Mortgage Size Surprise

Day before closing -- and I was surprised to find that a $100,000 mortgage (to choose an amount at random) actual means that the bank comes to the closing with a check for $97,000 because they withhold a certain amount for the fees. Should I have known this or is this unusual? Because the seller is paying the closing costs, this means I actually have to show up with $3,000 more than I expected at the closing!

Thank you.

A good LO would have discussed this with you up front and shown you a Good Faith Estimate which would indicate your payment, amount due at closing, total closing costs, etc.  You are saying that you had no idea how much the closing costs were going to be and who would be paying them? - or all of them?  Just because the seller is paying your closing costs....doesn't mean that your costs will be $3000 or $10,000 for that matter.  Your contract should be exact.  Sounds like either your realtor or lender is the next contestant on "Amateur Hour".

Agreed, I have not had a great experience with my mortgage broker. That said, what I'm surpried at is that a "Loan for $100,000 with bank fees totalling $3,000" is actually a loan for $97,000 with a $3,000 fee. Do I pay interest on the amount they "loaned me" and then held back as payment???

I have to agree with Curt.  Your contract should have been specific on how much of the closing cost the seller was paying.  Your broker should know (some don’t) how to read the contract and give you a correct Good Faith.  Are you sure the $3000 was not pre paid items like insurance or pre paid interest or did someone just drop the ball on explaining it to you.

Any money you borrow, you will pay interest on. Your loan is still for $100,000, but $3,000 is what it costs to complete the transaction, so you only have $97,000 available proceeds to use. 

Man this industry is messed up... why should the purchaser pay interest for 30 years on money paid directly to the bank? Money that they have access to immediately? They are not lending me that money -- I should not have to pay interest on it.

Very weird.

Ezra,

You can account for the money any way that you like.  You could look at it as though you paid the $3,000 costs out of your pocket (paying no interest on it) and only paying interest on the $100,000 that you needed.  You could view it as though you are paying interest on the $97,000 that they gave you and on the $3,000 fees, because you put $3,000 of your own money toward the $100,000 needed.

It comes down to this, you don't have $100,000 or you have chosen to borrow $100,000.  When you borrow money you will pay interest.  If you were to lend $100,000 to someone else, I would think you would want them to pay you interest. 

Ezra,

Unfortunately your loan officer didn't perform his job here, which is to explain the financing. At some point you would have signed application paperwork, including a good faith estimate which would outline all fees on the loan. A proficient loan officer should have explained all of this to you. By the same token, you have to pay interest on the money if it is rolled into the loan because you did not come out of pocket at closing with the money, so it really is borrowed. Let's take the seller concession out of it, as we don't have enough info (how much your closing costs were, exactly what they were paying etc), and look at how the fees/interest work. If the closing costs total $3,000, and you signed a GFE you are agreeing to that transaction. At closing you have 2 options, bring in $3,000 to pay these fees, or roll them into the loan. The $3,000 is due at closing, if you don't have the money to bring in, or choose not to bring it in, the bank may be able to roll them into the loan but the $3,000 still has to be paid from somewhere. Since you didn't bring the funds at closing, of course you would pay interest on them, as it is money that is borrowed. Whether it is paid to the seller as money to buy the house, or to the bank to cover the fees, the lender still lent this $3,000 out. There is nothing weird about that. What is strange about this transaction is how poorly the loan officer educated you on the process, the costs, etc.

AC

Thanks Antonio -- I think you've explained it perfectly. I was never given the choice of whether I wanted to bring the money to the closing (which I could do and would have preferred.) I also was never presented with or signed any estimate at all, in good faith or not.

Alas -- I don't have much recourse here, do I?

It sounds like you are staring at a Truth In Lending Disclosure which does not contain the actual loan amount or the note rate.  You should have been provided with a Good Faith Estimate of Settlement Charges and a Truth In Lending Disclosure within 3 days of applying for the loan.  The Amount Financed figure on the Truth In Lending Disclosure is not the same as the Loan Amount which is on the promissory note that you sign at closing.  Your loan officer will likely not be one for much longer given all of the licensing requirements headed our way.

ezra fischer:

Alas -- I don't have much recourse here, do I?

Sure you do, don't sign anything until you are in complete understanding.  I assume you do have the money to pay the amount needed, otherwise, I would like to know what bank will take you all the way to loan docs without verifying you have the money to close!?!  MisterVA brings up a good point about the TIL, this could be where the confusion started, but as I was re-reading this, I thought of FHA, or VA, or USDA, any loan with an Up Front Mortgage Insurance Premium.....that truly is a charge from the lender that you will then pay interest on....but as a good LO will cover with you, it could be the best loan and cheapest loan for your situation.

Ezra, I'm assuming you are a first time home buyer, that being said...enjoy your $8,000 home buyer tax credit.

Ezra,

It is not unusual for the bank to "net fund" their fees.  This means that rather than sending the full $100,000 to closing and then having title send their fees back to them (let's say 3000) they instead deduct those fees from the check they send to title.  This should not have any impact on the amount you need to bring to closing.

Joy Morris