Shopping for Closing Costs - Part 2

Last week we discussed some of the closing costs that are a part of virtually every lender's offerings. While many pundits think that these are horrible and recommend trying to negotiate to make them go away, I have never seen it happen, and I don't think that you'll be successful either.

Remember that the main common fees are those for Appraisal, Credit Report, Processing, Underwriting, and Document preparation. Two other reasonable ones deserve mention. The Flood Certificate fee, usually about $15, is paid to an agency that determines if you are in a Federally designated Flood Zone. Lenders are required by law to assure that all homes on which they lend that are in a flood zone have Federal flood insurance coverage. They determine that by making a request of one of the companies that compares your location with current flood maps.

The other fee is Tax Service. This is not a fee for paying your taxes; it is to pay for a service that monitors your County's records after your property taxes are to have been paid. They report to the lender if you haven't paid your taxes, "an event of default" on your note.

Next, a Discount Point is the fee you pay to get a lower interest rate. For example, if you are offered a loan at 5% and 1 point Loan Origination Fee, you could also get 4.875% for 1.5 points, but it would be shown as 1 point to the broker and .5 points as Discount Points to the lender. If you are going to be in the home for a while, you ought to pay a Discount Point to lower your rate.

But some lenders and others involved in the settlement process have other fees that may or may not be reasonable. Some lenders charge an Application Fee. This is wrong if it's an extra fee, but as long as it is applied to your fees at closing, I see nothing wrong. There are borrowers who, quite frankly, take advantage of our industry's willingness to work for free, hoping that we will get paid some time in the future. Some people apply at two or even more lenders and this kind of charge is meant to deter them from that silly practice.

Others charge an Administrative Fee. This is OK if it is in lieu of other fees, so check it carefully. One lender we use charges an Admin Fee, but doesn't charge any other fees. It just combines them all, and, in this case, their one fee is a lot less than what others charge when the fees are broken out separately. Some lenders charge a Funding Fee. It shouldn't be more than it costs to send a wire, say $20. That's cheaper than FedExing a check, and it's same-day service.

I have seen lenders, particularly mortgage banking companies, charge a Warehouse Fee. I think that is to cover the cost of interest on their banking line of credit, called a warehouse line, but I don't think that is reasonable because they are earning interest on your loan during the short period of time the own your loan.

Note that what we like to call "garbage fees" are not exclusive to the lenders. I am currently working on a loan and we got the charges from the escrow for their services, to wit: Escrow Fee $1,021 (the seller paid another $1,021), $75 Notary Fee, $200 Loan Tie-in Fee, $100 for printing out loan documents which were e-mailed to them, and a $75 Messenger Fee that I think they charge whether anyone actually uses one or not. Frankly, these were fees that used to be bundled in the escrow fee and I think that they charge for them separately because no one bitches about them. You should!

In summary, I hope that you have a better understanding of these fees, that you accept ones that you also think are reasonable and question ones that are suspect as being unreasonable. The time to do this is when you get the original Good Faith Estimate from your lender, federally mandated to be sent within three days of application. Review these with your lender and KEEP A COPY.

After you lock, demand an estimated closing statement, HUD-1, from the settlement agent and compare it with the original Good Faith Estimate. Tell the lender you refuse to pay any new charges, and if they charge them anyway, after the deal closes, take the broker or lender to Small Claims Court. I think the Judge will order them to give you back any charge not on the original Estimate. I would especially like to hear from anyone who does this.

Be careful out there.