Closing Costs Explained – Five Categories You Can’t Miss

You’ve found your dream home, have completed the mortgage approval process, and are reviewing the list of your closing costs.

Suddenly, you feel as though you are seeing some fees for the first time. Some services listed may sound odd. And there’s a lot of mortgage language you may not understand.

By working with STEM Lending, we can help you understand all of these fees, and how to reduce or eliminate them.

Before we dive into specific Q&A, most of your mortgage closing costs can be broken down into 5 categories:

  1. Lender Fees
  2. Third-Party Fees
  3. Prepaid Fees
  4. Closing Date Changes (interest accrual)
  5. Escrow Account Pre-Funding (property taxes, insurance)

With respect to the 5 categories, here are the important takeaways:

  • Lender fees encompass all items the lender utilizes in order to process, approve (or decline) and fund your mortgage loan. These include underwriting your application, recording your mortgage with the government, and any origination fees (see below for more detail on origination fees).
  • Third-party fees involve items related to actually processing your mortgage loan. Items like title insurance, mortgage insurance, flood certification, transfer taxes, and appraisals fall within third-party fees.
  • Pre-paid Fees relate to two items specifically that you must have pre-funded or prepaid prior to closing: (1) homeowners’ insurance, and (2) interest accrual on your mortgage loan.
  • Closing Date Changes: the interest accrual piece is complicated, so we wanted to break it out within the broader context of your closing date.  When you close on your mortgage, you are required to pay the accrued interest from the date you close through the end of that month. The CFPB describes interest accrual as “charges due at closing for any daily interest that accrues on your loan between the date you close on your mortgage loan and the period covered by your first monthly mortgage payment.” See here for more information.
  • Escrow Fees are the dollar amounts generally required by lenders when starting your new escrow account. These accounts are setup to pay your quarterly property taxes, and your monthly homeowners insurance. Not all lenders require you to escrow property taxes with them, but the benefits of doing so may include a lower interest rate plus the added benefit of centralizing all your home-related expenses into one simple payment.

Take a look below at three different potential scenarios that could happen to you as you evaluate mortgage costs (source: CFPB).
CFPB guide for different mortgage loan scenarios
Even after reading through this short walk-through of fees you are likely to encounter at closing, you may still have questions.

To help narrow any gap between your current mortgage knowledge & the information you need to have to close on your mortgage with confidence, we’ve taken a stab at a short Q&A below:

 

Q: What is a Mortgage Loan Origination Fee?

A: A: The mortgage origination fee is an upfront fee charged by the lender for processing. It’s a percentage of the loan amount — often about 1 percent. An underwriting fee is charged by lenders to analyze a mortgage application, calculating the riskiness of the loan.

They are typically broken down into something called “mortgage points.” These points are expressed as a percentage of the loan amount.  So if the loan amount is $100,000, and you see a $1,000 loan origination fee on the paperwork, the bank or broker is charging you one 1 mortgage point.

To be clear, the “loan origination fee” is paid to the loan officer or broker who initiates and completes the loan transaction with the borrower, and is only paid out if and when the loan funds.  This fee is the originator’s commission for helping you get your mortgage loan.

All fees should be completely & transparently disclosed on the Good Faith Estimate (GFE) and the “HUD-1” settlement statement. Pay close attention to this figure to see exactly what you’re being charged, whether paid out-of-pocket or via a higher-than-market interest rate. Most upfront banks and brokers will charge 1-2% of the loan amount, although this can vary.

You should always compare closing costs, origination charges, lender fees, AND your interest rate between different banks and lenders to get the complete picture. We believe in transparency at STEM Lending, and will help you find the best mortgage for you, regardless of lender or product.

Q: What is a Tax Monitoring Fee? What is a ‘Tax Status Research Fee? 

A: The tax service fee covers the cost of hiring a company that will monitor your property taxes to verify the amount due each year and make sure the taxes are paid on time. Most lenders require that borrowers pre-fund their property taxes in escrow

Q: What are these ‘Escrow Fees’? Is that the same thing as the money I put into Escrow?

