Understanding The Fees & Costs of a Mortgage
Michigan Mortgage Solutions is a mortgage broker which means our fee for service is typically paid by the lender that we choose to complete your loan. All mortgages have third party fees that should be really close to the same across the board and we’ll cover those shortly.
Depending on which mortgage program you qualify for, you may be required to pay a certain percentage on the purchase price as your down payment. Your down payment will be paid at close the day you purchase your home. The down payment CANNOT be covered by your sales concessions.
Some loan programs require that your down payment comes from your own funds and others will allow you to receive a gift for your down payment. You can find the down payment requirements for each loan program in the “Loan Programs” section of this guide.
If you put less than 20% down, you will be subject to paying Mortgage Insurance, also known as MIP or PMI. Mortgage Insurance is a fee paid by the borrower(s) that covers the mortgage lender against the borrowers default. Each mortgage program has different requirements when it comes to Mortgage Insurance and you can learn more about them in the “Loan Programs” section as well.
Besides the down payment, there are several other fees and costs that get charged when completing a mortgage. Some of those costs are rolled into the transaction and covered by the sales concessions and some will be paid out of your pocket.
Potential Out of Pocket Costs Prior to Closing
Earnest Money Deposit (EMD) â€“ Once you find a home that you want to put an offer on, you will usually provide the seller with an Earnest Money Deposit to show them you are serious about purchasing the home they are selling. This EMD check will usually be held by your realtor until your offer is accepted and then it will be cashed and applied towards the proceeds youâ€™ll need at close. Usually a minimum of $500 is required.
Appraisal Fee – The appraisal fee is now between $400 – 525 and it will provide a complete report on the homes current value. This is paid prior to closing.
Home Inspections – This is optional and costs between $250 – 450. A home inspection is when a licensed builder or inspector goes through the property and looks for any repairs that need to be made now or in the near future. Depending on what area you buy in, you may also be required to complete other inspections for the well and septic tanks if applicable.
Homeowners Insurance – You will be required to pay for a full year of homeowners insurance at closing. This is typically paid for on the day of closing and depending on how your purchase agreement is structured it could be covered by a sellers concession.
Third Party Closing Costs for Mortgage Transaction
Title Company Fees – The title company prepares your mortgage closing package and also insures your title is clear of any liens prior to purchase. Their fees include the following;
– Closing fee of $500 which covers the document preparation and Notary to close the loan. This fee is dependant upon which Title Company is used and that is determined by the seller or listing agent.
– Title Insurance which is a percentage of your loan amount
– Recording fees around $70 for recording the mortgage documents
Lender Fees – The lender is who will be lending you the money to purchase your home and they charge an underwriting fee between $695 – 895 to determine that you are eligible to borrow the money. You will also be charged between $12-25 for a credit report
Escrow Accounts, Tax Prorations, & The Homestead Tax Exemption
Escrow Account – An escrow account is established to pay your future property taxes and homeowner insurance premium. The funding of this escrow account depends on the month you close, as well as the amount due for summer and winter property taxes and the yearly homeownerâ€™s insurance premium.
Tax Pro-rations â€“ In the state of Michigan, we typically have a tax bill due in September as well as in February. The September tax bill covers from July of this tax year until July of next tax year. The February tax bill covers from December of this tax year until December of next tax year. Depending on which month you close in along with when your seller paid the tax bills, you may need to reimburse the seller for the taxes that he/she has already paid. This reimbursement of taxes is called a tax pro-ration.
Homestead Tax Exemption â€“ When it comes to purchasing a home, if it is a bank owned foreclosure, a second home, or a rental property, the taxes will be considered Non-Homestead. Non-Homestead Taxes are paid at a rate that is approximately 40% higher than when they are Homestead. If you purchase a home that currently has Non-Homestead taxes, you will need to qualify for the mortgage at the Non-Homestead tax rate.
This means that your escrow account calculations, the tax pro-rations, and your debt to income ratio calculations will be based off of the Non-Homestead tax rate. For this reason itâ€™s very important for you to know if the taxes are Non-Homestead because it may limit how much you can borrow.
The good news is that if you purchase the home as your primary residence, you can file for the Primary Residence Tax Exemption and get your taxes reduced to the Homestead rate. The bad news is that if you purchase your home after June 1st, you will be paying the Non-Homestead tax rate until the following year.
Putting it All Together
Every cost or fee discussed in this section will be presented to you within your mortgage application that you complete once your offer to purchase is accepted by the seller. There are two documents used to explain these fees, one being the Good Faith Estimate and the other being the Fees Worksheet.
The Good Faith Estimate (GFE) has been revamped in recent years in order to make it easier to understand. Unfortunately, with the recent changes, the Good faith Estimate no longer itemizes the costs and fees which makes it difficult to know what costs what.
This is why itâ€™s important that you request a Fees Worksheet along with your GFE as it will itemize all costs so you can see a breakdown of everything. In the next section we are going to show you how to structure your Purchase Agreement in a way that has the seller paying for most of your closing costs outside your down payment and appraisal fees.