How To Effectively Shop for A Real Estate Mortgage Loan
This is a little harder than shopping for buyer's agents, so congress critters might not be able to do it. But it's nowhere near as tough as high school algebra, so even if you're a politician you can just get your child, grandchild, niece or nephew to help you. High school aged children of your friends would work also. And if you're a politician who doesn't have any friends with children, you've got worse problems than getting the best home loan.
This problem actually breaks into two cases, one where you are looking for a purchase money loan and one where you are looking for a refinance.
For purchase money loans, the first step probably should not be an internet quote shop. Whether it's one of the ones where lenders advertise their lowest rates or one of the ones where you ask for four quotes (and get four hundred companies calling you), neither one of these is likely to be a good use of your time. At this point, you are trying to find out what loans are available to you, and how much of a loan you can afford based upon those loans. What you want is not someone who's trying to sell you their loan, what you want is someone who will tell you what's going on in the loan market right now, and how much you can afford (assuming the rates don't change).
What you need is a good conversation with a loan officer or six. At this stage, you're not willing to sign up for any loan, but you are looking for information that tells you whether or not that loan officer is likely to be a good prospect when you are. Are they willing to take you through the process verbally, and explain the results that they get and how they got them? They should use your salary as a starting point, move through a debt to income ratio and subtract from that your current monthly obligations, to arrive at what your monthly budget is for housing. From there, they can use current interest rates, as well as approximate tax rates and insurance costs, to show how much you can afford per month for housing. I would insist that they perform this computation based upon currently available rates for a fully amortized thirty year fixed rate mortgage with no more than one point of combined origination and discount. If you then want to choose an alternative loan type, and there may be reasons why you want to strongly consider doing so, you nonetheless know that you can afford the loan for the property you are considering, and that you're not getting in over your head with a loan that's going to turn around and bite you.
Now, just because the first loan officer gives you a number you are happy with is no reason to stop shopping. You want to have this same conversation with several different loan officers. The reason is confirmation. There is a large amount of pressure to qualify you for the largest loan possible, especially in the highly priced urban markets where most of the country lives. A little bit of difference can make a lot of difference on the property you think you can afford, which makes it a lot more likely that the average person will come back to them for the loan. They said they could get you a loan for $500,000, while the guy down the street said they could only get you a loan for $470,000. If, by some mysterious coincidence about as rare as gravity or air, people decide they want to stretch their budget to the maximum or beyond, who do you think most people in that situation will come back to? Most people buy a property at the highest possible end of the range they've been told they can afford. Actually, the most common thing that happens around here is that they'll go back to the people who said they qualified for $500,000 to see if there's any way they can stretch it so that they can qualify for this $530,000 (or $800,000) property they've gotten their hearts set upon. Since loan officers learn this pretty quick but you're still going to have to live with the consequences, you want to make certain they're not overpromising what you can deliver.
There are all kinds of incentives for loan officers to inflate pre-qualifications for loans. They get a higher probability of a larger commission check. There aren't any real reasons to give you the real numbers, as opposed to those highly inflated ones, except not wanting you to go through foreclosure and lose the property. The foreclosure thing is months to years away, and not certain, while the commission check is here and now and their benefit, as opposed to your problem. By the way, if you're one of those people who manage to beat the numbers and get through buying a property more expensive than you can afford, you're going to be thinking that loan officer walks on water and is your best friend in the world, because they got the loan through that "nobody else could." This is preposterous, but it's amazing the way that human psychology works, isn't it? With the way prices were climbing in 1996 through 2004, there were an awful lot of loan officers who got used to "betting on the market," and winning, because even if their client could not, in fact, afford the loan, they could refinance on more favorable terms when the rates dropped and the owner's equity went to more than fifty percent due to the general market. And if the rates didn't move by enough to save their house, they could still sell for enough to make what seemed like a mint. The predictable result was that these clients think that these loan officers are wonderful. Unfortunately, that's not the market we have today. That is unlikely to be the market we have at any point in the near future. As a result, you have these same people doing business with these same loan officers today, and losing their shirts as well as their homes.
