About Mortgage Lending

Understanding the mortgage lending process is, at best, difficult - and at worse, challenging

What follows is our attempt to simplify the mortgage lending business.  Our explanations will be brief, so if you need further clarification just give us a call.

The "hidden costs" of buying a home:

You will often see terms like "zero down" or "low down payment" or "100% financing" in the home lending business, and the average homebuyer sees those terms and think they can get into a home for nothing, or virtually nothing, out of their pocket.  While that may be close to the truth, there is no mention about other costs to the buying process, such as earnest money, appraisals, points, credit reports, insurance, and inspections.

Closing Costs, Prorates and Prepaid items

"Closing Costs" is a broad term that includes all expenses incurred in purchasing and securing real estate.  This does not include a downpayment (if one is being made) or the cost of any inspections at the request of the buyer (i.e., "pest and dry rot" or "whole home" inspections). 

Other up-front expenses incurred in buying a home typically include the cost of an appraisal and a credit report.  Property taxes and homeowner's insurance premiums are routine expenses as well.

Earnest Money

When you make an offer on a home you will be asked to come up with a "good faith payment" to show your intent buy the home.  Typically, this amount is about $1,000.  If you end up buying that home your $1,000 will be credited towards the total cost of the transaction.

Total Costs to Close

This term means the total money needed to purchase real estate, and typically includes:

• The down payment (if one is being made)

• Closing costs, prorates and prepaid (see above)

• Inspections (at buyer's request)

Any money paid towards the purchase (i.e., earnest money, appraisal, and credit report fees) are credited at the time the loan closes.

Appraisals

Appraisals are part of your closing costs.  Appraisals are needed early in the purchase process to determine fair market value.  Costs for a typical appraisal are from $300 to $400.  This fee is typically collected at the time the buyer makes a loan application and a property has been identified with agreed upon sales terms.

Inspections

Inspections may or may not be required as a condition of a loan.  After the appraisal report is received a lender can advise you of any required inspections or repairs indicated by the appraiser.  Any "lender-required" re-inspection of repairs typically cost from $75 to $95, charged by the appraiser for revisiting the property.

Points

One "point" = 1%.  Points are shown as a dollar amount and part of your closing costs, if paid.  Most lenders will quote a "par" or "zero points" rate, then advise on the impact of paying "points" for a lower rate (called "buying down the loan") by quoting the cost and the corresponding savings in the monthly payment at the "discounted" rate.

Should you buy points? Buying points when you close your mortgage can reduce your interest rate, which in turn reduces your monthly payment. But each "point" will cost you 1% of your mortgage balance.

Homeowner's Insurance

Your first year's premium of homeowner's insurance is paid at closing. The cost of this insurance policy depends on the loan amount and the coverage you choose through your chosen agent.