How to Negotiate Loan Costs

How to Negotiate Loan Costs

As a real estate investor, it’s important to know how to negotiate the costs of a loan. The loan process can be full of turbulence, so you need to be prepared before you go in and start the process. Always come with knowledge in tool belt. Then as you practice real estate investing, you will turn that knowledge into understanding and eventually wisdom.

The Closing Costs should never be more than 3% of the loan. You’ll want to watch your Good Faith Estimate and your HUD1 carefully.

At closing, take a look at the HUD1. HUD1 lists of all the costs to the buyer and to the seller. That’s where you want to look for junk fees you’re being charged. These could be administration fees, doc prep fees, etc.

A mortgage broker should make about 2% of the loan from you if you are doing one loan at a time. In my opinion, that’s the maximum amount that should happen, but some make a lot more than that.

It’s important for you to understand that most loans have an origination fee that goes directly to the broker. The broker then does a commission split with their loan officer. But that origination fee should be no more than 1% unless the broker is not making anything on the back side of the loan (called a yield spread).

For example, if they’re giving you a really good interest rate and they’re not making anything on the back side, the yield spread, then I ‘m willing to pay 2%. But only if I’m confident there aren’t any junk fees.

I usually tell the broker that when they give me my interest rate quote, they can make 1 on the front and 1 on the back. For less money out of pocket, at closing, they can make their money just on the back end and you can save 1%—out of pocket. Your rate will be a little higher, but that’s what I typically do.

Questions about the loan process? Let me know in the comment section below!

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Billy Epperhart
Billy Epperhart
4 Comments
  • Jill Stabenow
    Posted at 11:04h, 15 May Reply

    Billy-
    I am trying to understand the bank fees you are explaining above. I don’t understand the 1% on the fron 1% on the back. Thank you.Go slow, just starting out. Thank you, Jill

    • Billy
      Posted at 13:59h, 15 May Reply

      Jill,
      Thanks for your question. The 1% on the front is typically an origination fee. And before 2009, a lot of lenders were able to make a 1/8th of 1% to 1% commission on the loan when the papers sold on the back end on top of the origination fees. But right now, if you’re on the borrowing side, you mostly need to worry about how much you’re paying on the disclosed loan costs on the front end.
      Billy

  • Joe Johnson
    Posted at 09:59h, 21 June Reply

    Billy, could you give the same tips as in this article, but for the seller. We are getting ready to sell 3 house but up to this point all we have done is bought homes and I don’t want to overpay.

    Thanks

  • Cathy Parent
    Posted at 16:24h, 08 September Reply

    Hi Billy, hope all is well. I am looking at a couple of properties. One of them is a foreclosure. I have been trying to recall if you covered them in class. My question is how do you negotiate with a bank on a foreclosure? I will have it checked out of coarse but I was thinking, do they mark these up??? Just not sure? Any thought would be appreciated. The bank has dropped the price 9K in the last month. Asking 40,900. I will be looking at it next Tuesday. Thinking I could fix it up while I live in it and then rent it out or rent as a vacation property. It is just across the road from the lake. This lake is a hot spot in the summer. Thanks, Cathy

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