What you need is to keep going, and keep having these conversations with loan officers. Why? The first one may have been the Marquis of Queensbury, but then again they may have been the Marquis de Sade. What you need is evidence. Evidence of confirmation. Evidence of consistency. Evidence that both they and all of the other loan officers you meet with are performing these pre-qualification upon the basis of sound loan underwriting and rates that are actually available and not too expensive in terms of up front cost, that they are remembering to make allowances for the expenses of property taxes and home owner's insurance, and association dues and Mello Roos and everything else that may be relevant. You're going to pay these things. Prospective loan officers should make appropriate allowances up front, because they're going to be part of what's coming out of your paycheck.
What's a sufficient number of conversations? At least three in any case, but I would keep going until I had talked with loan folks that have at least two or three significantly different approaches to your loan. Negative amortization is right out, of course, and you can cross anyone who suggests one off your list of possible loan providers (at this update, thankfully, those abominations that wrecked millions are essentially gone), but while you should do the calculations of what you can afford based upon a thirty year fixed rate loan, in most markets there are other loans such as a fully amortized 5/1 that are well worth considering, and that will serve most people better in most situations. Every single loan there is has its advantages and disadvantages. The disadvantage to the thirty year fixed is that it is almost always significantly higher rate than other alternatives, and more people than not keep exchanging one thirty year policy of insurance that their rate won't change for another thirty year policy every two years. The question I would like to ask those people is "Why buy the thirty year guarantee in the first place?" Why not buy the three or five or seven year guarantee, if that's all you're going to use? Right now the costs may be very comparable, but the shorter fixed period loans are usually much cheaper. You want to budget as if you're going to that 30 year fixed rate loan (the most expensive there is), but there are many reasons why something else may suit your needs better when it gets right down to it.
Similarly, why spend money buying the rate down if you're not likely to keep it long enough to recover the money you spend in the first place? Spending $8000 in points, especially if you roll it into your loan where you're going to have to pay interest on it, may cut your monthly interest charge from $1960 to $1833. However, it takes between six to seven years to break even when you consider interest on the remaining (higher) balance.
It's possible one loan officer will cover several approaches. Much as it pains me to tell you this because I habitually do that, you should still talk to more than one loan officer. You want more than one person's word for one what is available in the way of rates and the costs to get them, and it is always a Trade-off between low rates and high costs. Not understanding that there is always a trade off between the rates available and the costs to get them is the most critical piece of knowledge that causes most mortgage borrowers to make bad choices that cost them tens of thousands of dollars.
Furthermore, you want confirmation of what loans and rates are available to you. If three or four loan officers independently tell you the same things, you've got a pretty good idea that they're approaching it correctly and giving you real information. The ones that make it up are likely to do base their usually inflated numbers upon different markups and mis-assumptions. Find a financial calculator on the web or buy one or use a spreadsheet, and check their numbers yourself. This is one of the largest sums of money you will be dealing with in one transaction in your life. You owe it to yourself to take the time and do the research to be certain you are getting good information. Due to the fact that real estate loans are very large amounts of money, and the loan transactions are very complex, there are a certain percentage of people in the industry who will use this opportunity to skim money effectively back into their pocket. These amounts of money, quite large by most standards, can be camouflaged under the cover of the much larger amounts of a very complex real estate transaction. Even the most honest loan officer is in the business to make money. This is in almost direct conflict with your desire to get the best loan possible at the lowest costs, but the loan officer who actually delivers the best loan to you has earned every penny of what they make, whatever it is.
