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Five Mistakes to Avoid When Shopping for a Mortgage
If you are shopping for a first-time mortgage or looking to
refinance your existing mortgage, you can make a lot of
phone calls to different mortgage brokers and receive many
quotes over the internet. The following report will give
you the knowledge needed that will save you thousands of
dollars.
1. Points. First of all, what is a point? A point is 1% of
the loan amount. Typically, a mortgage broker will charge
you 1 to 3 points on a loan. Where does this money go? To
the broker, not to the lender. The broker can give you the
same rate in many cases without the extra points. A
reasonable amount to pay is a half a point, or a point and
a half if you are getting a "par" rate (see next item). In
some cases, points can be used to bring down the interest
on a loan. For a long-term loan, that can be a good idea,
Only pay extra points if you know that they are being used
to buy-down the interest you are paying. If they are not
buying down the rate, they are buying the broker a vacation
somewhere.
2. Par Rate. The par rate is the rate without any
additional fees added on to the back. Anything extra added
to the rate gives the broker what is called a "Yield Spread
Premium", or YSP. Typically, a broker will want to earn 2
points on the "back end". He does this by increasing the
YSP on your interest rate. If a broker charges you anything
more than a half point up front, you should pay no more
than enough of a Yield Spread Premium to give the broker
one and a half back end points. A broker should be able to
earn about 2% of your loan amount in fees.
3. Quoting a Rate. A broker can not quote you a rate over
the phone, so don't shop for a rate. Why? All mortgage
lenders use an automated system that pulls your credit and
assigns a par rate, based on things like number of credit
accounts you have open, the amount you have on each, the
number of late pays you have on such accounts,late pays on
your mortgage, any public records, collections, etc. The
loan size also affects the rate. If the loan amount is too
low, the rate will be higher. If the loan is a jumbo loan,
the interest may also be higher as there is added risk. The
type of documentation also affects the rate you will
receive. If you have a regular job, your rate will be lower
than if you are self-employed. One criteria for a loan
amount is the debt-to-income ratio. If the your monthly
debt is too high, you will not get the amount of the loan
you need. In short, the only way to get an actual rate is
to pick a broker and give him or her all the information
needed for an accurate rate. So never shop for a rate!
Brokers will say anything you want to hear, just so they
can get you in and take an application!
4. Broker Fees. If you are paying a total of 2 points in
front and back end fees, the most you should pay in
additional broker fees is 0 on large loans and 00 on
small loans. This covers the fixed cost of all the work
that has to be done on getting the loan through, plus the
commission to the loan officer and company overhead. The
average loan officer will do only 4 loans per month, or
basically one a week. Thus, if a loan is paying out 00
in fees, the loan officer will get about 00, which is
acceptable for the skill needed to be a loan officer. The
remaining 00 covers overhead and management fees, plus
the fee that goes to the loan underwriter, which can be
0. Believe it or not, for every loan that is done, a
broker may pull credit on as many as 20 or 30 tire-kickers.
Each credit report costs about , so right there are 0
in fees that have to be paid from somewhere. The broker
fees do not include other third-party fees such as
appraisals, title search, title insurance, notary fees,
document fees, tax escrows, etc.
5. Settlement Table Surprise. Did you know that it is not
illegal to bait and switch in the mortgage industry? Most
borrowers rely on the Good Faith Estimate when getting
mortgage quotes. But, there is no law that says the lender
or broker may charge no more than the estimate. Recently
Congress tried to pass such a law, but the mortgage
industry fought it and it died. Basically, many borrowers
who trust the quotes they received "in writing" end up
shocked when they get to closing, and the actual fees being
charged do not match the Good Faith Estimate. The loan
officer will look just as surprised, even though he or she
knew what the real terms were when the deal was submitted.
They will say things like "something came up on your credit
report", or the "loan to value ratio was above the lender's
guidelines" or some other excuse. Many borrowers are too
embarrassed to get up and leave, so they just sign the
papers and accept the higher rates and fees. The folks at
the Department of Housing and Urban Development are trying
to make it mandatory for lenders to disclose exactly what
you will owe before you get to closing. If the bill passes,
a lender must tell you a flat amount that you will owe and
that is the final figure. But for now, it is "borrower
beware".
Buy now you should understand a bit more about the mortgage
industry. A good broker will work with as many as 20 or
more different lenders. So there is no need to shop
brokers. Let the broker shop for you. Develop a
relationship with the broker. Run different scenarios by
him. Don't believe any quote you get or rates that sound
great if your credit score is below 680. Many brokers will
send you a loan application and a Good Faith Estimate with
rates that they can't deliver. If your score is in the
low-600's or less, your rate is going to be between 7.5%
and 9.5% if you want a fixed rate. If your broker won't fax
or send you a copy of the lender approval letter, then you
may become victim of a "bait and switch" program, where
just days from the loan closing, you will get a call
stating the lender changed the rate and fees based on your
credit report. At this point, you have paid for the
appraisal, you have provided all the documents that have
been asked for and you already have the money "spent" in
your mind. The broker simply hopes that you won't back out
at the last minute. The problem is that the borrower's
score was 599! There are no lenders out there that will do
an 80% loan-to-value with a 599 mid-score at 6%. The broker
can put anything they want on the Good Faith Estimate. The
Good Faith Estimate is just an estimate and not a
commitment!
I hope this article was an eye opener for you.
About the Author: Desmond Primus is author to several articles and is the webmaster of a financial services website. To read more articles, please visit: www.FasterPropertySales.com
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