Yesterday, I spoke with a client who thought that he had an incredible loan offer on the table. However, it was a pre-approval for a loan for between $250,000 to $1 million with a wide range of rates. This wasn't technically a loan offer, and I had to caution the client that the situation was one of those classic "too good to be true" scenarios.
Many funding companies try to hook borrowers in by offering up enticing pre-approval numbers. At this point, they can charge a fee for doing some legwork, and the borrower has to pay up or move on in search of another offer.
The client that I was speaking with was very focused on the $1 million pre-approval and was ready to jump in with the funding company he was dealing with. The funding company in question was asking for a guarantee of a 5% fee at that point, and the client was about ready to write the check.
As a borrower seeking financing, you should never agree to pay a fee until you have a very specific offer to consider. Pre-approval numbers with sliding scale rates do not qualify as a loan offer, and you should be extremely careful proceeding with any funding company that requires a fee at the point of pre-approval.
Even when a loan offer is made and a fee is required, read the fine print carefully. There should be some safeguards for the borrower in the loan offer wording in regards to having the fee refunded in certain scenarios, or the ability of the borrower to back out of the offer without serious penalty if desired.