Important Things to Know About
- Certified funds at closing
- Do not move funds around without notifying your lender
- Homeowners Insurance
- What is a good faith estimate and what is its purpose?
- What are pre-paids?
- What is an escrow account?
- Understanding Truth In Lending vs. your actual note rate
- Do you know why the lender has suggested you go with a particular loan program?
- Locked rate vs. Daily rate
- The difference between discount points and origination points
- Zero Point Loans
- Zero cost loans
Certified funds at closing
Most states require that you have "good funds" at closing. The funds you bring to closing for your down payment and closing costs must be in the form of a cashiers check, bank check or wired funds from your savings, checking or investment accounts.
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Do not move funds around without notifying your lender
Lots of clients think that if the money is in the bank, why does it matter to the lender what they do with it? Believe us, they do! The underwriter's job is to make sure you have enough funds to close and also to make sure you haven't received a loan or a gift that the underwriter doesn't know about. The underwriter checks by looking for any large deposits which may suddenly appear in your accounts. The underwriter will also track the funds to the closing table to make sure the funds that were verified are the ones that are actually being used. This can become a nightmare at closing and causes tremendous frustration to everyone involved, especially you, the client. PLEASE ASK BEFORE YOU MOVE FUNDS!
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Homeowners Insurance
You must have homeowners insurance before your lender can draw loan documents. The lender needs to verify that you have enough fire insurance coverage to protect their interest in your property. You need to decide what insurance company you want to use and let your lender know as soon as possible. Oftentimes this can be overlooked and it doesn't become a problem until the loan documents are starting to be drawn and the closer discovers that there is no insurance. Your insurance premium is usually collected at closing. An estimated premium is disclosed on your good faith estimate.
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What is a good faith estimate and what is its purpose?
The good faith estimate is a disclosure required by law to be sent out to you three business days from the date of application. Most lenders are happy to provide you with the good faith estimate before you make loan application. The good faith estimate gives you the closing costs and pre-paid items associated with purchasing or refinancing a property. These charges include estimated costs charged by the lender and the Title Company. The monthly payment including taxes, insurance, and mortgage insurance (if any) is also disclosed.
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What are pre-paids?
Pre-paid items are not a cost of the loan but they are the monies which set up your tax and insurance escrow accounts. They pay interest from the date of closing until the first of the month. They feel like closing costs because it is still money you have to come up with in order to close on your house. Your good faith estimate will disclose these costs to you so you can be prepared for the total amount you need to buy your home.
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What is an escrow account?
If you are planning to put less that 20% down on your home, then you will most likely have an escrow account. The escrow account is to used to set aside money to pay the lender, monies that will pay your annual homeowners insurance bill and your annual or semi-annual property tax bill. The good news is that you won't be hit with large bills throughout the year that often can surprise homeowners. The bad news is that you have to pay enough pre-paids at closing, (see above), in order for this all to work. The requirements for escrow accounts differ from state to state when you are putting 20% or more down on your home. You need to ask your lender about each particular state's requirements.
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Understanding Truth In Lending vs. your actual note rate:
The Truth in Lending is a required government disclosure required to be sent out from the lender to the borrower three business days from the date of application. Its purpose is to disclose to you that the loan you are getting is costing you money. The Truth in Lending form shows you the annual percentage rate on the loan, factoring in some of your closing costs and pre-paids you will pay on your loan. In order to get the costs of your loan into an annual percentage rate, they must subtract the cost of your loan from the amount of loan you are applying for. The result is your annual percentage rate is always higher than your note rate and the loan amount you are asking for appears to be lower. Often when borrowers receive this in the mail they feel like their loan officer has not been honest with them. If you have any concerns you should contact your lender.
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Do you know why the lender has suggested you go with a particular loan program?
Sometimes borrowers get so excited about buying a home that they don't understand why or remember why they are going with a particular loan the lender has suggested. It is your right to understand. If you are not sure or do not feel comfortable with your understanding, ask more questions! It can be confusing to the borrowers why they may need to go with an FHA loan versus a conventional loan, why they need a co-signor, why they need to put more money down, or why they have to pay a higher rate or closing costs. YOU SHOULD FEEL COMFORTABLE WITH THE ANSWERS TO YOUR QUESTIONS!
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Locked rate vs. Daily rate:
Your loan is not locked until you have told your lender to lock it. Sometimes borrowers think this happens at the loan application and that the rate the lender pre-qualified them at is the rate they are going to get at closing. DO NOT ASSUME YOU ARE LOCKED. ASK! This is especially important because some lenders quote lower rates than the current market in order to get your business. Lock-in periods are typically 15, 30, 45, 60, or 90 days. The shorter the lock-in period, the better the rate. The reason is that the lender has less risk of market fluctuations with shorter lock periods. Our rates usually change once a day but in a volatile market they can change up to 3 times a day.
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The difference between discount points and origination points:
Loans are normally quoted "at par", which means one origination point and no discount points. An origination point is 1% of the loan amount. Discount points are additional points paid in order to buy down the rate below the current market rate. Borrowers don't typically pay them unless they are buying a new home and a builder has given them money towards closing costs. Sometimes, the borrower is relocating and the company they work for may give them additional money for closing costs and discount points. The option to buy down the rate is always there, but usually borrowers don't want to pay any more than they have to in closing costs.
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Zero Point Loans:
These are loans that are priced in such a way that you don't have to pay an origination fee. This is a great option to borrowers who want to save money in closing costs and don't mind paying a little more in their interest rate.
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Zero cost loans:
This is another option for borrowers who don't have or want to spend a lot of money to get a loan. The loan is priced in order to avoid the origination fee and closing costs. A perfect example of this would be someone who knows that the loan they are getting is not a loan they are going to keep for long. They will be doing another loan in the near future and don't want to pay closing costs both times. It is also a great option for people with limited cash reserves who need this option in order to buy a home.
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