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Some Fees Are Junk Fees.

Lenders also make money on origination charges. In some parts of the country (California, for example), origination charges are uncommon, but they are common in most places. An origination fee is also usually expressed as a percentage of the loan amount. A 1 percent origination fee on a $250,000 loan is $2,500. A 2 percent fee is $5,000.

Finally, lenders make money on junk fees, so called because they don't go directly to pay for any particular product or service. When you pay $15 for a credit report and get, well, a credit report, you're getting a product or service.

What you're getting for a junk fee is sometimes obscure. Common junk fees may be called administration fees or commitment fees. You'll also see application fees, broker fees, or processing charges. We'll discuss closing costs in greater detail in Chapter 4, but charging junk fees at the time of application is still another way that mortgage companies can make money on a loan.

This third method of making money on a loan, charging fees at the time of the loan application, is the way mortgage brokers make money. The mortgage broker can charge you a processing fee and/or an origination fee, but it does not make money by selling loans or collecting monthly payments.

Mortgage Brokers Must Tell You How Much They're Making on Your Loan.

One interesting difference between mortgage brokers and mortgage bankers is that brokers are required by law to tell you exactly how much money they're going to make and who's going to pay them.

When you apply for a mortgage loan, mortgage brokers have a legal obligation not only to discuss the closing costs you'll encounter, but also to tell you where their income is coming from. This is disclosed on a disclosure form called the Good Faith Estimate of Settlement Charges.

Most mortgage brokers will tell you that it's certainly no secret to them that they're required to tell the consumer how much money they're going to make off of her. This is called disclosure, and mortgage brokers have to disclose not only the junk fees they're collecting, but also other income from a wholesale lender. They're required to disclose this when the loan application is first being taken. If the fees are higher at the closing table than they were when they were originally disclosed, the mortgage broker must provide an updated Good Faith Estimate of Settlement Charges with the borrowers' signatures acknowledging the increased fees. It used to be okay for the mortgage broker to simply provide a "range" of possible income, but no longer.

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