Once you have credible, verified data on how much of a property you can afford, then you can start looking for buyer's agents, and actually looking at properties. Keep in touch with loan officers who you might be working with during the shopping process. Why? Rates can change. Actually, rates will change, and the higher up the scale and more highly qualified you are, the more often they tend to change. Sub-prime rate sheets might stay constant for a month or longer, with a modifier that may change or may not. Top of the line "A paper" changes every business day, at a minimum. Maybe not grossly, but it does change. I saw rates on 30 year fixed rate loans with equivalent costs go from about 5.25 to 6.625 in one month during late summer 2003. If you did the math based upon 5.25 and you qualified for $500,000, you only qualify for about $430,000 at 6.625. That is data that is supremely important to your property hunting. Do not allow a real estate agent to tell you that you can afford more than your real budget. Ever. If they say they can't find all of your desired characteristics within that budget and in your area, ask them for alternative suggestions. Compromising what you want is better than foreclosure. Going without is better than foreclosure. Fire the agent immediately if they won't work within your budget. When you find something you like and have a purchase contract, your procedure becomes very comparable to a refinance. The differences are comparatively small.
For refinances, you have a property already. There is an existing loan that has to be paid off. If you're in a purchase situation, you should already be in contact with several lenders, and you don't really care about any existing loans on the property because they aren't your problem.
But now is the time when you want to do some intensive lender shopping. Furthermore, you really want to compare what everybody has at the same point in time, if it's at all practical. For instance, generally the available rates will be a little bit lower in the middle of the week. They will more often than not be higher on Monday, Friday, and Saturday than they are on Tuesday, Wednesday, and Thursday. This isn't always true, especially if the financial markets are reacting to some large event, but it seems that it happens more often than not.
In a purchase situation, talk to your existing prospects and keep adding others until you get enough of them. For refinances, you want to move quickly in order to be a fair comparison. Whether you are buying or refinancing, ask every one of them this set of questions you should ask prospective loan providers. What you are looking to do at this point is choose who you are going to sign up with. Before you do that, you want to cross-check what every single loan officer tells you with the available evidence. Weigh what you know against what you are told by any given loan provider, and what that loan provider tells you as compared to other loan providers. Most often, the preponderance of the evidence will clearly support the ones you should sign up with.
Now, I know I said this earlier. Not only does it bear repeating as many times as I can find an excuse for, the folks interested only in refinancing might have been skipping ahead. Remember that you can get the a loan officer who's the equivalent of the Marquis of Queensbury, but more of them are closer to the Marquis de Sade, and most will be somewhere in between. The bigger the lie they tell you, the more likely it is you will sign up with them. The government really did try to change this with the 2010 Good Faith Estimate, but they can still low-ball the hell out of that tradeoff between rate and costs to get you to sign up. Sure, it's possible you might walk away at document signing, although not likely. If you don't sign up with them, they are guaranteed not to make any money.
When I first wrote this article, it was possible and feasible to lock every loan at sign up. That has now changed to the point where even I cannot do it any longer. If I lock a loan and don't actually fund and deliver it, the lender charges me (which really means all my future clients) a stiff penalty. This is now universal even for direct lenders, so good loan officers who are trying to deliver a lower cost loan are not locking at sign up any longer. The only lenders who can lock at sign up are those who have built inflated margins into their loans, so that they can pay for those charges out of the increased profits they're making. There is now a decision making process on when to lock a loan that I take every client through.
There is always a Trade off between rate and cost in real estate loans. It's like gravity. Exactly what the available trade offs are varies over time, and varies from lender to lender at any one time. Remember, that lender can low ball you pretty badly to get you to sign up, and once you sign up, you're not likely to discover that they did low ball you until time to sign documents. Very few people continue to look at the market once they have chosen a provider. The reason many loan providers want a deposit is so they can hold that money hostage for you signing the final documents. Unless no one else can do your loan, I would never even consider putting up a deposit with a lender. What they're telling you by requiring a deposit is that they want you to stop shopping. If they are telling you about a loan that really exists, and their loan prices really are good, there is no reason for a loan to require a deposit. You will pay for the appraisal when it happens, but that's less than a deposit.
