Reserves and Prepaids on the Good Faith Estimate
Rhonda Porter on 05 22, 2007
Sandy asked a series of great questions regarding her good faith estimate that she’s received for the financing of a home she’s going to purchase. I should have answered all 7 questions in a post…I got down to the last question and here I am!
“Typically do the pre-paid items involve a) interest for 3 days b) real estate taxes for 5 months c) hazard insurance premium d) hazard insurance for 2 months? Does this sound right?”
a) If a Loan Originator does not have a closing date, they typically use 15 days for interest under the prepaid section of the Good Faith Estimate (GFE). This is prorated interest based on the day the new mortgage (Deed of Trust) is recorded. Some LOs might use less days to make their closing cost appear lower in the “bottom line” to the borrower. However, if the Loan Originator knows that you’re closing at the end of a month, then using 3 days interest on the GFE is fine. I would rather show a couple extra days so that the borrower is prepared to bring in a little extra cash at closing than the opposite.
b) The number of months of property taxes collected for impounds depends on when the first mortgage payment will be due. If your LO is telling you that 5 months are due for prepaids, this probably means that your mortgage is closing in July with a first payment due on September 1. Here’s an example of how many months of property taxes are collected for conventional loans.
| FIRST PAYMENT DUE | RESERVE AMOUNT REQUIRED |
| JANUARY | 3 MONTHS |
| FEBRUARY | 4 MONTHS |
| MARCH | 5 MONTHS |
| APRIL | PAY 1ST HALF, RESERVE 1 MONTH |
| MAY | PAY 1ST HALF, RESERVE 1 MONTH |
| JUNE | 2 MONTHS |
| JULY | 3 MONTHS |
| AUGUST | 4 MONTHS |
| SEPTEMBER | 5 MONTHS |
| OCTOBER | PAY 2ND HALF, RESERVE 1 MONTH |
| NOVEMBER | PAY 2ND HALF, RESERVE 1 MONTH |
| DECEMBER | 2 MONTHS |
c) and d) If you’re having taxes and insurance collected in your mortgage payment, one year of your insurance premium plus 2 months is collected for the prepaids/reserve account for a purchase. This varies when you have a refinance depending on when your next premium is due.
You may to opt to pay your taxes and insurance separate and not have a reserve account. To waive your reserve account, there is a fee of 0.25% which is either charged to the borrower or the Loan Originator factors it into the rate. Unless you’re going to invest the funds that are going towards starting the reserve account, investing the monthly tax amount and making a gain over the 0.25% fee, you may want to just allow the lender to collect the taxes and insurance in your payment. It is your choice if you’re putting 20% or more down towards your next home (or if you’re refinancing and you have 20% or more equity).
Sounds right, Sandy! 
About the Author: Rhonda Porter
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37 Responses to “Reserves and Prepaids on the Good Faith Estimate”
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Is that the same Sandy who ask me tons of questions about home improvements? Hey Sandy, did you see my post I wrote for you “Snapshots for Sandy”? It just dropped off to the second page.
That Sandy does have a ton of questions. Sometimes I think she’s testig us.
I hope she sees your post and my answers to her 7 questions.
Sandy isn’t a “blue” person…
If a loan originator quotes less than 15 days interest on the good faith estimate, consumers can ask for a written guarantee that the loan will close within the day of the month that they are quoting.
For example: 3 days prepaid interest quoted.
Ask for a written guarantee from the loan originator that the loan will close on the last, second to the last, or third to the last day of the month.
If the loan originator is not willing or able to provide a written guarantee, ask the loan originator to provide a more accurate estimate.
Low-balling prepaid interest on the good faith is one sign that a loan originator is trying to get the costs to artificially appear lower, in order to win you as a client, unless the loan originator is willing to stand behind his or her estimate, with a written service guarantee.
Rhonda, thanks so much for the detailed explanation. Things make a lot more sense now. I have a question related to hazard insurance: Does the per month premium of 50$ sound about right? or on the low side?
