Thanks to two home purchases and refinancing my mortgage five times, I’ve become very familiar with that eternal home loan enigma known as the mortgage junk fee. As a result, I always challenge the more questionable junk fees — and you should too.
So what is a junk fee? Well, it refers to dubious lender or broker fees designed purely for increasing their profits. Yes, some fees are legitimate; after all, lenders and brokers have to make their money too, but in many cases junk fees are 100% profit.
So how can the layman know whether or not the fees listed on the itemization statement are legitimate? Well, here are three tips — and a junk fee glossary — that should keep 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 one down to, at the very least, the lowest price you receive.
2. Challenge Questionable Fees As Early As Possible
It’s important to understand that the time to challenge these fees is not when you’re at the settlement table signing papers. Instead, do it after you’ve got several estimates in hand from which you can compare fees.
3. Understand What You’re Being Charged For
It’s a cliche, but it’s true nevertheless: knowledge is power. So here’s a junk fee glossary that will shine a light on some of the more common charges:
Where applicable, at the end of each description I’ve included the percentage of institutions charging each of these junk fees based upon a 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’s supposedly used to cover the cost of managing the loan during the closing process; it’s 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 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. This odd fee is supposedly the cost of processing the loan terms-and-conditions paperwork. Completely bogus. (2%)
Credit Report. This is exactly what it says. Credit reports are extremely cheap; they’re 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 a Postage or Courier Fee. Despite the high number shown in the bank rate survey, I’ve successfully got this charge removed all but one time. Don’t feel bad for the lender — they aren’t losing any money here. (81%)
Fee. That’s right. “Fee.” If you see this garbage charge, immediately call your lender to get a detailed explanation of this. As she stammers and stutters, 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%)
Lender 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 a Lender 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 — if not an outright scam — 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’re working with a broker, he shouldn’t 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. A lender will tell you this is his cost of temporarily holding the loan before it’s sold on the secondary mortgage market. Utter garbage.
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.
Photos Credit: Woodley Wonderworks
Thanks for this! We are in the process of getting a new home right now and this is very helpful.
Len Penzo says
Best wishes on the new home, Melissa. And don’t forget to challenge your lender and make them explain the reason for any of the fees you see above!
Jerry A says
1. Credit report fee: If it is over $15, then you are being over-charged. If you are being charged anywhere near $100, then you are being ripped off. (I pull credit reports for my part time business.)
2. The flood certification is done by checking a map on a government website. If you are paying $15, then it is fair. No surveyor is involved, since anyone who can use the internet can run this search.
3. Title insurance is often a rip-off, but required anyway. There are 2 types of title insurance, one protects the lender and the other protects the buyer. The buyer pays for both of them.
4. I do not know why you evaluate differently the administration fee vs. application fee vs. processing fee vs. underwriting fee. These all basically mean the same thing for a mortgage. If you are paying more than one of them, by definition you are getting overcharged. I paid a $350 application fee to my credit union, but none of the other three fees noted here.
Len Penzo says
Thanks for the comments, Jerry. I think they are very helpful. However, I have to disagree with you regarding #4. I’ve been through the process multiple times and those fees do not mean the same thing to the lenders I’ve dealt with over the years. 🙂
I didn’t know that title insurance was a rip-off. This leads me to think about how much I must have paid on my last home. Is there any way to get rid of it?
Shemika Byer says
Precisely what I was searching for, thanks for posting .
This information is so outdated it’s an injustice to the buyer, seller, agents and everyone associated with the purchase, sale, title and lending process. This should be pulled it’s so inaccurate.
It’s always to ask as many questions and understand disclosures adequately. Legislation the past 2 years have minimized most of these issues. Not that they didn’t happen but it’s hardly possible today (2011). Always get a full explanation of fees, have a reputable lender, agent and have your new home inspected.
A loan officer
Len Penzo says
What part of this article is outdated, Tom? The basic message here is timeless: 1) comparison shop; 2) challenge questionable fees; and 3) understand what you are being charged for. Are you telling me loan companies are no longer allowed to charge junk fees? Somehow I doubt that happened but, if so, that law would be a godsend — since a lot of dubious lenders and loan officers love to take advantage of the public with these misguided fees.
Len, you apparently crapped where Tom eats, and that’s why he disagrees with you. If I was a loan officer and could rack up one loan per month with $500 in junk fees and charges, I could have myself one heck of a nice boat or RV or car that YOU, the borrower, would be paying for. Don’t ever ask a used car salesmen if you’re getting a good deal and don’t ever ask a loan officer if their fees are excessive.
Len Penzo says
That is sage advice, Tom.
