Denver Home Loan
Common Borrower Mistakes
House hunting without getting pre-approved
Failure to get a rate lock in writing
Choosing a lender based on lowest rate
Picking the Good Faith Estimate with the lowest "Total Settlement Charges"
Complaining about having to get your documents in order
Failure to buy owner's title insurance
Failure to review closing documents prior to closing
Not knowing your credit score, not understanding your credit score
Letting your credit keep you from applying for a home loan
Coming to closing with no money and/or no identification
Putting too much faith in the Good Faith Estimate
Buying goodies for the new house on credit
House hunting without getting pre-approved
If you will be getting a Denver home loan, be careful not to confuse pre-approval with pre-qualification. None of your information is verified during the pre-qualification process (which usually amounts to just a phone call between you and your mortgage broker). During the pre-APPROVAL process, your financial information is verified, your credit is pulled, and your application is reviewed by a lender. You receive a pre-approval letter, allowing you to shop with confidence.
Failure to get pre-approved hurts a buyer in two ways. First, you will be house shopping without knowing exactly how much house you can afford. You don't want to spend your free time shopping for houses in the $300,000 ballpark only to find out that you only qualify for $250,000. Second, pre-approval puts you in the category of a CASH BUYER because the seller knows that the loan process will go smoothly. When your offer is accompanied by a pre-approval letter, the seller will take your offer more seriously than a competing offer from a buyer who is not pre-qualified. In many cases, buyers who are pre-approved save thousands of dollars as a result of being in a better negotiating situation. Understandably, a seller doesn't want to accept an offer only to find out weeks or months later that the buyer couldn't get the loan. For this reason, sellers are skeptical about accepting offers from buyers who aren't pre-approved.
Failure to get a rate lock in writing
If you ask your mortgage broker to lock your rate, you may be surprised to found out down the road that the rate was never locked. Your mortgage broker may "forget" to lock the rate, either intentionally or unintentionally. Some brokers intentionally fail to lock the rate even though they agreed to do so verbally, hoping that rates will go down. These speculative brokers aim to pocket the difference when the market fluctuates favorably. When interest rates go up you are likely to hear something like, "Oh, you wanted to lock the rate. I wish you would have told me that." Your response is, "I did tell you to lock the rate." And then you and your broker go back and forth arguing about whose memory is accurate. The end result is that you wind up paying the higher rate.
Other brokers fail to lock the rate because they are irresponsible and simply forget to do so. The end result is that a lot of borrowers tell their brokers to lock the rate but the rate simply doesn't get locked for whatever the reason. A good broker will lock your rate as agreed, but just to make sure it actually happens, simply ask for the loan lock commitment letter. When a rate is locked the lender sends a letter to the broker, and the broker slips the letter into the loan file. Brokers never forward this letter to the borrower unless specifically asked to do so simply because so many brokers see this as an unnecessary step. Simply ask to receive a copy of this letter, and then you have the assurance that your rate has indeed been locked.
Choosing a lender based on lowest rate
Rate is indeed important but even more important is the overall cost of the loan. The total cost of the loan includes the interest rate, loans fees, origination points, discount points and other fees. Phone quotes are worthless. To get the real overall cost of the loan you must go over the nitty-gritty details of the written Good Faith Estimate. A lot of lenders will quote a great interest rate over the phone but hit you with outrageous fees. They might also quote a great rate but fail to mention that it comes with discount points and origination points.
Picking the Good Faith Estimate with the lowest "Total Settlement Charges"
Beware of brokers who lowball the charges out of the broker's control on the Good Faith Estimate (GFE). Click here to see a sample GFE. The GFE is a one page document that provides an estimate of all charges likely to be incurred at closing. The mistake that most borrowers make is that they fail to look at the individual numbers and go straight to the "Total Estimated Settlement Charges," which is located near the bottom of the GFE. Many uninformed borrowers then compare the "Total Estimated Settlement Charges" on the GFEs provided to them by two or three different brokers. You probably guessed it, but a lot of borrowers pick the lowest number and have that broker process their loan.
