Mortgage Lender Fees
by C. M. Watts
Everyone knows there are costs associated with getting a mortgage loan. One of the largest costs is the loan origination fee charged by mortgage lenders and brokers. The origination fee is the consideration mortgage professionals earn for helping borrowers locate a mortgage and acting as an advocate during the loan origination process. There is no national or local standard loan origination fee and the fee can vary based on the rate of interest -- lower rates correspond to higher fees and higher rates correspond to lower fees.
There are several other fees charged by lenders and mortgage brokers that do not amount to much individually, but combined can total hundreds of dollars. These charges, also known as "garbage fees", are over and above the normal fees charged for appraisals, credit reports, and title and escrow services. It is important to understand the basis for garbage fees, because they vary significantly between lenders and are often used by lenders and mortgage brokers as a way to increase revenues and supplement low origination fees. Some of the more common gargage fees are:
Document Preparation Fee: These fees are charged by lenders and some brokers for preparing the legal and miscellaneous documents required at closing. These documents include the mortgage note, deed of trust, Truth in Lending forms, escrow instructions, and various forms required by lenders. Sometimes lenders use an outside vendor to prepare the closing documents and pass on the cost to the borrowers.
Loan Underwriting Fee: Many lenders are increasingly using automated underwriting systems (AUS) to assess the credit risk of loans. Secondary market investors like FNMA and FHLMC provide AUS and charge lenders for the service. Other times, lenders may use subcontractors to perform the loan underwriting task. In order to offset these costs, lenders may charge borrowers an underwriting fee.
Loan Processing Fee: Loan officers and their loan processors work with borrowers to obtain the necessary documentation and information required by lenders. Documentation includes appraisal, credit report, employment and depository information, and any other information that may be required by a lender's underwriting department. Many times, loan originators will pass on these direct costs to the borrowers in the form of a loan processing fee.
Tax Service Fee: Most lenders use an outside service to confirm the property taxes are current. This fee is about $70.00 and is usually passed on to the borrower at closing.
Flood Certificate Fee: Federal Regulations require lenders to have flood insurance if the mortgage loan issued to a borrower is secured on a property located in a flood-prone area. Many times lenders use an outside service to research the flood maps and certify whether the property is in a flood area. The fee for this service is around $40.00 and lenders generally pass the cost on to borrowers at loan closing.
Notary Fee: Before the mortgage deed of trust can be recorded at the local court house, the signature of the borrowers must be notarized. An individual certified as a Notary Public witnesses the signature on recordable documents as true and correct and charge a fee from $10.00 to $40.00. Generally, lenders collect this fee from borrowers.
Wire Transfer Fee: Mortgage lenders generally wire the funds to the escrow company handling the loan closing. Funds are wired through the Federal Reserve System and done through commercial banks that are members of the Federal Reserve Bank. Usually, banks charge mortgage lenders a fee for the wire transfer service. This fee can be between $25.00 and $100.00 and is generally passed on to the borrower at closing.
Warehouse Differential Fee: This fee has not been seen for many years because short term interest rates have been lower than the actual mortgage note rate. If and when short-term interest rise, mortgage lenders may have a negative carrying cost from funds borrowed from commercial banks during the time the mortgage is funded until the loan is sold in the secondary market. This negative cost is sometimes offset by charging borrowers a Warehouse Differential Fee which is paid at closing.
Lenders are required to disclose garbage fees in the Good Faith Estimate of Loan Closing Costs and are a component of the annual percentage rate (APR). Borrowers must receive the Good Faith Estimate within three days of submitting the application to the lender. Further disclosure of the costs is provided at the time the loan is funded.
APR: Though lenders and mortgage brokers are required to disclose the APR right along side the rate and fees in advertisements, the garbage fees are rarely itemized. Because these miscellaneous fees are not disclosed as overt charges (except in the APR calculations), some mortgage originators are known to quote points lower than the market and recoup the short fall by charging exorbitant "Garbage Fees" at closing.
For example, let's compare the advertisement of two lenders advertising in the same newspaper or web site: Lender A is quoting 7.00%, 2 points, and $100 in "Garbage Fees". Lender B is quoting 7.00%, 1.25 points, and $1,000 in "Garbage Fees". The quote is based on a loan amount of $100,000 and a term of 30 years.
On the surface, lender B, with the lower loan fees, appears to be better deal. Though the APR is slightly higher, most consumers hone in on the loan fees when comparing lenders. However, a closer look would show the overall fees paid to Lender A are $125 less. The marketing approach used by Lender B displaying low loan fees would probably result in more business even though Lender A is a better deal.
Before chosing a lender and applying for a loan, consumers should obtain a breakdown of all charges, including garbage fees, and closely compare rate/fee scenarios between lenders, paying close attention to the resulting APR. Don't be fooled by lenders quoting below market rates and points. If it appears, too good to be true, it just may be, not true.
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