Mortgage lenders are insidious at piling on garbage fees as part of closing costs. As a real estate investor, you need to take steps to minimize these costs. If you don’t, these questionable fees can easily add up to more than $6,000 on a $200,000 house purchase.
The government has attempted to control these costs but not very effectively. Federal law requires lenders to provide a good faith estimate of settlement charges a minimum of three days after you apply for a loan. There are several things wrong with this. One is that actual costs can increase as much as 10% without you being told before you sit down at the closing table. The other major issue is lenders are not required to provide the good faith estimate until after you complete the application paperwork. Who wants to fill out all of the paperwork only to decide the fees are out of whack with reality?
Shop for Closing Costs
That’s exactly where you begin lowering your closing costs. By shopping around for reasonable closing costs. I know that as an experienced investor, you likely have a favorite lender that you repeatedly do business with. However, maybe it’s time you do a little shopping around to be sure they’re giving you the best deal for your repeat business.
We all know there aren’t big volumes of real estate deals closing these days. The fact is, lenders should be competitively seeking your business. Start by requesting good faith estimates from a half dozen different lenders. The first ones you want to throw out are those that won’t provide an estimate without a completed application. They must have something to hide.
You don’t need to nitpick each fee to learn which is lowest. Your objective is obtaining the lowest overall cost. To find this, add up the total fees for each of the lenders you have information from. This gives you an instant picture of which ones are over charging. Put aside those that are clearly unreasonable.
As a rule of thumb, total costs should be between 3% and 5% of the purchase price. These include non-negotiable costs like property taxes and government fees.
Next, you want to take the lowest two or three to negotiate with. Some fees are more negotiable than others. Fees for services provided by third parties may not be negotiable but the lender is responsible for using expensive third party services. These include title searches, appraisals, attorney fees, and title insurance. Often, lenders are locked into these costs contractually. However, if one lender charges substantially more for a third party service, you can always ask why and ask how you benefit from the expensive services they provide. Point out the discrepancy to the lender and ask them if they can be more competitive.
Look for Fees to Negotiate
Now, look for fees that can easily be negotiated. These include administration charges, credit checks, courier services, and documentation fees. The industry term for these is “garbage fees”. Usually there is no factual basis for how these fees are determined. The lender just charges a percentage of the amount being loaned to increase their profit.
For instance, some lenders charge $125 for a credit report while most charge $50. Their cost is less than $50 and you should ask that it be brought inline with what it actually costs them. Question all of these fess including settlement costs, underwriting fees, and application fees. Remember, you don’t care which fees they lower, you want the all around lowest closing cost.
But keep the loan terms and interest rate in mind. You don’t want to negotiate a $200 saving at closing just to end up paying $50 more in interest every month.
Remember, you can walk away any time right up to closing. Once you narrow your choice to one or two lenders, complete the application so you can obtain your binding good faith estimate. You want to compare this to the unofficial estimate you already have.
Finally, request a copy of the HUD-1 settlement statement a couple of days before closing. Do one more comparison to the good faith estimate to be sure everything is still inline with what you have agreed to.
Following these simple steps will put more profit in your pocket from every deal you make.
Author bio: Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years. He also draws upon 25 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest in the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite direction.