Home Mortgage Loan Shopping
When Buying Boston Area Real Estate
Part I - An Introduction
These techniques will enable you to effectively compare offers from various Lenders and choose the best loan from those offers. The first step in mortgage shopping is choosing a Lender. It is vitally important to recognize that the most important criteria in choosing a Lender is the Lender's ability to get the job done. For this reason, we recommend that you only do business with a "Credible Lender."
What Is A Credible Lender?
A Credible Lender is one who you, a close friend, or a real estate professional you are working with, has done a successful loan with in the last two to three months. Not just the same company, but the same Loan Originator. There's too much at risk in a purchase transaction to use a Lender you are not familiar with. If you want to try someone brand new and unproven, do it on a refinance. The four steps in mortgage shopping that will be covered are:
♦ Choosing The Loan Type And Preparing To Gather Data
♦ Gathering Quotes From The Lenders
♦ Identifying All The Fees That Are Involved That Are Not Lender Controlled
♦ Calculating The Value Differential To Make A Decision
Part II - Choosing the Loan Type and Preparing To Gather Data
As you prepare to make your loan choice and begin gathering your information tochoose a Lender, there are some things you should be thinking about and some decisions you will need to make. This presentation is not intended to take the place of your discussion about loan programs with your Lender. Rather, it is to give you an idea of what you should be thinking about when you make your loan choice. We will cover the six key concepts to keep in mind whenchoosing your loan type and preparing to gather your data.
1. Your Credit - There are quite a number of loan programs available in the marketplace. If your credit is good to excellent, you should be eligible for just about any of them. On the other hand, if you have had previous credit problems and your credit scores are below 620, you may need to look for a Lender that offers subprime mortgage loans.
2. The Amount Of Your Down Payment - Be realistic about the amount of money you can afford to spend for a down payment. Mortgage financing is available with little or no down payment, but a down payment of 5% or more will generally provide you with a better interest rate on your mortgage loan. A down payment of 20% or more will enable you to eliminate having to pay Private Mortgage Insurance (PMI).
However, you should keep in mind that your down payment will not be your only expense when you purchase a home. You will probably also incur some inspection fees after your purchase agreement has been accepted by the sellers of the property, and you will have closing costs when you go to settlement.
3. What You Think Rates Will Do In The Future - The direction you think the market will head can be important in deciding the type of loan that is right for you. For example, if you think mortgage interest rates will rise significantly in the next few years, you may not want to choose a loan type that might require you to refinance later, such as an adjustable rate mortgage (ARM).
4. How Long You Expect To Be In The House - If you are in the early stages of your home buying process, you may not know how long you plan to keep your new home. That is not a problem for now, but by the time you are ready to gather information necessary to select the Lender that will handle your mortgage loan, you will need to at least make an educated guess at how long you plan to live there.
5. The Level Of Risk You Are Comfortable With - Some loan programs offer additional benefits, such as a lower initial interest rate or the possibility of an interest rate reduction in the future. However, these loans also carry additional risks. If you are not comfortable with any risk, you should not choose a loan program with risks, such as an ARM.
6. The Amount Of The Monthly Payment - Keep in mind that your total monthly mortgage payment includes other items, such as your property taxes and homeowner's insurance premium. It is certainly important that your monthly payment be one that you are comfortable with and can afford to make each month. When you are considering the amount of the monthly payment that fits your budget, be sure to also think of the increased tax benefits associated with homeownership.
Part III - Gathering Quotes From Lenders
This method of Loan Shopping is valid for rates that are fixed for at least 5 years. Lenders may not appreciate you asking about their fees because most Lenders don't like to get shopped. So, make your rate quote request direct and to the point. You could phrase your request something like this:
"My credit score is 725. I'm looking for a 30 day lock on a $280,000 loan with 0 points. Can you tell me what your rate is to lock today and what your fees are like?"
You should select four or five credible Lenders from whom to obtain your rate quotes. As you begin to gather your rate quotes, it is important to hold four factors constant from one Lender to another:
♦ The type of loan
♦ The amount of the loan
♦ The lock period
♦ The date, and preferably the time, of the quote
These four factors are important in order to achieve accuracy by comparing apples-to apples and not apples-to-oranges.
