Appraisal Gap, Fee Tolerance, and an Affiliated Title Agency
Buyer Tessa is under contract for a $380,000 townhouse and plans a 90% loan-to-value conventional loan at 6.5% for 30 years. Her Loan Estimate shows a $3,420 origination fee (1% of the original loan), $650 appraisal, $1,200 title, $250 recording, 12 days of prepaid interest, and three months of tax and insurance reserves. Taxes are $3,800 a year and insurance is $1,500 a year. The seller agreed to a $6,000 credit toward closing costs. The appraisal comes in at $365,000. At closing, the lender's final Closing Disclosure shows a $4,100 origination/underwriting charge instead of $3,420. Tessa has $45,000 in cash. The brokerage's affiliated title agency will pay the brokerage $250 per closed transaction. The listing agent suggests Tessa 'just waive the appraisal contingency and bring a second loan' to close.
1. Recalculate Tessa's maximum loan and cash needed to close. Does she have enough cash? Show your work.
Read the worked answer
Lenders use the lesser of price or appraised value, so 90% times $365,000 equals $328,500. Down payment equals $380,000 minus $328,500, or $51,500. Closing costs: origination/underwriting $4,100; appraisal $650; title $1,200; recording $250; prepaid interest equals $328,500 times 6.5% divided by 365, or $58.50 per day times 12, or $702; reserves equal three months of taxes ($3,800 divided by 12 times 3, or $950) plus three months of insurance ($1,500 divided by 12 times 3, or $375), totaling $1,325. Total costs are $8,227. Subtract the $6,000 seller credit, leaving $2,227. Cash to close equals $51,500 plus $2,227, or $53,727. Tessa has $45,000, so she is short $8,727. The appraisal gap increased her down payment by $13,500 (from $38,000 to $51,500) and reduced her loan by the same amount. A second loan would add debt, may be barred by the first lender's underwriting, and does not solve the appraisal contingency. Better options: negotiate the price to $365,000 (then cash is about $38,727), ask for a larger seller credit within lender limits, or reduce closing costs. Waiving the appraisal contingency without cash is dangerous.
2. What is the tolerance issue with the $4,100 origination charge, and what remedy is Tessa entitled to at closing?
Read the worked answer
The $4,100 charge is $680 above the $3,420 Loan Estimate. Origination fees charged by the lender are generally zero-tolerance: the lender cannot increase them unless a valid changed circumstance justifies the increase and a revised disclosure is issued. The appraisal lowering the loan amount does not justify a higher origination charge; if anything, 1% of the smaller loan is $3,285. The lender must cure the excess by reducing the charge or providing a refund at or before closing. If the $4,100 includes a separate underwriting fee in the 10% cumulative tolerance category, the 10% limit is $342 on the $3,420 baseline, so the $680 increase still exceeds it. Tessa should demand a corrected Closing Disclosure at least three business days before closing and check all zero-tolerance fees, transfer taxes, and lender credits. She should not sign a waiver. If the lender refuses, she can delay closing, complain to the Consumer Financial Protection Bureau or state regulator, and preserve the Loan Estimate.
3. Evaluate the affiliated title agency payment and the listing agent's advice. What should Tessa be told?
Read the worked answer
An affiliated business arrangement is permitted only if the title agency discloses the affiliation in writing, tells Tessa she is not required to use it, and does not pay a referral fee. A $250 payment to the brokerage for each closed transaction looks like a thing of value for the referral of settlement business, which RESPA Section 8 prohibits unless it is bona fide compensation for actual services at fair market value. The brokerage should not accept it without a written agreement, a fair-market-value analysis, and disclosure; even then, per-closing payments tied to referrals are risky. Tessa should receive a written AfBA disclosure and a list of alternative title companies. The listing agent's advice to waive the appraisal contingency and bring a second loan is not neutral advice; it pressures Tessa to take on risky subordinate debt and gives up her contractual protection. Agents should not give legal or financial advice beyond their competence. Tessa's own agent should run the numbers and recommend renegotiation or walking away.