The problem with this approach is that most of the charges included in the "Total Settlement Charges" are out of the broker's control. The charges in sections 1100, 1200, 1300, 900, and 1000 are charges that having nothing to do with the mortgage broker. These sections contain charges necessary to closing the loan such as title insurance, tax stamps, pest inspection, hazard insurance, mortgage insurance as well as prepaid taxes and insurance. A lot of shady mortgage brokers underestimate these charges knowing that it will make their GFE look fabulous. The truth is that you are going to pay these charges (the actual charges, not the underestimated ones) regardless. Whether the mortgage broker underestimates, overestimates or hits these charges dead on makes no difference whatsoever—except that you are going to get the shock of your life a few days before closing if the charges are underestimated.
Here's what happens to a lot of unfortunate buyers. They get two or three Good Faith Estimates from different mortgage brokers. Broker A's Total Settlement Costs are $8,562. Broker B's Total Settlement Costs are $6,062. And Broker C's Total Settlement Costs are $8,789. Which broker will the borrower most likely choose? You guessed it. Super-shady Broker B will likely get the loan. Of course, Broker B underestimated the closing costs by $2,500. Based on the GFE provided by the broker, the borrower has saved up exactly $6,000 to put towards closing costs.
What happens in this type of scenario is that the borrower will get a call a day or two before closing where a representative from the title company says, "Your closing numbers are wrong. You are actually going to need another $2,500 to close the loan." Ouch. The borrower then borrows the money from a friend or relative or finds it under the couch cushions or asks for an advance on their paycheck, setting off a series of new paperwork problems for the lender because part of the closing funds has now been "gifted." Many times the borrower comes up with the funds, but it's an ugly situation at best. In the worst scenarios the borrower simply cannot come up with the funds, and the loan doesn't close. Misleading a borrower by underestimating the closing costs is unethical, unprofessional and downright slimy, but mortgage brokers do it every day. Brokers who rely on this tactic to get business are also more likely to put a borrower in a bad loan or screw up something due to negligence. Realize that the government will not protect you from an inaccurate Good Faith Estimate.
There is a simple way for the borrower to compare Good Faith Estimates. Simply disregard sections 1100, 1200, 1300, 900 and 1000 of the GFE when comparing mortgage brokers. The only time that a borrower should really be concerned about those sections is when the numbers in those sections are significantly lower on one GFE versus another. Low numbers in these sections indicate that a mortgage broker is trying to pull a fast one by underestimating costs out of the broker's control. If you disregard the above mentioned sections, you can quickly and easily compare the Good Faith Estimates offered by different mortgage brokers. Another word of advice: stay in close contact with your title agent. Your representative at the title company will be the first to find out when the real fees differ from the fees listed on the Good Faith Estimate. Don't let yourself be a victim of settlement sticker shock.
Don't think that the aforementioned sections aren't important—they are. The charges in these sections are estimates of what you are going to have to pay at closing, so review them carefully. It's also a good idea to do your own research to make sure that the charges seem right. Quiz your mortgage broker about how he or she calculated those estimates. Also ask your broker for a degree of accuracy guesstimate. A good broker will go through the charges one by one and provide a thorough explanation. One final and very important piece of advice … a good mortgage broker will overestimate these charges—that way the client will be pleasantly surprised when the actual numbers come in slightly lower.
