There are MANY factors that affect the rate and closing costs that a mortgage borrower is offered. It is up to borrowers to know how to find that "best deal", and make sure it is actually delivered as promised.
I provide my clients a "mortgage pre-approval worksheet", so they can gain a better understanding as to why it is necessary to think through, and understand, all of the topics I am sharing with you today.
The mortgage loan process is not fun. It's a pain in the neck, but it's crucially important, and consumers need to approach it correctly. Something everyone has in common is the desire to save money. If you understand all of the information presented here, you WILL get the best deal, and you WILL save money. So enjoy!
Factors that affect the loan (most of which are covered in the worksheet that I provide, but not all of these issues can be addressed before seeing a customer's credit report):
Loan Purpose, Property Type, Property Purpose, Desired Loan Program, Loan Amount, LTV, DTI, Income, "Liquid" Assets, Housing Payment History, Employment History, "Middle" Credit Score, Items that appear on the Credit Report that determine the scores, Potential Mistakes on your Credit Report, Positive and/or Negative Compensating Factors, and more.
Table of Contents
- How to choose a lender (or mortgage broker, or loan officer, etc.).
- Why shopping verbal rate quotes and Good Faith Estimates (GFEs) is a big mistake, and potentially very costly.
- Why a lender who provides verbal rate quotes is being unprofessional, if not unethical.
- The difference between pre-qualification, pre-approval, and final approval, and why it is so important that you know the difference.
- Why pre-approval is so important (and why anything short of pre-approval assures you of nothing; Shop pre-approvals, not non-binding quotes and GFEs).
- Why limiting yourself to dealing directly with a bank may very possibly not be your best bet.
- Why you might choose a Correspondent Lender or Mortgage Broker.
- Understanding the business model of your lender: What's in it for them, and, what's in it for you?
- How YOUR rate and closing costs are determined.
- What happens when your credit report is run.
1) How to choose a lender, mortgage broker, or someone else:
Lenders, correspondent lenders, mortgage bankers, mortgage brokers and loan officers can all theoretically get borrowers a suitable mortgage loan, but how to differentiate one from another? For now, let's agree that a common attribute of all of us is that we are all human beings (though some are more civilized than others). So what qualities do you look for in any individual that you might choose to do business with? If you are not sure, I'll make a suggestion as to what to demand from a lender. You need to be able to trust the person. You must be able to trust their integrity and level of knowledge. How do you know if you can trust a lender's integrity? You must ensure that their business model is transparent (easily understood), and that all pertinent information is put in writing in a timely manner (full disclosure). Then, you must be told exactly what to expect throughout the process, and the sequence of events must be explained in detail. Once the process is explained in a way that you fully understand, the lender should proceed to do everything that has been promised as it was described to you (accountability). Explained that way, it seems like a simple and sensible approach, right? Unfortunately, too often things don't work out that way. The good news is that well-informed mortgage borrowers know how to control the process and command best results. The other sections included in this piece will specifically describe how to command the transparency, full disclosure, and accountability that everyone wants and deserves.
2) Why shopping verbal rate quotes and GFEs is a big mistake, and potentially very costly: Very often, people shopping for a mortgage loan do the following: They initiate their search on-line, or make one or more phone calls, and say "I just want to know what the rate is, and I don't want anybody to pull my credit". When a prospective customer says that to me, I am thinking to myself, "Yes. I know that. That makes it impossible for me to give you an accurate and suitable response, but I understand your goal and your concerns". That is what I am thinking, but what I say goes something like this: "Well, of course the rate, AND the Closing Costs are very important ... everyone wants the lowest rate and closing costs, right?". RIGHT!!!! It gets very tricky at this point, because people want what they want, and most people don't want to be told that they are on the wrong track. If I begin to explain the inefficiencies of quoting a rate and closing costs without knowing a thing about the person's objectives and qualifications as a borrower, many people will simply move on to get the answer they are looking for from someone else. Unfortunately, these are the borrowers that fall victim to predatory lending, and I will go into detail in the next section.
