Are you a first time home buyer wondering how much you’re being charged on your mortgage? Are you having a difficult time understanding the loan estimate on your mortgage? How do you compare one lender to another by looking at the loan estimate? What is a loan estimate? When Should I received my loan estimate? What is most important about my loan estimate? What’s the difference between closing costs and prepaids? In this episode, we discuss the loan estimate in detail to help you avoid any pitfalls when going through the process of buying a home and so that you fully understand the loan estimate when buying a house to help you become The Educated HomeBuyer.
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Sample Loan Estimate – https://www.theeducatedhomebuyer.com/wp-content/uploads/2023/02/201207_cfpb_sample-loan-estimate_ARM.pdfVetted VA Live Slideshow – https://www.theeducatedhomebuyer.com/wp-content/uploads/2023/02/Vetted-VA-LIVE-EP-01-04.05.22.pdf
Connect with me 👇 Jeb Smith (huntington beach Realtor/orange county real estate) DRE 01407449 Coldwell Banker Realty ➡I N S T A G R A M ➳ https://www.instagram.com/jebsmith ➡Y O U T U B E ➳https://www.youtube.com/c/JebSmith
Connect with me 👇 Josh Lewis (Huntington Beach Certified Mortgage Expert) DRE 01209148 Buywise Mortgage M:714-916-5727 E: firstname.lastname@example.org ➡I N S T A G R A M ➳ https://www.instagram.com/borrowsmartjosh ➡Y O U T U B E ➳https://www.youtube.com/c/buywiseborrowsmart
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For Show Notes, See Below 👇
[00:00:00] Jeb Smith, Huntington Beach Realtor: How do you know how much you’re being charged when you’re going through the loan process? That’s one of the common questions that Josh and I both get when somebody is buying a home. And so today what we’re gonna do is we’re gonna dive into the loan estimate, actually understanding what the loan estimate means, what the numbers on it mean, what you as a buyer should focus on, what is controllable to some extent and what is not.
Because the loan estimate is really, probably one of the most important pieces of the loan process just because it goes over your interest rate, your charges, and it gives you an opportunity to compare one lender to another. So understanding it really works to your benefit. So Josh, This is gonna be a lot on your side because this is what you deal with day in and day out.
So let’s start with an overview of the loan estimate, what is it? Um, and then we can dive into each part of the loan estimate to help our listeners become educated home buyers.
[00:00:58] Josh Lewis, California Mortgage Broker: Jeb. We still have people who will say, Hey, can I get a good faith estimate?
Well, post 2008 required government intervention. Prior to that, we did literally have, and it is what it sounds like a good faith estimate. You were depending on your lender making a good faith effort to accurately disclose to you all of your charges and everything that you will need to bring in at closing.
So, Jeb, what I tell people, there are three things when you walk away from your pre-approval or when you get a property under contract that you really need to understand. So at pre-approval, you need to know, what’s my maximum? What’s the most I could qualify for? So what’s my ceiling on what I could pay for a property?
Then you need to know what’s my monthly payment if I do that, and how much cash do I have to have? For two obvious reasons you need to say, “I’m comfortable with that monthly payment, and yes, I have that money either through my own funds, gift, whatever acceptable sources of funds, I can meet those requirements.”
So the loan estimate’s gonna tell us a couple things. It’s going to confirm the monthly payment, and it’s gonna confirm all of the charges and cash to close. And versus in the past, it was a good faith estimate. So you get to closing… Oops. Instead of $2,000 of closing costs, you have $12,000 of closing costs. “I’m sorry I made a good faith effort, but you’re gonna need to find $10,000.”
Yeah. So now we have a very, very different process. It is a loan estimate. What we’re going to go through is exactly what sections of the loan estimate things are disclosed to you and what that means. So within three days of receiving certain information from you, we must disclose a loan estimate.
So in terms of a purchase, which primarily here on the show, we’re talking about purchases, the one that comes at the very end is a property address. So when we’re looking at it, we use the acronym Aliens in the Business.
It’s a property address, so technically, You’re not required to get a loan estimate until the very end of the process when we have a property address. Now refinance, that’s different, but not a purchase till we have a property address identified you are not required to be issued a loan estimate, but the other things there are loan amount, your income, the estimated value of the property, your names, and your social security.
[00:03:10] Jeb Smith, Huntington Beach Realtor: Well, let me jump in there real quick, Josh. So you said must be disclosed, right? So once I have the address, I’m purchasing a home. It must be disclosed by the loan originator. What happens if it doesn’t? Like what happens? Because you’re talking to people all the time that says, I talked, you know, whatever, I never got a loan estimate. What does that mean? Is there any recourse? Like what’s that process look like?
