Here are five facts you have the right to know (and that might surprise you):
1) The lender is required to provide you with the Good Faith Estimate and other disclosures within three business days of receiving your full and complete application.
You sign the disclosures to verify that you have received them and to indicate your intention to proceed with the loan. The disclosures are not a contract; therefore, they do not obligate either you nor the lender to close the loan.
2) The lender cannot allow you to sign final loan documents before you have had at least seven days to review the initial disclosures.
This means no more super fast three-day or five-day closings as sometimes happened when a home buyer’s first lender let them down and the closing date was upon them. The new law puts a speed limit on closing your loan.
3) The lender cannot ask you to pay for the appraisal nor can they require you to pay an application fee or any other lender fee before they give you the Good Faith Estimate. The only fee a lender may collect prior to disclosure is the cost of the credit report (which is usually about $25 to $35).
If a loan officer asks for your credit card information or for a check at the time of taking an application, this is a violation of the law and punishable by a fine of $5,000 and/or one year in prison (for each instance).
4) The lender must provide you with the appraisal report as soon as possible/feasible after it comes in from the appraiser — but it must be at least three days before closing.
This three-day rule could further delay a closing and might cause hardship to the home buyer; therefore, the home buyer has the right to waive the three-day requirement in the “case of an emergency.”
5) If the Annual Percentage Rate changes by a miniscule 0.125% or more between the initial disclosure (or an updated disclosure) and the final APR, the lender must give you a new disclosure and wait another three long days before you can sign final loan documents. This applies even if the change is in your favor!
(This is a change to the APR, not to the interest rate on your Loan Note. The APR is your Note rate plus some of the closing costs rolled in and amortized over the life of the loan. Therefore, a change to the APR is less significant than a change would be to your actual interest rate on the Note.)
So if the loan officer over-estimated one of the closing costs that are calculated into the APR — or if the loan officer was able to do you a favor and get a lower interest rate than expected — then you are penalized by three days as a result of this good news.
If your closing date is fast approaching, this is a problem. Let’s say you need to move out of your rental by the last Friday of the month and that is your closing date. It is the day before signing, and you cannot tolerate any delay. What happens if the fees come in lower so that you get an APR that is 0.125% less than the original disclosure?
You have the choice of not taking advantage of the savings or not closings on time, thanks to this new law passed by politicians who have never actually worked in the mortgage industry.
There is more to the new lending laws, of course, but I think that is enough frustration for one blog post.
I don’t like to end with bad news, so now for some wonderful news: Very soon I will make an announcement that says I am accepting clients for loans again. Watch for that news, coming soon!
Last two posts, I wrote about lender junk fees. Now as promised, today is about the unnecessary, bogus, and redundant fees that some settlement agents are tacking on. (The settlement agent is the neutral third party that handles the closing of the loan: signing and notarizing final documents, getting the Deed to the county to record, handling the disbursement of funds.)
The settlement agent can be a title company rep., an escrow agent (common in the West), or an attorney (common in the East). It is your choice, as a buyer or as a home owner refinancing.
Over the past seven years or so, more and more settlement agents are adding junk fees to their closing costs. It seems like they’ve said, “Hey, look at all these lender junk fees! Let’s see how I can pad my own profits by adding a few of my own.”
Then once one well-known company adds bogus fees, their competition sees it as a green light to jump on the bandwagon. It’s disgusting the way greed grows like a toxic black fungus.
Fortunately, there are good, ethical closing agents who do not charge extra for their services. I encourage you to choose these agents and help clean up the business by starving out the greedy ones. It is YOUR choice which settlement closing agent you use. (Per the Real Estate Settlement Procedures Act, Section 9)
To help you, here is my personal list of fee pet peeves.
Unnecessary or Bogus Fees I Don’t Want to See From a Closing Agent (alphabetical order)
* Archive or filing fee (You shouldn’t pay extra for their filing system. That is part of being in business.)
