Are There Hidden Fees on Your Closing Documents? Busting the Confusion!

Well, hello everyone. Welcome to this week's Mortgage Minute. My name is Art Alvarez with Mortgage Works, where we have the answers and they're on on the house. Coming to you from Palm Springs and the greater Coachella Valley area. The weatherman says we have abundant sunshine here today, and that is definitely true. The weather could not be more perfect than it is today and actually in the last couple of days. So that's part of the reason why our season is fast approaching and already starting to develop. We're seeing more and more people in town as we get into this more moderate weather. So, and of course, it's baseball season. I've been mentioning that last couple of weeks. We'll be done here just before the next game with with the Dodgers. So I promise I won't hold you over and we'll see how that plays out. Of course, I'll admit I'm actually pulling for the brewers because I want to see this go at least a seven game series nail biter. And then ultimately we'll see if the Dodgers prevail. By most predictions, that's what's going to happen. But you know, we'll have to wait and see. Again, I hope we can go seven games. And of course I'm rooting for the Toronto Blue Jays too. It's to me this time of year with playoff baseball, you want to see these, especially the pennant race and then the World Series, you really want to see it go all the way to seven games. That's what makes it so dramatic and so interesting. So I'm hoping that that'll happen. We'll see. So with that, how about we play ball, so to speak, with what's going on in the financial markets. First, I'm going to show you our rate grid.

And it's, you know, very good news. Mortgage rates are good, they're not bad. So I'm going to keep harping on that. We are very much now in a 5% market. Now granted it's high fives, but that 6% threshold we have broken that, you know, the conforming 30 year fix, we're under 6 at no points. The 2:1 and 3:2:1 buy ons under 6% note rate. So you can have a first year rate in the twos on a 3:2:1 first year rate on in the threes on a, on a 2:1, a 15 year loan is down to 5 and a quarter. That means 4 under, you know, under 5 in the fours is not far away. FHA 5 and 3:8 VA 5 and a half and the really good news is if you look at that toward the bottom of the rate grid, 30 year fixed jumbo, five and three quarters and then of course the seven year arm down to five and a half and actually the third year jumbo is five and seven eight. Excuse me, but the point is, did you notice all these rates are in the fives. So the notion that we're still in the sixes or mid sixes just isn't true, at least here at Mortgage Works. So if you're being quoted something north of 6%, you should give me a call at least let me give you a quote on what we can do for you. So let's look at the bond, your 10 year bond yield chart. And there you go. That's the kind of slope we want to see. Last week it was. Last Friday again This is a five day chart. Last Friday was up close to 415. You saw it drop early in the month, early in the week, I should say a little couple of upticks midweek. There's sort of that Wednesday dip that Jeff likes to see. But look at today, end of market today because the markets are closed now really dropped under 4% 3.98. So that's really good news. And we are still seeing some of our lenders start to reprice for the better. So this holds, I would imagine our rate grid tomorrow is going to look even a little better than it does today. So the real question then is what's happening with this bond yield, why this drop downward when in fact we have a lack of economic data points for the markets to react. So let me kind of go over that now. You know, what's making the market move as we like to talk about after showing you this chart.