Ah, Jillayne, I did not know we can ask for a written guarantee.
Ardell, I ask a lot of questions cause home buying isnt simple
for me. I meet a lot of people at work, socially, agents (seller) who seem to have a very diverse view points.
Sandy, that’s a tough one because home owners insurance can vary quite a bit from company to company. You cannot factor what any LO provides as an ESTIMATE for home owners insurance. This is something else you need to shop around unless you’re really happy with your insurance provider. You should contact them to get a quote. I typically bump up my estimate (who knows…maybe I’m losing out when people are shopping me) to about $65 per month in your price range…but $50 is not unreasonable. Do check with your provider.
Sandy, whenever you buy a home or do a mortgage, suddenly all your friends, co-workers, family, etc. are experts! It’s very much like being pregnant!
Ask for a written guarantee of closing costs from your LO no matter what! I don’t do it automatically and I should because I always fine tune the HUD at closing if it’s higher than what I estimated on MY COSTS. When clients ask for a guarantee in writing, I’m happy to provide it. If your LO won’t, I’d get a new one.
Jillayne,
What if the buyer tells the LO, “we’re closing at the end of this month”?
If a buyer or agent provides me tax, insurance and closing dates, I’ll preface my GFE on “based on the info provided by…”.
Funny you should mention it’s like being pregnant. I remember being very ticked off when I was having my first child because no one seemed to know anything FOR SURE! I think I screamed at the doctor “YOU’D THINK SINCE WOMEN HAVE BEEN HAVING BABIES SINCE EVE, YOU WOULD HAVE THIS DOWN PAT BY NOW!!! I also called them Philistines. I was in labor, of course.
I was thinking today how very much like being pregnant seems to be. Everything “depends” and everything seem to change no matter how hard we try to make if fit into a little checklist. The best house for this guy, is never the same as the best house for that guy, and even the worst house is going to sell to someone.
Hi Rhonda,
Your question in comment #7 is a very good one.
Yes, many buyers tell their loan originator “we are closing at the end of the month.” However, there are numerous factors that might prevent a transaction from closing exactly when all parties would ideallly like to close.
Quoting 15 days interest on the good faith estimate is fair and reasonable for the following reasons:
1) if the transaction closes between the 15th and the end of the month, the final prepaid interest charge will be lower! Yay! Lower closing costs. No complaints about that, and;
2) if the transaction is bumped into the beginning of the next month, the estimated costs are not going to be off by as much as compared to if the loan originator only quoted 3 days worth of prepaid interest.
Quoting 15 days interest on the good faith estimate is fair, reasonable, and more often leads to good consequences/results for the home buyer or refinancing homeowner.
Quoting less than 15 days interest, should only be done if there is some sort of guarantee in place that the loan will close within those last 15 days. Seeing no guarantee offered, the only reason LOs quote less than 15 days interest is to serve their own interest to give an appearance of lower closing costs.
Of course, chosing a lender based on who is quoting the lowest closing costs is a mistake. But we have already blogged about that over and over again.
Hi Sandy,
Regarding comment #5, there is a national professional organization for mortgage brokers, whose members pledge a guaranteed fee and a promise not to change their fees prior to closing. They give consumers a written guarantee.
The assoc is called the Upfront Mortgage Brokers Association.
http://upfrontmortgagebrokers.org/
Sandy, ANY MORTGAGE PROFESSIONAL can provide you with a written guarantee. They do not need to belong to an association in order to do so. Just ask. If they don’t then seek another LO.
I’m not so sold on the mortgage group Jillayne is promoting. I’ve tried to find out more info from them,however, they want a $$ for me to join before they’ll talk to me.
Jillayne, my question was just to continue this dialogue. Regarding Comment 9:
If the transaction is bumped into the first 10 days of the next month, the transaction may (or may not) be closed as an interest credit.
I will advise my clients to close towards the end of the month if their funds are tight. Some like closing mid month because they feel like they’re skipping a month and a half of mortgage payment on the new home. Of course we know no one truly skips payments…it’s all the prorated interest.