A: Great question. Don’t make the mistake of confusing escrow fees with money held in escrow. Some states charge an escrow fee or a closing fee. This is paid to the title company, escrow company or attorney for conducting the closing. Regardless of where the title company or escrow company oversees the closing, they both act as an independent party in your home purchase. Some states require a real estate attorney be present at every closing.

Q: What is the ‘Delivery Fee’ or ‘Courier Fee’?

A: Sometimes you will see an itemized fee for courier or delivery, or a cost for transporting documents. These costs should be relatively small, so be on the lookout for any unusually large fees.

Q: What is the ‘Recording Fee’?

A: As we mentioned above, this fee relates to recording your mortgage with the local government. The fee is charged by your local recording office, for the recording of public land records.

Q: What is the ‘Survey Fee’?

A: While not required by all states, the survey fee goes to a survey company to verify that the property lines for your home match what is on file, and for documenting things like shared fences on the property.

Q: STEM Lending helped me get my loan and I closed. What happens next?

A: As soon as one of STEM Lending‘s lending partners makes the loan it will be sold. That lender may have sold the loan before closing, sold the loan at closing, or will sell the loan after closing.  Depending on which of these actions occurred will determine whether the lender acted as a Mortgage Broker or a Mortgage Lender for your specific transaction.

Q: Do the lenders have to notify me when they sell/transfer my loan? If so, When?

A: Whenever your loan is transferred you are required to be notified within 15 days. Loans being transferred after origination is very common so don’t panic if you receive a notice saying your loan is being transferred. The “mortgage servicer” is the company who manages customer service & billing for your mortgage loan. The terms of your loan that you closed under will not change; what will change is that you will now make your monthly payment to a new institution.

Q: You’re saying that mortgage loans are sold after closing all the time? So, does it matter where I get my loan?

A: Whether you get your mortgage through a mortgage broker, lender, or mortgage banker, everyone will compete for your business. At STEM Lending, we compete by offering you unparalleled transparency, simplicity, and speed. Most conventional fixed rate mortgages and even adjustable rate mortgage (ARM) loans are ultimately sold to one of the GSEs (Fannie Mae or Freddie Mac). However, who you choose as your initial point of contact for getting your mortgage makes a huge difference. Mortgage Bankers and Brokers deal with multiple lenders so the consumer is exposed to a wider range of products and rates, resulting in more transparency and more choice for our customers.

To recap, closing costs are involved, and the last thing you want to do is become a mortgage expert, days before closing on your first home.

Our goal is to help arm you with only the relevant information you need to understand all of the fees and costs your hard-earned money is going toward as you close on your home.

Please reach out to us with any questions at support@stemlending.com

Explaining Debt-to-Income “DTI” and Its Importance

When mortgage lenders approve borrowers for a loan who have completed applications on STEM Lending’s site, that decision is based on a standard set of guidelines that are generally determined by the type of loan program. Today, we are going to focus on one of the main components of a mortgage approval: Debt-to-Income (DTI) Ratios.

Many potential home buyers have only a rough idea before applying — even for a pre-approval letter — about their own DTIs, how lenders view them, and what sort of obstacles they’re likely to encounter.

How Do I Calculate DTI?

Your debt-to-income ratio is all your monthly debt payments divided by your gross monthly income.  This number (reflected as a %) is one way lenders measure your ability to manage the payments you make every month to repay the money you have borrowed.

The lower the DTI ratio a borrower has (more income in relation to monthly credit payments), the more confident the lender is about getting paid on time in the future based on the loan terms.

Your gross monthly income is generally the amount of money you have earned before your taxes and other deductions are taken out.

For example, if you pay $2000 a month for your mortgage and another $200 a month for an auto loan and $500 a month for the rest of your debts, your monthly debt payments are $2700. ($2000 + $200 + $500 = $2,700.) If your gross monthly income is $7000, then your debt-to-income ratio is 38.57 percent. ($2700 is 38.57% of $7000.)

What is Front-End vs. Back-End DTI?

Debt ratios for home loans have two components.

The Front-end DTI ratio measures your gross income from all sources before taxes against your proposed monthly housing expenses, including the principal, interest, taxes and insurance that you’d be paying if the lender approved the mortgage you’re seeking.

