I have seen enough puzzled looks when taking a loan application to know this column is needed. Unless you are in the mortgage industry or obtain home financing on a regular basis, mortgage fees and terms can be confusing, and downright frustrating. Mortgage and financing terms are like another language, much like the "legalese" used by lawyers, but the more you understand, the better deal you will get yourself into. Lets start by looking at mortgage fees or costs; what fees are legitimate, and what fees you should be wary of, with a few lessons of wise financing along the way.
The Origination Fee. The origination fee is basically what the broker charges for doing the loan, normally between 1-2% of the loan amount. This is a fair fee for a broker's services, but unless you have a very complicated loan, paying 2% is too high, and you might want to look elsewhere. With the market the way it is today, brokers need and want your business, and you can afford to be picky in who you finance with. Lesson number one: this is a significant debt you are undertaking, ask questions and don't let yourself be intimidated into paying more than you should!
The Appraisal Fee. For the most part, every refinance and purchase of a home must have an appraisal done by a licensed appraiser, so this fee is not avoidable. Depending on the state and appraiser, the cost can range from $300-500. Since you are paying for it, make sure you get a copy of your appraisal.
The Processing Fee. Some brokers charge a processing fee because they have a hired loan processor or outsource the processing of your loan to a third party. The processor does all of the detail tasks for the loan, ordering title, insurance, the appraisal, and putting all documents together for the lender. This is not a junk fee, as the processors normally work harder than the loan officers, but should not be more than $400 or so for their time and effort.
The Credit Report. Like an appraisal, every home loan requires that a credit report be pulled on the potential borrowers. These fees differ between credit reporting companies, but normally range between $12-20 per borrower. Some lenders pay for credit reports for their brokers, so get a copy of your credit report to make sure its something the broker has actually paid for to charge you. Brokers cannot charge you for a credit report fee unless they are actually being charged a fee by the credit agency (in other words they cannot make a profit off the credit reports). Lesson number two: Be careful when you start looking for brokers to do your loan. Most will pull a credit report right away if you provide your social security number, and lots of inquiries on your credit can hurt your score. I have heard horror stories of people who went to LendingTree.com, only to have 40 different lenders pulling their credit, which dropped their credit scores down considerably!
The Underwriting Fee. (Sometimes called the Admin Fee) Always question what this fee covers. Lenders charge a fee for underwriting, closing, and funding your loan. This is how the lender makes its up-front profit on lending you money, and it normally cannot be avoided, depending on the lender. If the broker is charging the underwriting fee however, alarms should go off in your head. Brokers do not underwrite your file, and thus you should not agree to pay them such a fee without a reasonable explanation of its validity. Lesson number one revisited: Ask questions! If you think that a certain fee might be a junk fee, ask the broker exactly what it covers and what it's for. Don't be confused into paying more than you should.
In summary, while most fees are legitimate, and most brokers scrupulous and honest, go into your next home loan with your eyes wide open, ask questions, and you will get the deal that fits you best. The market is not the frenzy it was over the last two years, and brokers will offer significant deals to get your business these days.
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