As a mortgage banker I’m involved in the transaction to arrange financing for you but I’m also here as your advocate to help you understand the process and react to market conditions. 

If you are purchasing your first home the process may seem overwhelming.  In an effort to help you understand the details of the process I’ve posted a “cliff note” on the main factors affecting the financing of your first home purchase. 

Types of Loans. Loans can have a fixed interest rate or a variable interest rate. Fixed rate loans have the same principal and interest payments during the loan term. Variable rate loans can have any one of a number of “indexes” and “margins” which determine how and when the rate and payment amount change. If you apply for a variable rate loan, also known as an adjustable rate mortgage (“ARM”), a disclosure and booklet required by the Truth in Lending Act will further describe the ARM. Most loans can be repaid over a term of 30 years or less. Most loans have equal monthly payments. The amounts can change from time to time on an ARM depending on changes in the interest rate. Some loans have short terms and a large final payment called a “balloon.” You should shop for the type of home mortgage loan terms that best suit your needs.

Government Programs. You may be eligible for a loan insured through the Federal Housing Administration (“FHA”) or guaranteed by the Department of Veterans Affairs or similar programs operated by cities or states. These programs usually require a smaller down payment.

Interest Rate, “Points” & Other Fees. Often the price of a home mortgage loan is stated in terms of an interest rate, points, and other fees. A “point” is a fee that equals 1 percent of the loan amount. Points are usually paid to the lender, mortgage broker, or both, at the settlement or upon the completion of the escrow. Often, you can pay fewer points in exchange for a higher interest rate or more points for a lower rate. Ask your lender or mortgage broker about points and other fees.

A document called the Truth in Lending Disclosure Statement will show you the “Annual Percentage Rate” (“APR”) and other payment information for the loan you have applied for. The APR takes into account not only the interest rate, but also the points,

mortgage broker fees and certain other fees that you have to pay. Ask for the APR before you apply to help you shop for the loan that is best for you. Also ask if your loan will have a charge or a fee for paying all or part of the loan before payment is due (“prepayment penalty”). You may be able to negotiate the terms of the prepayment penalty.

Lender-Required Settlement Costs. Your lender may require you to obtain certain settlement services, such as a new survey, mortgage insurance or title insurance. It may also order and charge you for other settlement-related services, such as the appraisal or credit report. A lender may also charge other fees, such as fees for loan processing, document preparation, underwriting, flood

certification or an application fee. You may wish to ask for an estimate of fees and settlement costs before choosing a lender. Some

lenders offer “no cost” or “no point” loans but normally cover these fees or costs by charging a higher interest rate.

Lock-ins. “Locking in” your rate or points at the time of application or during the processing of your loan will keep the rate and/or points from changing until settlement or closing of the escrow process. Ask your lender if there is a fee to lock-in the rate and

whether the fee reduces the amount you have to pay for points. Find out how long the lock-in is good, what happens if it expires, and whether the lock-in fee is refundable if your application is rejected.

Tax and Insurance Payments. Your monthly mortgage payment will be used to repay the money you borrowed plus interest. Part of your monthly payment may be deposited into an “escrow account” (also known as a “reserve” or “impound” account) so your

lender or servicer can pay your real estate taxes, property insurance, mortgage insurance and/or flood insurance. Ask your lender or mortgage broker if you will be required to set up an escrow or impound account for taxes and insurance payments. Transfer of Your Loan. While you may start the loan process with a lender or mortgage broker, you could find that after settlement another company may be collecting the payments on your loan. Collecting loan payments is often known as “servicing” the loan. Your lender or broker will disclose whether it expects to service your loan or to transfer the servicing to someone else.

Mortgage Insurance. Private mortgage insurance and government mortgage insurance protect the lender against default and enable the lender to make a loan, which the lender considers a higher risk. Lenders often require mortgage insurance for loans where the downpayment is less than 20% of the sales price. You may be billed monthly, annually, by an initial lump sum, or some combination of these practices for your mortgage insurance premium. Ask your lender if mortgage insurance is required and how much it will cost. Mortgage insurance should not be confused with mortgage life, credit life or disability insurance, which are designed to pay off a mortgage in the event of the borrower’s death or disability.

Flood Hazard Areas. Most lenders will not lend you money to buy a home in a flood hazard area unless you pay for flood insurance. Some government loan programs will not allow you to purchase a home that is located in a flood hazard area. Your lender may charge you a fee to check for flood hazards. You should be notified if flood insurance is required. If a change in flood insurance maps brings your home within a flood hazard area after your loan is made, your lender or servicer may require you to buy flood insurance at that time.

The Good Faith Estimate is an estimate of closing costs and prepaids associated with the proposed loan.  Below is a section devoted to the "GFE". 