Complaining about having to get your documents in order
Don't complain about having to jump through hoops for your lender. It takes a lot of work to get a mortgage. You will have to rummage through your records and produce your last two years of tax returns, your W2s, your divorce decree, and who knows what else the lender will ask for. Don't begrudge this. Your lender is looking at lending you a lot of money. If you were going to lend $300,000 of your own money, you would want the borrower to jump through some hoops too. If you were looking at loaning out $300K of your hard earned dough, you would probably have your borrower hooked up to a polygraph to make sure they fully intended to repay the loan. You might even want a full medical evaluation to make sure that their ticker is sound. You might even want to talk to their 1st grade teacher and get a full criminal report from the FBI. The truth is that loaning out hundreds of thousands of dollars is serious business. Your lender—rightfully so—wants an assurance of repayment. For the most part, lenders are reasonable people. Just comply, don't complain, and try to get your financial documents submitted in a timely fashion. The whole process is a bit of a hassle, but home ownership is worth it.
Failure to buy owner's title insurance
Most insurance protects the policy holder from things that might happen in the future such as an automobile accident or a flood. Title insurance is different in that it protects the policy holder from events that transpired in the past. A lot of borrowers see title insurance as an unnecessary expense, saying, "If the title isn't clear, why would they close the loan?" The answer to that is that the lender is willing to close the loan because the lender is protected. The lender is protected because you bought title insurance on behalf of the lender. Lenders require borrowers to pay for the title insurance which benefits the lender, but they don't care whether or not you buy the same coverage for yourself.
Transferring the title to real estate is a potentially messy business. Usually, it goes smoothly … but not always. Let me give you an example. Recently, my parents bought the empty lot next to their home. When it came time to close on the property there were some issues with the title. The problem was that the lot had been bought and sold several times for cash, and now my parents planned on borrowing the money to purchase the land. Those previous cash sellers had to be tracked down one by one in order to sign away the rights to the land before the deal could go through. The end result was that my parents closed on the land, but the situation brings up an important issue: land ownership isn't always clear cut. This is where title insurance comes in.
If a bank is going to lend hundreds of thousands of dollars on a piece of real estate, they want to make certain that some yahoo doesn't crawl out from nowhere claiming ownership to the property. Title disputes can arise for all sorts of reasons, including forged deeds, undisclosed heirs, deeds by single persons who were in fact married, fraud, persons of unsound mind, mistakes and a whole host of other reasons.
Title insurance protects the lender in the event that an ownership dispute does arrive, but standard title insurance does not protect you, the borrower. If the title falls apart, the lender is covered, but you lose everything. Should a dispute arise, you will have to pay your own legal fees. If the legal decision doesn’t go in your favor, you lose your down payment, appreciation, money spent on home improvements, the property—and last but not least—you still owe the balance on the loan! Don't think that the lender is going to let you off easy just because they got their money from the title insurance company. You will still be on the hook legally for the entire loan. This potential nightmare can be easily avoided by buying owner's title insurance which protects you, the borrower. Owner's title insurance is crucial because it protects the biggest investment that most of us ever make—our homes.
Owner's title insurance also protects the borrower against shady home builders. If the builder erects your house but fails to pay some of the contractors and skips town, the unpaid contractors could place construction liens against your home. If your builder fails to pay subcontractors and suppliers, your owner's policy will spring into action to protect your property from construction liens. Don't let your home builder talk you into thinking that you are protected under his title insurance policy. The builder's title insurance only protects the builder, not the homeowner.
Title insurance is paid once at closing (there are no monthly premiums) and is effective for the entire time that the buyer owns the property. There is no need to renew title insurance, nor do you need to purchase another owner's policy when you refinance. You will, however, be required to purchase another lender's policy if you refinance your home. The coverage also increases 10% a year for five years to 150% of the initial amount (to allow for appreciation). The cost of owner's title insurance varies based on the price of the home, but $200 is in the right ballpark, perhaps more or less. Title insurance offers so much for so little.
A lot of borrowers make the mistake of thinking that title disputes are so rare that the coverage isn't really necessary. Every year title insurance companies pay out hundreds of millions of dollars in claims, so title disputes really do arise.
Remember that owner's title insurance is optional. Always buy owner's title insurance so that you can sleep easy in that house you've worked so hard to buy.
