Are these normal numbers on a loan disclosure?

Question

Trying to do my first deal and I just recieved a loan disclosure that breaks my deal. With a 714 FICO, 20% down on a $65k purchase they are quoting   a rate of  8.5% , adding 4.5 loan points, and a total of $8,825 in closing costs. All this for a $52,000 loan?  I didnt expect greatness in these times but it feels like these numbers are crazy. Any thoughts from the community on these numbers?

Randall Alan · Answer

@Aubrey Ford

Your challenge is that this is a very small loan (compared to a more typical loan size of $100-300k).  On smaller loans there isn't as much profit in them, so lenders and brokers may charge more to make it worth their while to write the loan for you.

Traditional lending for investment properties in my area was in the 7% range last time I checked.  Hard money was in the 10-11% range.  You don't say what type of lender you are getting this quote from ... so it's a bit hard to tell how great / bad it is.  For a hard money lender it looks about right... and the rate actually looks low.   A couple of points would not be unusual in todays market for a traditional lender as well.  Keep in mind that 4.5 points is $2,340... whereas on a $200,000 loan it would be $9,000.  I know that's sort of obvious.. but the point is that on such a small loan the fee as a dollar amount doesn't look so out of proportion.  Also, your FICO score, while descent, isn't 'outstanding'... so you are probably taking a little bit of a hit there as well.

I guess it depends on how they are breaking up their other fees.  If they are then stacking on a processing fee, a document prep fee, etc I would go back and press back on them that the points look high given the profit they are adding in the other places.  Many of these things are open to negotiation if they think they are going to lose the deal.  But my guess is that they will counter with the size of the loan warrants the extra expense given the low profit margin.  You can always shop the loan at a couple of different places and see who comes out on top.

Wish you the best!

Randy

Jay Hurst · Answer

@Aubrey Ford  Small loans are expensive for a couple of reasons. The first is the a good portion of closing costs are the same on a 65k purchase as they are on a 650k purchase.  So, a maybe  800 underwriting fee for example cost as a % of the loan is a lot bigger on a 65k loan then on a 650k loan. But, even more importantly most lenders have what are called "adjusters" the smaller the loan is which drives up either the rate or the costs, and in a lot of cases both of those. The economics on funded small loans is just not good for lenders meaning they do not make enough money to justify the costs of funding the loan.

That all being said your numbers look pretty out of the market assuming you are trying to go full documentation meaning you are qualifying with your W-2 income etc.  The first thing I would do if I was your LO would be to advise you to put down 25% instead of 20%. You would get a better rate AND likely drop your 4.5% points at least 2 points.  So, that would just require 3% more dollars out of your pocket with all 5% going to equity as compared to 2% just going to fees with 20% down.

Aubrey Ford · Answer

@Randall Alan Thanks for insight!. The loan is not hard money, its a standard conventional based on my W-2. one of the reasons the numbers were shocking. I had a prelim rate check with a different lender that was putting me at a 7.125% but they could not meet the close date requested by the seller. So I went to this broker instead figuring the rates woudl be at least comparable... Boy was I wrong LOL. Guess my newness is showing..

Aubrey Ford · Answer

@Jay Hurst Thanks for the feedback. Agree that the smaller loans tend to be more expensive, which I did expect. Was just a bit of shock to see how much. Thank you for the idea of 25% i makes way more sense. If I'm going to pay all that, better it go to principal, lower the rate, points, payments,  rather than fees that do not benefit me...