Real Estate Closing Costs--how to shop for a loan

[jay santos]

1. Find a loan officer that has access to a bunch of lenders. Ask them who they use, and make sure they have a good variety. If they're the kind of broker that does loans just for one bank, then you probably won't get as good of a deal.

2. Don't ask them for rates. Ask them point blank how much are they willing to do a loan for. Or say, "will you do a loan for half point profit and $300 loan processing fee?" Tell them you understand all the junk fees and the yield spread, and you are going to find someone who will do your loan for a half point. Call four or five and you will get at least one hungry loan officer. Some will say their boss won't let them go that deep, whatever, move on to the next one.

3. Sit down with your loan officer before you get started and go over a good faith estimate. Ask him where every single fee is going. Make sure they are all legit.

4. Fees. I group fees into three categories
a. Title company. You pay these to the title company or it goes for title related stuff. You may be able to negotiate these, but may be tougher. Closing fee, title insurance, endorsements, recording fee, doc prep, reconveyance, courier. This shouldn't total more than $400 outside of title insurance. Title insurance you can shop for more easily, but that will be like $700 on a $200K loan.

b. Lender. These fees go to the bank giving you a loan, and your loan officer doesn't get these. Underwriting/lender fee, doc prep, flood cert. Can total from $300 to $700--the main fee is the underwriting fee. You can only affect this by changing lenders.

c. Mortgage Company. Loan origination fee, credit report, processing fee, appraisal. Credit report costs $15. They will try to charge $50. Processing fee is legit at 300 or 350. Appraisal they may try to squeeze profit in. You can shop appraisers. The main thing is to get it all quoted up front in the good faith estimate.

5. Yield spread. This is the main thing to understand. Not publicizing yield spread is the reason loan officers can dupe consumers and make $5K on a loan they spend eight hours on.

Lenders (banks) publish rate sheets. They look something like this.


7.25 -3
7.125 -2
7 -1.5
6.875 -1
6.75 -.5
6.625 0
6.5 +.5
6.375 +1

When you ask a loan officer "what are rates today?" it's a loaded question. There is no one rate. There is a chart.

This means that if the loan officer delivers a loan at 7.25 for $200K (that meets the spec for that rate sheet), the bank/lender will pay the loan officer $6K. If the loan officer delivers loan at 6.625, lender doesn't pay anything for the loan. If the loan officer wants to deliver a 6.375 loan, the buyer must pay $2K at closing to lender.

So, when you call up a loan officer and ask for rates thinking you're comparing one company to another, the loan officer laughs in his head, knowing he has a sucker. If you want to compare, you ask the loan officer to read his rate chart and tell you the points for the given rate. Even if you ask him "par" (which means zero points) he will quote you -1 because he wants to keep the extra. Par to him means what he's willing to do the loan for, not par defined by the lender.

Another sneaky thing is that a rate chart won't show anything for par. It will go straight from -.5 to +.5, so the loan officer will steal that .5 and tell you it was the lowest you could get. Tell him, no we made a deal you would do the loan for total 0.5 and you charged me origination fee, so you use that extra .5 yield spread to pay that origination fee or to pay other closing costs.

P.S. junkie, I'm all for you making as much money as you can, just not on me.