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Does your private lender charge junk fees?

If you're a real estate investor, you're no stranger to the sticker shock of lender fees on your settlement statement.

In this article, we'll review what we in the private lending industry call "junk fees". These are the fees that are highly questionable and certainly negotiable. Understanding and being on the lookout for junk fees will save you thousands of dollars per deal.

Interest Rate

While not a junk fee per-say, anything above the prevailing market interest rate for bridge or DSCR loans should be considered a junk fee.

It seriously breaks our hearts when real estate investors come to us asking us to refinance a bridge loan that's currently nearly or more than double our standard rate. Use our Bridge Loan Index and DSCR Loan Index to understand and track market interest rates for these loan types.

Origination Fee ("Points")

The origination fee is also not a junk fee, except in cases where the private lender is charging an offensively high amount of "points". Points is the percentage of the loan amount charged as a fee to originate your loan. So if your loan is $100,000 and your lender charges 4 points, that's a $4,000 fee typically paid at closing. As a rule of thumb, origination fees higher than 2 points should be considered uncompetitive, except in cases where the loan amount is low (in these cases you'll see a minimum origination fee, let's say of $2,000 for example).

The origination fee should cover all of the fees the lender is charging on top of their quoted interest rate. Competitive private lenders will not charge the true junk fees that follow below.

Full Boat Interest

Full Boat Interest, otherwise known as Dutch Interest means that your lender is charging interest on the construction portion of your loan that they have not yet provided to you.

Since private lenders use a draw request process, this means you are paying interest on funds that have not even been requested yet! We don't think this is fair, and this alone is the doozie that can save you thousands of dollars depending on the timeline and budget of your rehab.

Pro Tip: request that interest on your loan be charged As Disbursed.

Underwriting Fee

Origination involves...underwriting. Why is your private lender charging you an underwriting fee when underwriting should be covered by your origination fee? When you see an underwriting fee on your term sheet or settlement statement, this is a red flag. It means your private lender is double dipping at your expense. This can be upwards of a $500 to $1,000 unnecessary line item that you should be able to remove.

Processing Fee

Just like the rationale for the Underwriting Fee (see above), this fee is excessive, as processing is part of origination and you're paying a substantial origination fee.

Servicing Fee

Servicing your loan is likely handled by a sub-servicer who may charge a small monthly fee of let's say $25 - $50. If you see a servicing fee on your term sheet and settlement statement, you should question its legitimacy -- especially if it's hundreds of dollars.

On the other hand, a "Servicing Setup" fee is reasonable since there is post closing work by your lender involved with onboarding your loan with a servicer. This fee should not be more than $100.

Admin Fee

What does this even mean? Again, in-line with our guidance for underwriting fee, processing fee and servicing fee, this is a bogus fee that doesn't belong on your term sheet or settlement statement.

Valuation Review

Valuation review is part of origination and should not be a separate line item for you to pay on top of your origination fee.

There are two types of legal fees:

  1. **Legal or "Doc Prep" Fee: typically charged by a 3rd party law firm that represents your private lender. This is a reasonable fee as your private lender is not receiving this fee, it is paid to their legal counsel.
  2. Legal Review Fee: beyond the above stated doc prep is just a bunch of malarkey.

Commitment Fee

There are two types of commitment fees:

  1. Title Commitment: this is a necessary and appropriate document from the title company, not the lender and may carry a small fee in the title section of your settlement statement.
  2. Commitment Fee: if this fee goes to your lender, you should ask them to explain why on earth you are being charged this fee.

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