Insider Tips
Provided by a Denver Mortgage Lender
Beware of big name mortgage companies
Always get a Good Faith Estimate (GFE)
Freeze—don't make a move prior to closing
Don't clean up your credit prior to applying for a mortgage
Review the closing documents prior to closing
Choose your closing date wisely
A good Denver mortgage lender will tell you: never go with the lowest rate that you hear. Too-good-to-be-true offers simply won't exist at closing. A dishonest mortgage broker will always quote a fabulous rate to get you in the door. In the business we call these brokers "Sunshine Blowers." They have a dozen or more dirty tricks to raise the price of your loan once they have you on the hook. If you go with the low ball rate quote, you'll wind up paying more in the end. If you do a lot of calling around, my rate is unlikely to be the best rate that you find—because it will be an honest quote. In general, the more attractive the quote, the more likely it is to be phony.
When talking to a mortgage broker, give them enough information to help you. If you dial the phone asking broker after broker, "What's your rate?" you are setting yourself up for failure. A mortgage broker can't quote you a realistic rate without first knowing certain key pieces of information. For example, a broker needs to know:
- Will your loan be less than $417,000? Loans over $417,000 are called "jumbo loans," and they have an entirely different set of rules.
- How long do you plan to own the home?
- Do you want to pay discount points to lower the rate?
- Will there be a second mortgage on the property when the deal closes?
- Is the property a single-family detached home?
- How long of a lock period will you need?
- Will you and all of the co-borrowers occupy the home as your primary residence?
- Will the down payment be a "gift" from a family member, or will it come from the borrower's personal funds?
- What type of loan do you need? Will you be putting down 5%, 10%, 20%?
- Do you know your credit rating? If there is more than one borrower, do all borrowers have good credit?
- Can you document all of your income using tax returns and bank statements?
- Have you been at your job for two years or more?
- Do you have sufficient cash to pay the down payment and settlement costs? If not, you will need to look at a flexible loan program which will be accompanied by a higher rate.
- Is your income sufficient to meet the maximum ratios of housing expense to income and total debt to income?
- Are you a U.S. citizen or a permanent resident alien?
I looked at one particular rate sheet from one particular lender on one particular day. Mind you that these rate sheets are long—11 pages in this case. Still, this is one lender, one day, one rate sheet. Do you know how many different combinations I counted? The answer: 3,135. That's right, and that's not counting 1,127 possible additional adjustments. I was surprised myself, but when I think about it, 11 pages of tables in small print is going to produce a lot of different scenarios. These tables are based on different down payments, different lock periods, A credit or B credit, and the list goes on. In short, mortgage brokers need information to quote accurate rates. To rate shop effectively, you need to know what type of borrower that you are. There is nothing wrong with being an A-minus borrower or a B borrower, but you need to know where you stand before rate shopping, otherwise you'll be wasting your time.
Realize that the quote you get on Tuesday can't be compared to another quote that you received on Monday. Rates fluctuate daily and sometimes more often than that. It sounds crazy, but to shop rates effectively, you really need to take a day off work in order to compare apples to apples. Making all your phone calls on the same day is the only way to really compare rates. And if you really want to do it right, make all your calls at the same time of the day.
As mentioned above, you also need to know what type of borrower that you are to get a realistic rate quote. "I'm looking for a full-doc program for a conforming loan. I'm an A-minus borrower, and I'll need an 80-15-5 loan program on a 5/1 ARM." I wonder if any mortgage broker has ever received such a call from any borrower. The reality is that most borrowers aren't fully educated about the loan process. It's too bad that schools don't teach mortgage basics. It's the biggest transaction that most people ever make, and most people go into it knowing little or nothing.
What normally happens is that borrowers call up rate shopping and are given pie-in-the-sky rates by mortgage brokers. Later on they are disappointed to find out that they don't actually qualify for the previously discussed rate. Many times this isn't the brokers fault. The borrower has a part to play in the loan process, and the reality is that the borrower has to spend some time providing information to the mortgage broker before any realistic rates can be discussed. Brokers often give pie-in-the-sky quotes because borrowers won't take the time to provide enough information for the broker to provide an honest quote.
When comparing rates, always ask for the same lock period—say 30 days. Also make sure to get Good Faith Estimates from each mortgage broker.
