I recently received an e-mail from a reader who was wondering how to select a mortgage lender. More specifically, he wanted to know:
“If bank A offers me a certain APR with roughly $3, 000 in closing costs, while bank B offers me a lower APR with roughly $3, 000 in closing costs, but bank B is a no name bank, which do I pick? In the end, a contract is a contract, right? If I sign with ‘Joe Blow Bank’ and they loan me X dollars at the lower APR, should I go with them? Or should I remember what my mom told me? If it sounds too good to be true, then it probably is.”
Personally, the only factors that I really pay attention to are the mortgage interest rate, lender’s fees, and closing costs. We’ve generally worked through a mortgage broker, and haven’t ever thought about who would ultimately wind up underwriting our loan.
In fact, it’s very common for mortgages to change hands within a few months of origination. As such, it’s not like you really get to choose who will end up servicing your loan, anyway.
Just be 100% sure that you’re comparing apples with apples… For example, adjustable rate mortgages (ARMs) typically have low initial rates that will move upward after three, five, or seven years. In the case of fixed rate mortgages, shorter term loans typically have lower rates than longer term loans (e.g., 15 year rates = 30 year rates).
Assuming that you’re being offered truly equivalent products, I’d focus on the financial details rather than sweating the name of the bank. Of course, you’ll want to be sure that your prospective lenders are legitimate outfits, so go ahead an check them out with the Better Business Bureau, but… Don’t let name recognition (or lack thereof) push you into a more costly mortgage.
If you have anything to add, please share your thoughts in the comments.
Roger – I just heard that on a National level there are now less than 125,000 loan originators. In 2005 there were over 500,000. It will be interesting to see what that number is at the end of this year.
With the new RESPA changes, there’s no more “bait and switch”. The Good Faith Estimate locks in the compensation, Locks in the costs, and offers a comparison “shopping cart” for the borrowers to see what other options are avaialble.
Now the new good faith estimate doesn’t have the payment and cash to close figures, a mistake in my opinion. We have to offer a seperate document to show that.
In my state, Idaho, there are 20% less loan originators in 2010 than 2009. Many of the bad apples have left this industry. I hope the rest find the door as well.
Kevin – If you havent seen the new GFE, you should (if anything just for shiggles). If you google 2010 GFE, you should be able to find a copy of it and the HUD-1. With all the changes that are taking place, it will be very difficult not to deliver what’s promised. In fact, if certain costs and fees are higher on the HUD-1 than on the GFE, the difference has to be credited to the borrower. Sleazeball loan reps will have to either conform or leave the industry because the new rules will be too much on them. When the dust settles, the quality of the loan reps remaining will be much higher than ever before ( and it’s about time!!!)
Bryan (19) – I fully agree with you in regard to the GFE, it’s the central document for a borrower when entering a mortgage application process. The problem is that no matter how well conceived the GFE may be, not everyone understands it. Worse, some people think they understand it.
You and I may be able to read it like a short story, but for the average person who isn’t in the mortgage business, it can read like a health insurance policy. Also, I never underestimate the power of the human mind to come up with ways to disguise charges in even the most well divised document. The other thing of course, what’s promised isn’t always delivered upon, and again it comes back to the quality and professionalism of the loan rep.
Interesting post. This is such a critical area… one of the largest investments the average person makes, yet so confusing at times. And deceptive at times too. Thanks!
On the brand new GFE, many of the fees that used to be itemizesd are bundled into one, and per HUD regulations those fees cannot be itemized in writing.
There is a place on the GFE set up for comparing lenders. These are the items the comparison section includes:
Loan originator name
Initial loan amount
Loan term
Initial interest rate
Initial monthly amount owed
Rate lock period
Can interest rate rise?
Can loan balance rise?
Can monthly amount owed rise?
Prepayment penalty?
Balloon payment?
Total Estimated Settlement Charges
I cannot stress more… if you are comparing rates and fees.. the only way to do a true apples to apples is to get GFE’s based on rates from the same time of the same day.
If you get a GFE from mortgage company A on Monday, and one from Company B on Wednesday, there is a good chance the rate and the fees related to that rate will be different, in fact if you went back to company A on Wednesday, you’d get a different rate also. In some cases, the rates can change mid-day, so it is tricky to compare rates
Also, the new GFE looks nothing like the one that was being used up until last month. Know what you’re looking for.
