UNDERSTANDING LENDER FEES
Lenders charge loan costs, including those for loan origination and underwriting. You might not be able to get out of them, but you can try to get your lender to knock them down. There’s no harm in asking. It’s better to ask for a discount and get denied than to not ask at all.
It’s also a good idea to compare offers from other lenders. If you can get an estimate before you submit your application, try to get different loan estimate forms from different lenders to compare.
In addition to the interest rate, lenders can charge loan fees to help offset the cost of origination, processing and other items. But let’s take a closer look at these fees, what they are and what you can do to help minimize or otherwise offset lender fees altogether.
First, not all lenders charge the same set of fees. There are no guidelines that lenders must follow with regard to the type of fee charged. Lenders come up with their own. Yet there are some common ones that lenders do charge on each and every mortgage loan. Further, lenders aren’t allowed to charge one borrower one type of fee and not charge it to another. That is in the same set of circumstances. Doing so could be considered discrimination by giving one client a break and not the other, or all for that matter.
One of the more common fees is called the Processing Fee. This fee is collected to pay for the overhead generated when processing the mortgage application. From the initial submission to ordering closing papers, all loans go through a process which can include several steps. Processing is performed by the Loan Processor within the mortgage company. Mortgage brokers also have loan processors and they too can charge fees. As long as the fees are universal and not selective. Once you’ve submitted your application, it’s the loan processor who you’ll interact with the most.
Origination fee is also a common one. An origination fee is listed as a percentage of the loan amount. If the loan amount is $200,000 and the origination fee is 1%, that works out to $2,000. Origination fees are also charged to offset the costs of originating, or finding and bringing the loan in-house, the application.
Another nearly universal charge is a Document Preparation fee. As the name implies, the amount is used to offset the personnel cost of preparing and delivering your closing papers to the settlement agent. Documents are drawn after the loan has been completely approved by the lender’s underwriter.
An appraisal fee is typically collected upfront when the loan application is first submitted. This fee is collected by the lender but is not paid to the lender. Instead, the lender uses this amount to order the property appraisal from an Appraisal Management Company, or AMC. Appraisal charges can vary based upon different factors but primarily due to the property type, proximity and sales price.
The underwriter is the individual within the mortgage company that makes sure the documented loan file meets the guidelines for the selected loan program. An underwriting fee is often charged to pay for the lender’s underwriter. Loan documents cannot be ordered without them being completely approved by the underwriter.
A Funding Fee is a fee reserved for VA loans. A funding fee is also expressed as a percentage of the loan amount and is used to finance the VA’s loan guarantee. With a VA loan, should the loan ever go into default, the lender is compensated for the loss. This compensation is financed with the funding fee.
With a purchase transaction, these fees must be paid for at settlement and out of pocket (with the exception of the funding fee). When refinancing, these same fees can be present but given sufficient equity they can be rolled into the loan amount instead of paying at the settlement table.
Finally, one quick note about how to offset some of these fees. A “no closing cost” loan doesn’t literally mean there are no loan costs, but the lender adjusts the interest rate upward and provides a lender credit at your closing.