want to make sure the appliances work, that there are enough electrical outlets, and that they are in working condition.
Bottom line:
Use an inspection to really get to know the ins and outs of your potential home to avoid costly surprises later.
Should the inspection uncover some problems, it’s time to decide if you can live with them or not. Inspection contingencies are often so general that the buyer can get out of the contract and have their full deposit returned. In fact, I always tell buyers that the property inspection contingency is their “get out of jail free” card. Because the contingency is often so broad, I’ve seen buyers use it as a way to walk away from a home they’ve had second thoughts about, without losing their deposit — even when the home is in great condition. It avoids
home buyer’s regrets.
2. Get written notice that your loan has been approved and make sure the property doesn’t appraise for less than the purchase price.
Given tougher lending standards since the credit crisis, the appraisal/loan contingency is more important than ever.
You must have a contingency clause that allows you, the buyer, to receive full written approval from the bank for your loan. If your loan broker isn’t willing or able to give you written notice that your loan has been fully approved, do not remove this contingency. If you do, you risk forfeiting your deposit. I’ve seen lenders pull out or deny the loan at the last minute — like the day before they’re set to fund.
To protect your deposit, grill the loan broker and don’t feel pressured by the seller to move ahead. It’s absolutely appropriate to ask the seller for an extension if you need one. Everyone in the transaction should want to work together to make the deal go through. But if you sign off that you’re approved and then you’re denied a loan, you risk losing your deposit.
An appraisal contingency should be added to the loan contingency as well. The property needs to appraise at no less than the purchase price. Some buyers have a larger down payment and they may get loan approval even if the property appraisal comes in low. This isn’t good news. And as the buyer, you should be able to walk away or renegotiate the purchase price if the appraised value is less than the contract price.
3. Review the property disclosures carefully.
Along with property inspections, sellers are required in most real estate markets to complete a series of disclosures regarding their knowledge of and experience with the property. By law, sellers are required to disclose property defects, neighborhood nuisances, or anything that would negatively affect the property. Additionally, you should have the opportunity to review any local or state reports like a building permit history or a flood/earthquake map.
You should receive the
seller’s disclosures and any required reports soon after your offer is accepted. In some markets, you may receive these disclosures
before you make an offer. If you discover something negative about the property, this is your chance to say “no thanks” to the seller.
However, you’ll be required to sign off on these disclosures and reports. Once you’ve done that, your deposit is at risk. So take your time. Review everything carefully. Don’t be afraid to ask questions about what you’ve learned. If you feel something is vague, or if a particular disclosure brings up an issue for you, investigate it. Go back to the listing agent or the seller and ask for additional documentation, because your deposit is at stake.
For example, in one case, a seller disclosed there was some leaking in one window in the rear of the house. On the surface, it appeared to be a small leak. Upon further discussion and investigation, however, it was discovered that the leak was part of a much bigger roof and gutter/dry rot problem.
Contract To Closing - Buying A Home
HOME BUYING
10 Steps of the Home Buying Process - Contract to closing.
The steps below are typical of those you'll follow from your initial contract to your closing:
1. LOAN APPLICATION: Immediately after they
negotiate the contract, buyers should apply for any financing necessary
to complete the purchase. The agent's advice can help them select a
reputable lender whose products and service best meet their needs.
Notification of loan application is passed to the listing agent,
who keeps the seller informed as the process progresses. During this
process, buyers must furnish the lender pertinent information regarding
their assets, income, debts and credit history.
2. HOME INSPECTION AND REPAIR RESOLUTION: The
rise in the importance placed on home inspections is probably the most
significant change that has occurred in the home selling process in
recent years. Typically, the process involves a top-to-bottom inspection
of the property, performed by an inspector who is chosen and paid by
the buyers. After the buyers review the report, they have the right to
ask the sellers to address any concerns they have about the property.
This is done during the Due Diligence Period which is part of the
Purchase & Sale Agreement.
3. DUE DILIGENCE: During this period,seller
grants the buyer the option of terminating the agreement for any reason.
Buyer may arrange financing, conduct evaluations, inspection,
appraisals, examinations,surveys & testing. During this period the
buyer may also inspect for active termite infestation.
This process can easily amount to a complete renegotiation of
the contract. The role of the listing and selling sales people is
critically important to successfully negotiating this often difficult
process.
4. APPRAISAL: As a part of the loan approval
process, the lender will require that the property be appraised to
ensure that the value of the property is adequate to justify the loan.
Although the buyer and seller have already agreed on a price, the
appraiser's evaluation must support that price.
5. LOAN APPROVAL: When the appraisal has been
satisfactorily completed and the lender has verified the buyer's income,
credit, etc., the lender can then make a decision on loan approval.
Both listing and selling agents will work to ensure that all necessary
steps are taken to reach this point.