And as I put on this slide, you know, and it's a question, will the U.S. i call it Data desert, is it going to continue? What I mean by data desert is again because of the government shutdown, most of the economic data points that the market relies on to monitor engage the direction of the economy. This data is not being released because of the government shutdown and people on furlough and some of these agencies, they're not at their desks, you know, crunching the numbers and you know, issuing these data points as they are scheduled to be. So as a consequence, the calendar this week as well, like the last couple of, not a whole lot to talk about in terms of data points and in fact this week like last, what's dominated the US economic calendar is what I call Fed speak where and I Counted them again. Eight different Fed governors as well as Chairman Powell provided remarks this week at different days of the week. I mean, literally all through the week, Monday through today, that's been a major part of any economic news is just what are these folks who are part of the Fed system? What do they have to say about the economy and interest rate reductions in terms of the Fed funds rate and so forth? So that's really kind of dominated the news. One bit of data, if you want to call it, was released this week. That's the Fed Beige Book. And so what the heck is a Fed Beige Book? I mean, is it a, is it a book that's beige color? Well, not exactly. Actually, the Fed Beige Book, for those who don't know it is released eight times a year and it's a qualitative review of economic conditions and that was released this week. And so what it underscored the biggest message out of the Fed Fed Beige Book release. Hard to say this three of 12 Federal Reserve banks reported expanding activity. So of course, flip that over. That means nine Federal Federal Reserve banks did not report expanding activity. So that of course suggests that the economy is softening, that it's slowing. But here's what's a little odd about that. If you look at predictions for third quarter GDP which should be out soon, again, we'll have to see what happens with this shutdown and how soon we get the number. The predictions are that the third quarter GDP for the US could be between two and a half to the Atlanta Fed saying 3.9. That if the Atlanta Fed turns out to be accurate, that flies in the face of the, of the Beige Book indication that things are softening. So again, we're a little bit at a loss having to wait for this shutdown to stop or be over so that we can get back on a regular schedule with data points. I'm going to go ahead and show you the list of data points that were scheduled for release this week that haven't been released, all except for one US Retail sales, the cpi, the Consumer Price Index, which by the way, that was supposed to be out on Wednesday. Yesterday. They're saying that they're going to going to release that. I think it's the October 24th. They're actually going to bring people in to get that number crunched and out. PPI Producer Price Index. That's wholesale wholesale inflation. Also on the list to be released, not released initial claims for unemployment benefits. Supposed to be released this week hasn't been the Philly Fed Manufacturing Survey. Did get released. That's the only one out of this list and that one did show some softening in manufacturing activity. So when you realize that most of these data points weren't released and you go back and look at that chart we just showed you with the the 10 year bond dropping to under 4%, what's triggering that? Well, as it turns out what hit the news late today is the regional banks. The regional banks are back in the news. Two of them, Zion and Western Reliance, have forecast that their numbers are going to be poor, that they're going to be releasing and it's apparently being attributed to poor loan quality. So what that did as we put on our some of our slides, the markets tend to respond with reptilian like minds to stimuli. That regional bank news release triggered a reversal in the stock market. It was up today and then it ended up going down 300 points. And this improvement in your 10 year bond yield is what we often call a flow of funds, a flight to safety. It's the basic point is investors looking at this news release about a couple of regional banks and it becomes a oh moment where do we have a bigger problem lurking there that we didn't realize we better move some of our money into a safe haven like treasury bonds. That I think is what's driving this drop in the treasury bond yield today. The message to any of you, whether you're a prospective home buyer, a realtor working with a buyer who's gonna purchase a home and need a loan, this improvement may be short lived. So when you have this kind of shock to the system and that move so quickly based on a news release like this, regional banks, this improvement could be something that's not around long. So if you're right there at the point where you want to get a mortgage, this would be a very good time to strike it while it's hot and grab these rates while they're there. Because once this news gets, you know, peeled a little bit and we get more details on what these announcements meant mean for the regional banks, you know, that could cause the bond yields to start to float back up. So just keep that in mind. If you're in the market to get a mortgage, you ought to consider right now it's a very good time. I know I keep saying it's a good time all the time. This in particular is a good time because of that bond bond yield dip. So if you're ready to, you know, take advantage, do it. And I think you'll be pretty happy if you do so with that we're going to move to our discussion SEC session and this is gonna. Jeff and I are going to talk about something that is kind of a hot button for me and all the years I've been in this business, I think there's still a lot of issues and misinformation about the cost to get a home loan, you know, closing costs. So we want to get into a little bit of a deep dive, really peeling the onion and showing you what is really true about closing costs. Are they legit, legitimate? What are they for? And why do they seem to be so much, when in fact maybe that's not quite true. So with that, I'll bring Jeff on and we can get the discussion started.

Hey, Art.

Hey, Jeff.

You know, as you're describing the current situation with rates and the regional banks, it kind of reminds me of that movie the Perfect Storm. You know, you gotta strike while it's happening. You can't wait because it is such a freak phenomena. I can't, I can't think of it in the last several years that we've discussed it where this has happened because of the shutdown and no data. And then the ones who are reporting are not giving us real positive data. But it can be positive for someone saying, hey, I need a loan for my home or a loan for my home.

Right, exactly. Using the Perfect Storm analogy. And I like that movie. I've seen it a couple of times. It's like, what is it? The Captain Clooney, he says, I always find the fish and now's the time to go out and find the fish. Because, you know, these numbers are pretty good and hopefully they'll last. I think there's. We're starting to see a pretty good amount of maybe almost too much optimism. I saw another news headline about now. There's a feeling in the markets that the Fed may be more aggressive on the two remaining opportunities to cut the fed funds rate this year. And now there's more and more talked about they're going to go a half percent lower, not a quarter. So we'll see. I'm a little skeptical. I wouldn't, I wouldn't count on that. And again, we already know from past September of last year when we were certain it was going to happen, and it did happen, it didn't help the mortgage market, mortgage rates at all. They got worse afterwards. I've got to keep that in mind as well.

Yeah. Before we dive into today, there's one other thing I want to ask you about because I think it is part of that Perfect storm thing is looking at, at history, it looks like now October through about the first week of November is really kind of that hot buying season. It seems like there's always an uptick in home buying during that period of time. Why is that and how can this even exacerbate it, maybe, maybe make it even better?

