THE LENDING GEEK

So how do you know whether your broker is treating you right? You check the “Good Faith Estimate” you [should] receive within three days of submitting an application with any loan brokerage. Without an explanation of this form, however, you might as well be signing a document written in a foreign language. In this article, I’ll do my best to dissect these fees and give you an understanding of what needs to be there, what might be there, and what should not be there.

The Good Faith Estimate or GFE is usually on legal-sized (8.5″ x 14″) paper and has lots of rows spanning the entire length of the page with various fees and should look something like this. In California, sometimes you will receive a two-page document in place of the Good Faith Estimate; this is called the “Mortgage Loan Disclosure Statement” or MLDS and its two pages look like this and this. In this article, I will refer to both documents as the Good Faith Estimate to cut down on confusion, as these two forms are similar: The Good Faith Estimate is a Federal form used widely throughout the United States, and the Mortgage Loan Disclosure Statement was created by California to provide what its regulators believed to be better disclosure to borrowers. I will not go into the argument for or against either form in this article, but just be aware that when I reference specific line items, I’m referring to the GFE, although you should also be able to find the contents on the MLDS as well.

Some of the fees described on the GFE are required. Some of them are not, and some of them are estimates, as the name implies. Until you see the final documents for your loan, you will not know the exact amount everything is going to cost. You can, however, back out of signing those documents if you notice a fee you didn’t see on the GFE or if a fee has gone way up. Let’s start with the required fees–although none of these fees are ever required, most lenders will not let you get the loan without paying them. This is not the case with “no closing cost” loans which many lenders now offer in certain circumstances (usually second mortgages such as Home Equity Lines of Credit or HELOCs), but for most other loans here’s what you’re in for, broken down by category:

• Brokerage Fees: These are the fees usually charged by brokers for items they order and services they provide.
  • Appraisal Fee: A house needs to be appraised so the lender can determine its Loan-to-Value ratio (LTV) and assess risk. If an appraisal has been run on your property within the past year, you might only need a Recertification of Value from the appraiser. These run around $125 while full appraisals can run from $300 to $400.
  • Credit Fee: If you want a loan, you’re going to get your credit report pulled, and brokers pay around $18 - $20 to credit agencies for this service. If you are getting a loan with anyone other than your spouse, you will also pay another $18 - $20 for a second (or third, or fourth, depending on how many co-borrowers you want on your loan) credit report.
  • Processing Fee: Most brokerages charge this fee to create certain documents (e.g., the loan application, GFE, Federal Truth-in-Lending, etc.) and as a general fee to gather everything they need to complete the loan. This fee fluctuates wildly from $300 to $595, but you can usually find it for about $375 if you’ve chosen a good brokerage.
• Lender Fees: Lender fees cover the cost of doing business with the bank your broker uses for your loan. They can either be bundled together into a general lender fee or broken apart and itemized. In case the lender groups the fees together, here is what you’re most likely paying for. Keep in mind that if the lender does not explicitly label these fees, they are probably just bundling them into a general lender fee and it can run from $600 - $900.
  • Underwriting Fee: The lender typically has an underwriter look at your file and assess the risk based on various factors (credit score, assets, income, etc.) and this fee can run $200 - $300.
  • Wire Transfer Fee: Some banks charge this fee to transfer funds from their account to the escrow office’s account. It is usually about $50.
  • Tax Service Fee: Sometimes, a lender will hire a third party to handle your property tax payments (in the event you have impounds, which I will discuss in a later entry) and make sure your tax property taxes do not fall behind so as to create a “tax lien” on your property. This fee ranges from $50 - $125.
  • Flood Certification Fee: Lenders need to know whether your property is in a “flood zone.” If this is the case, flood insurance might be required before obtaining the loan. The certification will indicate whether flood insurance is required. It usually costs lenders $15 - $20 to pull the certification, but be warned that if it turns out your property is in a flood zone, your hazard insurance premium will go up accordingly (although not by much).
  • Administration Fee: To cover the miscellaneous costs associated with processing your loan, a lender might charge an administration fee on top of the above mentioned fees. This can range from $150 - $300.
  • Document Draw Fee: Once your loan has been processed by the lender, it is handed to the “doc drawer” who takes the loan and creates the 60 - 80 documents (including your Note, Deed of Trust, etc.) you will receive when you sign. This fee might be $50 - $100.

  The following fees, while still lender fees, will not be bundled into the “lender fee,” if applicable. They are still categorized as lender fees, however, because the lender technically charges them or causes them to be charged.