[00:03:31] Josh Lewis, California Mortgage Broker: So your loan will not fund. No lender will risk closing a loan out of compliance. So within three days of having all six of those pieces of information, I have to disclose the loan estimate to you, and I have to get a signature from you.
99 times out of a hundred, that is done through electronic signatures. So that system says, when I sent you the disclosures and it says when you signed them. So I can show that I sent them within 72 hours. You can sign them later, but at least I have a paper trail of what I did.
Now, if we get to the very end, I try to send this file to a lender. They’re gonna say, “Hey, this is weird. The contract was issued on February 10th and escrow was opened on the 11th and you didn’t disclose until the 15th. Why was that?”
It can be a situation where someone changes lenders midstream, and I didn’t get that information until the 15th, but the lender is going to look at that and make sure that you are in compliance.
So the important part is once we get all six of those items, within 72 hours you have to receive a loan estimate. I can issue one before that. I would more likely issue you a fee worksheet. It’s a simpler, easier document. One page for you to understand all the things that are gonna be charged and get you the same information that we talked about. How much is my monthly payment? What do I need to be prepared for in terms of cash to close?
But as far as the government’s concerned, I have to do it through a loan estimate once I have those six pieces of information. And the key thing for you to know, Jeb, the difference between a good [00:05:00] faith estimate and the loan estimate is the loan estimate sets tolerances.
There are items that are no tolerance. So things that go to me the broker, or the actual lender, or that we control directly. If we own an affiliate. If we own an affiliate that does credit reports, we know what that is, we select the credit report and you can’t shop for that. So there’s no tolerance on those items.
They cannot increase from when we disclose them to you. We also have items that are a 10% cumulative tolerance, so it’s not any individual line item, but any of the items that fall under this bucket of 10% tolerance, it’s accumulative tolerance. I have to be within 10% of my disclosure to you.
So most times what lenders will do, they will over disclose to make sure that between over disclosing plus that 10% tolerance, they’re gonna have plenty of wiggle room to never have a tolerance cure, which is code for lender has to pay the difference because they didn’t accurately disclose to you.
Then we also have items that have an unlimited tolerance, so those are things that you can shop for and that you selected on your own or that are not required as part of the transaction.
So when we go through this and break everything down, I’m gonna go through each section tell you what’s disclosed in it and which of those buckets they fall under. But zero tolerance is anything that lender directly controls and or should 100% know and be able to disclose to you accurately.
10% cumulative tolerance are third party things, escrow, title charges that we don’t control but we should be able to disclose to you fairly accurately. Unlimited tolerance are items that you can shop for and or are not required by the lender.
So when we say these tolerances, Jeb, when do we check these?
We’re going to check at the very end, you get a very similar document to your loan estimate. It’s a closing disclosure. The closing disclosure, reconfirms that we met all of those tolerances, nothing changed, we’re in compliance, and you have to have that document three days prior to consummation of your loan, which is a fancy word for signing your loan documents.
[00:06:57] Jeb Smith, Huntington Beach Realtor: Now, at any point a lender sends me this loan estimate, am I committed to that lender? Do I owe that lender any money if the loan doesn’t close? If something doesn’t happen there, am I obligated to anything by having received this?
Can I receive multiple of these if I’m shopping around multiple lenders? You kind of mentioned comparing lenders a moment ago. If I’m comparing lenders, can I receive multiple copies of these? Should I receive multiple copies of these to be able to compare?
[00:07:26] Josh Lewis, California Mortgage Broker: So, to me, the loan estimate is not the best document for comparison, but the only document really that we can know would be the same from lender to lender would be the loan estimate.
So it’s not a bad idea to get it. Again, I can issue you a loan estimate without a property, without all six of those aliens, information that are in that aliens acronym, but I’m not required to. So I can give it to you at any point.
Again, I and most lenders will give you a fee worksheet again, instead of three pages, it’s one page. Lists everything. We’re gonna go through this. We had someone reach out from Jeb from the show this week and said, Hey, you guys talk about box A. What’s box A? Where do I find it and how do I compare it? Box A is generally where those items that are controlled by the lender and or broker. So that’s the big one.
But all of these have fees that are important, but for the most part, we’re estimating everything outside of box A. Some of the box B items are under our control and we will, we’ll go through that.
[00:08:23] Jeb Smith, Huntington Beach Realtor: Now to circle back, obligation? Anything when receiving this document? Do I owe anybody money? If I don’t close, what happens there?
[00:08:31] Josh Lewis, California Mortgage Broker: No, not at all. And it’s important for you guys to know that as a lender, we don’t get paid… as a realtor, a realtor does not get paid until the transaction closes. So we can go all the way through to the end and the transaction falls apart and not get paid.
