I’m no different. I shop around for lots of things, and generally go with the best deal. However, some things require more thought because the stakes are that much higher.
Imagine needing to have surgery – would you just trust any doctor? Would you purchase a very expensive car without any warranty or inspection?
Then why would you move forward with purchasing a home for hundreds of thousands of dollars without knowing more about your Real Estate Agent, your mortgage Loan Officer, or the paperwork based on which you’ll make mortgage payments for the next 15-30 years of your life?
Unfortunately, the information to help you is not really out there. Sure, you could look up reviews and if they’re really bad – then you know to stay away. But most mortgage companies don’t have reviews, and most bad reviews never actually get posted.
The reason? You, as the borrower, don’t really have access to the loan process, and can’t identify the culprit when things go wrong. It’s hard to get mad without knowing who to get mad at. You don’t know exactly how mortgage interest rates fluctuate when you’re being told your interest rate went up. And you can’t confirm or disconfirm if your underwriter is just being difficult, or your Loan Officer is a scatterbrain.
You only know what your Loan Officer decides to tell you… so working with someone you trust and that you communicate well with is of absolute importance!
Here are a some pointers to help you make your decision, and I’ll focus on 2 things:
1. Know the basic misconceptions and traps of the industry
2. Numbers talk – you just need to listen
1. Know the basic misconceptions and traps of shopping for a mortgage
You should receive a few different interest rate options to chose from, each with its own pricing. And no, I’m not talking about a fixed rate and one adjustable.
There should be 3 different fixed interest rates, each listing the costs or credits they are associated with. The middle rate should be the one your Loan officer considers best for you, while the other two should be one below and one above to point out the differences.
I can’t stress this enough, given how many borrowers have been mislead by the no-cost sales pitch.
“No cost” just means that you are talking a higher interest rate in return for the lender paying for part of or all of your closing costs. It is a mutual beneficial situation of sorts, but your Loan Officer should be up front about this.
While the intent was good, the practice sucks.
The APR was designed to be a shopping tool for borrowers, helping them choose the loan with lower costs.
Unfortunately – thanks to loop holes in the regulations – some lenders have to disclose all costs, while others can hide some of theirs. The lowest APR isn’t necessarily the lowest priced loan.
All that advertising doesn’t come cheap. Neither do all the people that work for this company, or the rent and utilities they need to pay to keep things running.
Can they get better wholesale rates for volume? Yes. Will you see those savings? No. Because there will always be a CEO that will match the market’s going rate and increase profits for the shareholders.
What you will get with big mortgage companies is often a higher interest rate and a low quality of service. You might be lucky enough to not have any issues on your loan.. but you won’t like what you find if that does happen.
Tip: Beware especially of mortgage companies that charge an up-front application fee to lock you in! Not only is it barely legal, but it should be a huge red flag.
A lot of Loan Officers are under the pressure of a monthly quota – especially with the big mortgage companies. They have bills to pay too, and they will do whatever it takes to get your business.
A few of the tactics employed:
If something doesn’t feel right, go with your instinct. Ask questions. Get answers in writing. Hold that person accountable for what they tell you, and if things change, ask (nicely) for proof.
I’ll leave it to that, because I risk not stopping my rant. I vented on the subject in a previous blog post: 5 Signs You should Ditch Your Mortgage Loan Officer!
2. Let the numbers talk
The single most important piece of document you want to focus on is the Loan Estimate (LE) contained in your initial disclosures package.
This form replaces the old Good Faith Estimate, and you should receive it in about 3 business days from starting your mortgage loan application (but not if you’re just Pre-Qualified and don’t yet have a home under contract). The Consumer Finance website has a really good link that explains this form in detail – click here to access it.
There are 3 types of costs associated with mortgage loans, but only one really makes the difference when comparing lenders.
It’s incredibly hard to deceive you once you understand what is what. I’ll focus exclusively on page 2 of the Loan Estimate , as it lists all the estimated fees involved.
Estimated is an important word here, because fees will normally be estimated a bit high to avoid compliance issues (high is good, low is very very bad). But we’re talking about a couple of hundred dollars high maybe, no more than that.
1. Loan Costs - This is where you compare lenders. See the top part of page 2 of your Loan Estimate
This is where you will see listed fees such as:
When you look at the above section, always look at line J as well – Lender Credits
If you have seller paid closing costs or don’t mind paying costs out of pocket, you’ll have an interest rate that has a small cost (discount %) and no lender credit, or a very small lender credit.
If you have no seller paid closing costs and don’t plan on bringing any cash to close in addition to any required down payment, you’ll have no discount points, but you’ll see a good chunk of $$ listed in the Lender Credits section. This is the “no cost” loan option – the lender is essentially covering your closing costs in exchange for you taking a slightly higher interest rate (anywhere from 0.25% to – 0.5% higher).
The market conditions can sometimes be volatile, with interest rates moving up or down multiple times a day, or significantly during a short period – this happens before every quarterly Federal Reserve meeting and when significant economic events take place. It happened before and shortly after our Presidential Election in 2016!
So, for the most accurate comparison, try asking your competing Loan Officers what the pricing is for the same interest rate ON THE SAME DAY. Use the first quote you get at your starting point. Go back and ask for an updated quote if you happen to have a few days difference.
Other Loan Costs
This is where you can get tricked - Ignore all of the highlighted costs area below, and do not base your mortgage company decision on them!
The fees listed here will be third party fees (credit report, appraisal fee, title company fees, and any inspections required) and pre-paid items (your escrow account setup, the daily interest you pay from funding to the end of the month, and insurance premiums which you shop for).
These fees are a normal part of any mortgage loan transaction, and because they are estimates, some lenders might estimate higher than others. They do not benefit the lender or your Loan Officer, and they are only collected to be distributed to the correct parties – based on actual invoices of services performed. If you notice a huge difference, then you’ll want to inquire on why that is – but small price differences are irrelevant.
Tip: I have noticed it is common practice for some loan officers to tell their borrowers in the initial stage of quoting that their company will not charge some of these fees. While technically true, it is a misleading statement: the lender only insures collection of the monies, and at closing, the title company disburses the funds to the appropriate parties.
Just to give you an idea, appraisals should cost around $500, and escrow accounts are set-up with two months worth of property taxes and hazard insurance. Any escrow overage is returned to you after taxes and homeowner’s insurance are paid.
The daily interest adjusts depending on the day your loan funds – it will be the daily interest amount X the number of days left in that month. So let’s say your mortgage loan funds on January 28 – you will pay for 4 days of interest. Your first mortgage payment will be due March 1st, and will contain the interest charged for the month of February.
If you’re working with a big mortgage company, do yourself a favor and shop around for a good title company instead of going with the one they suggest. In my experience, such title companies will be more expensive, and much slower to deliver.