Lenders Holding Your Money Hostage

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My lender told me that there is an application fee?

He said an application fee of $250 and then we'll need the appraisal fee and of course we'll need an inspection. Does all this sound legit, is there always an application fee?

If they are asking for upfront money, they are trying to hold your money hostage to commit you to the deal. Most of the companies that do that know that 1) Better rates are available to the public and you're likely to find something better if you try, and 2) they're going to hit you with a bunch of extra stuff they didn't tell you about at the end.

Never pay for more than a credit report up front. You should want to choose the appraiser if you're going to pay them - that way you own the appraisal, not them. You should also choose the building inspector if you've got to have one - most refinances don't, but only a complete idiot wants to spend that much money to buy a property and doesn't pay a few hundred for the inspection first. If the lender orders them, they own them. They have to give you a copy, but you can't take it to another lender to use if this one hoses you.

Now, at closing, you can expect to pay some fees. How much depends upon a lot of factors. I tell people with entry level single family residences to expect about $3500 total in actual loan costs, plus whatever points are paid to buy the rate down, plus the expenses related to the purchase, which vary a lot. By the time you're done with title and escrow and appraisal and lender's fees, that's what it really is. I'd rather tell the truth and guarantee the total, but since most people don't realize how many games prospective lenders can play, quite often the person signs up with the person who talks a good game but won't guarantee the quote. Usually you can choose a higher rate to get some or all of your costs paid (I love doing zero cost loans myself, and they actually are a good thing for most clients), but there is ALWAYS a trade-off between rate of the loan and cost of the loan.

Nonetheless, the idea of money you pay before the loan is ready is to commit you to the lender. People understand checks that they write in their gut. That $1500 check for the deposit on the loan is more important to many people than the $450,000 loan that comes with it. As evidence, I have offered people loans that were more than $5000 cheaper on exactly the same loan type and rate, but people would not sign up for my loan because they didn't want to "lose" that $1500 deposit. I've shown people better loans at lower rates on exactly the same terms that saved $1500 per year in interest, and they wouldn't switch. Why? Because they are thinking about that money that came out of their checking account, that they scrimped and saved and set aside laboriously over a period of months, not the money in the loan, which is just as real, but they haven't had to save it, and they don't realize that it is real in the same way as that deposit check.

So lenders who want large deposits typically do so because they know that their loan will not stand the light of scrutiny, and competition from other lenders, so they want to tie you to them emotionally, with money you don't get back if you switch lenders. Money that you've physically got in your checking account, money that you understand on the gut level. Be very wary of this sort of lender. Seeing as there are many loan providers who will do your loan without requiring such a deposit, I would suggest you find one of them (or better yet, two of them) to do your loan instead.

Caveat Emptor.

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2 Comments

Brian Brady Author Profile Page said:

"So lenders who want large deposits typically do so because they know that their loan will not stand the light of scrutiny, and competition from other lenders, so they want to tie you to them emotionally, with money you don't get back if you switch lenders"

I think you're overreaching here, Dan. Do originators who ask for application fees or large deposits want to eliminate competition? Of course. That doesn't mean that the final loan will be unsuitable.

I think originators who work on difficult files can and should expect commitment from the borrower. Forward locking a loan requires that commitment.

Dan Melson Author Profile Page said:

Who defines when a file is a tough file? Maybe if you've been rejected at least two places, but I've seen so many that were told they were tough files, but weren't, but rather highly qualified A paper borrowers that Fannie and Freddie would be glad to fund.

I'm writing the the largest number of folks, not the uncommon exceptions. Most folks have files that are pretty routine. And for the vast majority of loan officers trying to get those loans, the idea becomes one of trying to cut out the competition, because if the competition is out of the game, they can make more money.

I make more money for those files that nobody else can do. I suspect you do as well. But they are not the average file.

Please be civil. Avoid profanity - I will delete the vast majority of it, usually by deleting the entire comment. To avoid comment spam, a comments account is required. They are freely available, and you can post comments immediately. Alternatively, you may use your Type Key registration, or sign up for one (They work at most Movable Type sites). All comments made are licensed to the site, but the fact that a comment has been allowed to remain should not be taken as an endorsement from me or the site. There is no point in attempting to foster discussion if only my own viewpoint is to be permitted. If you believe you see something damaging to you or some third party, I will most likely delete it upon request.
Logical failures (straw man, ad hominem, red herring, etcetera) will be pointed out - and I hope you'll point out any such errors I make as well. If there's something you don't understand, ask.
Nonetheless, the idea of comments should be constructive. Aim them at the issue, not the individual. Consider it a challenge to make your criticism constructive. Try to be respectful. Those who make a habit of trollish behavior will be banned.

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This page contains a single entry by Dan Melson published on May 2, 2008 7:00 AM.

Real Loans for Real People May 1, 2008 was the previous entry in this blog.

From How Much You Make to A Payment You Can Afford is the next entry in this blog.

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