Rhonda Porter wrote a great article for Seattle’s Rain City Guide titled "Are you leaving too much on the table?" The article discusses the broker charges that occur when the seller of a home offers to cover a certain amount of closing costs. If you’ve sold a home you’ve probably been through this. When I sold my Orange County, CA condo two years ago the buyer asked for $10,000 in closing costs on a $480,000 condo.
As an aside, $10,000 seems like a buyer’s agent favorite number to ask for in contributions. It sounds significant, but NOT unreasonable, and maybe it’s a psychologically easy pill to swallow. Looking back at it though that is more than 2% or points as we like to call it. I would scratch and claw all day doing a refinance for 2 points. Why was I just OK with kicking 2% to the buyer?
As Rhonda points out usually that number is an "up to" or "not to exceed" number. This means, in theory at least, that it should be a cap and not a "goal" for an originator to max their fees out against. If the fees are maxed out for anything it should be in rate reduction for the buyer. From her post:
Here is what the HUD shows (Iâ??ve skipped the lines that do not have costs associated with them):
Items Payable in Connection with Loan 803. Appraisal 450
808. Underwriting Fee 795
809. Flood Determination 26
810. Tax Service Contract 70
811. Broker Application Fee 593
812. Broker Processing Fee 425
813. Broker Origination Fee Guess!
Title Charges 1101. Settlement Fee (incl. tax) 653
1108. Title Insurance (incl. tax) 632
Subtotal of Closing Costs (not incl. 813): $3644 Have you guessed how much the broker is charging for the Origination Fee?
Hereâ??s a clue: Deduct $3644 from the $10,000 the seller offered to pay â??up toâ??. Yes, Ladies and Gentlemen, the Loan Originator is collecting a 2% Origination Fee of $6336 on a loan amount of $316,800. According to the HUD-1 Settlement Statement, it is not Discount Points being used to buy the rate down for the buyers benefit. It appears as though the extra funds are going directly to the Loan Originator and the mortgage company she/he is employed by.
Rhonda’s being polite. The extra costs are definitely going to the originator. Rhonda asks:
Should agents require a Good Faith Estimate with the Preapproval Letter when Sellers are paying closing costs or provide a line-item range of allowable costs for the seller to pay?
I think it is a good idea. If the real estate agent is truly acting in a fiduciary capacity for the buyer it would behoove them to review the GFE upfront and ensure that the contributed closing costs are being used to help the buyer secure a better rate, etc. rather than going in to the pocket of an unscrupulous lender. It is equally important that the homebuyer understand how these costs are being used as well.
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