Chris Thomas

How much are the closing costs for a purchase transaction? 2.5%, 3%, 3.5%, 4%?

We get asked this question all the time, and here's why we can't answer it without actually preparing a Good Faith Estimate.

Many of the closing costs are fixed costs, meaning they are the same regardless of how big the loan is. Some examples of fixed closing costs are:

• Appraisal fee
• Credit report
• Underwriting fee
• Tax Certificate
• Loan closing fee
• Real estate closing fee
• Title insurance fees
• Recording fees

Other closing costs change depending on the size of the loan or the purchase price. Here are some examples of closing costs that change:

• Origination fee (usually 1% of the loan amount)
• State tax stamps

Still other closing costs depend on the individual property, the interest rate, the borrower's credit, or the closing date. Here are some examples:

• Property taxes (depends on the property and the date of closing)
• Homeowner's insurance (depends on the property and the borrower's credit score)
• Pre-paid interest (depends on the borrower's credit score - which determines the interest rate, the loan amount, and the date of closing)

Let's assume a property sells for $100,000 and the fixed costs are $2,000. The variable costs will probably be low because the taxes and insurance will be low. Let's assume the variable costs total $2,500. Total costs would be $4,500, or 4.5% of the purchase price.

Now let's assume we have a property selling for $500,000. The fixed costs would be the same - $2,000. The variable costs would be higher because the loan amount, the taxes, and the insurance would be higher. They might be $8,000. The total would be $10,000, which is only 2.0% of the purchase price.

Even though the closing costs are $5,500 less for the cheaper house, they are 2 1/4 times the percentage of the costs for the more expensive house - 4.5% versus 2.0%.

It's always a good idea to have your lender tell you how much the closing costs are. Guessing based on a "rule of thumb" is a very bad way to do it.

We are often asked what the difference is between a mortgage broker and a mortgage banker. Here's the difference.

A mortgage broker is any loan sales person who represents more than one lender. Some brokers represent a few lenders and others represent dozens of lenders. When a loan is funded by a mortgage broker, the money comes directly from the lender. As an example, if the broker is selling a loan from Wells Fargo, the money will be sent by Wells Fargo to the title company.

A mortgage banker can either be a retail banker or a wholesale banker. If the mortgage banker is a retail banker, they can only sell loans from the one company they represent. If a loan officer works for Wells Fargo, they can only sell Wells Fargo loans.

If the mortgage banker is a wholesale mortgage banker, they can sell loans from more than one lender, just like a mortgage broker. The difference is that the money for the closing comes from their own line of credit (called a warehouse line of credit). After the closing, the wholesale banker sells the loan to the lender within a short period of time - usually a few days.

The advantage of using a mortgage banker is that they have control of the funding. The advantage of using a broker is that they represent more than one lender, so they may be able to get a loan that is unavailable to a retail banker. The best option is a wholesale mortgage banker (they represent many lenders and control the funding).

There is much debate over the advantages of using a retail banker versus a wholesale banker, but the one true difference is that the retail banker has to take a shower every day and wear nice clothes when they report to work at the bank. A wholesale banker (or broker) can sit at his desk at home in his boxers and a ratty T-shirt.

Borrower funds used for the down payment, closing costs, and reserves must be "seasoned" for two months before they can be used to qualify for a mortgage. This means the borrower must be able to provide proof that the money has been in their account for two months. Cash on hand is not an acceptable source of funds for most loans. If someone is going to use cash on hand to qualify, they need to put the money in the bank as soon as possible.

If a borrower has a joint account with someone who is not a borrower, the money in that account can be counted, provided the person who is not the borrower states that the borrower has use of all the money in the account. The money must still be seasoned for two months to count it.

A borrower can also receive a gift from a relative for certain types of loans (most notably FHA loans). In the case of a gift, the money does not have to be seasoned. It must be deposited into the borrower's account before the loan can get a final approval, but it does not have to be in the account for a full two months. One day is fine.

As the holidays approach, there will be questions about whether income from seasonal employment can be used to qualify for a mortgage. Here are the rules:

• The borrower must have worked in the same job, or in the same line of seasonal work, for the past two years.
• The borrower's employer must confirm that there is a reasonable expectation that the borrower will be rehired for the next season.
• The income is then averaged over the past two years.

Super important bonus tip: Make sure the lender involved in your transactions is re-disclosing the Truth-in-Lending disclosure (the TIL) whenever the annual percentage rate (APR) changes. If the APR on the most recently disclosed TIL is not within 0.125% of the APR on the final TIL signed at closing, the loan cannot close until 3 days after the correct APR has been disclosed. This is a federal regulation (it's part of the Truth-in-Lending Act). Regardless of whether you are the listing agent or the selling agent, make sure you ask the lender if they are disclosing the TIL properly.

There is a lot of confusion regarding when someone should get a conventional loan versus an FHA loan. Here's a brief overview of the differences:

FHA loans:

• The loan is insured by the federal government, so it is only underwritten once. If the loan is approved by the lender, it automatically gets approved for mortgage insurance.
• The standard down payment amount is 3.5% of the purchase price. If the borrower makes a full price offer on a HUD home, then the down payment is only $100.
• The borrower can get a gift or a loan from a relative to pay for the entire down payment.
• The guidelines are the same for all FHA loans, regardless of whether the property is in a declining market or not.
• Interest rates are the same for everyone with a credit score above 660. They go up slightly for people with scores between 620-659.
• Reserves are not required and collection accounts do not need to be paid.

Conventional loans:

• The loan is insured by a private mortgage insurance company, so it gets underwritten twice - once by the lender and again by the mortgage insurance company. The stricter guidelines are almost always from the mortgage insurance company.
• The standard down payment is 5% for first-time home buyers. If the property is in a declining market, the mortgage insurance guidelines may require an additional 5% down for people who are not first-time home buyers.
• The borrower can get a gift from a relative, but they must have at least 5% of the purchase price from their own funds. However, if a relative gives a gift of 20% of the purchase price, then the borrower doesn't need any money at all from their own funds.
• Everyone with a credit score above 720 gets the best rates. For every 20 points below 720, the rates go up.
• The mortgage insurance companies SOMETIMES require the borrower to have reserves and to pay collection accounts. (Do NOT advise anyone to pay collection accounts until their loan has been run through Fannie Mae's or Freddie Mac's online underwriting systems, because paying old collection accounts will lower their credit scores and they may not get approved.)

This may make it look like FHA loans are superior to conventional loans. They are - but only for some borrowers. For other borrowers, a conventional loan is better. The way to tell is to fully qualify the borrower, determine what their financial goals are, and only then recommend a particular loan.