When I provide a GFE, I fully disclose to the buyer and agent what my strategy is, if one is needed, as I discussed above. Ex. Mr and Mrs Buyer would like to close at month end.
If there’s a contract in place, I ask when the closing date is and prepare my GFE based on that. The closing date not only impacts the prorated interest but how many months of taxes should be reflected on the GFE.
Ok, I love the comparison to pregnancy! Especially since it is so fresh in my mind (I have a 4 1/2 year old and an 18 mos old). You can apply it to babies, kids, etc. I think the next time I am in an over pricing or under bidding situation I will say “you know how your baby is WAY cuter than anybody elses baby? Owners feel the same way about their home” Ok, I wouldn’t really say that but it’s fun to think about. Thanks Rhonda!
Sandy, homebuying isn’t easy for anyone, it’s not just you
Good for you for doing the research. Make sure you shop around for the insurance – many people will sign up with whoever does their car insurance without checking other companies but sometimes you can get cheaper homeowners elsewhere. By the way, MetLife is one of the last companies to offer complete replacement coverage which is nice to have. Employers, such as Microsoft, get extra discounts through insurance so check w/ your employer and see if they have any programs like that.
Thanks, Jennifer. I find it very similar, too. They’re both life changing experiences and everyone is so full of well meaning advice, even if they have never owned a home or had a baby! Suddenly everyone’s an expert! Buying a home and pregnancy is not easy. But both are worth it. Thank goodness that most transactions close in 30 days and not 9 months!
Yes, they are both definitely worth it! I wish it all went quickly, on the agent side we can be with people for quite a while! The home search (or listing period) is like the pregnancy and the closing period is like labor and delivery. Some women seem to deliver quickly with no problem while some women spend days in pain. Once an offer is accepted you have to successfully pass resale certificates (for condos), title reports, inspections, and any other contingencies. You never know when false labor will rear it’s ugly head too!
Many years ago when I was in title insurance and on maternity leave (this would be over 14 years ago as I think of my son), I did a series of post cards that I sent to my Realtor/Lender clients with photos and business/pregnancy puns. It was fun. And…my son was born on Labor Day…so it all fit in nicely. I still have copies of the old post cards in his baby book.
Rhonda: Does the AMT come into play for seattle residents and affect deductions on the primary residence mortagage interest ?
Hi Sandy, can you please spell out AMT for me? Thanks!
Sandy, I’m zapped tonight…I had the honor of doing a podcast with two other mortgage professionals and we rambled on for 45 minutes (I hope the interviewer does some editing!).
Regarding AMT, I suggest that you contact your CPA or other tax professional so they can properly advise you based on your specific scenario.
Just a note that “April – Pay first half – reserve 1 mo” means the Seller pays first half, Buyer pays seller from day of close to June 30 plus one month to impounds.
If taxes are $4,800 a year, the Seller pays $2,400. Buyer pays $400 to the mortgage Company and the buyer also pays $800 to the seller, or $1,200 in total. This is important to note as I believe the $800 paid to the seller is tax deductible, but won’t show in the amount the mortgage company later tells you was paid in property taxes, for income tax purposes. So keep the HUD 1 for when you do your taxes.
The mortgage company then has $400 in your impound account. No monthly payment in May. June, July, August and September mortgage payments have $400 each toward property taxes, plus the 1 month impound, equals the six months due in October.
I think when people don’t want to give the mortgage company the tax money, it is because they feel the mortgage company is collecting more than they need to have, which is not the case. In fact, if your impound account is short, the mortgage company will often pay your property taxes with their own money, to make sure the taxes are paid. They will then allow you to pay them back, sometimes over an extended period of time.
This is my understanding. If anyone sees anything out of order there, feel free to make the correction.
Great point, Ardell. The mortgage company is only allowed to maintain a certain amount of “cushion” in the reserve/impounds/escrow account. If the funds exceed that amount, they contact the borrower and offer to either refund the difference or lower the payment. The same is true if the opposite happens and not enough funds are reserved (increase in property taxes, insurance, etc). In that case, the payment is typically increased or the borrower can send in a payment for the difference.
