This BLOG On Upfront Costs For Mortgage Loans Prior To Closing Was UPDATED On June 9th, 2019
What If A Lender Is Asking For Upfront Costs For Mortgage Loans?
The mortgage process is time-consuming and involves a lot of work on behalf of both the lender as well as the loan applicant.
- The borrower first needs to complete a 4-page mortgage loan application, often referred to as 1003
- Once the mortgage loan application is completed, the loan originator will run credit
- It is a tri-merger credit report where the credit report consists of three credit bureaus:
- The middle credit score is used for the purposes of which credit score the mortgage lender will use in credit qualification purposes
In this BLOG, we will discuss Upfront Costs For Mortgage Loans Prior To Closing.
Documents Required To Start Mortgage Process
The loan officer will also request documents to start the mortgage process. Typical documents required are two years of tax returns, two years W2s, and 30 days of paycheck stubs to determine qualified income.
- Tax returns are necessary because in the event the borrower took a lot of unreimbursed expenses, those figures will be deducted by the borrower’s income and the adjusted gross income will be used to qualify income
- W2s will determine the hourly rate and/or salary the borrower makes
- Any deductions for itemized expenses such as child support and/or alimony deductions or wage garnishments and the most recent paycheck stubs are necessary to determine year to date income and the amount the borrower makes
Loan officers will also request asset information such as 60 days bank statements and other asset information such as 401k statements and/or investment account statements to determine the source of down payment and/or closing costs for the home purchase.
Steps In The Mortgage Process
Again, the mortgage process is a time-consuming process
- The mortgage process normally takes at least 30 days to close on a home loan from the date the loan officer gets the signed mortgage disclosures back to the date of the home loan closing
- A lot of time and costs is incurred by the mortgage lender
- Credit reporting fees, processing fees, hours spent by the mortgage loan officer, hours spent by the mortgage company’s opening department, the underwriting department, quality control department, closing department, and funding department
However, on every home loan, the mortgage lender does not get paid unless the mortgage loan closes and funds.
What If Borrowers Does Not Close
If a mortgage loan does not close and fund, the mortgage loan originator and the mortgage company does not get paid and cannot charge borrowers for the countless of hours worked:
- Lenders do not work as lawyers
- With attorneys, they are allowed to ask for retainers in advance
- Attorneys can charge their clients for the number of hours they have put in
- If a case takes longer than expected, the lawyer can ask for more money by their legal clients
- This is not how the mortgage business works
There are strict mortgage rules and regulations that restrict upfront costs for mortgage loans and mortgage loan borrowers need to be aware of this.
Upfront Costs For Mortgage Loans: Am I Obligated To A Particular Mortgage Lender?
Borrowers will get dozens of pages of mortgage documents once they decide to choose a particular mortgage lender.
- These mortgage disclosures can often be confusing with a bunch of legal mumbo jumbo terminology
- Borrowers will need to sign and acknowledge the mortgage disclosures and sign and date it
- One thing borrowers need to realize is borrowers are protected by federal and state mortgage lending
- Borrowers are not obligated to go with any particular lender
- Borrowers can cancel their mortgage loan transaction up to the date they close on their home loan
Asking Borrowers For A Fee For Hours Worked
A mortgage lender cannot sue a borrower if the borrower ends up canceling their mortgage loan transaction up to the date of the mortgage loan closing.
- It does not matter if the mortgage lender has put in more than 1,000 plus hours
- If a borrower is not happy with the loan officer or the lender at any time during the mortgage process, they can cancel their mortgage transaction and walk away from it
- Lenders are not allowed to charge any costs and/or fees
Upfront Costs For Mortgage Loans: What Can Lenders Charge Upfront
Borrowers should not pay anything upfront for residential mortgage loans except for appraisal fees.
- I have heard of some mortgage brokers who charge credit report fees upfront but those are very few. If a mortgage broker or loan officer asks you for an upfront fee for them to run your credit report, go somewhere else
- Most lenders will not charge anything upfront
- Lenders cannot charge you any upfront costs for mortgage loans except for a third party home appraisal fee
- If a lender is asking you for upfront costs for mortgage loans such as processing fees and underwriting fees, that is not legal and they are not following proper mortgage lending rules and regulations
A lender can charge you credit reporting fees, processing fees, and underwriting fees. That needs to be disclosed on the closing disclosure. That needs to be charged as part of the closing costs at the closing of the home loan.