During the last three weeks I’ve discussed how your property location, credit score, your specific loan scenario, timing, and games sales people play can significantly impact the rate you pay for your loan. If you’ve missed any of the last three parts you can view them at PART I, PART II, and PART III.
Games Sales People Play, is such a large topic itself, I had to break it up into two parts! The reason that it’s even possible to play games with you and your rate is because the mortgage lending process is complicated – plain and simple. In addition, the salespeople have a huge advantage over you. While you may get a home loan 2-3 times in your lifetime the sales people are closing at least that many loans every month.
To help you make smart decisions about home loan financing, let me share with you some of the insider secrets I’ve learned during my 19 years in the business:
Telling you that you can’t Lock until Approval – An important question to ask the lender from whom you are getting a rate quote is “can I lock the rate right now, over the phone?” For most lenders, the answer is no. Making you wait to Lock until your loan is approved means you are subject to anywhere from 2 weeks to a month of rate market changes. Basically, you have applied for a loan with the final terms left open till a later date. It’s kind of like writing a blank check to your lender! Why would a lender tell you this? Well, it’s to the sales person’s advantage if they can convince you not to lock your loan. Your guard is typically lowered once you’ve been in process with the lender for a few weeks and they can take advantage of this. Realize that when you called them on the phone a few weeks prior, they told you whatever rate they thought you needed to hear to get you to apply. Now, you can bet their “best” rate quote won’t be nearly as aggressive when they’ve got $450 of your money, non-refundable, and have collected all your private financial information for the last three weeks. Are you really going to cancel just because they quote you a rate that is 1/8% higher than someone else? And that’s assuming you even notice. You can prevent this from happening by selecting a lender that is able to lock you right up front, over the phone.
Rates are low and it looks like they may stay that way for the next few months as our government pumps tons of money into the mortgage business in an attempt to stabilize the housing mess. Lenders are slammed with refinance applications and are operating with a fraction of the staff they had a couple of years ago. It’s not a pretty process – a couple of the largest banks are taking 60 days to process a loan!
Rebecca and I hand select our lenders, and to date have been able to keep our process to 30 days or so.
So, the next time you ask a lender “what’s your rate?” just remember that it is virtually impossible for them to give you a valid rate quote. The only way to give you an accurate and valid quote is to have a full loan application, appraisal, and credit report. Anything less than that and the rate quote is just an educated guess at best.
So how do Rebecca and I overcome these roadblocks to providing you a rate quote you can count on? First, we take your information by telephone in about a 15 minute conversation. It’s not necessary to come in for a two hour loan application appointment. Second, we will order a credit report for you. We can provide you a written Good Faith Estimate with a valid rate quote and we can lock right over the telephone at the point of our conversation. There is never any up-front money collected or costs incurred by our customers until such time as they have a solid, written proposal upon which they can make a smart decision.
If you have a question about lending or real estate, please send Rebecca and I an email at MMullin@TheLoanConsultant.com, or give us a call at 509-252-9151. We’d love to share our knowledge with you!
During the last two weeks I’ve discussed how your property location, credit score, your specific loan scenario, and timing can significantly impact the rate you pay for your loan. If you’ve missed either or both of the last two parts you can view them at PART I, and PART II.
Now we’ve arrived at the part I’m most passionate about - Games sales people play to bamboozle you. If you have read the previous sections you should honestly be saying to yourself – “hey, there is absolutely ZERO chance the mortgage guy I talked to on the telephone gave me a valid rate quote, or even if he did, that the quote is still valid now.”
To help you make a smart decision about what lender to work with, let me share with you some of the insider secrets I’ve learned during my 19 years in the business:
· Low Ball rate quotes over the telephone - The loan salesperson’s main motivation is to get you to make a formal application and cough up a non-refundable “application fee.” Given this motivation (and the information I’ve provided about all the factors that impact your rate), do you honestly think the rates you see published on web pages, in print, or given verbally over the phone are accurate and valid? Nope! Usually they are just low enough to entice you to call. Once they have your non-refundable application fee they can sell you on a higher rate very easily by referring you to any one, or more, of the “add on” factors I’ve mentioned previously. The conversation, quite honestly, goes like this – “gee, I’m sorry Mr. Borrower. After you applied I ordered your credit report and your credit score is a 685. I have to add .875% in fees to your loan.” A professional lender will allow you to hold off on the non-refundable fee until AFTER they’ve seen your credit report and given you a valid rate quote.