Well, you know, I'm going to say that yes, there is that belief that as you get into the fall and of course schools restarted and anybody was trying to scramble and move before, you know, they have kids and they want to get a new home before school starts, that's one thing. But yeah, it does appear that in some markets things are starting to improve. I don't know how much of that I would attribute to seasonality necessarily just on its own. I think there's more factors involved. In fact, I think I've mentioned on our show it's been quite a while ago that not too many years back here in the Coachella Valley, which is an area, a market that is very much considered one that is going to be seasonally affected. You know, we've got our very hot summers and then we've got our season, you know, which basically runs from now until April.

That of course there's going to be more real estate, home buying activity, more selling during the season and it always drops off in those hot summer months, basically from May to through September. Well, there's been some study of the numbers here in this market on that, you know, theory and what the numbers show is it's for the most part not valid that the actual activity between the off season here in the Coachella Valley and the, you know, inseason and of course the seasons are. It's significant because you know, the weather's a lot better, it's much more tolerable, all the snowbirds come in, the population here probably doubles with all the part time residents and you've got all these major events like the tennis tournament in March and of course the festivals in April. But in reality the data seems to show that the activity in terms of home selling and buying is really pretty even whether you're in season or off season. So I think at least this fall, I think it has more to do with the fact that I think again, we've had very stable rates with a little bit of a trend downward despite all the, you know, negative headlines. The economy is relatively good. Stock market certainly is doing very well and we haven't seen a whole lot of job losses. The unemployment rate continues to be low. You put all that together and, and of course again, I keep saying rates are a lot better than people want to give them credit for. Yeah, they put all that together. I think that's really probably why activity seems to be picking up a little bit now. It's not, we're not back to the heyday again. I always caution those headlines about yeah, purchase applications are soaring and all that kind of stuff. Well, it's always a question of soaring from what, but it is a little bit better. We're seeing it here. We're seeing more purchase activity. So you know, that's a good thing. And I, I do tend to think that's going to continue especially if we can keep these rates under 6 because I think that's an important psychological level. So.

Well, if you were to, if you were to strip out those, those crazy years where the rates were out of control, low and buying was, was a frenzy, how are we looking to the, the norm without that anomaly?

Well, I mean, I think a couple things. One is we, we're getting closer to a normal real estate market.

Okay.

You know, I think, you know, the days on market, the amount of inventory is getting closer and closer to normal. You know, normal being the six months of supply based on the current sales rate. And for example, I think last month in the Coachella Valley There was like 517 sales, you know, for the month, you know, closed sales. Now that's better than it was a year prior, but it's still below what would be considered a normal market. And that 500 sales was about a based, was as a result of a listing inventory of about 2,000 homes. So guess what, that's about a four month supply. So I think if we can get to a six month supply of listings so that there's more for buyers to choose from and if we can get rates to continue to stay where they're at or trend a little bit lower, it'd be great to see a conforming loan back in the mid fives or maybe low fives, which would imply that FHA VA loans could hit 5 or below in the high fours. You put all that together, I think you're going to see the combination, more listing inventory, signal to the buyers that hey, there's more to look at and we're likely going to have less of an issue of competing with a whole bunch of buyers. And now we can see rates are relatively more affordable than they were when they were six and a half or seven. You put all that together and I think we could have a pretty good real estate market going forward. Here for the next, you know, pretty good period of time.

So, yeah, it feels, it feels right. It seems like all the factors are really lining up again to go back to that analogy of the perfect storm, this is just one more of those pieces of that puzzle to make it come together. So thank you for. That's a little off topic, but I thought, you know, we're digging in a little bit. Well, let's talk about this. And you know, this is often the look and I'm sure you see it or hear it over a phone call or an email way more than I do. But I've been on that end where, hey, I thought my loan costs were only X and it's like, holy cow, what happened? And that's a look of shock on their face. I'm excited about getting into this because I think, you know, I noticed we had lunch yesterday and I noticed, you know, you did have some tears in your shirt from getting some arrows in your back as the messenger. So hopefully this will help clear some of this up that, you know, you are just a messenger and it'll make more sense as we get going along here. Okay, so here, here's the big thing is it seems like there's a mortgage closing cost confusion and misinformation. I'm just going to go through these lists and then we'll break them down one at a time.

Sure, sure, let's do that.

