Woe to the Buyer: Part II - Loan Closing Costs in 2014

Written by Posted On Saturday, 17 May 2014 13:26

Picking up where we left off on Costs to Acquire a Loan in 2014 versus how it was done previously is where we bring this scenario back up to date. Before Dodd-Frank, lenders priced their administration, processing, underwriting, and closing documents relatively competitively with one another. That was before the government started dictating how much a lender may "make" on a loan. What the Congress missed about this scenario is common to most industries, not just the lending community. When you say someone can only make a certain amount of money for a service, then that company needs to recuperate the lost profits one way or another. And almost always, it's accomplished by making the consumer pay more. So, although the intent was to “cap" what a lender could charge, all it did was “move” the fees over into another category, which on a purchase is also not a tax deductible item for the buyer.

Think about the new Qualified Mortgage (QM) – it just doesn't affect the ratios of income used to qualify you as a borrower; it has also affected how much money a lender could make on a loan. Many lenders now will only generate a loan if they can make money by charging you points (versus zero point loans as it was in the past) in order to stay out of trouble with the new guidelines. As former lenders, we have never had a borrower beating down our door to pay points on their mortgage, and especially not to save something like $15 to $30 per month. Not when it was coming out of their after tax monies and they were trying to buy a house. It almost never happened.

Let’s not get into a litany about how badly the lending universe is spinning out of control, instead let's speak to the “junk” fees and in this new age of lending, how much they have gone up. In the ho hum days of mortgage lending (pre 2007), the average “junk” fees cost about $360.00 to $695.00. Today, they are rapidly approaching $2,000 per loan. That $2,000 to the lender is the same as if you paid them 2.00% on a $100K loan amount. This significantly increases their yield on each loan they originate. And, a huge difference is that these fees are not tax deductible to you on a purchase. You'd be better off asking the lender to "absorb" those costs and charge you points. At least points on a purchase are tax deductible in the year you buy. However, you'd first need to verify all of their fees and then what rate they'd give you at zero points (if available) and then how many points you'd need to pay to cover the junk fee costs and what the new rate would be if you did that approach. Put all of them to paper and see what will work best for you. But always remember, the interest rate is being charged on a larger sum of money over many years and sometimes, it might just behoove you to come out of pocket and just pay the higher junk fee costs.

Lender's closing costs are not the same as the cost to acquire a property. As a lender, we might not have any closing costs (not likely today but we were able to do this in the past), but that has nothing to do with how much it will cost you to "acquire" the home. Let's assume the lender only charges a flat $500 fee in closing costs. If you call up on the phone and say - “what are your closing costs?” - the answer will be $500. However, the point you are missing with that question is, “how much is it going to cost me to acquire this house?”

Here's a list of costs you should be thinking about well in advance of applying for your mortgage:

  • Down payment
  • Home inspections
  • Appraisal
  • Credit Report
  • Underwriting Fee
  • Administration Fee
  • Loan Processing Fee
  • Tax Service Fee
  • Flood Letter Fee
  • Survey
  • Closing Document Prep Fee
  • Homeowner's Insurance Premium
  • Title Insurance - Lender's and Owner's
  • Settlement Fee
  • Wire Transfer Fee
  • Recording Fees
  • Transfer Fees
  • Documentary, Intangible, Mortgage Stamp Taxes (if applicable, varies by state)

The list above is common in Florida, you may not pay all of these fees and some may be negotiable, especially documentary stamp taxes and owner’s title policy, but you should plan for the worst and hope for the best as they say. If we take into consideration all of the fees, excepting Down Payment, Underwriting, Administration, Loan Processing, and Closing Document Prep fees – we are easily looking at another $3,500-$4,500 in costs that a buyer needs to have available for closing. So, it's important that you speak with a reputable lender first, before looking at homes to buy – there is nothing worse than falling in love with a home that in the end is beyond your reach to purchase.

Benjamin Dona is the Broker and Owner of Gulf Coast Associates, Realtors in Bonita Springs, Florida. He holds two advanced degrees, an MBA and an MA, and has an extensive background in both business and marketing. In 1998, he founded Gulf Coast Associates, and formed a group of like-minded Realtor® associates dedicated to offering professional real estate services by concentrating on information, education and the use of leading edge technologies. He also is a recognized expert on the "Net," a much-quoted and read blog author, and a contributor to both national and international news outlets. Benjamin is a member of the National Association of Realtors, the Florida Association of Realtors, and numerous local real estate boards throughout Southwest Florida.

Contact Benjamin Dona at 239-948-3955

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