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RESIDENTIAL REAL ESTATE CONTRACTS: SECTION 7
This is a brief summary of real estate contracts. This summary does not cover all aspects of the contract. This video has been made specifically for Real Estate Agents to use as an unofficial educational resource. Nothing in this video is intended to convey legal advice or best practices in any field. This video is only intended to give general advice on broad topics relating to contracts and the closing process at large. For legal advice please contact an attorney and for lending advice please contact a lender.
7. SETTLEMENT CHARGES
This is the first mention of who pays for what when it comes to the purchaser vs. the seller. The first thing listed is that the purchaser will be paying all the lending fees, funding fees, and mortgage insurance fees. We’re going to break down some of the terms in this section, including prepaid items, escrows, loan discount fees, funding fees, PMI, MIP, and VA funding fees. These are all extra fees — closing cost fees — and are not part of your purchase price.
Closing costs and funding fees could be anything from origination fees, processing fees, mortgage points, discount points, discount fees, etc. A lot of these are actually the same thing, and it just depends which lender you’re talking to. They can overlap, and these terms just show how each fee is itemized and how a lender is charging. Sometimes you’ll have banks that charge the standard 1% origination fee, but then you’ll have a broker who waives the entire origination or processing fee. The broker can do this because they will most likely sell the loan immediately. The contract states here that it’s the buyer’s responsibility to pay these fees by default.
Funding fees are different for each type of loan you may have. The VA loan is the only one with a standard funding fee; with a VA loan you can get fully funded without putting anything down and without paying insurance and still get a great interest rate, which is a great deal. But because of that you’re going to have to pay a VA funding fee.
On the right side at the end of that sentence where it says “Funding fee to be financed?” you would type Yes or No. What they’re asking there is whether the funding fee will be part of the loan and if your client is going to be borrowing money to pay that funding fee — the VA loan is very unique in this way. If you don’t know upon contract signing whether this fee will be financed or not, just leave it blank. This will not make or break your contract for the lender.
PMI = Private Mortgage Insurance
MIP = Mortgage Insurance Premium
Generally your MIP would occur with an FHA loan. This is another government-backed loan program similar to the VA, but for the general public. FHA loans have benefits to them, and that’s why the government-backing is there. If you have less than a 10% down payment on an FHA loan, you have to keep the MIP for the entire life of the loan, which could be anywhere from $20-$70/month depending on what the property is worth. If you put down 10-20%, you’ll have MIP added on for 11 years or until you refinance. This insurance is for the lender; until you have equity built into the property and would lose money if you don’t take care of it, they’re going to require insurance. This protects the lender if the owner destroys the house and then walks away from it, requiring the lender to foreclose. 20% is generally the equity line where a lender thinks the owner would have real money built into the house.
Private Mortgage Insurance is more often associated with a conventional loan. PMI is also applied when you put down less than 20% and automatically falls off once you’ve paid about 22% of your loan, which typically occurs around year 4 on a 30-year loan. When you look at the front page of a CD, you’ll notice there are two sections on your monthly payment: the first section will include the PMI and will show a higher monthly payment, and the second section shows a lower payment for years 5-30 because the PMI will have dropped off. An industry secret is that your borrower can pay attention to their equity lines and, once they’ve paid off 20%, can submit a written request to the lender to have PMI turned off. This can occur in the third year after just making the standard mortgage payments and will cut an entire year’s worth of PMI payments for your client. At 20% the lender trusts you, but at 22% they trust you enough to remove PMI themselves.
TIP: You can choose to refinance when it comes time to drop your PMI, but you can’t guarantee the same interest rate you initially signed up for. For example, if you get a mortgage now while interest rates are below 3% and then refinance in three years to remove PMI, your interest rate will likely be higher, which would end up increasing your monthly payment rather than lowering it. In this case, it would make sense to just wait for PMI to drop off automatically once you have 22% equity and pay the additional monthly fee so as to not lose your favorable interest rate.
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[INSERT SAMPLE REAL ESTATE CONTRACT HIGHLIGHTED AND CORRESPONDING NOTES SHEET SIDE BY SIDE]
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