Bank Fees
Protect your Escrow Deposit
Bank-paid Fees
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Borrower-paid Fees (if applicable)
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| 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
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.
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.
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