It may not seem like a logical situation, to charge a mortgage application fee, but many mortgage companies do so, and it is legal for them to do so.
Why would any mortgage company charge an application fee like this? The bottom line is that it helps them to turn a profit. In short, when you apply for a mortgage, someone has to take your information and process the application.
To offset the costs of that process, especially in situations where you do not go through with the loan, or do not qualify, this application fee can help to cover those costs of the lender.
What happens when you apply for a mortgage loan?
1. The first step is to meet with a local loan officer to pre-qualify and determine your potential eligibility for a loan.
2. The 2nd step is to submit your completed application to an underwriter who will analyze the credit history and the score of the applicant. This gives the first indication as to whether or not the lender will consider the borrower.
3. Most of the time, there are contingencies involved in the approval process. For example, you may only qualify for the loan if you prove your income. However, sometimes there are other options available to those who do not otherwise qualify. For example, the lender may say that if you provide proof that you paid off a debt or that you have documentation that supports your current asset values then you may qualify for a lower interest rate.
4. The loan officers will still need to review the process and will need to ensure that all data is in process properly. The loan officer also works with the applicant through the process. He or she may ensure that document is available and received, and determine if the loan will move further through the process.
Keep in mind that not all lenders charge these fees, but many do to help offset the costs of all the work that a loan officer needs to do in an instance where the mortgage loan is not approved. This happens in many cases, in fact. The costs will also range significantly from one lender to the next, depending on their fee structure.
In some cases, the applicant pays the fee upfront while in other instances, the applicant will pay it with closing costs. In all cases, you should be informed of the fee prior to actually applying for the loan, or you may not be able to apply until you pay the fee.