Continued from Part 1, where you should have figured out what type of loan you want to get, gathered copies of your important paperwork, and gathered a list of potential lenders. Now to narrow things down to one final lender.
III. Narrowing Down The List
To trim down your list, you may want to call some of them up and ask them a few questions.
1) What type of loans do they specialize in? (Don’t tell them what you’re looking for yet.)
2) What do you need for a rate quote and Good Faith Estimate? What is your quote? Many will give you a rate quite easily, but the GFE is sometimes harder without submitting private information. Just remember, any such quote is only as good as the information you provide.
3) How fast can they lock their quoted rate/points if you choose them? Can I lock this quote you just gave me today? Will they provide written lock confirmation? Will they guarantee their lender fees? (See below.)
Some other people throw in some quiz questions that relate to guessing future mortgage rates, but I don’t really care about that. Your final list might look something like this:
- A few Upfront Mortgage Lenders. These lenders have agreed to disclose accurate rates/points for the market niche they service, as well as guarantee their lender fees. At the very least, you should be able to get a good idea of a competitive current rate.
- First-time homeowner programs in your area, or perhaps you have a preferred lender for your housing project.
- Credit unions that are either local or otherwise restrictive (only teachers in your county, military affiliation, etc.)
- A broker that was highly recommended by a trusted friend experienced in real estate.
- A loan officer from a “big” bank, perhaps where you have an existing relationship.
IV. Compare Good Faith Estimates
When you apply for a mortgage, the government requires your lender to give you a Good Faith Estimate (GFE) within three days of your application. But you should be able to get one, or something similar to one, beforehand with no cost. When done, you should have GFEs from about 2-5 people to compare side-by-side. The actual document looks like a huge list of different fees and can be pretty confusing, but you need to simply break it down into three parts:
a. Interest Rate / Discount Points
- Use interest rate, not APR
- Also note lock period
b. Fees Paid To Lender (Add these all up)
- Application Fee
- Commitment Fee
- Rate Lock Fee
- Origination Fee
- Funding Fee
- Administrative Fee
- Transfer Fee
- Processing Fee
- Loan Set-up Fee
- Wiring Fee
- Discount Fee
- Flood Certification Fee
- Tax Service Fee
- Underwriting Fee
c. Third-Party Fees At Closing (Not paid to lender)
- Credit Report Fee (should only be ~$20)
- Appraisal Fee
- Title Insurance (may be able to specify your own)
- Hazard Insurance (you pick)
- Government Fees
Do not just look at the number at the bottom, or the total closing costs. There are many tricks to make this number look smaller than other reputable brokers by including very low estimates.
Only add up all the fees charged by and paid to the lender (b). Ignore the fees not paid to the lender (c). Don’t worry about the specific breakdown. Sometimes they interchange and/or mix up discount points and origination fees (both are a percentage of the loan amount), so if you are paying points you could add these all together. Make sure nothing is missing. If in doubt, ask. A trick by bad brokers is to “forget” about a fee that gets tacked on later.
Compare the sum of all lender fees. Along with the interest rate, you should be able to find the top two contenders.
V. Negotiating Closing Costs
While getting the GFEs, you should be clear that you are shopping around different lenders and that you care both about the rates and the total lender fees (closing costs). Once you have your best quotes, there are a variety of ways to hint that you want to negotiate closing costs. Remember, the broker gets paid through these fees (and possible a yield spread premium), their profit is all in there somewhere.
One way is just to be blunt and say “I want to pay the absolute minimum for these lender fees. Are they all really necessary?” Another way is to ask for an appointment to “go over” the GFE. Ask the broker about each and every fee listed, one by one, and ask if it is necessary and/or negotiable. Sooner or later the broker will either say “no, these are firm” or “okay, how about I remove XXX or reduce YYY by $500″. I did the list thing, and my broker eventually offered me a 0.25% credit back towards all closing costs so I would shut up. See how it’s only the sum that matters? On a $600,000 loan this was a $1,500 savings on the quoted GFE. However, there is nothing wrong with somebody saying “no, my quote is competitive and I stand by it.” I just need to hear those words.
Finally, after negotiating, you should ask if the broker is willing to guarantee all their lender fees until closing. In theory, this shouldn’t be that hard, because they are the ones who set the fees. The Upfront Mortgage Lenders all agree to this. If not, ask them why, and ask them if they will guarantee within $500. How firm are they? If they totally refuse, it might be time to try Lender #2 with the next best quote. Rinse and repeat.
If you’re really hardcore, you can also ask them to guarantee the sum of all the third-party fees within $500 or so. For example, the appraiser may charge $600 or $675, but it shouldn’t be $995. They may balk at this, since technically they don’t set these fees. (Shady kickbacks to title insurance companies aside…)
With this final information, either accept it or ask Lender #2 to match or beat it. I don’t recommend too much back-and-forth, you should be pretty close to the best available rate by now.
Now, send these lucky folks all your information – application, credit report, supporting documentation, etc. – and ask for a loan approval letter, official GFE, and Truth-In-Lending Statement within 72 hours. If you get all this, you can finally breathe – you have a loan!
VI. Locking The Rate
If you have a rate that you like, I would consider locking it in that day. A rate quote is just a number that changes every single day until you lock it in. You can usually lock before obtaining official approval. Some people like to “float” and see where the rate goes, but this is always a gamble because the rate could go up and never come back down. I waited one extra day, and the next day my rate went up 0.125% and never went back down to that first day’s rate for the next two weeks. Of course, it could have also gone down. (A big drop will also happen the day after you can no longer change the rate. Murphy’s law.)
In my opinion, there is not any reliable predictor of daily variations in mortgage rates. There might be a big event during the day, and your mortgage broker might say “lock in at today’s rate before my office closes because tomorrow it will skyrocket!” Otherwise, you just have to decide if you want to take that risk. If you float, you need a lender that publishes their rates publicly, ideally on their website. Otherwise, the rate that they feed you after they’ve got your business could be completely different than what they are quoting to other prospective borrowers. Sometimes you can lock in a rate and also float down later. This may or may not incur a fee.
VI. Back-Up Loan
Now that you have a pretty solid plan, you should approach your 2nd-best lender and ask them to match the rate of your top preference. If they have a “real” GFE from Lender #1, chances are they will match. My Lender #2 did. You never know what underwriting or the markets will do during the approval process. Maybe they don’t think your job is stable enough, or your credit score is not quite good enough anymore, or maybe the lender itself will implode. It’s always good to have a backup.
If you are successful, by the end of this process you should have almost everything locked up until closing day. The rate. The points. The lender fees. Unless your broker is really mean/stupid/evil, there shouldn’t be any surprises from the loan. To double-check, you should request a copy of the HUD-1 (official form including all final fees) form 24 hours before signing day, in order to make sure all the fees match up. On signing day, triple-check that info on the HUD-1 form you actually sign. Make sure the loan has all the correct information on it – rate, term, amount, pre-payment penalty, and so on.
Finally, I would like to say that I am not a mortgage professional, just a guy who spent a lot of time learning about mortgages and went through the process. Comments welcome.
More Thoughts On Finding a Mortgage
Brian Brady, World Wide Wealth Advisors
The post is a new addition to my Experiences in Buying A Home.