Lender loan origination fee-scam?

Question

Wondering if it’s normal for lenders to ask for a loan origination fee of approx. $1200. What is the usual ways you deal with this transaction? I suggested giving the funds to an attorney in trust and releasing them at due time, which seems the safest way to protect myself from a scam. Thank you for your responses in advance!

Jay Hinrichs · Answer

@Don Konipol  one does need to use caution.. as we know there are plenty of pump and dump due diligence scammers out there in the lending world.

I would say ( dont know for sure) these folks have either never borrowed money or are very new to this.. and they find their broker via facebook or some social media and are attracted to terms that are really non existent they simply don't know what they don't know..  I know when I am getting larger loans from my banks the only thing i pay for up front is the MAI which is in my case 4 to 10k .   However having invested with a few syndication's over time these folks did pay pretty large up front underwriting fee's.. however i believe who they paid them to were known companies that actually fund.

Don Konipol · Answer

@Melina Gorosito

First, determine if this is money going directly to the lender, or is it a fee the broker is collecting for himself?

Second, is it a fee that covers third party costs like appraisal, title report, survey, legal document prep?

The residential property buyer has been spoiled by the carryover from O/O purchases with small application fees, low cost appraisals, and fees “collected at closing”.  Some of this carries over to the small balance commercial arena.

Appraisal costs for commercial properties start at $2500 (MAI) and go up from there.  In less competitive states title agencies charge to run a title report.  Commercial surveys want to be paid at job completion, not out of closing.  On hard to place loans, the best mortgage brokers charge a commitment fee upfront since they will be putting in a lot of time and effort.

All the above has been used by dishonest scam brokers and lenders to obtain large upfront fees for loans they never intend to fund.

We recently closed on a $5 million + purchase of a 4 building office/warehouse complex.  We obtained a loan for half, $2.5 million.  Because of our experience and track record, our lender accepted a $6,250 commitment fee instead of their usual .5% which would have been $12,500.

Those who say never pay a fee upfront will either not obtain a loan for difficult to finance commercial property or pay higher interest/points at closing for a lender that has no commitment fee.

One of our businesses is hard money commercial real estate lending.  We charge no commitment fee.  As a result we make loans all the time at 12% interest to borrowers who qualify with institutional lenders at 7% but refuse to pay an upfront commitment fee.  The cost of this refusal on our average loan size of $2 million is 5% per year, $100,000.  But they stuck to their guns, and heeded the advice of those without large commercial lending experience who said NEVER pay a lender an upfront fee.

True, if you never pay an upfront fee you’ll never be scammed out of the fee.  You’ll also never get the best mid to larger sized commercial loans.

Justin Kane · Answer

A LOT of people wrote long paragraphs, so I hope im not being redundant but 1% of loan is typical for origination fee but everything is negotiable also negotiate with the title company to see if they will waive their escrow fee or drop it to 200 on your side.. dont be afraid to ask, the worst they can say is no

Joel Owens · Answer

You have to know if you are talking to a REAL lender, a mortgage broker, or one of these fee taker types.

Some people get pulled in to contracting with these lenders that say they can do magical loans. They have no clue if the lender can fund anything. They want to charge a fee upfront. If this is paid this fee taker can just say they have no control over the lender blah, blah, blah. The fee is set so low as to get the purchaser to send it.

You have to make them honest and not paid until closing. Another situation is where the lender asks for a large deposit and then keeps stalling the loan and the reports being ordered. They hold the money to make interest in an account and then many months later return the money saying they could not fund the loan. Another one is they give great terms but then change the terms to something horrible and claim the buyer did not give them a full package so terms changed.

Basically these types exploit any avenue they can which might be a valid reason to do something unethical and possibly even illegal.

This is why relationships are important in the business and knowing who is a real lender and who is not. If a lender or individual is saying give us these fees and this magical loan will happen you have not been able to get anywhere else you should use extreme caution knowing the odds of closing that loan are slim to none.

Since the last downturn residential became a lot more regulated for lenders so many scammers moved to commercial opening up under different company names where regulation is not as tight.

David Fernandez · Answer

Hi @Melina Gorosito, some banks have them and they are usually collected at closing. They usually range between $500 and $1,000 for most regular sized loans, so it’s in the ballpark

If you are dealing with a mortgage broker, then tell them that they can be collected at closing, don’t pay upfront. One of my friends (he does large deals) paid $20,000 UPFRONT! to a broker as origination fees to help him get a loan he needed. Allegedly that will help him cover his underwriting costs, etc. Guess what, the broker didn’t end up bringing the loan and kept the $20k.

So, no matter who you are dealing with, if the fees are reasonable to you, then tell them that you are ok with paying them at closing.

Hai Loc · Answer

My bad.. I didn't read the post thoroughly.. Yes up front is a different matter and is a scam

Roy N. · Answer

@Melina Gorosito

As others have mentioned, it depends on the type of property and financing with which you are dealing.

In Canada, origination fees are unheard of for residential properties  - unless you are dealing with an off-market lender (which means you cannot borrow from a bank, credit union or other tier 1 or 2 lender).

When you move into commercial properties, there are a variety of fees, an origination fee is a possibility, but still not common.

If you are using an independent broker who's not being compensated by the lender (which they should disclose), they will charge you a fee for their services (in my experience these fees are negotiable).

In our experience, even when paying the lender levied fees associated with commercial financing (lenders admin, legal, etc), the fees are deducted from the funds advanced.   If a "lender" is asking for a fee an originating fee upfront, you would be best served to walk away.   If you are paying an independent mortgage broker for her/his services, they'll probably invoice you separately, but not until the financing is disbursed.

Roy N. · Answer

Hal:

Any administration, legal or processing fees are typically taken out of the disbursement ... unless this is a new thing in the Big Smoke.  It is not normal to ask for a fee up-front.

Hai Loc · Answer

That's pretty normal especially if it in GTA

Jay Hinrichs · Answer

I have done some HML in British Columbia and its quite different in CA than the US  .. the difference is what happens in a default situation.

However the one person i loaned to a builder/developer had this big 60k sq ft building that he had dismantled and wanted to move and put back up and needed about 5 million for it.. he burned through not one not two but 3 FAUX lenders to the tune of 25 to 30k each time. before he met me.. And i told him you just cant send that kind of money to a company that you cannot verify 3 ways from Sunday

Lender loan origination fee-scam?

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