Good comments Jerry,
When a credit report is run the cost to the one ordering is on the report. When I run a report the cost is $26, we bill $26 on the Settlement Statement because it’s reimbursement for a 3rd party expense. We are charged $400 for the appraisal and charge the same amount.
On title there is an owners policy that the seller pays, the buyer purchases the lenders policy, approximately $400. Title orders the flood report and pays a fee to do so.
The costs differ from company to company and probably state to state .
Some companies charge an application fee which generally includes the credit report, appraisal fee and tax transcript costs.
IF the lender is a broker there may be a processing fee, the investor they are using will have an underwriting fee as well. A mortgage bank will have an administration or processing/underwriting fee, not all of the above(hopefully).
The title company generates the Settlement Statement from the figures provided by the lender and adds their fees, real estate commissions & fees. They are required to be certain all expenses on the Settlement Statement meet current regulations and tolerances and are seperated by buyer & seller.
There’s very little room for junk fees and almost none for errors on the Settlement Statement. If there is an error in origination costs, the lender eats it, if title has an error they can be off by +-10%. If the annual percentage rate increases by more than .125% the lender must re-disclose the change within federal guidelines and the borrower has 3 days to review and accept or decline the change and continue or walk away.
After closing, the lender must sell the loan to an investor that once again checks everything and can ask the lender to repurchase the loan if it doesn’t comply.
There’s always some out there that would rather try to beat the system than serve their borrower, but they’re getting more and more scarce.
Still, know what your doing by shopping, researching and asking questions.
Another scam is the surveying fee. The mortgage company will charge between $500-$1500 for something that is done in minutes. The only thing they check is that the house and structures are all actually on the property and not on the neighbor’s parcel. They don’t even put corner stakes on your place for all that money…that cost’s a whole lot more.
Len Penzo says
That is sad, if true, Rene. Sadly, I believe it.
Lenders don’t charge for or order the survey. The title company does this and it’s shown on the Settlement Statement. They are usually done if there is a reason to believe survey lines have been altered or structures or fences have been placed near or over a line. Such a circumstance would cloud a title.They are not common in most cities.
Fees from the lender are: Origination(1%), credit report, appraisal and if charged, fees for verification of employment, deposit, mortgage or rents. Only charged fees are reimbursed by the buyer.
Laura Morton says
Great stuff. Lenders and brokers will not point voluntarily tell you that you are being overcharged. Therefore you have to challenge every item. You will always get a reduction. On credit reports $10 is a fair price. The lender contract for a bulk number and might pay $4 per report, depending on the volume. Commitment fee is a joke.
Len Penzo says
I have a buddy who used to be in the lending business and he also used to brag about making good money off the credit reports.
Suzanne Gerard says
When I bought a repossessed house there were still many closing costs and fees. Never did figure out exactly why.
Len Penzo says
That’s exactly how the lenders like it too. Always challenge every loan fee with the same veracity you would if you saw dubious charges on a restaurant bill. Make the lenders explain EXACTLY what each fee is for and what the job being charged for entails.
Suzanne Gerard says
Bought this house outright for cash for the full amount.
Ted Rood says
The big question on fees is which are third party (which cannot legally be marked up), and which are lender fees. RESPA requires lenders’ fees to be disclosed within a 10% tolerence, so a lender cannot add fees to a settlement statement that weren’t disclosed on the Good Faith Estimate. In my 11 years in the business, I have never seen a lender affiliated with a survey company, more often than not, title companies will “recommend” survey companies to lenders. As regulated as lenders’ fees are, title companies can still pretty much do as they please. I recommend making sure the title fees that are on your Good Faith Estimate also can be confirmed UP FRONT with the actual title company (rather than just your lender). I’ve seen some title companies bait and switch on quotes that were done verbally, only way to assure that won’t happen is by using a lender who has a long term relationship with a title company, but preferably isn’t “affiliated” with it…..if they are “affiliated”, you can be sure title will be marked up to make the lender some extra bucks.
Len Penzo says
Great tips, Ted. Thanks for taking the time to share them with us. 🙂
Good advice Todd,
Title companies like to Bundle their fees, which saves money for the buyer. Typically it would include the title insurance, expenses and endorsements for one fee instead of charging for document prep, efiling, courier etc.
Remember, the loan is filed with a county that charges a fee per page, the title company charges a fee for this that is estimated and reimburses the buyer if it is less.
