Most people who get mortgage financing, particularly those who use a mortgage broker, don't realize that some of the closing costs the lender presents are negotiable or can be avoided altogether. An alert borrower could save hundreds of dollars by paying attention to his good-faith estimate of closing costs and questioning certain fees.
Some lenders, especially mortgage brokers, charge a loan origination fee. This is the mortgage company's fee for securing financing for you. This fee varies from lender to lender and is (or should be) negotiable, based on the amount of work the lender has done for you. If you have had a rocky employment history that requires a lot of documentation or have numerous late payments on your credit report, you should expect to compensate the lender for the additional work required to secure your loan approval. However, if you are creditworthy and provide all the necessary documentation at the time of the loan application, it is not unreasonable to ask the lender to accept a lower origination fee. Mortgage brokers and mortgage bankers generally also receive fees from the bank or mortgage company that buys your loan from them. Therefore, a loan origination fee could mean double earnings for the lender. Loan origination fees are generally a percentage of the mortgage amount, usually between 0.5% and 2%, depending on the applicant and mortgage amount. As a general rule, the loan origination fee as a percent of the mortgage amount should decrease as the loan amount increases.
When you apply for a mortgage loan, many lenders will ask for an application fee. This fee is usually obtained up front to cover the cost of obtaining an appraisal (by a professional appraiser) of your home and the cost of obtaining a credit report. A mortgage credit report is a detailed report in which all information is verified; it generally costs about $50. Most credit bureaus now send you a copy at the same time they provide the lender a copy. Because you are paying for it, you are also entitled to a copy of the appraisal (by law). An appraisal of a single family home typically costs $200 - $300 (multi-family units may cost a lot more). Refuse to pay application fees that are not applied to the cost of the appraisal and credit report or that appear to be excessive.
Not only is it bad business for a lender to collect a fee before he has secured financing for you, it is also illegal in most cases. Just as you wouldn't pay a contractor up front for a bathroom remodeling job, don't pay closing costs up front (pay only the application fee, if required, and make sure that it will be applied to the cost of your appraisal and credit report).
Some lenders may include a processing fee, underwriting fee, wire transfer fee, or funding fee in their closing costs. These fees can represent the lender passing his overhead costs on to you. You should refuse to pay these fees unless you are dealing with a mortgage broker and these fees are being sent directly to the investor (you can verify this by checking the settlement provider listed on your settlement statement at closing).
If you were purchasing a car, you wouldn't expect the car dealer to charge you an office support fee or a fee for processing the check you write for the down payment, so why would you pay a mortgage lender's overhead? In some cases, these fees can simply amount to more loan origination fee (profit) in disguise.
Most other closing costs that you will see are legitimate and represent costs incurred to get your loan done, but don't be afraid to ask for an explanation of any charge that seems excessive. For example, all lenders will require a borrower to obtain title insurance to assure that their collateral is protected. A title company provides this protection and certainly is entitled to payment for it. However, don't be afraid to question title company fees, especially the smaller ones. I have seen title companies that add $20 document handling fees or $50 courier fees.
Certainly title companies may use couriers in order to get documents recorded and back to the lender, but $50 is probably not a reasonable fee for this. Handling documents is a normal part of any business, so why would I be charged extra for this?
As you speak with lenders and ask for rates, also ask for an estimate of closing costs. Question any cost that seems excessive or doesn't make sense. As you collect closing cost estimates from a number of lenders, you will probably begin to understand what reasonable charges are for these services in your area. You can also ask your real estate agent to give you an idea of what to expect.
By paying attention to closing costs and questioning any fee that looks suspicious, a homebuyer could possibly save hundreds of dollars - maybe enough for the recliner that would fit perfectly in your new family room!
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by Don Petrasek http://www.educatedhomebuyer.com
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