Written By: Glenn Michaels
When underwriting mortgage applications the usual problem for many borrowers is inadequate funds to close. The other problem is inadequate funds after closing (reserves). FHA does not require a borrower to have any reserves after closing on one and two family homes with traditional credit. Borrowers and underwriters must realize there are costs involved to purchase a home, move in to a home and to fix up a home.
Although reserves are not required for one and two family homes with traditional credit, borrowers will become strapped cash and these borrowers have a strong possibility of going into default due to the costs associated with buying a home.
Underwriters do not consider the move – in costs when a borrower has decided on a home that is being purchased. The moving company needs to be paid. Depending on the distance from their current residence to the new residence the moving costs can be substantial.
Title Insurance is a cost that is paid at closing. The borrower normally pays for the mortgagee policy and the fee policy. The title company normally collects in addition to the title insurance policies other fees required by the state, county, and/or town where the property is situated in. This is an additional closing cost. This is a figure that most underwriters make part of the closing and underwriters make sure the borrower has the funds to pay at closing.
Mortgage Tax and other recording fees. If by chance the property is situated in New York State, the borrower must pay a New York State Mortgage Tax, The mortgage tax differs based on the county where the property is situated. Properties located in the City of New York when closing, the borrower must pay 1.80% of the mortgage amount less $30.00. Properties located in Nassau and Suffolk Counties the borrower pays .80% of the mortgage amount less $30.00. This is a significant expense and all underwriters check to see if the borrower has the funds to pay. The lender also pays .25% as well. This fee is normally passed along as a cost.
Hazard Insurance (Fire Insurance) and/or Flood Insurance if necessary. The borrower must pay the first year premium for both policies at or before the closing and at closing the borrower must also pay to set up the escrow to pay for the future hazard insurance and flood insurance policy. Underwriters must make sure the borrower has enough funds to pay for this.
Home Inspection Fees. The fee for a home inspection is usually based on the size of the property and the location of the property. It also depends on who is doing the inspection. If a licensed engineer does the inspection or an inspection company does the inspection the cost could differ. There are some companies that insure their inspection.
Legal fees are involved with most closings. The home buyer normally has his own legal representation for a cost and most mortgage lenders require their lawyers to paid by the borrower as well at the closing. Underwriters normally include the bank’s legal costs but not the borrowers own legal costs into the transaction.
Appraisal Fee is usually paid by the home buyer. The cost for the home appraiser depends on the location of the property, the number of units and type of mortgage being applied for. This fee is a non-refundable fee whether or not the borrower actually closes on the property in question. This fee is part of the closing costs.
Land Transfer fees are not always paid by the borrower. In some locations the sell pays the fee. These fees vary by the location of the property.
Termite Inspection if the property is situated in an area where termites are common. The inspection fee varies greatly depending on who is doing the termite inspection, the location of the property and the size of the property.
Prepaid Expenses. Most mortgage loans have an escrow/impound account established at closing to pay future real estate taxes, school taxes, property insurance, flood insurance for the property along with the per diem interest. These figures are usually calculated in the borrowers’ cash to close.
Although FHA does not require PITI reserves after closing for a one and two family home with traditional credit, the borrowers may not be adequately set up for a rainy day after the loan closing that will probably impact the borrower’s ability to repay the mortgage.
About The Author
Glenn Michaels - As an NAMP® staff writer, Glenn Michaels is a mortgage underwriting instructor for Mortgage Underwriter University (www.MortgageUnderwriter.org). As a BBA & FHA DE Underwriter, Glenn is a Pace University graduate who also graduated from New York University’s School of Mortgage Finance. Glenn has conducted numerous training classes and has worked in the mortgage banking industry for 38 years. If you're interested in becoming a writer for NAMP®, please email us at: firstname.lastname@example.org.