Mortgage Overages Explained
12 minute read
Mortgage Overages Explained
Usually, the word “overage” has some positive connotations. When you have a profit overage for the month, it means that you’ve got more money in the bank than you’ve spent on goods, services, rent, and everything else.
But when it comes to mortgages, an overage is not something that you want to happen, particularly because it means your lender might be using you to pocket some extra cash.
Let’s talk about what a mortgage overage really is, as well as how you can take steps to avoid them.
What Is a Mortgage Overage?
When you apply for a home loan or any type of loan, the loan officer’s the primary point of contact. Loan officers are a bank, credit union, or financial institution representatives who assist you in the application process.
Loan officers need to have comprehensive knowledge of lending products and current trends in the housing market. This includes keeping up to date on the “posted prices” of loan programs on a given day.
Posted prices are the price at which buyers or sellers are willing to pay for a given commodity. This allows investors and brokers to discover the best available prices for given commodities, such as home loans so that they can exchange goods at the most inexpensive price point.
Here’s an example: The price of oil is constantly changing due to unforeseen events, like oil spills or natural disasters. While each participant in the oil industry is free to set their own price, most use a common benchmark known as the West Texas Intermediate as a reference.
Using this benchmark can act as a foundation for which oil prices can fall. Anything that exists over this price point will likely not be exchanged on the market, as there would be alternative offers that are much less expensive.
Essentially you can think of a posted price as a baseline, recommended price for a particular good. And when it comes to mortgages, the posted prices consist of current interest rates and points for different loan programs that a loan officer may offer to you as the borrower.
So what does this have to do with overages? A loan officer’s goal is to try to get you to agree to loan terms, at least the posted price. They receive about a .5 - .7% commission on the entire loan amount when they do this. So if they can get you to agree to a $200,000 loan, they’ll get about $1,000 - $1,400 in commission.
However, their goal is to get you to agree to pay more so that they can pocket some extra cash. For instance, let’s say the posted price on a given loan is 5% interest and 0 points. Points lower your interest rate in exchange for paying an upfront fee.
If the loan officer is able to get you to pay the same 5% interest while also forking over 1 point, they’ve achieved an “overage.” Points are usually around $1,000, and the officer will probably be able to pocket half of that.
So if you ever hear someone in the mortgage industry say that they had a “nice overage,” they’re referring to the fact that they were able to get an individual to pay more than the posted price on a given loan.
How Do Mortgage Overages Affect the Borrower?
Most often, individuals fall victim to paying more on a loan because they are unaware of posted price changes. While most lenders are ethical enough to tell you that prices have changed or increased, some aren’t as friendly.
A loan officer who is focused on cashing a check might do everything in their power to try to get you to pay more on a given loan. For example, they may try to get you to pay more points or upfront fees so that they can split the extra income with the lender itself.
Mortgage overages can put you at a financial disadvantage, as you may be paying more out of pocket up front. Additionally, loan officers may use rebates as a means of achieving an overage without taking any extra cash right away.
If you’re willing to pay a higher mortgage rate, you’ll get money back from the lender in the form of a rebate when the mortgage closes. However, the higher interest payments over time may count as an overage where the loan officer will be able to pocket some extra cash.
How to Avoid Mortgage Overages
Knowing that mortgage overages exist is the first step towards avoiding them during your application process. You can help avoid these fees by confronting the lender.
Let the lender know that you’re aware mortgages are not set in stone and that you have the freedom, and power, to explore other options. While loan officers are often helpful liaisons, they want to make money as much as anyone else. Don’t be afraid to ask them directly about whether or not you will be charged an overage.
If a loan officer seems to become offended, upset, or defensive because you respectfully make them aware that you won’t be paying an overage, we suggest going elsewhere. The officer is supposed to be a helpful resource for you, not a shady business person.
Additionally, not all loan officers are commissioned. If you’re afraid of confronting a loan officer about posted prices, you can work with an Upfront Mortgage Broker instead.
Upfront Mortgage Brokers, or UMBs, do business in a fully upfront and transparent way. They’ll disclose fees in advance and in writing, as well as the current posted prices, so that you know you won’t be charged an overage. UMBs don’t typically earn a commission, so they won’t try to get more money out of you.
UFMBs are hired in the same way that you might hire any other professional service provider. While you’ll need to pay a separate fee to receive their guidance, they can help you avoid heftier fees that might be associated with mortgage overages or other risky loan features.