3) Why a lender who provides verbal rate quotes is being unprofessional, if not unethical:
The factors I pointed to above the table of contents describes much, but not all, of the information a lender needs to actually get a loan closed in a compliant manner. The worksheet I provide tends to not only increase borrowers' appreciation of all that goes into getting a loan successfully closed (especially in this tight-credit environment), it may also help you clarify your objectives if you are not 100% certain of what you want. The point is, there are so many variables that can affect the rate and closing costs, and many specifics that differ from one borrower to the next. That is why, if you ask me what "the rate" is, I honestly don't know. Loans are like snowflakes, or fingerprints. At first glance they may appear the same, especially to the untrained eye, but the fact is that all mortgage borrowers are different, as are the loans they may qualify for, and also the lenders making the money available. Therefore, if a lender (for our purposes I am referring to anyone empowered to originate mortgage loans as "the lender") is pressured into offering a verbal quote, the lender is simply responding to your request that you be offered something that will entice you. Even if the quote is accompanied by a GFE, it means absolutely nothing and is non-binding. Consumers need to understand that if an offer is made before the lender knows anything about what you qualify for, that you are assured of nothing except the fact that you have given this person license to pull the rug from under you. The stories you hear about consumers getting "surprised" are based on the fact that this is the kind of shopping that goes on. I am certain that nobody wakes up in the morning and says "I'm going to call a bunch of mortgage lenders today, and I'm not going to stop until I find the ONE that is most likely to bait-and-switch me". I'm SURE nobody sets out to accomplish THAT, but uninformed and misinformed consumers do that EVERY DAY. Keep reading, and you will not fall prey to those tactics.
4) The difference between pre-qualification, pre-approval, and final approval, and why it is so important that you know the difference:
Pre-qualification IS NOT a necessary step, in that a Pre-Approval formally verifies anything that is discussed during the pre-qual stage. In other words, you can skip the pre-qual and start right in with the pre-approval. However, pre-qualification will not hurt you, UNLESS you put too much faith in it. What I mean is, the pre-qualification is simply a CONVERSATION, in which you might discuss your objectives and get an IDEA as to what may be available to you. However, since you have not provided any documentation at this stage, all you can do is get non-binding quotes and GFEs (that are designed to entice you), and you have NO GUARANTEE of anything (except that you may open yourself up to being taken advantage of). During the Pre-Approval stage, you provide documentation so a lender can know exactly what information you are actually willing and able to provide. With this information, a lender can show you a legitimate and thorough estimate (though many still will not); which is why it makes sense to get pre-approved with more than one lender, and compare binding estimates to make sure they are complete and accurate. Even at this stage of greater transparency and disclosure, you must DEMAND that the rate and maximum closing costs be GUARANTEED IN WRITING, because you otherwise still leave yourself open to "surprises", such as additional fees popping up at the closing, or getting a higher rate than promised, or a prepayment penalty, or even an ARM loan instead of the fixed rate you asked for. I promise you that after all the rate shopping to save $8 or $14 per month, and/or $200 in closing costs, you will be mighty upset if thousands of dollars appear out of thin air and land on your closing statement. If it's a purchase loan, what are you going to do, cancel? That is unlikely. You'll complain to the lender and they'll probably say they don't know what you're talking about. You'll say that you had a GFE, and be told that it was simply an ESTIMATE, which was generated BEFORE you provided your documentation, and (I promise you) an unethical lender will rattle off any one of 58 (let's say) reasons that your rate and/or closing costs are higher than quoted. I am not exaggerating or kidding you; I have observed ALL of these things happen in this business, and I have even witnessed TRAINERS coaching new employees on how to pull off these stunts (No, I did not join that company and left before the training ended). But this stuff is as real as the nose on your face. You can prevent all that, but it's up to you to know how to protect your interests. I am giving you the playbook here.
Moving on to the actual Approval. Once you have been pre-approved, an appraisal will be ordered by the lender you have chosen to work with, and your loan file will be sent to underwriting. The Underwriter simply reviews your supporting documentation to verify that all of the information on your loan application is accurate, and also reviews the appraisal to make sure that the estimated property value is supported, and it's a "good appraisal". Once that is done, your loan is approved, and you are "clear-to-close". So if there are no material changes to your borrower profile after being pre-approved, and if your documentation supports the loan application (which we already know it does from the AUS pre-approval), and the appraisal is valid, the actual approval is basically assured.
**** Purchase loans "fund" on the day of closing, but refinance loans have a three-day "cooling off period", or "right of rescission" (if you are refinancing and not sure what this means, please ask me about this).