* Courier or messenger fee (Getting the signed documents back to the lender is part of what the closing agent’s large fee should cover. Moreover, FedEx and UPS, the services most agents use now, charges about $40 to overnight documents, so they shouldn’t show a padded fee of $60 – $100, as they often do.)
* Document preparation fee (Preparing the closing Settlement Statement and a handful of other boiler plate forms is what their main big fee covers. Adding this is redundant and borders on dishonest, in my opinion.)
* Email or edoc fee (They don’t need to charge you $50 to $150 to receive the documents from the lender by email. That is part of their normal job.)
* Wire fee (While banks do charge a nominal fee to wire funds, none of the good settlement agents tack on this fee for their clients. They figure it is part of what their big fee covers.)
Fees that are not junk are title insurance, title search, endorsements, loan tie-in, or other reasonable and customary title fees.
Here is a copy from an actual closing statement from a loan in California, $625,000 loan:
Closing/Escrow Fee ESTIMATED $ 1,300.00
Notary Fee $ 125.00
Lender’s Title Insurance ESTIMATED $ 799.00
Endorsements $ 75.00
Courier / Messenger $ 65.00
E-Doc Fee $ 75.00
Loan Tie In Fee $ 150.00
My Comments: Evidently, this escrow settlement agent doesn’t think $1,300 is enough to make for their services. They are adding a $65 courier/messenger fee and a $75 email fee. If I were that borrower, I would either insist that the extra $140 be waived or I would choose a different closing agent. In addition, if I did not require a notary to come out to me, because I would sign in the agent’s office during normal business hours, I would ask for the notary fee to be waived.
If you see another garbage fee, please send me a message via my Ask a Question page or comment on this post at the top right. If you would like to recommend or warn about a good or bad closing agent, please let me know, because I am keeping a list.
Let’s all do our part to clean up the mortgage industry — including the closing side — by giving our business to the good, ethical agents.
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Junk fees and garbage fees are the unnecessary fees that some banks and mortgage lenders charge to pad their profits. These fees are either nonsense, redundant, or padded costs. You want to avoid wasting your hard-earned cash and say NO to those fees. As promised, here is updated information on lender fees for 2015.
Current Law About Mortgage Fees
The Dodd-Frank Act (passed after the release of Mortgage Rip-Offs and Money Savers) says two things you should know:
1) Lenders cannot increase their fees from the time of the Good Faith Estimate to the closing HUD Settlement Statement.
2) All of the lender fees in the upfront Cost Estimate or Fees Worksheet must be added together and posted on one line in the Good Faith Estimate: “Our origination charge” (page 2, #1).
What This Means to You
1) You no longer have to worry about a lender adding a big junk fee at closing, as used to happen. This also means you don’t need to ask the loan officer for a written guarantee on the lender fees, because that is now built into the law.
2) Your main concern when it comes to lender fees is the total cost of those fees. Are they fair? Are they reasonable? Are they too high? To help you answer those questions, you can dig deeper into what those fees are.
Common Lender Fees
Lenders might call their fee an administration fee, commitment fee, processing fee, underwriting fee, or simply, origination fee. As long as it is a fair and competitive amount for your region of the country, it doesn’t matter which of those fee names they use. (East and West Coast states are higher priced than the South and Midwest.)
Another common fee–one that I do not like–is the application fee. Some lenders used to charge an upfront app. fee of $150 to $400 for taking the loan application. Thankfully, it is now illegal to collect that money before your loan has been pre-approved. However, I still do not like the idea of lenders taking an application fee before closing, because if the loan does not go through for some reason, the application fee is the one they do not have to refund to you. One of the biggest national banks charges an application fee for this very reason. Sneaky, right?
In my professional opinion, a lender should not charge the following fees: (To my way of thinking, these services should already be covered by the administrative, processing, or underwriting fees.)
* Ancillary Fee
* Document Preparation Fee
* Doc Fulfillment Fee
* Document Review Fee
* Email or e-doc Fee
* Funding Fee
* Misc. Fee
* Photo Review Fee
* Satisfaction Fee
* Storage Fee
* Warehouse Fee
Next blog post, I will discuss junk fees that title companies, escrow companies, and even attorneys who provide settlement/closing services are charging nowadays. I invite you to subscribe to this blog so you don’t miss out on any important information.