And then there's a closing cost worksheet and we're going to actually pull up an example so R can go through it. So when you're on that receiving end, whether it's with art or somebody else, God forbid, but with art, and you see this, you're like, oh, okay, I know this, I understand it. It's not going to blow my mind and I can, I can move forward. And then, you know, this, this idea about junk fees and artists had a program about that before. You know, what are, what's real and what's not. Well, he's going to disclose that today and really clear that up for you. And then understanding. And this was even for me, as much as I've been around art non recurring and prepaid closing costs. I think once you see this list in this, this worksheet, it will like ring the bell like it did for me, like, oh, I get it, okay. Non recurring. And then finally, as I say, let's not shoot the messenger. So if you're ready, Art, let's get into it.

Yeah, let me go through these points real quick one by one and then we'll dig into the worksheet example that we're going to provide to everybody. The first thing is mortgage closing cause confusion and misinformation. I've seen this for years and it continues to be very persistent. What that talking point really means is a lot of borrowers, I'd say most of them don't really have a clear handle on closing costs as it relates to financing your purchase. In other words, there's a tendency when you're getting a loan to really focus on the closing costs associated with just purchasing your home and sort of over simplistically assuming that all these closing costs that you're being confronted with are because you're getting a loan. And then quite often folks will kind of react negatively when they see a disclosure, whether it's a closing cost worksheet or a loan estimate, which I'll touch on in a second here. They'll just sort of draw this rapid conclusion when they see a particular number that is a compilation of all the costs and just assume, oh my gosh, this loan is costing me $12,000 or this loan's costing me $15,000, when in reality that's not technically quite true. And so again, we're going to get into that when we show you the worksheet example. But as a consequence, there's a lot of misinformation that is associated with closing costs as just a general subject. Now I want to the second point, and this is an important distinction, closing cost worksheet versus a loan estimate. Now, a closing cost worksheet is not an official loan estimate from a regulatory standpoint. But we and I use this daily.

When we first encounter a customer who's going to get a loan or ask us to arrange a loan. And I've covered on this program before. One of the unique things about the mortgage industry is people end up quite often making a decision as to where they're going to get the loan, what company they're going to use to arrange their loan, and they'll start the process without even knowing what the cost is going to be to get the loan. It's like trying to buy something from another in another industry. You're going to purchase a product or service and yet you'd make the buying decision without knowing what the cost is going to be, what the price is going to be. That is very prevalent in the mortgage industry. I just had a refi inquiry about a week ago where the person reached out to me and they explained they went to their existing lender who was servicing their loan and asked if they could get a quote. And that lender said, well, no, we can't give you a quote unless you apply for the loan first. And then within three days of your application, we'll give you some numbers. I think that that's prevalent in the mortgage industry. I think it's a poor practice. I've fought that my entire career. I think it's wrong. I think you should be able to get at least a pretty good idea what your price or what your terms are going to be for a particular loan inquiry you're considering before forcing you to apply for the loan. We don't need a lot of information to do that. I basically need to know the home value or purchase price depending on if it's a refi or purchase the loan amount you desire. What type of property is it? Single family condo, PUD two to four units? What the disposition of that property is going to be? Are you buying it for your primary home, a vacation home or a rental property? And what you think your credit score is. With that information, I can provide you a detailed closing cost worksheet as it shows there. And I'll give that to you even before you've decided to retain us to arrange your loan. I think that's important. I want you to know what kind of terms we can offer before you make your decision to have us as your mortgage originator. I think that's appropriate. I think it's fair and it's not done enough, not done enough in this industry. And I think that's one of the things that sets us apart. So if you're a prospective borrower, you should keep that in mind. Check with me. I can give you that worksheet without asking you to apply or getting any of your information. If you're a realtor working with a buyer, hey, at least ask us to give you a closing cost worksheet and use it for price competition for shopping around, as you, I'm sure, encourage some of your clients to do that. So what's different about that than an le? The loan estimate is something that is going to be created after you've applied for the loan, we've registered it with a lender and that starts a regulatory process where this loan estimate has to be dispersed to you within three business days after your application. Now, the loan estimate is an official regulatory disclosure. Unlike the closing cost worksheet. The closing cost worksheet has some verbiage right at the very top disclaimer that basically tells you this is not your final loan terms. Get A loan estimate to get a better idea. So that's the proper disclosure on the closing cost worksheet. When you get to the loan estimate stage, that's where the regulatory milestones get triggered. We register your file. A loan estimate is going to be sent to you within three business days. You have to sign that. Even. You have to sign that before your loan could be submitted for underwriting and before your appraisal can be ordered. So that's the distinction between these two types of disclosures. Most lenders, most originators do not use the closing cost worksheet the way we do. Again, they'll force you to. Well, we won't tell you any terms specifically in writing. You got to apply first, and then we'll get it to you in three days. Again, I don't like that approach. I don't think that's fair. You need to know the numbers, or at least a good idea what the numbers are right up front before you apply. Junk fees. You've all heard the term. It's been around for decades. I've always kind of cringed at that accusation, if you will. I don't think it's a fair description of what's involved in closing costs when you're getting a mortgage.