· Encouraging you to Float instead of Locking – when you apply for a loan, one of the first choices you have to make is whether to Lock the rate (if the lender allows this option before loan approval, see below) or whether to Float with the market while you are in process. If your motivation is to Float (gamble) with the market please understand you have just given the lender the ability to play games with your rate! Here’s how it works – you’ve applied with Sally Saleswoman because she had the “best rate” when you were rate shopping. Unbeknownst to you she gave you a Low Ball quote to get you to apply. You’ve now made application, paid your $450 non-refundable Appraisal/Application Fee, and handed over all your confidential financial information. Sally Saleswoman confidently advises you that “lenders offer the BEST rates when we only lock for 15 days. A 30 day lock is always more expensive – like .5% in added costs. If you want to pay the extra fees that’s ok. Or we can process your file to completion and then we’ll be in a position to lock for only 15 days and you’ll get the best pricing.” Sounds pretty good, doesn’t it? There are two problems with this scenario. First, if rates get worse by even a smidgen (see Timing in part two of this series) the rate you pay when you are eligible to lock for 15 days could be WAY higher than the rate you could have had if you had locked up front for 30 days!!!! Second, Sally Saleswoman knows you won’t back out if you wait to lock until only 15 days before closing escrow. She no longer has to honor the Low Ball offer she gave you to get your application and can now extract as much from you as she thinks she can get away with. Does every mortgage person play the game this way? Of course not! But given what you read in the papers about greed and irresponsible behavior do you think it’s possible that a good percentage of the mortgage people behave this way? How do you know whether you lender is playing games with you? There’s a secret way to expose the game players, and I’ll write about that shortly.
If you have a question about lending or real estate, please send Rebecca and I an email at MMullin@TheLoanConsultant.com, or give us a call at 509-252-9151. We’d love to share our knowledge with you!
“Mike, I keep hearing about low 4.5% rates, but every time I call a lender the rate they quote is higher! What’s up?” How Your Rate Is Determined, Part 2
Last week we discussed how your location and your credit score can impact the interest rate you pay. This week we look at two more factors, both of which can be even more critical that the first two.
Specific Loan Scenario – So, we’ve already adjusted your rate for where you live and what your credit score is. Now, let’s get into the more complex “hits” and “add ons” and look at how your specific loan scenario can impact the rate you pay:
· Purpose of loan – purchasing a home is the least risky loan and will always have the “base” rate. Refinancing your current first mortgage increases the cost, and including a second mortgage in the payoff or pulling additional cash out of your home to consolidate debt sends the cost exponentially higher. The chart below shows the "add ons" and "hit" for a refinance loan. If you have a 700 FICO (remember, you have perfect credit at this level!), and want to borrow up to 80% of your home’s value lenders will add approximately .875% to your cost – that’s $1,750 on a $200,000 loan and is in addition to the “hits” you may have already incurred for your location and your Credit Score.
· Property Type – borrowing against your principal residence is always the least expensive. Borrowing against an investment (rental) home adds approximately 1.75% to 3% of the loan amount to the cost.
· And on and on… If you go back to Part 1, you can see the master “add on” chart from a national lender. If you look closely you’ll notice I haven’t listed ALL the possible “hits” or “add ons.” In addition, other lenders may have more factors to consider.
The factors to this point are what I call “static” factors – they are specific to your credit profile and the characteristics of your loan request. They remain the same whether you talk to me today or next week. The next factor, Timing, is the one that drives you (and I) crazy because it makes obtaining a rate quote a moving target.
Timing – can be everything. Timing is the reason I say “you can cost yourself a ton of money by shopping around for the ‘best’ rate.” The market forces that impact mortgage interest rates are moving 24/7 and lenders can, and do, change rates throughout the day. Below is a rate change notice sent by one of my lenders. You'll note they changed rates TWICE in one day for a total of .25%
![clip_image001[4]]($clip_image001[4][2].jpg "Daily Rate Change Notice")
A “normal” mid-day rate change is .25% of the loan amount which is $500 on a $200,000 loan. One “normal” rate change of .25% and you’ve erased two days of effort to shop for a lender with lower fees.
