Creating the Dream Loan Estimate

Dear Happy Home Buyer,

If purchasing a home is among your goals for 2025, here's a useful guide. It's beneficial to begin your home search by setting a budget. While there are numerous loan options available in the mortgage market, financing 100% isn't always feasible. It's more likely that you'll need to make some contribution on the closing day.

Some people prefer to use a fixed dollar amount, while others opt for a percentage, such as planning their home price limit with a 20 percent down payment. This can sometimes be confusing since the down payment is just the beginning. In addition to the down payment, there are also closing costs and prepaid expenses. The down payment, closing costs, and prepaids together represent the total cost to purchase the home on the closing day. The answer to the total out of pocket will vary depending on the property's location, the lender, and the loan type.

As interest rates and home prices continue to reach all-time highs, consider these strategies to reduce your out-of-pocket expenses on closing costs. Loan officers and realtors can be valuable resources for budgeting in this area, as closing day fees can range from as low as 2.5% to as high as 8% of the final sales price. Here are some methods to help you decrease closing costs.

In the process of qualifying, your lender will provide you with a Loan Estimate, previously called a Good Faith Estimate, detailing your anticipated closing costs. The challenge is that the various fees on this Loan Estimate can be perplexing. Below, we clarify the purpose of the customary fees.

If you have your loan estimate handy, please grab it and turn to page 2.

Loan Costs, A. Origination Charges

Points: The fee you might incur to reduce your interest rate. Expressed as a percentage, for instance, 1% of a $100,000 loan equates to $1,000 (1 point).

Loan origination fee: A fee charged by your lender to cover administrative costs for establishing and processing the mortgage, which can be either a flat rate or a percentage of the loan amount.

Application fee: The expense incurred when submitting an application online, by phone, or in person. This may also be referred to as a "processing fee" or "administration fee."

Processing Fee: Expenses incurred by lenders for reviewing documents, verifying employment, and coordinating with the title/escrow/attorney during the loan process. If the lender needs to translate foreign documents within the processing scope, outsourcing the translation and valuation of these financials may necessitate additional time and lender-related costs.

Underwriting Fee: This is a direct fee charged by the lender to you for the underwriting process, which occurs after your documentation is reviewed and confirmed to comply with investor guidelines.

Commitment Fee: In certain states, a fee may be required to issue the loan approval. Occasionally, this replaces the processing fee.

Loan Costs, B. Services You Cannot Shop For

Appraisal Fee - The expense for the appraiser selected by the lender to assess the home's value.

Credit report fee: A lender direct expense related to ordering a soft and hard credit report through a credit repository.

Flood Certification/Flood Life of Loan/Flood Determination: Fee paid to the company responsible for determining if the property is located in a flood zone and for ongoing monitoring of changes in flood maps.

Tax service fee: Charges paid to a service provider that oversees your property tax payments and notifies the lender about any tax-related problems.

Rate Lock Fee / Float Down Fee: A charge to secure the rate provided by the lender for the requested period. If your lock is broken during the application process, the lender may charge a fee to re-lock at current rates to break the original rate lock.

Loan Costs, C. Services You Can Shop For

Title search: The fee for the title insurance company to conduct a search on the home's title.

Title insurance: Covers the expense of title insurance to safeguard your lender's lien priority on your property.

Pest inspection: Cost of a home inspection to ensure the lender that there are no significant pest-related problems.

Courier: Third party costs to the lender's expenses in dispatching official documents through a courier or messenger service.

Survey: An evaluation of a property that discloses boundary lines, gas lines, roads, walls, easements, encroachments, and enhancements.

Attorney, closing, and settlement fees: Legal fees related to the review of documents and agreements, along with escrow fees.

Other Cost, E. Taxes and Other Government Fees

Government recording fee: The charge incurred to formally document the transfer of home ownership with the government.

Transfer taxes: A government-imposed fee based on the mortgage amount or sales price for property transfer.

Other Costs, F. Prepaids

Prepaid interest: Refers to the pro-rated interest that accumulates on the mortgage from the settlement date until the beginning of the first complete mortgage month. This cost is determined by your interest rate and the daily per diem interest expense multiplied by the number of days left in the closing month. Think of it as similar to paying rent for a partial month if you move in after the first day of the month.

Mortgage Insurance Premium: For FHA loans with a down payment of less than 20%, you are required to pay the mortgage insurance premium, which includes an Upfront Mortgage Insurance Premium at closing as well as a monthly fee.

Prepaid homeowner’s insurance: Usually, your insurance for the upcoming twelve months is paid ahead of time.