Every cost, every fee that you incur when you're getting a mortgage loan to purchase a house or a refi is going to have some basis in terms of a service provided to you or certain things that you're obligated to pay, like taxes or getting insurance on your home. So think of it this way. When you buy any other product or service, you know, you go to the hardware store and buy some things. Do you go to the cash register and say, well, I don't want to pay that. That's a junk fee. Or you go to your accountant and they do your taxes. And of course, folks just finished filing their last extension deadline yesterday. And when you get your bill, do you say, well, no, I don't like this amount. It's. I think there's some junk in here. I want you to change this amount because I don't think it's valid. Well, the mortgage industry gets subjected to that criticism all the time. I think it's misadvised or misapplied, I should say. And it's not fair. It's not. It's not reality. Any fee that you're going to incur on a mortgage loan or a home purchase or refi, pretty much without exception, there's a valid justification for that fee, and we'll get into that a little bit when we show you this worksheet. And then finally understanding the non recurring and prepaid closing costs, non recurring closing costs, those are what I call fee based third party fee based fees from third parties providing a service. And they're non recurring because again, they're one time you're getting charged for a service being provided to you. That's what non recurring means. Now when you're getting a loan, again refi or purchase, there are going to be a whole nother section of closing costs called prepaid closing costs. That implies that certain costs are going to be levied to you that are not based on a fee being charged from a third party provider. It's going to be things like prorated interest on your new loan that you're asking for. It's going to be on, you know, homeowners insurance premium. Because you have to have homeowners insurance on your house. Now. Yeah, you could say that's a fee being charged by an insurance company, but you need homeowners insurance or you should have homeowners insurance. Whether you're getting a loan or paying for a home for cash or you're refinancing and you're, you know, your home is free, I'm sorry, you're not refinancing, but you own a home that's free and clear, you better have homeowners insurance. Although believe it or not, there's a lot of people who don't. But the point is prepaid closing costs are not fee based charges from third party providers. And then lastly, don't shoot the messenger. One of the unique things about the mortgage originator.

Entity like us is we're put in this position where, especially once we've registered your file with the lender, which is going to trigger that loan estimate I talked about earlier.

In most, almost all cases that has to go out before on a purchase transaction, for example, you've opened escrow. But we don't yet know what the other parties involved in the process are going to charge you. In particular escrow and title companies. And yet we have to, with a fairly high degree of accuracy, provide you a disclosure through the loan registration and loan estimate process that is going to give you a set of fees from all the parties who are going to be involved in the transaction, not just us. And the fees that are going to be shown are estimates at best and are subject to change until we do find out what escrow and title companies are going to charge, which we get later in the process. So in the meantime, we Try to emphasize to the new borrower. Understand we are basically presenting this information. We're presenting you estimated costs from a variety of parties. It's not all coming from us and in fact from us. Nothing. We don't charge fees at all, never have. So understand we are the messenger at that early stage of the process and we will help you get to a more accurate set of numbers later in the process to but initially don't be too concerned, don't overreact to that initial LE because it is going to be intentionally overstated in terms of the actual fees disclosed. In fact, most lenders have a template for that and so understand it'll be subject to change once we get the escrow and title companies and other parties to give us a accurate specific quote for their fees that they're going to charge. So with that background let's go ahead and jump into a worksheet example so I can show you more in the details. And with this one, this shows you it's a, it's a snippet of what the.

Worksheet that we use looks like. And one of the good things about it is it's a one page form. A standard LE can be three to five pages. This is one page. It's all showing on one page which I think is easier to read, review and understand. And again, as the bullet point indicates, this is generated and delivered to the borrower prior to loan registration. So this, in this case, what I'm doing here with this worksheet is me, I as the originator, I'm giving you your price, I'm giving you your loan terms even before you've applied for the loan. So keep that in mind. The fees that are shown on this are generated from either confirmed fees or estimated data. In our case, of course, I'm very well attuned to what the, you know, local escrow title companies, in fact most any escrow title company are likely to charge. So I can be relatively accurate by using estimated fees for those other third parties. And of course some of them we have a very good idea what the charges are going to be. For example, the appraisal fee, the credit report fee. If you work for a company that outsources their employment verification process to a company like the called the work number, we have a pretty good idea what those are those fees are going to be. And that's what we put on this, this form.