The Back-end DTI ratio measures your income against all your recurring monthly debts. These include housing expenses, credit cards, student loans, personal loan payments and others. Under federal “qualified mortgage” standards, your back-end ratio maximum was capped at 43%, although with recent announcements from Government Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac, there is wiggle room case by case

Why is the 43% Debt-To-Income Ratio so Important?

For loans to be eligible for sale to Fannie Mae or Freddie Mac, lenders have to follow the 43% guideline set by the GSEs.

The federal “qualified mortgage” rule sets the safe maximum at 43%, although Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA) all have exemptions allowing them to buy or insure loans with higher ratios.

FHA traditionally allowed DTIs over 50% for some borrowers, however those borrowers have to pay private mortgage insurance (PMI) for the life of the loan.

Freddie Mac also uses private mortgage insurance and will accept loan applications with DTIs above 45%.

Fannie Mae will be raising its DTI ceiling from the current 45% to 50% as of July 29, 2017.

Fannie Mae also uses private mortgage insurance on its low down payment loans, but the premiums are automatically canceled when the principal balance drops to 78% of the original property value.

As an prospective borrower, your application will still have to go through Fannie’s automated underwriting system (Desktop Underwriter), which examines your entire application, including the down payment, your income, credit scores, loan-to-value ratio and a slew of other indexes.

Takeaways

Studies by the Federal Reserve and FICO, the credit scoring company, have documented that high DTIs doom more mortgage applications — and are viewed more critically by lenders — than any other factor. And for good reason: If you are loaded down with monthly debts, you’re at a higher statistical risk of falling behind on your mortgage payments.

In general, we think your front-end and back-end DTI ratios should be 28% and 36% respectively, or lower.

  • FHA limits are currently 31/43, though these can be higher with justification from the lender.
  • VA limits (for veterans) are only calculated with one DTI of 41.
  • Conforming loans have to conform with the DTI limits we mention above for your mortgage loan to be eligible for sale to Fannie Mae and Freddie Mac
  • However, a non-conforming (Jumbo) loan does not conform to purchasing guidelines set by Fannie Mae and Freddie Mac

To learn more about DTIs, head over to Fannie Mae’s “Know your options” site (www.knowyouroptions.com).

As always, follow our STEM Lending Blog for more relevant content for you as your home buying process moves forward.

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Understanding Different Kinds of Mortgage Lenders

Buying a home for the first time? Understanding the different kinds of mortgage lenders you will encounter when searching for your home loan will put you in a great position, early in your search process. Getting started with a mortgage application can feel confusing, even invasive. Various lenders ask for documents from every aspect of your personal and financial life, and the complexity can be overwhelming.

At STEM Lending, we are here to help bring you up to speed, quickly, while helping you understand what you need to know.

Here are several types of mortgage lenders we’ll go over in detail:

  1. Non-bank lenders
  2. Wholesale lenders
  3. Retail lenders
  4. Direct lenders (aka ‘Portfolio Lenders’)
  5. Correspondent lenders
  6. Mortgage banks
  7. Mortgage brokers

First-time homebuyers often dive into the process by looking for reasonable terms without thinking about what kind of lender they want to work with.

We believe that by understanding the different types of lenders that exist, your increase in upfront knowledge will make a sizable difference in your satisfaction & bottom-line.

For example, CFPB research showed that a borrower taking out a 30-year fixed rate conventional loan could get rates that vary by more than half a percent. Getting an interest rate of 4.0% instead of 4.5% translates into approximately $60 savings per month.

Over the first five years, you would save about $3,500 in mortgage payments. In addition, the lower interest rate means that you’d pay off an additional $1,400 in principal in the first five years, even while making lower payments.

Different Mortgage Lenders

If you know how to choose the right lender, you’ll feel more comfortable providing your profile and more confident when analyzing their rate quotes. Here’s a guide to understanding the above listed sources of consumer mortgages.

Non-Bank Mortgage Lenders

Let’s start with Non-Bank Lenders – who are they and what can they offer you?

Non-bank lenders are not considered full-scale banks because they do not offer both lending and depositing services. They are not a bank.