Beware of big name mortgage companies
It's not mortgage fraud. It's not technically a scam. And it's totally legal. What is it? Absurd, outrageous, ridiculous, and astronomical could all be used to describe the fees charged by some of the big name mortgage companies. A lot of these companies charge fees of 5 points over what a normal mortgage broker would charge. On a $200,000 loan, that amounts to $10,000 in unnecessary fees. The type of companies with slick television advertising campaigns and billboards on every highway are many times in the business of raking uneducated buyers over the coals. It's sad, but a lot of first time home buyers get taken advantage of by these big name mortgage companies. These dishonest big boys are almost always national. To avoid getting caught in their web, consider using a local company in your area.
Always get a Good Faith Estimate (GFE)
A good faith estimate is a written estimate that you are supposed to receive by law within 3 days of making a mortgage application. The GFE breaks down the individual settlement costs likely to be incurred at closing. The GFE looks a little bit intimidating, but an honest mortgage broker should be happy to explain each line in detail.
A Good Faith Estimate (GFE) is just that—it's an estimate. Loan providers can't legally be held to a price quote. Because the market is volatile, yesterday's price quote may not be applicable today. Interest rate quotes aren't firm until they are locked.
Your Good Faith Estimate can also change just because a broker is trying to take advantage of you. The closer that you get to closing, the more vulnerable you are. Your mortgage broker knows that you have already sold your existing house, that you have movers booked for the big move, and that you have told all your friends and family about your new home. If you haven't locked your rate, that puts you in a potentially tight spot.
If you decide to take a chance on interest rates going down, you had better hope that your mortgage broker is a church-every-Sunday-Eagle-Scout-Dad-always-taught-me-to-do-what-is-right kind of a guy. Because if he isn't and you didn't lock you're rate, you're going to pay for it. A greedy broker will bump up your rate just before closing and pocket the difference. What are you going to do about it? It will be too close to closing to start again with a different broker, and of course, you can't just fail to close on the house. The broker hasn't done anything illegal. Sure, you can lodge a complaint with the Better Business Bureau, but will that really do any good? You can choose to never do business with that broker again, but he won't care. Most brokers operate their businesses without any expectation of referral business. What you will wind up doing is what virtually everyone does in this situation—you'll lump it. If you decide to take a chance that interest rates will go down, do so only if you really trust your mortgage broker.
Freeze—don't make a move prior to closing
So you've picked out your very own home-sweet-home, arrived at terms with the seller, and you're ready to move forward. You pick out Colorado's best mortgage broker, and you make formal application for a mortgage. Suddenly, you realize that you have forgotten your 20-year wedding anniversary. This isn't just any anniversary—it's the big 2-zero. You run down to a jewelry store and spend three hours picking out just the right thing. You have perfect credit, so you open a house account and put part of the purchase on an installment plan. Your wife is happy, and your anniversary goes just as expected.
Then you're wife says, "Honey, Toyota is running a zero interest special. Do you think we should trade in the minivan? It hasn't broken down yet, but that's just the thing that worries me. Maybe a problem is just around the corner." You and Mrs. You scoot down to the dealership and pick up a new set of wheels. She and the kids will be safer, and it's something you've been putting off anyway. You should have done it a long time ago.
Okay, back the truck up. You just screwed up your credit score. You went from being a slam dunk on your mortgage application to a no-can-do-take-your-business-somewhere-else situation. "You're kidding me," so you say? No, I'm not kidding around. Opening new lines of credit can drop your credit score dramatically. Depending upon your situation, the lender might bump your rate or decline the loan altogether. To be on the safe side, just don't change anything financially between the time that you apply for a mortgage and closing, even if you have perfect credit. Don't apply for new credit cards, don't buy a new Mercedes, and don't co-sign on a car for your sister-in-law. Don't make a move.
Also, don't close credit lines that aren't being used. This increases your debt percentage as it relates to available credit, which will negatively impact your score. Don't add to your credit card balances. Don't transfer credit card balances without first talking to a mortgage broker who is a credit expert. There are a lot of things that you shouldn't do, but to sum things up, don't do anything until you talk to a mortgage broker (who is also a credit expert) about whether or not your decision will help or hurt your credit. I'm happy to offer free credit advice anytime. Just give me a call.
Don't clean up your credit prior to applying for a mortgage
Yes, you understood me correctly. Don't clean up your credit prior to getting a mortgage. You see, activity (even if it's good activity) can be harmful to your credit. The credit bureaus use these complicated mathematical algorithms to determine credit scores. Because computers can't think (yet), they see activity as just what it is—activity. Credit scores don't like to see activity because activity means that you are changing things, which is potentially dangerous. "Recent activity on a negative account" is the technical term for paying off bad debts, and the negative impact on your credit score can be dramatic. Sometimes a lender will want you to pay off a bad debt with the loan proceeds, but never try to patch up your credit problems while you are in the mortgage application process.
