A Layman's Guide to Mortgage Application Junk Fees

As many of you know, I recently refinanced my mortgage for the fourth time in ten years.  Since then I have become familiar with that eternal mortgage loan enigma better known as the junk fee.  I always challenge the more questionable junk fees and never take them for granted. You should too.

Junk fees refer to lender or loan broker fees charged to cover company overhead.  Lenders use a variety of junk fees to boost their profits. Yes, some junk fees may be legitimate and the lenders have to make their money too.  But in many cases junk fees are overpriced or just pure profit for the lender. This is because lenders sometimes use junk fees to keep quoted interest rates low only so they can lure in more customers; they then make up the difference via ridiculous charges.

It is tough for the layman to get a real feel for what a legitimate cost is for each of the fees listed on the itemization statement.  So what is the average person to do when trying to refinance or buy a new home?  Well, here are three big tips that are guaranteed to help you from overpaying at closing time:

1.  Comparison Shop

The best way to fight excessive junk fees is to comparison shop your loan and make sure that you try to negotiate each junk fee down to at least the lowest price you have received from amongst all of the lenders surveyed.

2.  Challenge Questionable Fees As Early As Possible

It is important to understand that the time to challenge these fees is not when you are at the settlement table signing papers.  The time to make a stink is as soon as you get your lender’s good faith estimate that breaks out all of these mysterious fees, or at least as soon as you have several estimates from which you can compare and negotiate from.

3. Understand What You Are Being Charged For

It is a cliche, but it is true:  Knowledge is power.  Therefore, to further help your negotiations with your lender or broker over these charges, I’ve created a Junk Fee Glossary for you.  Where applicable, at the end of each description, I have included the percentage of institutions charging each of these junk fees based upon this informative survey conducted by Bankrate.com; the lower the number, the more negotiating leverage you should have to get the fee removed or lowered.

Administration – A pure junk fee that supposedly is used to cover the cost of managing the loan during the closing process.   This fee is outrageous and ripe for negotiation.  (14%)

Application Fee - This fee is shameful.  No lender that wants your business should ever charge this fee.  Imagine paying money to simply fill out the application to buy a service.  This is equivalent to a hamburger stand charging you money to place your order for a cheeseburger.  (18%)  

Appraisal Fee – Lenders need to know the value of your home.  But in times of rising home prices (remember them?) this is usually unnecessary if you refinanced or bought your home within the previous year.  (83%)

Closing Costs / Settlement Fees -  These fees cover services that must be performed to process and close your loan application such as title fees, recording fees, appraisal fees, credit report fees, pest inspection, attorney’s fees, taxes, and surveying fees.  Watch for double dipping with other junk fees.  (93%)

Commitment Fee – As far as I can tell, this odd fee is for processing the statement by the lender of the terms and conditions under which a loan is made.  Completely bogus.  (2%)

Credit Report – This is exactly what it says.   Credit reports are extremely cheap; they are generally free to individuals at least once per year.  While they aren’t necessarily free to the lenders, it is highly doubtful they are paying even $100 for it.  This is usually a big profit maker for the lender.  (81%)

Document Prep - This is a classic junk fee that nobody should ever pay.  The process of preparing paperwork is an inherent part of the lender’s job.  This is tantamount to a burger joint tacking on an additional “Burger Preparation” fee on top of their advertised menu price.  (34%)  

Discount Points – This fee is used to buy down the interest rate.  (47%)

Express Mail Fee – Again, another junk fee that should be inherent to the lender’s job.   This is also sometimes listed as Postage and/or Courier Fees.   Despite the high number shown in the bank rate survey, I have successfully got this charge removed all but one time.  Don’t feel bad for the lender — they aren’t losing any money.  (81%)

Fee – That’s right.  “Fee.”  If you see this, immediately call your lender to get a detailed explanation of this.  As he or she stammers and stutters away with their response to such a garbage charge, be ready to pounce on any instances of double dipping that crop up.

Flood Check/Certification Fee – In order to comply with federal regulations and secondary mortgage requirements, lenders are required to obtain a certification from a surveyor indicating whether the property is within a flood hazard area. (95%)

Funding Fee – This is similar to a wire transfer fee, so watch for double-dipping.  (14%)

Lenders Fee – These fees are borne by the lender during the closing process and may include attorney fees, application fees, recording fees, courier fees, etc.  If this number appears excessive to you, ask for a detailed breakdown of all costs involved with this fee.  Then after you get the breakdown, make sure the lender is not “double dipping” by charging you, for example, a Lender’s Fee and a Courier Fee.  Due diligence on your part usually makes this one of the more negotiable fees. (46%)

Origination Fee – This is a payment associated with the establishment of an account with the lender.

Processing Fee – This fee is fairly common and covers the cost of processing the loan.   (45%)

Reconveyance Verification Fee – A fee charged to have someone verify that the bank holding the seller’s loan actually reconveys the title, or clears the loan.  Pure poppycock.

Tax Service Fee – This is a fee to cover a third party the lender hires to monitor and/or pay the property tax bills.  (82%)

Title Fees – These fees may include escrow fees, document prep fees, messenger service fees and recording fees for recording the title onto the deed.  Watch for double dipping here.  (29%)

Title Insurance – This fee covers the costs of assuring the lender that you own the home and the lender’s mortgage is a valid lien.  It also protects the owner in the event someone challenges ownership of the home. (83%)

Underwriting Fee – A lender charges mortgage underwriting fees to cover the cost of evaluating your total loan application package, including your ability to pay the loan back.  This should include your credit report, employment history, financial documents and appraisal.  Again, watch for “double dipping”.  There should be no credit report fee if there is also an underwriting fee.   If you are working with a broker, he should not be charging you for a separate underwriting fee, as this is handled solely by the lender.  (40%)

VA Funding Fee – This is required by law and is intended to enable veterans who obtains a VA home loan to contribute toward the cost of this benefit, thereby reducing the cost to taxpayers.  It is usually in the vicinity of 2 – 3% of the loan.   If you aren’t getting a VA loan, then you shouldn’t be charged this fee.

Warehouse Fee – This is another total rip-off mortgage fee.  I’d try to define it, but nobody else seems to be able to, so neither will I.  

Wire Transfer Fee – This fee covers the cost of transmitting cash via the inter-bank wire transfer system to you, your prior lender or the company closing the loan.  Similar to the Funding Fee, so watch for double dipping.  (50%)

Remember, federal law prohibits lenders from charging fees for nonexistent goods or services, as well as markups of settlement expenses when no additional services are rendered.   But the good faith estimates that the lenders hand out have very minimal legal backing, so in the end it is up to you to make sure that you are not being taken for a ride at closing time.  Knowing the make-up of your junk fees is a great place to start.

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