Section 8 Unit 3 Calculating Closing Costs Flashcards

1
Q

Monthly Income based on Hourly Wages

A

Monthly income = (hourly wage × hours worked per week × 52) ÷ 12

Monthly income = ($16.50 × 40 × 52) ÷ 12

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2
Q

Bi-Weekly Salary

A

Monthly income = bi-weekly pay × 26 (number of paychecks the borrower receives in a year) ÷ 12

So, if a borrower is paid $1,500 on a bi-weekly basis, the borrower’s monthly income would be:

Monthly income = ($1,500 × 26) ÷ 12

Monthly income = $39,000 ÷ 12 = $3,250

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3
Q

semi-monthly salary

A

While it sounds the same as bi-weekly salaries, a semi-monthly salary is calculated differently than a bi-weekly salary. That’s because under a semi-monthly pay schedule, a borrower only receives 24 paychecks a year (12 months × 2 paychecks per month) instead of the 26 paychecks that a bi-weekly salaried borrower receives.

So, if a borrower earns $1,500 per paycheck under a semi-monthly salary, we can calculate that borrower’s monthly income as:

Monthly income = (semi-monthly pay × 2)

Monthly income = ($1,500 × 2) = $3,000

Notice that although this example and the example on the previous slide show that borrowers earning the same amount per paycheck, the borrower who received a bi-weekly fixed salary earned significantly more than the borrower who received a semi-monthly fixed salary.

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4
Q

LTV

A

Loan-to-value ratio = (loan amount ÷ home value) × 100

Note that the home value is the lesser of either the appraised value or the sales price. So, let’s reexamine the example we brought up in the previous slide. A borrower takes out a loan for $100,000. The property he’s buying with that loan is worth $120,000. So, we calculate the LTV ratio by using our formula:

LTV ratio = ($100,000 ÷ $120,000) × 100

LTV ratio = (0.83) × 100 = 83%

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5
Q

Discount Points

A

Discount points are used to lower the borrower’s interest rate. They are essentially pre-paid interest, paid at the beginning of a loan to drive down overall monthly payments on a loan.

A borrower purchasing discount points is also called a buydown. Buydowns may decrease monthly loan payments for a specific amount of time (i.e., temporarily), or for the entire life of the mortgage loan (i.e., permanently.) Although buydowns may be temporary or permanent, when calculating discount points you will always base the buydown cost on the loan amount, not the sales price. The formula for calculating discount points is:

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6
Q

Buydown cost

A

Buydown cost = loan amount × discount points

A loan discount point is equal to 1% of the mortgage loan amount

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7
Q

Loan Origination Fee

A

Loan origination fee = loan amount (which is the sale price – down payment) × loan origination percentage

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8
Q

Acquisition Cost

A

Acquisition cost is basically the total cost that a borrower must pay in order to completely purchase a property, including the loan amount, the down payment, and all other closing costs.

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9
Q

Acquisition Cost

A

Acquisition cost = purchase price + closing costs

Acquisition cost = ($18,000 + $97,000) + $3,500 = $118,500

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10
Q

More about Acquisition Costs

A

More About Acquisition Cost
What about times when the seller agrees to pay some closing costs or discount points for the buyer? Let’s say that a seller agrees to pay for three discount points and the buyer will pay $5,200 in closing costs. The purchase price for the property is $265,000 and the buyer has $50,000 as a down payment. What is the acquisition cost for the borrower?

Recall that a discount point is a percentage of the loan amount. So, first you need to figure out what the loan amount is:

Loan amount = $265,000 – $50,000 = $215,000

Great! Now figure out how much the seller is going to pay for those three discount points:

Three discount points = $215,000 × 0.03 = $6,450

Fantastic! Now we’re ready to find the borrower’s acquisition cost. Let’s go!

Acquisition cost = purchase price + borrower’s closing costs – value of seller-paid points

Acquisition cost = $265,000 + $5,200 – $6,450 = $263,750

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11
Q

Understanding Prorations

A

Proration means to divide or distribute a sum of money proportionately

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12
Q

What is being prorated?

A

Is the item an accrued or a prepaid item?
Is it based on the statutory year (360 days) or the calendar year (365 days)?

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13
Q

Types of Prorated Expenses

A

There are two types of items that can be prorated at closing: accrued expenses, and prepaid expenses. Both accrued and prepaid expenses are shown on the closing statement.

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14
Q

Accrued expense

A

Accrued expense items are expenses shown on a closing statement, that are owed, but are not yet paid such as unpaid utility bills, and unpaid property taxes. Accrued expenses are divided proportionately between the buyer and the seller at closing. The buyer gets credit for accrued expenses at closing (think of it as a reimbursement from the seller for these items), and the seller receives a debit (or is charged)

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15
Q

Prepaid expense

A

Prepaid expense items are monies that the seller has paid ahead of time, but hasn’t used such as prepaid utilities or property taxes. Prepaid expenses are also divided proportionately between the buyer and the seller at closing. The seller gets a credit for expenses they’ve prepaid but haven’t used (think of it as a reimbursement from the buyer), and the buyer gets a debit (pays for the portion that they will use). Lenders may also require that buyers prepay certain expenses as a condition of granting the loan, such as insurance policies, and property taxes.

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16
Q

Calculating Prorations

A

As we’ve mentioned mortgage interest, taxes, insurance, and other similar expenses can be prorated in one of two ways:

Using a 360/30-day method (aka statutory year): 30 days × 12 months
Using a 365-day method (aka calendar year): use the exact number of days in each month of the year (keeping in mind that this assumes 28 days in the month of February)

17
Q

To calculate the prorated amount that will display on the closing statement:

A

Step 1: Divide the yearly cost by 12 to find out the monthly cost.
To determine the daily cost, divide the yearly cost by 365 (calendar year) or 360 (statutory year).
Step 2: Find out the number of months or days in the proration period.
For a statutory year, 30 days. For a calendar year, it is based on the actual calendar days.
Step 3: Multiply the number of months and/or days in the time period by the monthly and/or daily cost.