If you’re in the process of closing on a new mortgage loan to purchase your home or refinance an existing mortgage, you might find the paperwork provided confusing and misleading. You may have already received a copy of the Good Faith Estimate from your discount mortgage broker and are finding that the actual closing costs and fees are nowhere near what you were promised.
How can you make sense of the actual charges associated with your new mortgage before closing and is too late to bail if the loan is not what you wanted?
Using the HUD-1 statement to reconcile what your mortgage loan broker promised on your Good Faith Estimate will give you an accurate picture of your loans actual fees and closing costs. Here are tips to help you make sense of this important mortgage document.
The Good Faith Estimate Is Not Reliable
Your Good Faith Estimate is just an estimate. The law requires that your get this document after submitting your application; however, it does not require that it accurately reflect the fees associated with any mortgage offer. After all the Good Faith Estimate is only an estimate and mortgage brokers frequently low ball closing costs and leave their markup of your lowest mortgage rate off this document completely.
If your Good Faith Estimate is all but worthless, how can you effectively comparison shop? Should you rely on the Annual Percentage Rate (APR) like your bank would have you do when taking out a mortgage? The Good Faith Estimate may be bad for comparing mortgage loan offers online but the Annual Percentage Rate is worse. When it comes to comparing closing costs using Good Faith Estimates from several different mortgage companies and brokers will give you a good idea of the average costs for the area you live; however, it won’t give you an accurate picture of your mortgage broker fees. Because many of the closing costs you encounter come from third party companies any broker that lists these charges much lower than the others can be easily identified as low-balling.
Despite its shortcomings the Good Faith Estimate is still the best way to compare loan offers to find the best mortgage deals, provided you reconcile with the HUD-1 statement before closing. What should you look for on your Good Faith Estimate/HUD-1 before signing the loan contract? You already know that comparing estimates from several different brokers and discount mortgage companies will give you a good idea of what average closings costs are where you live, but what about broker markup and garbage fees? There are a number of charges invented by your mortgage company or discount broker that you need to be on the lookout for.
Mortgage Garbage Fees
Garbage fees come mostly from your mortgage company or broker. If you find anything on your Good Faith Estimate that resembles an application fee, processing fee, broker courier fee, rate lock fee, or broker rebate you’re looking at thousands of dollars in unnecessary junk fees. Here’s a rundown of these mortgage junk fees:
Rate Lock Fee This is a fee charged for supposedly “locking in your mortgage rate.” First of all, lenders do not charge a fee for locking. Period. If you find this fee listed on your Good Faith Estimate or HUD-1 Statement it has been completely fabricated by your mortgage broker and is destined for their pocket. Never agree to pay a fee for locking in your mortgage rate.
Loan Processing Fee Some mortgage brokers claim that they use “professional loan processors” to prepare your mortgage application before sending it to the underwriter at the lender, charging as much as $500 for this “service.” What does loan processing entail? Making copies, collecting signatures and Fedexing documents to the underwriter at the mortgage lender is not worth $500 of your money…don’t fall for this one.
Application Fee Another useless junk fee. You might have to pay for credit reports; however, don’t pay for an application fee on top of paying for your credit history. This is just nickel and diming your money away.
Broker Courier Fee This is another made up fee that will be going directly into your mortgage broker’s pocket.
Broker Rebate This is a big one. If you’re not already familiar with the broker rebate or Yield Spread Premium you will need to carefully read the next section of this article. Neglect this area of the best mortgage and you will overpay thousands of dollars in unnecessary finance charges for the entire duration of your loan.
So What is Yield Spread Premium?
Yield Spread Premium or YSP for short is the “rebate” your mortgage broker receives from the wholesale lender for charging you an above market mortgage rate. This markup of the wholesale mortgage rate that your lender approved you is what makes mortgage interest rates retail by nature. Online Mortgage lenders encourage this overcharging with the discount broker rebate because they make the majority of their profits selling loans with above market rates to investors on the secondary market. The problem with this “broker’s rebate” is that it is rarely disclosed and could raise your lowest mortgage payment by hundreds of dollars every month. Question the average mortgage broker about Yield Spread Premium and you’ll have a defensive and often angry person on your hands.
And why not? Yield Spread Premium doubles, often triples the compensation they receive from your loan. Is the broker rebate dishonest? Because the average mortgage broker website tries to explain away Yield Spread Premium or tells you not to worry about the broker rebate because it’s not being paid out of your pocket it IS dishonest.
How Can You Tell If Your Mortgage Has YSP?
Finding Yield Spread Premium in your loan documents can be difficult. The first opportunity you’ll have during the mortgage process to spot the infamous broker rebate is on your wholesale lender’s rate lock confirmation. Once you’ve agreed to lock in your mortgage rate if you’re dealing with an honest mortgage broker you will receive written confirmation FROM THE LENDER. Shady mortgage brokers will try and pass off written confirmation typed up on their own letterhead. If you get rate lock confirmation like this from your mortgage company or broker, you have not locked in your mortgage rate. Unless you have written confirmation FROM THE LENDER you could be a victim of a bait-and-switch scam when the loan you were promised falls through because your mortgage broker did not properly lock in your mortgage rate.
Once you have written confirmation of your rate lock from the lender any Yield Spread Premium will be clearly indicated on this document. If you’ve already locked in your rate and either didn’t get written confirmation or got it from your mortgage broker the next opportunity you’ll have to discover the broker rebate or Yield Spread Premium is on your HUD-1 Settlement Statement. You should always request this document prior to closing and should be provided a copy 24 hours before closing on your new mortgage.
Once you have the HUD-1 statement from your lender you’ll find that it closely resembles the Good Faith Estimate you received. If Yield Spread Premium you will find it around lines 810 or 811. If these lines are blank you’ll have no broker rebate…that’s exactly what you want to find on the HUD-1 statement. If you find a “Broker Rebate” with a number next to it you’ve got Yield Spread Premium, and yes that large number is in dollars. This is your mortgage broker’s cash compensation for overcharging you. In most cases this is being paid in addition to the origination fee you’re already paying for the broker’s services (and are probably overpaying).
If you don’t find the broker rebate on your HUD-1 statement be sure to look for any other fees payable to the mortgage broker like processing or broker courier fees. The broker rebate or Yield Spread Premium is frequently referred to as POC charges, meaning Paid Outside of Closing. This is simply legal speak for Yield Spread Premium…don’t be fooled.
Don’t Get Ripped Off
Most homeowners get ripped off on their first few mortgages because they just don’t know better. You can prevent your mortgage broker and lender from ripping you off and save thousands of dollars per year on your next mortgage by doing your homework and learning how to negotiate for wholesale mortgage rates.
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