The paperwork involved in buying a home or investment property can be overwhelming. First the bank hits you with round after round of documentation requests. Then you get to closing and there’s a huge stack of papers to sign. When you finally get to the settlement sheet, which is the form that lists out all the costs and fees for your purchase, you might be ready to sign anything just to be done with it and get the keys to your house. Unfortunately, title companies, realtors and bankers all know this and very often they will try to sneak in junk fees. Don’t fall for this trap!
What are junk fees? They are extra fees that some real estate professionals, who generally have a big knowledge advantage over the buyer, will sneak in to make some extra cash at your expense. They come in many different shapes and sizes. Some of the common ones you might run into are “conveyance fee”, “settlement fee”, “doc prep fee”, etc. I had a settlement today where they tried to charge me a “lock change fee” of $120. These fees can add up to hundreds if not thousands of dollars.
How do I stop junk fees? The best way to stop junk fees is to know exactly what you will be paying well before your purchase date. If you are getting a mortgage, makes sure the give you a Good Faith Estimate early on in the process and make sure you understand every line. You should also demand that you receive the settlement sheet (also called the HUD) at least 48 hours before closing. If you don’t get it in time, delay the settlement. Under no circumstances should you walk into settlement without having already seen the sheet.
If you’re an investor, I recommend actually writing a clause into your corporate paperwork that prohibits you from paying junk fees, and then sending a letter explaining your policy to the title company as soon as the agreement of sale is signed. Here’s the letter that we use.
How do I read a settlement sheet? Once you have the settlement sheet in hand, you’ll see there are two columns: one for the borrower (you) and one for the seller. Go through the borrower’s column line by line and make sure you understand each charge that is being applied to you. Here is an example of one of our settlement sheets where I have written in descriptions of all the charges.
If you are getting a mortgage, there will be a few more items on the sheet. See the table at the bottom of this post for some of the more common items that you will run into.
If this is your first purchase, it can be difficult to tell whether some fees are legitimate or not. At BREP, we’re happy to review your settlement sheet with you free of charge. We do this because we believe in helping new homebuyers, and don’t want to see fellow Philadelphians ripped off. If you contact us we’ll be happy to set up an appointment with you to review your documents and go over any questions you might have.
|Common Settlement Charges|
|Loan Discount (points)||A one-time fee paid to reduce your interest rate. Only pay this if you negotiated it ahead of time|
|Loan Origination||An extra fee charged by many banks. This should be negotiated before you choose a bank and worked into your decision. If it wasn’t disclosed to you, don’t pay it!|
|Doc prep fee||Another extra fee banks may charge. Once again, negotiate this before choosing a bank|
|Appraisal fee||Generally around $400 for a house|
|Credit report fee||$25 or less is reasonable|
|Flood cert||Required in PA – $40 is reasonable|
|Interest||You will be required to pay the first month’s interest in advance|
|Mortgage insurance premium||If you are borrowing more than 80% of the home’s appraised value, you generally need to pay a mortgage insurance premium. This amount is standardized by the government.|
|Hazard insurance premium||You will be required to pay insurance for the remainder of the year|
|Property tax||You will be required to pay property tax for the remainder of the year|
|Title Insurance||The fee for title insurance is standardized by Pennsylvania|
|Notary fee||A fee of $25 or less to notarize documents at settlement is normal|
|Recording fee||The city charges a fee to record the deed or mortgage|
|Settlement or Closing fee||Junk Fee! Title insurance costs are standardized for a reason. Don’t let the title company tack on extra charges|
|Conveyance fee||Junk Fee! This is the bank claiming that you have to pay their employee to do their document prep work. Don’t pay it, that’s their job!|
|Processing fee||Junk Fee! Once again, the bank charging you to do their job. Fight to have this removed!|
|Remote settlement fee||Junk Fee! Some title companies have the nerve to charge if they have to step out of their office. If this is not a reimbursal to a 3rd party, ask them to remove it.|
|Wire or FedEX fee||Possibly a Junk Fee! Did the bank or title company actually need to wire or FedEX something on your behalf? Often they will try to charge you for a fee that was required for someone else’s documents.|
|All others||I have some more types of junk fees than I can remember. Earlier today someone tried to put a $120 “lock change” fee on our HUD. $120 to change a lock? I’d love to have that contractor’s job!If you see a fee that you don’t understand, drop us a line and we’ll help you determine if it’s legit.|