Living in Contra Costa County

After reading a post here on AR about how a buyer commented to an AR Realtor at the closing table that they didn't know there were closing costs, I was inspired to blog about how incredibly unlikely this probably was.  In Part 1, I discussed the three following documents: the loan application (1003), the itemized fees worksheet (IFW) and the HUD settlement cost booklet.  All of these documents are three of the earliest and most basic documents that disclose and explain a buyers closing costs.

In Part 2, I want to discuss three more documents that disclosed to the borrower their closing costs and that also require the borrowers signature stating that they acknowledge receiving these documents and have been apprised of what their closing costs and fees are that are associated with their mortgage loan.

Good Faith Estimate (GFE):  Once a propety has been identified, by law, the MLO/lender is required to provide the borrower with a GFE for the property.  The GFE is a three page document that not only summarizes the terms and conditions of the loan you've applied for but it also breaks down your settlement costs and fees.

 

 

 

 

 

 

 

 

 

Furthermore, it also explains to you which fees and costs are subject to change, which is anywhere from zero tolerance to no more than 10% tolerance.  For the record, the lender origination fees have a zero tolerance and only title and escrow fees are eligible for the 10% tolerance.  The GFE also provides a comparison table for borrowers to be able to compare different loan products that they are shopping for.

Mortgage Loan Disclosure Statement (MDLS):   Like the federally regulated GFE, the MLDS is provided to the borrower once a property has been identified and in conjunction with the federally regulated GFE.

Like the GFE, the MLDS is a three page document that not only summarizes the terms and conditions of the loan you've applied for but it also breaks down your settlement costs and fees.  The borrowers signature block is on page three.

Here in CA, the MLDS is regulated by the CA DRE and the CA DRE requires that a borrowers settlement costs be separated by which ones are paid to the broker and which ones are paid to the other settlement service providers.

Settlement Statement (HUD!):  The HUD1 is similar to the GFE in that it summarizes the terms and conditions of the buyers loan as well as itemizes all of the costs and fees associated with the escrow transaction.  The borrowers signature block is on the last page.

However, unlike the MLDS that separates the brokers costs and fees from the other settlement servicers costs and fees, the HUD1 statement identifies which costs and fees are the buyers and which ones are the sellers.  Additionally, the HUD1 also compares the GFE costs and fees to the HUD1 costs and fees to illustrate that they are within their federally regulated GFE tolerance levels.

Typically, the buyers MLO/lender will receive two HUD1 statements, one when escrow is opened (estimated HUD1) and one more before loan documents are ordered (final HUD1).  The borrower is required to sign both statements to acknowledge that they have received copies of them.

This is why it is legally impossible for a buyer to get all the way to the closing table without knowing what their costs are.  Regardless of whether or not an MLO and/or lender explained every single detail of these disclosures and documents, the fact that the buyer was provided these disclosure and documents and is required to sign and acknowledge most of them leaves the buyer responsible for knowing what they're signing and asking questions if they don't know what they're signing.

As I've said before, I find it irresponsible for any MLO/lender to not fully explain these documents and disclosures to their borrowers.  However, I also find it irresponsible for any borrower to not understand what they are signing too.  Getting a mortgage loan is a very serious financial decision and for anyone to take it so carelessly as to not know what their closing costs are going to be is just plain foolish.

Buying a home is one of the most important decisions someone can make.  The home buying process is not a simple process and it's because it can get really complicated and convoluted, that borrowers today need to be working with true professionals who can and will serve their buyers best interests.  If you have any questions and/or concerns, please feel free to contact me, Donne Knudsen at 805.2069123 or donne4loans@earthlink.net.  That's what I'm here for and I would love to be able to assist you in your search for an affordable home loan.

HOW ARE A BUYER'S CLOSING COSTS DISCLOSED? Let Me Count the Ways! - Part 1

 

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Donne Knudsen
Mortgage Loan Originator - C2 Financial Corp.
NMLS# 249822   /   DRE# 01364050
805.2069123

E-mail   My Blog

Serving low-medium income individuals and families as well as first time buyers with their mortgage needs including down payment assistance

Los Angeles County  --  Ventura County

© 2010 - All Rights Reserved

Recently I got an email from a potential first time buyer who was hesitant to start househunting because of warnings she had received from friends about how expensive it is to buy.  Here is part of her email:

I want to buy my first home.  Friends keep telling me that I have to pay closing costs and that they are a lot of money.  Is that true? What are the closing costs for? And how much commission do I have to pay if I use a real estate agent?

The very first thing I want to make clear is that the seller pays ALL commissions from the proceeds of the sale.  Absent a separate agreement you make, which is uncommon, you as the buyer will not pay any commission to the Realtors/real estate agents.