Rhonda,
What is the requirement of the LO to include the tax prorate amount, so the buyer knows their total cash to close including monies paid to the seller?
“Instead of that “April pay first half plus 1 mo impound” I usually see 3 mos taxes without the breakdown of 2 to seller and 1 to mortgage company.
My advice to Sandy is that she not try to get everything down to the penny, but have a cushion plugged in as “miscellaneous”. The purpose of estimating the costs is to make sure you have enough case to close. So even thinking that it is accurate to the penny is a dangerous way to approach it.
I expect the LO to be absolutely accurate as to their costs but not everyone else’s. Home inspectors, Appraisers, home warranty and other costs can throw things out of whack if someone is not adding a $500 or so miscellaneous category to allow for appraisal to be $400 instead of $350. And I don’t think the Home Inspection or Home Warranty fees show at all.
Ardell,
Right now, 3 months taxes would be pretty accurate. That would fit for a May closing which would make the first payment in July.
The LO should be referring to a closing date if they are using less than 6 months taxes on their initial GFE. I will ask a potential buyer when then anticipate buying a home (or if they all ready have a contract) before estimating how many months taxes will be required for reserves. I also let them know that I tend to “high ball” vs. “low ball” my estimates and that once we have the closing date and actual taxes, the GFE will be revised with the current information. I think savvy consumers appreciate having a “worse case” scenario with taxes rather than someone low-balling just to be surprised at closing with having to bring more in than originally estimated to fund the transaction.
The LO needs to include taxes and insurance in the payment for prequalification purposes, even if the borrower is waiving their reserve account.
ps: Home inspection and/or warranty fees do not show on the GFE. That will show on the HUD. Those items are not involved with the financing.
Sandy, and any consumer, can easily wind up in a spin by trying to shop for the lowest possible rate and lowest fees. I’ve written about that before at RCG and Mortgage Porter. You do want a competitive rate and cost for your mortgage…but what is just as important and often lost when you “over shop” is the service you receive from the Mortgage Professional.
Questions like Sandy’s are great…they even provide good blogging material such as this post…but I do wonder if Sandy is asking her LO these questions and if not, why not? If so, is she just verifying info? Or does she not trust her LO? Is she with someone who has quoted a low rate/cost and now she’s not getting her needs met (such as answers to her questions).
It’s interesting to me. I’m dealing with another buyer right now where they may go to the builders lender for closing costs credit, but they want to use my brain and advice…which I don’t paid for. I feel good helping people…that’s the main reason why I blog…but I also feel good having food on the table and the lights turned on.
I digress….AGAIN.
You do bring up a good point though, Rhonda.
Does DIY real estate mean using the assistance of professionals for free? I have a problem on many levels when someone asks “I just put an offer in on xyz property, what do you think?” I really can’t answer at that point, nor do I really want to answer it. Puts me in a damned if I do and damned if I don’t situation.
Ok one of the reasons why I asked these questions was because I am contacting multiple people now for loans. The GFE lines 803, etc posted here all have different titles in words and figures. Some loans have loan orgination fees while some have points. I am curious about many things 1) why do LO’s use different terms for the same line numbers? for a person like me, its very confusing 2) why is there so much vairability in the numbers? I feel this process is not as transparent as it needs to be. 3) I did ask each LO all of the above qns. Some are very upfront about explaining them to me. Some dont give me resonable sounding explanations. Now since I dont know much abt this process, I am wondering my instinct (if you will) is wrong when i say a LO’s explanations are not reasonable. What I dont get is how come the advice from LO’s change even though I go through the same listed of bulleted specs (what I want) with each LO.
Sandy, how did you go about selecting your different LOs? What type of institutions do they work for (bank/broker/credit union)?
I would not work with anyone who didn’t seem “upfront” and you also need to be careful of smooth talkers. Selecting a LO is not an easy process and I’m glad that you are putting so much effort into this.
