$500 Application fee on loan?

Question

Hi all, first post after scrolling through for months. I have an offer through a broker from a construction lender on a 2 family gut renovation in Boston that I'm looking at. Not sure if this is truly "hard money" or what, but no income requirement. They are looking at the project itself, my experience, credit, and cash reserves. The offer looks good so I went to get fully approved, and the broker told me that there is a $500 application fee. Is this normal?

I have always just done conventional bank financing and portfolio loans, so was surprised by this fee. If normal, no problem, but didn't want to be walking into something sketchy. I'll lose the fee if I don't get approved from what I understand. I've never worked with this broker before, met him at a RE meetup, though another broker I was connected with knew him.

Thanks!

JL

Chris Mason · Answer

Generally speaking an upfront fee measured in 1% or more of the purchase price or loan amount is a flag for a scam.

But $500 looks like an appraisal fee. And/or someone would have to do a LOT of scamming for it to be worth it at $500 a pop.

Because it's so small, small enough that it looks like an appraisal fee and/or "confirm you aren't wasting my time" fee (rather than being a large "I'm trying to scam you" non-fee), and if there's an online presence indicating folks have done business with them and/or you know people that have, I'm going to say you're probably safe in this case.

Nghi Le · Answer

It does sound like a hard money lender.  The only fee a lender should be charging up front is for appraisals and BPOs.  $500 does sound like an appraisal fee, but I'd double-check with the broker (just in case he surprises you again later with another $500 fee for the actual appraisal).

The BP community can tell you if the lender you're working with is a good/competitive one if you know the terms, such as leverage, rates, points, and other fees that are due at closing.

Jonathan Lee · Answer

Thanks everyone who has replied. The broker is willing to have me submit all the application stuff without the fee and get the underwriter to give me a verbal yes/no. Then when I need to pull the trigger on an offer I can pay the $500 knowing that I'll be approved unless I've misrepresented or something has changed significantly. I haven't proceeded yet but at least that sounds less risky

George Despotopoulos · Answer

@Jonathan Lee

You should know what your $500 is going to and in writing (whether it's an e-mail or even a text message). It should usually be refundable less expenses incurred. Sometimes lenders charge an upfront fee to cover for expenses such as ordering/running a automated valuation, pulling your credit, and running a background check.

I definitely agree with others, $500 is a little high, especially in relation to your loan amount. They should be able to provide you a breakdown of what it goes towards. An application fee would normally get paid to the lender and the lender pays their expenses through it. Appraisals should get paid directly to the appraiser.

Veronica Frieling · Answer

Hey Jonathan, I echo that it sounds like a hard money lender. I lend hard money in CA and DO NOT charge for application fees upfront. The only fee that is sometimes necessary is the appraisal fee, but even those are sometimes paid through the transaction of the loan, rather than being an up front cost.

Definitely double check with the broker to see what other "fees" will be coming up before actually funding your loan.

Tom Gimer · Answer

Up front fees are problematic, as you can tell from all the responses telling you to proceed with caution. There are a LOT of scammers out there who will disappear with the $ and move on to the next pigeon. Most are more ambitious than $500 a pop.

Feel it out. Find some people who have actually obtained financing. Confirm they paid the same fee.

What's the rate? If you post the term sheet there are plenty of people here who can spot red flags if they exist.

Christopher Blanco · Answer

Any up front fees that are not for appraisals/inspections are a red flag. I work as a loan originator, and the ONLY up front fees we MAY ask for is the appraisal, but that is only after you have been approved. We do have a few other fees that are part of standard closing (points, legal, etc), but those are all part of the closing and never upfront.

Ola Dantis · Answer

@Jonathan Lee As for application fee?!!! That's a red flag!

Also, remember that this is still an "application", meaning it is not guaranteed that you will get what you want from this transaction. A possible eventuality is that he ends up with your $500 and you end up with a loan denial letter.

Be careful, keep your $500.

Hope this helps, JL. Goodluck. Thanks! - Ola

Jonathan Lee · Answer

Thanks all. Yeah it is being called an "application fee" by the broker, but since it is applicable to the closing costs it could for the appraisal or any other cost

$500 Application fee on loan?

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