Most companies that still require an up front fees charge various amounts and justify that money for multiple reasons. Because you are paying for their services in advance, there are some obvious inherent risks involved.

The first thing to consider is whether the money is refundable and what it is being used to cover. Unprincipled lenders can use the application or any other up front fees to to raise your level of commitment so that you are less likely to switch companies if the terms change. Now, just because a company charges up front fees doesn't mean that is there intention, but in most cases the money is non-refundable, so you should take extra steps to make sure you are covered.

We've outlined some of the reasons you may be asked to pay an up front fee and what you should look out for prior to giving them a check.



Credit Report

If the money is to be used for your credit report, that should raise several additional questions on your part. Any pre-approval they supplied you is not worth the paper it was printed on if they don't know your credit history. By giving them money in advance, you are opening yourself up to surprises down the road. And just telling them your credit score won't suffice either.

You can avoid this issue by either supplying them with a tri-merge copy of your credit report, which we covered in our special report on being your own broker, or make sure they have already pulled a copy of your credit previous to supplying a pre-approval. Also, you should note that a lender's expense for pulling your credit is typically between $30-$50.



Appraisal Expenses

The appraisal is another expense sometimes covered in the application fee. This is a legitimate up front expense since the appraiser is a third party contributor and will typically require the money to be paid in advance. In many cases, the lender or broker will take care of ordering an appraisal on your behalf and then you will pay the appraiser directly when they come to view your property. Regardless of whether the application fee covers the appraisal or you are paying the appraiser directly, you need to do your due diligence first.

The biggest of which is to have a precise estimate of your properties value prior to contacting any potential lender. By overstating the value, you are only going to set yourself up for unwelcome surprises. For example, by telling the loan officer your property is worth 250k, they will then secure a pre-approval based on that figure. You then agree to the terms of the loan, only to find out after you paid for an appraisal that your home is actually only worth 210k. That will typically have an impact on your rate since your Loan to Value (LTV) has changed significantly.

A great way to avoid this potential change in your approval is to take some of the same steps the appraiser will take to calculate your home's value. The most significant factor in estimating value is based on recent home sales in your area. There are multiple resources on the Internet for finding out what a home has sold for or even go to the Department of Taxation office in your state. However, please note that when doing your research, you should try to find sales within the last year, homes that are in close proximity to yours and also make sure the homes you're are comparing are as similar as possible. This will ensure the most accurate estimate.

As a last resort, you can also ask the appraiser to do the same research. Simply request that they research the 'comparibles' prior to visiting your home. Any reputable appraiser should have no problem taking this extra step, however do not rely on this solely. Appraisers aren't infallible and there's no guarantee they will take this extra step. Also, by doing your own research, if there are some discrepancies in value, you can simply compare the homes you used to ones the appraiser put in the report. They may have overlooked a comparable home you found and you can request the appraisal be changed in order to get the value up.



Rate Lock

The only time there may be a justifiable up-front charge for a rate lock is if you expect to exceed the standard 30 day provision. Perhaps you are purchasing a home that is still under construction or your loan terms stipulate you have to sell your existing home first and you don't yet have a buyer. If you want to protect against rising rates and want to lock in for a longer period of time, an extension could make sense.

If you find your lock is about to expire, many lenders also offer the ability to simply roll the cost of extending a rate lock into the loan. It's called 'buying down' the rate and will show up on you Good Faith and/or HUD-1 as a Discount Point(s). That fee will then be included in your final settlement charges.

Another option is to include the cost of an extended lock into the rate itself. The longer the lock, the higher your rate, but it's a way to avoid any up front fees. There is typically minimal impact on the rate for a 60-90 day extension, but make sure you take that into consideration when shopping for a loan.

As a last option, you could consider letting the rate 'float.' Rates go up, but they also go down and you could find yourself in a better position without sacrificing anything out of pocket. There is inherent risk, so we recommend you use your better judgment, do some independent research and consult a professional.



Processing / Underwriting

This is will normally be charged to cover the time invested in your loan if you were to switch companies or change your mind. Most processors and underwriters are on salary and the hours put into your file need to be covered regardless of whether the loan closes.
Again, if you're comfortable with the terms of the loan and everything goes as planned, this money will be applied to expenses that you would normally have to pay when the loan closes anyway.

The combination of underwriting and processing fees can be upwards of a thousand dollars or more so make sure you are confident in your decision before making any payments. And also double check to make sure this is the only processing and/or underwriting charges and that nothing else will be included on the HUD-1 at closing.



Be Prepared...

The aforementioned expenses are the most common reasons for requiring an application or other up front fees. As we mentioned previously, the addition of any up front expenses does not necessarily signify any type of unprincipled behavior. However, through some preliminary research and preparation, you should be covered against any and all potential surprises. Make sure you have a clear understanding of what the money is covering and make sure you provide as much information about your situation as you can so that you and the loan officer can both be prepared.