What Are Junk Fees in Mortgages?
Junk fees refer to additional charges imposed by a lender during the closing of a mortgage. These fees often come as a surprise to borrowers, lacking clear explanations from the lender. This unexpected aspect can create an impression that these fees are excessive and unjustly added on top of other legitimate closing costs.
While mortgage junk fees are a common issue, illegal junk fees can also be found in other consumer financial products like auto loans, deposit accounts, and student loan services. This article focuses specifically on junk fees present in mortgages.
Understanding Junk Fees in Mortgages
Junk fees are a subset of costs listed in the HUD-1 settlement statement, which details all fees due at closing. Traditionally, borrowers received this itemized statement by federal law. Before closing, lenders were required to provide a good faith estimate (GFE) of these costs. In 2015, the Consumer Financial Protection Bureau (CFPB) consolidated these documents into the Closing Disclosure.
These fees can inflate the overall cost of purchasing a home, often catching buyers off guard. The HUD-1 statement lists various fees, ranging from standard items like home inspections to controversial charges that some classify as junk fees. Examples include document preparation fees, application fees, funding fees, and more.
Junk fees can sour the homebuying experience, which should ideally be a joyous occasion. Borrowers have the right to challenge and negotiate these fees with lenders. Unfortunately, many borrowers do not take advantage of this right, allowing lenders to profit from these additional charges.
Critics of the mortgage industry argue that lenders do not always adhere to the good faith estimate requirements and may add undisclosed fees to the final HUD-1 statement.
Consumer Financial Protection Bureau (CFPB) Reforms to Closing Process
The CFPB’s 2015 reforms aimed to streamline the closing process paperwork and impose restrictions on fees and adjustments post GFE provision. This move was driven by the need to prevent lenders from adding hidden fees that borrowers might overlook.
One significant change was limiting fee increases to no more than 10% from the initial estimate to the final closing statement. Lenders must now provide a new lending estimate if there is a substantial change in the loan circumstances.
Despite CFPB efforts to curb deceptive lending, borrowers bear the responsibility of scrutinizing and challenging unnecessary fees. Lenders are incentivized to close mortgages to generate revenue but may be willing to negotiate fees to secure the deal.
What Are Some Common Junk Fees in Mortgage Contracts?
Examples of junk fees in mortgages include document preparation fees, application fees, funding fees, verification of employment fees, sign-up fees, translation fees, and automated underwriting fees.
Where Can I Find Mortgage Fees Before Closing?
Mortgage fees, some of which are disputed by consumer advocates, appear on the HUD-1 settlement statement that borrowers historically received at closing. Since 2015, this information is provided in the consolidated Closing Disclosure document.
Can I Negotiate to Remove Junk Fees from My Mortgage?
Yes, borrowers can request lenders to amend or eliminate certain fees during the closing process. It’s essential to carefully review and question any questionable fees in the mortgage agreement.
The Bottom Line
Mortgage junk fees are additional charges added by lenders at closing, often without clear explanations, leading to concerns about excessive fees. While CFPB reforms have aimed to protect borrowers, it remains crucial for buyers to scrutinize fees and negotiate with lenders to ensure fair and transparent mortgage agreements.