Or this can’t happen with the realtor cuz the realtor’s name is on the contract up front. Once the realtor’s name goes on the contract, if that closes, they’re getting paid. You can start with a lender, get three weeks into the transaction and go, “I don’t like this guy. I’m gonna switch to a different lender.” And we did 80% of the work and don’t get paid. So you are only going to pay for the loan when you actually close.
If I have any fees that can be collected upfront and I want to make sure I get them collected upfront, I need to ask you for them. And really the only things to be collected upfront are actual upfront charges, the appraisal. So we can have you pay directly for the appraisal. It’s generally the best way so that you’re not writing a check.
We don’t have trust accounting issues, and that way we can make sure that there’s nothing hanging out there if the transaction falls apart and or you change your mind about who you want to get your loan from. That way we have that covered. The other thing would be the credit report. Credit report until very recently was a $25 to $50 item we would never collect for it upfront.
We had big changes at the beginning of the year here and now those are 70 to $125 a piece. So those can be collected for upfront. When you look and say maybe one out of four people that I talked to will actually end up qualifying and closing for a loan, if you have a hundred dollars credit report on every one of those, we’re 400 bucks in the hole before we ever get to close [00:10:00] alone.
So sort of change the calculus there. But those would be the only two things that you would pay up upfront in terms of getting a loan estimate and comparing. You don’t need to pay anything upfront and you have no obligation when you see those. And people hang, get hung up, Jeb, on going, “well, I don’t wanna sign this. I don’t know that I’m getting a loan from you.”
You’re not signing that saying, I’m getting a loan. You are signing it saying I received these disclosures within the required timeframe.
[00:10:22] Jeb Smith, Huntington Beach Realtor: Good stuff. So, something important to note if you’re listening to this on the podcast, there’s some links in the description of this video where there’s a loan estimate.
There’s also a link to a slideshow as well that kind of goes over each page of this. But understand, if after listening to this it. A bit confused because we’re talking about different letters in the alphabet and what goes under that letter on a form, and you have no idea what that form looks like.
Go click the link in the description of this podcast. Whatever platform you’re listening to, it will be there. It’ll also be on the website, so theeducatedhomebuyer.com. If you click on this show episode, which is season two, episode eight, you’ll be able to find the links there and be able to dive into that loan estimate and listen to it while looking at it.
And it’ll probably help make a little bit more sense for you. And if you’re finding it on YouTube, the links in the description below as well. So, Josh, let’s talk about the boxes, right? The different parts of the loan estimate. You started by talking about box A. Is that the most important piece of the loan estimate in your opinion?
And if so, let’s start there and kind of dive into it.
[00:11:25] Josh Lewis, California Mortgage Broker: So the loan estimate is three pages. For the most part, when we get to page three, you’ll see nothing really important there. Page one has some critical information. When we talked about you need to know three things. What is your maximum you can purchase?
What are the terms of my monthly payment if I get that loan? And then what do I need to be prepared to pay in total cash to close? Page one tells you what the payment is and a few other things. Page two is gonna give you the breakdown of the total cash to close and what goes into that. So let’s start with page one…
[00:11:58] Jeb Smith, Huntington Beach Realtor: Hold on. Before you dive into that, I think it’s important to note as a listener. All loan estimates are the same, right? It’s the same document no matter what state you’re in. It’s a federal form. The only thing that’s different are the numbers that are input into that document.
So understand the loan estimate itself is a template document. It’s just the information going into it is the same regardless of where you’re located. So…
[00:12:21] Josh Lewis, California Mortgage Broker: So Jeb, at the top of page one, it’s gonna just give you some basic information. The date that it was issued, who the applicants, you, are, give you your name and address. The property, if we have a property, it’s not gonna be 1 23 Main Street, T B D. Address.
It’ll have the property address. Has the sale price or the loan amount there. It says the loan term, the purpose, whether it’s purchase or refinance, loan term, meaning how many years, 30 years. The product, whether it’s a fixed rate, you know, a 7/1 arm. It’s gonna have that information, whether it’s conventional, FHA, VA or other. It will have your loan number.
And then most importantly for you, if you have a property, it’s gonna say, with this loan estimate, is my rate locked? It’s a Simple box says no, and that means a lot of these things when we get to Box A can change if the loan is not locked.
If the loan is locked, now your rate and points are locked. And it’s also gonna tell you, how long is my rate locked until. So, Cool, how long is this good for?
If it’s not locked, it’s gonna tell you how long this quote is good for and when it expires. The next section is the basics, your loan terms, your loan amount, your interest rate, and your principal and interest payment.
So let’s go back and look. The government was very concerned that people were being sold loans with just a principal and interest payment, and either weren’t given the taxes, insurance, mortgage insurance, HOA dues at all, or were given grossly inaccurate numbers. So when we look at that, the first three things are just loan amount, interest rate, and principal and interest.
