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