In addition to your down payment, there are closing costs that go into a mortgage. The down payment lowers your loan and goes toward the price of the house. The closing costs are fees paid for services rendered. Here are the seven most common and what they are for:
1) Origination Fee: The lender’s fee for processing, underwriting, and funding your loan.
2) Credit Report: Goes to the credit reporting agency that provides your tri-merge credit report to the lender. You have the right to know your credit score.
3) Tax Service Fee: Lenders use a third party service to ensure the property taxes are properly paid and posted. (You don’t want your property taxes going to the neighbor’s address.)
4) Flood Certification: Federal banking law requires lenders to determine whether or not the property is in a flood zone and needs flood insurance.
5) Escrow or Attorney: Federal law requires a neutral middle party to handle the disbursement of funds. They also sign and notarize your final loan documents, send the Deed of Trust to the county for recording, and perform other required tasks for your loan closing.
6) Title Fee: Insurance to protect your title against false liens and judgments, fraud, errors, and other incorrect encumbrances on your title.
7) Recording Fee: The local county charges to record your Deed of Trust.
None of the above fees are unnecessary, bogus, or junk fees. They are all costs for legitimate and required services.
Added, unnecessary fees would be things like Application Fee, Archive Fee, Doc Prep, Doc Fulfillment, Email or E-doc Fee, Wire Fee, and so on.
Discount Points are not a junk fee. This is when you choose to buy down your interest rate to a lower rate by paying a chunk of the interest up front. This is optional.
A no-fee loan means you are paying for the fees by taking a higher interest rate. One way or the other, you do pay required and necessary closing costs.
The seller may pay some or all of your closing costs. The real estate agent may not pay your closing costs, per federal banking law.
In addition to closing costs, there are “pre-paids.” These are not fees; but rather, your taxes and insurance as well as daily interest. (More about pre-paids in an upcoming blog post.)
There is a lot more information about fair and unfair mortgage costs than what I can put into a blog post. Feel free to check out my best-selling book that was chosen by The Washington Post as their Book of the Month (“Color of Money” book club). Mortgage Rip-Offs and Money Savers
A home buyer gets a new Good Faith Estimate right before closing that is almost $5,000 more expensive than the original GFE. He wants to know if this is legal, or if he’s getting ripped off. Here is his question with my answer.
Q: We are purchasing a new home. The builder gives us incentive to use their mortgage broker and lender. The broker gave us a good faith estimate before the start of building. This GFE said we would receive credit of about $2,000 to offset the $6,000 origination fee. Four months later, as the home nears completion, we locked in on a rate. For some reason, the broker then sends a new GFE. Pretty much the same as the old GFE, except the new GFE says we would only receive about $180 to offset the $6,000 origination fee. Is this legal? Thank you.
A: In my opinion, you are getting ripped-off. However, what your loan officer is doing is 100 percent legal. So yes, he can do that. I’ll explain why, and what you should do about this now.
The so-called credit is actually the YSP (Yield Spread Premium) the lender makes by selling your loan to the wholesale lender. Your loan officer is giving you the YSP as a credit to help pay for their (exorbitant) fees. The YSP is directly tied to the interest rate. When the interest rate goes down, there is a bigger YSP to credit to you. When the interest rate goes up, there is less YSP money to credit to you.
According to the two GFEs you received from your broker, the interest rate when up significantly in the past four months, and that’s why the credit decreased. But there’s something very wrong here.
First, why hasn’t your loan officer been keeping in touch with you about interest rates as your loan progresses? You don’t suddenly get a $2,000 surprise at the last minute! (Not with a good loan officer.)
Second, why didn’t your loan officer give you a choice between rate and credit? No one in their right mind locks in a rate with a net $5,000 fee. Surely, you did not approve that lock-in!?
The reason your loan officer sent you a new GFE is because the pricing changed so drastically, making it a legal requirement to give you a new GFE disclosure. But that GFE should not have been a surprise. There should have been a discussion and approval by you ahead of time. If not, then this loan officer is one of the types I warn people to avoid in my books.
I can tell you this: No one — and I mean NO ONE that is ethical or reasonable — is selling loans with a $5,000+ origination fee nowadays. And that is what this loan officer is trying to sell you now. That is a rip-off. It is not in your best interest to pay that kind of origination fee. A competitive origination fee would be in the $600 to $900 range, depending on your location.
You are in the driver’s seat here. You do not have to stand for this bait-and-switch, over-charge. You have options, and it is not too late.
First, you should tell your loan officer that you will not be paying more than $900 in total origination fees. You would like to know if he’d prefer to give you a new rate lock and GFE, or if he’d prefer to lose your business altogether, because you will move on to another lender if you don’t receive an acceptable GFE within the next 24 hours.
There are so many different good, ethical, honest lenders you could go with. There is no reason to pay an extra five grand. There are lenders that can close a purchase loan on a rush basis in three weeks, so you still have time if you act now.
What’s more, when you allow yourself to be ripped-off, you send a message to this loan officer that his tactics work and that he should keep on doing this to other home buyers. Only when we choose to stop accepting high priced loans will the high priced lenders either lower their prices or go out of business.
In your case, it appears that you are not receiving any kind of special deal by going to the builder’s pet broker. You are paying for it with that ridiculously high $5,000 origination fee. That is one of the common rip-offs I expose in my mortgage books.
By reading Homebuyers Beware or Mortgage Rip-Offs and Money Savers, you will know how to properly shop for a good, ethical loan officer. You will understand par rate and YSP. You will understand why to ask right up front, “What is par rate?” and “How long is the rate lock you quoted me?” You will communicate to the loan officer by how you speak that you are a savvy borrower who will not be scammed or ripped-off.
I got sick and tired of the lies, junk fees, over-charges, and rip-offs. And that is why I decided to stand up for the American home buyer by writing Mortgage Rip-Offs and Money Savers. Thanks to the American public, it has become the top mortgage book on Amazon — and that means a lot of good folks have become money savers.
Best wishes to you.