Welcome back! I apologize for not being very active in the [first part] (https://www.reddit.com/r/personalfinance/comments/9fukac/introduction_to_buying_a_house/), there was a lot of stuff going on in life at that point. I'm back with part 2, on closing costs, loan programs, and other assorted questions and answers. [This here] (https://www.reddit.com/r/personalfinance/comments/9fukac/introduction_to_buying_a_house/) is a fantastic guide for getting started, although it doesn't *quite* include everything. Feel free to use that one for reference, I'm going to make my own list. Note that these can be paid by the buyer or the seller, that's up for you guys to decide, although it might be *very* difficult to get some people to budge on things they don't want to bring to the table.
- Appraisal fee: ~$400. You are allowed to shop around for it. I mentioned last time, appraisals are absolutely necessary after the 2008 housing crisis. I also mentioned this, but home values are based upon the actual prices homes in the area sell for. If there's no home like yours in the area, then they may do a cost-based appraisal, but market-based is the standard.
- Application fee: 0-$600. The other post lists these two as one fee, but the truth is that different lenders handle them differently. I personally don't like them and my company doesn't charge one. If you are being assessed one, make sure you find out if it's refundable. As a general rule, if it's not refundable, be very cautious about finishing the application. It's not a guarantee that they're not good, it's just money you won't be able to get back.
- Credit Report Fees: $25-$50. This is the only fee they're allowed to charge before an application has been completed. Federal law says this *must* be the actual cost of pulling credit, which is *typically* only around $25, but co-borrowers will bring that up.
- Home Inspections: $250-$300. This is *not* an appraisal. These aren't required except for VA loans, which require pest inspections, water tests, the whole 9 yards. I'd *recommend* it just as a good idea for you to know what you're getting into. Edit: By "recommend" I mean you might be screwing yourself over with what turns out to be a crappy, moldy house. It's worth the $300, but if you absolutely can't afford it, it won't stop the loan.
- Survey: ~$450. This one may or may not be required, depending on where you are and who you're working with. The point of the survey is to determine exactly where the property line is and that the property matches what's on the county record. Very helpful for property disputes, too, but usually not really worth it for those.
- Title Services: $700-$1500. You can shop around for this. This is one of the pretty cool things about a mortgage. When you buy a house, they do a complete title search, checking the entire history of the title, starting from the time the title was actually first established. That will *typically* include the recording fee for the update to the title, too. If it doesn't...
- Recording Fees: $50. This is just the cost of getting the county clerk to actually mark the transfer of the title. Usually included in title services, but if it isn't, it's still usually pretty cheap.
- Lender's Title Insurance: ~$400. This is to protect the *lender* in case blemishes that need to be cleared up come up on the title search. You can also buy your own policy for about the same amount of money, but that's completely optional. It covers the lender (and you) if any unexpected liens show up, or a past heir appears out of nowhere to claim the property as an inheritance. Not the sexiest product out there, but it typically doesn't require anything outside of the up front premium.
- Transfer Taxes: ~0.1%-1+%. The actual dollar amount depends on the amount of the loan. It also varies *heavily* on where you are. Some counties are a lot more expensive than others.
- Attorney/Paperwork Fees: $0-$500. Sometimes yes, sometimes no. This is the fee associated with actually drawing up the contracts involved and paying the lawyers for their time. And this is where we start getting into some of the doozies.
- Prepaid Interest: 1st month interest, typically ~$200-$300. Most of the time, you'll be required to pay the interest that would accrue over the first month.
- HOA Transfer dues: Varies. IF your neighborhood has an HOA, they *may* have some fee associated with transferring membership in the association, or you have to pay your first year's dues...
- Initial Escrow: ~$1000 + ~0.3-1% of price. This is the combination of the first year's homeowner's insurance and the property taxes for the rest of the year. Something to be aware of, the previous owners *may* have paid ahead on the insurance, so they may need to be refunded for that. Property tax rates vary state by state and county by county, so you're going to want to look into that ahead of time. I also get a lot of questions on what escrow actually is. Escrow is what you call it whenever you give money to a third party to pay someone else. When it comes to a mortgage, it typically refers to the taxes and insurance. When it comes to buying a house, it refers to...
- Earnest Money: $500-$3000. This is negotiable and down to the seller. This is the money you put down on the house to show that you're actually going to buy it. When you do this, it also gets put into an escrow account, to be held until the sale goes through. When you hear that your house is in escrow, that means that your offer has been accepted, but the closing paperwork hasn't been signed. Edit: At the closing table, earnest money gets counted as part of the whole down payment. And now we get to the last two fees, the two biggest ones.
- Origination Fee: $700-1.5%. This *might* be a tiny bit negotiable. This is how the MLO gets paid and this is where the underwriting and processing fees typically get rolled it. Sometimes you might get them itemized, but if you don't this is where they are. This one depends heavily on the lender you're working with. Ask about what's getting rolled into it, because depending on what it includes, you might be able to get it reduced more than you would by just saying "that's a lot".
- Discount Points: 1%-3%. These are entirely optional. Just know that you'll be paying a higher rate. The way these work: a point is equal to 1% of the loan amount. MLOs are limited in how many they're allowed to use on a loan after 2008, usually around 3 or 4. You can usually bring the interest rate down by 1/8% to 1/4% per point. Whether they make sense for you or not is entirely dependent upon your situation. Ask the lender how many points, how much it will cost, and how much it will save you. This one is for *you* to determine.
Now, time for the fun part! Loan Programs! Because lenders don't really talk about what the actual differences between loan programs are, a lot of people really don't understand how they work. Really, there are only 3 major loan programs out there. Those three: FHA, VA, and Conventional.
