How to Avoid Paying Any "B.S." Mortgage Fees When Buying a Home!
At Michigan Mortgage Solutions, we get a lot of phone calls from home buyers wondering if the lender they’re working with is giving them a good deal. The problem with answering that question is that it’s 100% dependent on the accuracy of the numbers used to create the “Good Faith Estimate” within your mortgage application.
The “Good Faith Estimate” will include all of the costs associated with the mortgage as well as the estimated cash needed to close. However, the Good Faith Estimate does a poor job of itemizing the costs by itself, so it’s best to also ask your lender for a “Mortgage Cost Worksheet” or a “Fees Worksheet” as they are much more detailed.
The worksheet will break the mortgage costs down into two categories which are “Prepaid Closing Costs” and “Lender Closing Costs”. At closing, the “Prepaids” will be identical from lender to lender because these costs are all based off of the same numbers. “Lender Closing Costs” can vary widely from lender to lender. These are the costs above and beyond your required down payment.
One thing to keep in mind is that it really doesn’t make sense to shop lenders until you have a property under contract. The reason being is very simple, without a specific property in mind, every number becomes an estimate. Comparing one fictitious estimate against another will do you no good in determining who can offer you the best outcome.
Also, make sure to work with someone that you know, like and trust. Buying a home is typically the biggest financial decision you’re going to make and if something doesn’t feel right or you’re not getting the service you feel you deserve, it’s best to find a lender that meets your needs. You are not obligated to do business with any lender and you should go into the transaction believing that the lender is there to earn your business.
Prepaid Closing Costs
“Prepaids” include items like establishing your escrow account, paying tax prorations, homeowners insurance, and any prepaid interest. Once you find a home and have it under contract, it’s really easy for your lender to get the correct property tax information as well as for you to get a quote on your homeowners insurance. Once these correct numbers are obtained it simply comes down to doing the proper math.
The problem is that most lenders fail to use the correct numbers and often the correct math when estimating these costs. In fact, the majority of them don’t even include the years worth of homeowners insurance that you're required to pay at close. I’m not exactly sure why this is but I believe it’s a combination of poor training and simple laziness. The “Prepaids” have a huge impact on how much cash you’ll need to close so it’s very important to have these numbers dialed in from the start to avoid any nasty surprises at the closing table.
Plus, when you know the numbers, you can craft a much better offer because you’ll know exactly how much you’ll need to ask for in seller’s concessions to make everything work. This is key to obtaining a smooth and stress free closing.
Quick Tip - If you are shopping your mortgage lender against the competition, DON’T consider the “Prepaids” within the comparison. Even though these numbers are very important to your out of pocket costs, they will be identical from lender to lender at the closing table. Don’t be fooled by someone claiming to give you a better deal because their “Prepaids” are lower.
Lender Closing Costs
“Lender Closing Costs” are what you should be paying the closest attention to when comparing lenders because the majority of these costs are controlled by the lender. I’ve broken these costs down into two categories; Lender Fees and Title Company Fees. Lender Fees and Interest Rate are what you should be comparing between lenders as the Title Company Fees should be identical across the board.
These costs include but are not limited to the following;
Origination Fee - This is compensation paid directly to the lender / broker
Application Fee - This is compensation paid directly to the lender / broker (We Don’t Charge This Fee)
Appraisal Fee - This is paid to a licensed appraiser to determine the value of the home
Processing Fee - This is compensation paid directly to the lender / broker (We Don’t Charge This Fee)
Underwriting Fee - This is a fee paid directly to the lending institution originating the mortgage
Admin Fee - This is compensation paid directly to the lender / broker (We Don’t Charge This Fee)
Credit Report Fee - This covers the cost of your credit report
Tax Service Fee - One time fee to allow lender to verify and update property tax information
Flood Cert Fee - One time fee to allow lender to determine if home is in a flood zone
Title Company Fees
Closing Fee - Paid to Title Company for completing the closing
Title Insurance - Paid to insure that the title on the home is clear of liens (Percentage of loan amount)
Recording Fees - This is paid to the county recorders office to record the mortgage and deed
Condo Questionnaire - This is only needed if you are purchasing a condo
Quick Tip - If you are shopping your mortgage lender against the competition, DON’T consider the “Title Company Fees” within the comparison. The Title Company is chosen by the Listing Agent and the buyer is subject to whatever that title companies closing fee is. Title Insurance is a percentage of the loan amount so at close it will be the same from lender to lender. Recording Fees are based off of the number of pages that are recorded and therefore will be identical from lender to lender.
