The Real Estate Sage at The Real Estate Investment Institute - REII

Let me start by apologizing for the first 5 parts of this series! Unless you're a mortgage originator a line by line understanding of the "Good Faith Estimate" is a waste of time, most are a waste of paper!

My regular readers know that I believe that Regulation Z was a noble idea who's execution and implementation has confused and cruelly mislead the consumer. Consumers reliance on the APR, Annual Percentage Rate, has cost them unknown billions! Yes, the "B" word. In a feeble minded attempt at consumer protection HUD, the Department of Housing and Urban Devolvement, added to the confusion with the inclusion of the YSP, Yield Spread Premium, disclosures about 15 years ago, providing irrelevant useless information that implied a hidden evil. YSP came shortly before the infamous, "Section 32" laws that drove many lenders, who helped troubled people, most of whom succeed, out of high risk lending,. All in name only of consumer protection and fairness.

There is good news regarding the "Good Faith Estimate" and "Truth In Lending" disclosures! There is a lot of useful information along with the distortions on those forms. But, the information is not in the individual line items, rather it is in selected totals!

Notice we're talking about "Est. Closing Cost" near the bottom of a "Good Faith Estimate" not the "Total Est. Funds needed to close!"

One of the most confusing things about the "Good Faith Estimate" is the necessary inclusion of the prepaid items. Prepaid cost are of course estimated, in fact they can't be totally known until after the loan is funded and recorded, and they will be what they will be! Two honest lenders can come up with widely varied estimated prepaids, and both be honorable and honest, and no matter which loan closes the final prepaids will be the same.

Loans should never be compared by their prepaids, prepaids are determined by the loan program, the property, and the date of closing and will not vary from one lender to another at closing! When comparing dissimilar loan programs the prepaid cost that are included don't really vary, because they are cost reverent to your owning the property. Programs that have fewer prepaids only postpone when you pay these costs, they don't eliminate them. To included prepaids when comparing loans only distorts the comparisons, by the lenders physic ability and / or integrity. Personally I've always tried to estimate prepaids high, particularly "prepaid interest. (See: Explaining Pre-Paid Interest ) this increases the APR, but protects the client from shock at closing which could require a couple of thousand dollars in unexcepted prepaid cost. Money that must be paid at closing that may legally have been omitted from the "Good Faith Estimate!" Money the buyer may not be able to pay because it was not anticipated.)APR is a distortion! The APR is calculated based on a fully amortized loan. Even if the "Good Faith Estimate" was perfect, unless you keep the loan a full thirty years and make every payment on time you'll be paying more then the APR indicates. The sooner the loan is paid off, the higher the actual loan cost!

It's rare that loans written in the last thirty years are amortized to completion. Homes are sold, equity is harvested (cash taken out), and loans are refinanced to lower rates, but rarely kept 15 to 30 years! When was the last mortgage burning party you attended? Paying off a mortgage one payment at a time is something our Grandparents did if you're under fifty that was your Great Grandparents. All most all mortgage loans are paid off in 5 to 7 years, some lenders would say 3 to 5 years.

Why, would anyone want to know the cost of a loan over 15 or 30 years when they are only going to keep it 3 to 7 years? APR, distorted or not, simply isn't reverent in today's market.

I have a suggestion. To compare any two or more mortgages collect selected information at the bottom of the "Good Faith Estimate" in "TOTAL ESTIMATED FUNDS NEED TO CLOSE" SECTION:

"Principal & Interest"               $ ___________

"Mortgage Insurance"              $ ___________

Sub Total these two numbers   $ ___________

now multiply the sub total by the number of months you're likely to keep the loan say, 36, 48, 60, 72, or 84.

                                            $ ___________

add

"Est. Closing Cost"                  $___________

Total cost over the likely life of loan $___________

Do the same thing for additional loans and simply compare the total cost.

If the loan is adjustable then determine the worst case scenario, raising the payments to the maximum the program's CAP limits allow over the term you're using. (APR is determined assuming that the index, that portion of the rate that changes, will be the same as it is today when the loan is adjusted, you shouldn't make that assumption.) Pay attention to the CAP's it doesn't matter if the loan can go up 6%, if during the time you keep it, it can only go up two per cent.

If there is secondary financing that varies from loan to loan compute the same information for the second in each case and add it to the first. In cases where the second is the same for each loan, such as a seller carry back it is not necessary to add it to each first to determine the best first.

There has been a lot of talk lately about 2-1 and 3-2-1 buy downs, simply compute the payments and cost to compare loans.

My program is flawed, but not nearly as much as APR! I don't take into account the time value of money (the interest or profit you might have made on the extra money you pay up front.) Nor do I consider the additional amortization (if your interest rate is lower you will have a lower payoff) experienced with a lower interest rate. I also don't consider prepayment penalties. I believe that the time value of money and the additional amortization just about offset each other. I don't believe most consumers have the extra cash available to make such decisions. I don't included prepaids because most expire in three years or less and I've suggest starting your comparisons at three years, if the prepaids are in force they will need to be included.

