How Do I Know What Lender is Offering Me the Best Deal?
It can be a challenge to compare competing mortgage financing offers because lenders tend to be very savvy in hiding fees. A common denominator a buyer can use in comparing offers is the APR or Annual Percentage Rate. The APR takes into account the costs of the loan throughout the life of the loan and translates it to a percentage. It is a percentage that is higher than the actual interest rate. APR calculations for adjustable rate mortgages are less telling than fixed rate mortgages because terms of the loan change part-way through the life of the loan.
Unfortunately, even the APR can be manipulated slightly; so another good way to compare is by looking at the bank fees that are itemized on a Good Faith Estimate. Ask each lender for a Good Faith Estimate (GFE) in writing. A lender should provide a GFE within three days of your application. Pay special attention to the bank fees, which are placed primarily in lines #800-900 on the GFE. Third party fees, recording fees and title fees will basically be constant among lenders, so getting a good understanding of the total bank fees is crucial when comparing. Once you do select a lender and lock in a rate, keep your GFE and bring it to closing to make sure that the bank fees have remained the same.
Things to Ask Before You Commit to a Lender
The mortgage process can be very confusing and intimidating. Before you commit to a lender you should ask these questions and get the responses in writing:
* Is there an origination fee? Discount fee? Broker fee? Application fee? Points? Each bank typically has it’s own way to disclose bank fees. However, some banks will unnecessarily add in points, which can amount to thousands of dollars in extra bank fees. One point is typically 1% of the loan amount and can be charged to you under the guise of the terms used above. Points are typically not necessary, unless you are looking to do a long-term interest rate buydown.
* Is there a pre-payment penalty? If you are not careful, you can get stuck with a hefty pre-payment penalty, which will limit your options to refinance or pay off your loan when you sell. Some states limit or do not allow pre-payment penalties.
* How long will my rate be locked for? What happens if my loan does not close before my lock expires? Typically rate locks guarantee an interest rate for 30, 45, or 60 days. If your loan does not close before the rate lock period expires, you could be required to pay a penalty to extend the interest rate.
* Who will underwrite my loan? Some banks outsource their processing and use automated underwriting. Automated underwriting decreases your loan processing time and tends to be very efficient. Underwriting that is done at the local level often gives more allowance for compensating factors and unusual circumstances. Therefore, a bank with both automated underwriting and manual underwriting is preferred.
* Are You a Broker or a Bank? A broker is a middleman, who matches you with a lender. If you have a strong profile, you are often able to do the work of the broker on your own and can save thousands of dollars in broker or origination fees. Look to get financing from a bank first.
* Will My Interest Rate Adjust? Some buyers are unsuspectingly sold adjustable rate mortgages (ARM) and enjoy a very low payment initially, but are shocked at the rate and mortgage payment increase as the rate begins to adjust. ARMs serve a purpose if your goal is to retain the home are short term. Be especially wary of the ‘Option ARM’ loan that gives you a very low monthly payment, but forces you to pay additional accrued interest each time you make that minimum payment.
* What Documentation Do You Need to Verify My Income, Debt, Credit, Assets and Employment? Be extra careful if self-employed income, commission, overtime and bonuses are being used to qualify you for the loan. The employment, commission, overtime, and bonuses must usually be consistent over two-year period to be used in qualification. Unfortunately, some lenders are not thorough enough in asking the appropriate questions to help you select the correct loan product in their initial conversation with you. Assets must usually be seasoned in an account for at least two months to be used to qualify towards a downpayment, closing costs, or required financial reserves. Banks offer many different options for those who are self-employed, unemployed or may not be able to document their income or assets on paper. The less the lender can verify on paper, the higher you interest rate will be.
What is My Interest Rate Based on?
Your interest rate is based on the risk that you present to the lender and the strength of your overall credit and financial profile. Your rate is based primarily on your credit, income, debt, assets, and employment history. Those that can verify and document adequate income and assets, who have been steadily employed, and have excellent credit can expect to get the best rates.