An overage, as you might guess, refers to a surplus. And in the case of a home purchase, that overage, or at least part of it, tends to wind up in the pockets of loan officers at the expense of the home buyer.

Simply put, an overage is an amount above the loan amount that is advertised. The overage usually stems from a higher interest rate, origination fees or points.

For example, the advertised loan may call for a 5 percent interest rate and 0 points. But a loan officer might convince a home buyer to agree to a 5 percent rate and 1 point. Points are tax deductible during the year the purchase is made and a loan officer may suggest that a purchase might be more easily obtained if the buyer is willing to pay a point. On a $100,000 loan, a point is worth $1,000 and that $1,000 is considered an overage.

Loan officers typically keep half the overage, though at some institutions they can keep the entire amount.

Shrewd loan officers may also obtain overages by increasing the interest rate slightly and offering rebates in the form of negative points. Unlike adding points to a purchase, which are usually paid at the time of closing, bumping up an interest rate slightly does not require the borrower to pay any more out of pocket, though the borrower will be paying extra over the life of the loan.

It’s Just Business

Defenders of overages argue that wheeling and dealing are simply part of doing business and that negotiating all the terms of a purchase is standard procedure in many markets.

You can compare this to buying a car. A car salesman has a minimum price he can charge, but there are dealer fees, rebates, incentives, trade-in possibilities and financing arrangements through the dealership itself that allow for all kinds of extra dollars to be moved around, with some winding up in the wallet of the salesman.

Avoiding Overages

Overages are not a required component of a home purchase, and they can be avoided if you’re careful. Pay close attention to the advertised terms of loans and be wary of accepting alternate terms proposed by a loan officer

You can even ask, “You’re not charging me an overage are you?

The two other important steps you can take are to shop around for the best loan for you and to carefully read all the paperwork, especially the Good Faith Estimate of Disclosure, which details the terms of the loan.

Unfair Lending

The U.S. Department of Housing and Urban Development has historically allowed for overages (though that may be changing – see below), but has repeatedly warned financial institutions and consumers about the inherent risks of overages.

Housing officials have been concerned that the arbitrary nature of the practice can mean certain groups may be charged overages more than others. Certain ethnic groups or buyers with poor credit who are simply anxious to buy a home can become targets.

Future of Overages

Charging overages may soon be a thing of the past. Some institutions, such as Bank of America in 2010, have taken it upon themselves to enact policies that will not allow overages on home purchases or re-finances. Federal legislation is also in the works to restrict loan officer compensation.

Loan officers typically rely on straight commissions for originating loans. But one trick loan officers have used is to take less commission in order to get a deal done that will pay them more in an overage than they’re losing by taking less commission. A bill working its way through Congress in 2011 would even stop that practice.

By doing away with the financial incentive to charge overages, the aim is to eliminate overages altogether.