Is it even worth asking the question “which to consider” until you have a good faith estimate in hand from both companies? Personally, I’d go a step further and get an GFE from at least two other companies as well. As pointed out earlier, it’s not the initial rate, it’s the extra fees and charges that will get you!
All the money for mortgages comes from one of three places: FannieMae, FreddieMac or the FHA. The company you buy your mortgage from sells it to one of them ( it mght pass through some other companies first, but that’s who ends up with it). The company you pay each month is only “servicing” it on behalf of the owner(s) of your mortgage. Being that the money comes from the same places,interest rates will be very similar from one company to another, fees will vary so it is wise to understand the different fees so you can conduct an educated apples to apples comparison. Also, rates change daily, sometimes more than once a day, so if you are shopping rates, make sure they are for the same type and term of loan, with the same rate lock period (15, 30, 45 days, etc.)and from the same day’s rate sheets.
The goverment is issuing a slew of regulations designed to make shopping for a mortgage simpler and safer. The Good Faith Estimate (GFE) was just an “estimate” of costs that could and did change, making it almost worthless. Beginning 1/1/10, the new GFE is a binding document that HAS TO match the final HUD-1 Settlement Statement (with very few minor exceptions).
Additionally, Loan Officers who work for Mortgage Bankers or Mortgage Brokers are now required by law to be licencsed in the State(s) they sell loans in and registered on a National Registry. These require fingerprinting, credit and background checks, education,testing and annual continuing education. I expect that much of the riff raff will be leaving the industry in the next few months as a result. Ironically, Loan Officers employed by the Big Banks are not required to be licenced or meet many of the new requirements, so expect to see a shift in professional quality. You will be able to easily differentiate the Professional Mortgage Advisor who is Knowledgeable and caring about your financial well being, and the unlicensed, uneducated order taker who’s main concern is meeting his/her quota or commission earnings goal. Ask lots of questions, and then ask more!
Finally… the mortgage you choose and how you manage that mortgage will dramatically impact every aspect of your financial well being. Do not make a decision until you feel you are making an informed decision and working with someone (a person, not a Brand) you feel you can trust to guide you with your best interests being their top priority, and will be there for you even after the mortgage closes.
Anyone who is interested in getting a mortgage should look into it ASAP because the rates are going to go up soon. The government is printing money and a rise in interest rates always follows. 25 years ago people, including myself were paying 15% or even higher, on a mortgage. I wonder how many of your readers remember those days.
You have the right idea. The mortgage will get sold immediately anyway.
John DeFlumeri Jr
My warning: Be careful! When we purchased our current house 2 years ago, we got a good deal with a fairly well-known mortgage company. As often happens, the loan was sold off a few months later to another reputable mortgage company. No problem so far. But about 6 months after that, our loan was again sold, this time to a lender who had a bunch of “C”-level loans. This lender took our payments, which were all on time, but managed to “lose” some or all of our principal, not once, but several times. On top of that, we had escrowed our property taxes, but when they came due, the lender didn’t pay them. I spent hours upon hours getting passed around from one service rep to another, often being told that I needed to talk to a manager, but when they would transfer me, the connection got cut off. I reported them to the BBB, sent numerous faxes and letters, and even contacted my attorney– he told me that it was extremely difficult to fight the lenders. I started doing some research online and discovered that many people had gotten into trouble because this lender either didn’t pay their property taxes or lost their principal and then destroyed their good credit.
After all was said and done, we went with USAA, one of the most reputable lenders out there, and were assured that our loan would never be sold off. We didn’t get the very best rate, but we still got a good deal and more importantly, we got peace of mind. I definitely learned my lesson on this one. In the future, I would either ensure that the loan wouldn’t be sold, or find out whom the lender sells to and research those companies. Getting the best rate isn’t worth it if your taxes don’t get paid and your principal magically disappears!
mils, sounds like you’ll be hit either way. I’m a FORMER mortgage expert and I know that a lot has changed in the year that I’ve been out of the business, but that still sounds bizarre.
You probably would be best to run this by a mortgage person where you live, as regulations do vary from state to state. Get a couple of opinions if you can.
“Back in my day”–one year ago–either you needed PMI or you didn’t. This is fishy.
I had a guy from wells fargo tell me I would get a lower interest rate with PMI than I would without PMI. That sounds very fishy, dont you guys think? He also said if I were to buy one point on my mortgage that with PMI it would be 1% of my loan, but without PMI it would be .5% of my loan to buy a point. Something just seems wrong about that….
