Navigating the Loan Estimate: Page 2
Closing Costs Breakdown
What’s on Page 2 of your Loan Estimate?
Page 2 of the Loan Estimate contains a lot of important information about the costs of your loan. But as the name suggests, most of these costs can only be estimated at this point in the process. Your final Homeowners Insurance and title costs will be determined by the provider you choose. Your property taxes, including what is needed for prepaids and escrow, is determined by the county, not the lender.
The most important thing to remember when comparing official Loan Estimates across lenders is that only the interest rate, Origination Charges, Lender Credits, and Mortgage Insurance (if applicable) should factor into your cost comparison. All other fees will be the same at closing regardless of the lender you choose. Below, you will find an example loan estimate and details of each section on page 2.
Origination Charges are the fees charged by the lender or broker. When comparing lenders’ Loan Estimate documents, you should pay attention to the fees in this section, as they are specific to the particular lender or broker who issued the Loan Estimate. All other fees are third-party and should not be taken into consideration when choosing a lender, since they are not lender specific.
Some of the most common names for the fees you might see listed in this section are Application fee, Processing fee, or Underwriting fee. These fees represent the internal costs the lender incurs for consummating the loan. At Morty, these fees are built into the interest rate, so you will not see any of these line items in section A of our Loan Estimates. The only line item you will see is for discount points (if applicable). Points are a fee you pay for a particular interest rate. If you do not want to pay points, make sure to discuss your loan options with your Loan Officer.
One of the most important things to note about this section is that once your rate is locked, the lender is legally bound to the fees shown in the section. These fees can only change if there is a valid change in circumstance such as a change in home value, purchase price, or loan amount.
Services You Cannot Shop For
These required fees are associated with services that are standard for any mortgage. They are “not shoppable” by the consumer because the report/service provided relies upon a qualified third party to complete. Due to risk components and third-party approval requirements, the lender gets to choose which companies are used to perform these services. Regardless, the variance of the total costs in this section across lenders is fairly small and these fees are fairly standardized.
Service You Can Shop For
This is almost always reserved solely for title-related fees that are charged and performed by a title provider. This service is required by all lenders but can be performed by any title provider. Some states require the use of a title/settlement attorney (attorney states). If you want to learn more about selecting a title company in your state, check out Selecting Title.
Many times on purchase transactions, Realtors will recommend home buyers to a title provider that is local. We typically do not know the exact breakdown of these providers’ fees, so we use estimated title costs from our lender’s preferred partners.
- Lender’s Policy
- Settlement [Closing] Fee
- Attorney Fee – Replaces the Settlement/Closing Fee in Attorney States
- Survey – Many times this fee is not required. Some providers include it in initial quotes and remove the fee once they complete their preliminary title work.
- Misc. Fees – Most title providers charge a handful of other fees in addition to the core fees (Lender’s Policy & Settlement/Closing Fee). There is little to no standardization here and varies widely across lenders because all lenders use different title providers to estimate costs up-front.
Taxes & Government Fees
These fees are imposed by the state or county you are purchasing in and are not imposed by the lender. These are estimates and will be identical across all lenders at closing. To receive a more accurate number, contact your local tax authority or ask your real estate agent for more information about property taxes in your area.
Recording Fees are standard fees associated with the process of recording the transaction and transfer of ownership within the public records monitored and maintained by the state, county, and local municipality. The cost for this ranges from $100-$500 and is dependent upon the property location.
These are state, county, and local/municipal taxes directly associated with the transfer of real-estate ownership between two individuals within their jurisdiction.
Depending on the state and purchase contract, certain components, if not all, of the necessary transfer taxes may be covered by the seller.
When applying with Morty, if you have indicated a request to lock but have yet to provide a purchase agreement that details which party is responsible for transfer fees, the transfer fees will be placed on the buyer as a precaution to avoid under-estimating the final costs in the event the buyer is responsible for payment.
Section F – Prepaids
Homeowners Insurance Premium (HOI)
HOI is required by lenders to insure the physical property of the home because the mortgage is secured by the property. Therefore if the property is damaged, the lender needs to recoup any losses that may impact the value of the home and in turn the mortgage/funds lent.
For Purchase transactions, the prepaid amount for HOI is always the first year (12 Months). It will be up to you as the borrower to choose your Homeowners Insurance company. So the amount on the Loan Estimate is just an estimate until you secure a policy.
- The calculation for prepaid interest is the cost of interest from the closing date to the end of the month. Check out the formula:
- Prepaid Interest = [(Loan Amount x Interest Rate) / 360] x Days left in the month
- You will pay the prepaid interest for the period covering the closing date to the end of the month so that the following month can be covered by the first mortgage payment which is backward-looking (arrears).
