My Loan was Denied - What Fees Can I Recover?

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"What mortgage fees can i recover after loan denial" was a search I got. The answer is basically, "None."

The only thing that should be charged up front is a credit check, which costs about $20, and you should be prepared to spend that $20 several times over while you're shopping lenders. If you're worried about twenty dollars when you are applying for a mortgage, chances are that you shouldn't apply.

Once you have selected a provider, however, expect to pay for the appraisal before it is done. The new appraisal code of conduct means that they are going to get paid for any appraisal done. Loan providers have zero control over the appraisal process, and once ordered, no avenue of appeal if the value is low, while being obligated to pay that appraiser. This means every loan company out there has had to make a bleak choice: Decide whether to charge an upfront deposit, or jack up their margins so that the people whose loans close and fund pay for the appraisals of those that don't. As I said in Loan Providers Offering to Pay For The Appraisal, this means that those companies that offer to pay for the appraisal (i.e. choose to jack up their prices) will make more. Your choice as to which to deal with, but either way you choose, you will need to do upfront due diligence. My choice has been to require payment for the appraisal before I order it. I don't like doing this but I like the alternative of charging those clients who stick enough to pay for the clients who don't even less.

Deposits were historically charged by lenders who want to get you committed to the loan, and they do it for at least two reasons. The first is psychological commitment. Usually when I mention things like that, I get people who immediately come back with, "Those kind of mind games don't work with me!" I'm not looking for an argument, and with most folks, I don't know their past history well enough to come up with an example, but this phenomenon is essentially universal as far as humans go, and those few not subject to it are probably suffering from some other more debilitating psychological problem. In fact, the normal progression of a loan is a series of commitments upon your part. The decision to talk to potential providers. The application.

After the application, lenders want the originals of your documentation and money. The original documents are requested so that you cannot shop or apply for a loan elsewhere. I, as a loan officer, do not need your original documents for anything I can think of. I need the original of the loan application and a couple other items you fill out with me, but not of your pay stubs, your taxes, your insurance bill, or any other documents you have pre-existing. Copies are just fine for any lender I do business with, so long as they are clean and readable.

The next step is to get money out of you. If all they want is the credit report fee of about $20, that's fine and normal. Credit Reports cost money, and if you're just shopping around, a loan provider has two choices: raise their loan prices slightly so that they charge those people who finalize their loans more, or charge folks whatever the cost is to run credit when they apply.

But many loan providers want more than the credit check fee. A lot more. They want a deposit that varies from several hundred dollars to one percent of the loan amount, even two percent in some cases. They might say it's for the appraisal, and usually at least part of it does go to the appraiser. I used to say that you should not give it to them, but the standards behind that advice are changing. I've had my clients tell me about the tales they've been told, about how that money is to pay the appraiser. The best thing for consumers is that the appraisal should be paid for when the appraiser does the work. Unfortunately, the new appraisal rules prohibit the consumer paying the appraiser directly, and require the lender to pay the appraiser (as well as preventing the lender from firing bad appraisers). As I've said before, you want to be the one who orders the appraisal, and therefore controls it. Unfortunately, the new standards completely prohibit this consumer advantage. An appraisal done under the old way of business will cause it to not only be wasted money as it is unacceptable, it stands a good chance of costing a lender their ability to do any business. Therefore you may have no real choice but to put a deposit for the appraisal up-front. But don't give the lender any more than the appraisal money.

The reason they really want larger amounts of money out of you upfront is two-fold. First, it builds that psychological commitment I talked about a while back. Second, it makes you financially committed to a loan, which tremendously raises the level of psychological commitment. It means they've got some of your cash. Most people don't really understand loans, not deep down where it really matters. Consider, for a moment, which you would rather have: $400 cash, or a loan that costs $5000 less (not so incidentally making a difference of $25 on the monthly payment), but is otherwise identical. Dispassionately sitting there on the monitor in front of you, the choice seems obvious. You're going to have to pay that $5000 back sometime, and in the meantime you're paying interest on it. But move it to a situation where these potential clients have already put down a $400 deposit with an overpriced loan provider, and the vast majority of them won't sign up for my loan. Why? Because they're thinking of that $400 in cash that came out of their checking account, not the $5000 in extra balance on their mortgage. Companies want that deposit to stop you from going elsewhere, to a loan provider that can do the loan (or, more importantly, is willing to do the loan) for much less money. Practically speaking, they're not only guaranteeing themselves a certain amount of money, they are guaranteeing that the client won't change their mind about their loan.

So do you get it back if the loan is denied? Nope. At least I've never been told about an instance where it happened. That money was a good faith deposit. Legally, it was an incentive for that loan provider to do the work of that loan, all of which costs money. Provably costs money, I might add. The loan processor doesn't work for free. The underwriter doesn't work for free. The escrow officer doesn't work for free. The appraiser doesn't, the title company doesn't. Nobody works for free. Phone calls and copies and word processors to generate all of your documents from the title commitment to the loan documents. Some documents are the same for every loan and can be computer generated. Others, like the title commitment, require humans to enter literally everything on them.

But a deposit for more than appraisal and credit report isn't necessary. In fact, you can find loan providers out there (I was one of them, and would like to be again, but while I can blow off a $20 credit check if the loan doesn't fund, I don't make enough money off loans that fund to enable me to pay for $400 plus appraisals that don't) who routinely work the whole loan on speculation of it funding. They might ask you to pay for the credit report and appraisal up front, but everything else is paid for when the work is done and the loan funds. I would much prefer that you write the check to the appraiser when they do the work, but I can't legally do that any longer. You might ask the advantages to the consumer of this. That advantage would be that these loan providers are not holding your money hostage. This means that if the loan falls apart because the loan provider told you they could do the loan and they couldn't, they're out the money, not you.

As of this update, the law of getting loans has changed a lot in the last few years, and it's to the advantage of the banking and other interest groups, not the consumer. Look to the people in charge of Congress for the reason. Furthermore, the lenders are instituting more changes because they can, now that there are a lot fewer lenders and less competition. I'm not happy about any of this, but even the best loan officers have two choices: Adapt as best we can, or find a new line of work. If the best loan officers trying their hardest to help consumers leave, ask yourself what would be left?

So if a loan provider asks for a large cash deposit up front to begin the loan, chances are that you shouldn't give it to them. Chances are they are trying to lock you into their loan by holding your money hostage, and when you discover at closing that they tacked thousands of dollars onto the loan charges that they conveniently "forgot" to tell you about or pretended didn't exist ("Escrow's a third party charge. We don't have to tell them about it until afterwards"), and now you are facing a choice between forfeiting your deposit and signing off on a loan that's not what you agreed to when you gave them that deposit. Better not to face that choice, by not agreeing to pay anything beyond the credit fee up front, and the appraisal when ordered. The purpose of this article is to help you understand - before you sign that loan application and fork over a deposit - exactly what your choices are and the possible consequences to you.

Caveat Emptor

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About this Entry

This page contains a single entry by Dan Melson published on October 26, 2013 8:00 AM.

The Home Valuation Code of Conduct (New Appraisal Standards) was the previous entry in this blog.

Issues with Relocation Loans is the next entry in this blog.

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