CW 575 - Understanding Closing Costs, Good Faith Estimates (GFE), Loan Points, Title Insurance

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Hey, welcome to the Creating wealth show. This is your host, Jason hartman. Episode number 575. 575. And today we will be talking about understanding closing costs, understanding good faith estimates, loan points, and title insurance. You know, obviously you could go into a lot more depth about all of these subjects. There's no question about literally you could dedicate a whole show to each one. This is kind of an overview. Closing costs do vary, depends on the area, depends on the deal, depends on the loan structuring. And one of the things that few people, few borrowers seem to understand is about the concept of buy downs. We have covered that on past episodes. We're going to touch on it a little bit today. But again, this is meant to be an overview. You could go deep into every one of these subjects. But either way, I think you will like it and you'll learn some stuff here. So that's good. Since our topic today is, you know, very real estate focused, I just in the intro portion wanted to talk about maybe a couple general things real quickly. Number one, I'm in Boise, Idaho today and seems like I'm always moving around when I'm talking to you. Last couple of years I've been really making it a point to attend a lot of conferences. Of course we've got the Venture Alliance. We just finished our awesome weekend there in Newport, Rhode Island, Martha's Vineyard, Providence, Rhode island. And I flew back to San Diego, picked up my dog and put the clothes in the laundry, did a few things the next day and then got on a plane again to come to Boise. But this time Coco came along. It's always nice when I can bring the pup with me. My daughter, lol. Anyway, she's here and I wanted to talk again about a couple of things before we get to our guest and talk really real estate specific stuff. An interesting article on Newser Today. And this is about character and really the essence of a person and that age old discussion about character versus intellect. And you know, my grandma passed away a few years back at age 96. She had Alzheimer's and suffered with that for about the last 12 years of her life. And I tell you, that is tough. Of all the ailments one can suffer, I don't know if there's really anything worse than losing one's mind. You know, we can lose our health and suffer all sorts of different things, but your mind is just. That's you, I guess, right? Well, this article is kind of interesting. It says your essence is rooted in your character, not your intellectual. Who you are may have more to do with what you stand for than what we know. Than what you know, right? In an attempt to begin to tackle the age old question of what shapes one's identity, researchers at Duke University and the University of Arizona surveyed the caregivers of those with different neurodegenerative diseases to see which ones seem most likely to strip away the essence of a person. And the article goes on to say, reporting in the Journal of Psychological Science, they said that people can be stripped of their abilities to move, think and even remember. But it's not until they are stripped of their moral characteristics I.e. courage, kindness and honesty that their caregivers begin to feel that the person's true identity is slipping away. Essentially, the article says, identity is not what we know, but it's what we stand for. According to Scientific American. To test this, the researchers asked caregivers of 248 people suffering from either Alzheimer's or dementia or lateral sclerosis als such questions as how much do you sense that the patient is still the same person underneath? Those caring for the ALS patients were at least likely to feel an essential metamorphosis and identity has occurred. Well, those caring for FTD patients who suffer from frontal control damage that impacts things like empathy and impulse were most likely to feel that the patient's identity had changed, reports the Wall Street Journal. Boy, this article calls on like every source. It's amazing which it calls this research profound. Our mor character, after all, is what links us to other people. A statistical analysis of all three groups found changes in moral behavior to predict changes in perceived identity more than changes in memory or intellect. So my comment is, I guess what they're saying is that intellect really is largely memory, right? I mean, if we know a bunch of things, how do we know them? Well, we know them by thinking them through, I guess, taking things in our experience and assimilating what we think of those things and then remembering that, or just simply remembering things that we learned and regurgitating them. Right. That's largely what our educational system unfortunately is. It's not about thinking, it's about remembering and regurgitating. And I don't think that's a very good thing, but certainly that's, that's part of intellectual growth, is simply memory, rote memory. So the article goes on to say, regardless of the type of disease. Okay, so that's very interesting. And I remember Dennis Whately saying years ago, of course, he was on the show when I had, you know, discovered his great material in his books and audio cassettes, yes, those old audio cassettes. Many years ago. He said a great quote, he said, if you don't stand for something, you'll fall for anything. So what is the essence of a person? Is it what we know or is it what we stand for? This article says, drawing on many, many sources and the study mentioned that it is what we stand for that determines who we really are. Another interesting article also newser, one of my favorite little apps that now check this out, like under the category of it's an amazing time to be alive, right there are now, they are now experimenting with these artificially intelligent ads that are reading our emotions and serving up content based on the emotions. Now remember that movie Minority Report, right, where they would have this pre crime division. And it's interesting I've been reading about that, how more and more police and government are using these kinds of ideas. They're using algorithms to predict crime. They're using traffic patterns, they're using events and weather. And it's amazing, but scary at the same time. Of course, you know, this whole Big Brother thing is really worrisome. And by the way, on a tangent here, Edward Snowden is now on Twitter and he's got a whole bunch of followers joining him on Twitter. So that's interesting. And you can now follow Edward Snowden. Hero or villain? You decide. I think he's kind of a hero, to tell you the truth, pointing out what Big Brother has been doing to us. And you know, look on a tangent here, someone could easily convince me that Edward Snowden is a villain and he is a bad guy and he should be in prison. If you could show me one important.

