Part two in our series about understanding the loan estimate will delve into page two of the loan estimate. This is part two of a three-part series, Keys to Understanding the Loan Estimate. (For part one, click here.)
Page two of the loan estimate is broken into three sections: the loan costs, other costs, and calculating your cash to close. This form should be used for comparing lenders, and the only sections to be concerned with are sections A, B, and J (lender credits). Everything else on the form is going to be the same.
Loan Costs
Loan costs are broken out into origination charges, services you cannot shop for, and services you can shop for.
The CFPB says the best way to tell if you have a competitive loan offer is to compare loan estimates. This is 100% true. Loan estimates do not lie. Now, if you're looking at a loan estimate, this is probably not the first time you're seeing numbers from your lender. You may have seen numbers from many lenders, but it hasn't been a loan estimate. You have probably been looking at closing costs worksheets. This is the preferred method that lenders like to use when giving numbers to people because a loan estimate means you've actually applied. So, comparing multiple loan estimates means you've actually applied with multiple lenders, which is typically a no-no. You can do it, but most lenders don't like to do it just for comparative purposes. They'd rather issue a closing costs worksheet.
Origination Charges
The first thing to check on this page is if your loan includes points. If it does, it means that you're typically buying your loan interest rate below market. The rest of those application fees you don't see anymore. A lot of these are state-dependent, but more than likely, the rest of the charges—underwriting, processing, whatever—are going to be lumped into one fee called an origination charge.
Services You Cannot Shop For
Section B are services you cannot shop for. Now, that's kind of rude, right? Well, yes, these are services, and you are not allowed to shop for them. That's because the lender is the one that has this agreement with these third parties, whether it's an appraisal, credit report fee, flood, or all the other little fees that you must pay to get a loan. These actually can differ from lender to lender, which is why this section should be one of the items you need to be looking at when comparing lenders, but they're not going to vary much.
Services You Can Shop For
Thirdly, are these services you can shop for. These are good to review because these are typically title company fees. If you're buying a house, your realtor is going to give you a title contact and refer somebody that they have worked with. That's totally fine. Again, you're not going to see a massive variance here, but these are services you can shop for.
So, if you total all the loan costs (again, not lender costs but the cost to get a loan), you will end up with a total in section D, total loan costs.
Other Costs
The second section is other costs, which are broken up into four sections.
Taxes and Other Government Fees
The first section is taxes and other government fees. These are the taxes you pay when you record the mortgage. On a purchase, you will have to transfer taxes because you're moving from one owner to the next. For a refinance, you will have to pay those recording fees again in many states across the country.
Prepaids
The following two sections, prepaid and initial escrows, are not really closing costs. Prepaids are monies that you prepay. It's your money going to pay for things that you, the homeowner, need to pay for anyway.
The main one is your homeowner's insurance premium. Now you're probably going to look at this and say, “wait, wait, six months?” On a purchase, it's going to be 12 months. You always have to have a full year paid up when you do a new loan. If you didn't have an insurance policy on a particular house, it's going to be 12 months. If you're refinancing halfway through the year, your lender is going to want to know that you have a full year paid in advance. That's where that money comes in.
Prepaid interest depends on the day of the month that you close. So, if you close the sale on the 15th of the month, your lender is going to collect interest from the day that you close through the end of that month. Then they're going to skip a month, and your mortgage payment will be due the following month. As an example, say you were closing on July 28th. You would have three days of prepaid interest in July. You will skip August, and your first payment will be due on September 1st.
Taxes and Escrow
The next part is taxes. Make sure your taxes are accurate. This is the escrow that your lender collects at closing to make sure they are going to have enough “padding” (money) to pay the insurance bill and the tax bill.
Owner’s Title Policy
Title policy is optional and it's going to be a pretty big number when you purchase a house. On a refinance, those are typically reissued, so there won’t be a charge. Lenders insurance is always required. Title insurance for owners is optional. I'm not a huge fan of owner title policies, unless you're buying a new construction, a foreclosure, a house that just had a lot of work done/major renovation, or if you bought in some area that you have to really worry about. But otherwise, in 26 years of doing mortgages, I’ve never seen an owner's policy be enacted to protect the homeowner. It's peace of mind, so it's still not a bad idea to get it. I just, personally, have not gotten it in the past.
The last item that is going to be important for you to be watching for when you're comparing mortgage rates is any lender credits you're getting. It will be listed in the lender credits section. Also, make sure that the lender credit that was shown to you on your closing costs worksheet appears on your loan estimate. If it doesn't, it was never there in the first place.
Cash Needed to Close
Your cash needed to close will be the number that comes from page one of the loan estimate. This is the amount that you will need at closing. It has everything in there—your deposit (if you made an earnest money deposit for your home purchase), any seller concessions, and any other credits that will be given to you at closing. It's all in there. So if this number is wrong, raise a red flag, and deal with that with your lender right away.
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