Mortgage Loans

Mortgage Loans:

How to Shop for a Home Loan

Getting the financing for your home can seem daunting and tedious, but essential to the purchase. Most consumers call around or use the internet to shop rates. Then, they select the lender offering the lowest interest rate, oblivious to the myriad fees and charges that will be added onto the loan later. It is not the smartest way to shop, nor is the rate the only thing to think about when getting a home loan. A little knowledge of the home mortgage game can go a long way.

Steps

1. Decide what avenue to take to obtaining your financing: Credit unions, banks, big lender retail stores (e.g. Countrywide) and mortgage brokers.
   
   • Credit unions usually provide the best value and service, but regular banks and the big lender retail shops will also provide good service. A mortgage broker is a "wholesaler" who uses several lenders to service their customers. The advantage of a broker versus bank or retail store is that the broker has more selection of rates and products. A bank or big lender retail store will only offer the products their company provides.
     
2. Consider more than just interest rates. Ask for and question all of the charges on a Good Faith Estimate. This is a required document and while it is only an estimate, question the charges listed and ask what they are for and if they can change.
   
3. Negotiate rates if you are using a broker. A broker makes his money in two ways: Origination fees or yield spread. Banks that lend money to consumers through brokers, entice the broker to use them with commissions, commonly known as yield spread or rebates. Essentially, the broker makes more money for the loan when he can sell a higher interest rate to the consumer. This means that your interest rate is, to an extent, negotiable, as are many of the fees on a Good Faith Estimate.
   
4. When you are quoted an interest rate, ask the broker to tell you what his origination fee, rebate or yield spread on that rate is. A broker may not charge an origination, but will receive a large yield spread for the rate quoted. A fair amount would be a total of 1% of the loan amount, from yield spread, origination or combination of the two. A broker usually wants to make at least 2%. Don't pay an origination unless he is telling you he is not getting anything on the back end of the deal.
   
5. Consider paying discount fees or origination fees to get a lower rate. This is just another way for the broker to get paid when a customer wants a specific rate. If the bank is offering a particular rate, but requires money up front to get it, the customer will pay the discount and the broker will get his cut with the origination fee. Or, the rate will be par, which means the bank charges nothing, and the broker will get his money with the origination fee.
   
6. Negotiate these items for your best deal.
   

Tips

• Don't expect the broker to work for free. He will need something to cover the overhead. Ask what he is making and question the fairness of all fees. His job is to explain them. If it doesn't sound fair, have them adjust it.
  
• You are required to have a HUD-1 form 24 hours before close. This will disclose all fees charged. If you see add-ons or increases, this is the time to take care of them. You can do it at the closing table, but expect a lot of stress from all parties if you wait. No one wants to put off a deal worth hundreds of thousands of dollars to bicker over a few hundred.
  
• Don't just shop for rate, pay attention to the details and professionalism of the broker. Is he organized, does he return calls, does he act professional and take his time answering your questions.
  
• If your credit is poor, expect to pay more. It usually takes a great deal more work to get a borrower with credit issues by the underwriter. The broker will want more to do it. But that doesn't excuse greed. Insist the broker disclose what he is going to make on the deal and keep it fair.
  
• Conversely, if you have strong credit, income and assets, the loan will be a slam dunk and you should NOT let the broker make a huge commission off of you. Insist on a lower rate or less origination fee.
  
• Demand good service. It is new and unusual for most of us. Don't allow them to make you feel stupid.
  
• If the broker requires documentation of income, assets, etc. provide them as quickly as possible. It will only help the loan get underwritten that much quicker.
  

Warnings

• Don't let a broker ride roughshod over you and make you feel stupid. No question is too dumb. Not many of us buy houses that often and it is their job to educate you. If you have a question, have them explain it so that you fully understand what is going on. If you don't or they won't help you, get a new lender. You can walk away from the lender all the way to closing day. If the deal fails because of this, the only thing you will lose is your earnest money put up for the sale. However, there are usually plenty of warning signs of problems before closing. Don't ignore them!