Once you've selected your loan add it's "Est. Closing Cost" to the highest "Est. Prepaids" you've been quoted for the best idea of how much money you'll need to close.

Most but not all consumers will find that the lowest closing cost is much better for them than the lowest rate, when a reasonable holding time is used to determine cost.

Bill

William J Archambault Jr

The Real Estate Investment Institute

http://www.reii.org

Good Faith Estimate Part 1

Good Faith Estimate Part 2

Good Faith Estimate Part 3

Good Faith Estimate Part 4

Good Faith Estimate Part 5

For a printable PDF copy of my comparison work sheet subscribe to my Sporadic Real Estate Investor News Letter. Sporadic is the operative word I don't send out a lot of them. Just write "Subscribe" in the subject line and send it to sreinl@reii.org

Line 902 *Mortgage Insurance Premium

This is the PMI or MI paid in advance.

Line 903 Hazard Insurance Premium

This is the first year's cost of your home owners policy. This fee will be what it will be, it's better if this estimate is high.

Line 905 *VA Funding Fee

Fee charged by the VA.

All lines in the 1000 series are to establish escrow/impound account and should not be compared between lenders they will be what they will be, only the PMI/MI on line 1002 can be known at the time of the disclosure. It's better if this estimate is high.

Escrow/impound accounts are required on conforming loans over 80% loan to value, and are common on all loans. I would distrust anyone who gives you a low estimate to reduce the estimated total cost.

At the bottom Right is the "Estimated Monthly Payment" If you are making comparisons check only the "Principal & Intrust" and the "Mortgage Insurance," PMI/MI, because all the other numbers are estimates and will be what ever they are with what ever lender finances the property.

* These items will be labeled "PFC" for "Prepaid Finance Charges" You don't pay them until closing the label refers to items used to determine the "APR" listed on the "Truth In Lending" form.

Lines to look at are: line 812, 1101 (If you are buying a new house, the builder/subdivider will have a contract with the escrow company for a low cost closing, you will get the discount with an outside lender but they will originally estimate a much higher fee), 1106, 1107, 1108, 1201, 1202, 1203, 1302, 901 (this is the big one), 902, 903, ( for the 1000 sears charges use the total cost because lender could use the same cost but for fewer months distorting the total) 1001, 1002, 1003, 1004, 1005.

Now that you've adjusted the variables out of the estimates compare them again, if there is a major difference confront the originators there is a reason for any major difference. It's necessary to ask each for an estimate at the same rate, conforming loans are available in 1/8% increments over a 2% range. Talk to your originator.

This is eddied copyrighted material from "Get The Money / A Consumers Guide To A Successful Mortgage Application" republished here by the author with permission of the publisher. Watch for"Truth In Lending."

Bill

William J Archambault Jr

The Real Estate Investment Institute

http://www.reii.org

Links:

Part 1Good Faith Estimate Part 1

/blogsview/44523/Good-Faith-Estimate-Part

Part 2 Good Faith Estimate Part 2

Part 3Good Faith Estimate Part 3

Line 102 and 1203

Rarely used.

Line 1302 * Pest Inspection Fee

This depends upon local need. If required by lender see. Always required on VA loans.

Unnumbered Comparison To Broker (Not Paid Out Of Loan Proceeds)

This is the "Yield Spread Premium" paid by the lender/investor to the mortgage broker, if not for the YSP you would have to pay this much additional at closing. YSP is much maligned but great for the consumer, See the article: A Consumers Guide To Mortgage Brokers And The Evil Yield Spread Premium

.Line 901 *Interest for __ days

Mortgage interest is always paid in the arrears, meaning you pay the interest after you use the money, but all mortgage payments are now due on the first of each month. It takes two to three weeks for the lender to enter your loan in their computer systems, so they start your payments on the first of the second month following closing, this means your accrued interest could be for 29 to 60 days. At closing you will prepay up to 30 days interest so that your first payment will have no more that 31 days accrued interest. See the article: Explaining Pre-Paid Interest

Before closing you may be able to request a payment the first of the next month, if your closing will be in the first week (normally not later than the fifth) of the month, in which case you could have a credit instead of a large charge.

This is eddied copyrighted material from "Get The Money / A Consumers Guide To A Successful Mortgage Application" republished here by the author with permission of the publisher. Watch for the next part and then "Truth In Lending."

Bill

William J Archambault Jr

The Real Estate Investment Institute

http://www.reii.org

Links:

Part 1Good Faith Estimate Part 1

/blogsview/44523/Good-Faith-Estimate-Part

Part 2 Good Faith Estimate Part 2

Part 3  Good Faith Estimate Part 3

Line 803 *Appraisal Fee

The estimate cost of the appraisal. This rarely varies except when additional inspection are required because of unfinished work or required repairs.