1. The Type Of Loan - Ask each Lender for a quote based on the same loan program. You cannot compare a quote for a 30 year fixed rate loan from Lender A to a quote for a 5 year adjustable rate loan from Lender B.
2. The Amount Of The Loan - Obtain your quotes based on the same loan amount. If you are just beginning the home buying process, you may not know the loan amount you will need. That's okay. Just be sure to ask each Lender for a quote based on the same loan amount. It is not unusual for Lenders to offer a better interest rate for larger loans.
3. The Lock Period - Interest rates vary based on the lock period. Typically, the shorter the lockperiod, the better the interest rate. Shorter lock periods produce better rates because there is less risk to the Lender of a significant change in the market. Again, if you are just beginning the home buying process, you won't know the lock period you will need. Just be sure to ask each Lender for a quote based on the same lock period. 30 day lock periods are standard.
The Date And Time Of The Quote - Interest rates change daily. In fact, in a volatile market the interest rate may change several times in a single day. So, a quote you obtain on Monday from Lender A cannot be compared to a quote you obtain on Tuesday from Lender B. When you call Lenders for rates, it is important to ask for a rate they can lock you in at today. In some cases, if the Lender thinks you are not ready to lock, they may quote you a lower rate than they could actually provide just to get you in the door. The Lender must think that you are ready to lock your rate right now.
Part IV - Identifying All The Fees Involved That Are Not Lender Controlled
Utilizing The Good Faith Estimate To Identify Lender Controlled Fees -Many years ago, the federal government made an effort to help consumers see and understand the costs involved in a mortgage loan. This body of laws is called the Real Estate Settlement Procedures Act, or RESPA. Because of RESPA, Mortgage Lenders must supply borrowers with a Good Faith Estimate, or GFE, of their costs within three days of receiving a mortgage application.
For years, we suggested that consumers compare lender fees on this Good Faith Estimate form. However, many Lenders have since discovered how to use the ambiguities in the form to make themselves look better. A detailed discussion of this is beyond the scope of this presentation. However, the thing to understand is that the Good Faith Estimate is complicated. It is complicated because there are so many things the Lender is required to put on the Good Faith Estimate that the Lender must estimate. If the Lender estimates low, they look better. If they estimate accurately, it takes more time and the numbers may look worse. You can see the conflict.
There have been many transactions where the borrowers have been misled by a cleverly crafted Good Faith Estimate. In some cases, these scam Good Faith Estimates have cost the borrowers hundreds of dollars. There is an additional problem in that Lenders have different labels they put on their fees. One Lender may charge a $200 document preparation fee and another Lender may not charge any document preparation fee, but may charge a $240 tax service fee. It is complicated. However, there is a solution.
Getting Started - If you look at a Good Faith Estimate and remove all the standard fees that are not Lender controlled, what will be left are the Lender controlled, or "Junk Fees." There are two Lender related fees that are fine for the borrower to pay:
♦ The Credit Report Fee
♦ The Appraisal Fee
Some Lenders roll the cost of the credit report and the appraisal into an "application fee." This is fine, as long as the application fee is not more than the typical combined cost of a credit report and appraisal, and the Lender doesn't charge a separate credit report fee and an appraisal fee. Begin by reviewing each of the Good Faith Estimates you received and removing the non-Lender controlled fees
900 Section - Items Required By Lender To Be Paid In Advance - These items include prepaid interest and hazard insurance, both of which should show up on all the Good Faith Estimates and are independent of the Lender. Remove these fees by drawing a line through them.
1000 Section - Reserves Deposited With Lender - These items include a few months of hazard insurance, property taxes and the aggregate analysis. Again, these are independent of the Lender, so remove these fees by drawing a line through them.
1100 Section - Title Charges - These items include the settlement fee and title insurance premiums. These fees are determined by the Closing Agent, not the Lender. Remove these fees by drawing a line through them.
1200 Section - Government Recording And Transfer Charges - In most areas of the country, the recording fee is based on how many pages must be recorded. If you are comparing the same mortgage type, they will usually have the same number of pages. Transfer taxes and tax stamps are fees imposed by the city, county or state in which the property is located. So again, these fees are independent of the Lender. Remove these fees by drawing a line through them.
1300 Section - Additional Settlement Charges - You may see a survey, which is not required by all Lenders. But, if you are buying a home and an existing survey is not available, we generally recommend getting one. Assuming you get one, the cost will be the same regardless of the Lender. So, remove this fee by drawing a line through it.