Now that you have an idea on the costs associated with a mortgage, I’d like to go into more detail on which ones are negotiable and therefore comparable. First off, the “Prepaids” and “Title Company Fees” are pretty much non-negotiable because they are almost always a fixed cost.
Negotiable Lender Fees
When it comes to “Lender Fees” there are four that are negotiable. These include the “Origination Fee”, “Application Fee”, “Processing Fee”, and the “Admin Fee”. Of the four fees, the “Origination Fee” is really the only fee that I don’t consider a "B.S." Fee and I’m sure you can guess what I mean by "B.S."...lol! The reason I believe the other three fees are "B.S." is because we never charge them so I don’t think you should have to pay them.
The “Origination Fee” isn’t a "B.S." Fee because in certain circumstances a borrower can get a lot better interest rate by paying an “Origination Fee”. At Michigan Mortgage Solutions we go over multiple scenarios demonstrating the benefits of each and leaving it up to our client to decide which is best for them. With that being said, the majority of the loans we close do not include an origination fee.
When comparing lenders, you must also consider the interest rate as well as the costs. Interest rates change on a daily basis and sometimes several times per day. For this reason, the interest rate that you are quoted from any lender can change until the rate is locked-in. Most lenders provide their “Good Faith Estimates” based on that day’s rates so comparing them against each other still makes sense even if the rate is not locked in yet.
However, lenders also provide a lender credit in some cases to help the borrower cover some of the costs. In most cases, a lender credit is the result of offering a slightly higher interest rate. It’s very important for you to determine if you are getting a lender credit when comparing lenders because this will affect the closing costs as well as the interest rate.
Out of Pocket Costs During Purchase Transaction
When you purchase a home, you’ll incur some out of pocket costs prior to closing. These costs include your Earnest Money Deposit, your Appraisal Fee, a Home Inspection if desired, a Home Warranty if desired, and one years worth of Homeowners Insurance if it’s not included within your “Prepaids”.
Earnest Money Deposit - This is a deposit that you put down when your offer is accepted on a home. Usually this deposit is around $1,000 and it will sit in escrow until closing and will be applied towards your down payment and closing costs.
Appraisal Fee - After completing your mortgage application you will need to pay for an appraisal of the property to ensure that it is worth what you are offering to pay for it. The lender will only lend you up to the appraised value minus your required down payment. This Appraisal Fee is collected by an Appraisal Management Company, AMC for short, which is a third party that manages licensed appraisers. Lenders have no direct contact with the appraiser and must handle everything through the AMC. Lenders have no control over this fee and it’s $350 to $525 depending on the type of mortgage it is.
Home Inspection - A Home Inspection is seriously recommended when buying a new home because it will warn you of any current, as well as potential issues, you’ll be facing as the new owner of that home. This is optional but it could save you from a financial disaster. An inspection can range from $250 to $500 depending on whether well and septic inspections are required.
Home Warranty - A Home Warranty is usually a year long warranty that covers the mechanical systems as well as the appliances included in the purchase of your home. They allow new homeowners to avoid paying huge replacement costs by fixing or replacing covered items for a small service fee of $75 which includes parts and labor. These warranties usually cost around $500 and some foreclosures actually include them as an incentive to purchase.
One Year of Homeowners Insurance - When purchasing a home, the lender will require you to pre-pay for the first year of homeowners insurance to guarantee that their investment is insured and protected against disaster. If your lender does not calculate this as part of your “Prepaids” this will be in addition to your closing costs. Depending on the size and make of the home as well as the location and the borrowers’ credit score, homeowners insurance can range from $600 to as much as $2,500 per year. It’s best to get a quote as soon as you find a home.
Now that you have a better understanding of the fees associated with your mortgage, feel free to call us today at (248) 674-6450 to get pre-approved. If you're interested in more information I believe you may find the following articles useful;