5) Why Pre-Approval is so important (and why anything short of pre-approval assures you of nothing; Shop pre-approvals, not non-binding quotes and GFEs):
I expect that you understand now why Pre-Approvals (and written guarantees backing any GFE) are so important, and everything that comes before the pre-approval "doesn't amount to a hill of beans". During pre-approval, you actually verify with documentation anything you might have discussed during the pre-qual stage. Your loan application, along with your verifying documentation, is processed through the FNMA (Fannie Mae) or FHLMC (Freddie Mac) Automated Underwriting System (AUS), in order to get you an "Approve/Eligible" finding. Once you have that, you can request binding estimates, and some lenders will even allow you to lock in your rate and closing costs immediately. By the way, there are some, if not many, lenders who will pre-approve you for free, very quickly, and with no obligation that you actually go forward with the process. Do you see the difference between formal pre-approval, and a random non-binding rate quote? Do you understand how the pre-approval protects you, whereas non-binding offers leave you vulnerable to predation? I truly hope so, but if not ..... whatever questions you may have, I am going to do my best to assist you.
6) Why limiting yourself to dealing directly with a bank may not be your best bet:
Many banks that you may walk into will very often charge an application fee of $300-$400. However, the bank may or may NOT have the loan program that best suits your needs, may NOT have the most competitive rate/closing cost combination for the loan program you desire, and the loan officer may NOT have the time, knowledge, or desire (or all of the above) to give you the customized service you deserve. But banks do have lots of Overhead, so don't be surprised by the application fee required for the honor of having them consider your application.
And let me offer you this tip: If you let on that you are not shopping, and/or don't know how to properly shop for a loan, you will likely be offered higher rates and closing costs than you could get elsewhere. The reason is, the higher the rate or closing costs the bank can "sell" you, the more revenue for the bank. You might be thinking, "What about you, Bob. Would it be different if I was to consider working with you?". The answer is YES, we do it differently. And I will explain that in detail a bit later. For now, I will simply recommend that if you do go to a bank and get pre-approved, don't stop there. Get pre-approved with more than one lender and compare the loan proposals that will actually be delivered.
7) Why you might choose a Correspondent Lender or Mortgage Broker:
Correspondent Lenders and Mortgage Brokers shop the Wholesale Lenders on behalf of the borrower. At first glance that may be confusing, so I will explain. Some of the Wholesalers do retail lending, some do not. For instance, you can go directly to a Chase, Citi, Wells Fargo, or Countrywide (now owned by Bank of America) yourself. Other wholesalers, some of which you may not have heard of, do not lend directly to the public. What a broker or correspondent lender does, in theory, is shop the Wholesalers to find the best deal for you. However, like the banks themselves, most brokers, correspondents, and mortgage bankers (similar to correspondents), make more money if they "sell" you a higher rate, or closing costs, or both. My company, Amerisave, structures the pricing of our loans differently, so any temptation our loan originators could possibly have to steer you into a particular loan program, or rate/closing costs combination, is completely removed from our business model. We are protected, if you will, from ourselves. In turn, our clients are protected as well from any kind of low-ball or bait-and- switch tactics. I will shed more light on that later. For now, I want to highlight that the benefit of a correspondent or a broker is that your credit is pulled once, your application is taken once, and we then shop among the Wholesalers to find you a suitable deal. So you don't have to go to each individual lender and submit an application (and pay the fee) and have your credit pulled over and over. It is your job to apply all the things I have discussed here, regarding how to get the best offer and guarantee from any loan originator to ensure that it will be delivered as promised.
8) Understanding the business model of your lender (What's in it for them, and what's in it for you?)
Even if consumers know nothing else about the loan process, they need to know the following:
- How to ensure that what you are being offered can and will be delivered as promised? The answer is that you need written guarantees provided in a timely manner.
- Loan Pre-Approval should be free, fast, and not obligate you. Once you are pre-approved, any GFE you received previously must be updated, and you need to be allowed to lock your rate and closing costs immediately. Before locking, the loan program, rate, closing costs, and whether you have a prepayment penalty (our loan programs have no PPP) must all be disclosed in writing immediately. Remember, since you have not spent any money and are not obligated, you have no risk if your lender is willing to operate in this manner.
- Especially if it is a purchase loan, avoid "putting all your eggs in one basket". Get pre-approved and locked far enough in advance of closing that if something goes wrong ..... anything .... you still have ample time to walk away and find another lender that operates honestly and ethically.
- Know how your lender gets compensated. Does the lender make more money by putting you into a loan program that may not serve your best interests? "Selling" you a loan is an adversarial approach; but a lender that advises you, and does not steer you into a given loan program that might generate more revenue for them (at your expense) is an Ally. That is why Amerisave refers to our employees as Mortgage Consultants or Loan Advisors, as opposed to Loan Officers. Officers prepare for battle and write tickets; that is not what I do.
