There are two types of fees that a borrower is charged when obtaining financing: loan initialization fees and loan duration fees. Loan initialization fees are the fees that are charged at the time the loan is initialized. These fees include lender fees and closing costs. Most of the borrower's initialization fees can be paid by the seller or sometimes wrapped into the loan amount. This will decrease the amount of money the borrower is required to bring to the table at close. If you are going to write up an offer that requires the seller to pay for your closing, it is important that you first check with your lender to make sure that the loan program you are planning to use will allow the seller to pay those fees. Investors will often offer more for a property by the amount of his lender fees and closing costs if he is going to require the seller to pay for them. It would be a large loss of equity if the borrower offered more and the lender didn't allow the seller to pay these fees. Lender fees include the following: Origination Points: Origination points are used to pay the loan officer that the borrower initiates the loan through. 1 point = 1percent. Discount Points: Discount points are the prepayment of interest in order to get a lower interest rate. If the borrower pays extra points up front for the loan, lenders are willing to decrease the amount of interest that they will charge. The borrower benefits from this in the long run as the savings from the lower interest charged surpass the up-front cost of the discount points. It would not be wise to pay discount points for a short-hold property. Underwriting/Processing Fee: An underwriting or processing fee pays the underwriter or processor for evaluating all the borrowers financial documents and making the final decision on whether or not the borrower qualifies for the loan. Credit Report Fee: When a lender pulls a credit report, it costs them approximately $18 to do so. They will often pad the cost and charge you more for it. Keep this in mind when you review your good faith estimate so you can negotiate the price down if you are being overcharged. Appraisal Fee: Appraisal fees vary depending on how many units are in the property being appraised. It is a good idea to be familiar with the market appraisal fee for your type of property. Garbage Fees: Garbage fees are the loan officers unnecessary charges to the borrower. They are another way for the loan officer to increase his profit from the transaction and disguise it with another name. For example, if you see a processing fee and an underwriting fee, you are paying twice for the same thing. Many loan officers are paid a premium for their services through over charging uninformed borrowers. The best way to avoid these garbage fees is by collecting Good Faith Estimates from at least three lenders. You can use them as leverage when trying to negotiate the fees down. Hidden Fees: The most common garbage fee charged by a loan officer is often not even known by the borrower. This fee is an increase in your interest rate in order for the loan officer to receive a larger commission. Closing costs include the following: Title Fees: Title companies make sure that the seller is delivering good title to the buyer. This means that there are no liens or other encumbrances on the property other than what the buyer is already aware of and agrees to take the property subject to. A title company or attorneys office is usually the place where settlement occurs. Settlement is when the documents that execute the financing and the purchase and sell of a property are signed. Escrow Fees: An escrow company plays the middle man in the transfer of certain funds. For example, the borrower sends his monthly mortgage payment, including taxes and insurance, to the escrow company who in turn sends a portion of it on to the mortgage company and the remaining portion is held in an escrow account until the propertys tax and insurance are due. Loan Duration Fees: These are fees a borrower may be charged during the term of the loan. These fees include interest, late fees, prepayment penalties, mortgage insurance, etc. Prepayment Penalty: Avoid obtaining a loan that charges a prepayment penalty if you can help it. A prepayment penalty is what it sounds like. It is when the lender has the right to charge you a penalty for making extra payments to the principal or if you pay off the entire loan early. These types of loans can make it really hard on an owner if he decides to sell during the prepayment penalty period. The proceeds of the sale would be used to pay the penalty. Lenders use these prepayment clauses in their loans to ensure that they will make a certain profit from issuing the loan whether or not the loan is in place for its entire term. Private Mortgage Insurance: One way a borrower can obtain a mortgage loan with a lower down payment is under a private mortgage insurance (PMI) program. Because the loan-to-value ratio is higher than for other conventional loans, the lender requires additional security to minimize its risk. The borrower purchases insurance from a private mortgage insurance company as additional security to insure the lender against borrower default. The cost of this insurance is typically added to the borrowers monthly mortgage payments. We will show you how to keep your down payments lower and avoid having to purchase mortgage insurance. Loan Amount or LTV:
LTV stands for loan-to-value. LTV is the ratio of the amount of debt to value of the property. Debt is the amount of the loan, and the value of the property is the sale price or the appraised value, whichever is less on a new purchase. For example, if a property is bought for $100,000 and the buyer gets financing for $80,000 then the LTV is 80 percent. LTV = L divided by V L = loan amount
V = property value If the appraisal is greater than the purchase price, a lender will typically require that the property be owned by the borrower for at least one year before the lender will use the appraised value over the purchase price in determining the LTV. However, a no-seasoned refinance loan program becomes available on occasion. No seasoned means the borrower has owned the property for less than a year. With this program, the lender will use the appraised value even though the owner has had the property for less than a year. LTV affects the amount of down payment a borrower must come to close with. If a borrower qualifies for a loan with an 80 percent LTV, he will have to find another way to pay for the other 20 percent. By using one loan with an 80 percent LTV and a second loan with a 20 percent LTV, you are able to obtain a total of 100 percent LTV. Not all first loans will allow you to use a second loan in place of a down payment. If you plan on using a second loan for your down, you want to let your lender know so that he will be sure to find a first loan that will permit it. Conventional loans are available with LTVs up to 95 percent for any one loan. Keep in mind that any one loan with an LTV above 80 percent subjects the borrower to private mortgage insurance payments. There are other factors that affect the possible LTV: whether the borrower plans to occupy the property or not, his credit score, if he will be proving his income or using a stated income program, how many units the property has and if the mortgage is a purchase loan or a refinance. All of these factors need to be disclosed to your lender in order for him to provide you with accurate counsel on what type of loan program he can offer you. |