Failure to review closing documents prior to closing
Ask to review the closing documents prior to closing. This allows you to make sure that there are no mistakes and that the terms haven't changed. You would be surprised at how often borrowers are surprised at the closing table. Quite often the terms presented to a borrower at the closing table are not the terms that the borrower originally agreed to.
You can also have an attorney review the documents, but the State of Colorado does not require an attorney to be involved in the transaction. At a minimum, review the closing documents yourself prior to closing. It's also a lot easier to review the documents in the comfort of your own home rather than at the closing table itself.
Not knowing your credit score, not understanding your credit score
Typically only 1 in 4 people are even in the ballpark when guessing their credit score. Your credit score might be better than you think, particularly if you have been paying your bills in a timely manner for some time. Credit score insecurities keep people from even trying to get home loans, which is unfortunate because most people are qualified—they just don't know it. Knowledge is power. In addition to knowing your credit score, you should take the time to read the Credit Score and Credit Tips sections on this web site. Understanding how things like credit inquiries, debt ratios and paying on old accounts affect your credit score is crucial. The knowledge you gain from reading the information located in Credit Score and Credit Tips will put you in charge of your credit score. You will no longer be in danger of making an error that could be devastating to your score, and most importantly, you will understand clearly how to maintain and gradually improve a good credit score.
Letting your credit keep you from applying for a home loan
Don't be embarrassed about your credit score. Lenders and mortgage brokers have seen it all. We also realize that a lot of negative items on credit reports are the result of medical issues, job loss, separation or divorce, illness, unjust tax liens, co-signing, and identity theft. Although some people are guilty of this, most of you don't take your credit card to Las Vegas and gamble yourself into a bad credit situation.
The good news is that there are a lot of lenders out there who want to lend money to you, even if your credit isn't perfect. You wouldn't let embarrassment keep you from seeing a doctor, so don't let it keep you from meeting with a mortgage broker.
Coming to closing with no money and/or no identification
It's hard to believe, but a lot of borrowers show up to closing empty handed. You cannot bring a personal check to closing. Bring a cashier's check to closing; otherwise your closing will be delayed. Also remember to bring an official ID so that your signature can be notarized.
Putting too much faith in the Good Faith Estimate
A Good Faith Estimate is just that—it's an estimate. A lot of brokers issue Good Faith Estimates that they have no intention of honoring. Unfortunately, the government will not protect you from an inaccurate Good Faith Estimate. To avoid getting snookered, read up on mortgages and use your good judgment in picking an honest and professional mortgage broker.
Don't move assets from one bank account to another unless absolutely necessary! These transfers show up as new deposits and complicate the application process. You can move funds later if you need to do so.
Do not pack any of your important documents. Important papers such as tax returns, W2 forms, 401k statements, divorce decrees, bank statements and the like should be packed separately from your household goods. Obtaining duplicates of these documents is sometimes difficult and time consuming and could result in a delayed closing.
Lenders look to verify employment for 2 years. Your income could be disqualified if you change jobs. Still, changing jobs within the same industry with little or no downtime (less than 30 days) is generally considered acceptable to lenders. What really creates bottlenecks in the loan process is when a borrower has recently made a change in career.
Buying goodies for the new house on credit
A lot of homeowners-to-be run out and buy new appliances and furniture on credit before the ink is dry on their purchase agreement. Opening up new lines of credit will drop your credit score, so wait to make those purchases until after closing.
If your lock expires, you will be charged either the current market rate or the original lock-in rate, WHICHEVER IS HIGHER. I know it doesn't seem fair, but it's standard practice in the industry. It's not up to your mortgage broker, though. The lenders set the policy as to what happens when a lock expires. Make sure that your lock period allows sufficient time to close. This is particularly important when the property being purchased is new construction. Sometimes the homeowner-to-be will lock a rate, but the builder fails to complete the home on schedule. Consider delays when choosing your lock period.