When buying a home, don’t be surprised to pay a hefty fee simply for closing a mortgage. Loan origination, underwriting and broker fees, as well as costs for appraising a home or requesting a credit report, can quickly add up.
Even though many of a lender’s charges are justifiable, others are only there to help increase the lender’s profits.
Luckily for the homebuyer, some of these so-called “junk fees” are negotiable.
“It doesn’t hurt to ask,” says Diane Masucci, mortgage consultant and board member of the Financial Planning Association of New Jersey. “While many of these fees are set, it’s still worth the effort to negotiate.”
By using your negotiating skills, you could save hundreds—possibly thousands—of dollars when finalizing a mortgage. However, before you begin negotiating, you need to know what to look for when navigating the paperwork that quickly piles up during the home-buying process.
Consider these six steps to avoid junk fees when closing a mortgage:
1. Know what fees to expect.
Before applying for a mortgage, know what fees you can expect to pay so you can spot any redundant or unnecessary ones. According to the Federal Trade Commission, different institutions have different names for the same fees. For example, an “application fee” is sometimes referred to as a “loan processing fee,” while an “origination fee” may be called an “underwriting fee.” All of these fees are charged to cover the cost of processing the mortgage.
Other common fees include wire-transfer fees—a bank fee to wire money—and credit report fees, which is the cost to pull your credit report and score.
It’s worth noting there are also fees for work done by a third party, such as appraisal fees and title fees. These fees are set by the appraiser or title company, respectively, and are less likely to be negotiable.
2. Research how much fees typically cost.
While the total cost of fees will vary depending on the size of the loan and the lender’s policies, it’s a good idea to get a general sense of how much each itemized fee will cost. This could help you determine if you’re being overcharged for any one service.
For example, origination fees can vary from state to state, but there is such a thing as too much.
“The most I’ve seen [for origination fees] is 1 percent of the loan,” says Donald J. Frommeyer, president of the National Association of Mortgage Professionals. So if you’re taking out a $200,000 loan, for example, don’t expect your origination fee to be more than $2,000.
Expect appraisal fees to range from $350 to $550 per appraisal, Frommeyer says, with wire-transfer fees ranging from about $15 to $30. Credit report fees are generally about $20.
Keep in mind that these fees could be much higher, though. If an appraiser goes out to a home and sees a need for more work, you may be charged again when the appraiser checks back on the property. In addition, if a lender seeks supplements or recent updates on your credit report, more costs may be tacked on.
3. Review the “Good Faith Estimate” (GFE).
After applying for a mortgage, your lender or mortgage broker is required to provide you with a GFE within three business days, according to the Consumer Financial Protection Bureau. The GFE explains all of the costs that you will need to pay to get your mortgage, including estimated lender fees. Based on your previous research, see if there are any fees listed on the GFE, specifically in the section called “Your Charges for All Other Settlement Services,” that seem unfamiliar or too high.
4. Ask questions.
If there are fees on the GFE that you don’t understand, ask your lender or mortgage broker for an explanation. If you find different fees are listed for the same service, ask your lender to get rid of the redundancies.
If a fee is higher than you expected, ask if it can be reduced.
“If homebuyers think [fees are] too high, just ask, ‘Can we do anything about them?’” Masucci says.
5. Compare, but look at the big picture.
Ideally, you’ll apply for a mortgage with more than one lender. When shopping around, you can use a mortgage shopping worksheet to compare not only interest rates, but also the various fees and other costs listed on the GFE.
“The most important thing you can do is look at the total overall package of fees and loan rates they’re offering you,” Masucci says. One lender might offer much lower fees, but the interest rate may be a half-percentage point higher, she says.
6. Review the fees on the HUD-1, and negotiate again.
Once you’ve chosen a lender and a loan, you’ll receive a HUD-1 settlement statement, which itemizes all of the services and fees charged to process your loan. On page 3 of the document, there will be a comparison between the actual cost of the fees and the estimated cost from your GFE.
If the actual cost for some fees is much higher than the estimate, ask your lender for an explanation. Discrepancies allow you to ask—once again—if fees can be lowered or waived before you close the loan.