Avoiding Junk Fees Could Pay Off At Closing Time

If you look down your long, long list of closing costs at your lender’s office, you probably won’t find one labeled “junk.”

That’s because lenders don’t like to admit that some of the charges they’re passing off as “necessary’ are really fluff. Actually, they aren’t fluff. To the lender they represent an important stream of profit. If anything, they fluff the lender’s pocketbook.

But if you’re looking to save money — and why wouldn’t you be? — junk fees may be a good place to negotiate with the lender for a better deal. But the time to negotiate is before you sign the loan application. Once you’ve signed, you’ve sealed your deal for better or worse.

Let’s start at the beginning. When you apply for a loan, the lender will need information from you, and information that only outside sources can provide. These include a credit report on you and anyone purchasing the home with you, and an appraisal of the home’s true value which will give the lender an estimate of what the house is worth from someone not directly connected to the transaction.

The lender is charged for the credit report and the appraisal, as well as other legitimate costs. These are passed along to you, the borrower, in the form of closing costs and fees.

Sometimes, as in the case of the appraisal, the lender will actually bill you for the amount he or she is charged. The appraiser charges $200 for an appraisal, and you’ll get charged $200 as a closing fee.

But in other cases, the lender inflates the actual charge to, shall we say, prime the pump. If the lender has an electronic appraisal done on your property, it might cost him $25, but he’ll charge you $125. You feel good, because technology just saved you $75 over having a live appraiser actually go and visit the house. But the lender, having pocketed $100, feels better.

Sometimes the actual cost of the credit report is passed along and sometimes the lender will double the true cost and pocket the difference.

Inflating actual costs is just one example of junk fees and costs that get built into your loan without you knowing it. A more egregious example are charges for made-up things, like “underwriting fees” or “document preparation.”

What is an underwriting fee? A lender will tell you an underwriting fee is the cost that they incur to underwrite your loan. They need someone to go through your whole package to make sure it complies with secondary underwriting requirements.

Perhaps. With technology, however, a lender can get your loan approved in as little as 3 or 4 minutes.

What the lender is actually doing is electronically asking the secondary market investor, usually Fannie Mae or Freddie Mac for a home loan, if your loan will fall within their guidelines for repurchase. The repurchase of your loan typically takes place shortly after closing.

But an underwriting fee is purely a junk fee because the whole point of applying for the loan is so that it gets underwritten. You’re being charged an extra fee on top of all the other fees to do exactly the same thing.

Another common junk fee is the document preparation fee. Basically, computer programs print all the necessary paperwork at the touch of a button. Someone will key in the necessary information. But again, underwriting the loan and preparing the paperwork is within the general scope of, well, getting the loan approved for you.

The problem with junk fees is that they all sound so legitimate. It’s difficult to tell what’s real and what isn’t. As the borrower, you’re entitled to an explanation of each and every charge in a way you can understand. If the lender throws some jargon your way, stop and ask for another explanation. Keep asking until you really understand what each and every charge is for.

Finally, there is a way to eliminate all closing costs and fees from your loan. The simple answer is for the lender to raise your interest rate. The fewer fees, the higher the rate.

(You can also lower your interest rate by paying more points to buy down the rate.)

The trick is to get the fees down without raising your interest rate. That’s how you save money.

While competition has increased in the mortgage community, the real estate market working at record levels. Business is brisk and a lender may or may not want to negotiate with you. You have the choice whether to attempt to negotiate with the lender to lower your costs and fees or simply accept what you’re offered. You’re the customer.

Here’s a quick rundown of some of the closing costs and fees you can expect to pay when you purchase a new home, along with an approximate range of what you might be charged for these fees.

Lender’s points, loan origination, or loan service fees. The lender’s points – a point equals 1 percent of the loan amount – may also be referred to as the service charge. The points are the largest fees paid to the lender and usually run between 1 and 3 percent of the loan amount. COST: Usually zero to 3 percent of the loan or more. One point is common.

Loan application fee. The money charged by the lender to apply for the loan. The application fee is almost never refundable, which means you’d better be pretty darned sure you want a loan from a particular lender and will be approved for it before you apply. COST: Usually $0 and $350.