Classified thing that really damaged our country in any way, you Know the government, when you have a government job, the government can just say everything's classified. So, you know, by any small discussion or release of information, you know, you're suddenly a traitor and you should be shipped off to prison and court martialed. Right. But, you know, the question is, should it be classified? That's really the question. So I have yet to hear about anything that Edward Snowden did that puts this country in any real jeopardy. You know, military intelligence, etc. Things like that. Now, maybe I've missed that and I'm totally open to that possibility. But if you tell me that, then I'll say he's a bad guy. But until then, sounds like he just did the citizens and the rest of the world a favor in disclosing what our government was doing to us or is doing to us. But you know, we didn't know about it before Snowden. Right. Anyway, so these ads are now using cameras on billboards and they're literally looking at faces, interpreting the expressions on the faces and serving up ad content based on our moods and emotions. That's right out of Minority Report, the movie. Right. Remember when he was walking by and the scanners on these billboards in like a bus station or something like that or a train station were scanning the eyes and serving up ad content based on the eyes of the people walking by? I mean, amazing yet scary at the same time. Amazing stuff on the real estate subject, of course. And that's what the rest of the show is about with our guest today, banks. There's an article here I'm going to talk about in a future episode which Oliver just posted. It's a New York Times article and it's entitled, as banks retreat, private equity rushes in to buy troubled home mortgages. So it looks like there is a new secondary mortgage market, or maybe not new actually, but it's getting bigger, rushing in to buy more mortgages. So we will see how this all evolves, folks. Anyway, we've got our Meet the Masters event coming up in Southern California in January. It is going to be awesome. I'm working on a couple of bigger name speakers. You know, we've never really gone for like the bigger name speakers at our events and until they're confirmed, of course, I can't announce them. But they're people, you know. Of course, we've always had our local market speakers specialists and our property managers, CPAs, attorneys come in and speak about all of the various aspects of building a fantastic investment property portfolio that's again coming up in early January. So get Your early bird tickets now go to jasonhartman.com, click on the events section. Take advantage of that and look for more announcements on that. We will look forward to seeing you there. Also, we've got a property tour coming up in Orlando, Florida. Great market. You know, one of the things about markets like Illinois and for Florida is that these are judicial foreclosure states. So the market clears much more slowly. Price discovery happens much more slowly. You may have missed the market in a lot of these areas where the foreclosures happen more quickly, the properties are recycled back onto the market. Those opportunities have largely passed in a lot of those markets. Phoenix, Arizona would be one example where the prices have already gone up and the markets recovered quite a bit. But you know, you look at the lag time in some of these other markets, there are some great opportunities for you. So that will be announced and posted soon. Meet the massers right now. You can register for that in January and get your early bird pretty prices a bunch of you already have. Go to Jason hartman.com and check that out. Okay, let's get to our guests. Let's talk about closing costs, good faith estimates, financing loan points, and title insurance. Here we go.