- Example: If your closing date is September 15th. You will pay prepaid interest at closing to the lender for the 15th to the 30th of September (the lender will never lend for free). The first mortgage payment can then be made on November 1st to cover interest costs for the full month of October.
Property Taxes – See Section G
Initial Escrow Payment at Closing
If you do not elect to waive your escrow account, there will always be some non-zero value in this section. Mortgage servicers that collect your monthly mortgage payments will collect principal and interest on behalf of the lender and also collect property taxes on behalf of the local tax authority and HOI payments on behalf of the HOI provider. So as you make your monthly payments, your escrow account is constantly being replenished so the mortgage servicer has enough funds in the account to pay for them on the predetermined due dates.
As previously noted, property taxes are set by the county, not the lender. So the amount in escrow should not factor into your decision when choosing a lender.
Escrow payments collected at closing consist of two primary components that are summed together in the escrow costs at closing. (1) the escrow cushion, and (2) the escrow deficit.
The typical amount mortgage servicers like to hold in an escrow account as reserves are ⅙ the annual premium. Since ⅙ of 12 months is 2 months, the escrow cushion for HOI & Property Tax is 2 months’ worth of payments for each. These are both collected at the time of closing if the borrower is going to have an escrow account.
The minimum amount of funds on a standard mortgage that are collected at closing in Section G should be 2 months of HOI & 2 months of property taxes. If an escrow deficit exists, then there may be additional months needed.
- Property Taxes – Deficit is dependent upon the property address and your closing date
- Real Estate taxes are set by local taxing authorities. The due dates for taxes are also set by these taxing authorities and do not take into account the transfer of real estate ownership nor the closing on a new purchase. This is why there is in many cases an escrow deficit the mortgage servicer faces at the time of closing.
- Collection amounts and dates vary across states and localities. The most common collection structures are annual, semi-annual, and quarterly.
- Rule of thumb for calculating total amount collected upon due dates. Divide annual real estate tax by 12 & multiply by:
- 6 if collected twice in the year
- 3 if collected quarterly
- Some states collect different amounts in the Summer vs. Winter. This is most commonly due to what is often referred to as a “School Tax”
- Once the (1) tax due dates and (2) amounts due have been determined, the deficit can be
Please note that Morty (and most lenders) default to combining the Escrow Cushion & Escrow Deficit amounts in the escrow account. The deficit is technically a prepaid cost so sometimes it is included in Section F.
For current year taxes, the lender may display prorated taxes between buyer and seller as a combination of Prepaids, Escrows, and “Adjustments & Other Credits” (seen in calculating cash to close).
The section includes an estimate for an Optional Title Owner’s Policy. When deciding if you would like to purchase an Owner’s Policy, it is best to consult your title provider.
Total Closing Costs
- “D+I” is the sum of all closing costs combined from all previous sections.
- Lender Credits: Lenders offer credits for interest rates that are “above market” in the sense that the base rate the consumer is receiving is above the Par Rate. Lender credits would also be listed on page 1 of the Loan Estimate.
- If the mortgage rate does not have discount points there should almost always be a nonzero value offered as credits.
- There should never be lender credits if there are discount points
- Credits act as a rebate and reduce closing costs. The net balance between fees in section A – Lender Credits is a good way to review options across lenders (as long as interest rates and loan terms are the same)
Calculating Cash to Close
Closing Costs Financed (Paid from your Loan Amount): Common on Government Loans (FHA & VA) where borrowers finance up-front insurance and funding fees associated with closing the loan. Morty does not offer these types of loans
Down Payment/Funds from Borrower: This is the dollar amount of your down payment
Deposit: Frequently referred to as Earnest Money Deposit (EMD), these are the funds that you have already sent to escrow or are planning to send to escrow as a “Good Faith Deposit” to show that the offer at hand is serious. Sellers can keep borrower EMD’s in certain situations, dependent upon purchase contract and can range from $1,000 to $100,000+ depending on the purchase price and transaction.
Funds for Borrower: This section is typically left blank for conventional loans. It would have a value if the borrower were using an external lending party to help cover some of the down payment or closing costs. You will see this most commonly on FHA, Home Ready, and Home Possible loans.
Seller Credits: Sellers can give buyers money back from the proceeds of the sale to help cover some or all of the closing costs. This is typically something that gets included in the offer or purchase contract negotiations. Seller credits cannot exceed total closing costs and cannot be used as a downpayment. They are also often capped at 3% of the purchase price depending on the LTV and loan program.
Adjustments and Other Credits: These adjustments and credits are used to cover prorated taxes between you and the seller. They can be shown as a positive or negative amount to represent if they are to or from you. These amounts are determined by the property’s real estate tax due dates and the contractual closing date. This is not something that is required or directly tied to the mortgage process but commonly gets added on as part of the settlement or closing process and is facilitated by your and the seller’s closing or settlement agents.