When you apply for a purchase mortgage or a refinance loan, your lender must provide you with a Good Faith Estimate. The GFE includes a cost summary of the fees and charges that you must pay in connection with your loan. Some of the expenses listed are estimates rather than actual costs. With loans backed by the Federal Housing Administration, the estimated costs are comprised of your taxes, homeowners insurance and mortgage insurance.
Good Faith Estimate
In 2010, the United States Department of Housing and Urban Development, implemented the Real Estate Settlement Procedures Act. As a result of RESPA, lenders must provide you with a GFE within three days of your application for an FHA loan or another type of mortgage. The GFE includes the proposed interest rate, the loan term, fixed costs such as legal fees, and estimated pre-paid items such as your property tax. When you close on the loan, the final settlement statement must include the lender's estimated closing costs alongside the actual closing costs. You can use this information in a case against your lender if you feel you were misled about the cost of the loan.
Mortgage Insurance
The FHA does not fund loans, but it does insure your lender against borrower default. You must pay for mortgage insurance if you make a down payment of less than 20 percent. You pay for this insurance by paying a monthly mortgage insurance premium that forms part of your mortgage escrow account. Additionally, you must pay the premium for the first year up front. The amount of your upfront mortgage insurance premium varies depending on the loan term and your down payment, but it normally amounts to at least 1 percent of the loan amount. Your lender must estimate the mortgage insurance cost up front, but the final figure may change if you make a larger-than-expected down payment or if you change the loan term.
Homeowners Insurance
Lenders typically require you to obtain homeowners insurance before you can secure a mortgage against your home. The cost of the homeowners insurance depends on several factors that include your credit score, the property type, the condition of the home, and the security upgrades that you have installed. You normally obtain a homeowners insurance quote after you have been approved for a loan. Therefore, your lender estimates this cost on your GFE. Lenders use data related to recent mortgages to estimate this expense. If applicable, your GFE must also include details of any prepaid flood insurance charges.
Tax
When you buy a home, you must pay property tax. Your lender can find out the taxes due on the home by reviewing the tax appraiser's website. However, some states such as Florida have laws that cap the amount that property tax can increase on a home from one year to the next. The property tax resets when the home changes hands. Therefore, the taxes being paid by the current property owner may differ greatly from the taxes due on the home after you purchase it. Consequently, estimates of prepaid taxes are often inaccurate.
Tags: mortgage insurance, homeowners insurance, down payment, loan term, your lender, against your