So what this does is it provides a preliminary set of loan terms to the borrower based on those parameters. I explained to her earlier and again, this is done in advance of registering your file with a lender and having that official LE go out to you by the lender, where we do have those strict timeline disclosure periods as well as tolerance limits on these fees, depending on what kind of fee it is. So that's the purpose of this worksheet, is to give you some advanced indication of what the costs are going to be before we step into the official regulatory process of having a loan estimate issued to you by a lender. And what I want to do first of all is kind of break this down and on the next slide we'll get into this in a little bit more detail.

Now this one here, what Jeff is showing you is the upper left box of the worksheet. Now this is important because this is the non recurring closing cost section of the total cost. Again, these are generally all are fee based charges coming from third party providers. And what's interesting is you look at the bottom, it's highlighted, it's about $6274 total non recurring closing costs. So of course you're thinking, oh well, I'm getting this loan from Mortgage Works and they're charging me $6274 to arrange the loan. At least that's what they're estimating they're going to charge me for. But here's the thing that's not quite accurate. As I told you earlier, we don't charge any fees at all. We don't have a doc fee, we don't have a processing fee, we don't have an underwriting fee. We've never had that. We don't charge you any fees at all. We get paid by the lender, not by you, the borrower. If you look closely at this section of the worksheet, it's only a few of these costs that are actually directly loan related, I'll call it. Such as the VOE fee, as I mentioned earlier, the underwriting fee, which actually is a fee that is typically charged a flat fee charged to you by the lender. We register the loan with the appraisal fee. Yeah, that's loan related. Because if you buy home cash, you don't necessarily have to get an appraisal unless you want to. Credit report fee, again, that's more directly loan related because on a cash deal generally you're not going to be asked to provide a credit report to the the seller. Tax service fee, notary, I'm sorry, tax service and flood cert. Now those are actual third party vendors that the lender uses to monitor your property tax payment history as well as to determine if your home is in a flood zone. So that those that I just mentioned are basically the third party fees that are directly related to getting a mortgage to purchase the home. Notice the rest of the list all starts with the term title. What that means is these are costs estimated that are going to be charged to you, not by us, not by the lender, but by the escrow and title companies involved in your transaction. And there's a pretty substantial list, right? You've got notary fee, endorsement fee, sub escrow fee, settlement agent fee, that's your escrow fee, lender's title policy.

Recording for a deed, a transfer deed. Actually it's a quick claim deed or not a quick claim deed, a grant deed, another recording fee for the mortgage. Okay, so you can claim that that's because of the mortgage. So we'll give you, we'll grant you that wire courier fees and recording service fee. The point of calling this out or showing you this distinction is because out of that $6,274 number, only about 2,500 is directly related to the loan itself and from the lender. So almost 2/3 of this non recurring closing cost section is being charged to you, not by the mortgage originator, not the mortgage broker us, not by the lender we've registered your loan with, but by the escrow and title companies involved in handling your transaction. So understand that 2/3 of the non recurring closing costs, certainly at least half and in some cases as much as 2/3, they ain't coming from the lender, they're coming from escrow and title. Now I'm not trying to slam escrow and title. They perform a valid, you know, critical service in a real estate transaction. So they are deserving of every dollar they collect. But just understand that.

