Don't decide on mortgage until knowing all fees
Part 2: How to choose right loan, lender
By Ilyce Glink, Wednesday, May 7, 2008.(This is Part 2 of a two-part series. Read Part 1, "Best loan in today's market: fixed or adjustable?")
A new study suggests that one of the reasons many subprime loans have failed is because of very weak underwriting.
"Underwriting" is the process by which a lender decides whether a borrower is a good risk. It involves looking carefully at the paperwork provided by the borrower, including a signed loan application, bank account statements, paycheck stubs, tax returns, profit and loss statements (if the borrower is self-employed), and a review of the appraisal of the property obtained by the bank.
The underwriting process also includes a process called "verifications." The loan officer is supposed to call your bank and verify how much cash you have in your account. He or she is also supposed to call your employer to verify your employment history and income information. If the facts you've put down in your application can't be verified, the loan officer is supposed to reject your loan application.
This isn't what happened in the subprime market meltdown. In some cases during the past several years, if a borrower's information couldn't be verified, the loan became a "stated-income" or "no-doc" loan. The borrower simply paid a higher interest rate and fees, and limited or no verifications were performed.
As a borrower, you want the lender to be sure you're qualified to borrow the amount you have in mind. You want to know exactly how much you'll owe each month, and for how long.
Underwriting the loan is arguably the most important thing a mortgage lender can do, and we've all seen the results of poor underwriting: a high rate of foreclosures and defaults.
When choosing a good mortgage lender, whether you choose a mortgage broker or a mortgage banker, you'll want someone who can do the job right. Finding a lender who will take the time to make sure you understand the different loan programs being offered, and will help you decide which loan best meets your needs is key to having a smooth closing.
How do you find a good lender? As with finding a good real estate agent, start by garnering recommendations from your friends, family and work colleagues. If you are working with a real estate attorney, he or she should have the names of loan officers who do a good job for their clients. Your real estate agent, if he or she is a pro, will have a list of names of mortgage lenders the company does business with.
Beware of real estate agents who only proffer the name of only one mortgage broker or lender, particularly if that lender is an in-house mortgage broker. The in-house lender may not be a bad lender, but you need to make sure you find the best lender for your circumstances and lending needs and not the lender that may yield the greatest benefit to the real estate agent's company.
You should also include a credit union, if you belong to one or can join one. Credit unions typically offer some of the least expensive loan programs, whether you're looking for a mortgage or a car loan.
Once you compile your list, you should do some basic due diligence to make sure that the loan officer and mortgage company is in good standing in your state, and that there are no outstanding complaints against them through the Better Business Bureau.
Next, start calling the loan officers to chat about their offices, how long they've been in the business, how many mortgages they're currently working on, and your own situation.
(By now you should have in hand a current copy of your credit history and credit score, which you can buy for $14.95 at MyFico.com or even less if you obtain a free copy of your credit history through www.annualcreditreport.com. Ask the loan officer to assume that you have this particular credit score for the purposes of your initial consultation, so your credit history isn't taped unnecessarily.)
You can ask each lender to give you a best price offer for the loan program in which you're interested. So, if you want a quote on a 30-year fixed-rate loan and you're putting down 10 percent, ask for that price quote. If you haven't quite decided between a 30-year fixed-rate mortgage and a 5/1 adjustable-rate mortgage (ARM), then ask for both. Be sure to ask for a detailed list of fees that will be charged for the loan.
These "other" fees can differ greatly between lenders. While some fees may be the same from one lender to the other, some lenders add additional fees to their services. Whereas one lender may have $800 of additional fees going to the lender, another may have fees that may be double that for the same loan and the same interest rate.
At the end of the conversation, you should feel comfortable with the loan officer, and the loan program he or she has offered. If you get a funny feeling that maybe something isn't quite right, (perhaps the loan officer is too eager to get your business?), then it's time to do some more research.
What about online lenders? Mortgage companies have collectively spent hundreds of millions of dollars creating fancy Web sites designed to attract borrowers. There's nothing wrong with doing some research online and perhaps even applying for a loan online.
But you'd want to know that the company you're doing business with is real.
If you're choosing a lender like Bank of America, Citi, SunTrust or Countrywide, you won't necessarily get a cheaper price by applying online. But it will take away some of the opportunity to have a personal experience, which I think is important in this, the single biggest purchase of your life.
To get even more valuable advice from Ilyce, visit her Personal Finance and Real Estate Center.
***
What's your opinion? Leave your comments below or send a letter to the editor. To contact the writer, click the byline at the top of the story.
All rights reserved. This article may not be used or reproduced in any manner whatsoever, in part or in whole, without written permission of Inman News. Use of this article without permission is a violation of federal copyright law.
Bookmarking Sites
Add A Comment
You must login or register to post a comment.
Submitted by David Fialk on May 7, 2008 - 6:29am.
As published on www.JustRealEstateTalk.com
Mortgage Pre-Qualification versus Pre-Approval
Before taking the time to drive around looking for a home, before taking the time to visit Open Houses and before taking the time to meet with a REALTOR® to look at homes, meet with a Mortgage Lender to review the mortgage process and obtain Mortgage Pre-Approval.
The reality is that most all buyers need to obtain a mortgage to buy a home. Since so few buyers are able to think about buying a home and paying cash, wouldn’t it make sense taking care of the financial details first?
Price range is determined by the down payment plus the mortgage amount to be borrowed. The mortgage amount is determined by income qualifications, credit and other important criteria.
