How Do I Know If I've Been Lowballed on a Mortgage Quote?

The answer isn't quite "Their lips were moving,"

There are some lenders who make a habit of quoting real loans at real costs that they have reason to believe they can deliver. With probably a much larger number, however, the rule of thumb is that they will tell you whatever it takes to get you to sign up with them, regardless of whether it's true or not. This is fueled by perception of cost and cognitive dissonance. When you're initially shopping a loan, you have very little commitment to the idea. If the prospective lender can imply that the costs will be cheaper than it actually will be, it's easier to generate the business. As you go through the process of getting the loan - loan application, appraisal, etcetera - your degree of "buy in" increases, to the point where about eighty five percent of everyone who finds out they were lowballed at sign up will still sign the final paperwork for the loan. Furthermore, the paperwork is complex enough that over half of those who were lowballed literally never figure it out.

This creates a bizarre set of incentives. Why should lenders tell you the truth at sign up and risk you walking away leaving them with nothing? Especially when half the people never figure out they were lowballed and eighty five percent of those who do will sign the final paperwork anyway. For those keeping score at home, this means above a ninety percent probability that the lowballer will get paid for a completed loan, versus a very high probability that your prospective customers will go with someone else who pretends to have a better loan if this lender tells the truth. Furthermore, they'll quite likely pull your business away from a competing loan that would have been better in the final analysis, but the loan officer there was honest and told you the truth about the loan they could do - the rate and costs. Note that this doesn't mean you'll actually pay less - the real costs are still there, and you'll still pay them. Nonetheless, the whole lowballing scenario is a win for most lenders and loan officers, because even if the client does figure it out and gets angry, the odds are overwhelming that they get paid for a loan, as opposed to not getting paid for a loan. For consumers, the only thing signing up with a lowballer does for you is allow you to fool yourself. Since this makes a huge difference as to which loan (or loans) are the best ones to apply for, but can lead to paying thousands to tens of thousands of dollars in unknown and undisclosed costs that can mean it wasn't really worthwhile to get that loan at all, to soaking up so much money on a purchase that you don't have the down payment you were expecting, to even forcing you to beg money at the last minute from friends and relatives in order not to lose your Good Faith Deposit (along with the property you thought you were buying).

If all of these issues sound like an interesting and exciting challenge to you, you should probably stop reading right now. The rest of the article will be a waste of your time. For those of us who like to have real estate transactions flow easily and in a predictable and stress-free manner, however, avoiding these issues is worth learning what you need to know and planning ahead. But most lowballing lenders won't suddenly become paragons of virtue simply because you ask them to. You need to force them to be honest.

There are two basic components to this strategy. The first is to remove the ability of the lender to pretend charges don't exist by not talking about them. People rant and rail at "junk fees", but the cold hard truth is that most so-called "junk fees" are not junk fees at all, but legitimate costs of the loan that the lender simply declined to tell you about, lest you take yourself to another lender. This is quite legal, by the way. One of my first articles explained the Good Faith Estimate and the lowballing games that can be played, quite legally. The most recent update of that article is Good Faith Estimate. The equivalent article on California's MLDS is on my professional site. Require them to fill out every line on either form with an actual number of dollars - no PFC, POC, or anything else. If the number is zero, say it's zero. This gives you a real idea of what all the charges should be.

There is a better, simpler, alternative, that's far simpler for most folks: Force the lenders to quote a loan type, the rate, and the total costs of doing that loan - including all third party fees - and guarantee that total, in writing. Note that this doesn't include the money needed to set up any Impound account and it also doesn't include prepaid interest, both of which are money that most people prefer to roll into their mortgage balance if they can, but are not costs because they are your money that goes to pay for things you would have to pay for anyway - property taxes, homeowner's insurance, the interest on that monthly payment that you never actually skip. It's still a better idea to come up with the money for these "prepaids" out of pocket if you can.

But if lenders guarantee their quote in writing, this removes the incentive to low-ball. You're only paying $X, end of discussion. Any money over that that the loan costs comes out of their pocket - dollar for dollar. So anything extra they try to gouge you for comes straight back to you from them. Yes, you need loan type and the rate to be part of that guarantee, because there is always a tradeoff between rate and cost on loans, and if you lock down the cost, they boost your interest rate by one or more steps to pay the difference. Lenders don't like making these guarantees, and not just because some folks won't qualify, but because it removes their ability to lowball you. But if they're talking about a loan that they really have, and can really deliver to you on the terms they're talking about, they should be willing to make such a guarantee. If they won't, there is a reason, and it tells you all that you need to know about their truthfulness.

Another one of my early articles covers the Questions You Should Ask Prospective Loan Providers (link is the most recent update). Print it out, take it with you when loan shopping. Make copies and record the answers from each prospective lender if you want. Each and every single question on that list will save you from problems most people don't know or don't ask about. If a prospective lender starts hedging too much, you know there's an issue. Terminate the interview, and find a different lender.

It's very easy for mortgage lenders to sell you upon the benefits of a much better loan than they have any ability to or intent of delivering to you, and to do so legally. You can take steps to defend against such, or you can be one of the victims. It is overwhelmingly likely that a guaranteed quote is real and deliverable, while a quote that isn't guaranteed will be far more expensive in actuality despite a lower quote, because a non-guaranteed quote is literally so much hot air. By themselves, the standard forms you get at loan sign up are worthless. But the fact is that any kind of competent loan officer should have a pretty good idea what is and is not deliverable, while consumers have no such reliable pipeline of information. Requiring a good guarantee puts the responsibility for paying any increases where it belongs: On the lender and loan officer, who have the necessary information to quote loans that are really available and deliverable to someone in your circumstances, but usually find it to their advantage to quote significantly less than the actual costs in order to get you to sign up with them.

Caveat Emptor