Those are their fees, not ours as the mortgage broker, not our, not the lenders fees either. And yet again, we're in this unique position that we're the messenger and we have to present this to you. And I just want you to, and I want to clarify that again, a good chunk of those total non recurring fees are not directly related to the loan itself at all. So with that we'll go to the second part of this disclosure or this worksheet. There it is with the green heart there. These are the estimated prepaid costs. And what's interesting about this, if you notice at the bottom there is much as the non recurring closing costs directly, you know, that are directly more directly related to the loan or escrow and title services. So why is that? Well, there's a breakdown there that you can see, hopefully. And what you can see is first of all, if you're getting a mortgage, yes, there's going to be prorated interest on that loan and that'll vary depending on how late in the month that you close. Then the rest of it is like hazard insurance. Well, when you buy a property, you got to get a homeowner's insurance policies and policy. And so you have to pay the first year premium upfront when you close escrow. Plus, if you decide to set up an escrow account or called an impound account for your insurance and taxes, then you have to pay additional money up front to set up those accounts. The other thing you see there is property taxes paid in advance. That is where in the current tax period, like for now, the first half of the 2526 taxes runs July 1 to December 31. Well, if you're going to close a purchase transaction, let's say this month, escrow is going to split up the current property tax liability between you, the buyer and the seller. So that's what that 750 number is. And that would be done whether you're getting a loan or not. Right. Association dues. Let's say this property is a planned unit development or a condo and you have association dues. Well, the homeowners association is going to charge you one month dues in advance. Again, not directly related to the loan at all. Hazard insurance, you pay your first year premium, that's 2,512 months. So it's in place at closing. But if you want an impound account on your mortgage, you have to click provide, I should say three months more to set up that account. And then if you want to impound account for taxes as well, then in addition to that proration of the current period taxes between you and the seller, you're going to have to cough up, in this example, five months additional of taxes. So the lender already has that in place so that they can disperse that second half tax installment that's going to be due March of next year. And so that's advanced funds that you're providing in order to set up that account. But again, property taxes is a liability you're going to have whether you get a loan or not. You could pay cash. You won't have to set up an inbound account if you have a cash purchase. But you do know that you're going to have a six month installment of taxes coming up. Not too Many months from now for that second half of the tax year. So the point of this is you see 6274 for non recurring costs. You actually see a higher amount for prepaid items, 6,400. So where does this trigger the biggest negative reaction from a borrower when they're first starting the process? Well, we're going to show it to you now. There it is on that worksheet on the left, I'm sorry, on the right side of the worksheet. Worksheet in line F, you can see a total of costs and prepaids $12,000 over $12,000. So to the untrained eye, especially if you're a first time home buyer, you look at that and you go, my word, I'm paying $12,000 to get this loan. Well, not really. As I've just illustrated, only about half of that is directly related to getting the loan. Well, actually not even half of that, probably more like a quarter of it is directly related to the loan itself. The rest of it is escrow and title fees and then your prepaid items, taxes and insurance, even if you throw out the prepaid interest in case you were paying cash for the home. So that's the important distinction I always try to make every one of my customers understand or help them better understand, no, this loan is not really costing you $12,000 dollars. If you're getting this home and you're paying cash, most of those non recurring closing costs are still going to be there. Again, most all of them being title and escrow related, they're still going to be there. So that's the important distinction I want to make to everyone is understanding this, this breakdown between the two types of costs and realizing that when you're getting a mortgage, these are not a bunch of junk fees. These are all accurate and valid. Depending on the service provided or the fact that you have to pay the tax man for your property taxes or you have to pay an insurance provider. None of this is junk. It's all for real. It's all valid and not really stuff you can negotiate frankly for that matter. So I think this is an important distinction that I wanted to show you and hopefully it'll give you a little bit more clarity about what's the true cost of getting a mortgage. Because it's not as much as you might otherwise otherwise think.

Hey Jeff.

Well Art, I think that that definitely using the spotlight example definitely shines some light on some of these fees that we don't, we as borrowers, as you say, the Untrained eye. I know this is things you deal with multiple times a day, every day. So it just becomes second nature. But we see it once every maybe once a lifetime or once every 10 years. And so it does catch us off guard, especially when, you know, a, if I'm working with a lender that's not mortgage works and they don't give me a worksheet, I have no idea going in there. And that's almost like all I can imagine is when, you know, on the, on the floor of the Senate they said just sign it and you can read it later. You know, wait a minute, I want to know what's going to cost me before I go in. So I love the fact that you add the worksheet in there. But then when we compare that, we compare the two, it makes total sense of like, oh, I get this now. I understand. When it comes out, I want to point something out that you mentioned when we were talking about this offline was sometimes you're going to have some items on the LE that are not, I'm going to say not, don't. Are not relevant. Can you give us.

Not applicable.

Yeah, there we go. Not applicable. Can you give us a couple of examples of that before we get into this special?

Yeah, yeah, yeah, Real quick. I think I mentioned this last week. One of the issues with the LE process is again, as I explained, because it happened so early, it has to get out within three days of the application date, the registration date in almost every case on a purchase transaction. We don't not, we do not yet know.

What the escrow entitled parties who are a major part of the fee source. We don't know specifically what they're going to charge. We don't even in some cases know who the escrow entitled companies are yet. And yet here we are having to register the file and we've got to get this disclosure out within three days or there's big regulatory penalties. So what most lenders, virtually all lenders do is they'll have a fee template already set up. One of my lenders, for example, calls it their smart fees. And so when you register a file they highly recommend just use our smart fees. And so what happens is that populates this LE that they send out to the borrower to be e signed through an email and to avoid under disclosure where regulatory penalties will be triggered, they intentionally either overstate some or many of the fees on the length or they'll add additional fees that will not be applicable. For example, and I think I've mentioned This to you recently, I have a refi. In fact, I had a past client who went through this process. Even though I thought I had sort of trained him about what to watch out for, I gave him a worksheet first. He said, okay, let's do the refi. He applied and, and then we. He got the le. And the LE had a two thousand dollar transfer tax. It had a three thousand dollar owner's title policy. Well, those are not applicable on a refinance transaction. They're only on purchase transactions. So this LE that he was sent was overstated by considerable because of the lender's smart fee process where they're trying to avoid under disclosure. And of course, like I said, even though I've done loans for him in the past. When you got that le, what happened? I got an email saying, hey, I thought the closing costs were going to be 7,000, but this says 15,000. Why? You know, and of course I had to explain it to him and once I did, he's like, oh, okay, I remember now.