Your questions are again, excellent and valid. I wrote a topic about points (discount and orig.) at http://www.raincityguide.com/2007/03/03/whats-the-point/
Different lenders do have different fees. If I have to broker vs close in our credit line (I’m a correspondent lender) there are more fees. We close a majority (I’d say 80%) of our loans in our credit line. Plus, some might price some of the cost into the rate…it is challenging to shop. And to add to that, rates change constantly. So far, since Monday, one of the major lenders I work with has had 7 price changes (in 4 days). So the rate quote you received on Monday…or even yesterday… from one lender is no longer valid when comparing it to another lender.
LOs experiences, training and ethics will all be unique to the individual. And, how much a LO expects to be paid on a transaction (how your mortgage is priced) varies, too.
The last stats I heard for WA State is that we have 13,000 mortgage brokers…this does not include loan originators who work at banks. (I believe there are more brokers than bankers).
My point is that it all comes down to the individual. You are basically shopping for a person and not the rate/fees. http://www.mortgageporter.com/reportingfromseattle/2007/01/how_to_pick_a_l.html
Sandy, as I mentioned before, I would be happy to help review your GFEs. I actually enjoy disecting the little buggers. It could be a future post (we’d leave names out to protect the innocent or not so innocent lenders)!
Hi Sandy,
There’s a federal law that directs how loan originators are to complete their Good Faith Estimates. Here is a link to the HUD website, which explains the different line items on the Good Faith Estimate, and it’s companion the HUD I Settlement Statement, which you will receive at closing, which should match up closely (but rarely perfectly) with the GFE.
http://www.hud.gov/offices/hsg/sfh/res/sc3secta.cfm
In addition to the GFE, you need to check each Federal Truth in Lending to make sure there is no prepayment penalty on any of your proposed loans. With your credit scores, this would only be used for increasing the LOs income unless they have offered to use it to lower your rate (either way, I would not opt for a prepay).
[...] The Good Faith Estimate is easily manipulated by Loan Originators. Some LOs might use short term rate locks for their quotes (shorter term cost less than a longer term lock) or they go skinny on the prepaid items without having an estimated closing date from the borrower. [...]
Jillayne, on comment 10, you reference the upfront mortgage brokers group. I notice they also advertise on your website. What is your relationship with them?
[...] Based on the Good Faith Estimate from early April with the internet lender, his loan is 5% down utilizing an 80/15/5 with a 30 year fixed rate “Jumbo” mortgage priced at 6.75% with no discount or origination points. Instead of showing itemized fees, the internet lender shows a “bundled closing fee” in the amount of $1025 in section 800 of the GFE. The title and escrow fees are wrong which are typical when working with an out of state lender. The second mortgage is a 30/15 at 7.975% with no discount or origination fees. The estimate did not factor in reserves, so it falsely appears there will be less cash due at closing (unless Joe was waiving his reserve account, which he was not). I prepare a GFE based on current rates in early June. At that time, I was able to offer Joe Buyer the same terms. However, when you factor in the reserves (taxes and insurance), my estimate appears to look less competitive as the payment appears higher and you need more funds for closing. [...]
my mortgage contract contained house payment, pmi insurance,reserves for taxes,and reserves for insurance.we had a fixed rate intrest rate @6.75%. lived in the house for 6 months and the payment went up to 1385 per month on a 122,000 house should i get a lawyer to look into this.
caramel, you can email me your Note if you’d like. Could it be that your property taxes or home owners insurance increased?
What happens to the reserves? When are they utilized? “How long” or “do I” have to maintain them?
Willie, you don’t “maintain them” unless you qualify and opt to pay your taxes and insurance separately. This requires an minimum loan to value of 80% and lenders typically charge 0.25% of the loan amount for you to waive your reserve account.
In Washington state, taxes are paid in April and October. The home owners insurance is paid annually (once a year). The mortgage servicer manages the reserves and makes these payments on your behalf.