When shopping for a mortgage, consumers need to take note of a very sneaky practice that is STILL commonplace in the mortgage world.
That is?
The ‘Up Front Fee’ that goes out of your pocket, into the lender’s, and magically disappears if you decide to not go through with the transaction.
A lot of lenders today, including some big ones that surprise me, charge non-refundable fees of around $400. They say it covers the appraisal, or the ‘rate-lock’, or whatever they can think of. BUT, if you call back even just 24 hours later, because you changed your mind, that money is gone gone gone. “I told you it wasn’t refundable”, they say.
I understand the rationale behind companies WANTING to keep people chained to them. In reduces the amount of ’shopping around’, for example. No one wants to walk away from $400- it’s a psychological ‘leash’, basically. It keeps the borrower close.
But, why would a consumer want to go with a company who is obviously so desperate for business they have to EXTORT people into sticking with them? Companies will keep charging the fees if consumers don’t say ‘No’. If everyone said ‘No’, those fees will go bye-bye.
If you can do so, avoid companies who charge up front fees, especially if they are labeled ‘non-refundable’. There is no reason for that. No excuse. I have never felt comfortable charging any kind of fee up front, and the appraisal is paid the day of, directly TO the appraiser, so my clients are on no ‘leash’. They can leave any time they want, and I am ok with that.
Walk away at the first hint of a company wanting money out of YOUR pocket for the privilege of doing business with them. Heck, these days WE should be paying YOU! 
Say it with me now ‘No Up Front Fees! No Up Front Fees!’
Very good.
Jennifer Monastero
Citizens Community Bank
Last 5 posts in Uncategorized
- A Question That Doesn't Get Asked Nearly Enough..... - November 27th, 2009
- "So, What Does The Dow Mean?" - November 25th, 2009
- One more way to stay in your home - November 23rd, 2009
- Renovation Financing: Can I change Contractors? - November 14th, 2009
- Understanding Adjustable Rate Mortgages Part III - November 13th, 2009
- Stumble it!
- Categories: Uncategorized
Comments
18 Comments so far
Brian Brady
Question (for fun): If you could lock-in a rate, .25% below market, and you felt it made sense to lock, but the investor required .5% upfront, would you advise your client to pay an up-front fee?
Jennifer Monastero
Well, two questions back at you. 1) is it ‘non-refundable’? and 2) what is the loan amount? I’d say I could stomach the fee if the loan amount was $100k, but not so much $700k. Also, if it was refundable, then yes, of course, go right ahead and pay it.
Brian Brady
Call it $400,000. For $2,000, non-refundable, up-front, you can guarantee a 30 day lock for your client, at 5.25%, for a 30-year fixed. Pricing we’ve not seen since Summer, 2003.
Remember, you think rates are headed higher (in this example)
Brian Brady
Point of Disclosure: I collect a non-refundable deposit for every loan I do. No exceptions.
Jennifer Monastero
Brian, you seem to like ‘numbers games’. I will humor you. IF the $2000 is credited to closing costs, then it’s really a question of the rate, and if it is really worth it to the client.
You could come up with more scenarios, but instead, why not discuss the philosophy behind charging your clients non-refundable fees? To me, it’s not a nice thing to do. If you are confident in your products and your abilities, why would you feel the need to collect a measly couple hundred bucks just in case they go elsewhere? I just don’t get the mindset.
It’s like cell phone companies that make you sign up for two years. I tell them ‘I don’t want a free phone, don’t put me on a contract’, and what do they do? PUT ME ON A CONTRACT. If they weren’t worried about competition stealing my business, they wouldn’t need a contract from me, and a bogus fee looming if I leave. How about having good pricing, good customer service and a low rate of dropped calls??? Who needs all that good stuff when they get paid $175 even if I walk away? See, the motivation for them to DO THE ABSOLUTE BEST goes out the window. And some people need motivation to do a good job.
I imagine you got burned a lot out there in Cali, and if so, I understand your reasoning to a certain extent. You don’t want to waste your time with people who aren’t serious about working with you. I can tell right from the first conversation if they are worth it to me or not, and if I think they’re not, I tell them to go elsewhere. It’s that simple. I waste no time, and I certainly don’t wrangle them in with an up front charge. Not worth the energy to me.
That was long-winded for the morning.
Brian Brady
Lets’ stick to the hypothetical question. We can debate the terms of my employment agreement later.
Yes, the $2,000 is applied to closing costs and the rate would have been 5.25%, yesterday. Would you have advised your customers to pay the money?
Jennifer Monastero
Brian, I hate hypothetical situations. Give me a real life example please.
The topic of the blog is up front fees in general- application fees, ‘commitment’ fees etc. NOT solely rate lock fees. Why do you choose to focus on that one? Is that what you call your fee?