Click here to view a sample "Good Faith Estimate"

Section 800. Items Payable in Connection with Loan: These are the fees that lenders charge to process, approve and make the

mortgage loan:

801. Loan Origination: This fee is usually known as a loan origination fee but sometimes is called a “point” or “points.” It

covers the lender's costs in processing the loan. Often expressed as a percentage of the loan, the fee will vary among

lenders. Generally, the buyer pays the fee, unless otherwise negotiated.

802. Loan Discount: Also often called "points" or “discount points,” a loan discount is a one-time charge imposed by the

lender or broker to lower the rate at which the lender or broker would otherwise offer the loan to you. Each "point" is equal to one percent of the mortgage amount. For example, if a lender charges two points on a $80,000 loan this amounts to a charge of $1,600.

803. Appraisal Fee: This charge pays for an appraisal report made by an appraiser.

804. Credit Report Fee: This fee covers the cost of a credit report, which shows your credit history. The lender uses the

information in a credit report to help decide whether or not to approve your loan and how much money to lend you.

805. Lender's Inspection Fee: This charge covers inspections, often of newly constructed housing, made by employees

of your lender or by an outside inspector. (Pest or other inspections made by companies other than the lender are discussed in line

1302.)

806. Mortgage Insurance Application Fee: This fee covers the processing of an application for mortgage insurance.

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807. Assumption Fee: This is a fee, which is charged when a buyer “assumes” or takes over the duty to pay the seller’s

existing mortgage loan.

Section 900. Items Required by Lender to Be Paid in Advance: You may be required to prepay certain items at the time of

settlement, such as accrued interest, mortgage insurance premiums and hazard insurance premiums.

901. Interest: Lenders usually require borrowers to pay the interest that accrues from the date of settlement to the first

monthly payment.

902. Mortgage Insurance Premium: The lender may require you to pay your first year’s mortgage insurance premium or a

lump sum premium that covers the life of the loan, in advance, at the settlement.

903. Hazard Insurance Premium: Hazard insurance protects you and the lender against loss due to fire, windstorm, and

natural hazards. Lenders often require the borrower to bring to the settlement a paid-up first year’s policy or to pay for the first year's

premium at settlement.

904. Flood Insurance: If the lender requires flood insurance, it is usually listed here.

Section 1000 - 1008. Escrow Account Deposits: These lines identify the payment of taxes and/or insurance and other items

that must be made at settlement to set up an escrow account. The lender is not allowed to collect more than a certain amount. The

individual item deposits may overstate the amount that can be collected. The aggregate adjustment makes the correction in the amount on line 1008. It will be zero or a negative amount.

Section 1100. Title Charges: Title charges may cover a variety of services performed by title companies and others. Your

particular settlement may not include all of the items below or may include others not listed.

1101. Settlement or Closing Fee: This fee is paid to the settlement agent or escrow holder. Responsibility for payment of

this fee should be negotiated between the seller and the buyer.

1102-1104. Abstract of Title Search, Title Examination, Title Insurance Binder: The charges on these lines cover the

costs of the title search and examination.

1105. Document Preparation: This is a separate fee that some lenders or title companies charge to cover their costs of

preparation of final legal papers, such as a mortgage, deed of trust, note or deed.

1106. Notary Fee: This fee is charged for the cost of having a person who is licensed as a notary public swear to the fact

that the persons named in the documents did, in fact, sign them.

Section 1200. Government Recording and Transfer Charges: These fees may be paid by you or by the seller, depending upon

your agreement of sale with the seller. The buyer usually pays the fees for legally recording the new deed and mortgage (line 1201).

Transfer taxes, which in some localities are collected whenever property changes hands or a mortgage loan is made, can be quite large and are set by state and/or local governments. City, county and/or state tax stamps may have to be purchased as well (lines

1200. GOVERNMENT RECORDING AND TRANSFER CHARGES

1201. Recording fees: Deed $ ; Mortgage $ ; Releases $

1202. City/county tax/stamps: Deed $ ; Mortgage $

1203. State tax/stamps: Deed $ ; Mortgage $

1300. Additional Settlement Charges:

Section 1301. Survey: The lender may require that a surveyor conduct a property survey. This is a protection to the buyer as well.

Usually the buyer pays the surveyor's fee, but sometimes this may be paid by the seller.

1302. Pest and Other Inspections: This fee is to cover inspections for termites or other pest infestation of your home.

1303-1305. Lead-Based Paint Inspections: This fee is to cover inspections or evaluations for lead-based paint hazard risk

assessments and may be on any blank line in the 1300 series.

Transaction Summary:

Total estimated monthly payment. This section incorporates loan amount, interest rate, taxes , insurance and mortgage insurance to provide your estimated monthly payment.

Closing cost summary.  This section autofills the figures from the above costs to detail closing costs paid by buyer vs. other parites.

Total estimated funds needed to close.  This section calculates the closing costs, prepaids and seller credits from above to give the “cash from borrower” figure.  At the day of closing this is the amount needed from the borrower (buyer) in the form of a cashiers check to apply to the loan/closing costs.

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