Lender Tricks - Watch Those Hidden Fees
November 13th, 2007 Categories: Mortgage and Finance
When selecting a mortgage company to finance that new Raleigh home, be sure to make your comparison carefully. Buying a home requires most people to get a mortgage. If you don’t get a mortgage very often, it can be a little confusing. Or maybe a lot confusing. Mortgages have lots of moving parts. There are a bunch of fees and costs that are typically accounted for at closing. These costs vary from lender to lender and comparing offers from mortgage companies is not always easy.
Here’s an example of what I’m talking about. I just had a client select the builder’s “preferred lender” primarily because of some closing costs they were going to pay for them. As always, I recommended a lender who I know and trust to take care of my client. The quick comparison my client did between the two lenders resulted in a $1,000 advantage to go with the builder’s recommendation.
The offer from the builder’s preferred lender was for $1,000 of lender paid closing costs. After applying for the loan, the client asked me to look over the good faith estimate and let them know if everything looked okay. The rate was in line with what is currently available. All the usual fees were present and accounted for. Then I noticed, shall we say, an unusual item that caught my eye.
The $1,000 lender paid closing costs had turned into $1,146. Hey, when an amount someone is going to “give” you is larger than expected, that’s a good thing, right? Not in this case. I immediately began looking to see if I could figure out why this was such an odd amount.
It turns out there was another odd amount on the good faith estimate. The loan origination fee was 1.56%. Hmmm, why wasn’t this amount 1.5%? Or better yet, what wasn’t it 1%, which it is most of the time? Well, a quick check of the math revealed that 0.56% of the loan amount was exactly $1,146.
So, what had actually happened here was the lender had taken an extra $1,146 from my client and simply given it back. The original $1,000 closing costs that the lender offered to pay did not exist. It never existed. It was my client’s own money.
Maybe even worse than that is the fact that this lender has much more to loose by disappointing the builder that he does by disappointing my client. One loan versus many loans. They don’t call him preferred for nothing.
The moral of this story is; Remember that old saying… “If it sounds too good to be true, it probably is.” Or how about the one that goes, “there’s no such thing as a free lunch.” Okay, enough with the old sayings already. You get the point. Be careful when making comparisons and seek the advice of someone you trust.
Bob,
Sounds to me like Raleigh, NC. is very luck to have a fiduciary agent such as yourself. Great job in pointing that out to your clients.
Up here in the North Georgia Mountains, we don’t deal too much with similar instances. We deal primarily with second homes, so most of our buyers are cash buyers or they already have an established relationship with a lender. However, when the opportunity arises, we do educate them on the best and most trusted in town.
Chad
Great catch. Now that lender lost a bunch of loans. Hard to believe they would have the nerve to do that.
Chad - You’re lucky not to have to deal with this issue. Our market here in Raleigh is about 40% new construction homes. Almost every builder has incentives tied to using their preferred lender/attorney. My job is, as you say, to be a fiduciary for my clients. Working with unknown lenders and attorneys creates more possibility for things to go really bad when the train jumps the tracks. I counsel my clients to get the very best terms possible from a lender, and if at all possible, make it someone we have a relationship with who can be called to task when problems arise.
Marty - You can bet I’ll be cautioning anyone I have who is considering working with this lender in the future.
Good catch! That’s why it is so important that buyers select a real estate agent who is knowledgeable about all aspects of buying a home. I want to point out that just because this particular lender did that, that is in no way the “norm” with builder’s preferred lenders. As a preferred lender for a builder, my builder truly pays the closing cost incentive they offer and I don’t have to “build it in” anywhere. Thank you for educating people to truly look at the estimates. It is difficult to truly compare estimates these days when there are so many different ways to structure a loan. It’s nice that your buyers have you to help make sense of it all.
Hi Sheri,
It’s good to hear from you on this! You are a great example of a builder’s preferred lender who does NOT use tricks like what I recently encountered. I have worked with you on several occasions and the experience was great! I look forward to doing it again!
Unfortunately, when things like this happen it puts everyone on the defensive and gets us looking with suspicion at incentives. For the record, I should let everyone know that I have had other clients who took advantage of genuine incentives from builders using preferred lenders that were not recovered through hidden, or puffed up fees.
At the same time, it has happened enough that it is worth “watching for.” The best advice I can give any client is to get good faith estimates and compare them carefully. Clients should ask their Realtor’s advice. A good agent who is watching out for their clients’ best interests will tell them the truth and help them understand when estimated closing costs look real and when they don’t.