- You must be able to COMMAND transparency, full disclosure, and accountability. If you have accomplished that, you will have a feeling of well being and everything will proceed smoothly and efficiently. If you feel uncertain, uncomfortable, or anything less than confident as you approach the closing, something has already gone wrong. If you work the playbook, you will be in control and realize best results.
9) How YOUR rate and closing costs are determined:
The previous sections have pretty much explained most of the details. However, let's understand that rates and closing costs are two sides of the same coin. The lower the rate, the higher the closing costs. The higher the rate, the lower the closing costs. I can show you (not TELL you, but actually SHOW you) our entire offering of rate and closing cost combinations, including the much advertised "No Closing Cost" loan (there ARE actually closing costs, but they are built into your rate; sorry folks, no free lunch). Our loan advisors report that many people search rates and closing costs on our web site, and then start calling around to see about saving $11/month, or $100 in closing costs. That's fine, but as I have repeated many times in a number of different ways, Pre-Approval is what matters, and even then there is more work to be done. Also, as I believe I have made clear, the rate and closing costs made available to you depend largely on YOU ..... what you qualify for, and how good a job of shopping you do. One last mention on this topic, which I alluded to earlier, and it is very important. I pointed out previously that my company, Amerisave, does things differently than most. In fact, we do many things differently, which is how we earned the designation of "certified UpFront Mortgage Lender". For one, we do provide the written guarantees I have been referring to, and we do so in a timely manner. In fact, the guarantees are posted on our website (www.amerisave.com/partner/rfreedman). Also, we structure our loan pricing so that we make the same revenue from any rate/closing cost combination you may choose. The borrower picks from among the loan programs they qualify for, and they choose the rate/closing costs combination. I can advise you as much as you like, but the choice will be yours. And the fact that customers can see the same rates and closing costs on our site that I could show them, and we can do the search together if they like, prevents any kind of steering. If you are at all confused or skeptical, just put us to the test. The proof, as they say, is in the pudding.
10) Running Your Credit:
This topic is very important because many people are (understandably) very concerned with privacy, identity theft, and not lowering their scores due to too many credit pulls. So let's address this item by item:
- ID Theft: It is an increasingly complicated world. With "innovation", comes "externalities". Obviously, there are evil geniuses out there that can get hold of your personal information if they are intent on doing so. Heck, even the (trusted?) credit bureaus sell your personal information after your credit is pulled. Did you know that? That is why after a single credit pull you may get bombarded with marketing mail and phone calls. Welcome to the mysterious world of "trigger leads". Most citizens are unaware of this stuff. And if you have no knowledge of the bureaus selling your personal info., then obviously you have not consented. Or maybe you did, by not reading the fine print on page 94 of some document you signed at some point.
Anyway, yes, it's complicated out there. But I have no part in it. I have been in financial services for 15 years, and a mortgage licensee since 2002. I have never received so much as a written complaint, and my record is spotless. You can do a little research if you want to verify that claim.
- Too many pulls: Very often the first mortgage lender that pulls a borrower's credit will advise the prospect not to let anyone else pull their credit, claiming it will lower their scores (which is not necessarily true, as I will explain). This helps that lender limit the competition, which is why they scare borrowers that way. Perhaps that is a big reason why 70% of borrowers work with the first lender they speak with. The fact is that any number of credit pulls that occur within a two week period for the same transaction (such as a mortgage, or buying a car) are to be regarded as a single credit check. Of course, I do not control any of that, and given the "shenanigans" that the credit bureaus engage in (see above; AND, why do a reported 80% of credit reports contain errors?), I cannot make any promises as it pertains to credit scores. I am not going to defend the credit bureaus because they make my job more difficult and I am not a fan of the way they operate (must be nice to have lobbyists protecting your lousy business model).
However, a single pull has a negligible (if any) impact, and even multiple pulls are not SUPPOSED to hurt your scores. Skeptical? I don't blame you. I am too. So here's an idea: Why not get a copy of your tri-merge credit report, and submit it to any lender you are considering working with along with your documentation. That way your credit is pulled only once.
Conclusion: There are more issues I could cover here. There is always more. But we have covered a good amount, and I am hopeful that this will increase your understanding of, and comfort level with, the mortgage loan process. Remember, it is up to you to command Transparency, Full Disclosure, and Accountability.
Questions? Please Ask. Call me or send me an e-mail. That is what I am here for.
- - Bob Freedman