Keep in mind that by the time the lender issues the rate change it’s too late to LOCK at the previous terms. You could get a rate quote from a lender and that quote could be invalid minutes later.
If the cost can change .25% or more in one DAY, how much do you imagine it can change from day to day or week to week? This is why calling multiple lenders over the course of a couple of days can actually cost you money. You could spend 2-3 days calling different lenders gathering invalid quotes (based upon the fact those lenders can’t possibly know enough about you or your circumstances to apply the correct “hits”). You decide you think you know who has the “best” rate and you call them back on the 4th day to apply – oops! – the cost has increased .50% over the last three days and your “best rate” lender is now offering you a rate that is worse than the “worst rate” lender you spoke to three days ago!
So…you think you’ve found the lender you want to use because you like their rate quote. But wait! Can they LOCK in the rate they just quoted you? Or are you still subject to market changes? The rate you pay on your loan is not determined until your lender LOCKS your loan.
Many lenders require your loan to be approved before they can lock the rate – and this subjects you to a couple more weeks of rate changes while they process your file. We have the ability to LOCK the terms for you right over the phone, with just a few pieces of personal information.
If there is any inside info about lending or real estate you’ve been curious about, please send an email to MMullin@TheLoanConsultant.com, or give me a call at 509-252-9151. I’m passionate about real estate and mortgage lending, and would be happy to share my knowledge with you!
“Mike, I keep hearing about low 4.5% rates, but every time I call a lender the rate they quote is higher! What’s up?”
Do you want to know how lenders price your loan? Want to know about the little known details that might cost you thousands of dollars? Read on, and I'll explain...
The last couple of weeks we’ve been fielding tons of requests for rate quotes as homeowners shop around for the “best” rate to refinance their home loans. One particular caller spilled out his frustrations to me over the conflicting information he’s been getting as he calls one lender after another. While I’d like to tell you that the other lenders just didn’t know what they were talking about, in all likelihood they were just blindly answering the callers question (“what is your rate?”) but not taking the time to explain the entire process of how mortgage rates are determined.
The reality is that the rate YOU pay for a home mortgage in Spokane, WA is determined by a complex combination of geographic differentiation, your credit profile, your specific loan scenario, timing, and finally, good old fashioned sales games played by lenders.
First, I’d like you to know that the cost of mortgage money is pretty much the same on a wholesale basis to everyone. Banks and credit unions sell the majority of their loans to Fannie Mae and Freddie Mac, as do mortgage brokers via their wholesale relationships. A complete explanation of Fannie Mae and Freddie Mac is pretty tough to do here, but the easiest way to describe them is they are pretty much the ONLY funding source for home loans right now in the U.S. Bank, credit unions, and mortgage brokers “originate” the loans and the loans are ultimately purchased by Fannie and Freddie to replenish the cash that was used to make your home loan so we can lend to another family. The point to understand is that the basic cost of home loans is determined by what price Fannie Mae and Freddie Mac is willing to pay for a loan on any given day.
Another distinction to understand is the difference between banks and credit unions versus mortgage brokers. In the old days banks and credit unions used to make loans on their own terms and pricing by lending you money that they had in their vault. With very minor exceptions, all banks and credit unions now sell their loans to Fannie Mae and Freddie Mac just like mortgage brokers do. The big difference is that the banks and credit unions only offer ONE single menu of loan products – they either approve your loan or deny it based upon their product menu. Their loan sales people will typically have one rate sheet of programs.
Mortgage brokers, on the other hand, can represent an unlimited number of lenders. There are small mortgage broker shops that are approved with only 1-2 wholesale lenders and there are larger brokers who are approved with hundreds of wholesale lenders. While bank and credit union loan sales people have one rate sheet to serve you, mortgage brokers have literally dozens to view and chose from.
Given all of that, the rate differentiation between lenders it is not nearly as wide as most consumers think. Most of the pricing differences you see or hear are due more to the specific issues I’ll discuss below, than to one lender being “more expensive” than another.
The follow chart is going to be instrumental in my demonstration of how rates are determined.
