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Closing on a home brings unexpected costs

Realty Q&A is a weekly column in which Lew Sichelman, a nationally syndicated columnist who has been covering the housing market for more than 40 years, responds to readers' questions on real estate.

WASHINGTON (MarketWatch)--Question: We just returned from closing on our new home. To say the least, it was a jolting experience. We were particularly mystified by the numerous and expensive array of closing costs we were charged. We asked the closing agent to explain them to us, but all he pretty much said was that they were normal and everyone pays them. Is that true? Are these fees justified? Were we overcharged? And what can we do about it if we were? --J. McG., Baltimore

Answer: Since I do not have your settlement sheet--the infamous HUD-1 document--in front of me, I cannot comment directly on your particular situation. However, I can tell you that in my experience, many of the fees lenders charge at closing are bogus. Hey, they're not known in the business as "garbage" or "junk" fees for nothing.

It's not like lenders are trying to hide them. After all, they are right out there for the world to see, first in the Good Faith Estimate borrowers are supposed to receive within three days of applying for a mortgage. And then they're listed again in the HUD-1 you receive at closing. But since you get the GFE after the fact--after you give the lender a check to cover the cost of the appraisal and credit report--it's a little too late to use to comparison shop for the cheapest, least onerous charges.

Worse, perhaps, lenders have different names for their charges, so it's hard for a layman to figure out what each fee covers. And it's especially tough to compare one lender's tolls to another's.

Take processing fees, for example. Depending on the lender, this charge might be labeled as an underwriting fee, an application fee or even a rate-lock fee. And if the lender tacks on a $450 processing fee and a $300 underwriting fee on top of the "fairly common" application fee, you are probably paying more than you should.

Lenders argue that their charges are justified because of the expense they go to process loan applications, many of which fall by the wayside because would-be borrowers can't clear the underwriting process. But real-estate attorneys and closing agents say they see garbage fees all the time. And even if the exactions aren't junk, they're often exorbitant.

It's always a good idea to comparison shop for big-ticket items, and mortgages are the biggest ticket most consumers will ever punch. Wise borrowers don't wait until after they've applied for a loan to see a lender's list of settlement costs. They ask in advance and compare them along with everything else before finally committing to one lender over another.

"It's important that consumers fully understand what is included in each fee, watch for redundancies and ask questions," warns Megan Greuling at online lender LendingTree.

Many settlement charges are legitimate. The origination fee, often expressed as a percentage of the loan amount, covers the lender's work in evaluating and preparing your loan. And government recording and transfer taxes are always collected when a property changes hands.

But even one extraneous charge can be costly. And a laundry list of closing costs should set your antenna wiggling. So if a lender balks at giving you a schedule of charges, head for the door. Good lenders will tell you their fees if you are smart enough to ask.

Here's a list of what I and others consider the more onerous junk fees:

Application Fee: A levy over and above the origination fee, this charge is intended to weed out the tire-kickers. But it is redundant if you are a serious borrower who actually applies for a mortgage. And if you are approved, you shouldn't be charged twice for what is essentially the same thing.

Document Preparation Fee: This is charged for drawing up the note, deed or trust and other legal documents. Sometimes, though, the escrow agent draws up these important papers, not the lender. So it's just another way to collect a few hundred bucks from an unsuspecting borrower.

Document Review Fee: This ostensibly is for going over the loan package when it is returned after closing. But some settlement professionals say that unless they suspect fraud, lenders rarely look at a file when they get it back. Even if they do review the documents, the look-see is rarely worth the kind of money borrower's pay for it. "It probably takes five minutes of some low-level clerk's time at most," a closing agent once told me. This charge may also be listed as attorney's fees, which cover the cost of the lender's attorney examining your loan file, but is actually just another case of overkill.

Mortgage Guarantee Fee: Fannie Mae and Freddie Mac charge lenders for guaranteeing the principal and interest payments on loans they buy or insure, and lenders pass the cost on to borrowers. But sometimes lenders hold the loans or sell them to a nongovernment entity and still charge borrowers.

Tax Service Fee: This is supposed to cover the cost of paying your property taxes on your behalf; that is, receiving the bill, cutting a check and mailing it to the tax collector. But since most lenders pay taxes for all borrowers in the same jurisdiction in bulk by wire, the fee is usually excessive. Some lenders even levy this fee on borrowers who are paying their own taxes, maintaining that they must confirm that the taxes are, indeed, being paid. But worst of all, perhaps, is that lenders earn big dividends on your money that they are holding in escrow for you, so they are, in effect, collecting twice.

Underwriting Fee: This charge is for reviewing your loan application to make certain you qualify. But this is the lender's job. The lender is in business to underwrite loans, so this cost should be covered by the origination fee.

Processing Fee: Another cost that should be covered by the origination fee. After all, making a mortgage is nothing more that processing papers.

Inspection Fee: This covers examinations, often of new construction, by the lender or an outside inspector hired by the lender. But was an inspection actually made?

Warehousing Fee: Warehousing is normally lender lingo for packaging a number of loans together for sale to investors. But in this case, it's either the lender's charge for holding all the papers in a file until the transaction is closed, or holding the loan on a shelf until it is sold on the secondary market. Either way, it's nefarious at best.

Courier Fees: This is for sending papers back and forth between the lender and settlement agent, either by courier or overnight delivery. You'd think these rush-rush services would be reserved for last-minute necessities, but lenders use them all the time so they have a signature on file to prove the papers were actually sent and not lost in someone's mailroom. The fee isn't much, maybe $35 or $50. But the charge has become so routine that borrowers are dinged with it even if nothing was sent overnight or by courier. So ask to see a signed receipt before paying it.

Many closing agents blanch when they see these fees on a settlement sheet. But they have no choice but to collect them if that's what the lender requires.

But you have a choice. Refuse to pay and threaten to walk. Many lenders relent at the last minute.

Nationally syndicated columnist Lew Sichelman has been covering the housing market for more than 40 years. MarketWatch readers are encouraged to send their real estate questions to him at lsichelman@aol.com. Answers will be presented in this column every Friday. However, because of the volume of email he receives, he cannot answer every reader's query.