When the seller retains the services of a Realtor to help them to sell their home, they sign a commission agreement which states the total amount of commission the seller will pay.  If that Realtor finds a buyer himself, he will collect the entire commission.  If the buyer is represented by her own Realtor, the seller's Realtor will have to give the buyer's agent a share of that commission when the escrow closes.

Some buyers feel that they can get a better deal if they don't use the services of their own Realtor to assist them in finding a home, negotiating the deal and preparing the piles of paperwork involved.  This is absolutely false, and in fact in some cases the truth may be just the opposite.

Buying your first home can be a terrifying experience, as you are probably unfamiliar with all of the terms you may hear, documents that have legal significance, and when you can and cannot negotiate certain issues.

Some people who have bought other homes may feel that they have gone through it before so they can do it on their own, but this can be dangerous because laws change constantly, as do the forms and required disclosures.  The services of an experienced Realtor are FREE to you as the buyer, so do the smart thing and find a Realtor to help you.

As for closing costs in general, there are two main categories for a buyer.  Those directly related to the purchase escrow will occur in every transaction.  Those related to your loan will depend on the type of loan you get, your creditworthiness, and the the amount of down payment you can invest.  If you will be paying all cash, these costs are not involved.

Before you start househunting, I suggest you meet with a lender and determine the amount for which you will qualify and get a very rough estimate of what the loan costs will be and whether they will be rolled into the loan or payable in cash before escrow closes.

Those costs could run from one to four percent or so, depending on the factors above and others, including whether you will be required to pay for things like mortgage insurance.  Other issues may affect those costs as well, but in general loan costs include:  loan origination fees, any charge for negotiating a lower interest rate, credit reports, appraisal, and prorated homeowner's insurance and property taxes, plus various administration expenses like delivery and other smaller costs.

Escrow's responsibility is to gather all documents, including loan documents and documents prepared by the Realtors and signed by the buyer and seller that clarify the terms of the contract for the purchase, required disclosures, etc.  It is their job to find out the amount the seller owes on the property and to see that your loan proceeds are deposited into escrow and they distribute all of the funds to the seller after paying anyone else who is owed a portion of the proceeds, such as the previous lender, any liens, commissions, and the seller's closing costs.

Escrow will thereby assure that you receive a clean title to the property, with no outstanding liens except that which you incur with your lender.

The title company will do a title search during escrow and guarantee that there are no secret liens that no one knows about.  They will issue you a policy of title insurance to protect you and your lender against any liens that might not be covered by their title report.  There are seldom any, but if you later discovered an encumbrance that did not appear in the report, you would be able to turn to the title company to indemnify you against it and negotiate on your behalf.

Your escrow and title costs will include the fees to those two companies for their services, which are based on the purchase price, any prorated taxes and insurance not included in the loan costs, document preparation, delivery and recording costs, notary fees, any inspection fees not paid for at the time of service.  These could total about one and one half to two percent of the purchase price. Your Realtor can help you get a rough estimate of these costs depending on the offer you want to make.

I have not tried to give you a detailed itemization of every single cost that might arise, but this should give you a general idea of what these closing costs are buying you.

An important thing I want to stress is that your closing costs may be one issue that could be negotiated with the seller.  In your offer, you might ask seller to pay certain charges or to pay a certain dollar figure toward your costs or a percentage of the purchase price toward them.

Just remember that the seller has his own closing costs and is paying all commissions, so they will be looking for the cleanest offer.  If your offer asks him to pay all of your costs and someone else offers the same purchase price but will pay more of their own costs, he will likely choose to accept the other offer.  So your offer should be drafted carefully and thoughtfully. 

If the property has been on the market for awhile with no offers, it may be easier to ask for more of your costs or simply to offer a lower purchase price and pay your share of closing costs.  Each situation is different.  Your Realtor will help you make your decisions.

Also, if you are currently paying rent, it may be costing you money that you will not be losing if you own your own home.  Your loan payments will begin to increase your equity, and you will receive tax benefits as a property owner, among other financial benefits.

So your first step should be to meet with a lender of your choice to see how much house you can afford and how much cash you will have to have available.  If you have a Realtor in mind that you would like to use, that person may be able to recommend several lenders from which you can choose if you wish.

This is an adventure you will enjoy and you will be very happy that you embarked on it if you find a Realtor who can walk you through it and remove the fears.

 

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Susan Neal
Realtor/ Broker
Century 21 Noel David Realty

Full time real estate services in Fair Oaks CA, with friendly professionalism, 30+ years experience.
I work hard to give my buyer or seller a low-stress transaction.

"Happy clients make me happy."

 

For all your real estate needs or questions, call me at (916)705-8951or visit my website at www.SusanNealFineProperties.com.