Section 8 Unit 3 Calculating Closing Costs Flashcards
Monthly Income based on Hourly Wages
Monthly income = (hourly wage × hours worked per week × 52) ÷ 12
Monthly income = ($16.50 × 40 × 52) ÷ 12
Bi-Weekly Salary
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
semi-monthly salary
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.
LTV
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%
Discount Points
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:
Buydown cost
Buydown cost = loan amount × discount points
A loan discount point is equal to 1% of the mortgage loan amount
Loan Origination Fee
Loan origination fee = loan amount (which is the sale price – down payment) × loan origination percentage
Acquisition Cost
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.
Acquisition Cost
Acquisition cost = purchase price + closing costs
Acquisition cost = ($18,000 + $97,000) + $3,500 = $118,500
More about Acquisition Costs
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
Understanding Prorations
Proration means to divide or distribute a sum of money proportionately
What is being prorated?
Is the item an accrued or a prepaid item?
Is it based on the statutory year (360 days) or the calendar year (365 days)?
Types of Prorated Expenses
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.
Accrued expense
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)
Prepaid expense
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.
