TEN SHOPPING TIPS

 

Many otherwise prudent people choose a Lender on the basis of very subjective thinking, like, "We have banked there for 15 years," or "I've seen their ads on TV." Shopping for a loan can save you a lot of money if you do it right, but most people (as many as 80% by some estimates) go about shopping in the wrong way. They "shop" for a loan the way they shop for a new barbecue. Loans are not like barbecues. The variations between loans is far too complex for that approach. Most people get confused by the staggering array of choices and that's why they don't get the best results. I wrote these tips - and my book -  to help folks just like you.

The following tips are based upon my 16 years of experience in funding more than $600 million in loans. They will help you get the best loan for your family's needs.

1. Immediately get a credit report from Experian (formerly TRW) at 1-800-682-7654, TransUnion at 1-800-916-8800, or Equifax at 1-800-685-1111. Then you have plenty of time to correct any mistakes. Scores above 680 is excellent while below 640 represents trouble.

2. Do NOT call a bunch of lenders and ask, "What are your rates?" Almost every lender has at least a dozen programs, each with 10 or more rate vs. fee alternatives. That's over 100 choices. Many lenders quote a program which was designed specifically to shnooker the telephone rate shoppers. It will "sound good" because it was designed to "sound good." Other lenders - some people estimate higher than 50% -   simply may not tell you the truth. Some Loan Reps purposely lie to phone shoppers in order to induce borrowers to apply with them. You are not smart enough to "catch them. Beware of "Zero Cost" loans. They are sucker loans. Remember - Nothing is free!

3. Your objective is to find a lender you can TRUST. Ask advice from your friends, co-workers, neighbors who are homeowners. Some of them will have had positive experiences with a lender. Call the lenders they refer you to, make appointments (what the phone is for!), and interview them in person. You need to assess the competence and communication skills of the Loan Rep who will be handling your transaction. Personally, I would avoid the huge institutions which hire Go-fers for $7 per hour and call them Mortgage Consultants. They don't know much and have no power within their company. You want a rep who will help you and, if needed, "go to the mat" for you.

4. Determine which loan program is best for you. Here are three very simple guidelines. First, do NOT pay for 30 years of expensive rate protection (what the 30 year fixed rate loan does) if you are only going to be in your home for 5 years. Second, if you are a Teacher or retired Minister, you are in no position to take risks; you need a fixed rate loan. Third, if your income is rising or if rates are falling, an interim ARM fixed for however long you intend to be in the proeprty is probably more suitable for you.

5. If you choose an ARM, if rates have risen, choose a loan tied to a lagging index such as the 11th District Cost of Funds. If rates are falling, choose a loan tied to T-Bill's, CD's, or LIBOR. Re-fi when the rate environment changes. (NOTE - NOW - mid 2003 - IS NOT THE TIME FOR ANY PURE ARM!!!)

6. For the common programs, the differences in rates between reliable Lenders is minuscule. For example, most Conventional loans are sold to FNMA or FHLMC which buy loans from 24,000 banks, S&L's, and mortgage bankers. Each of those 24,000 lenders have the same "cost of funds" on any given day. You want a lender who will "sell" you FNMA money at the lowest mark-up. (Remember what I said about Trust?)

7. Your lender is legally obligated to send you the RESPA and Good Faith Estimate of Closing Costs within 3 days of application. Insist on this!!!! Read them and ask questions until you understand them. While this disclosure is not binding on the Lender, it will show the costs and fees on the program on the date you applied, a good starting point. Many people think that their rate is locked in at the rate shown. This is not the case! You need to find out your lender's lock policy. The market can change rapidly so developing an executing a good lock-in strategy is very important.

8. If you are dealing with a Mortgage Broker, insist on seeing the rate sheets from his sources of funds. If he refuses to show them to you, get up and leave. When you find a Mortgage Broker who will work with you, negotiate what their commission (their points) and other fees will be on top of what the money source's rates and fees are. Then get an Agreement in writing that they will not charge you more than the agreed upon commission. When it comes time to lock your rate, get some help figuring out which rate/fee choice is best for your needs. Get the name of the Manager.

9. If you are dealing with a Direct Lender, ask the Loan Officer, "How are you compensated?" If you get the answer, "I'm on commission," ask, "Does your company have certain programs or pricing options on which you get "overages" or extra commissions?" If so, you want to identify those programs and you obviously want something else. Get the name of the Manager.

10. Your Settlement Agent (Escrow in some states) will call you when loan documents are delivered to them. You have enough to do at escrow just signing your loan docs. It's a poor place to review anything, so have them Fax the RESPA forms and the note to you. Compare these forms with the initial RESPA forms you were given. In the event there is more than a minor discrepancy, call the Manager to get an explanation (now you know why I suggested you get his/her name.) If you see the letters, "P.O.C." it means the Mortgage Broker is getting paid something in addition to their Loan Origination Fee. That's OK if the Origination Fee and the amount P.O.C. add up to what you agreed upon in #8. (e.g.- 1 point Origination and 1/2 point P.O.C. is OK is you agreed that they would make 1 1/2 points total.) If you have a problem, go to the Manager and complain vigorously. Lenders who are not honorable - there are some - are used to blowing off people who just complain a little. If you are right and if you are insistent about not signing loan docs until they are correct, they will correct the error rather than deal with the mess you can create with their Regulators.

11. (Well, I had to get one more in.) Most people have a benign relationship with their mortgage. The coupon comes every month and they just pay what it says to. They do not remember what the rate is and if it's an ARM, they are only dimly conscious of the variations. Every year Lenders make millions of dollars of profit off of people who weren't aware that somewhere along the line they could have re-fied into a lower cost loan. Here's some good advice: develop an active relationship with your mortgage. Write down the key features of your loan and pay attention to the market. If you find a lender you can trust, ask him to keep you informed of developments which could be of benefit to you.

There are some terrific Loan Agents out there and if you are pleased with yours, reward that person and his firm by referring them to friends. If you are dissatisfied, there are a Regulatory bodies in every state and HUD in Washington who can examine cases of irregularity. Don't be shy. Our industry would be a lot better off if people DID complain when they are abused.

If you liked my Tips, these ideas are explored in significantly greater detail - like over 250 pages worth of detail - in my book HOW TO SAVE THOUSANDS OF DOLLARS ON YOUR HOME MORTGAGE. Also included are charts and an worksheet templates. You may switch to the Order Page by clicking here. 

We are always interested in Feedback. If these tips or my book help you save money, we wish you would tell us. Write or send an e-mail