Then it’s gonna tell you, is there a prepayment penalty or is there a balloon payment? I get these questions all the time. It is incredibly rare that you’ll see a prepayment penalty on your vanilla type loans. You’ll see them on unique investment property loans, bank statement loans, debt service coverage ratio loans, but Fannie/Freddie, FHA, VA, USDA, you’re not gonna see a prepayment or a balloon.
So, not a super important detail. Now it goes through projected payments. This is a chart for whatever reason they wanted to show you. What are the payments for years one through seven? What are the payments for year’s eight through 30? So again, shows you principal and interest. Then it has a line item for mortgage insurance, and then it shows your estimated escrow and your total monthly payment.
That is the important one, why they made a point of putting principal and interest up higher, and then the total monthly payment lower? I don’t know, but the total monthly payment is there. You’re gonna see both. For me, most of my clients don’t really care what the principal and interest is. They want to know their total payment that they’re making.
Then below the estimated total monthly payment, it gives you a breakdown of taxes, insurance, and [00:15:00] any other assessments. So it’ll show you, does this include taxes? Is it in an escrow? Meaning is it paid to the lender every month and they pay it, or are you going to pay it?
Again, this comes out of problems with the good faith estimate era when people didn’t know, is this payment I’m being disclosed, does it include my taxes? Does it include my insurance? Do I pay them? I pay them to the lender? Do I pay them individually? Now, it breaks all of that down. The last thing on page one shows estimated closing costs and estimated cash to close.
When we get to page two, Jeb, I’m gonna break this down. I hate what they call closing costs here because it includes closing costs and prepaid items, and it lumps them all together. So when they refer, they being the government, in their nomenclature for the loan estimate, closing costs refers to all costs separate from the down payment.
So in, in their parlance, you only have your down payment, your closing costs then less any lender credits, seller credits, agent credits, credits from any source, if that makes any sense. So the bottom there shows you estimated closing costs and estimated cash to close. But all of that, now we go to page two and get into the details.
And this Jeb is where we get to what we were talking about in terms of Box A. And what box A is, is the items that you are paying to a lender. Now, Jeb, when you wanna shop a loan, we say box A is the only thing that matters. For the most part, that’s because all of the other boxes are dictated by the terms of the contract.
Or like in box B, you’ll see we have things like a credit report, an appraisal, they can have a very minimal variance. I wouldn’t make my decision based off of that. So when we’re talking about box A, it’s what do I pay to the lender? Am I paying a processing fee? An admin fee, an underwriting fee? Am I paying any discount points, any origination fee, application fee?
Again, all of those things go to the broker and or the lender. So when you are shopping for a loan, 90% plus of borrowers are still even in this market, getting 30 year fixed rate loans. What is my interest rate? What are my box A charges? Because the rest of everything we’re gonna go through is dictated by the terms of your contract.
[00:17:15] Jeb Smith, Huntington Beach Realtor: Yeah. And, and earlier, like you mentioned on page one, how the closing costs were kind of lumped into one category along with the prepaids, right? So oftentimes when Josh, you’re talking about closing costs, I just wanna be clear here, we’re not gonna go deep dive on this at all, but there are items like interest, there are items like property taxes, certain fees that are not controllable by you.
And those, along with those prepaids, and you’re saying they, they’re lumping that together as one whole fee along with origination charges, so the origination charges points and all of that are in that box as well.
[00:17:53] Josh Lewis, California Mortgage Broker: What you’ll see as we go through these boxes, Jeb, they give you individual boxes and then they total them, and then they go through the prepaid side.
So if you were looking at this, if you’re listening to this, you’re not gonna be able to see it, but pull up that sample loan estimate. On page two, their idea was the left side would be closing costs. The top of the right side would be prepaid items, but they kind of failed at that because they have some things that are closing costs.
So if you’re at home and you’re saying, what is the difference between closing costs and prepaids? If it’s a recurring cost that you’ll continue to have year after year as a homeowner, that’s not a closing cost. If you pay it one time as a result of buying your home and getting a mortgage, that’s a closing cost.
So as we roll through this, again, box A, those are closing costs that are payable to the lender and or the broker. Points, processing, underwriting, doc fee, admin fee, application fee. Any of those things are charges that go directly to the lender. And at the end of the day, Jeb, I honestly don’t care if someone wants to break it out and have 10 line items on there.
I think it’s simpler to not charge those things and just say, here’s my rate and here’s my points, and this is what we want to make on the file. A lot of lenders prefer to say, “Hey, we’re only gonna make one point on this loan, but then we’ve got, you know, three quarters of a point in other fees.” So box A, add up the total charges, whether it’s $1000, $5000, $0, and say to get a rate of 6% on a 30 year fixed conventional loan, they are wanting to charge me $1,200.