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“What are your lender fees?” I asked. A simple enough question, one every loan officer should know the answer to. Then to clarify, I added, “I am interested in the fees that go to your company only, not third party costs such as appraisal, credit report, flood certification, and such.”
“Is this for a purchase loan or a refinance?” the loan officer replied. Clearly, he was skirting my question, because lender fees do not change based on the loan type.
Nevertheless, I thought I’d humor him. “The fees for a purchase loan,” I replied.
“And what loan amount are you interested in?”
I could see where he was going. He was trying to segue into taking a loan application. I wanted to be honest, so I said, “I am not looking for a loan at this time; I just want to know what your company’s lender fees are.”
“I don’t do surveys,” he said.
“So you won’t tell me what your lender fees are?” I asked.
“If you know anything about mortgages, you would know that there is a lot more to it than rates and fees.”
“I think it’s odd that you won’t tell me your lender fees, but that’s okay. I will call someone in your other office and find out,” I said. Then I bid him a good day and hung up.
My husband had been listening in. He said, “They must have very high fees if he won’t tell you what they are.”
I called another lender and asked the same question. This time the loan officer did a verbal dance. Three minutes later, he still hadn’t told me what his lender fees were.
I called another lender and the lady hung up on me. I called right back in case it was an accidental drop, but she let my call go to voice mail.
Twenty minutes of phone dialing later, I came upon a loan officer who said simply, “Our lender fees are $995.”
How refreshing! An upfront, honest loan officer. That is one I would do business with.
Even now with the huge stack of new lending laws that are supposed to protect the borrower and make everything transparent, it’s not so easy finding a loan officer you can trust, who will answer your questions in a forthright manner.
As I explain in Mortgage Rip-Offs and Money Savers, the best way to compare loan offers is to ask for a written estimate. We used to ask for a Good Faith Estimate, but now, thanks to the Dodd-Frank Act, we have to ask for a Cost Estimate or Fees Estimate. That worksheet is what used to be called the Good Faith Estimate, and it is more specific and clearer than the new GFE designed by the feds.
Don’t worry about getting a GFE when you’re shopping for a loan, because Dodd-Frank states that their (convoluted) GFE is to be given after the loan officer has received six pieces of information:
1) Property address
2) Property value
3) Loan amount
4) Borrower’s name
5) Social security number (for pulling credit)
6) Borrower’s income documentation
How can you determine whether or not you like the lender’s pricing if you cannot see what their pricing is? Especially since the majority of them won’t give you a verbal quote over the phone? You do not know the property address when you are starting your house search.
The answer is, skip the GFE and ask for a Cost Estimate. Some lenders call it an Initial Fees Worksheet, a Loan Worksheet, or whatever. We don’t care what title they put at the top of the page. All we care about are the numbers on the estimate.
Here is an actual example from a lender in Texas, in the same order as listed on their Itemized Fee Worksheet:
Document Preparation Fee $200
Administration Fee $1,340
Origination Points .5% $1,599.60
Adjusted Origination Charges (Total) $3,139.60
The junk fee is quite obvious. It is the $200 doc prep fee. The lender is charging $1,340 to process and underwrite the loan, so why do they need to add another $200? And, why are they listing it separately? Is it because they don’t want to scare away borrowers with a $1,530 fee?
The .5% origination point is for the interest rate that is slightly below par rate. The borrower can choose to eliminate the half point by taking an interest rate that is an eighth (.125%) higher if desired. So that is not a junk fee.
My next blog post will be more about junk fees. There are still plenty of nonsense fees out there — and they are being charged by both lenders and closing agents. I cordially invite you to subscribe to this blog if you’d like more information on this topic. As always, thanks for stopping by.
What is this? Is it a junk fee? Do I really have to pay that? These are questions people have been asking me.
