Thursday, July 20, 2006

How to minimize the risk of paying extraneous fees at closing

This post on TheLandlordBlog talks about how HUD-1s are never correct, and I completely agree with this. It seems like many mortgage brokers and title agents go out of their way to pull the wool over your eyes, and that the first and last time you'll see these extraneous charges are on the HUD-1. For an inexperienced investor, these pointless charges can go undetected and get paid. If the mortgage brokers are questioned, they will be removed, but you have to know to look.

From my experience, dealing with a mortgage broker requires extra care compared to dealing with a bank. The worst experience I've ever had dealt with one company who slapped on several thousand dollars in fees that I saw for the first time on the HUD-1 (at the closing, because "it wasn't ready until then"). I was refinancing two properties at once, and planning to use the money to purchase another. When I looked over the HUD-1, I noticed that there were several extra thousand dollars in fees to the mortgage broker and to the bank. Things like "Processing fee", "Commitment fee", "Appraisal review fee", "Funding fee", and of course the unexpected 1-point "Loan origination fee". None of these items were listed earlier when the broker was enumerating my closing costs. And although I had never heard of any of these fees before closing, they wouldn't remove any of them. I ended up just dropping the deal and walking out of closing, because the people were just too slimy. Since then I much prefer banks = )

While most cases aren't typically this bad, there still may very well be a few hundred dollar fees that can and should be removed at closing. Here are a few things that you can do to minimize the risk of getting taken advantage of at closing:

  1. Be familiar with the process and know what fees are typically paid at closing.

  2. Ask your loan officer to enumerate all expected closing expenses when first applying for the loan. While unexpected costs can and do occur, it is helpful to remember verbatim what was stated earlier to make sure that he was at least being somewhat honest with you.

  3. Go through every line in the HUD-1 with somebody who is both good at math and understands the process. Ideally this person should have no financial stake in the outcome.

  4. Be prepared to walk away from the deal. If you are not, they'll smell blood and won't budge. You'll end up getting jammed with the costs.

  5. Shop around early in the process, use a bank or trusted/recommended mortgage broker (recommended again by somebody who doesn't have financial interests in the deal).

  6. Use your own title agent

  7. Don't be too excited/excitable, you need to be able to think rationally during closing.

  8. Use a lawyer

Any other suggestions?

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