I have only made one credit mistake in my life. I rented a house with a bunch of guys in college (two decades ago), and I was foolish enough to put the electric bill in my name. When we all moved off to other places, I paid my part of the electric bill; the other guys didn't pay their part. I didn't pay the bill on principle. "I paid my part," I thought to myself. But that was a dumb thing to do. It went on my credit, and I eventually wound up paying the whole bill.
If you find yourself in a similar situation, don't do anything. Lenders are particularly concerned with your last two years of credit history. Don't reach into your distant past and try to clean up your credit history. It will actually wind up hurting your credit score because it will count as current activity. What you should do is close on the house and then clean up your negative credit issue after closing. As long as you don't plan on getting another mortgage within two years, cleaning up the negative mark on your credit will help the next time you go to get a mortgage.
Review the 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.
Choose your closing date wisely
It's a good idea to schedule your closing at a time other than at the very end of the month. If there are any problems with your closing it can be difficult to resolve those problems because everyone in the real estate business is so busy during that time. There are horror stories where borrowers literally sit for hours at the closing table waiting for the lender to return their call about something that isn't right in the closing documents. There are other nightmares where the closing documents don't show up at all.
The reality is that most closings go smoothly. Lenders do their job, the title company does theirs, and there are lots of handshakes and good luck wishes exchanged after all the papers are signed. It's not always like that, though. Sometimes closings are rocky, and sometimes they are downright miserable experiences.
Movers are also swamped on and around the first of the month. Moving crews book two to three jobs a day on these days. If you book your movers for the early morning, you can bet they will be in a rush to get to their next appointment, and your furniture will be hurriedly thrown into the moving van. Once my wife and I watched in horror as the mover literally picked up one of our paintings and tossed it across the truck to land on top of the tall pieces of furniture. The good news is that the painting was unharmed because we had packed it so well, but the point is that our movers were definitely in a hurry. If you schedule movers for later in the day (so that they won't be in a rush), you just exchange one problem for another. If you are the second or third move of the day, the movers are likely to be late.
The best way to avoid problems is to move off-peak. Everyone—and I mean everyone—moves the last couple days of the month or the first couple days of the month. If you book your closing on the 25th, for example, you will usually get a better rate on your moving crew. If you don't have to be out of your current house until the 30th, then you have 5 days of wiggle room in the event that something goes wrong with your closing or in case your movers don't show up. All of the people involved in your transaction—your real estate agent, your lender, your mortgage broker, your movers and your title company—will have plenty of time to attend to any potential problems or hiccups if you close and move off-peak.
Let's pretend that you have saved $25,000, and the money is sitting in a mutual fund. Should you leave the money in the mutual fund, or should you use it to purchase a home or rental property? The answer is found in understanding the concept of leverage.
Leverage is a very simple concept. If a window is jammed shut, you can use a crowbar to gain leverage in order to open the window. When it comes to money, leverage usually means using borrowed money for personal gain. I once heard a woman speak who worked on Wall Street. She said, "We don't have any money on Wall Street. We use other people's money to make money for ourselves." But how does leverage come in to play for the average person?
We all have to have a roof over our heads. The question is whether to buy the roof or rent it. If you have a mortgage, you are using leverage to make money. If you rent a home, you are choosing not to use leverage. Here's how it works.
If you have $25,000 sitting in a mutual fund, that money is making more money. Let's pretend that you have picked a truly fabulous mutual fund, and you are making a 10% return. That means that you will earn $2,500 on your $25,000 investment in the next 12 months. That's not bad, but you could make more money if you used the financial crowbar known as leverage.
If instead you took that $25,000 and used it as a 10% down payment on a home, you could buy a $250,000 home on which you would have a $225,000 mortgage. The $225,000 mortgage (aka other people's money) is leverage. Historically, real estate appreciates at a rate of 5% to 6% each year. Assuming a 5% increase in value, your home will appreciate $12,500 ($250,000 home value x 5% = $12,500 appreciation).
Let's recap. If you leave the $25,000 in a mutual fund, you will make $2,500 (assuming a 10% return). However, if you use the $25,000 to purchase a $250,000 home, you will make $12,500 due to the mighty power of leverage. In a nut shell, leverage allows you to use a mere $25,000 of your own money to control an asset worth $250,000. Understanding the principle of leverage is the reason that a lot of people stay out of the stock market, opting instead to put their money into real estate investments. Every landlord on the planet understands the concept of leverage and is using it to his or her advantage. Leverage isn't just for the guys on Wall Street; it's a powerful financial tool used by every homeowner in America.