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ShanetheMortgageMan
Posts: 7,792
Registered: ‎09-28-2007
Re: Good Faith Estimates Explained
Section 900 is for items that the lender requires you to pay in advance.

Line 901 is Pre-Paid Interest. On mortgages, interest is paid in arrears. Meaning a mortgage payment due on July 1st will pay for principal due for July, but for interest that accrued on the mortgage balance being borrowed in the month of June. So let’s take an example where you are closing on your mortgage transaction on May 20th. Your mortgage lender would not make your 1st payment due on June 1st because there just isn’t enough time to set it up with their servicing department (usually needs about 20 days for that to be set up). The first payment would be due on July 1st. So since interest is paid in arrears, and July 1st payment pays for the interest that accrued in the month of June, and you are not making a June 1st payment which would’ve paid for the interest that accrued in the month of May, you prepay May’s interest on the closing of the loan. So a closing on May 20th would have 12 days of prepaid interest charged at closing (5/20 through 5/31).

If you close within the first 10 days of the month there are some lenders which will give you the option of having your first mortgage payment due the 1st of the immediate month following the closing – this is done by “funding into the month” where instead of being charged pre-paid interest at closing you would receive an interest credit. So using an example of closing on May 5th, and let’s say you chose to have your 1st payment due on June 1st (which pays for May’s interest), you would have a full normal payment due on June 1st, but at closing you would receive an interest credit from the lender for 5 days (5/1 to 5/5). On the GFE this would be represented by a negative amount of days of interest on line 901.

Line 902 is any Mortgage Insurance Premium (MIP) that is paid upfront. This is most common on FHA loans however some conventional loan mortgage insurance plans might also give you the option to pay MIP instead of it on a monthly basis. On FHA loans the mortgage insurance premium is 1.5% of the amount being financed, on conventional loans which have the option to pay upfront mortgage insurance it will be determined by the characteristics of your loan (credit score, mortgage type, mortgage term, occupancy, loan-to-value to name a few). On FHA loans the MIP can be financed into the loan amount (base loan amount + extra loan amount to cover the MIP), but on conventional loans it is a cost that must be paid for (if a purchase) or paid for/financed into the loan amount (on a refinance if there is enough room to increase the base loan amount to cover it). On USDA Guaranteed Rural Development loans, this is where the 2% guarantee fee would be listed as well. On USDA GRD loans the 2% guarantee fee can be rolled into the loan (base loan amount + extra loan amount to cover the 2% guarantee fee).

Line 903 is the Hazard Insurance (homeowners insurance) Premium. Homeowners insurance is required when you have a mortgage against your home. There are basically three parts of homeowners insurance – dwelling coverage (to rebuild your home in case of a disaster), personal coverage (to protect your belongings, house gets robbed, etc.), and liability coverage (someone trips on a garden hose in your yard, etc.). Lenders only require you have sufficient dwelling coverage, the other two forms of coverage are optional but I do recommend you get them. On purchase transactions the premium for this insurance needs to be paid up for a full year, which is typically how insurance companies bill homeowners insurance anyway. You can pay this through the closing on the mortgage or to the insurance company directly “outside of closing”, which it would then be marked with a “POC” (like the appraisal fee on line 801). On refinance transactions, unless the premium falls within the first two months after closing, you can just pay it as normally scheduled. On a refinance transaction, if the premium has to be paid within the first two months after closing, and you are “escrowing” (described in section 1000) then lenders often require you pay the insurance premium at closing.

Line 905 is the VA Funding Fee. This is similar to line 902, Upfront Mortgage Insurance, where it can be financed into the loan amount (base loan amount + extra loan amount to cover VA Funding Fee). The VA Funding Fee amount is determined by the Veteran’s status, the transaction type (refinance, cash out refinance, or purchase) and how much in remaining VA benefit entitlement they have remaining.

Section 1000 is for Escrow Reserves Deposited with the Lender in the situation where you are establishing an escrow account to pay property taxes/homeowners insurance from.

Line 1001 is for the Hazard Insurance Reserves. This is determined by when your homeowners insurance premium is next due. On a purchase transaction it is most common for there to be 4 months of reserves collected for at closing. The reason being is that the lender is often 2 months shy of a full amount to pay the homeowners insurance premium the following year, plus in addition to however many months the lender would be short by, it is legally allowable for the lender to collect an additional two months as a “cushion”. For example you are closing on the purchase on May 20th, which is when the homeowners insurance goes into effect. On 5/20/09 is when the next homeowners insurance premium is due. Your first payment is not due until July 1st. You would be making July, Aug, Sept, Oct, Nov, Dec, Jan, Feb, Mar, and April’s mortgage payment (10 months) before the lender would send out the money to pay the insurance premium due on 5/20/09. The reason they don’t assume you’d have made May’s payment, and would then need 1 less month of reserves, is because often you can make your payment up until the 15th of the month without incurring a late fee, and that would be too late for the lender to pay out the insurance company the premium and have it received on time – the lender isn’t interested in cutting it that close. Thus the 2 months of reserves + 2 month cushion = 4 months. On a refinance transaction the hazard insurance reserves are calculated by the 2 month cushion + however many months they lender would be short by when it comes to paying the upcoming homeowners insurance premium.

Line 1004 is similar to line 1001 except for it’s the Property Tax Reserves. This is determined by when your property taxes are due, and how much is due on each due date. Most states/counties have their property taxes due twice a year in equal amounts (6 months each), however there are areas of our country where they are collected for 4 times a year in equal amounts, once a year in one lump amount, and even twice a year in unequal amounts. Your mortgage originator should do their due diligence and find out when property taxes will be due for the property you are financing. Line 1003 is grouped in the same category, as there are some areas in the country where there are school taxes/county taxes/municipal taxes, etc. If you are ever interested in finding out ahead of time, you can call up the taxing authority for your county and they can explain when taxes are due, how they are calculated, and any exemptions one can qualify for (such as homeowners exemption, disability exemption and senior citizen exemption, which availability may vary depending on location).

An escrow reserve is not required to be established on all loan programs. If you are doing a conventional loan program and your loan-to-value (LTV) is 80% or below (90% or below in California) you have the option not to establish an escrow account. Keep in mind you are solely responsible for paying your homeowners insurance and property taxes in that situation. If the lender determines you have not paid those items on time they can force you to establish an escrow account and/or force you to use their own homeowners insurance company (called force placed insurance). On FHA loans, VA loans, and USDA RD loans you are required to have an escrow account. Sub-prime programs, which are a type of conventional loan program, often give you the choice to set up an escrow account or not regardless of what the LTV is.

Line 1005 is if Flood Insurance is required and is paid separately from your normal homeowners insurance. Often the flood insurance premium is included in the homeowner’s insurance premium amount; you should speak to your insurance agent to determine how that would be set up if flood insurance is required.

Below section 1000 is the total for the Pre-paid items/Reserves, as well as a total of for the Settlement Costs.