  • Interest For n Days:: Lenders will charge pre-paid interest for any days left in the month in which a loan funds. If a loan funds on the 20^th of the month, your first mortgage payment might not be until the 1^st of the month after next. The lender would then want 10 days of interest to recoup the cost of the interst it pays to its warehouse bank for taking out a loan (as most lenders also loan from a larger bank, then repay the bank when they sell to a larger investor). This charge will usually be estimated at 29 days, but it is generally much less when it comes time to sign the documents; twenty-nine days is the worst-case scenario, and it’ll cost you around $30 - $40 per day of interest, depending on the size of your loan.
  • Hazard Insurance Premiums: Any home with a mortgage on it in California needs to be insured against hazards, and most lenders want a few months of hazard insurance paid when your loan closes. Six months of coverage is standard, but sometimes you might need to get at least one year of insurance; that might run you $1,200.
  • Property Taxes: If property taxes are due in the coming months (in California, they are due on November 1^st, delinquent on December 10^th, and due on February 1^st, delinquent on April 10^th), lenders might require they be paid in escrow. The amount you might pay here relies on the amount of tax you pay as set by your County Tax Assessor. It is reset every time a house is sold to a new figure, but once you own the house, its taxes do not fluctuate very wildly. Since there are many tax laws regarding property taxes and because the amount varies with the value of your house, it is impossible to estimate what you might pay for them. The range might be between $1,000 - $4,000 in California, however.
  • Reserves for Impounds: If you are impounding your taxes and/or hazard insurance payments (i.e., 1/12^th of the annual payment is included with your monthly payment, and payments to the respective companies/agencies are handled by the lender or a third party hired by a lender through the tax service fee), you may have to fund the accounts with a few months’ worth of payments depending on the month in which your loan funds. For instance, since California property taxes are due on November 1^st and February 1^st of every year, if your loan funds in September, you will have to fund your tax impound account with enough money to cover the November tax payment. After the initial payment, you will go back to paying 1/12^th every month, but the initial funding could come out to as much as $2,000.
• Escrow Fees: Escrow or closing fees are associated with the company chosen to handle the signing of your loan documents that also acts as a liason between the borrower, the lender, and the broker when the loan is nearing its completion. Their fees vary wildly, but there are still general fees to consider.
  • Closing/Escrow Fee: Escrow companies will charge a fee of around $300 to coordinate the signing of legal documents, pull a Preliminary Title Report, and tie up any loose ends with the lender.
  • Notary Fee: A notary usually needs to notarize at least 8 pages in a typical set of documents at the signing, and this person usually operates his or her own company as a travelling notary public. A fee of $125 for a signing is not uncommon.
  • Title Insurance: Title companies charge a fee based on the amount they will be insuring (your loan amount). For loans in California, this fee can run from $700 to $2,500 or more, depending on the size of your loan.
  • Recording Fees: Certain documents (e.g., the Deed of Trust and any Grant Deeds) need to be recorded at the County Recorder’s Office of the county in which your property is located. Recording fees are generally $9 for the first page of a document and $3 for each additional page, and a Deed of Trust can range from 15 pages to 25 pages. Recording fees are typically around $60 - $80.
  • Document Preparation Fee: Once the escrow office receives the documents you will sign from the lender, they sometimes charge a fee to prepare those documents for you. It might sound like a bogus fee, but if the escrow office charges it, it’s usually unavoidable.

There are other fees that might spring up fitting into this category as well, but they aren’t as common (e.g., flood insurance or mortgage insurance reserves). One thing to note is that although they’re usually required, any of these fees can be paid by the broker, and a good broker will do just that. These fees are often called non-recurring closing costs or NRCCs, and if the broker pays them, he is paying them out of his own commission. This might mean he has bumped your interest rate an eighth (0.125%) or two (0.250%), but that’s a trade-off you should think about (I’ll explain this topic in depth in the next article). Onto the unnecessary fees!

• Underwriting Fee: If this fee and the lender fee are present, you’re probably getting hosed. Unless the lender is using a contract underwriter, this fee is paid for by the lender fee, and even then it’s also probably included anyway. I have seen underwriting fees of $500 on top of $795 in lender fees, and I can assure you that $500 is going directly to the loan agent, not the underwriter.
• Internet/Fax/Phone Fees: You’re paying for the loan agent’s Internet access/fax bill/phone bill. Seriously.
• Administration Fees: I have no idea what this is; it’s just a bogus fee already covered by the processing fee. Sometimes loan brokerages charge desk fees of their loan agents, since they act as something of independent contractors, but those fees only run $300/month at most. This fee can get up to $600 per loan, so don’t fall for it.
• Application Fee: It’s called a processing fee, and if both are on the GFE, you’re getting charged twice for the same thing.
• Loan Origination Fee: The loan origination fee is a very hotly contested issue in the mortgage world. This is not necessarily a bogus fee, but if a loan agent wants to get greedy, he’ll do it with this. When you hear commercials about how many “points” you’ll pay (usually zero, if the brokerage wants to draw in clients!), this is the fee they are referring to. One “point” is equal to 1% of the loan amount, and loan agents might charge 0.5 points, 1 point, or even 1.5 points, depending on the amount of the loan.

  Something you probably will not see on the GFE is called a “Yield Spread Premium” or YSP, which is identical to the loan origination fee, but behind the scenes. The YSP is the amount a lender will pay a loan agent for bringing in a loan, and this is the fund most good brokerages will use to pay your NRCCs. Since you were never charged this amount in the first place, a loan agent using the YSP to pay your fees is truly cutting into his own commission. If, however, you are charged a loan origination fee and none of your NRCCs are paid for you, be sure to find out what the broker is making from the YSP; he should not be paid twice for the same amount of work. One of the few scenarios in which a loan origination fee might be charged without any NRCC credit would be if the loan amount was something like $100,000 with a lower-than-average interest rate, where charging a loan origination fee might almost be a necessity to make any money at all off a loan.

I have seen bad loan agents charge $10,000 without paying any NRCCs, and I have seen good loan agents take money out of their YSP to pay for your NRCCs, charging you nothing. The loan agents who gouge you are usually scraping by, jumping from loan to loan while the agents who pay some or all of your costs generally have clients backed up out the door, and have years of quality experience behind them.

This entry was posted on Wednesday, August 23rd, 2006 at 6:58 pm and is filed under Education. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.