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Shopping for a Mortgage
To
get a Low Interest Rate ...
and the Program Right for YOU ... obtain copies of your credit from all three Credit Bureaus.
... read the Definitions
... complete the loan application
... obtain Quotes using the BayHouse Quote Request Form for PURCHASE or REFI
Mortgage Fraud by Robert J. Sadler, Marketing Director GAPS/AEGIS (TM) "... If a lender detects misrepresentation, federal law provides for those convicted of loan fraud to receive a possible 30-year sentence and up to $1 million in fines! ..." WOW! A 30-year sentence and up to $1 Million in fines? How much does a broker/lender get fined for making misrepresentations to the borrower? There is no fine, as far as
I know, but I don't know the law. The only suits I am aware of were
against lenders and brokers who charged more than they disclosed on
their revised disclosures, supplied to the borrower at closing,
or who understated the APR (meaningless for ARMs anyway.)
A few commen concerns or problems with the BayHouse Quote Request Your broker refuses to answer the questions? Hire a new broker who will. You feel uncomfortable asking so many questions? Just think of all the questions YOU have to answer on the loan application. You know you have a few credit dings and feel like you have to be grateful for anyone trying to "help" you? Commissions for the "credit impaired" are usually 2 to 4 times higher than for A paper loans. Subsequently, it's much more important to ask about fees and commissions. Brokers know that you can NOT quickly move your loan elsewhere and they often hit you with outrageous fees at closing. You don't think you should ask how much your broker will earn on your loan? Well, then don't. It's YOUR money :)
That's ok, as long as all the pertinent questions on the Quote Request are answered (highly unlikely) AND there is not page after page of procedures, terms and conditions in legalese. I would not accept those annoying disclaimers as a substitute. You want to establish
I don't think you can expect much service if the broker makes less than $2,000. Don't be surprised if you close late and DON'T get what you expected. You might even lose that house you thought you were moving into next week, because you've got no loan! On a purchase, I'd be very happy with $3,000 to the broker and great service such as detailed written program descriptions, accurate disclosures, replies within 24 hours, lender pre-approval, etc. (I'm talking San Francisco Bay Area dollars here. Adjust for your cost of living in your area.) There is nothing more frustrating than an incompetent
and/or flaky loan agent causing delays at closing.
Mortgage Quote Site deleted BayHouse account, threatened with legal action and falsely accused me of sending "hate" mail. First they sent me junk E-mail, then they deleted the BayHouse account after two days:
Instead of playing the "low quoting" game, I had quoted extremely high rates. I asked how they do business, and Dr. David J. Roberts replied with legal threats and a complaint to my web host based on false accusations. In e-mail sent to my ISP (Internet Service Provider) Dr. David J. Roberts claims:
My ISP forwarded the above E-mail to me and wrote:
I subsequently asked Dr. David J. Roberts:
This IS the real estate and mortgage business. Be VERY careful and get EVERYTHING in writing.
At the REDC Auction on August 6, 1995 in Santa Clara, I asked the agent of First Republic Mortgage what their profit would be on a $200,000 loan with a 20% down payment, excellent credit and income (A paper.) I could not get an answer other than "it depends on the loan" and "every loan is different." That's BS. Yes, every loan is different, but they DID quote rates. Apparently, their profit depends on how much they can get away with.
Why I don't broker loans anymore I got very tired of working without pay. I found that too often I spent a tremendous amount of time getting marginal loans approved as A paper. I didn't charge for credit disputes and many hours of counseling buyers and their agents on negotiations and contract writing. I remember one borrower who went to bank of America INSTEAD of taking the MCC program. Often the real estate agents tried to steer the buyers to their "preferred lending professional" so they could CONTROL the buyers and didn't run the risk of me answering the buyers' questions about inspections, contracts and contingencies. I got tired of ... explaining over and over that the rates in the Sunday paper were quoted the previous Wednesday. ... having to prove that a quote is not true if it sounds too good to be true. I made countless calls to other brokers and banks about their much lower rate, only to hear that it was a "printing error" or "due in 5" or "fixed, but it's the start rate..."
And that's not my thing.
