Find out the costs and fees of the loan process
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Real estate investing comes with familiar and unanticipated costs and fees during the loan process. A recent article by RCN Captial explores the potential charges that will likely differ from one competitor to another.
Application and processing fees occur after the client’s application is received. The lender will need to spend manual effort to vet the potential of the deal, resulting in a fee which covers the cost of reviewing the application. Additionally, the lender may charge a processing fee to pay for any additional time spent analyzing the deal and the initial terms for the client to consider. “Some lenders charge both application and processing fees, while others charge only one or none at all. Keep an eye out for these fees and make sure to ask if they can be waived if the loan gets approved,” said RCN.
Survey fees occur when there is no current survey of the property available. A drawing or map of the property showing boundaries and access points is created by a surveyor and contains a property description and potential improvements, providing the new owner with details on what they are purchasing.
A feasibility study occurs with more expensive fix and flip properties resulting in a report that ensures the expected property renovations that are reasonable, timely and completed within the budgetary limitations. The report confirms the client is making decisions that are realistic during the rehab process while reassuring the ability to pay off the loan at the end of the term without complications.
Credit check fees occur during an important part of the loan process with either a hard or soft pull. “Soft pulls are less expensive and do not affect a person’s credit, but most lenders will require a hard pull because the will want a comprehensive overview of a person’s credit history,” said RCN. Hard pulls show up on a credit report and could decrease an individual’s credit score.
Background report fees occur during the background check from a lender. This report includes a person’s criminal records, employment, and education history, resulting in the potential request from a lender for a letter of explanation depending on what is found. This could also be used to verify a client’s real estate experience, with the potential of improving pricing and comfort in offering favorable terms on a potential deal by lenders.
Legal fees are part of the closing costs and can either be a flat fee or an hourly rate. Services might include preparing legal documents, reviewing documentation, and sending out the appropriate paperwork. Closing attornies are involved in examining the title, provide feedback for the title insurance company, make sure issues are resolved, and are in charge of closing the transaction along with dispensing payments to anyone that needs to be paid.
Insurance fees include homeowners insurance include flood and title insurance. Homeowners’ or builder’s risk insurance covers costs of any damages that occur during renovations on the property. Flood insurance will be needed if a property is indicated to be in a flood zone. Title insurance will protect the lender in the event that difficulties happen with the title. Landlords may also be required to purchase loss of income insurance to protect against rent loss if a rental unit remains vacant.
Origination fees, also known as points, are where lenders charge for the creation and servicing of a loan. Each point is 1% of the loan amount and is due at closing. These fees can differ from lender to lender, the size of the deal, or on the property’s location. “ Larger loans can have smaller origination fees because the loan amount is high enough for the lender to make their money while charging fewer points,” said RCN. Smaller loans can have increased origination fees due to the cost of lending being higher compared to the profit the lender is able to make on the loan. The same time and manpower are spent while the return on the loan is much smaller.
“Leveraging a property can be a great option,” said RCN. “It can give an investor the power to purchase multiple properties and grow their real estate portfolio faster. It can increase the return on investment, generate tax deductions from the interest payments, and build wealth by creating a forced savings plan. If done right, the costs and fees associated with getting a loan will more than pay for the profit the investor makes on a great deal.”
