Closing Costs

Posted by  on Apr 16, 2009
When you talk to a lender, they will prepare a Good Faith Estimate of closing costs. Sometimes they will give it to you right away, but they are only required to mail it to you within three business days of application. Because the lender is the one who prepares the estimate, many buyers associate all the closing costs with the lender. Actually, the lender is only preparing an estimate of the costs you may incur when buying or refinancing and is not required to list all potential costs. Nor does the lender know what all the costs are actually going to be. The estimate is an educated guess based on experience. Make sure that you anticipate the actual costs are going to be more than the estimate.

When you are comparing two lenders, make sure that you do not look at the total cost. Only compare the costs actually charged by each lender. Both lenders are only making informed guesses about costs charged by others. There are two broad categories of closing costs. Non-recurring closing costs are items that are paid once and you never pay again. Recurring closing costs are items you pay repeatedly over the course of home ownership, such as property taxes and homeowner’s insurance.

Some of the items that appear here do not traditionally appear on a lender's Good Faith Estimate and lenders are not required to show all of these items. To determine your maximum mortgage amount, lenders use guidelines called debt-to-income ratios. This is simply the percentage of your monthly gross income that is used to pay your monthly debts. Because there are two calculations, there is a front ratio and a back ratio and they are written in the following format: 33/38. The front ratio is the percentage of your monthly gross income that is used to pay your housing costs, including principal, interest, taxes, insurance, mortgage insurance and homeowner’s association fees.

The back ratio is the same thing, only it also includes your monthly consumer debt. Consumer debt can be car payments, credit card debt, installment loans, and similar related expenses. Auto or life insurance is not considered a debt. A common guideline for debt-to-income ratios is 33/38. A borrower's housing costs consume thirty-three percent of their monthly income. The guidelines are just guidelines and they are flexible. If you make a small down payment, the guidelines are more rigid. If you have marginal credit, the guidelines are more rigid.

If you make a larger down payment or have sterling credit, the guidelines are less rigid. The guidelines also vary according to loan program. FHA guidelines state that a 29/41 qualifying ratio is acceptable. VA guidelines do not have a front ratio at all, but the guideline for the back ratio is 41.


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