I chose a local bank for my mortgage because it came recommended by a couple guys at work. They had the lowest real rates and closing costs of any of the banks I checked out, including the big national banks. I knew they were going to sell off the loan, but I’ve been happy with the new servicer so far. The only problem came about due to my loan officer taking 6 days(including Columbus Day) off work in the middle of my contract-closing period. It ended up delaying the appraisal and then everyone had to hurry around to get it closed on the date we specified. There was supposed to be someone else doing some things during his absence, but even when I made multiple direct requests to order the appraisal, nothing happened.
Evan (8) – Excellent point! People get blinded by numbers, by something that looks like a great deal, but things have gotten so complicated in so many businesses you have to be at least a bit cynical and discerning.
More than anything, we all need a reliable person to navigate us through the complexity of the transaction we’re entering. The worst thing we can do is assume we know more than we do. Think about how complex the industry you work in has gotten, and realize that’s happening in every business. It isn’t just about price any more.
Let us not forget no-one works for free. So loan officers, underwriters and the lot must charge something. But, all closing fee’s aside. Can they close the loan? Do they earn their pay, or are they having you re-fax last year’s 1040 for the third time? If the guy/gal can pull the trigger without making you loose your mind, they’ve earned the 2 or 3 grand.
APR, Bait & Switch, that’s all smoke and mirrors. B/c you are paying your mortgage off early right?!?!
Kevin,
It sounds a lot like when you see the car lease ads for $89/month for a $27,000 Altima?
One other thing, if this is for a refinance, then I’d seriously consider whether paying $3,000 in closing costs is worth it to refinance. I recently looked into this and in my state (TX) it would cost about $3,500 to refinance (regardless of lender) due to us having the highest title insurance costs in the nation. Regardless, in my situation, refinancing to a lower rate still did _not_ make financial sense because of the high costs and my planned rapid loan payoff plan.
I found my mortgage broker through BankRate.com. You should be comparing APR (which takes into account the fees), instead of comparing just the “interest rate” for mortgages in the same family (15-year fixed, for example). Have the banks send you “Good Faith Estimates”, which discloses all of the expected fees. Good advice Nickel.
Yes-the quality of the broker is the key. A good broker/loan
officer will ask a bunch of questions, run your credit(or at least
ask your credit score) and crunch some numbers, so that the rate
quoted is the rate that can be delivered. He also has solid
familiarity with underwriting guidelines and understands the traps
that your profile might contain.
If you call an 800 number and ask for a rate, and the person at
the other end quotes you their best rate without asking you any
probing questions, the rate quoted may be a complete fiction.
Worse is the loan rep who takes your loan, knowing you can’t get
the best rate, but lets the loan go up the chain so that someone
else can deliver the bad news, maybe too deep into the transaction
for you to walk. Those are the bad closings you hear about from
time to time. But the rate quoted was never a real rate from the
start.
A lenders rate isn’t a real rate if they can’t give it to you. The
low rate is just the billboard to get you to call in.
Kevin: I’ve definitely seen this in action when calling lenders at the top of Bankrate’s mortgage rate list. They list a super low rate to get top positioning, but when you call it’s not available for some random reason. Perhaps it’s never been an issue for us because our broker (who came highly recommended) filters out the crap.
As a “retired” mortgage loan originator and underwriter, it always
amazed me how people would chose a lender based entirely on price.
So many got burned–just because you’re quoted rate and fees up front
doesn’t guarantee that that’s what you’ll see at closing. Bait
and switch is alive and well, regulations not withstanding.
The first thing you should look at is the knowledge and integrity of
the lender’s rep. Does he or she sound knowledgeable, or does he
seem to dance around your questions or make light of them? What’s
his or her reputation? Do they come with references?
It was amazing to see sleezeball loan reps over promise and under
deliver again and again, and people always believed them! They
believe them because they want to believe them, because they
mistakenly believe the answers are all in the numbers. That maybe
so, but it’s never true if the promised rate and fees can’t be
delivered upon.
Nice Post. You also should check the underwriting guidelines for the bank. Will one bank lend you more based on the value of your home or will one bank require you to put more money down. Also look at other services the bank may offer. Can you view your mortgage on line or do they require you to have auto debit from their bank account. As you stated you want to make sure you are comparing apples to apples. Rather than just looking at the name and interest rate of the lender.
Do consider that some “Joe Blow Banks” utilize aggressive pricing strategies to come off as the lowest rate, but they get you with tons of closing costs and fees. On the other hand, banks typically offer slightly higher rates to cover for their well-known name marketing budgets