Banks no longer dominate the U.S. mortgage market; in 2016, non-depository independent mortgage lenders originated 47% of completed home-purchase loans and 42% of refinance loans, according to data from the Federal Reserve.

Non-bank lenders still sell the vast majority of their loans to Fannie Mae and Freddie Mac, so they must comply with their underwriting and capital standards.

Examples of these types of lenders would be Quicken Loans, Freedom Mortgage, Caliber Home Loans.

Wholesale Mortgage Lenders

In this type of lending, the wholesale lender is the one that is actually making the loan and whose name typically appears on loan documents. The third party – bank, credit union, or mortgage broker – in most cases is simply acting as an agent in return for a fee.

A wholesale mortgage lender is distinct because it works with independent mortgage brokers, who are client-facing. These brokers work on the retail end with borrowers and handle all correspondence, while simultaneously working with an Account Executive at the wholesale mortgage lender to carry out processing, underwriting, and loan funding. The borrower never actually interacts with the lender, only the broker does.

The wholesale mortgage lender funds the loan, and will usually sell it on the secondary market within a month or two.

Examples include United Wholesale Mortgage, LoanDepot LLC, and Plaza Home Mortgage.

Retail Mortgage Lenders

Retail lenders are exactly what they sound like, lenders who issue mortgages directly to individual consumers. They may either lend their own money or may act as an agent for Again, retail lending may simply be one function offered by a larger financial institution, which may also offer commercial, institutional and wholesale lending, as well as a range of other financial services.

Direct Mortgage Lenders

A direct mortgage lender is a bank or lender that works directly with a homeowner and underwrites their product in-house, without using any kind of middleman or broker. Mortgage bankers and portfolio lenders usually fall under this category if they have retail operations.

Examples include SoFi, Wells Fargo and Bank of America, though smaller entities could share this distinction as well.

Portfolio Mortgage Lenders

Portfolio mortgage lenders originate and fund their own loans, and may service them for the entire life of the loan. Because they typically offer deposit accounts to consumers, they are able to hold the loans they fund on their balance sheet.

They are also able to offer more flexibility in loan products because they don’t need to adhere to the guidelines of secondary market buyers. Once their loans are serviced and paid for on time for at least a year, they are considered “seasoned” and can be sold on the secondary market more easily.

Bank of America, Chase Bank, and Wells Fargo Bank are examples of portfolio mortgage lenders.

Correspondent Mortgage Lenders

A correspondent lender is, in some ways, a hybrid between a traditional lender and a mortgage broker. Correspondent mortgage lenders originate and fund loans in their own name, then sell them off to larger mortgage lenders, who in turn service the loans, or sell them on the secondary market.

Correspondent lenders can lend their own money, but can also shop your mortgage around to other lenders, like a broker. Whether the correspondent lender funds the mortgage directly or shops it out to another lender.

Correspondent lenders can handle loan approval with their own in-house underwriter, but the loan programs are usually based on terms approved by the larger mortgage lender, or “sponsor.”

Mortgage Bankers

Mortgage bankers are essentially “mortgage lenders” that originate and sell their loans in pools on the secondary market to investors such as Freddie Mac and Fannie Mae, along with private investors.

If they are non-depository institutions, they finance the loans with warehouse lines of credit extended by other lenders, but quickly sell them off on the secondary market so they can originate new loans. Once the mortgage is made, they sell it to investors and repay the short-term note. Those mortgages that are ‘conventional’ (loan sizes under $424,100) are usually sold onward to Fannie Mae and Freddie Mac.

Mortgage Brokers

A mortgage broker is a middle man between borrowers and banks who shops around to find a borrower the best rate and fees. While mortgage brokers may handle some of the funding paperwork, the lender is ultimately responsible for underwriting approval.

Mortgage brokers work independently with both banks/mortgage lenders and borrowers, and need to be licensed. Their job is to contact borrowers and bring in potential deals. Once they have a deal, they can send it to a mortgage bank or a wholesale lender. They need to process the loan once it is approved, and can negotiate pricing with the bank, mortgage lender.