Hey, I wanted to welcome one of our lenders back to the show to talk about closing costs. You know, this is a constant source of questions for us for our lenders, and we really hope to pull back the curtain on these closing costs. A lot of lenders want to want to make this kind of mysterious. And I think one of the reasons, frankly, they do want to keep it mysterious is so that the consumer doesn't really know how to shop for a loan and they don't really know what questions to ask and they can get in a position where they're frankly getting overcharged. So here on the show, we want to help you protect yourself and become your own best advisor. When it comes to my ten commandments of successful investing, you know, I always talk about that thou shalt become educated. That is the first commandment. But the reason to become educated is so you can be your own best advisor, so you don't need to rely on other people. So that's what we want to do, is help you get educated so you are armed with the knowledge and you can go out into the marketplace and you can compare effectively. So let's dive into this. So, Joe, you know, I'm looking at a loan quote for just an example buyer here and, you know, a purchase price of a property of $142,500 142. 5. And there's this whole list of costs. Lender fees, appraisal fees, prepaid interest. Now that people should understand is not really a closing cost, that's just a proration. There's insurance escrow reserves that also not a closing cost, that's just an impound account or an escrow account to pay your insurance. And then the next one, tax, escrow reserves, same thing. Not really a closing cost, just an account to pay your property taxes. Back to closing costs though, we've got title fees, owner's title insurance, lenders, title insurance, transfer taxes, recording fees. Let's dive into some of this stuff, tell us what it's about and how does someone know what the amounts of these charges should be?

So I get a question.

To provide my good faith estimate constantly. Any lender these days is going to overestimate certain charges, certain third party charges, such as the title fees, the appraisals costs, and possibly recording fees. Each market, each county will have different fees in that regard based on the loan amount and or based on the location of the property. So one fee that I typically tell folks to really look at is the lender fee. That fee will never, it's a hard fee that the lender can quote. It should never really change. And that's the one that really you should look at. When comparing lender to lender, the good faith estimate can sometimes be somewhat of a misnomer because the other charges, the other third party fees are a lot of the times over inflated or overestimated because those fees have not yet been invoiced to the customer or to the lender prior to closing.

Okay, good. So what should these fees be though? I mean, people should understand these are not regulated by the government. Well, I don't want to say that because they sort of are.

But. Well, maybe, maybe the best way to tackle this is to talk about the requirement to give what lenders call a GFE or a good faith estimate. And that's shortly after someone applies for a loan. And there have been some recent changes in this policy. Right. And usually what you're saying is lenders will try to overestimate the costs on the good faith estimate. But some lenders, you know, they still charge a lot. I mean, you know, talk about that for a moment if you would. I don't know exactly the question to ask.

So for example, prior to, let's say 2008, the Great Recession, lenders would provide a good faith estimate to folks and estimate fees, those third party fees, if the Client went to closing and those third party fees were higher than the lender estimated. Well, then the customer had to pay the higher fee. The government stepped in and said that was unfair to the consumer and the lenders should have a better idea of what these third party fees are. So if they estimate on the low side, then the lender is actually nowadays required to pay the differential, not the consumer. So what lenders are deliberately doing at this point is overestimating these third party fees on their good faith estimates, which again leads to it being somewhat of a misnomer in terms of what the actual fees will be when you get to closing.

Okay, so now everybody gets good faith estimates that just say these huge fees and they massively overestimate them so they can come in under them or at the same time fees and they can be okay and not have to pay. So this is why all these laws and regulations, they always have these unintended consequences that they never really seem to work out in practice. But, but you know, that's the government for you, right?

