I’m frequently asked by loan signing agents: How do I explain the California Per Diem Interest Disclosure form?
But before I tell you exactly how to explain this to a borrower, you need to understand what this particular document is saying.
The easiest way to put it is this page tells the borrower that they owe interest to the lender the day the loan gets wired to escrow, not when escrow closes.
Allow me to elaborate:
Let's say the loan funds on November 15th. That means the borrower owes interest to the lender starting on November 15th through the end of the month, November 30th.
Pretty simple, right?
But, escrow might close the loan one day or even a few days after November 15th, especially if it’s a weekend or holiday.
Keep in mind, while escrow always does their best to close the loan the same day they receive the wire from the lender, closing the loan the next is business day is a regular practice.
So if escrow can't close the loan the same day they receive the money from the lender, then the borrower pays interest on a loan that isn't even theirs yet.
This can potentially become an issue if the lender sends the money to escrow on a Friday but escrow doesn't close the file until Monday. Therefore, the borrower has to pay three days of interest from Friday (the day the money leaves the bank) to Monday before escrow actually closes the loan. The same scenario happens if escrow receives the money the day before a holiday.
So in our example above, the borrower may start paying interest on November 15th, but the loan actually closes escrow on November 18th.
Now here is where it gets tricky - you may notice two boxes on the lower half of the page. Obviously, one needs to be checked… but which one?
Answer: It depends on whether or not there’s time pressure for the loan to close.
Let’s talk about the two options that the borrower can choose from in the form:
The first option states “I elect disbursement of my loan proceeds to occur on any day BUT a Monday” or “I request the loan proceeds to be disbursed within one day of the funding date.” This may be worded a little differently from lender to lender, but you should be able to understand what they are talking about by reading the options.
By checking the box above, the borrower is instructing escrow to fund on a day that will prevent extra days of interest being paid before the loan closes.
It seems apparent that a borrower’s best choice is to check the box that prevents paying any interest over a weekend. Who wants to pay extra days of interest without actually having the loan closed and in place?
But this isn’t always going to be the borrower’s best choice (because it could delay closing for a day).
So let's now talk about the second box:
If the first box prevents a loan from being closed on a Monday so the borrower avoids paying extra interest (even if it means a later closing date), then the second box states that the borrower is okay with a loan closing on Monday, or on any day for that matter (to close the loan on the earliest possible date).
By checking this box, the borrower understands there is a chance that they may responsible for interest over a weekend or over a holiday, even though the loan has not yet been funded.
So here are a couple of scenarios in which the borrower may choose to check the second box:
Imagine if the borrower has a rate lock that is about to expire and the loan has to close by Monday or a day following a holiday to keep their interest rate the same.
Checking the first box could delay funding and allow the rate lock to expire, causing the borrower to have a higher interest rate, and therefore a higher monthly payment and total loan cost.
In another potentially problematic scenario is if, by contract, the loan has to close on a Monday.
In both cases, the borrower should know if timing is of the essence.
So, how do I explain this document when I am at a loan signing?
I simply say, "this form says you have to pay interest the day the loan funds".
"If you don't believe that your loan needs to fund quickly, this box (pointing to the first box) says you don't want to be responsible for any additional days of interest, even if it means a delayed closing by a couple of days."
"If you believe that your loan needs to fund as soon as possible, perhaps you have a rate lock that’s expiring or you have to close by a certain date, then this box here (pointing to the second box) says to fund as soon as possible and there may be a few days of interest per day as a result."
This will cause either one of two responses from the borrower:
Once again, we cannot give advice, but we can be educated about what each box means. Notice how I simply read what each box says and let them make the decision.
That is a characteristic of a good loan signing agent.
And now that you know what the Per Diem Interest Disclosure form says, you’re one step closer to becoming an expert loan signing agent.
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