Non-refundable loan application fee?

Question

After talking to a few banks, I've potentially found one that will do a 30k, 30 year mortgage for an investment property.  But, they charge $325 non-refundable loan application fee.  Is this normal/standard?

Joel Nielsen · Answer

One of the things that will thwart your closing numbers is the size of your loan.  When I do a $250,000 loan the appraisal is still $350, the processing fee is still $500 etc. etc.  In your case you have a tiny loan amount but since the costs are standardized it appears that you are getting screwed.  So $3,000 something in closing costs seems outrageous on a $24K loan.

But you would roughly pay the same $3,000 in closing costs for a $250K loan.  Does that make sense?  The "set closing costs" really stand out against a smaller loan than a larger one.  The bottom line is that a loan is a loan is a loan and requires exactly the same amount of work regardless of the amount.

As for me, I won't do loans under $175K.  It seems the hassel factor is higher for small loans versus the bigger ones, and of course, the bigger ones pay more money.  Hope that helps,

Best,
Joel

Fred Shandler · Answer

roughly $75 positive cash flow, per month.

Timothy W. · Answer

Well....that pays off equity quicker.  Less fees too.  I'm assuming a little less cashflow in the interim.  How much less cashflow?  I'm too lazy to run the numbers right now and figure you have.   :mrgreen:

Fred Shandler · Answer

Alright, I just heard back from another lender.  The fees are less, but she could only do a 20 year fixed.  The property would still cash flow, so it might work.  Thoughts?

Thanks
Fred

Timothy W. · Answer

Looks to me like $1,600.00 less in charges right?  At $75 a month, you break even between the two loans in under two years.  I hold long term.  If it were me and I were looking at the 20 year span of holding this property in this current financing, I'd look at the cheaper loan as being an advantage for 12 years (2 years for the cheaper fees to catch up to the cashflow difference and 10 years earlier payoff) and the more expensive loan as being an advantage for 18 years - i.e. 18 years of higher positive cashflow.

In the end we're really talking about nominal amounts here but as a matter of principle, I always keep my eye on long term cashflow.  However, do you think in 2 years you'll refi out and your strategy will change to lines of credit?

Fred Shandler · Answer

thanks again for the responses guys.  This deal would be a long-term rental.

Timothy W. · Answer

FYI, just as an example, I have a mortgage broker that does mortgages down to $20,000.00.  Again though, the understanding is that he has to make money on doing it so the 5-6% thing goes out the window.  I can't fault the guy for needing to stay profitable to keep running his business.  If you want stuff tailored to you - gotta pay the tailor.

Sue In Denver · Answer

Fred, the closing costs as you list them amount to 13% of the loan!
It was my understanding that the sum total of all closing costs cannot be more than 6% of the loan amount.

After looking at your costs these are the ones I would raise issue with:

I'm not familiar with the title process in your state but the fees seem as though you're paying twice for a title policy and also being charged for the seller's costs.

The seller pays for the title policy that comes to you and all the costs associated with it (search and exam).  The buyer pays for the mortgage title policy which I assume is the Concurrent ALTA.  In some areas, the buyer and seller split the cost of the closing agent while elsewhere it falls to the seller.  Here it appears that you are in an attorney state and there is no title agent doing the closing.  I would also ask why there is a separate fee for a search & exam.  This is a part of the title policy and I've not seen it separated out this way.  Again, I am not familiar with the title process or their fees in NY.

I would also ask for a specific, detailed breakdown of what the processing fee is about.  This is usually a junk fee.  Since the loan amount is so low, it's another way for the broker to help cover his time.  They have to do the same amount of work on a $30,000 loan as they do on a $200k loan.

Since you have such a low loan amount, I might ask someone to loan you the money rather than going through this lender.  You could offer a 10% rate of return for 5-years or so with a balloon at the end.  If you could come up with another 4k out of your funds and go looking for someone to borrow 20k from, you're done.  Or 2-people with 10k or 4-people with 5k.  It's doable!

You didn't say what you planned to do with the property.  If you plan to hold it and rent it out, you will be able to refinance out into something later and/or give your investor a regular monthly income for the life of the loan.  If you're planning to fix and flip, you'll be able to cash them out much sooner.

I'm guessing there's someone in your network of friends or family that could help to fund this.  If they do, have an attorney draw up the paperwork and the note to make it legal.  The cost of the attorney will be much less than the cost of this type closing expense.

If you have no option to do this, then you have no other option than to go with this guy.  I'm guessing you also tried your local S&L?

Just my two cents!

Timothy W. · Answer

The question really is what other options do you have?  Do you have other ones to compare this against?

Fred Shandler · Answer

Tim, thanks for your replies.  And you're spot on -my goal is to eventually have the ability to buy via lines of credit, then re-fi.  As opposed to conventional mortgages like this.  But, with that said, does this appear to be a mortgage that deserves consideration?