Lender’s credit report. The lender may actually pull up two credit reports on you: The first will come just after you have filled out the application and paid the fee; if there is a second report ordered, it will be pulled just before closing, to make sure you haven’t made any enormous purchases (like a new car) or gotten into credit trouble during the elapsed time. Most first-time borrowers don’t realize there may be a second credit check. They also don’t realize that a credit check will be pulled on everyone who is going on the title of the home. COST: Usually between $18 and 75 for each person on the title.

Lender’;s processing fee. With this fee, the lender is trying to pass onto you some of the cost of doing business. The processing fee is the fee for processing the loan application. COST: Usually between $75 and $125.

Lender’s document preparation fee. The cost of actually preparing the loan documents for the closing. COST: $0 to $200.

Lender’s appraisal fee. This is the fee lenders charge you to have the home you want to purchase appraised. Lenders supposedly charge you exactly what they’re being charged for the service, which is provided by an outside contractor. Cost: Usually from $220 to $350. If your lender is doing an electronic appraisal (which is increasingly more common), expect to pay anywhere up to $200, although the lender’s cost may only be as little as $25.

Lender’s tax escrow service fee. This is a onetime charge for the lender to hire a separate company to make sure your lender receives your property tax bill information. With a tax escrow, you’ll pay approximately 1/12 of your annual property tax bill with your mortgage payment. That money gets escrowed and the lender is supposed to use it to pay your annual property taxes. Either way, you’ll have to pay. COST: From $40 to $120.

No property tax escrow fee. If you choose not to have the lender escrow your property taxes, you may be charged a one-time fee for the privilege of paying your own property taxes. COST: Up to one-half of a percent of the loan amount. (FYI: In some states, these fees are being reviewed by the legislatures to determine if they are legal.)

Title insurance cost for the lender’s policy. When you purchase a home, or refinancing your loan, a lender will generally receive a title insurance policy. The cost of this policy is paid by the borrower. COST: Between $150 plus, depending on the value of the home.

Special endorsements to title. If the lender requires extra title endorsements, the buyer must pick up the cost. Some of these might include a condo endorsement, if you’re buying a condominium, a PUD (planned unit development) endorsement if you’re purchasing a home in a development having specific zoning characteristics, an environmental lien endorsement (a statement to the lender that the lender’s mortgage on the property won’t be affected if the government finds an environmental hazard on the property and files a lien against it so that the owners clean it up), a location endorsement (which proves that the home is located where the documents say it is), and an adjustable-rate mortgage endorsement. COST: $25 to $75 each.

Prepaid interest on the loan. The per-day interest charge on the loan from the day of closing until the last day of the month in which you close. This is paid at closing because the lender has to calculate it by hand. After you pay, you then skip a month and begin to pay your regular monthly balance. This is because most loans are paid in arrears. If you have poor credit and are getting a subprime loan, your payment schedule may be different. Ask the lender to put it in writing. COST: requires a separate calculation for each borrower.

There are other closing costs and fees you’ll pay if you’re buying a home, but your lender won’t have any control over how much they are. Still, here’s a look at what’s coming:

Any outstanding house inspection fees. If you had a pest or lead paint inspection, you might have had the cost arranged to be paid at closing. COST: $225 to $275.

Title or escrow company closing fee. The charge for actually holding the closing at the title company or completing the escrow. If you live in a state with an escrow closing, you would have an escrow closing fee. COST: $150 on up, depending on the cost of the home.

Recording fees, of deed or mortgage. You’ll pay this whether you’re buying or refinancing. COST: $50 to $100.

Local city, town, or village property transfer tax; county transfer tax; state transfer tax. The charges that the buyer will pay vary from city to city and state to state. Some cities and states charge nothing or very little. COST: In general, property transfer taxes range from nothing to a percentage of the sales price.

Attorney’s fee. If you’re in a state where everyone uses a real estate attorney, you can expect to pay a flat fee. This fee should cover the negotiation of any listing agreement, plus negotiation of the contract, and representation at the closing. Make sure your attorney gives you an engagement letter specifying the scope of the representation and the price you’ll be charged. Some attorneys charge by the hour. COST: $250 on up.