Why would a mortgage company charge an application fee? Mortgage companies strive to make a profit--even from the applicants who they will not approve--but the basic answer to this question is simple: because they can.
Applying for a Mortgage
Applying for a mortgage sets a few different things in motion. Typically a computer program will immediately analyze the credit history and score of the applicant and make a preliminary decision as to whether or not the application should be approved. Sometimes the computer program will make the decision that the application should be approved as requested and, in some instances, the computer program will approve a different amount or make the approval contingent upon some conditions. Common contingencies include proof of a particular debt being paid off or documentation to support certain assets.
While mortgage companies do generally save money by utilizing an automated underwriting computer program to have the first look at incoming home loan applications, loan officers must still be on hand to review the decision made by the computer program and to deal directly with the applicants. In other words, the acceptance of a mortgage application does cost the mortgage company money in some ways. By charging an application fee, the mortgage company offsets the costs associated with processing applications from potential borrowers that will not be approved.
Other costs associated with accepting mortgage applications include:
- Purchasing the credit report
- Maintaining the website accepting mortgage applications
- Payroll for staff directly associated with mortgage applications
Even if a mortgage application is denied by an automated system, there is a good chance that some applicants will want to speak to human representatives in order to find out more about the denial or to request an additional review of their applications. For this reason, mortgage companies cannot be completely automated without angering some customers who want to speak to an actual person to get answers. Charging an application fee helps pay for the costs associated with maintaining staff.
Why Would a Mortgage Company Charge an Application Fee Now?
Application fees for mortgages may seem somewhat outdated considering most applicants nowadays are aware of two important facts:
- Mortgage applications are mostly processed by automated underwriting systems, which makes the process less expensive for mortgage companies than it once was.
- Many mortgage companies do not charge application fees at all.
Why would a mortgage company charge an application fee in present day despite the fact that not all mortgage companies do? Many of the mortgage companies that charge application fees are lenders that accept applications from potential borrowers who have less than perfect credit. While it is not easy for people with serious credit issues to get approved for home loans, there are indeed some lenders who will attempt to find a way to approve these customers. These types of loans are referred to as "subprime" and are not nearly as prevalent as they once were.
Many people consider application fees to fall under the category of "Junk Fees" or "Garbage Fees." These are fees added to the total closing costs for a mortgage loan. Other junk fees include origination fees and document preparation fees. While it can be argued that pulling a mortgage loan together does cost the lender money, many counter that the profit comes from the interest the borrower will pay over the years of the loan.
Essentially, junk fees only increase the profit of the mortgage lender and are not required by state or county regulations in order to transfer title of ownership. An application fee is one way for the mortgage company to earn a profit even if the application is not approved.