Often not at all. Only when the loan closes does the broker receive a commission. Once the loan recorded the lender mails or direct deposits the commission check. Just like in any other business, brokers have wholesale rate sheets and mark up the cost with their profit. Example: At 8% the Lender offers to pay 1/2 point to the broker, commonly this is called a REBATE. One point = 1% of the loan amount. On a $200,000 loan, one point = $2,000. If the broker wants to earn $2,000, he quotes 8% + 1/2 point. You pay $1,000 and the Lender pays $1,000 to the broker. If the broker wants a $4,000 profit, you pay 1.5 points ($3,000) and the Lender pays 1/2 point ($1,000) in our example. Your aunt gives you a $100,000 gift. Now you only need a $100,000 loan. The broker quoted you 8% + 1.5 points because he wanted to make a $4,000 profit. Since you reduced your loan amount, the profit is accordingly reduced to $2,000. (1.5 points or $1,500 from you and 1/2 point or $500 from the Lender.) You will have to pay an additional 2 points ($2,000) or the broker just lost a $2,000 commission. What would the broker do? In my experience, the broker would say "sorry, rates went up." And you'd get a 8.5% interest rate and still only pay 1.5 points, but the broker would get 2 extra points (rebate) from the Lender for the higher interest rate. The broker has the same amount of work for the $100K loan or the $500K loan. That's why I recommend that a fee should be negotiated before formal application. And, this example is rather unrealistic. Often the borrower gets a higher loan than originally applied for and the broker subsequently gets a higher commission if you didn't use the Quote Request Form or otherwise limited the broker fee. On average, for a 30-year fixed rate loan, every point changes the interest rate by 1/4%. That's how "no cost" and "no point" loans are created. You agree to the higher interest rate in exchange for no points and/or no closing costs, the broker uses the high rebate to pay for your closing costs.
Ask your broker for a copy of a whole sale rate sheet to make sure you're not being "low quoted." They may say that's illegal, but that's not true.
They can write "Example" on the rate sheet, I got the
letter from the California DRE approving sample rates without APR.
The mortgage market is extrememly sophisticated. Home loans are securitized and sold on Wall Street. Fannie Mae and Freddie Mac purchase the conforming loans and we have many Jumbo investors for the higher loan amounts. All brokers have almost identical rates. Sometimes brokers receive volume discounts from certain wholesalers, but usually their pricing is a little higher to begin with. The main difference in the quoted rates is the profit.
Sometimes wholesale lenders will offer special rates for loans locked by a certain date, because they purchased a commitment for a certain dollar amount or because business is slow, etc. "Lock with a 21 day lock by noon tomorrow, 2 day delivery" would be a typical offer. Should that rate be quoted to someone shopping for rates? One can't prepare the loan package in 2 days, as you need a title report and appraisal. There are many issues to the rate quoting game, be sure to get everything in writing. "Mortgage Quote Site" deletes BayHouse Account is
a typical example of the philosophy in the Mortgage Business. And here is an ad for loan agents as seen on 9/14/2001:
Notice the "No Need to disclose rebate" and the "100% Commission + SRP" (service release premium.) Mortgage companies are CONTINUALLY exploring legal ways to be able to NOT disclose their commission. Banks don't have to disclose commissions. They organized as a mortgage BANKER so they can make SECRET PROFITS and low quote? Another lending outfit I wouldn't touch with a 100 ft pole ....
In Fall 1993, I was taught how to "low quote" in the Loan Origination class at Cal State Hayward for the California Association of Mortgage bankers' Certificate Program. When the instructor was asked how she quotes, she replied:
Her bait and switch tactic can easily make a $10,000 difference over the life of a loan. BTW, this scummy instructor was the president of a California Mortgage Women Association. Don't be fooled by titles and designations!
CA law *used to* require mortgage brokers to disclose all profits within 3 days of receipt of the application. Since the DRE once again dropped the ball, the only protection
you now have is the completed and signed Quote Request Form.
They are my favorite loans, simply because they are "no brainers." If you have no closing costs and you lower your rate with a "no cost" refi, how could you lose? The California DRE disagrees with me. They made prohibiting the advertisements of "no cost" loans by CA Mortgage brokers their priority in 1993, while B of A was running full page ads (legally) in the Chronicle. The DRE position is that the borrower always pays for the loan due to the higher interest rate compared to a new loan with the borrower paying closing costs and points. However, apparently they don't realize that they are comparing to the wrong rate. I truly belief that the CA DRE has been completely corrupted by Corporate America. It's that, or they are braindead. The "no cost" refinance is the only sure winner as it costs the borrower nothing, no matter how soon the loan is paid off. And next time rates go any lower, you do it again! On average it takes over 5 years to recover closing costs and points. I used to provide a spreadsheet to my clients comparing the existing loan to a 1.5 point loan, a no point loan and a "no cost" loan. The calculation is rather simple. Example:
Now you know it will take 5 years until the refinance starts to pay off. That's a long time, a lot can happen in 5 years:
Unless you keep our sample loan for at least 5 year, you just gave away your money and you're not going to get a penny back. You could add these same $3,000 to your favorite investments. Of course, if you are SURE that you are going to keep the loan substantially longer and rates are at the all time low, get the lowest rate you can afford. Calculate your closing costs and recovery period at the time you lock.
Or set any target date, use a payment calculator to create your own amortization schedule. I highly recommend the calculators included with Quicken. You're in charge!
There are many scammers selling bi-weekly loans and mortgage acceleration programs.
