How Do Lenders Hide Fees?

I received this email from a reader last night:

I’m about to close on a home in Washington with a [major builder in a subdivision].  This is my first home and I enjoy reading your blogs.  I’m in the process of shopping for a lender.  I just wonder if you had any experience with [Builders Mortgage Company].  I’m being offered $5,000 toward closing fees [if I work with the builders lender].  I have been told to watch out for hidden fees that would wash away the $5,000 in the long run.  The good faith estimate is comparable with other lenders.  How can a lender hide fees?  How much time do I have left before I have to decide on a lender?

How can a lender hide fees?

For starters, the house could have the credit for the closing cost built into the sales price.   I have worked with agents who have negotiated the same credit working with me (not the builders preferred company).  Some builders won’t budge.
On a good faith estimate, a Loan Originator may claim that certain fees are estimates only.   You really should only shop a LO by the fees shown in section 800 of the Good Faith Estimate.   And as I’ve discussed in previous posts, rate shopping can be quite a fruitless task.      Ask a Mortgage Professional, perhaps one that you received an estimate from all ready, to review the good faith estimates that you have all ready received.   

I suggest asking your Loan Originator if they will guarantee your closing costs within $100 of Section 800 of your Good Faith Estimate.   This means that once you are approved and have locked in your interest rate, the LO should be able to provide you with closing costs plus or minus $100.   If they won’t guarantee this, I would find a LO who will.

Watch for prepayment penalties which are disclosed on your Federal Truth in Lending.   Loan Originators can make up for dollars lost there.   If the box marked on the TIL states their “may be” a prepayment penalty, ASK!  If you find out at closing you have a prepayment penalty and your Loan Originator did not disclose this upfront, don’t stand for it!   The Escrow Officer should not be the person informing  you of a prepayment penalty.   

Some Loan Originators will play with costs outside of section 800 on the GFE to make their fees seem lower.  Title and escrow we have no control over and it can vary quite a bit.  Some LOs will throw in very lower than actual title and escrow costs.  You can ask them who they’re using for rates or what their reference is.  The purchase and sale agreement dictates who title and escrow providers are and what the level of title insurance will be.

Other ways LOs may contort their closing costs is with reserves and prepaids.  Unless you have a closing day that is set or that you’ve provided a LO, Loan Originators should use 15 days.  If they’re using 0 days of prorated interest with no closing date provided, they may be trying to pretty up their Good Faith Estimate.   The amount of taxes that is required is based on when your first mortgage payment is due.
What you really need to watch when working with a builders lender who is offering $X in closing fees is the rate at the time you lock with the builder’s lender.

Contact three people you respect and trust (tax advisor, financial planner, friend, co-worker, etc.) and ask for referrals.   Ask them for their mortgage professionals and then call and ask for rate quotes based on locking with a closing date of [when you’re closing] and based on the total fees in section 800 of the GFE.   1% in your loan amount typically equals 0.25% to rate.  If your loan amount is $500,000, and your rate is 0.25% higher than the going rate, the LO may have made $5000 to compensate for the credit.

I would never recommend going blindly with any lender unless they were referred to you by someone you all ready know and trust.  Do you know the builder personally or have any reason to trust them?  If it’s the builder’s mortgage company, they have double incentive to do your loan and there are no free lunches.

Let your LO and the escrow company know that you will require a copy of the HUD-1 Settlement Statment at least one business day prior to your signing appointment.   Compare this to your Good Faith Estimate and contact the LO and if there are descrepencies.  Bring your Good Faith Estimate to your signing appointment.   

Inform the LO when your signing appointment is and ask them to be available (by telephone at the very least).   Call your Loan Originator from your signing appointment if you find errors they need to correct and be prepared to call their bluff if they don’t.  After signing, you have less power to make corrections, if needed.   Don’t be afraid to contact your real estate agent from the signing table if you’re experience other than what you have expected from your Loan Originator. 

Escrow is (supposed to be) a neutral third party. They cannot tell you that you’re receiving a bum deal and they don’t always know for certain if you did (they may have a hunch.   I can tell you from working the escrow side before being in mortgage, things look pretty different from the Loan Originators shoes…but you witness what seems to be people getting bum deals when you’re in escrow).

How Much Time Do I Have Before I Have to Decide On a Lender?

All Loan Originators desire 30 days for closing.   Some of us “magicians” will pull off two weeks or less.  I don’t recommend this—it’s stressful for all involved.    The quicker you can decide if you want to work with the builder’s lender, the better.   However, if you feel you need to make a change and that you’re getting a bum deal from your current lender you do have the right to switch during the process.  Effective later this month, buyers will need to notify the sellers and essentially ask permission to switch lenders per the revised NWMLS purchase and sale agreements.   Depending on how the market is, this will give builder-sellers the chance to bump buyers if the homes in their subdivision are selling for more than when the contract was written.   This is all the more reason to do your homework about who your Mortgage Professional will be before you enter into a purchase and sale agreement Ideally, you should select your LO well before you begin shopping for your next home.

Hopefully you have found the right Loan Originator (what I like to refer to as a Mortgage Professional) from the get-go and this is all moot.   Please don’t blindly go with any Loan Originator that has been referred to you by someone who has an interest in your transaction closing.   If you have any doubts about your Loan Originator, get a second opinion NOW (yes, I’m shouting at ya…forgive me and thank me later).