Prepaid interest is not a fee. It is actually a partial mortgage payment. I will explain.
If you close your loan on June 15, then you will own your home from June 16 to June 30. For those 15 days of ownership, the lender does not send you a bill for a partial mortgage payment; instead, it is included in your closing costs.
If you close on June 30, you will have only one day of prepaid interest, because you will own your home for only one day in June.
If you close June 5, you will have 25 days of prepaid interest.
Prepaid interest is calculated to be exactly fair. You pay for the days you own your new home from the date of funding to the end of the month.
Before you have a contract on a house, the loan officer doesn’t know which day of the month you might close; therefore, most lenders will select 15 days of prepaid interest. The most conservative lenders will select 30 days of interest, ensuring that the cost will not go up. Some lenders, in an effort to make their estimate appear cheaper than their competitors, select one or two days of prepaid interest. In this case, you will most likely see a higher charge at closing, unless you truly close at the end of the month.
Which is the Best Day to Close?
The best day to close your loan is the day you want to take ownership of the new property. For many people who are renting, the best day for them to move out of their apartment or rental house is at the end of the month. However, some people want two weeks’ lead time so they can paint and clean. In that case, taking ownership in the middle of the month works better.
Be aware that the seller might put in a clause that says closing is June 15, but occupancy is June 20. This means you will own the house on June 15 and pay the prepaid interest from that day, but you cannot move in until June 20. You are giving the sellers five days to move out and you are paying for those days for them. If you don’t like that arrangement, speak with your Realtor about the closing date matching the occupancy date.
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This fabulous Victorian dream home is for sale in a popular Seattle neighborhood. In has a secret room. Yes, Nancy Drew fans, a secret room! I shouldn’t tell you where it is, but if you guess that it might be on the third floor above the turret, behind a bookshelf, you would be right.
The secret room wasn’t always there. The current owners, Darren and Janine Pritt, added it after they purchased the home in 1994.
It was originally built in 1901.
The first improvement they made was to remove the stucco to reveal the beautiful, warm woodwork underneath.
Waking up to a view of Lake Washington and the Cascade Mountains beyond starts any day off right, in my opinion.
Go ahead and guess the listing price.
To make it easier, I’ll give you multiple choice options.
A) Over $5 million
E) It’s free.
If you guessed D for the listed price, you guessed correctly. Have fun challenging your friends to guess, and who knows, maybe one of them will purchase the home and invite you to a dinner party.
The Cost Estimate Worksheet or Initial Fees Worksheet is the form loan officers provide before they have taken a full application and pulled your credit report. What people are asking me now is, “Can I trust this estimate or will they increase their fees later?”
Great question, and I have an answer for you that will make sense.
The official 3-page Good Faith Estimate is a contractually binding document from the lender to you (per recent lending laws). The lender may not increase their lender fees by even one dollar from that GFE to the final Settlement Statement.
But the problem is, you cannot get that GFE without having your credit report pulled and submitting your financial documents. The new law ties the lender’s hands in that regard, because how can they commit a contract to you without verifying what you qualify for? So the worksheet serves as the upfront estimate now, due to this federal regulation.
This is no problem. The upfront worksheet is more specific than the GFE designed by the feds. I actually prefer it for comparing loans. However, it is not a contract, so can they increase fees later?
Yes, they could; but it would be a very stupid thing to do. And no, the good, honest, ethical loan officers would never do that!
The good, honest, ethical loan officers don’t lie to potential customers. They look out for your best interests and do all they can to help you get the best financing. They would never risk having you ditch them and file a complaint with the Consumer Financial Protection Bureau for committing bait-and-switch. Moreover, their personal moral compass would never allow that.
Even still, I have seen a minority of loan officers increase their fees between the initial worksheet and the GFE. (I see estimates from lenders all around the country from good folks using my coaching service.) There are usually red flags on the worksheet that raise suspicion.
For example, they leave off essential costs such as the appraisal report and property taxes. Then on the GFE when those are added in, they also show an increased origination fee. If that should happen to you, please send me an email and let me know. I will reply explaining what recourse you have.