And if another lender wants to give you 6.125 and charge you $1,200, that’s worse. If another lender wants to give you 6% and charge you zero in box A, that’s better. We’ve talked before, Jeb. Really the terms are just one part of selecting a lender. Um, one third of that stool, but that is how you’re going to compare it.
[00:19:46] Jeb Smith, Huntington Beach Realtor: And then you can also have the case where somebody might be offering you five and a half, but then you’re paying three points to get there, right? So understand that just because it shows a lower rate on the loan, You have to then go look at the fees. What are [00:20:00] you paying in order to get that rate. Right?
Because if somebody is significantly better than everybody else, chances are you’re paying for that in some way. So again, just kind of a quick summary here before we dive into it. When you’re comparing lenders you’re looking at the rate, right? You’re also looking at box A. How much is it costing you to get that rate?
[00:20:22] Josh Lewis, California Mortgage Broker: Absolutely. And Jeb, this came up on the live show last week. Someone told us this amazing rate they locked and they told us it was a major national bank, one of the big three banks that you all know of.
And I said, “Well, that’s cool. I see preapproval letters from them all the time. Their favorite thing to do is to do a pre-approval with a rate about a percent lower than what the market is at, and then you look at the APR and the APR is exorbitant where it’s showing someone paying like four or five points for that rate. No one ever does that.”
The loan estimate is what puts the end to all that silliness. Don’t look at a pre-approval letter that says an interest rate and say, I was pre-approved at this interest rate. Look at the loan estimate. Look at the rate and box A and that tells you what you’re paying for. So everything else that we’re gonna go through here, Jeb, is generally dictated by the locality that you’re in or the terms of the contract and are not under the control of your lender and don’t really matter to getting a rate and fee quote.
[00:21:12] Jeb Smith, Huntington Beach Realtor: And to play bad guy here, that rate’s not even your rate until it’s locked, right? And rates change by the minute, by the hour, by the day, by the week, however you wanna look at it. Rates are constantly changing, and it’s not to say that you can’t get the rate you’re being quoted, but just be cautious when you’re comparing lenders and you’re looking at box A and you’re looking at the rate, you need to do it in a pretty quick timeframe when comparing people, right?
You don’t want to go to say Josh on a Wednesday and then go to the next lender the following Wednesday and then compare the two loan estimates. It’s not comparable because we don’t know what’s happened in that timeframe. So when you’re doing the shopping and trying to compare lenders, again, you’re not just looking at rates and fees, you’re also looking at competence, expertise, all of those things going into it.
But you’re also doing it within, hopefully the same day and even a shorter timeframe, if at all possible, just to make sure it’s comparable.
So we’ve talked about box A a little bit, Josh, what, what comes next? What about the rest?
[00:22:10] Josh Lewis, California Mortgage Broker: So let’s roll into box B. These are items that you cannot shop for. The reason why you cannot shop for is they’re required items that we have to have.
What falls here? The appraisal, we have approved appraisal management companies, depending on who the lender is. Credit report, we have to pull that fee
[00:22:26] Jeb Smith, Huntington Beach Realtor: For the appraisal, Do you set that fee or does the management company pick that fee?
[00:22:28] Josh Lewis, California Mortgage Broker: The appraisal management company does. So if there’s one that has fees that are absurdly high, obviously we’re not gonna use them. So the fees for the appraisal are amazingly consistent across the industry. We’re talking, from high to low, maybe $150 difference. So this isn’t a big area of variance and it’s not an area where I would want the lowest cost provider.
The other thing, the credit report, when we’re doing this very early in the file, I only work with one credit company. Most lenders only work with one credit company, so you can’t shop for that. Things like flood cert, tax service fees, you don’t really need to know what those are.
But again, those are companies that we have to work with on a regular basis, or the lender does. So those are selected by the lender. You can’t shop for them. As a result, those are zero tolerance items. They cannot change because you don’t get a chance to shop for them. Are those under the control of the lender? Yes, they are, but they’re amazingly consistent across the industry, so I don’t think they’re something you really need to account for when you’re shopping for loan terms.
Now we roll into box C. This is the fun one, Jeb, and you can answer this. These are technically services you can shop for. What falls here, title, escrow, the survey, if you’re in an area that has survey, things like the pest inspection, these have a 10% cumulative tolerance. So meaning all together, they can’t vary by more than 10% from what I disclose.
I also, with your loan estimate, have to give you a written service provider’s list saying, whose fees am I quoting? Am I just pulling these outta the air? No. These are one to three companies that offer fees that you could pay within 10% of this and get these services. So, if you go outside of that list, you do shop and you go outside of that list, those become unlimited tolerance. You shopped, you chose, it was your choice. You wanted to pay more.
But Jeb, why don’t you talk a little bit about why those are not really items you can shop for? Cuz I get the question all the time. Someone says, “Hey, this is cool. I got the loan estimate. I wanna get these fees down so I’m gonna start shopping on these items. Who do I call?
