When a home buyer is shopping for their next home, they often request written rate quotes from mortgage originators to see a detailed list of closing costs and an estimated total monthly mortgage payment. Before HUD mandated their Good Faith Estimate in 2010, they could rely on a Good Faith Estimate. Due to the liability a mortgage originator may incur on issuing a GFE before the buyer has a purchase and sales agreement (in contract to buy a home), a buyer would be hard pressed to find a mortgage originator is allowed to issue a GFE pre-contract. In addition, HUD's GFE does not include the total mortgage payment nor funds required to close the transaction, so it's not best tool for a buyer.
In lieu of issuing the Good Faith Estimate, mortgage originators can issue a written "rate quote worksheet" which may have different names by different lenders. Just like the old GFE, the rate quote worksheets also vary in appearance from lender to lender as they had to be created by lenders as a result of the limitations of the HUD's GFE…they are not a standardized document. The written rate quote worksheet should contain all the same information as the good faith estimate did prior to HUD's 2010 GFE as well as the APR.
The rate quote worksheet is simply a tool to provide an estimate of closing costs as well as what current rates are available if the home buyer were locking at that moment.
Some fees on the quote can change, including:
Title Insurance and Escrow. There are several title insurance companies located within each county. Home buyers DO have the ability to select their title and escrow providerand some offer discounts when you use title and escrow from the same company. They may discover that their real estate agents try to control who provides this service. Often times, listings have a title committment prepared by the listing agents preferred title vendor (sometimes called a "TBD"). Until the mortgage originator knows who the title and escrow company are, this fee is an estimate and the fees do vary.
Property taxes. Property taxes are in the mortgage payment as well as the prepaids/reserves section of the mortgage quote. The number of months required to collect for reserves may varies based on when the first month's payment is due…so until there is an established closing date, it's a "best estimate". NOTE: I use 1.25% of the sales price divided by 12 months, unless I am provided a different figure to use for taxes. Property taxes are specific to the property that is purchased…and property taxes may change over the years (impacting your mortgage payment).
Home owners insurance. Home owners insurance is in the payment as well as the prepaids/reserves. This fee can vary based on who the provider is (selected by the home buyer) and the amount/type of coverage they request.
Prepaid interest. This will be based on the very date of closing, paying interest through the end of the month (because you now own the home and have a mortgage). Until we have that contract, most lenders will use 15 days of interest for purposes of a rate quote. Closing earlier in the month increases the days of interest and later in the month reduces the days of interest.
Of course, how the loan is priced once the rate is locked (with or without discount points) may also change as the home buyer may not decide this until they know the what pricing (what rate at what cost) is actually available until the moment they are able to "lock".
This post was written based on a question from a home buyer I'm working with in the Seattle area. If you have a question regarding mortgages that I can answer on Mortgage Porter, contact me! You just might read your answer on my blog.