I mean, there are, there are further changes coming to this in on October 1st, though.

Oh, wow. Yeah. So by the time people hear this, the changes may well be in place. Do you want to talk about the new, the new policy? How's that work?

I think they're just going to overhaul the good faith estimate and the truth and lending documents to make it one uniform document and make it much more simple for consumers to understand what the actual fees are, what their actual bottom line will be. It will be more in line with what the real fees and costs are associated with your loan.

So that's part of the regulations.

Okay, so what are these? Let's talk about these lender fees. What are the lender fees? Are they points? Points are just prepaid interest. Okay, are they points? Are they processing fees? You know, in the industry, these are called garbage fees, a lot of them. So what are these lender fees? When you see this on the statement.

A lender fee or an origination fee, someone sometimes called, typically are lumped or bundled fees by the lender for the processing of the loan, the underwriting of the loan, the credit report that we have to pull, and the flood certificate that we have to get on the property. So sometimes they're broken out, sometimes they're bundled into one lender fee or what's called an origination fee. These are separate to points. You know, points can be paid to buy down the rate and improve the payment over time on the loan.

Appraisal fees.

That's Going to vary from market to market. So a customer purchasing in Chicago versus a customer purchasing in Memphis may have different title fees or appraisal. Sorry, appraisal fees by as much as 50 or $100, depending on the appraisal.

Well, that's not a huge deal. So how much should the lender fees be? Can you put some dollar amounts in here? Our sample transaction here for the show is $142,500. 142,500. So what are these fees gonna look like?

So my lender fee would be $1,190.

Okay, so less than 1%, right?

Right. The appraisal fee would be 350. Let's split the difference. 350.

Okay. Approximately, yeah, give or take 100 bucks. Okay. And prepaid interest, that's not a closing cost. That's just a proration. So you shouldn't stress about that. But what I do want people to know is will there be 30 days of prepaid interest in there? Will there be 15 days? What will that look like?

It depends on what day of the month you close your loan. So if you close on the 20th of October, you will prepay 10 or 11 days of interest to the end of October. Then you won't make a payment on your mortgage on November 1st, but your first mortgage payment would come due on December 1st. Because on every mortgage, you're always a month in arrears paying your principal and interest.

So when you, when you bring in the money to closing, when you, you probably wire it in and you think, gosh, why were these closing costs so high? You've gotta, you've gotta parse out the prorations. Because when you prepay interest, that's just part of your payment. You notice that, you know, many times you didn't get a statement asking you to pay again for 45 days. Okay. And the reason is, is because you prepaid some of the interest. Okay. So understand that. Same with insurance and taxes. Okay, let's go down to title fees. And so those prorations, just to say it again, are not a closing cost. Title fees, what. What would those be?

So you've got owner's title, and you've got lender's title insurance. Now, owner's title insurance is mandated by lenders, by the government to put on the good faith estimate. But it is not a fee that the buyers will pay. It is a seller charge that we simply have to disclose to the buyers. That will change in October with the new regulations as well. But the fee that our buyers need to be concerned about is the lender's title insurance and the closing agent fee for the title company. You know, on average, they're going to be around 15 or $1600.

Okay, so what's always been interesting to me about title insurance is that you have this odd scenario where all the parties pay for somebody else's insurance. Isn't that funny? The seller pays for the buyer's title insurance and the buyer pays for the lender's title insurance. Kind of crazy how that evolved, huh?

That's title companies, they have it wrapped up, you know.

Yeah, they do, they do. Okay, so the title fees, that's one of the more expensive charges then, right? Is the lender's title insurance policy.

It would definitely be one of the higher fees on your, on your closing costs or your HUD set on the statement.

Okay, and who is going to set those title fees? I mean, certainly there are many title companies out there. You can use a different title company. What happens there? What's the dynamic of that? Do you want to just address that for a quick moment?

So in certain states, the seller of the property is responsible for.