6. CLOSING ATTORNEY: When the loan is
approved, an attorney specializing in real estate must be selected to
prepare for and conduct the closing. The closing attorney is selected
according to the contract and the lender's requirements. Among other
items, the attorney will check the title to the property, prepare
necessary paperwork, and handle the receipt and distribution of all
monies in the transaction.
7. TERMITE INSPECTION: Most contracts require
the sellers to furnish a termite clearance letter to the buyers. A
licensed pest control operator must certify that the property is free
from infestation by termites or other wood destroying organisms. If
infestation is discovered, treatment and repair may be required. The
cost of this inspection and any repairs is determined by the terms of
the contract. The cost of the termite clearance letter is usually the
responsibility of the buyer.
8. HOMEOWNER'S INSURANCE: If the home will be
subject to a mortgage, the buyers must arrange for a homeowner's
insurance policy covering the property. The selling agent will help the
buyer make sure that the coverage is adequate to satisfy the
requirements of the lender. These arrangements must be made prior to
closing and the policy must be present at the closing.
9. RE-INSPECTION OF REPAIRS: In the event the
seller is required to make repairs, sellers should be careful to hire
reputable repairmen and keep good records of completion and payments
involved. Buyers will normally have the property re-inspected to ensure
satisfactory completion.
10. UTILITIES TRANSFER: Prior to closing, both
buyers and sellers should arrange to have the utilities transferred
from one to the other. To accomplish this task, a date (usually the
possession date) will be agreed upon for the transfer. The sellers
notify the utility companies to cancel their services on that day. The
buyers make applications with the various utilities and ask that their
services be established on that same day.
Careful planning and coordination are essential to
ensure a smooth, successful closing process. During this critical
period, your sales associate will prove to be very valuable.
Estimated Time Line
The following timetable presents an idea of the timing of the different events in the home buying or home loan process.
First Week
Deposit earnest money check and make loan application
Pay for appraisal and credit report
Arrange for property inspections
Arrange for exterminator inspection
Second Week
Make property inspections
Make exterminator inspections
Make repair request to seller
Make sure all information that the mortgage company requested has been submitted
Arrange for movers
Third Week
Re-inspect to assure that repairs have been completed
Call to find out if mortgage company needs any additional information Fourth Week
Arrange for cashiers check for closing
Arrange for settlement, signing of papers
Arrange for transfer of utilities
Arrange for exchange of keys and personal items
Fourth Week
Arrange for cashiers check for closing
Arrange for settlement, signing of papers
Arrange for transfer of utilities
Arrange for exchange of keys and personal items
This time line is just an estimate of deadlines based on a
30-day closing. Times may vary for longer closings and some items may be
completed earlier or later than shown. This is an example only and not
intended to be a representation or guarantee of time of completion for
any specific transaction.
Difference between Interest rates and APR
What is the interest rate?
The interest rate is the percentage of the loan amount that is charged
for borrowing money. We can consider this the base fee. It is very
important when comparing loan quotes since it directly affects monthly
payments.
What is the APR (Annual Percentage Rate)?
The APR is a calculated rate that not only includes the interest rate
but also takes into account other lender fees required to finance the
loan. The idea behind APR is to help consumers understand the tradeoffs
between interest rate and the fees paid at closing (such as paying
higher fees to lower interest rates or increasing interest rates to
cover closing costs). The government thought this was important so they
required it to be shown next to the interest rate as part of the
Truth in Lending Act.
Here is a diagram showing how APR tries to balance interest rate and fees:
How APR is calculated
Conceptually:
To calculate the APR, the lender fees (fees required to finance the
loan) are incorporated into the interest rate. This is done by
amortizing the fees out over the life of the loan as if they were
additional payments, and then calculating a new rate.
Specifically:
(feel free to skip this paragraph)
The fees are added to the original loan amount ($200,000 + $3,000) to
create a new loan amount ($203,000). This new loan amount, along with
the interest rate (5.00%), is used to calculate a new monthly payment
($1089.75). The APR is then calculated by working backwards to figure
out what the rate would have to be for a loan with the new monthly
payment ($1089.75) and the original loan amount ($200,000). This is
your APR (5.13%). The APR is typically higher than the interest rate
because it includes the fees.
Limitations of APR
As useful as the APR can be, it has its limitations. APR spreads the
fees paid upfront over the life of the loan. So the comparison of APR
is only accurate if you plan to keep the mortgage for the entire length
of the loan. Since most borrowers do not keep their loan for the full
period (they typically refinance or move), the APR can make some loans
look artificially better. In the example above, if you only kept the
loan for 3 years, the second loan would be much more expensive even
though it has a lower APR. This is because the $6,000 in fees is paid
upfront whereas the higher interest rate in the first loan is amortized
over the life of the loan. See my post on
whether or not you should pay points to learn more about the tradeoffs of paying interest upfront versus over the life of the loan.
The other problem with APR calculations is that different lenders may
include different fees in their APR calculations for various loan
programs. Remember to always ask your lender what is included and not
included in your APR.