Is There Such a Thing as an Underage?
Underages are the exact opposite of an overage, so they occur when a borrower is undercharged for a given loan package. They typically occur when competition for a particular type of loan is especially popular in the current market.
If you’re an aggressive mortgage shopper who knows your way around a bargaining table, you may be able to secure an underage on your given mortgage. With that in mind, an underage often causes loan officers to focus their efforts on achieving an overage to balance out the loss of commission, so be cautious whenever you’re working with an officer for such a pivotal financial decision.
Mortgage Overage vs. Escrow Overage
A mortgage overage can be confused with an escrow overage, but there are some major differences between the two.
When you take out a home loan, you’ll get an escrow account. An escrow account is a savings account where money from your monthly loan payments is held. You can use this money towards features like homeowner’s insurance or property taxes.
Each year, you get an annual escrow analysis that reveals exactly how much you need to pay each month to go towards escrow in order to cover these sorts of fees. However, this projected price is just an estimate.
Sometimes, you may be paying more money into your escrow account than you need to cover your charges. If that’s the case, it’s known as escrow overage. You’ll receive the difference in the form of an escrow refund check. Additionally, an escrow shortage occurs when you’re not putting enough money into escrow.
This is obviously different from a mortgage overage, as mortgage overages are not ideal. Conversely, an escrow overage can be a nice, welcomed sum of cash in your pocket.
Mortgage Overages vs. Cash Out Refinance
Another common mistake is made when individuals confuse mortgage overages with surplus funds from a home cash-out refinance. While some people may refer to this as an overage, it’s not the same thing.
During a cash-out refinance, you’ll refinance your home for more than what you still owe. For example, if you still owe $65,000 on your home, you may refinance for $75,000. The extra $10,000 exists as “cash in your pocket” that you can use for whatever you’d like.
While this is technically an overage, it is correct to refer to the extra funds as “surplus funds” in order to avoid any confusion. Surplus funds are also relevant in a foreclosure sale.
The Job of a Loan Officer
In most cases, a loan officer is one of the most important tools between you and a lender to help you get a mortgage.
The chief job of a loan officer is to assist you in applying for a loan. They’ll walk you through the current offers and packages that the financial institution is currently offering, as well as give you some advice in regards to what loan terms might best suit your needs.
A loan officer will help with the initial screening process to see if you’re a good candidate for a loan right off the bat, but they probably won’t proceed with an application if you don’t meet specific criteria.
If you’re a good fit, the loan officer will get you started on the application itself, helping to prepare and gather documents that the mortgage processor and mortgage underwriter will need in order to approve you for the mortgage.
How to Shop for a Loan Officer
You have the freedom to shop around for different loan officers based on their rates, as well as your own perception. If you get a bad feeling about a specific officer, then it’s probably a good idea to go elsewhere.
It’s wise to ask friends and family about their experiences to see if there are any lenders that they specifically recommend (or do not recommend). This can help you avoid overages and let you find a loan officer that makes you feel comfortable.
You must have a good relationship with your loan officer, as you’re likely to have more interaction with them than anyone else at your lending company.
Also, you can get a referral from your real estate agent. Since your interests are the same as your agent’s, they won’t direct you to officers that have a history of shady practices. In fact, most real estate agents work with “preferred” loan officers who have a history of reliability.
A mortgage overage occurs when a loan officer gets you to pay more for a given mortgage than the posted price or baseline market price. Typically, this is done by having you pay more points. Loan officers gain more commission by achieving overages.
You can avoid overages by letting a loan officer know ahead of time that mortgage rates are not set in stone and that you will not be conducting business with them if they charge you an overage. Additionally, you have the freedom to shop around for other lenders. A real estate agent, as well as word of mouth, can help steer you towards loan officers with a good reputation.
Network Capital can help get you on the right track if the underwriting process is making your head spin. Everything from start to finish is conducted in-house, letting you get to the closing table in as little as 15 business days without having to communicate with multiple parties at once. It’s just one of the ways that we’ll help kickstart an even better life for you and your family.
Loan Officers : Occupational Outlook Handbook | US Bureau of Labor Statistics
About Us | Upfront Mortgage Brokers Association
What are surplus funds in a foreclosure? | California Rural Legal Assistance Inc.