You’re right Len, comparison shopping is essential. Regulations the past few years limit fees and charges. Lenders can only charge to the borrower what they are actually charged by third party vendors such as credit reports and appraisals. It’s also regulated to disclose relationships that may benefit lenders such as part ownership in real estate companies, title companies, appraisers. Yield spread/investor rebates have been eliminated at the loan officer level and new federal and state disclosures have been implemented. Appraisals are no longer a lender/appraiser relationship. Lenders must use an Appraisal Management Company and may not know who the appraiser is until it’s delivered. Due to new federal and state regulations in licensing and testing most of the lenders that took advantage of this process have left the business. The loan officers that remain are those that comply with regulations and are committed to the borrower, seller and integrity of this business. There are always exceptions but fewer than ever and they won’t last.
Honestly, the mortgage should be an exciting and positive experiance for all involved. It should be transparent, informative and in most cases relatively fast(30 days or less). More complicated issues such as HUD homes, short sales, borrowers with marginal qualifications are more complicated, however a committed loan office works with the borrower, seller and agents to put the pieces in place. If a borrower doesn’t understand what’s going on and can’t get the information from the loan officer, it’s time to shop.
As a lender I can explain every fee, it’s origin and purpose. Fluffing the bottom line is less possible, each lender should have similar charges and be able to explain them to the satisfaction of the borrower. Today, compliance is the name of the game. Investors and lenders that can fit into this new regulatory environment won’t be around long.
Len Penzo says
Thanks again for the comments, Tom. But as long as there are exceptions to the rule regarding ethical lenders, posts like this will always be necessary.
Programmer of the internal computer applications used by mortgage banks in the early 1990’s and 2000’s let me tell you that the rule followed within the mortgage industry is ‘if there are no points in the mortgage, then there is no point for the mortgage’.
The core principal of money lending is for the lender to earn three times on every dollar loaned. #1 is fees. #2 is interest. #3 is penalties. The borrower will always pay as many of the costs involved with the loan as the lender can legally pass on. If there is not a law allowing the lender to pass on a cost, the banking lobbyists will make the law happen.
Agreeing to put the closing costs for your loan is not a service. It is a strategy. A lender always agrees to fold your closing costs into the loan. Why? Because they get their fees up front and, then they earn interest on those fees over the period of the loan (10, 15, 20, 30+ years).
Mortgage sales reps ‘slice & dice’ points on the mortgage into the fees to generate additional income for themselves and the lender on a 60/40 split with the lender. 3-5 extra points buried in the fees, earning reps an extra 1800-3000 per 100K of loan value per loan.
As for the new world order for mortgage lending in 2011…
Knowing that the government agencies, responsible for regulation enforcement in the securities industry, are understaffed, under funded and have a track record of checking up on each licensed rep once every 10 years. How do you imagine these same agencies will perform with the additional burden tracking every newly licensed mortgage broker?
The more regulations enforced on any industry from outsiders, the more opportunities created by insiders to take advantage within the industry.
Len Penzo says
I agree with you, Bob. The lenders try to maximize their profits like any other business. It’s important that buyers beware. Again, folks, challenge your lenders at every opportunity regarding these fees. Make them defend their prices and explain them all, right down to the last detail.
Lender fees no longer have any tolerance, title fees have a 10% tolerance and if there is an error by either the lender pays to correction. Fees are accurate within those guidelines. There is no more “points” or “yield spread” that the loan officer splits. That was regulated out as of April 1 this year. The government may have created the regulation but reinforcement starts with the compliance dept of the lender, underwriting, title and finally the investor that takes the loan. The number of buybacks due to non compliance has grown so lenders are not likely to hide anything. Those that do won’t be around long.
Many of the federal workers let go in the last year went to be RESPA inspectors according to classes I’ve attended. Lots of eyes watching because the focus is on the mortgage business right now.
Appraiser Micro says
Junk fees – Now with AMC fees. For those not in the know about new lending process: AMC fee is the co-mingled total appraisal fee, of which an oftentimes undisclosed amount goes to the appraiser and the rest goes back to the appraisal management company, oftentimes a subsidiary of the lender. Future HUD1 disclosure rules brought forth by the cfpb may bring better consumer awareness here, but that remains to be seen.
The problem with all these fees is that the lenders include them because of all the ridiculous federal regulations. A lender that had no fees would make a killing in the lending industry – unfortunately, the feds would shut them down.
Interesting. Thanks for the writeup.
I’ve only done one purchase and a few refis. I always shop around on the rate and total fees, but I’ve not negotiated individual fees down/away. I always pay my fees and points up front rather than add then to the loan – don’t want to pay the extra interest for a miniscule increase in tax deductions.
David @ VapeHabitat says
Are those 3D printed houses on the header image. I love them!
Len, those three tips are what I need for me to be aware of the basics about mortgage application junk fees. Thanks friend.
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