Comparing Loan Estimates and Fee Worksheets from different lenders
In the quest for homeownership, securing the right mortgage is a pivotal step. Many consumers will shop around with multiple lenders and are often focused on the important numbers of interest rate, APR, monthly payment, and cash to close. This blog post aims to guide you through the intricacies of comparing loan estimates, shedding light on potential pitfalls such as omitted costs or fees, and, particularly, the underestimated funding required for an escrow account.
What is a Loan Estimate?
A Loan Estimate is a standardized form designed to provide borrowers with transparent and concise information about the terms and costs associated with a mortgage. When comparing loan estimates from different lenders, it's paramount to focus on more than just the interest rate. The various fees and charges, which may differ significantly between lenders, require careful consideration.
Hidden & Underestimated Costs:
One common challenge in comparing loan estimates is the exclusion of optional costs or costs to which there is no “cure” due to the borrower for underestimating them. The Owner's Title Policy, safeguarding the homebuyer from potential title issues, is one such fee. Additionally, many real estate brokerages charge an Admin Fee, which on the low end range from $150 and we have seen this fee as high as $1,350. We always reach out to the agent to get their fee or if they are not available, we put in a place holder somewhere in the middle of that range to minimize surprises. Awareness of these potential omissions empowers borrowers to make informed decisions based on a comprehensive financial overview.
Another common way some lenders massage the numbers is to intentionally underestimate funds needed in the escrow account. The escrow account is established to cover ongoing expenses like property taxes and homeowner's insurance. While lenders provide estimates for the escrow amount, these estimates can sometimes fall short of the actual costs and there is no penalty to a lender for “estimating on the low side”. Underestimating the funding needed for the escrow account poses significant risks. Some lenders may provide lower estimates to make their offers seem more attractive, potentially leading borrowers to underestimate their overall financial commitment.
The Danger of Underestimated Escrow Amounts:
1. Monthly Payment Shock: A lower estimated escrow amount can create a false sense of affordability, only for borrower to experience a "payment shock" when the actual costs are factored in. This sudden increase in monthly payments can strain the borrower's budget and financial stability.
2. Additional cash at closing: In cases of severe underestimation, there may be insufficient funds available to pay for insurance premiums and fund the escrow account. This shortfall could necessitate a significant out-of-pocket expense for the homeowner, potentially leading to financial hardship or scrambling to get a gift from a family member the week of closing causing delays.
An illustration:
If you compare loan estimates from two different lenders, most of their fees should be accurate. Lenders are required to “cure” (i.e. credit you back the difference for any tolerances) things like the origination fee, credit report, appraisal fee, recording fees, and title fees if the fees increase above the allowable amount. It's difficult to understate these fees, because of these tolerance thresholds. However as mentioned above, there is still plenty of opportunity for an unscrupulous lender to massage their initial loan estimate. In this example below, a buyer could wind up with a $4,930 “surprise” increase in their cash to close.
In this example, the lender did the following on the initial estimate:
Didn't list an admin fee for the real estate broker
Didn't list the Owner's Title Policy (because it's an optional fee)
Intentionally underestimated the insurance premium
Intentionally underestimated the number of months for taxes & insurance to fund the escrow account.
Didn't look at the closing date on the contract and in turn underquoted per diem interest.
Transparent and accurate estimates are paramount. Don't hesitate to seek clarification from lenders about escrow estimates and ensure that the projected costs align with the reality of property taxes and insurance premiums in your area. Armed with this detailed understanding, you can make well-informed decisions, avoiding unexpected financial burdens and securing a mortgage that not only fits your budget but also aligns with your long-term financial objectives.
Our team will do it’s best to provide you the most accurate numbers up front to avoid any last-minute surprises the week (or day!) of closing.