Other Costs, G. Initial Escrow Payments at Closing

Escrow for property taxes, insurance, and mortgage insurance: This isn't an overcharge from the pre-paid expenses in "F." but rather the necessary advance based on the schedule of taxes and insurance, considering the close and due dates. If you're escrowing for these costs, the lender will mandate a minimum number of months to ensure they can be paid in full by the installment date.

Other Costs, H. Other

Owner’s title insurance: an optional expense for title insurance that safeguards your entire home value.

Don’t worry. Now that we’ve covered some of the closing costs you might encounter, we have six tips to help create your dream loan estimate. Here’s our guide on how to lower closing costs:

Loan Estimate Settings

Lenders must provide a loan estimate once you've applied with a specific property in mind. Although these estimates are preliminary, it's crucial to review the document with your lender. Inquire about the range of fees and whether all of them are necessary. Every fee should have a purpose and be standard for loan amount type. If something seems off, request a written explanation from your loan officer to identify unnecessary or inflated fees. Be cautious of fees with similar names, as they might indicate double charges for the same service. Sometimes a processing fee is equivalent to a commitment fee, but you shouldn't have to pay for both when there are other similar fees in section "A." In the past, the format was based on the lenders' "Good Faith Estimate of Settlement Costs." GFEs were unregulated, but after reforms, all lenders had to adhere to the same rules, resulting in the current Loan Estimate format. While fees aren't uniform, the situation has improved over time. Nonetheless, reviewing the loan estimate, asking questions, and shopping around can help you maximize your savings.

Don't Sleep On Shopping!

Closing costs represent a major financial consideration when purchasing a home. The fees associated with closing vary based on the parties involved. Lending fees, in particular, fluctuate depending on the program and your eligibility criteria. It's always advisable to compare options to ensure you receive a fair interest rate in relation to the fees. You can also request a lender to match lower closing costs based on written estimates. In addition to obtaining quotes from different lenders, you can seek quotes for other third-party services, such as a home or pest inspection, attorney, or title fees. Refer to section "C." for Services You Can Shop For. If you've been through this process before, consider reconnecting with parties you previously worked with. Rely on recommendations for a lender, realtor, or other professional to secure the best costs for the necessary services.

Touch Base with a Few Lenders

Once you understand the fees projected by the lender, compare them with those from other lenders. Gather more loan estimates and ask each lender to match or beat these fees. It's best to get your Loan Estimates on the same day, as rates and origination costs related to the rate can vary with market conditions. Also, ask if a float down option is available and who pays for this feature. Keep in mind that mortgage rates aren't directly linked to Fed funds, so even if the Fed doesn't take action, it doesn't mean mortgage rates haven't shifted.

Sweet Talk The Seller

In a Buyer's market, you might be able to negotiate with the seller to assist with your closing costs. This assistance, referred to as seller's concessions, can lower or completely cover your closing costs and prepaids, depending on the seller's contribution. Keep in mind that this affects the seller's net profit, and in a Seller's market, such help may be minimal or unavailable. Stats on concessions by frequency and amount are often available online so dig into the data.

Points Vs. Equity

Depending on the interest rate environment and your tax strategy, it might be beneficial to pay for a point. However, before enthusiastically buying down the rate, consider the recovery period and how long you plan to keep the home. If you intend to sell in a few years, purchasing points may not be worthwhile. If the future suggests cheaper money, now might not be the best time to invest in points. While points can lower your rate and improve your monthly payment, consider using your hard-earned money for the down payment, especially if your mortgage includes mortgage insurance. Most homeowners aim to eliminate M.I. as quickly as possible. If you're uncertain about how long you'll stay in the home or maintain the financing, explore other options to reduce monthly payment. If you're buying in a low-interest-rate environment, you probably don't need to pay extra for points to lower your interest rate. Each point costs 1% of the loan amount, so paying for points can quickly add up - eating into your capital & increase your closing costs. For each point purchased, you'll need to keep the loan longer to break even.

Appraisal: Online Model vs. Full Monty

Due to the remarkable increase in home prices over the past four years, it's become common for certain loans and properties to qualify for an appraisal waiver. If one lender offers this, it's likely that others will too, as it's typically an investor feature based on the property location, credit score, and amount of down payment. If your lender proposes a drive-by approach or online valuation, it can save you both time and money. These options are available, but you should consult with your realtor to determine if it's the best choice. Similar to comparing loan estimates, it's strongly advised to compare recent sales of similar homes to your prospective property. This will help you determine whether you've found a great deal or an overpriced property. The appraisal fee might be invaluable.

Sim Sim,

Mardi Jinn