[00:24:21] Jeb Smith, Huntington Beach Realtor: Yeah. So when, when you’re buying a house, more often than not, especially in the market that we’ve been in over the last couple of years, and the market that we’re in now, it’s still a seller’s market. I mean, yeah, it’s a balanced market more so than say, a seller’s market.
But more often than not, when we’re writing an offer for a buyer, we’re putting that the seller gets to pick the title and escrow options on that contract. Why? Because they still have a little bit of leverage in this market and we’re allowing them the opportunity to choose who they want to work with.
Now you can say, I want to choose my providers, and therefore, you know, we dictate that. But I will say more often than not, the seller, the seller’s agent, [00:25:00] is going to counter that and say, we want to use our people. Now here’s the deal, when the title insurance is being paid by the seller in most cases, right, for the owner’s policy.
Now, if you’re getting a loan, there’s a lender’s policy that you’re paying as well. And on top of that you’re also getting an escrow fee, right? Here in the state of California, we have an escrow company. In other states, you might have an attorney or what have you. And then in California we usually split that fee.
The buyer pays a fee, the seller pays a fee. And they’re separate of each other. Now, you could say, I don’t want to use your escrow company. I want to go get my own escrow company. But what you’ll find is by doing that, you end up typically paying more money than you would have if you just went with their escrow company.
Because they’re representing both sides of that transaction they can typically offer it at a lower cost, more of a discount, and so, Again, in summary here, without going into deep detail, it’s usually, less expensive just to go with the providers that they have offered.
Now, maybe you’re in the industry, right? Oftentimes I’ll have clients, or agents representing themselves buying property, and they have a relationship with a lender, and they’re able to get a discount for say, both parties in that case. In that case, it’s a conversation. Me talking to the other side saying, “Hey, listen, my client has a relationship here.
They’re able to get a discount not only for them, but for your client as well. It makes more sense to go this direction”, in which case they’re usually more open to the idea of doing it, but more often than not, sellers, sellers agents want to use their escrow companies because they have relationships.
They know that the job is going to get done properly, that you’re not gonna have issues when it comes to closing. And that’s generally why we allow the selling agent to pick their own resources just because it typically allows a smoother process. But I know we kind of went down a rabbit hole there and that’s something we could talk about more in other episodes.
[00:26:55] Josh Lewis, California Mortgage Broker: And for us as a lender, this is why, again, I say box C is not really important. When I get the contract, this stuff is all dictated. I’m gonna reach out to escrow or title and they’re gonna tell me what all of these fees are based off of the contract. And that’s the same for if you talk to five other lenders.
That box is gonna end up being the same. Box B is gonna be very similar cuz those fees don’t vary much. Box A, origination charges, those are the ones that can vary from lender to lender. So box D is simply a total of A plus B plus C. And the government, in their infinite wisdom calls this total loan costs. So instead of saying closing costs and prepaids, they make up their own term of total loan costs.
Now we go to the right side of the loan estimate, and we have other costs. So other costs in E, these to me are actual closing costs and loan costs. Basically recording fees transfer taxes, things of that sort. Those are one time costs.
We said prepaids are things that will recur and you’ll pay throughout your life of home ownership. These items are closing costs. They should go to me on the left side and under total loan costs. They should go under total loan costs, but they don’t. They put ’em over here under other costs.
Now, box F, they have a box that is prepaids. This is homeowner’s insurance. Mortgage insurance, prepaid interest, prepaid property taxes, prorations, that type of stuff. So things that you are prepaying at closing. And people will say, why is that? Well, your homeowner’s insurance company’s gonna want that first year’s premium.
There can be some probations between you and the seller. Depending on where you’re at, the seller may have already paid that year’s or that six months of property taxes, and you are gonna live in the property for a portion of that. You need to pay them back.
So now we go to box G. This is initial escrow payment at closing.
These are the amounts. That are charged and collected by escrow at closing to establish your escrow impound account. So when we look at that, a lot of times people say, this is a double charge. I’m being charged for homeowner’s insurance again. No, remember in box F prepaids you paid the first year’s premium.
In box G, they’re gonna collect two to three months to establish that impound account because the first month you’re in the home, you’re not gonna make a mortgage payment. They wanna make sure there’s 12 months in that account to pay it at renewal. Same thing with the property taxes. In California. This can be complicated because we pay property taxes every six months.
We don’t pay them every six months. We pay them twice a year, but not every six months. So the amount that gets collected, depending on the month you close in can vary. But box G is not going to vary from lender to. Box F is not going to vary from lender to lender.
