The Consequences of Not Shopping Multiple Lenders

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Minorities get higher rates.


They add that the fact minorities are more likely to borrow from institutions specializing in high-priced loans could mean they are being steered to such lenders or that some lenders are unwilling or unable to serve minority neighborhoods.

What they describe is called redlining. It is illegal. HUD really gets their panties in a bunch over it, too. Mostly what actually happens is that the lenders simply aren't chasing certain kinds of business. If any comes to them, they deal with it like anyone else. This is standard marketing procedure. Figure out who you're trying hardest to serve, and really chase that segment. If anyone else wants to come to you, that's wonderful and you serve them the same as any other customer, but they're still not someone you're going out of your way to attract.

One thing that the article explicitly said: This does not include or compensate for credit scores. Working with people in the flesh, I have experienced the fact that there is a difference between how various groups handle credit. Often, the urban poor have some difficulty in meeting the requirements for open and existing lines of credit. They are more likely to have failed to make the connection between credit reporting and future qualifications for credit, having at some point made a decision not to pay a creditor. On the flip side, Often, they are more poorly educated about their options or think they're a tough loan when they're not. This extends into the general population, although it's less prevalent. I have a friend I went to high school with. He and his wife make over $160,000 per year between them in very secure jobs they have held for over a decade each. Their credit score is about 760. The loan officer they were originally working with told them they were a tough loan to try and scare them into not shopping with anyone else. The reality is that the only question is what loan is best for them because they easily qualify for anything reasonable. This is far more common than most people think. When I originally wrote this, if you had two or three open lines of credit and your credit score is above 640 - sixty plus points below national average - I could have gotten 100 percent financing, and the possibility didn't disappear completely until you went below 560 (whether it's smart was a question for the individual situation, but I could have gotten a loan done if it was). 100 percent financing is now gone (unless you're a veteran!) but if you've got a five to ten percent down payment and stay within your means, a loan can be done for credit scores down to 620 for conventional A paper, and with a 3.5% down payment down to 580 and perhaps lower than that with an FHA loan. With increasing equity, I can usually get a loan done even for credit scores down to 500 (two hundred points below national average!), albeit with prepayment penalties. Now, the better your situation, the better your loan (e.g. rate, terms, closing costs, etc.) will be, but the question is not usually "Can I do a loan for these folks?" but "Can I find them better terms than anyone else?" and "Should I do this loan or is it really putting them in a worse situation than they're in?"

Quite often, the loan provider that urban poor go to is the one who advertises where they see it - basically, the lender who chases their business, usually by advertising in that area or in that language. Every other lender is still available to them, but they go to the place whose advertising they see. They think "This guy wants my business. He does business with people like me all the time. He can get me the loan." The problem is that all too often, this loan provider has chosen to chase this market precisely because the people in it, most often urban poor, do not understand they've got other choices, and do not understand effective loan shopping, and so this loan provider makes six percent (the legal limit in California) on every loan plus kickbacks and arrangements under the table. They make more on one loan than I do on half a dozen for roughly the same amount of work each, and the loan they do are not as good for their client as others that can easily be found.

Most people are better loan candidates than they think they are, and qualify for better loans than they think they do. It's more often the property they have chosen and the fact it requires a loan bigger than they can afford that creates an untouchable situation than the people themselves.

(I got a ten minute lecture a while back from a nice young couple telling me they "deserved" a rate of four to five percent on a 100% loan for a manufactured home sitting on a rented space, because it was "the same rate everyone else is getting". Well, if it had been on a regular house sitting on owned land I could have gotten them that loan on very desirable terms, but nobody ever did 100 percent loans on manufactured homes, and if there's no ownership interest in the actual land involved then it's a loan secured by personal property, not real estate, and it becomes a personal loan, for which the rates are much higher.)

So keep this in mind if and when you're in the market for a real estate loan, and shop multiple lenders, and shop hard. Remember that all of the times your credit is run in a two week period for mortgage purposes only counts as one inquiry, whether it is just once or whether it's five dozen times. A loan provider does not have to run credit themselves to get a quote, but the information must be complete, accurate, and in a form they can use.

Keep in mind that the loan market changes constantly. A quote that's good today almost certainly will not be good tomorrow. When I originally wrote this, I wrote "If it's not locked, it's not real, and a thirty day lock is not valid unless extended on the thirty-first day, for which you will pay an extension fee if necessary." That is still valid, but lenders are making it very expensive to loan officers and their future customers for locking a loan without it closing, so it has become too expensive to lock loans before there is pretty concrete assurance it will close. So shop hard, with a real sense of urgency, get it done quick, and make your loan provider get it done quick. Any additional stress will more than pay for itself (and the longer the loan takes, the greater the opportunity for stress, too). Loans are taking longer now than they used to due to new regulations that have the effect of delaying every loan for 3-4 weeks, so 45 days is about the fastest you have a prayer of actually getting a loan funded. But I will bet money that a loan done in sixty days or less from the time you say that you want it is a better loan than the loan that takes ninety days or more.

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About this Entry

This page contains a single entry by Dan Melson published on February 10, 2014 7:00 AM.

Mortgage Transaction Case Study was the previous entry in this blog.

Real Estate Loans Require Land is the next entry in this blog.

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