Credit Report and Appraisal Fee - Now, go back through each of your Good Faith Estimates and look at the fees that remain. You will typically see a credit report fee and an appraisal fee. These are okay to pay, as long as the amounts are close to the same on each of your Good Faith Estimates. So, remove these fees from all the Good Faith Estimates by drawing a line through them.
What's Left? - The fees that are left are the Lender controlled fees, or Junk Fees. Total the Junk Fees on each Good Faith Estimate and write the total on the bottom of each form. Now you can easily see how much each Lender is planning to charge you in fees for the interest rate they have offered you.
Remember, it is okay for a Lender to make a profit on the loan. If they don't make a profit, they cannot stay in business and they cannot help buyers buy houses. You just don't want the Lender to make their whole month's income off your loan.
Part V - Calculating The Value Differential
Now that you have removed all the standard costs of the loan that are out of the Lender's control, what you have left are Lender controlled fees, or Junk Fees. When you are shopping for the best mortgage loan, it is important to look at both the interest rate you are being offered and the junk fees associated with that interest rate. If you look only at interest rates, you will see only half the picture.
For the purpose of our training example, we used the following loan and Lender specific information:
♦ Loan Amount = $180,000
♦ Loan Type = 30 Year Fixed Rate
♦ Interest Rate Quotes:
Lender 1 = 5.875%
Lender 2 = 6.250%
Lender 3 = 6.000%
Lender 4 = 6.250%
Lender 5 = 6.125%
♦ Monthly Principal and Interest Payment
Lender 1 = $1064.75
Lender 2 = $1108.28
Lender 3 = $1079.18
Lender 4 = $1108.28
Lender 5 = $1093.68
Step #1 - Total The Junk Fees - As you add up the junk fees on each Good Faith Estimate you received, be sure to look carefully for Lender fees on line items that should not be used for Lender fees. Lenders frequently do this in an attempt to disguise their fees as true third party costs, and/or to make Good Faith Estimate comparisons more difficult. But, now that you know how to mortgage shop, this is not a problem for you. Write the total dollar amount of the junk fees on the bottom of each Good Faith Estimate.
Here is our training example:
Lender 1 = $2,381
Lender 2 = $4,592
Lender 3 = $0
Lender 4 = $499
Lender 5 = $2,178
Step #2 - Multiply The Monthly Principal and Interest Payment By The Hold Period - The hold period is the number of months you expect to be in the house. The methods shown here are valid for rates that are fixed for at least five years, so for our training example we will multiply the monthly principal and interest payment by 60, the number of payments over a five year period.
Here is our training example:
Lender 1 = $63,885 ($1108.28 x 60) 5.875%
Lender 2 = $66,497 ($1108.28 x 60) 6.250%
Lender 3 = $64,751 ($1079.18 x 60) 6.000%
Lender 4 = $66,497 ($1108.28 x 60) 6.250%
Lender 5 = $65,621 ($1093.68 x 60) 6.125%
Step #3 - Determine The Cost Of The Loan - Add the total junk fees to the total of monthly payments for 5 years to determine the cost of the loan.
Here is our training example:
Junk Fees + PITI X 60 = Total Loan Cost
1 $2,381 + $63,885 = $66,266 5.875%
2 $4,592 + $66,497 = $71,089 6.250%
3 $0 + $64,751 = $64,751 6.000%
4 $499 + $66,497 = $66,996 6.250%
5 $2,178 + $65,621 = $67,799 6.125%
In our training example, Lender 3 has the lowest loan costs, even though Lender 1 offered a lower interest rate. However, because Lender 1 charged $2,381 in junk fees its loan cost was higher.
The value differential between the Lender with the highest loan cost (Lender 2) and the Lender with the lowest loan cost (Lender 3) is $6,338. This means that you could get the same loan from Lender 3 for $6,338 less than from Lender 2.
The value differential using the average loan cost of the four higher Lenders as compared to the Lender with the lowest loan cost (Lender 3) is $3,286.50.
This means that you could get the same loan from Lender 3 for an average of $3,286.50 less. Happy Loan Shopping!
Here is an example of a comparison spreadsheet Jon used in Michigan.
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