How Loan Fees Can Really Add Up : Home financing: Most borrowers are aware of the big charges, but a few dollars here, another service charge there and surprise--you’re talking real money.
The stack of paperwork that home buyers and refinancers face at the close of escrow can be staggering. But the list of fees tacked onto home loans can be just as daunting.
Critics have a name for the more far-fetched of the charges--they call them “garbage fees,” a soiled laundry list of odds and ends that even lenders may find it difficult to define and defend.
Borrowers are usually aware of major charges--loan origination fees (or points), appraisal fee, etc. But they have come to resent the formidable tally produced by such questionable items as “photo inspections,” “loan warehousing,” “amortization schedules” and “credit evaluations.”
Borrowers can end up paying one lender “hundreds, or even thousands, of dollars more than they would pay another lender” for a home loan because of varying fee practices, said Great Western Bank Vice President Eugene A. Crane, who conducted a study two years ago that surveyed fees charged in a dozen U.S. real estate markets.
Some fees are so vague that even lenders are hard-pressed to define them, said Crane, who turned up a handful of such fees in his survey. Among them were “administrative fee,” “trustee fee,” “financing statement fee” and “computer fee.”
Among the most suspect charges are lenders’ loan preparation fees, sometimes called “documentation fees.” The charges cover processing of paperwork, including the time it takes to photocopy a stack of loan documents. The fee typically ranges from $50 to $250. Crane’s study found that lenders charged preparation fees as high as $395.
“It’s the highest markup of any fee charged,” said Tom Dunlap, president of Jon Douglas Financial. “Most documents are now drawn up on computers, so lenders have to buy special software that can be expensive. But they recoup that cost 10 times over since copies are just run off on laser printers. They’re basically charging for the cost of the paper and their time. I think a reasonable charge would be around $75.”
Lenders will sometimes increase fees for preparation of jumbo loans, said Steve Love, a personal financial adviser in Torrance and a former controller for a title company. “But the extra work involved is not significant, “ he said.
Borrowers often become confused about such fees because the terms loan preparation, documentation and processing may have similar meanings for lenders, although processing may sometimes refer to the handling of loan payoffs.
Some lenders have the audacity to charge for all three services, Love said. “I’ve seen lenders charge for loan documentation, preparation and processing when the work performed under each of them was basically similar. For all three, that can add up to $800 or more. In my opinion, they’re just trying to spread out the damage so it doesn’t look so bad.”
The $100 that HomeFed Bank charges to prepare documents is “close to the true cost for us,” said bank spokesperson Monica Wiley. “We need to prepare between 12 to 15 documents that need to be printed in duplicate. The cost covers staff time when printing and computer programming time. Also, government agencies sometimes make regulation changes that need to be entered into the system.”
Home Savings charges $200 for what is termed loan processing, which covers preparation plus verification of employment, deposits and “anything necessary to process the loan,” said bank spokesperson Mary Trigg. “It obviously costs us something to do the footwork. There’s also time involved. The costs have to be passed on to the applicant.”
In a 1980 Department of Housing and Urban Development study, the most recent survey conducted by HUD on loan charges, fees varied by as much as 100% among lenders with “little or no corresponding difference in the cost of operations” among lenders surveyed.
The study also concluded that loan fees can add 6% or more to a mortgage’s final cost.
Next to loan documentation fees, borrowers find courier fees almost as vexing. The fees, about $30 per transaction, are charged by escrow companies that need to quickly send loan documents to lenders or mortgage brokerage firms.
“It was outrageous. They charged us $30 a shot, three times over for delivery and pickup,” said Stefnie Evans, who with her husband, David, purchased their $160,000 Altadena home last year. “I called the mortgage broker, saying that I was home everyday and was happy to run papers around. They said, ‘Oh, no, don’t worry, that’s what the escrow company is being paid to take care of.’
“There was no mention of these charges when we got our good faith estimate of costs. We really put up a fuss.”
The ordeal convinced the couple to do some hindsight comparison shopping. “We found that other escrow companies have their own messenger services so they don’t add extra charges,” Stefnie Evans said.
David Evans added that his lender’s estimate of closing costs tallied $2,700, but shot up to $6,000 by the time escrow closed. “All sorts of surprise fees started cropping up,” he said. “The escrow company also gave us a low estimate and then just started racking up fees.”
Love remembers one escrow company that was chronically late with document preparation. “They would come down to the wire and have to use Federal Express to send everything,” said Love, who racked up $6,565 in fees on a $185,000 loan he took out in December, 1991. “They passed all the charges on to the client. Sometimes you have to make sure they’re on top of everything. Their procrastination can cost you.”
Another sore spot for borrowers: escrow companies that require large deposits to cover potential overcharges accrued during closings.
“Our lender was very up-front about costs and was actually accurate to the penny,” said Stefnie Evans, adding that her escrow company asked for a $750 deposit, promised a refund at closing of $300, but returned only $110 “because of last-minute charges that kept coming up,” she said.
Escrow companies rarely require such large deposits, however, but may request smaller amounts to cover paperwork fees charged by banks when borrowers refinance.
Escrow companies may also require deposits because final costs, which involved interest on money held during escrow, may fluctuate until the actual closing date.
“The cost estimate just never comes out the way borrowers think it will be,” said Evelyn Folks, owner of Warranty Escrow in Torrance. “These things are out of anyone’s control.”
David, who asked that his last name not be used, paid an escrow deposit of $630 when he bought his Pasadena home last year. “A person buying a home is relatively strapped for cash,” said David, who paid a total of $3,456.99 in loan fees. “Sometimes people can’t afford to tie up that kind of money. Why can’t escrow companies just estimate the costs closer? I would expect that maybe they would need an extra $50 or so, tops.”
Refinancing a loan can bring on additional fees. When interest rates began dropping a couple of years ago, the rush to refinance was seen by some lenders as a chance to tack on $100 or more to application fees. Large mortgage lenders, such as Bank of America, required customers to put down large deposits--as much as 1.5% of the loan amount. Deposits on such transactions are refunded if loans are rejected, or credited toward closing costs if approved. But if loans are approved and borrowers decide to seek out another lender, they could lose, for example, $1,500 on a $100,000 loan, plus an application fee of up to $450. For some lenders, the fees remain in place even though refinancings have slowed. Lenders say the practice discourages borrowers from submitting multiple loan applications.
In defense of such fees, Greg Lumsden, an executive vice president of Countrywide Funding Corp. in Pasadena, said refinancing “takes more hand-holding” on the part of lenders.
“With an original loan, there’s a real estate agent who is involved to advise the borrower and answer questions,” Lumsden said. “With refinances, all those questions come straight to the lender. And borrowers aren’t necessarily more knowledgeable the second or third time around. Home buying remains a foreign process to most people, even if they’ve done it a few times.”