Providing clean title for our buyer and, or the lender. So the seller of the property will typically order that title insurance and provide that invoice to the lender so that the buyer, the client, can be charged at the closing for that insurance.

Okay. All right.

There are other states where the lender's responsibility to ensure or the buyer's responsibility to ensure that title is provided on the property prior to closing and that can be shopped out from company to company within the market. But generally speaking, they're pretty consistent with their costs.

What about transfer taxes? Now, these vary by area, right?

Yeah, they're basically municipality taxes or stamps on the property. Some municipalities have buyer and seller transfer stamps, and some municipalities have just seller transfer stamps. So when the property is changing hands, maybe it's just the seller that has to pay the municipality a tax. And in certain cases there are municipalities that you have both parties pay a portion of the transfer stamps or the taxes.

It's really a local charge to the municipality for the transaction of, you know, transferring ownership in the property.

Okay. And so this is going to vary by area. And this is not something you can negotiate, Right. This is not a, it's just a government fee. And, you know, it's their way or the highway, right?

Yeah, I mean, to a certain degree, yes. But some, some sellers or some.

You know, people who are selling the properties are writing up the contracts even though they may be responsible for the seller transfer stamp may put a clause in the contract to make the buyer pay it. So you would have to, you'd have to look at your contract closely there.

Yeah, this stuff can all be, can all vary by what's actually written in the contract. And it also varies by area. Okay. Because each area, and this is one of the great things I always say to our investors is. Well, it's not one of the great things I say, although what I say is pretty great sometimes, maybe not always for sure, but it's one of the great things about real estate. That's what I meant to say is that it's so fragmented and that fragmentation, I always say embrace the fragmentation because that keeps the big institutional players out of our business. That's one of the reasons they don't like it because things vary by area. The customs are just different in every area. And they don't like that fragment. They want it to be all the same nationally or even, you know, with institutional players globally in many cases when it comes to the way various stock markets work and so forth. Okay, good. Recording fees again, that's going to be.

County by county and local area by local area. Each county is going to charge you a certain amount to record each page of your closing documents. So that fee can vary based on how big your closing documents and how many pages are in your closing documents.

Sure. Yeah. Okay, good, good. Anything else you want to say? We got to wrap up. This was just meant to be a real quickie discussion here, but anything else you want people to know, we're going to have you back. We're going to talk about how the loan rate is determined and how to calculate your debt to income ratio. And some good stuff coming up on future episodes. But on this topic of closing costs, what else do you want people to know, if anything?

The only thing I would bring up on that in this regard would be if you are paying points, it is an addition. It's a fee in addition to the lender fee that's stated up front. So if you wanted to pay a point to buy down the interest rates, it would be a dollar charge in addition to the lender fee.

And that's exactly what we're going to talk about in a future episode, how mortgages are priced. You know, I've owned a couple of mortgage companies over the the years. I've had different mortgage, I'll call them relationships over the years in terms of affiliated business arrangements and so forth inside my real estate company. It's been interesting for me to learn and understand over the years how loans are priced. So we're going to save that for a future episode, but it's going to be a good one. And then also calculating your debt to income ratio so you can tell yourself if you're going to qualify for a loan without going to a lender. We, we want people to be empowered so they know and they can do their own stuff if they want to. So good stuff. Hey, thanks for joining us and talking about closing costs and we'll talk to you on a future episode. Okay.

Okay, thank you very much.

I've never really thought of Jason as subversive, but I just found out that's what Wall street considers him to be.

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This show is produced by the Hartman Media Company. All rights reserved for distribution or publication. Rights and media interviews, please visit www.hartmanmedia.com or email mediaartmanmedia com. Nothing on this show should be considered specific personal or professional advice. Please consult an appropriate tax, legal, real estate or business professional for individualized advice. Opinions of guests are their own and the host is acting on behalf of Platinum Properties Investor Network, Inc. Exclusively.