We hope this has been an informative way for you to learn more about the different types of mortgage lenders you will come across as your search for a home loan begins. As always, please reach out to us with any further questions at support@stemlending.com or by heading to https://www.stemlending.com

 

Understanding your FICO Score

FICO – it’s an acronym you hear and read a lot about, but do you know what it means?

Fair Isaac Corporation (“FICO”), is a data analytics company founded in 1956, and is focused on scoring your credit.

Based on what we know, FICO weights certain criteria differently, including:

35% payment history

30% amount owed

15% length of history

10% new credit

10% types of credit used

Here’s the important thing to remember – your credit report is different from your credit score.

What’s a Credit Report?

Your credit report shows how well you repay each of your debt obligations, while your credit score estimates your creditworthiness with one numerical value.

A credit report includes information about your past and existing credit agreements, such as credit card accounts, mortgages, and student loans, and lists “inquiries” about your credit history. It outlines how much you owe creditors, how long each account has been open, and how consistently you make on-time payments. Credit reports also list related public records, such as collections or court judgments against you, tax liens on your property, or bankruptcy filings.

What’s a Credit Score?

A credit score is best thought of as a grade given to your specific credit report.

There are three different credit reporting agencies – Equifax, Experian, and Transunion – each of which assigns you a credit score. When you request your credit score, you will actually receive three numbers in return, and since the numbers will be coming from different reporting agencies, they may all be different.

Lenders typically assign interest rates based on what bucket your credit score falls into. Insurance companies, landlords, mortgage lenders, and even potential employers now review your credit score as a benchmark for figuring out how responsible you are.

The most widely used score, FICO, ranges from 300 to 850. On the FICO scale, the higher the number, the better.

How Can I Access my Credit Report and Credit Score?

The Fair Credit Reporting Act (“FCRA”) allows consumers access to one free credit report annually from each of the three credit reporting agencies. The free annual credit report will not contain your credit score. To access your credit score for a fee, you can contact the credit reporting agencies. There are also credit monitoring services available for a fee that can provide this information for you. Many banks and credit card companies now provide credit scores to their customers.

By understanding your credit report and credit score – and checking them regularly – you can make informed choices that will impact your financial future.

Generally, a credit score over 740 is considered excellent. If your score is below 650, you may see higher interest rates for loans and credit cards and should consider taking steps to improve your credit.

Demystifying the Mortgage Down Payment

When you’re thinking about buying a house, the amount of your down payment plays a critical role in the process.

Your down payment is a percentage of your home’s purchase price that is paid upfront by you, in cash, when you close on your Home Loan.

Whether you’re getting your loan from a bank or a non-bank mortgage company, lenders will look at this down payment amount as your equity investment in the home, and that amount (%) plays a vital role in determining not only how much you’ll need to borrower, but also:

Which type of loan is best suited to you  a Fixed Rate Mortgage or an Adjustable Rate Mortgage.

Whether your lender will require you to pay for private mortgage insurance (often referred to as “PMI”). This typically happens if you put down less than 20% of the home’s purchase price.

Your interest rate. Because your down payment represents your investment in the home, your lender will often offer you a lower rate if you can make a higher down payment.

So, do you absolutely need to have 20% to buy a home? No.

Among Millennials especially, there is a lot of confusion about the minimum down payment needed to buy a home, and we at STEM Lending are here to make that clear.

An outlook study conducted by United Wholesale Mortgage (UWM) along with Michigan State University found that 67% of millennials thought the 20% down was indeed necessary, while only 7% were aware that a down payment can be 5% or less.

As a Millennial homebuyer, you should know that there options available to you to purchase a home with less than 20% down payment.

Additionally, you should be aware of the potential consequences of having a down payment lower than 20%, and we’ll spell that out below:

Private mortgage insurance (PMI)

For conventional financing, if your down payment is lower than 20%, your loan-to-value ratio will be higher than 80%. In that case, your lender may require you to pay private mortgage insurance, because they are lending you more money to purchase the home and increasing their potential risk of loss if the loan should go into default.

With PMI, a homebuyer can put down less than 20% of a home’s purchase price and still qualify for a conventional mortgage loan. But a homebuyer will have to make larger monthly mortgage payments (since they’ll have to pay PMI).

