As a result, the big banks are using some very aggressive and often misleading tactics to win borrowers back.
These tactics include massively understating closing costs and then implying that their closing costs are lower than ours (or other lenders’).
But for purchases, closing costs are going to be almost identical no matter which lender a buyer uses.
This is b/c closing costs consist of prepaid interest, prepaid property taxes, prepaid insurance, transfer taxes and third-party fees like title insurance, escrow fees, and appraisal fees.
In other words, lenders have no influence over almost all of the closing costs associated with a purchase.
Here are some things to watch for:
1. Prepaid Interest: Buyers have to pay interest through the end of the month in which a loan closes. Hence, if a loan is set to close on January 5th, the borrower will have to pay 26 days of interest. We always estimate 30 days of prepaid interest in our closing cost estimates b/c we want to make sure buyers are not caught off guard at the time of close. Big banks typically estimate minimal prepaid interest in order to make their closing costs appear to be lower.
2. Prepaid Property Taxes: We have a borrower who wants an impound account and who is closing in January, so we estimated seven months of prepaid property taxes. A competing big bank recently estimated only five months of prepaid property taxes for this same borrower, which is simply two months too little.
3. Prepaid Homeowners Insurance: If borrowers want an impound account, we will estimate fifteen months of insurance while the big banks will often estimate only twelve. This is again just misleading.
4. Owner’s Title Policy: Big banks often just eliminate this item from their closing cost estimates altogether b/c owner’s title insurance is optional and it again makes closing costs appear to be lower. We include the owner’s policy, however, b/c it is very inexpensive when bundled with the lender’s policy and we think it is well worth the money when it is so inexpensive.
5. Third Party Fees: As mentioned above, lenders have no control over third party fees (title, escrow, appraisal, etc.) but the big banks will often understate them as if they do.
Again – we estimate all of our closing costs as accurately and as conservatively as possible to make sure borrowers have sufficient cash ready at the time of close.
When big banks underestimate closing costs they not only mislead borrowers, they create unnecessary stress and put the transaction at risk of blowing up altogether.
And finally, the above list does not include a few separate transgressions we have seen over the years; we saw all of them play out with a single borrower as recently as Monday.
Jay Voorhees
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 01524255, NMLS# 335646