This is a copy of a portion of an actual wholesale rate sheet from one of my favorite lenders. What you are seeing is small section of ONE page, out of FIVE pages of programs they offer. Keep in mind, I have potentially 296 other lenders all of whom have some variation of this same chart. Lenders call this an “add on chart,” because each one of the numbers on the chart represents an improvement or worsening of the base interest rate. For every borrower we have to carefully pick through these charts to make sure we apply the correct “add ons” to your specific loan scenario. The negative numbers are a worsening of your base cost, and the positive numbers are improvements. The cost change as a percent of your loan amount. For example, -.300 means that we have to add 3/10ths of 1% to your costs or $600 on a $200,000 loan request. The final cost is calculated by adding and subtracting the applicable “add ons” for your specific request and credit profile. These “hits” and “add ons” are universal to ALL banks, credit unions, and mortgage brokers – the actual percentages may be slightly different but everyone has them. You can see how easy it is for a careless person to make a mistake and miss-quote your rate!
Geographic rate differences – Every week Freddie Mac publishes the Freddie Mac Primary Mortgage Market Survey® in which they provide the average rates and points for home loans across the country. If you look more closely at the data, though, you will see there are regional differences with the average rates. In addition, specific lenders will have different pricing for different regions. In the chart below you can see that this lender segments the county into 6 different regions and has slightly different pricing for each. This lender give price improvements to regions 1, 2, and 3 but has worse pricing for the high foreclosure states in region 4 and 5.
Your Credit Profile – your credit score has never impacted your financial security more than today. A year ago rates were pretty much the same for everyone if their score exceeded 700 points, and there was only a small cost increase for scores between 680 and 700. Now it’s another story! Take a look at the 75.01-80% column below – your credit score needs to exceed 740 in order to get the base price. Any score below that has additional cost. I’ll tell you right now that the majority of people do NOT have a 740 score. In my experience most people fall between 700 and 720 – and that range includes people with perfect credit. If you have a $200,000 loan request, a 700 FICO, and want to borrow 80% of the home’s value we have to ADD .75% ($1,500) to your costs. And the price gets exponentially worse if you are just below 700. How do you find out what your score is and improve it if necessary? I’ll get around to writing about that at some point, but in the mean time just give me a call and we can discuss. Whatever you do – do NOT pay an online credit service to check your score. They will give you the wrong score!
So we’ve discussed the first two major categories of pricing criteria for your loan and already you could easily be .5% to 1% higher than the base cost for a home loan – and we’ve got three more criteria to cover!
Again, these issues are common to ALL lenders whether they be your bank, a small credit union, or a mortgage broker. We all get our money from Fannie Mae and Freddie Mac so the cost factors are pretty generic.
Next week we’ll discuss how your specific loan scenario impacts the rate you pay. You’ll be surprised at some of the things lenders have to charge you for that will continue to increase your cost over the base rate.
I think you will agree by the time you have read this and the next few weeks’ segments, that there really is no way a mortgage professional can give you valid rate quote over the telephone. Sure, they may throw out a number but just realize it’s a “sales call” to them and they are going to give you whatever number they think you need to hear to get you to apply. There will be plenty of opportunities after you apply to give you the “oops! The rate has to change, because…”
If there is any inside info about lending or real estate you’ve been curious about, please send an email to MMullin@TheLoanConsultant.com, or give me a call at 509-252-9151. I’m passionate about real estate and mortgage lending, and would be happy to share my knowledge with you!
This is an update to an earlier post I made on this topic. Now that the details are published by the IRS it is clear that some clarification is in order.
Why does the heading of the article indicate you may not have to be a first time home buyer in order to qualify for the “first time home buyer” tax credit?
Because the government’s definition of “first time home buyer” is someone who has not owned a principal residence within the last 3 years. If you’ve been renting for the last three years you are now a “first time home buyer.” If owned a rental property but not a principal residence, you are a “first time home buyer.”
Here are some pitfalls of the program that might trip you up:
The tax credit is an IRS program, not a home loan program, and I am not a tax expert. The IRS has creeated a great information page that includes many additional details. CLICK HERE to go to the IRS info.
If you qualify as a “first time home buyer,” or know someone that is – you should act quickly. Particularly if you have not yet filed your 2008 tax return. You could purchase a home in the next 30 days, eFile your 2008 tax return, and get a quick $8,000 cash gift from the IRS a couple of weeks later!
To get pre-approved for your first home, give us a call!
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"Building Wealth Through Professional Loan Strategies" 20 years of experience in real estate investment and finance - I have solutions for any real estate needs you might have.
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