As a prospective homebuyer, it is essential that you think about your lender’s requirements and what a higher or a lower down payment will mean for your monthly cashflow and your ability to repay the loan. Ultimately, you have to determine if it is worth it to pay PMI each month in order to receive the other benefits of homeownership vs. saving for a larger down payment of 20% or more and avoiding PMI, even if that means waiting longer to buy a home?

Programs That Allow for Less Than 20% Down

Freddie Mac has long allowed for 5 percent down, and their Home Possible AdvantageSM mortgage is available to qualified borrowers with as little as 3 percent down, which can even be raised by a gift from a family member or employer or a grant from a government agency.

Fannie Mae announced in 2015 the “Home Ready” Buyer program, under which qualifying first-time homebuyers can have down payments as low as 3%. Both first-time or repeat home buyers are eligible. In late 2015, this program replaced Fannie Mae’s ‘MyCommunityMortgage’ program.

To receive the 3% rebate, homebuyers must complete an online homebuyer education course. Fannie Mae said that it is partnering with Framework, a nonprofit created by the Housing Partnership Network and the Minnesota Homeownership Center, to create the homebuyer education course, which is 100% online.

Down Payment Assistance Programs

Down Payment Assistance Programs can be run by your direct lender, a non-profit organization, or local and state housing authorities where you live. As a NeighborWorks Housing Survey showed in 2014: “70% of U.S. Adults are unaware of down payment assistance programs available for homebuyers,” and that’s why our STEM Lending Blog is helping to make you aware. These programs are an important tool you may be able to leverage towards homeownership, provided you qualify.

The three main types of down payment assistance are grants, second mortgage loans, and tax credits.

Grants – Grants are funds that you do not have to pay back as long as you own and occupy your home for a certain period of time.

Second mortgage loans – The most common down payment source, many second mortgage loans offered by state and local governments have low or zero interest rates, and the payments are deferred over a specified time span and, in many cases, the loan is completely forgiven over time.

Tax credits – Certain states and local governments, including housing finance agencies, issue mortgage credit certificates, which reduce the amount of federal income tax you pay. This makes more money available upfront for your down payment or closing costs.

The U.S. Department of Housing and Urban Development (HUD) provides grants to state and local organizations through the HOME Investment Partnerships Program and the Community Development Block Grant Program.

To find the programs in your state, go to HUD’s on-line listing or the handy new tool from Down Payment Resource.

 

Why We Founded STEM Lending

STEM Lending founders: Shantanu Sharma (left) and Hakim Thompson
 

STEM Lending was founded out of a realization by Shantanu and Hakim that Millennials majoring in Science, Tech Engineering & Math (STEM) were being underserved in the lending market.

Research has consistently shown strong future earning potential of STEM majors, and yet current credit scoring methods hurt Millennials, due to their thin credit history.

Hakim and Shantanu are themselves Millennials and worked together at Goldman Sachs, with Hakim specializing in Mortgage Finance and Shantanu in Technology.

We both had stressful experiences when seeking loans, which left a lasting impression on us. At MIT, Hakim saw classmates arriving from Spain, Italy, and Russia who already had Masters and PhD degrees, and still found it was next to impossible to get a loan at competitive rates. As an immigrant STEM PhD student at UNC, Shantanu had a difficult experience getting a loan with his thin credit history in the US.

As a first time home buyer, Hakim was shocked to find that his mortgage application and closing process required detailed mortgage knowledge, something most first time home buyers would not have. Between the pre-approval, full application, appraisal, inspection, title search, comparing rates, and getting the final commitment, his entire mortgage process lasted over two months!

STEM Lending was founded to address these inefficiencies in providing better rates to creditworthy borrowers, and to also streamline what is a broken and grueling user experience today.

In the US, a quarter of homebuyers are unhappy with their mortgage lender and the disappointment is even worse for first-time homebuyers. Getting a loan shouldn’t be confusing, shouldn’t require you to manually negotiate with multiple lenders and brokers, and it shouldn’t take that long. Today’s borrowers demand speed, efficiency and a transparent experience – that’s what STEM Lending is committed to provide.