How to Compare Mortgages

Thu - 7/29/2010

Credit Scores

Shopping For The Best Mortgage

First let me show you how to get burned:
1. Believe the ads you see, hear and read. Especially the "no closing costs" ads or the "it's a racket, it's a rip-off" or "no one else can do what we do" ads.
2. Let someone else such as a real estate agent or builder set up the loan for you or offer some "special incentive" for using "their lender".
3. Refuse or fail to become educated as most people do.

Now let me show you how to compare mortgages to your advantage:

1. Know what you want as an end result. It should be one of the following:
    A. Reduce your monthly payment?
    B. Get cash out to re-invest or pay bills?
    C. Purchase a new property?
    D. Renovate an existing property?
2. Know your own credit score. You can check your score at any number of locations including from the credit reporting agencies (CRA) directly. A big misunderstanding about credit scores can be heard even among loan officers who really don't know what they are talking about and especially among real estate agents who use the term "FICO score". Each CRA has their own independent score. FICO is exclusive to Experian (I just looked up FICO on a search engine and even a mortgage company misused the term and incorrectly defined it.) TransUnion uses the Empirica score and Equifax uses the Beacon. Lenders who use scores almost exclusively look at the middle score regardless of whether it is the Empirica, Beacon or FICO. Now you know more than a lot of loan officers and real estate agents!
3. Know the terms used (words and phrases). For example ARM loans were completely misused over the last few years and that is a shame. My first home purchase was a Freddy Mac adjustable rate mortgage and I bought the rate down for a 3-2-1 so I could afford not only to purchase the home but to fill it with the furniture I needed. Had that loan not been available I still could have afforded the home but as an FTHB I would have been able to DTI at that LTV without the 3-2-1 3/27 ARM. See what I mean?
4. Know your rights under applicable law. It may be that we are about to have a National Fair Lending Act(FLA) (currently H.R. 3915) which will eliminate some confusion state to state. We already have the RESPA (Real Estate Settlement and Procedures Act). Each law has several different parts some of which will affect your application and transaction and some which will not. Some transactions are not covered by and FLA or RESPA such as a commercial use property purchase or refinance.
5. Know what you are looking FOR and AT when you look at a Good Faith Estimate (GFE) and Truth In Lending (TIL) document. It is pretty easy to listen to some radio talk show host with absolutely no financial training, education or experience giving disinformation which is blindly accepted by the greater listening audience. You, however, are an intelligent caring borrower - I know this by the fact you have read so much to get to this point. It really is best to bottom line closing costs and monthly payments and forget about what some may call a "junk fee". What difference does it make if one company has a "pet care fee for the office dog" of $500 if their overall closing costs are lower than the competitor? Some companies choose to lump fees together and call them an admin fee. So you either get a company like Novation Mortgage which line items costs and some may call them "junk fees" but the bottom line is still less than the national competitors who have just one huge admin fee.
6. For goodness sake ask for a PRICE GUARANTEE! Believe it or not some loan officers do not accurately complete the GFE/TIL. Wow, what a surprise.
    A. If you have not submitted correct and verifiable information to the loan officer and the loan officer has not checked your credit there is little likelihood your GFE will be correct.
    B. When you get your GFE look for these fees. Chances are your GFE will not necessarily have all of these fees line itemed but ask about them anyway. I have seen too many GFE forms from competitors which have omitted some or most of these fees and did not lump them together:
           a. Loan Origination Fee
           b. Processing Fee
           c. Admin Fee
           d. Underwriting Fee
           e. Credit Reporting Fee
           f.   Handling, postage, courier, wire, or other delivery fee(s).
           g, Title fee
           h. Attorney fee
           i.   Appraisal Fee
           j.   Pre-paid interest
           k. Flood cert fee
           l.   State transfer taxes
           m. State recording fee
           n. Private Mortgage Insurance fee
           o. Prepaid Property Taxes (escrows)
           p. Prepaid Homeowners insurance (escrows)
           q. Mortgage Broker fee
           r.   Ask about any other fees inadvertently or otherwise omitted
   C. When you receive your TIL (Novation NEVER sends a GFE without a TIL) look for the following:
           a.   Interest rate
           b.   Terms of the loan (due in number of months)
           c.   Type of loan (fixed rate, adjustable rate)
           d.   Length of fixed period before adjustment period if applicable
           e.   Is this an Interest Only loan?
           f.    Is there a pre-payment penalty?
           g.   How and when are late fees assessed to your late payment?
           h.   What is the Annual Percentage Rate (APR)?
           i.    Are you required to purchase a life insurance policy?
           j.    Ask about any other lines you do not understand.
7. To avoid confusion on the TIL look at the APR and on the GFE look at the Total Estimated Funds Needed To Close. When you find the Guaranteed Lowest Total Funds AND APR you only need to compare terms to see which is the better loan.
8. Understand Yield Spread Premium (YSP) and what it does. Your government understands YSP but many powerful elected officials who are highly influenced by massively wealthy banking associations and lobbyists are siding with big banks in an effort to steal it away from you. YSP probably should never have been shown because it is only a tool for confusion and has nothing to do with shopping for interest rate or closing costs. Comparing the APR is more important than worrying about the YSP. Banks make a lot of profit "on the back" of every loan. Mortgage brokers make a little profit "on the back" of a loan. Banks never show the consumer how much profit they make but it can be as much as five times more than a mortgage broker makes. Mortgage brokers are required by federal law to fully disclose every penny of profit they earn on every covered loan. Banks are not. So honestly, forget about the very confusing issue of YSP or be concerned about the Service Release Premium earned by banks and direct national lenders because both equally affect your interest rate.
9. Documentation required from you to qualify for the loan. Many states have tried or are trying to outlaw stated income even for self-employed borrowers. Now there is a nice move designed to penalize all you small business owners. But I digress, stated income loans were definitely abused over the last few years in many if not most markets. Still, if you have an interest rate at one lender quoted of 8% and at another lender at 6% I would recommend seeing what type of documentation each is requiring.
10. Down payment amount required from you. When someone calls my office and says "your loan officer quoted a rate of 6.875% but Polly Wants A Cracker loans down the street quoted me 6.250%" my first question is, "How much down payment required at PWAC?" A 90% loan is going to be a little more expensive than an 80% loan.
11. Be honest with yourself about your buying power. Just because your neighbor living in an identical property at the identical price financed at the same lender got a 6.5% interest rate doesn't mean some other circumstance doesn't qualify you for a 6.75% rate.
12. Know that some costs are associated with the type of property, type of loan (terms), your credit, income and assets, the state in which the property is located, your intended use of the property, and other factors. The GFE and TIL are only as honest as you and the loan officer who prepares the documents. NO LOAN OFFICER CAN SEND AN ACCURATE GFE/TIL UNTIL THEY HAVE EXAMINED YOUR QUALIFICATIONS AND THE PROPERTY QUALIFICATIONS. Until then it is only an ESTIMATE.

To Sum It Up

Examine the Total Estimated Funds Needed To Close on the GFE
Examine the APR and Terms on the TIL
Ask for clarification on Terms you do not understand
Shop around and demand a price guaranty on relevant closing costs

Try creating your own spread sheet or other type of a chart to compare apples to apples. Here is a sample I created that you may start with. By no means is it the only way to compare and I recommend you work on it a bit to create your own method of comparison.

Unfortunately I cannot tell you what you should expect to pay in fees because I may be accused of price fixing. Just suffice it to say we shop all the time and we know what our clients tell us and show us from our competition and we are consistently overall apples to apples extremely competitive on our pricing of closing costs and interest rates.

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