Recurring vs. Non-Recurring Closing Costs!

I am all set and ready to buy a home what are my closing costs and how much out of pocket do I need?

This question is one that I here very often. As a consumer I would want to know this as well. This would be a significant part of what helped me make my decision. Like they say an informed decision helps make the choice that much simpler. Ok so I made that saying up but it is what I believe.

Recurring Closing Costs – Costs that will continue to be paid throughout the ownership of the home – Recurring costs should actually be named Homeowner expenses in advance. Commonly they are called Pre-Paid Items. These items include the following:

Hazard Insurance – one year in advance + 3 months reserves (reserves needed if impounding which is a requirement on all loans that exceed 80% LTV)

Property Taxes - Pro-rated taxes based on purchase date + specified number of months to be impounded determined based on the month that you close. EX. July = 7 months taxes in advance

Pro-rated Interest – This is your first month’s mortgage in advance. It will be pro-rated from the date of close to the end of that month. Your first payment will be the following month on the first. EX. July 15th close date would require 16 days pro-rated per diem interest calculated on your interest rate. You would then have a first payment date of September first.

Mortgage Insurance – Although I do not find this common some lenders will ask for 1 month mortgage insurance in advance.

Miscellaneous – If there is a Homeowners association you may be required to pay a month or two upfront as well.

Non-Recurring Closing Costs – These are the expenses that we are trying to get the seller to pay. These are the one time fees that you have been putting money in the piggy bank for. You will not have to pay these fees ever again unless you buy another home or refinance your existing mortgage. These include but may not be limited to the following:

Origination – This is what the broker or the loan originator charge you to do your loan. Generally 1% on all FHA deals. This does not have to be a fee that you pay but your interest will rise if you choose not to pay it. See – Origination Definition for a more elaborate explanation.

Discount - See Discount Definition for more detail.

Broker Costs – The only fee that Capitol Mortgage Corporation charges its borrowers is $695 for processing. Many brokers will charge processing, admin, broker fee or many other miscellaneous. When in doubt ask.

Wholesaler Costs – Generally the wholesaler that will actually fund the money for you charges an Underwriting fee $750-$850, wire fee, tax service and a MERS which is electronic registration.

Appraisal – For Conventional done through HVCC and for FHA through an independent appraiser.

Credit – There is a cost for the Credit Report through a third party generally collected at the time of application.

Title and Escrow Fees – This is a third party gatherer of the docs. They will collect monies, sign the loan document, provide a preliminary title report, draw up the estimated settlement statement etc. There fees are determined by the loan amount and purchase price. The standard fees that are charged include but are not limited to: Title Insurance, escrow fee, doc prep, notary, Recording, courier, endorsement and other miscellaneous expenses.

I have found that Non-recurring costs generally run between 2.5-3% of the purchase price when you pay an origination of 1%. The lower the loan amount the higher that figure can be because there are set cost ie: $695 processing that is a higher percentage of 100K than it is of 200K.

Recurring Costs depending on the month and the amount of property taxes can range from 1-1.5% of the purchase price.

It is important to know the difference between recurring and non-recurring closing costs and have an understanding of who is going to pay what. You are responsible for the down payment and all of the costs recurring and non-recurring that the seller does not credit for.

EX: FHA PURCHASE 3.5% down payment requirement

100K Purchase Price – Down Payment $3500 (minimum statutory investment required by HUD)

Recurring Costs 1.5% or $1,500

Non-recurring Costs 2.5% or $2,500

Seller Agrees to Pay 3.5% toward closing or $3,500

Borrowers Estimated Cash to close would be Down Payment $3500 + Recurring Closing Costs $1500 + Non-recurring Closing Costs $2500 – Seller Credit $3500 = (3500 + 1500 + 2500) -3500 = $4000 cash out of the borrowers pocket. In this example the seller paid for all the Non-recurring costs and 1% of the recurring closing costs leaving the buyer responsible for down payment and .5% of the recurring costs or Homeowner expenses in advance.

*****Disclaimer – The Examples illustrated in the post are merely to paint a picture and may not represent your transaction. The purpose of this post was to explain the difference between loan costs and pre-paid homeowner expenses. If you have any questions regarding items in this post please add them in the comment section or call your Loan Officer.****

As always thank you for reading.

Costco or 7-Eleven? Can closing fast cost you money?

Many of the homes that are being financed for purchase today are either short sales or they are foreclosures. On the Short Sales in particular you may wait up to six months to get the approval to sell the property as the offer was submitted.  The approval can initially be a verbal approval with the executed contract to follow.

The Good News: You are in contract to buy the home that you wanted.

The Bad News: You have thirty days to close from the initial acceptance and your Loan officer will not get the contract for up to a week. This will give you 20-25 Calender days to close.

The Choice: Due to the limited time that you have been given to meet the contractual terms of the agreement you have been placed in a position to have to choose whether or not this home is worth the Price.

After six months of negotiating an accepted short sale contract and waiting patiently as a buyer to hear the news you now have to decide immediately.

Point to Ponder: If you are in a hurry and you need milk fast do you:

A. Go to Costco

B. Go to 7-Eleven

Second Point to Ponder: Which one of the two costs more for the convenience?

A. Costco

B. 7-Eleven

If you answered 7-Eleven both times you are correct. As a consumer trying to meet the contractual obligation of the short sale terms you have been forced to go to a store that is fast and efficient rather than the store that you may get twice the amount for your dollar. Costco on Saturday Morning is not the fastest place on the planet to get in and out of. You may have to wait in line. Of course we are happy to do so because of the bang for our buck.

Going to 7-Eleven costs you more but because you are eager to get in the home and meet the contract you have chosen to sacrifice your overall well being to meet the standards of the same person that took six months to make a decision. You may be saying about now: Is this fair? My answer is simple Absolutely Not! The worst part is even if 7-Eleven is not fast enough they have the nerve to charge you for making them wait.

In conclusion, I certainly know that not all is fair in love and war. I also now that as a consumer we have the right to choose whether or not we want to accept the terms of the contract. However, it is the same Costco approving the short sale that is saying 20 days should be sufficient to close this escrow so I just don’t care.

Can you get in and out of Costco on Saturday in 30 minutes or less including parking, shopping, purchasing and exiting the lot?

*7-eleven costs more most of the time. This is not always the case. Wholesalers hedge markets. When they do so they may be competitive for the moment but then they are subject to creating Costco like lines. Managing their offered rates help to control the lines. Therefore to keep turn times down rates may increase to decrease the traffic and vice versa.

Where have I been? My first uncut video post explains this!

I just wanted to take 3 uncut minutes of your time to let you know where I have been. I can’t wait to get back to my blogging schedule and providing you the useful information that you have grown accustomed too. Please take a minute to watch my newly constructed YouTube work in progress. Thank you all for your patience while I work to bring you the best Mortgage Information in the easiest ways too understand. After all this is California Home Strategies “Real Estate Strategies We All Can Understand.”