I do advise you to ask your other prospective providers about whether the loan you choose is deliverable, however. Mind you, there's a strong incentive for them all to say "no" but then ask them "why isn't this loan deliverable?" If the answer starts discussing wholesale pricing and lender incentives and bonuses that they have and others do not, listen carefully. What that loan provider makes is tied up in how costly your loan is really going to end up being. When they explain why the loan margin really isn't there to deliver the competition's lower quote, listen to them. Then take it back to the people who provided that quote and say, "convince me you can actually do this". This includes making enough money to make it profitable for them - at least a couple thousand dollars. The provider making this money is not a problem and not a reason to try and negotiate it down - what they make does not equate to "profit" let alone what the people doing your loan actually get to spend. Remember, you've already decided this was the best loan available based upon the bottom line to you! What it is is insurance that they will actually deliver this loan they are talking about because nobody does free loans. My clients who ask this find out exactly what loan from what lender I'm basing my quote upon and much I plan to make on the loan - and if that's a problem for them, they can go get someone else's more expensive one!
On a regular basis, I hear various folk advising people that they can avoid all this by "just picking a large, reputable provider." Nonsense. This is wishful thinking at its worst. Large scale reputation is established by advertising. Think about that for a moment. "Large reputable providers" spend millions per week trying to get the suckers to come in. Who pays for that? It certainly isn't the people who work there! "Large reputable providers" will sit you down in a nice comfortable chair in a beautiful office, and lull you with talk of how well they are going to take care of you. Somehow, they manage to deflect the conversation away from exact numbers and exact quotes. You can't compare loans without specific numbers. Then, this "large reputable company" is going to deliver a loan with a rate that's a quarter of a percent higher and costs you two points more than you could have had, not to mention higher fees - and they'll still be low-balling you! Trusting yourself to a "large reputable company" without the exact same due diligence isn't avoiding the issues of shopping a loan in that jungle out there - it's intentionally delivering yourself into the hands of the head-hunters. These companies do not compete on price. They compete on the basis of serving cattle who want to be comfortable. Serving them up to be slaughtered. On a $400,000 loan, you just wasted $8000 up front, and $1000 per year. Glad you could avoid that hassle, glad to avoid talking to sales people, glad you could avoid taking half a day off work to shop loans? You've paid handsomely for that avoidance. Kind of like committing suicide because somebody might murder you.
The main issue in all of this is finding the loan on the best terms available to you. The main obstacle to that is the fact that lenders can low ball their quotes shamelessly, and it's legal, so it takes some serious research to figure out what is likely to be real from what is not. The new rules for 2010 change a lot of that, but still leave gaping loopholes that any loan officer who tries can sail an ocean liner through.
When I first wrote this, I said "Unless there is something external holding the whole process back, such as "Your house isn't going to be finished for two more months," I will bet money that a loan done in thirty days or less is better than one that takes sixty days or longer." This is still a valid principle in that the loan that is done faster is likely to be better. The problem is that new government rules and regulations and Wall Street required underwriting checks inspired by their new requirements have added a minimum of about 3 weeks to the time it takes to do a loan since then. I used to be able to reliably fund a purchase money loan in 21 days or less without any extraordinary effort, a refinance in three extra days to cover the right of rescission. The way the process has been externally complicated, it is questionable if even the best loan officer trying their hardest will have the loan funded within 45 days of application. Sixty days is more likely. Plan for this. It's just a fact of life - one more "service" provided by your elected representatives. But better sixty than ninety or more.
You need to do your due diligence up front. Real estate loan rates change every day, and whatever reason it was that caused you to need or want a loan is almost certainly time critical. For purchases, you've got a purchase contract that's good for only so many days before they'll start charging extensions. For refinances, if it's to get cash out, you have a time critical need for that money, and if you don't get it on time, you're likely to have to pay it out of your checking account or put it on a credit card, if you can. For refinances without cash, just to get a lower rate, those attractive rates are not going to last forever, The one thing I can guarantee is that the available rates are not going to be the same by the time you go to sign documents at the end of the process. If the lender doesn't deliver what they talked about, it's going to cost you a large amount of money. Therefore, you really want to do enough due diligence to give them a reason to actually deliver that loan they talked about in order to get you to sign up.
Caveat Emptor
Original Article here
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There are a lot of variables to keep in mind when finding a mortgage loan. Just make sure you don't take a loan that is beyond what you need, it will only come back to haunt you later.