[00:29:31] Jeb Smith, Huntington Beach Realtor: And something to note, Josh mentioned there that you’re not paying it twice because you’re paying the full year in advance and then you’re establishing this impound account by putting that money into that impound account every single month with your monthly payment, what happens is when that bill comes up, mine generally comes in December, right?
So when that bill comes in December, escrow then has enough money in that impound account because you established it upfront and you’ve been putting payments into it each month along with your mortgage payment, it’s there to be paid.
You’re not going to then receive another bill [00:30:00] from your home insurance company asking for the lump sum of those 12 months, right? Because it’s been established in that impound account.
So you’re, again, in summary, you’re not paying it twice, you’re just paying that lump sum and then putting money aside so that it’s gonna be ready to be paid when it’s due, the next time it comes around.
[00:30:17] Josh Lewis, California Mortgage Broker: Yep. And here’s what I will say, because these are not items that we control and there’s essentially unlimited tolerance on these because we can claim we don’t know. And when I say we, a lender, a loan officer can claim, “well, I didn’t know what those were going to be.” Because of that, I will see these egregiously underquoted.
Again. Does it matter? It matters in terms of how much cash you need to be prepared to have at close. It doesn’t matter in terms of picking a lender, it’s going to be what it’s going to be.
So Box H is a real simple one. It’s other. in general, the things that we see fall under here are things that are not required by the lender, but that you have chosen to pay.
So, An owner’s policy. Jeb talked about an owner’s title policy. 99 times out of a hundred you get that, but it is not required by the lender as part of this. They require the lender’s policy to ensure them, but they don’t require that you insure yourself. So if the seller refuses to pay it and you choose to get an owner’s policy, it would go under there.
Sometimes in a tight market, a seller won’t pay a home warranty, so that’s a cost to you, but the lender doesn’t require it. So things like that can go in there. Most times, box H is gonna be empty, and when I’m quoting it, I’m gonna quote it with box H empty because I don’t really have any idea until you get a contract what’s gonna go in there.
Now, when we send out your official loan estimate, once I have a contract, we have to go through that and see if there’s any of those charges in there that you have agreed to pay that we do need to disclose.
Box I is super simple. It takes all of those other costs, box E, box F, box G, box H, and totals them. So when we look at that now, we get box J, it totals box D and box I. Total loan cost plus total other costs and puts them together. Below that, it’s gonna list if you have any lender credits.
Now this one bears special description because this boggles my mind. Oftentimes, I will get an estimate from someone and they’ll say, “Hey, I’m getting this interest rate and the lender’s giving me a one point credit.”
I’m like, “it’s impossible. That rate is, there’s no way to give you a 1% lender credit and give you that interest rate.” And I’ll go back and look in box A and they’re charging a two point origination fee. I have no idea why someone would charge you an origination fee and then give you a lender credit to pay a portion of it. How about we just charge a 1% origination fee?
It’s something to look out for. It’s something to understand. And to me, anyone who’s charging you an origination fee or discount points and then giving you a lender credit is purposely trying to deceive you or make it difficult for you to understand what they are actually charging you for the loan.
So Jeb, at this point we’re almost done, but the last box on the bottom right of page two gives you a summary of everything. The total closing cost, basically it takes box J, total closing costs, less lender credits, adds your down payment. It takes away any deposit that escrow is holding. That was from your contract, any seller credits, any other adjustments or credits, and it shows you estimated cash to close.
So at this point, when we go through this, we know what you’re gonna need at closing. We know what your interest rate is, we know what your monthly payment is, and we know all of the details of the loan. So that is the purpose of the loan estimate. If you’ve listened very long, you know, I’m not a big fan of government regulation and government intervention.
This is an instance where I can say, I don’t love the loan estimate and closing disclosure. It’s not perfect, but it is a thousand times better than what we had before, which was the good faith estimate. Just trusting lenders outta the goodness of their heart to get you an actual, honest, accurate estimate.
I literally, back in the day, would tell people all the time, , someone is lying to you. Those numbers don’t exist. That is absolutely insane. And Jeb, you used to do loans and you did that under the prior system and you would have situations all the time. And those people would call me in tears like a day before closing, “Hey, I just signed my loan docs and I have to pay $12,000 more than I was told.”
Yeah, I told you that 30 days ago, but you wanted to go with the lowest bidder who gave you the wrong number. Now that cannot happen. You’re gonna know very early in the process, honest, accurate fees. So from that perspective, it’s much better than it was.
[00:34:20] Jeb Smith, Huntington Beach Realtor: It prevents the idea of the bait and switch, right?
You’ve heard about it probably in the multiple industries, but it happened a lot in the mortgage industry. Like Josh said, somebody would quote you a rate, say no points or whatever, and it just seemed way too good to be true. And many times it ended up being exactly that. Way too good to be true.
And if you wanted to close, you ended up having to pay a lot of money to do it. And so this essentially prevented it, which in turn is a very, very good thing.
