Module 3.8 determine closing costs

Question 1

what is the generally percentage for closing costs

Answer 1

1.5 to 4%

Question 2

what are 20 items included in closing costs

Answer 2

appraisal fees
legal fees and disbursements
title insurance application fee and premiums
registry fees (title search, property tax search, land registration fee)
real property report/survey
mortgage insurance application fee and premiums
homeowner insurance
prepayment penalty for early renewal or refinance
lender fees
property tax adjustments
utility bill adjustments
interest adjustments
mortgage brokerage fees
interim financing (if applicable)
GST (new-builds only)
Estoppel certificate (condominium transactions only)
home inspection fee
utility deposits
moving costs
possible miscellaneous expenses such as appliances, window coverings, and garden tools

Question 3

what are the three different adjustment costs

Answer 3

• interest adjustments
• Property tax adustments
• Utility bill adjustments

Question 4

what are interest adjustments

Answer 4

Many lenders like to be paid on the first or 15th of the month, so there may be a gap between the closing date and the first payment date. To cover the interest for this period, lenders calculate interest for the number of days and deduct the amount from the advance of funds.

Question 5

what are property tax adjustments

Answer 5

If property taxes for the year were paid in advance by the seller, the applicant needs to reimburse these monies. If the seller has prepaid the property taxes for the whole year, the adjustment can be a significant cost.

Question 6

what are utility bill adjustments

Answer 6

If the seller has already paid for any portion of the utility costs past the date of closing, the applicant needs to reimburse these monies.

Question 7

What is the total cost of credit

Answer 7

Be aware that some of the costs listed above may be included in the calculation of the total cost of credit (TCC). The costs that would be included in the calculation of the TCC are those that the applicant has no control over or receives no continuing benefit from. For example, the cost of a title insurance policy for the lender would be included in the TCC.

Question 8

why is Total cost of credit important

Answer 8

• if there are any lender or broker fees charged as part of the mortgage transaction, TCCC must be calculated IOT dermine APR

Question 9

what are the 4 main mandatory disclosure documents

Answer 9

Consent form to obtain consumer credit history (mandatory)

Mortgage Borrower Relationship Disclosure (mandatory)

Mortgage Borrower Compensation Disclosure (mandatory)

Cost of Credit Disclosure (if required by circumstances where the lender or brokerage charges fees); also referred to as the Fair Trading Act (FTA) or “Annual Percentage Rate [APR] Disclosure” document

Question 10

what fees are included in cost of credit disclosure

Answer 10

• extra fees
• lender fees
• broker fees

Question 11

when is a broker required to provide a disclosure statement

Answer 11

The lender does not enter into credit agreements in the course of carrying on a business (see s.72 (1) (2) of the Fair Trading Act). In this situation, all the disclosure duties of the credit grantor are imposed on the mortgage broker; or

The lender enters into credit agreements in the course of carrying on a business, and the credit grantor deducts the mortgage brokerage fee from the mortgage loan (see s.73 of the Fair Trading Act). In many jurisdictions, however, it is becoming more common to require cost of credit disclosure on every transaction.

Question 12

is the cost of credit disclosure always supplied by the broker

Answer 12

no, often is supplied by the lender at the end of transaction by the lawyer. If not, then the broker is to supply before compliance is completed.

Question 13

how soon must you complete the cost of credit disclosure

Answer 13

at least two days before the earliest the following

• the day the applicant makes a payment (other than disbursment)
• the day the applicant enters into a mortgage agreement
• the day the applicant incurs any ovligation in relation to the mortgage.

Question 14

when is the cost of credit usually introduced to the applicant

Answer 14

often not completed until closing because closing are not accurate until that point

Question 15

how must cost of credit info be disclosed

Answer 15

verbally and in writing

Question 16

who can cost of credit disclosure be made by

Answer 16

Brokerage
Lender
Lawyer

Question 17

when does the brokerage provide cost of credit disclosure

Answer 17

The brokerage makes this disclosure if it is charging a fee to the applicant (in which case you and/or the brokerage must maintain a copy of the disclosure in the loan file).

“Every mortgage broker that represents a lender in a deal in mortgages must ensure that the lender complies with the written disclosure requirements to be provided to the applicant pursuant to the Fair Trading Act.” (Section 73(4))

Question 18

when does the lender provide cost of credit disclosure

Answer 18

The lender makes this disclosure when no brokerage fees are being charged or when the lender is charging a fee to the applicant (in which case, the lender has all the necessary information for the disclosure).