Brian Brady
“Brian, I hate hypothetical situations. Give me a real life example please.”
I offered this to a new customer (stranger from the website) yesterday, at 9:30AM. The pricing was .25 discount and 1% origination; the $2,000 will be applied towards the final closing costs. The customer deposits that money with an escrow company along with a copy of our origination agreement.
“Is that what you call your fee?”
I call it a non-refundable deposit towards closing costs. If we fail to doc the loan within 17 days, and the customer follows the terms of our origination agreement, the money is refunded immediately.
Jennifer Monastero
Your real life example means nothing without knowing the rate (was it really 5.25%?). Was it a ‘par rate’?
Jennifer Monastero
If it was 5.25%, you shouldn’t have to charge them anything- the odds of them walking away from you are so low- why would you ever feel the need to hold something over their heads to get them to stay??? Now, if you were giving them 5.75%, and you thought rates would go lower- then yeah, sure, sign ‘em up! I don’t understand your logic here.
Rhonda Porter
I collect a deposit for the appraisal, credit report, title cancellation and underwriting–UP FRONT. These are hard costs. In the event the transaction does not close, the borrower is refunded the balance (for example, if the appraisal was not ordered but credit and underwriting was, they would receive the difference).
I do not “spend” my clients deposit until we have an approved transaction.
Jennifer, are you absorbing appraisal, title, credit (third party) costs on your transactions if they do not close?
Jennifer Monastero
Appraisal is paid to the appraiser, so no, I am not absorbing that. As for credit report charges, that’s a cost of doing business, isn’t it? Just be selective in who you run reports on. As far as title goes, that’s up in the air. Usually, title isn’t ordered until the purchase contract is signed. And I’ve never eaten a title search fee yet, nor have I been asked to.
But, Rhonda, charging a non-refundable fee is what I am talking about. If someone pays Ditech $500, and then decides they don’t want to use them, that money is GONE. It has nothing to do with what ‘hard costs’ were paid out, or not paid out. They get NONE of it back.
It sounds like you have a happy medium here- you charge for your hard costs, and whether it works out or not, you are covered. Also, you are not charging a percentage up front that is above and beyond what your ‘hard costs’ would possibly add up to. Still, I would have a hard time doing that. To each her own.
Nic
Why don’t we call a spade a spade here Brian. What is the purpose of the Upfront Fee? Very simple question.
Jennifer Monastero
Amen Nic!
For the record, and I guess I’m more in agreement with Rhonda here, if there are fees that need to be paid out, of course the borrower should pay them. BUT, that has little to do with the up front fees I speak of. A potential client calls up, says they want a GFE, and the response is ‘Yeah sure, let me run your credit and take a $495 non-refundable deposit from you! How does that sound!?’. That’s what I don’t like. But again, too each her/his own.
David Conaway
Suggestion - let people make the choice. It’s ok to collect and ok not to collect. It’s ultimately up to the consumer – isn’t it? If they choose to pay, THEY made that choice. There’s nothing wrong with that choice as long as they’re dealing with a reputable lender. I don’t collect but that’s my choice. I’m not sure collecting vs not collecting is really that important in the scheme of things. The question I want answered is where do you get this much time to post on the internet all day? Oh yeah, can’t we all just get along? Best of luck to you.
Justin Sheftell
It seems pretty clear Brian is referring to a mandatory lock here. It is a benefit to the client to obtain the better pricing and of course they need to put the money on the table up front because if they back out that money is lost to Brian’s investor.
However the topic of this post is more geared at Quicken/Ditech/Countrywide habits of getting the money before any true approval or disclosure is done. I think we have two totally separate issues here.
Jennifer Monastero
David, I have no idea where Brian gets all that time.
You’d have to ask him directly. As for the topic at hand, it IS a choice and one that I am trying to have consumers actually think about before they hand over any of their hard-earned money.
Justin, you are correct. Having the borrower pay for certain fees, as they come along, is one thing. But to take an application AND a check at the same time is pretty ludicrous. Non-refundable means non-refundable, and you know what those lenders do? They say that they can’t offer you what was on TV, but CAN approve you at a higher rate. What does that mean to the consumer? Take the higher rate, or lose that money. After all, they were able to ‘approve’ you, so you have no recourse… This is a good way to do business???
Free Loan Modification Kit
I wouldn’t urge anyone to hire a company that charges up front fees, another thing to watch out for is “Law Firms” that charge “Retainers” make sure their is actually an attorney there and not just someone renting out their license to a company. If its a law firm you should be able to speak with an attorney before you pay anything in my opinion. If they are to busy to speak with you then look elsewhere