So yes, that's good. Okay, so I'm excited about this next. First of all, thank you for, for really breaking this down for us non experts, if you will. That, that helps tremendous amount. And keep in mind folks, those of you listening and watching this, this is not uncommon the type of care you get with Art. With over four decades of experience at Mortgage Works. I mean, you know, it's like he's not going to make you alone unless it works for you in your best interest. And I really like that about Art. And he's. And this next, in this next section, we call it the Product Spotlight Loan. Product Spotlight. You know, we were talking about this. I, in my head I'm like, loan products, all loans are the same. And Art says no. Jeff, there's a lot of different pieces that really happen that it's almost like, no. If I'm a mechanic and I'm working on a car, I have a whole bunch of different tools I can use to fix certain things. But one particular tool will not fix another part of the car. I have to use a different tool. So I'm excited for you to start sharing some of this in this new program that we call the Loan Product Spotlight. And so I'm going to turn it over to you. And again, thank you so much for really breaking this down for us.

Oh, you're welcome, Jeff. Thank you. All right, folks, everybody, I want to show you real quick a particular scenario I like to tell stories about kind of real world. Real world examples of What I encounter from day to day in terms of potential borrowers who need some help with some financing. So in this case, what I want to share with you is a example of an interaction I just had with a past client, actually somebody I made a loan to in the past. In fact, I made a loan to him about five years ago to purchase his home. So he contacts me and first of all, what was his goal? He was looking to obtain equity, an equity loan to improve his property. In particular to put in the backyard another one of these cases where he bought a brand new home five years ago and his backyard is still, you know, undeveloped. It's basically dirt. So that's his example or that's what, what his request was. So here's the challenge though.

His income was not sufficient to meet the debt to income ratio limit, but he had sizable liquid assets. Now this gentleman had a long career in the railroad, railroad industry. He ended up getting injured, he retired early, he's in his early 50s. He does get a pension from the railroad and he did get a significant amount, lump sum amount at the time of retiring due to injury. In fact close to half a million dollars in the bank. So but the challenge was the monthly pension income wasn't sufficient to be within the debt to income limit based on the, on that pension income and his existing first mortgage, what the mortgage would be on the equity loan plus any other debt that he had. And the other problem with that was he was too young or he is too young to do a reverse mortgage type product. Either a new, you know, reverse mortgage first mortgage or the home safe second mortgage product that we've talked about on this show before. He was too young to be eligible for either one. So what was the solution? Well, the solution was to use a non qualified mortgage product, a non QM product to get a CES that's a closed end second. It's not a heloc, it's a closed end second. So it's a traditional fixed rate loan where when he gets this loan he's going to get the lump, the money all in a lump sum. He can't draw on it in the future. But this, what's unique about this is it uses an asset utilization, I call it slash depletion approach. Some lenders use either label to describe this type of loan program. What this program does is it allows us to take that nearly half million dollar account that he got the settlement from the railroad and we can basically amortize it, the balance over a specific period of time, in this case 84 months, 7 years. So you take that investment account balance, divide it by 84 months, the result was 5,100amonth. That is utilized as an assumed monthly income that's added to his other railroad pension income. So that you combine the two, we now have over $9,000 a month of qualifying qualifying income that can be used to calculate the debt ratio. And so there you go, what looked like an impossible challenge to overcome this particular non QM product, which by the way asset utilization or depletion can be used for both first mortgages, refire purchase as well as secondary financing closed end second. And some lenders will do HELOCs with this as well. This is a good example of the non qualified mortgage low doc type alternative that can still help somebody get financing where they otherwise wouldn't qualify for conforming terms in most cases because their income is too low or their, you know, the debt side of their balance sheet is too high. So this solves the issue and he's going to be able to get his loan amount which is 100,000 and finally after five years have a nice improved backyard with all the bells and whistles. So this is a pretty good success, success story of how some of these unique non qualified mortgage programs can really help solve an issue that otherwise there would not be a solution for. So with that, I think that concludes our show for today. I want to thank you all for watching and listening to this week's Mortgage Minute. I encourage you to keep an eye on those baseball playoffs.

Dodgers probably will prevail, but I'm hoping the brewers win so we can at least get a 2 to 2 even up split on the the four games to start with and we can get to a seven game series. So enjoy that, enjoy the rest of your weekend. I know got lots of football going on as well and in the meantime we'll see you next week on the next edition of the Mortgage Minute. My name is Art Alvarez with Mortgage Works where we have the answers and they're on the house. So long, take care of Sam.