Transparency, Literacy & Connection Lender Fees & Loan Related Pre-Paid Expenses

Lender fees and loan related pre-paid expenses are the costliest part of the closing costs in a purchase or a refinance transaction. 

The lender fees are your one-time fees that you pay for the services a lender/loan broker provides and that covers a range of services. The loan related pre-paid expenses are upfront portion of recurring expenses such as interest on the mortgage, property taxes, property insurance and in some cases mortgage insurance.

In theory, you should be able to shop for any portion of the expenses paid to any service provider other than a government agency.  To shop for them, you have to know what the norm is for the fees first, and also know whose pocket the fees are going in and what for.

The lender fees are broken down in 2 portions. The first one is a fixed flat fee ranging from $1500 to $2500 to cover administrative, processing, underwriting and other staffs’ fees. This fee could be higher if you are dealing with hard money lenders.  There is also an appraisal fee that is a flat fee. This is paid to a 3^rd party service provider and ranges between $450 to $700 for residential properties worth $1.5 m or less. The bigger the property is, the more work it will take to appraise it, the higher the appraisal cost is.  For commercial properties and land parcels, the fee is much higher.

And there is the loan origination and the loan discount fees that form the 2^nd portion of the lender fees and are charged as a percentage of the loan amount.  They are often called points on the loan.

Sometime these fees are charged separately and sometimes they are bundled together. The discount points are meant to lower the interest rate on the loan. The more discount points you pay, the lower your interest rate will be, saving you thousands of dollars over the course of the loan.  The origination points are there to cover the commission for the services of the lender and the loan officer. This fee, like the discount points is a percentage of the loan amount.

In addition to the lender fees, there are the prepaid expenses.  Property taxes paid to the county government either monthly or every 6 months, property insurance paid either monthly or annually to the insurance company and the interest on the mortgage paid monthly to the lender, all are recurring expenses of home ownership. 

Depending on the day of the month and the month of the year your closing takes place, you may end up paying up to 6 months of property taxes, 12 to 14 months of property insurance and up to 30 days of interest upfront to your lender so it can pass it on the appropriate party. The upfront portion of these expenses depends on the loan program and it’s the lenders’ call and the client has no say so in them.

Now the question is what portion of the loan fees can you as a borrower shop for and possibly negotiate with your lender?

Theoretically, you should be able to shop for every item of your expenses except for the taxes. But in practice, most service providers have a set fee for most of their services. Depending on the structure of the organization, most of the time the origination fee seems to be the only negotiable item. With that said, just like realtors’ average commission is between 2% to 3%, the average loan origination fee is between 1% to 2%.  If the lender is charging you more than the 2%, especially on the larger transactions and bigger loan amounts, they will consider paying some or a portion of your flat fees.

The challenge consumers face is that there are so many different loan programs with different types of lending institutions, for different types of properties that makes it very difficult for borrower to compare apples to apples when they shop for a loan.  On top of that, not every lender is ruled by the same set of guidelines. Depending on the structure of the lender’s organization, some are not required to disclose all their fees the way mortgage brokers are, making it more difficult for the consumers to make the right choice. 

My recommendation is when you are in need for a lender services, educate yourself first, shop with 2 or 3 and choose to work someone honest and fair with experience.  If you find one and start working with him, don’t let other solicitors interfere with your decision.

In an effort to bring you transparency, literacy and connection, I hope the content I shared with you comes handy next time you are in a real estate transaction and helps you make an informed and intelligent decision.