Upfront Costs For Mortgage Loans

Upfront Costs For Mortgage Loans Prior To Closing

Gustan Cho Associates are mortgage brokers licensed in 48 states

This guide covers upfront costs for mortgage loans prior to closing. What would you do as a borrower if a lender asked for upfront costs for mortgage loans? The mortgage process is time-consuming and involves a lot of work for both the lender and the loan applicant. The borrower must complete a 4-page mortgage loan application, often called 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:

    • Transunion
    • Experian
    • Equifax

The middle credit score is used for which credit score the mortgage lender will use for credit qualification purposes. In the following sections, we will discuss the upfront costs for mortgage loans prior to closing.

Documents Required To Start Mortgage Process

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The loan officer will also request documents to start the mortgage process. Typical documents required are two years of tax returns, two years of W2s, and 30 days of paycheck stubs to determine qualified income. Tax returns are necessary if the borrower takes a lot of unreimbursed expenses. Federal income tax returns are not necessary unless the borrower has a 1099 side or rental property on their income tax returns, says Alex Carlucci, a senior loan officer at Gustan Cho Associates:

Unreimbursed expense figures will be deducted from the borrower’s income, and the adjusted gross income will be used to qualify for income. W2s will determine the hourly rate or salary the borrower makes.

Any deductions for itemized expenses such as child support 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 or investment account statements to determine the source of the down payment and closing costs for the home purchase.

Steps In The Mortgage Process

Again, the mortgage process is time-consuming. 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. The mortgage lender incurs a lot of time and costs. Credit reporting fees, processing fees, hours spent by the mortgage loan officer, hours spent by the mortgage company’s opening department, the underwriting department, the quality control department, the closing department, and the 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

What If Borrowers Does Not CloseIf a mortgage loan does not close and funded, the mortgage loan originator and the mortgage company do not get paid and cannot charge borrowers for the countless 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 hours they have put in. If a case takes longer than expected, the lawyer can ask for more money from 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 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 legal mumbo-jumbo terminology. Borrowers must sign and acknowledge the mortgage disclosures and sign and date them. 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 until they close on their home loan.

Asking Borrowers For A Fee For Hours Worked

A mortgage lender cannot sue a borrower if the borrower cancels their mortgage loan transaction until the closing date. It does not matter if the mortgage lender has put in more than 1,000 plus hours. If a borrower is unhappy with the loan officer or the lender during the mortgage process, they can cancel their mortgage transaction and walk away. Lenders are not allowed to charge any costs or fees.

Upfront Costs For Mortgage Loans: What Can Lenders Charge Upfront

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Borrowers should not pay anything upfront costs for mortgage loans except for appraisal fees. I have heard of some mortgage brokers who charge credit report fees upfront costs for mortgage loans, but those are very few. The only upfront costs for mortgage loans a lender can charge are a credit reporting fee and home appraisal fee, adds Alex Carlucci, a senior loan officer at Gustan Cho Associates:

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 asks you for upfront costs for mortgage loans, such as processing 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, processing, 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.

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