[00:34:48] Josh Lewis, California Mortgage Broker: We talked about page three, Jeb. Page three to me is silly. No one ever looks at it. The information they give you there is not that great. So there’s a box called comparisons and it says over five years the total you’ll pay in principal interest, mortgage, insurance, and [00:35:00] loan costs.
The total principal you have paid off. Is it helpful? Yeah, but it’s not really helpful for comparison when you’re shopping for terms or when you’re wanting to see what you have. It’s gonna show your annual percentage rate. Jeb, how often do we get this question? “Well, you said my rate’s 5% and this says my APR is 5.2%.”
APR is a government manufactured number that takes into account that you do have to pay costs for a loan, and it’s meant to make it where you can compare loans side by side. In general, the most important thing you wanna see is you want your APR as close to the note rate as possible. We talked about earlier, a pre-approval letter that, a major national bank likes to send out with an impossibly low interest rate and a spectacularly high apr.
That’s because they have like four and a half points in there that you would pay to get that interest rate. So for a 5.125 note rate, it’s gonna say you’re paying a 5.94 APR. It’s not super useful, but it’s there. An even less useful number that they give you is the total interest percentage. This is the total amount of interest you’ll pay over the loan term as a percentage of your loan amount.
Again, not super useful. It’s a function of the loan amount and the interest rate. In terms of comparison, it’s not gonna be great. It does say a few things here. Under other considerations says if your loan is assumable or not, says the terms of your late payment, reminds you you’ll have to have homeowner’s insurance, gives you a reminder that you’re not guaranteed to be able to refinance in the future because people would tell people that, “Hey, we’re gonna get you into this, and then in a year we’ll refinance. So don’t worry that the terms suck on this. We’re gonna change it.”
Just reminds you, you’re not guaranteed to be able to refinance. And then it tells you whether the lender intends to service your loan or whether they intend to transfer servicing immediately. Also, not super useful because at any point down the line, they can transfer servicing to another servicer.
Page one, page two. Those are the important things for you in this process. Okay?
[00:36:49] Jeb Smith, Huntington Beach Realtor: Yeah. So that’s a lot of information guys. A lot of detailed information, and I will tell you, and I might be going out on a limb here. I would say that the majority of loan originators out there probably don’t understand this document in the way that it was just explained.
So when you’re out there shopping for lenders, don’t just compare fees. Also find a lender that understands the document that you’re looking at, right? If you have questions, they should be able to answer it in the detail that Josh just provided without really thinking about it. Right? Just some things to think about.
It’s, again, it’s not always about rates. It’s not always about fee. Those are very, very, important, but it’s also about being able to get to the finish line once you’re in contract, right? If your lender isn’t able to get you there, then you have other problems.
So again, if you are listening to this, have no idea what any of this stuff means. Not sure what a loan estimate is, check that link in the description. It’ll provide a copy of the document that we just went through.
Then you can go back through the document and listen line for line. I think that would be very, very helpful in helping you understand it. Or maybe you already have a loan estimate and you wanna know what you’re looking at. That will also help.
So, Josh, anything you wanna add before wrap it up today?
[00:37:57] Josh Lewis, California Mortgage Broker: Just to double down on what you just said, it is important that you get good terms. If you have literally someone that you knew was the absolute greatest loan officer in the world, and they’re charging you $10,000 in box A and a higher interest rate, probably not worth that premium versus an average loan officer.
But when you have two people that you’re talking to, one fumbles and stumbles, you don’t get a good rapport. They can’t explain things to you, and they’re gonna save you a thousand dollars in Box A. It is not worth it. It is not worth it. My best example I can give you right now, Jeb, someone from the live show who we got to late in the process, they had already locked their loan with another lender who had really amazing terms.
We could have matched them, but it was a thin loan. Well, guess what? Every day I get a text from this guy, can you explain this? Can you explain that? And I finally just had to say, unfortunately, I can’t because I’m not doing your loan. I can’t continue to walk you through the things that your originator is not capable of.
So when you’re picking a lender, the terms here from the loan estimate are very important. You have to get good terms, but also make sure you’re working with someone that you have a good rapport with and that you feel has the knowledge and expertise to walk you through this stuff.
[00:39:05] Jeb Smith, Huntington Beach Realtor: You know, we almost made it through this entire podcast without Josh’s phone ringing, and there it comes at the end.
Anyhow, if you made it to this point in the show, you’re a very, very special person. There was a lot of information there without having that document in front of you that was difficult to follow, but we appreciate you doing it. For that you’re a more educated home buyer, which is essentially what we’re trying to create here.
So do us a favor. If you’re liking the show, you’re listening, you think it’s great, rate us, review us whatever platform you listen to and follow us on YouTube.
Until then, see you next time. Adios.
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