**VA:** I'll handle the veterans first. Veterans have the best loan program available. You can have 100% of the value of the house financed with a guaranty from the VA. There *is* a funding fee to be aware of, but this is the only fee on purchase that you are allowed to roll into the loan. It's usually 1%-2% of the loan amount. HOWEVER, if you receive literally any disability benefits from the VA, you can have the entire funding fee waived. In addition, VA loans require a VA appraisal, which is a little bit more expensive, usually ~$650. They also require pest inspections, water tests, the whole nine yards. VA loans are only allowed to be used for primary residences in a 1-to-4 family residences. Fun thing about this stuff. VA loans are not actually loaned by the VA. The VA simply guarantees it against default for the lender. But only certain lenders are allowed to offer a VA loan. Not just anyone is allowed to underwrite those, it's an extra certification process. If you're looking for a VA loan, make sure to actually ask if they can offer those. As a *general* rule, there are very few times a VA loan isn't the best option for someone. However, with rates on the rise, the advantage of VA loans is shrinking.
**FHA:** This is the one that people toss around a lot that confuses a lot of people. FHA stands for Federal Housing Administration. An FHA loan is insured against default by Ginnie Mae. ALL FHA loans have a Mortgage Insurance Premium attached to them, which will raise the monthly payment a little bit. FHA purchases require a minimum down payment of 3.5% to come from *somewhere*. The actual down payment amount required is slightly dependent on your credit score, but as long as you're a 580, it's fine. These loans generally have much looser credit requirements, which makes them a little bit more common. They also require an FHA appraisal, which is also more expensive, usually ~$550-$650. These also have an extra underwriting certification, but it's much more common than VA. Right now, about 1/3 of the loans in the US are FHA loans. The biggest disadvantage with FHA loans is that they include Mortgage Insurance for a *minimum* of 11 years. If you put down less than 10%, the Mortgage insurance is in place for the life of the loan. BUT FHA loans also have much more generous credit qualifications, and this is the other big advantage. Most conventional loans (going into that next) require at least a credit score of 620. FHA loans can get as low as 520, although lenders that actually offer those are a little more rare. The one catch is that you can not in any way be delinquent on any government debt, *including student loans*. Just be warned of that.
**Conventional:** This is the last major category of mortgages. Conventional just means there's no associated government program. This includes just about every ad that you see, including those idiotic HARP ads.... (For those wondering, HARP is designed for people underwater on their mortgage. If you haven't refinanced since June 1, 2007, you can have the appraisal waived. If you owe more than your home is worth, it might be worth looking into. Otherwise, just ignore it all.) Conventional loans typically require a 10% down payment, but almost universally, require a 5% down payment of *your own funds*. These can be gift funds, but they require a notarized letter saying it's a gift and not a loan. There are certain, very specific, circumstances that can get you a 3% down payment, but they're very rare. If you're putting less than the traditional 20% down, you will be required to pay for Private Mortgage Insurance. Yes, this is technically different than Mortgage Insurance Premiums from FHA loans. Either way, you'll be paying extra. On Conventional loans, though, the second the loan hits 80% you're allowed to cancel the PMI, and the second it hits 78%, they're required by law to cancel it. If your credit score is above 620, conventional is going to be your best bet about 95% of the time.
**Adjustable Rate Mortgages** Time for a little note about ARMs. These are really the loans responsible for the housing crash in 2007. After that, they're a little bit more strictly regulated. An Adjustable Rate Mortgage is a mortgage that will *change in rate*. That's the catch with them. Typically, they're fixed for the first ~3-5 years, then adjust every year after that. The adjustments are capped and you're informed of what those caps will be, usually a maximum annual adjustment as well as a maximum lifetime adjustment. These are *risky* as all get out, the adjustments are tied to what the markets are doing, usually tied to one of a couple of indexes. I would never, ever, actually advise anyone to go into one of these unless they're going to be in the loan for less than 5 years. Even then, it might not be worth it. Just... Risky products.
Finally, to wrap it all up, because this one is getting long too, I'm going to say a little bit more about something that got a lot of conversation on the last post. I know I said interest rates really don't matter, and to an extent, that is true. They matter only inasmuch as they affect the monthly payment. The bigger effect is the length of time of the loan, because you have to pay a large sum of money in about half the time. (Side note, some lenders are able to write loans on 5-year intervals, some are only able to write them in 15 or 30 years. Worth asking about.) I'm not going to tell you to not worry about the interest rate, but I am going to say that the interest rate is not automatically the single most important part of the loan. For those asking about why I'd recommend a 30 year loan for someone who really couldn't decide on what term, here's why: 30 year mortgages have *much* lower payments, which allows for much more flexibility. If you're able to make the payment on your 15 year loan without a problem, it's not really something to think about. But if the 15 year is going to be a little tight, or you foresee something coming up in the near future, like having children or a company going under, the 30 year gives the flexibility for just in case something happens, you're on the hook for $700/month instead of $1300. Very, very few mortgages have prepayment penalties anymore, so that shouldn't be something you need to worry about if you choose to go that route.
One last note, just in case people are feeling a little cynical or jaded from past experiences: After the Dodd-Frank Act, Mortgage Loan Originators are, by law, only allowed to be compensated based on two things. Those two things are 1. the Loan Amount and 2. the number of units they fund. If an MLO is compensated based on program, rate, discount, or anything like that, it's *quite* illegal. We don't care if you choose a 15 or 30 year, FHA or conventional, Adjustable or fixed rate, any of that.
So anyway, that's the rest of the information dump. I know there are a couple of other MLOs on the sub and maybe a few Realtors, feel free to jump in and help with answering questions too.
Submitted September 18, 2018 at 05:21AM by Ozurip https://ift.tt/2xm4kkD