Not only is obtaining Mortgage Pre-Approval important to the buyer themselves, but it becomes even more important in the process of searching for a home and making contract offers. Most experienced REALTORS® require their clients to have Mortgage Pre-Approval and, more importantly, very few home sellers will even consider a contract offer without Mortgage Pre-Approval.
Many buyers have asked, “is there a difference between a Pre-Qualification letter and a Pre-Approval letter” or “does it make a difference if I have Mortgage Pre-Approval or Mortgage Pre-Qualification”? These terms appear to be similar, but are in fact quite different. Not only do they cause confusion for home buyers, but there seems to be many interpretations from those in the real estate and mortgage industry as well.
Speaking as a REALTOR®, the difference is documentation and verification. In other words, is the buyer providing copies of income paystubs and bank account statements to the Mortgage Lender in the pre-approval process or is the Mortgage Lender simply relying on verbal information provided by the buyer? More often than not, the difference between the two terms is that one is issued without any verification of information and the other starts with the buyer providing written documentation of all information submitted. While neither is a considered to be a mortgage commitment, nor a written mortgage guarantee, obtaining a Mortgage Pre-Approval letter is more preferred than obtaining a Mortgage Pre-Qualification letter.
Based upon my experiences in selling real estate and helping buyers obtain mortgage financing, Mortgage Pre-Qualification is generally a process where a buyer contacts a Mortgage Lender/Mortgage Rep, often on the phone, who then asks the buyer to provide some information such as current address and how long living there, social security number in order to obtain a credit report, down payment amount and annual income. I assume a credit check authorization form is signed by the buyer and faxed to the Mortgage Lender. After the credit check is ordered and received by the Mortgage Lender, the Mortgage Rep then estimates the amount of mortgage the buyer can afford and sends(via fax or email) a letter to the buyer with the title Congratulations, You Are Pre-Qualified, for a mortgage loan in the amount of $___________ and a purchase price of $__________. This is usually done within a half hour or so of the initial phone call, and at best can be described as an estimate of borrowing ability, and not Mortgage Pre-Approval.
In the qualification letter, varying type disclaimer information is always included such as: subject to a formal mortgage application and payment of application fee, subject to verification of employment, subject to verification of assets, subject to credit review, subject to mortgage underwriting guidelines, interest rate to be the prevailing rate of interest for the mortgage type applied for, among many other subject to statements. In other words, we will give you a mortgage when we see that the information is correct.
What kind of problems could arise when a formal mortgage application is submitted by the buyer after they’ve obtained a Mortgage Pre-Qualification letter like that one? The mortgage application process involves somewhat standard underwriting criteria and guidelines for each particular type mortgage, whether VA, FHA, Conventional and other variations of each.
The Buyer does have a Pre-Qualification letter, but how reliable is it if important information such as income, debts and assets, while assumed to be correct and accurate, has not been at least verified with copies of paystubs, savings accounts, charge card statements, etc.? Yes, it is possible that the buyer provided correct information and will obtain a mortgage commitment when a mortgage application is submitted. However, there are many circumstances where even though the information verbally provided is accurate, certain other details are not mentioned which may have a negative impact on the mortgage approval process. Details like income being received off the books, down payment being borrowed(not gifted from a family member), savings for the down payment only but no other assets for closing costs or inconsistency in work history to name just a few situations that can cause problems in obtaining mortgage approval.
While Pre-Qualification letters like the previous example are common, not all Mortgage Lenders provide Pre Qualification letters in that manner. Since the mortgage application and approval process involves a credit check, income verification and asset verification among other criteria, many Mortgage Lenders require a more thorough process in providing Mortgage Pre-Approval. In addition to obtaining a credit report, many Lenders require the buyer to provide proof of two years of income, pay-stubs or income tax forms, copies of bank statements and copies of charge card statements.
When all the information is complete and the credit report is obtained, it is then submitted to the Mortgage Underwriter for review and approval, who then issues the Mortgage Pre-Approval letter. In fact, the Mortgage Pre-Approval letter is worded something like this: Congratulations, You Are Pre-Approved for a mortgage loan in the amount of $________ and a purchase price of $__________ subject to a Contract of Sale and a satisfactory Bank Appraisal on the home being purchased. While more time consuming than the previous pre-qualification practice discussed above, not only is it more thorough and more reliable, it also provides a shorter mortgage application time process and provides the ability for a fast closing when one is desired.
Consider the advantages of this type Mortgage Pre-Approval. First of all, there is the confidence for the buyer in obtaining a written mortgage commitment for the home they have just signed a contract for and the home they have already made an investment in; hiring an Attorney for contract review and hiring an Home Inspector to perform the Home Inspection, Termite Inspection, Radon Inspection and any other required inspections. Needless to say, I can’t even count the number of real estate transactions I’ve heard about that fell apart after the buyer paid for the bank appraisal and all the inspections due to the buyer not being able to obtain mortgage approval, even with a Pre-Qualification letter. It just doesn’t make sense!
Even more important is the benefit in negotiating with a seller in the purchase of a home, something that can make the difference of being the buyer who gets the signed contract or being able to negotiate a better price. The Mortgage Pre-Approval provides comfort to the seller and REALTORS® in knowing that they have a serious buyer and one who has already taken the most important step in buying a home, arranging the financing first!
Help yourself negotiate for a better home purchase.
Contact a Mortgage Lender to discuss obtaining Mortgage Pre-Approval before you get in the car to look at houses! It is worth the effort, trust me!
David Fialk
Broker Owner
732-283-3400 Office Direct
Choice Realty.com
David@ChoiceRealty.com
www.DavidFialk.com