Question 19

when does the lawyer provide the cost of credit disclosure

Answer 19

The lawyer for the applicant makes this disclosure to the applicant and maintains a record of it in cases where the lender specifically requests this disclosure.

Question 20

when the brokerage fees are being charged what 5 things must you carry out

Answer 20

Determine the closing costs.
Calculate the total cost of credit (details later in this session).

Calculate the annual percentage rate (details later in this session).
Present the applicant with the Cost of Credit Disclosure document.

-You can download an APR disclosure program from the AMBA website to generate a form. Or if your brokerage uses the Filogix Expert software, you can produce a Cost of Credit Disclosure form from that program. See the two learning activities below.

Allow the applicant a 48-hour “cooling-off period” to consider the information before signing. The applicant can back out of the agreement without penalties or charges within that 48-hour period. The applicant can also choose to waive the 48-hour cooling off period and sign right away.

Question 21

what is total cost of credit

Answer 21

is the anticipated dollar cost of a loan over its term, calculated as the difference between the total loan repayments to be made by a borrower and the total advances to be received by the borrower (possible payout penalties are not worked in)

Question 22

what is the reason for the difference between what the applicant will receive and what the borrower will repay

Answer 22

• the interest charged on the loan

- the various fees associated with arranging a mortgage.

Question 23

example of calculating cost of credit

Answer 23

For example, if an applicant takes out a loan for $100,000 at an annual interest rate of 6% simple interest (with no principal payment until the end of the year), the interest cost (or cost to borrow) would be $6,000. If lawyer’s fees and title insurance for the deal came to $2,000, then the applicant would receive only $98,000 because the lender would take the $2,000 fee out of the loaned funds. Repayment, however, would still be interest and balance on the total loan of $100,000. Therefore, the applicant’s total cost of credit in this example is $6,000 (interest) + $2,000 (fees) = $8,000, and money in hand from the loan is $98,000.

Loan amount = $100,000
Interest = $6,000 ($100,000 x 6% simple interest per year)
Fees = $2,000 (lawyer and title insurance, subtracted from loan amount)
Money received = $98,000 ($100,000 – $2,000 fees)
To be repaid = $106,000 (original loan + interest + fees)
TCC = $8,000 (interest + fees)

This is a simplified example, however, because it includes neither compounded interest nor principal-plus-interest payments during the year.

Question 24

what is the applicant pays all fees up front

Answer 24

then the applicant will only pay the mortgage interest. if they have the bank pay the fees then that is deducted from the amount advanced, having an effect on annual interest rate.

Question 25

what is the relationship between TCC and APR

Answer 25

you will need to calculate TCC to calculate the APR

Question 26

what fees are included in TCC

Answer 26

• Mortgage interest charges
• appraisal (copy NOT given to borrower by lender)
• legal fees and disbursements
• title insurance - lender policy
• RPR report (copy given to borrower)
• Lender fee to maintain property tax account on high-ratio loans
• mortgage default insurance application fee and premiums
• lender fees (any monies paid by lender to arrange document, secure, administer, or renew a mortgage

Question 27

what is excluded from TCC

Answer 27

• Appraisal (copy given to applicant for third-party use - subject to any limiting conditions that may prohibit same)
• legal fees and disbursements (borrower selects lawyer)
• title insurnace - owner policy
• registry fees - title search, property tax search, land registration fees
• RPR - copy given to borrower
• mortgage protection insurance application fee and premiums
• homeowner insurance
• prepayment penalty - incurred as part of the early renewal or refi
• ## property taxes managed and paid by borrower

Question 28

where to enter TCC costs

Answer 28

Fees portion of filogix

Question 29

what is Relationship between APR, EAR, and TCC

Answer 29

The annual percentage rate (APR) is related to both the effective annual rate (EAR) and the total cost of credit (TCC). Like the EAR, it takes into account the effects of compounding and compounding frequency, and like the TCC, it includes both the interest and non-interest costs on the loan.

Question 30

Why is APR is higher than the nominal interest rate and EAR

Answer 30

Because the APR factors in the non-interest costs of the loan, it is higher than both the quoted (nominal) annual interest rate and the effective annual interest rate. That is why a discussion of the annual percentage rate (APR) comes up as part of the Cost of Credit Disclosure.