Fortunately, most of the shady loan sharks are no longer in business. If your loan officer has a Mortgage Loan Officer License with a MLO #, it means he or she has completed the 20 hours of study plus additional hours of state-specific study, has passed an extensive background check including fingerprinting, and a credit check. Look for that number (or ask) and listen to your gut instinct or internal lie detector.
If you still feel uncertain, feel free to send me a question here. Your mortgage is important, and you should feel confident as you proceed with your loan.
Experian, one of the three major credit bureaus, has announced they are now selling FICO scores. (FICO stands for Fair Isaac Company, the originator of the proprietary scoring system used by mortgage lenders and other creditors.) Before you race over to their site, there is an important piece of information you need to know.
The three credit scores for sale are using their brand new algorithm called FICO 08. It has some improvements over the old system, such as medical collections are not counted against you since a majority of those are the fault of insurance companies and not the consumer. The problem is that only about 10 percent of mortgage lenders have upgraded to FICO 08.
This means that the scores you buy are likely to be different than the scores your loan officer at the bank, broker, or credit union will get when they pull your credit.
Is it then worth Experian’s fee of $50 (minus a few pennies) to get your scores? That is a personal judgment call; but for me, I would wait and let my loan officer pull the credit report that they will actually be using instead.
If you want the inside information on how certified credit specialists and credit repair attorneys get negative accounts removed from credit files and boost their clients’ credit scores, then you’ll want to check out the newly released book, Repair Your Credit Like the Pros here. With this information, you can do the work yourself and save your money for your down payment.
When refinancing, it is easy to focus on the interest rate and monthly savings, completely forgetting that your loan term (years) will make an even bigger difference in the total amount you will pay for your house.
Key Principle: When paying a mortgage, your #1 enemy is not the interest rate. It is time.
Why is Time an Important Factor in a Mortgage Loan?
Spreading out your payments over 30 years is what causes you to pay 2.5 to 3 times more for your house than the purchase price. If you shorten that time to 20 years or to 15 years, you will save tens of thousands of dollars on the typical loan.
How This Principle Applies to Refinancing
If you’ve been paying on your mortgage for close to ten years and refinance into a 30-year loan, you go backwards by ten years and cost yourself a lot of cash, even if you lower your interest rate. Therefore, you must lower your rate by a very significant amount in order to come out ahead, because ten years’ interest gets you far into the amortization schedule.
If you’re ten years into your loan and you want to refinance into a lower rate, then look at taking a 20-year loan. That way, you get the lower rate without going backwards.
Even better, also look at the 15-year loan. The 15-year loan gives you an even lower interest rate and cuts even more years off your loan. You come out ahead in every way! The only caveat is that you must be able to afford the payment.
Be careful not to take a payment you cannot afford, because you don’t want to set yourself up to default on your loan.
The bottom line is that you must consider your loan term — the number of years you’ve already paid into the mortgage and the number of years for your new loan — in order to make the best financial decision.
Good news for home buyers using the FHA loan program! The annual mortgage insurance premium (MIP) required on this loan is being cut by half a percent for all new loans starting January 26. The expectation is that this will save the average home buyer $900 per year by reducing their monthly payments.
The MIP is the fee charged to the borrower to compensate for the low down payment. FHA requires only 3.5% down. Because there is little equity in the property, insurance is required to protect the lender in case of default.
This new fee decrease affects the 30-year fixed rate loan (as well as the 25-year and 20-year term). The 15-year loan, which has a lower premium already, remains unchanged.
FHA 30-year Fixed Rate MIP Reduction
Loans less than $625,000, 3.5% down: MIP reduced from 1.35% to 0.80%.
Loans less than $625,000, 5% down: MIP reduced from 1.30% to 0.85%.
Loans at or above $625,000, 3.5% down: MIP reduced from 1.5% to 1.0%.
Loans at or above $625,000, 5% down: MIP reduced from 1.55% to 1.05%.