Is it necessary to pay loan fees upfront?

Question

I'm applying for a $125,000 construction loan. Lender wants 1 pt. and is offering 5%, due in two years.

He wants the 1 pt. ($1250) upfront. I told him I'd prefer it be deducted from loan proceeds. He claims it's refundable if the loan isn't approved, but I'm leery. Was burned once before by paying   a loan broker before getting the loan. Any advice from anyone?  thanks

Chris Mason · Answer

If it's truly refundable, why wouldn't this fellow include it as a closing cost? EG, you pay if and only if the loan closes, and if you don't pay it doesn't close. Everyone is protected.

Ed B. · Answer

update:  I asked this broker how he's going to verify my worthiness for being approved for a loan without knowing my SS#: His answer:  "By ur references and. We will run ur name."

Yeah, right! He's going to loan $125K without checking my credit history via my SS #? Sorry for wasting everyone's time checking out this joker, but as least my suspicions have been confirmed.

Ed B. · Answer

thanks for all the great info. Joel, and for  helping me better understand how brokers operate.

Joel Owens · Answer

First off you need to determine WHO you are talking to.

There is an actual:

1. Bank - private non-bank direct lender

2. A mortgage broker that works with sourcing debt in the capital markets that works with the direct parties above.

3. A point or fee taker in a daisy chain trying to introduce a lender or source to fund a loan. These type of people are nothing more than hand offs. If they take a fee upfront and the source doesn't perform you are screwed. They get their little fee and you are sol. Not only can you get damaged on the deposit money to them but also if your loan fails and contingencies have passed in the contract you stand to lose some or all of your earnest money if the seller will not extend time for you to find other financing.

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I have so many credible sources on the commercial side that I don't work with point takers. A lender deposit is typical but that goes for appraisal, inspection, lender legal, etc. and goes direct to the lender. You get instructions direct from the lender where to send funds. Once funds arrive the lender starts on the file. The mortgage broker usually has a fee agreement and non-circumvention you sign before introducing the lender. The lender doesn't usually want to deal with the buyer and the mortgage broker creates a nice package for the lender to process. They act as a conduit working the file until closing moving things along.

Typically fee for a mortgage broker is 1% of the loan amount paid at closing as a condition of closing. There usually is a ceiling of a fee minimum if the loan is small. Some guys there is a 5,000 minimum or they will not do the loan as it is not worth their time. If the LTV is low a lender will sometimes allow the mortgage brokers fee to be financed into the loan amount. If the LTV is 75 or 80 then it would push the loan risk to high to roll the fee in so lender would not generally go for that. 50 to 60% LTV they might.

Direct lenders if buyers try to play dirty and cut the mortgage broker out will generally not go for that as the mortgage brokers send them tens of millions or more in loans annually and they do not want to burn that bridge for one shady buyer.

If you do not want to use a mortgage broker then a local bank or credit union can be good sources for construction loans.

It's all about how much of the process you want to do. With a mortgage broker the package can be presented in an optimal way to the bank which can make them say yes to the loan. If you do not package correctly and make a bad first impression it is very hard to unring that bell.

I don't care who it is we pay nothing to nobody before closing except for a lender deposit and the unused portion is credited back at closing or however the purchaser chooses to use those excess funds.

Lot's of scammers out there. Go with your gut and surround yourself with the right people. The terms  you are mentioning for rates should be in the ballpark if you call around. Local banks close to the actual project know the area and tend to be a great source.

You can search here:

FDIC Bank Search

Ed B. · Answer

Chris, yes, he did write "ur" in his reply to me. What you saw is exactly how he wrote it.  So he's either too lazy to properly spell "your," or  just doesn't know how to spell?  Maybe I'm too picky, but when I'm dealing with something as crucial as financing I prefer to deal with someone who knows how to spell simple words. :)

Jonathan Godes · Answer

1 pt and 5%? That is not a lender rate, that is a "mom and dad doing me a solid" rate. Unless this is an official bank or your parents... run.

Anthony Elgort · Answer

We frequently take points as the loan fee at closing. We sometimes structure deals without points as well, but the interest rate will be slightly higher.

I've never taken points form anyone prior to closing. Sounds shady.

Unfortunately, not everyone has the utmost ethics in business dealings.

I work in california-- if anyone has questions.. feel free to ask.

Tamara Elliott-Deering · Answer

I work with 3 hard money lenders and while they charge me the earth there has never been any up front fees with the exception of the appraiser who I pay directly. By the way my favorite hard money lender has such a great appraiser that I never mind writing him the check, he's always very forthcoming on suggestions to improve the ARV. If anybody needs funding in Central Texas PM and I'll give you the name of the company I work with.

Ed B. · Answer

John, maybe he can check me out by only my name, DOB and address, but why would  a lender only do that and run the risk of possibly not uncovering a bad payment history by not checking by SS# ? It makes about as much  sense as leaving your house for the weekend and only locking the front door but not the rear. No, I have no proof the lender is a fraud, but I have lots of suspicions his only motivation is to collect upfront fees and then ultimately denies the loan approval. And if he prefers to cater to borrowers with such lousy credit they are afraid to disclose their credit history via a SS# credit check, I think his rate would have to be much higher than 5 %.

Chris Mason · Answer

I never ask for SSN. It's on your tax returns, which I need to preapprove anyways.

I also never ask for DOB. It's on your gov't issued photo I, which I need to preapprove anyways.

And so on.

But ya this guy is still sketch. Did he really say "ur" in written correspondence with you?

Is it necessary to pay loan fees upfront?

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