Line 804 *Credit Report

The cost of the credit report, this can go up as the actual lender may require additional reports or an electronic report may need supplemented.

Line 805 *Lender's Inspection Fee

Rarely used.

Line 806 *Mortgage Broker Fee

The latest name for what brokers use to call a processing fee, it now includes any fee charged by the broker not included on lines 801 and 802.

Line 809 *Tax Related Service Fee

This pays for an independent company that reports to the lender for verifying that the taxes and insurance are paid, This protects both you and the lender.

Line 810 *Processing Fee

Mortgage brokers are required to label chargers as the investor/lender does, this is a rarely used third party fee. The brokers fee is now listed on line 808.

Line 811 *Underwriting Fee

Investor/lender third party fee.

Line 812 *Wire Transfer Fee

This may or may not be charged by the investor/lender or by the escrow company.

Line 1101 *Closing or Escrow Fee

Third party fee for closing services. This fee will be what it will be, it's better if this estimate is high.

Line 1105 *Document Preparation Fee

Investor/lender third party fee.

Line 1106 Notary Fee

Normally included on line 1101. This fee will be what it will be, it's better if this estimate is high.

Line 1107 Attorney Fee

If required. This fee will be what it will be, it's better if this estimate is high.

Line 1108 Title Insurance

This is the "lenders policy" not the "owners policy" generally provided by the seller to the buyer. This fee will be what it will be, it's better if this estimate is high.

Line 1201 Recording Fees

The local "Recorders office" charges. If this varies between lenders it is only because they don't know how many pages will need recorded. This fee will be what it will be, it's better if this estimate is high.

This is eddied copyrighted material from "Get The Money / A Consumers Guide To A Successful Mortgage Application" republished here by the author with permission of the publisher. Watch for the next part and then "Truth In Lending."

Bill

William J Archambault Jr

The Real Estate Investment Institute

http://www.reii.org

Links:

Part 1Good Faith Estimate Part 1

Part 2 Good Faith Estimate Part 2

The Good Faith Estimate is an "ESTIMATE" of the cost of the loan you've applied for.

The lender is required to provided you with it and its' companion the "Truth in Lending" form within three days of your application.

We're going to go through it line by line, but the individual lines are unimportant! You should be concerned in the total cost of the loan not individual line items.

There's an old saying "figures never lie, but liars figure" it is never so true as it is in these two forms. Because, different rules apply to brokers as compared to bankers a quick glance at the form by the uninformed consumer all to often misleads the consumer.

Because of the constantly changing market it's rare that a loan closes in accordance with the original disclosures. This fact along with the variables that can't be controlled mean that the original disclosures are only as useful as your originator's integrity. It's this reason why you never select your originator by the lowest rate.

Money paid for the origination of the loan, by tradition this is normally 1 point (1 point is 1% of the loan amount) In practice this is never the only amount paid for origination.

Discount also expressed as points, was originally/properly used to adjust the yield of a loan, in current practice it is often includes any amount paid for origination that is smaller than one or exceeds the one listed in line 801.

This is eddied copyrighted material from "Get The Money / A Consumers Guide To A Successful Mortgage Application" republished here by the author with permission of the publisher. Watch for the next part and then "Truth In Lending."

Bill

William J Archambault Jr

The Real Estate Investment Institute

Links:Part 1 Good Faith Estimate Part 1

Figures don't lie, but liars figure!

It is never so true as in "The Good Faith Estimate!" If that weren't bad enough for the real estate consumer the liars' figures get exponentially distorted, when applied to the "Truth In Lending" form! These are government mandated disclosures that lend an air of respectability that totally missleads the consumer! That air is better described as lender flatulence, it reaches it's most offensive odor with the "Annual Percentage Rate" (the proverbial, APR)!

This is the first in a short series where we are going to take a line by line look at the "Good Faith Estimate" and the "Truth in Lending" forms, with an editorial at both ends.

Only a bureaucracy could take such a good, nobel idea as "Reg. Z" witch tries to simplified borrowing and do no such thing! Only a congressman could have come up with the title "Truth in Lending."

It is important to understand each line in the "Good Faith Estimate" although as you will learn there are only a few that you should be concerned with. When we get to the "Truth in Lending' disclosure we'll go beyond its' similarity to a four hole out house and show you the valuable information that comes after the four holes.

Even with a well done "Good Faith Estimate" and a correct "Truth in Lending" form the consumer has no easy way of comparing loans. If the poor consumer looks in the four boxes near the top of a "Truth in Lending" form, he doesn't find "Truth" but rather he finds the same as if he were looking into the holes of an out house!

Bill

William J Archambault Jr

The Real Estate Investment Institute