“NEVER PAY FRONT MONEY” is a wise rule to live by. If you don’t pay for something until you have it in your hands, no one can skip town with your hard-earned cash. To get a business or real estate loan, however, loan applicants may be asked to shell out cash for a deposit or upfront fee (sometimes referred to as an advance fee or front fee). In cases like this, the most important things to know are:
- Is the deposit or fee for a legitimate, reasonable and documented cost?
- Is the money refundable, and under what conditions?
- Can the money be credited toward the cost of closing the loan?
HOW DO YOU TELL A RISKY FRONT FEE from a legitimate, reasonable charge like a good faith deposit, earnest money, or an application fee, processing fee or transaction fee? After all, honest and reliable lenders and brokers sometimes need to charge a deposit or service fee so they can afford to do due diligence and carry out the work you need them to do.
TO DEAL WITH FEES AND DEPOSITS EFFECTIVELY, you need to know the difference between them.
FEES ARE TYPICALLY CHARGED FOR THE COST OF SERVICES such as:
- legal work
- title searches
- credit reports
Such fees are often not refundable, but may be credited into a loan’s closing costs.
DEPOSITS, SUCH AS EARNEST MONEY in a real estate deal, are a way of acknowledging the costs the lender may incur to make the loan. They also help to ensure the lender that the borrower is serious and acting in good faith about wanting to complete the transaction. Deposits are sometimes refundable and may be rolled up into closing costs.
WHEN A LOAN APPLICATION IS REJECTED or the borrower decides not to proceed with the loan, some lenders will refund the amount of the deposit, minus costs incurred up to that point. For example, if you gave a $500 deposit, and the lender spent $250 on a completed appraisal fee and $20 on a credit report, the lender might refund the difference of $230. Since you paid for the appraisal and credit report, the lender should provide you with copies of each.
IN THE UNITED STATES, RESPA (the federal Real Estate Settlement Procedures Act) requires mortgage brokers and lenders to document their fees, in writing, on good-faith estimates and settlement statements.
IF A BROKER OR LENDER CHARGES the borrower for unearned or illegitimate, nonrefundable fees or deposits, they may be breaking the law and could become subject to legal penalties.
DEPOSITS AND FEES CAN VARY WIDELY from one broker or lender to another and from one deal to another. Larger commercial and real estate loans usually require more work and have higher fees.
HERE ARE SOME TIPS to observe with any loan offer:
- Confirm that the lender has provided complete contact information, especially if it‘s an online lender and you won’t be visiting their offices. If a the lender doesn‘t give their physical address, phone number, and a “real”* email address , avoid them. Today, lenders should also have their own, fully operational websites. *A real email address is one that doesn’t come from a free service like Yahoo or Hotmail; ideally the lender will have an email address or form connected with its website. If they fail to produce any of these things UP FRONT, we would not give them any money up front.
- Make sure the broker or lender has a good reputation. Pay fees only to people you know you can trust. If necessary, check online, at consumer reporting agencies, the Better Business Bureau, or in public records.
- Confirm that the broker or lender makes the type of loan you want in your area and for the amount you’re seeking.
- Ask for details on loan deals they’ve completed and see what deposits, fees or refundable amounts were involved in those deals.
- Work with a skilled attorney who has knowledge of the laws in your geographic area and experience in the kind of deal you’re looking to do.
- Use a written agreement that clearly lays out all terms of the deal, signed by you and the broker or lender you’re working with.
BE SURE YOU KNOW THE EXACT PURPOSE of each fee or deposit. Ask yourself: does it seem reasonable? A $350 appraisal fee might be normal, but a $10,000 travel fee may be out of the ordinary.
ALWAYS GET A SIGNED AGREEMENT STATING WHAT FEES may be charged and what services or products will be provided as part of the deal. This will make it easier to ensure that the broker or lender honors the deal and doesn’t pull out or disappear after you’ve shown your good faith and paid good money.
THAT MAY SEEM LIKE A TALL ORDER. No broker or lender can guarantee that a deal will always go the way everyone hopes it will. There are too many unknowns. But there are smart things you can do to stay safe.
AVOID PAYING ADVANCE FEES until you confirm that the person you’re dealing with is “legit” and will uphold their end of the bargain as stated in the written agreement. This isn’t a guessing game. You can easily confirm the lender’s history and reliability by reviewing records of the lenders “done deals.” If necessary, you can contact previous clients of the lender for more detailed input.
BELOW ARE SOME SIGNS THAT MAY TELL YOU when you should not pay money in advance. None of these things by themselves mean a broker or lender is bad or dishonest, but if you see a bunch of these signs all at once, it may be wise to wait until you can confirm all the details.
SIGNS TO LOOK OUT FOR:
- The broker or lender asks you to pay an advance fee that seems high for the kind of deal you wish to do.
- The broker or lender tries to rush you through a transaction.
- The broker or lender says it’s a “done deal” or claims you’re guaranteed to make a lot of money no matter what happens.
- The broker or lender won’t sign a written agreement or loan document; or they won’t agree to standard, reasonable terms; or they try to put unclear words in the fine print; or they don’t clearly explain the purpose of a fee.
- The broker or lender asks for your credit card, bank account or social security information without explaining and documenting why this information is required.
- The broker or lender repeatedly fails to answer their phone or email, or fails to identify themselves as the person or company you think they are.
- The broker or lender won’t give you their physical address or refuses to see you at their office.
- The broker or lender wants you to send money electronically to them or to a third party at a far-off or unspecified place.
- The broker or lender refuses to discuss the possibility of any kind of refund if something beyond your control goes wrong.
- The broker or lender discourages you from checking them out with consumer reporting agencies or looking them up on the Internet or in public records.
WHEN YOU NEED MONEY, THE PROMISE of a loan may seem like an answer to a prayer. Avoid paying unearned front money and advance fees, and you’ll risk less and be richer in the long run.
AT THE END OF THE DAY, BORROWERS MUST WEIGH a number of factors to decide for themselves whether a deposit, fee or promise seems legitimate. You may not be able to predict the future, but you can assemble all facts on each lender, evaluate the evidence based on the criteria discussed above, and PAY FEES ONLY WHEN THOSE FEES WILL PAY OFF FOR YOU in the end.