Question 31

APR is the “true” interest rate for the loan

Answer 31

The annual percentage rate (APR) represents the interest costs plus the non-interest costs incurred to obtain a loan, expressed as a percentage of the average balance of the loan over the term of the mortgage. The APR is the “true” interest rate on a loan because it takes into accounts all of the following:

original loan amount
all additional non-interest charges over which the applicant has no control or from which s/he receives no continuing benefit
nominal annual interest rate
compounding frequency
total number of payments (amortization)
payment frequency

Question 32

Adding fees and costs to the original loan amount increases the interest rate

Answer 32

Just as the effect of compounding interest over time increases the interest rate on a loan, so does adding fees and other costs to the initial loan amount. This is because when an applicant has to pay various fees and closing costs as part of arranging a mortgage, those costs are subtracted from the amount of money the applicant actually receives from the lender, but interest is still charged on the entire amount.

Question 33

Example of APR

Answer 33

For example, assume a negotiated loan amount of $100,000, a quoted (nominal) interest rate of 6%, and no principal payments until the end of the year. In this case, simple interest costs would total $6,000. Therefore, the applicant would have to repay a total of $106,000 at the end of the year.

Now assume a total of $2,000 in fees and closing costs for the same loan. These costs have to be paid upfront, so they are subtracted from the loan amount. Therefore, the applicant only receives $98,000 of the negotiated $100,000; however, interest is still charged on $100,000.

When you factor in the interest and non-interest costs associated with this mortgage ($6,000 in interest and $2,000 in fees and closing costs), you can see that the applicant is actually paying $8,000 to borrow $100,000 but only receives $98,000. The total s/he has to pay back, however, is $106,000, which reflects the interest and balance on the $100,000 contract.

By dividing the total cost of borrowing by the amount of loaned money actually received, you arrive at the annual percentage rate (APR). For the simple interest example above:
TCC ¸ loan amount = APR
$8,000 ¸ $98,000 = 8.2%

So the applicant in this example may think s/he is paying 6% interest for the loan because that is the quoted rate, but s/he is, in fact, paying 8.2% interest. That is why it is so important that the annual percentage rate (APR) be properly disclosed to the applicant because it is like a hidden cost. (NOTE: This example is highly simplified because it does not take into account interest compounding and frequency, payment frequency, or amortization period.)

You will typically use a mortgage calculator or an APR calculator to determine these values. Using a more realistic example and an online APR calculator, consider the following.

Question 34

what are consequences of not making disclosures

Answer 34

If the information in a disclosure document is not complete or correct, the applicant may be entitled either to cancel the agreement or to receive statutory damages. Moreover, certain disclosures are legislated under the Fair Trading Act and the Real Estate Act, whereby failure to disclose certain information may result in disciplinary actions against you and restrictions in your ability to continue to practise.

Question 35

what does the process of preparing an applicaton file for submission to lender imply

Answer 35

gathering all the necessary information and documents
verifying the authenticity of the information and documents
providing alternative proof if particular required documents are not available
explaining any shortcomings in the application to provide the lender with the whole picture if the documentation cannot

Question 36

what things need to be done to build and maintain relationships with lenders

Answer 36

Review the brokerage’s preferred lender list (if there is one) and/or review the market to determine which lender best fits your applicant’s situation. Then, review and understand that lender’s underwriting guidelines. Only send your files to the “right” lender(s).

Review that lender’s products to ensure that there is a product that is a fit for your applicant’s circumstances. Then, review and understand that product’s underwriting guidelines. If the product isn’t a good fit, look elsewhere.

Thoroughly review every aspect of your applicant’s loan application. Confirm all facts yourself, before you submit the file.

Explain any shortcomings and highlight advantages of the situation in a summary note to the lender (either paper or electronic). Make sure the lender gets a complete story.

Ensure that the documentation does not misrepresent the applicant, that all documents are included in the file, and that none are forged. Ensure that you have addressed any red flags.

Use the lender’s preferred format for packaging and submitting the loan file. Arrange the documents in a logical order. Make it easy for the lender to find the information s/he needs.

Question 37

what must be retained in the loan file

Answer 37

the application itself, signed consent forms and disclosures, all supporting and verification documents, notes, correspondence (including e-mail), photocopies of all original documents viewed, and paperwork pertaining to mortgage protection insurance (application/acceptance/waiver/indemnification certificate)

Question 38

If a file is declined what are some reasons

Answer 38

Was it an “auto-generated” decline because the file information was inconsistent with the format that that lender requires? It can be as small as a data field that was not filled out and is usually something that lenders do not care about, but which this lender considers a critical piece of information.

Was the decline because of a credit policy issue?

Was it declined by a mortgage default insurer?
Is the property outside of the lender’s usual (geographical) area?

Has the lender or insurer flagged the property or applicant as needing “enhanced due diligence”? This may mean that there is a history on the property or the applicant of which you may not be aware.

Is the applicant getting down payment money from a country under embargo?