Use the payment calculators to set up your own schedule and simply increase your monthly payment accordingly. I highly recommend using Quicken to analyze your loans. While there are many free calculators on-line, you'll save a lot of time using Quicken because you can save your loans. In the real estate newsgroups, bi-weeklies and the merits of mortgage prepayment have debated more than any other topic. If you are interested in the various pros and cons of prepaying
your mortgage, check out the postings in misc.consumers.house and
misc.investment.real-estate.
Some wholesale bankers offer service release premiums to brokers for high volume (sometimes as little as two loans.)
Brokers usually don't refund these rebates to the borrower. The concept is similar to the car dealers selling cars at or below dealer cost. The dealers already know that they will get a large rebates from the manufacturers. The broker expects an additional secret profit.
Direct lender (bank) versus broker You get that warm fuzzy feeling when you walk into your favorite lending institution, you're admiring the marble while you're standing in line? If you're comfortable in this setting and you don't mind paying for the marble, the bank may be the place to get your loan. However, be aware that
If I needed a loan, I would skip the marble and go with a broker.
The broker does most of the work, assembling the loan package and underwriting it. Loan processing is very paper intensive and time consuming, especially when done properly. The broker verifies employment and assets, orders and reviews the appraisal, preliminary title report and credit report. The broker SHOULD take the time to analyze the borrower's needs and advise and educate the borrower about the numerous loan options. The borrower should be able to make an EDUCATED decision based on true facts provided by the broker. The wholesale lender underwrites the loan again and the Quality Control Department checks some of the information provided (to detect fraud.) Once the loan is approved without "prior to docs" conditions and locked, the loan documents can be ordered. After the signed documents come back from the title company, the lender reviews the docs for completeness and accuracy and the funding department will (hopefully) wire the funds to the title company, on time for a smooth closing.
When obtaining the loan directly from the lender, their processing department processes the loan just as a broker would. Except that there is little chance of consultation in favor of
the borrower.
A lock guarantees the rate for a certain amount of time. The longer the lock, the higher the rate and/or points. Lenders have to hedge (buy insurance) to protect themselves against rising rates, as they sell the loans immediately after closing. Generally, I favor not locking until the loan is ready to close within a short term (10 to 30 day) lock. If you *think* that rates will go up, a long lock might be beneficial, IF you are correct. Some lenders offer special locks with an option to lower your rate if rates go down. However, the initially locked rate is a little higher to begin with. There is no such thing as a free lunch. It's usually just hype and promotion. It is very important that you get a written lock confirmation and that you are realistic about the funding date. When a loan funds only a day after the lock expires, you will usually receive the market rate. For some strange reason (investor psychology), rates go up real fast, while they come down very slowly. Sometimes a broker can get an extension for a fee (usually anywhere from 1/4 point to 1 point.) When a broker locks your loan with a wholesaler (mortgage banker, bank or investor), these funds are then reserved for THAT loan. Wholesalers secure the money they loan out through their secondary marketing department. They usually pay a fee to reserve the funds at the locked rate for the time of the lock. Every banker/investor has their own strategy on exactly how they accomplish this, but it's similar to purchasing stock or futures options. Once the option expired, it's worthless. Occasionally secondary marketing screws up, playing the market, and they don't have enough funds at the locked rate. When wholesalers don't have the funds to close, they usually will start requesting documents they already had or ask for additional (often ridiculous) documentation, just to delay the closing so that the lock expires or rates improve. It's not unusual for this to happen. When a deal sounds too good to be true, there is usually
a reason.
I don't predict rates and I don't rely on anyone else's predictions. In February 1994 the CA Association of Mortgage Bankers predicted rates would go even lower, to the 5%-6% range in 1994. That didn't happen and rates went up instead. Sometimes financial gurus are correct, as rates can only go up or down. If they really knew where rates are going, they would trade bonds and retire. Economic Calendar and Forecasts At this CBS MarketWatch page you will find some of the many reasons why rates always change.
The Feds control short term rates only. The Feds lower short term rates, but mortgage interest rates increase? Yes, I've seen it happen, because the bond market expected a larger rate cut, the market felt that inflation might be on the rise or because of many other reasons such as the budget deficit, events in foreign countries, etc.
Rates go up, rates go down... what else is new? If your deal makes sense, go for it! If you think rates will go down in the future or you anticipate keeping the loan less than 5 years, consider a "No Cost" loan and/or an ARM. You should be able to refinance whenever rates are what you've been waiting for, unless you have a special loan such as a MCC Loan or very little down payment. Don't forget the cost of MI if you plan to refinance. There's more to life than getting the * lowest * rate in ten years. Follow the instructions here to ensure that you get a low rate for the market at the time and select the appropriate program.
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Almost
all mortgages (except FHA and VA) are now declined if your credit scores are
not meeting the underwriting guidelines.
DON'T sign the
application, as that gives permission to run your credit again,
lowering your credit scores. 
