The costs of closing a loan with a lender refers to the total fees that must be paid in cash by the borrower, property seller, and sometimes even by the lender.
Because these closing costs of loans can often be confused with the closing costs of real estate transactions, it is also often described as the settlement costs.
The closing costs items can typically be split into 4 categories:
- Fees charged by lender
- Lender controlled third party fees
- Independent third party fees
- Miscellaneous expenses and charges
Here’s a basic run down of what they consist of.
Fees charged by lender
It is inevitable that lenders are going to find every opportunity to charge the borrower. They are after all… banks.
The fees charged by a lender is usually expressed as a percentage of the loan amount or as a flat fee.
For example, a facility fee for a personal loan of $5,000 might be 2% and an administrative fee of $120. This results in $100 ($5,000 x 2%) plus $120.
They are almost always deducted from the disbursement. Meaning that the borrower would have the fees directly deducted from the $5,000 loan resulting in him obtaining $4,780 instead of the borrower $5,000. It would either be debited into his personal account or in the form of a check.
For the same amount of work, a lender would pocket a higher fee the higher the loan quantum disbursed.
This would be like a gym charging you more money on the membership just because you lifted more weights.
No matter how much we might disagree with how these charges are implemented, these are the reality that we live in today.
When fees are expressed as a percentage of the loan, they actually consist of origination fees and points. But really, origination fees are just points in another name.
The reason for labeling them as origination fees instead of points is for marketing purposes so as to advertise a lower fee to consumers. This is because consumers are usually focused on the total charges as a percentage of the loan amount.
The flat fees however are expressed in dollar amounts.
And lenders tend to itemize them in a list so that borrowers can see for themselves what they are technically paying for.
These can include fees for:
- Wire transfer
- Exchange rate
While this can seem like a comprehensive attempt to be transparent to consumers, anyone with half a brain should know that lenders can put any label on these things and put a price next to them.
They could jolly well insert a fee of $10/hour for the waiting time an approver had to spend on while waiting for an analyst and label it as administrative fees. The sad part is that there’s nothing a consumer can do about it.
The thing is that when a borrower needs to take a loan, he would be happy enough to have it approved.
So these fees are not a focal point for someone in desperation.
Lender controlled third party fees
This category of fee is often the source of great frustration on borrowers.
This is because these fees originate from third party service providers that are hired as required or appointed by lenders.
And borrowers have no choice other than to pay for them even if the service providers charge fees that are considered premium compared to market rates.
An example are appraisal fees when a mortgages is concerned. Most lenders do not allow a borrower to appoint an independent appraiser to appraise the value of the property in question.
They would only accept an appraisal report conducted by the appraiser they appoint.
Yet the fees are passed onto the borrower.
The appraisal company in this case, gets free clients without having to spend money on advertising.
Other lender-controlled third parties might include:
- Home inspectors
- Credit bureaus
Independent third party fees
Most people would be able to understand why a lender insist on an appraiser they appoint. This is so that they know they can trust the credibility of their appraisal as the value of a house is paramount when it comes to a mortgage.
It affects the loan to value.
But in other areas, lenders can be more flexible in granting a borrower the chance of selecting their own merchants and service providers.
These can include:
- Pest control
Legal work for example is an essential part of a mortgage. While lender might have a preferred approved-panel of law firms recommended to borrowers, the borrowers usually retain the right to appoint their own attorneys for closing.
This leaves home buyers and investors the freedom to hire their own less costly lawyers.
However, lenders that offer legal fee subsidies sometimes demand that borrower only hire those on their approved-panel to qualify for the said subsidies. Effectively having the borrowers’ hands tied.
Miscellaneous expenses and charges
These are all other expense items that you have to pay for out of necessity or by choice. And lenders don’t necessarily have knowledge about them.
Per diem interest would be classified under this category.
Since 1974, the Real Estate Settlement Procedures Act (RESPA) requires that lenders provide borrowers with a good faith estimate (GFE) depicting the settlement costs.
While this legislation was erected with the best intentions for the good purpose to helping consumers better understand the money they have to pay for settlement, the application of it does little to provide the type of clarity that would truly serve consumers.
This is because the declaration requirements are simply not specific enough.
It leaves a lot of room for lenders to say a lot without saying anything.
I can go hysterical going into the details. So it’s best that I just leave it at that.
Don’t put too much thought into the weight that a GFE brings to the table.
Ultimately, as a consumer, what’s most important is to know the total number of points, this might or might not include the origination fees, and lender-controlled fees to third parties.
If the lender guarantees them, all the better.
There is also a movement towards total settlement cost being more detailed and transparent. And it being sufficient for consumers to have an overall picture of what’s going on with all the charges.
I can see this being the norm in the near future.