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10 Expense Items In “Standard” Loan Costs
Every lender will have their own operating procedures and systems regarding how they charge and structure their fees.
But there are many cost items that you can expect to pay for with every mortgage.
While different lenders might name them differently or package them with other items, there is no getting away from these “standard” loan costs.
1) Application fee – $10 to anything the lender decides
I don’t know how the practice of application fees came about in the world. Because I find this fee as one of the most ridiculous to charge consumers no matter which industry.
I suspect that it must have originated from government agencies who wanted to deter abuse of their public service. Since their services are free, too many people apply needlessly for stuff, they will never get anything done.
Corporations then found that it was an easy way to make extra money and adopted the practice. Only on a more expensive scale.
Can you imagine having to pay an application fee for a customer account on Amazon so that you can buy products from their ecosystem?
Maybe banks do realize how stupid this fee is and therefore are often very willing to waive it for borrowers.
Whatever the case, it’s a standard that lenders charge a loan application fee.
2) Appraisal – $300 to $500
How much you pay for a property have little impact on how much it is valued.
Because lenders offer mortgages based on loan-to-value (LTV), the value of a house becomes a critical element for how much the borrower can eventually borrow.
Sometimes banks hire third party appraisers from an internally-approved panel to do this jobs, some have their own department of appraisers to do it.
If it’s a necessary service, why not provide the service in-house, right?
On a side note, appraisal service providers often kowtow to banks as they need good relationships with them in order to leech off them. So banks are well-known to have a lot of leverage over them.
And when appraisers are in-house, you can expect them to be more flexible in determining a value that is favorable to all parties involved.
3) Closing fee – $150 onwards
The party that closes the loan will inevitably charge a fee for doing so.
This party can be a:
- Escrow service
If you have conducted business for huge amounts of money, you would know how important escrow can be.
If not, imagine having purchased an expensive set of home security cameras online and find that they cannot work at all after receiving them. The vendor then refuse to refund making you wonder how evil the world has become.
An escrow service would be able to hold your money and only release it for payment once you verify that you have received the products in good working order.
This is generally what escrow is.
Taking into account how such a service can provide peace of mind to all parties including buyer and seller, it’s not going to be free in a capitalistic world.
4) Credit report – $50 to $100
At some places, you can legitimately purchase your own credit report for less than $10.
So you’d not expect it to cost much when a lender charges you for it…
… but no…
For the value added service provided by the lender, the price for your credit report will be marked-up.
Try telling a lender that you would run your own credit report and they will insist that it cannot be accepted for fear of truncated documents.
So the borrower is pretty much powerless unless the cost is waived of course.
For the record, there is a simple credit report and a comprehensive. Maybe the simple report is the cheaper one and the one that lenders use is the comprehensive one… validating the more expensive price.
5) Document recording fee – As much as $10 per page
To formally and properly close a mortgage, deed of trust has to be recorded at the local county.
And as you can probably predict (since home buyers have money to burn) that there are going to be filing fees for this.
The typical set of documents required for filing can consist of anything between 10 and 20 pages.
After paying for this, you’d finally realize the value of an executive summary if you haven’t done so.
6) Prepaid interest – Depending on loan amount and amortization
Some borrowers might be making a scene out of this expense.
But be mindful that this is not really a fee. It’s the cost of the mortgage itself.
When interest is required to be paid upfront, you are paying for the use of the funds for the month before.
And since it is not a complete month, this amount is pro-rated.
7) Reserves – Depending on loan amount and amortization
The need for a collection of reserves can be required when a lender is doing the escrow for property tax and insurance.
And this amount while not a fee will make up of a few months worth.
8) Survey – As low as $100 and up to $1500
When a lender calls for a survey to be conducted, it means that the details of the property being financed is unclear.
A survey is an exercise where surveyors conduct observations to determine building locations and boundaries by way of drawings.
It will note things like:
- Adjacent streets
- Maybe even the Starbucks across the street
If a recent survey had been conducted on the site, it might be accepted. Or the surveyor who conducted the survey might be requested to do a timely update of records.
9) Title insurance – As little as a few hundred to thousands of dollars
The price of the policy will depend on factors such as:
- Amount of loan
- Value of house
- Date of most recent title insurance policy (if any)
However, you should complain too much about whether this a necessary insurance policy to pay for. Because it protects you as much as it protects the lender.
And because how much risk it can take off the plate of the lender, this expense is often absorbed or partially paid by the lender.
10) Underwriting fee – Up to $1000 and sometimes even more
Underwriting is the process of putting legal jargon and terms of the loan into a legal document so that the lender can be assured that it will never be the party that gets screwed.
Large banks usually have their own lawyers to draft these contracts. But you’d suspect whether the lawyers are just using templates and changing the property details.
Maybe templates are used after all. Maybe banks hire lawyer to create a template and use that.
Anyway underwriting fees, or sometimes called document preparation fees, have legal work involved.
So it’s a great chance to charge professional (expensive) fees towards the consumers. You can be assured that a profit-driven entity to take advantage of this and not retreat without a fight.
It’s one of the toughest cost items to negotiate for a waiver.
Seldom will lenders allow you to hire your own independent lawyers to draft the document. And if they do, you will find that third party law firms will charge you even more!
So this is an area that you are pretty much powerless. It’s better to be an obedient borrower here.
The above mentioned fees should rightfully be listed, usually on a page within the closing statement.
If ever you find that you are being charged exuberant fees for unclear reasons, do question the mortgage officer about it.
Chances are that they will be so elaborate in their explanation that you will be left with no questions.
Finally, remember negotiate the mortgage so that you can weasel out of as many cost items as possible.
Every dollar saved is a dollar earned.