The Best Idea About Applying for a Mortgage
For all the fact that I rant on about problems in out national mortgage market here in the United States, the problems are mostly on a retail level. Almost in their entirety, they have to deal with what happens when one consumer meets one provider, and I believe that they will vanish when the consumers are informed of the facts, and take the time to make rational, informed choices.
The fact is that for mortgage providers, there are strong incentives to lie to consumers. "Everybody else does it, too - how else am I going to compete?" Also, real closing costs seem high. Real closing costs are high enough that many states with so-called "predatory lending laws," limiting the amount in total charges as a percentage of the mortgage, either have already repealed them or are considering repealing them so that their residents can get loans. I can talk to people about closing costs that have been significantly reduced by contracts I have with service providers, and they'll say, "Costs seem high." Well, yes they are expensive, but they're real, and what I tell you about up front actually covers what my clients will be asked to pay. Just because we allow you to roll them into your mortgage, where you pay interest on them for a very long time, instead of the money coming out of your checking account doesn't mean you somehow didn't pay this money.
So we can take it as proven that there's an incentive for loan officers to minimize costs of their loan in conversation with you. Many will tell you anything it takes to get you to sign up with them, do anything they can to force you to stay with them (signing fees or lock fees up front are common, and THE BIGGEST RED FLAG I KNOW, and requiring you to give them original documents is almost as common and almost as large). They will penalize you out of spite if you decide you don't want their loan.
From almost the first moment a consumer talks to some mortgage providers, they are lied to. The fact is that as long as the rate that they quote you is available, the providers won't be held responsible if you don't get it. If you ask them what their rate is on a 30 year fixed rate mortgage without points and they reply with a the rate that's available on a 30 year loan that's fixed for one month at a time with five points, that's actually legal. They can sign you up for the former, deliver the latter 30 days later, and with rare exceptions that they are adept at avoiding, not get in legal trouble. They can tell you all about a loan that's based upon completely different qualifications than the ones you possess, in order to get you to sign up. And many loan officers, from the largest, "most reputable" banks on down to the smallest brokers working out of their home, make a habit of it. The examples I give above may be more extreme than usually happens, but it's a matter of degree, not kind, and I have seen every single rotten trick that I tell you about, pulled on prospective clients by other loan officers in the most extreme way I talk about. Furthermore, blatantly unethical is still blatantly unethical, whether they're stealing multiple tens of thousands of dollars from you, or "just a few thousand between friends." If you found out you were victimized by a Nigerian 419 scam, I'm sure you'd feel much better to find out that you were only taken for $3000, where it could have been $30,000, right? This is no different. No, let me take that back - it's worse. If the loan provider were honest, your patronage would still have put a lot of money in their wallets, and they backstab you to get more?
The first thing to keep in mind is that all of the incentives are aligned for them to tell you ANYTHING in order to get you to sign up with them. The fact is, many people, once they sign the initial papers, consider themselves committed to that provider, and won't switch no matter what. At the end of the process, many loan providers are adept at hiding the crucial things you should study carefully in amongst the sometimes dozens of pieces of trivial paper that you have to sign. A large portion of people victimized in this way never notice that the loan delivered had three points more than the loan they signed you up for. A few more only realize it weeks later when they get a statement loan balance is much higher than they thought, and it's too late to do anything about it. And of those people who do notice that something is amiss when they're actually signing the final documents, eight to nine out of ten will cave in and sign. They're tired of the whole process, all they have to do to have it be over is sign right there on the dotted line. And if it's a purchase, the consumers are under a deadline. It's the thirty-ninth day of a thirty day escrow, and if they don't sign these loan documents right now, they not only don't get the house, they also lose their deposit and the extra money they've been paying to keep the escrow open while the loan officer got his (or her) stuff together and decided exactly how much in extra charges to stick them for. The leverage available to the consumer in such a situation is Zero. Zilch. Zip. Nada.
I'm going to make what seems like a heretical suggestion here. This is truly radical. The resistance in some quarters (particularly loan officers) to this suggestion is enormous. I can already hear howls of outrage already from loan officers and their bosses. Furthermore, I can hear millions of consumers griping about the paperwork involved already, and I haven't even said it yet - except to fewer than a dozen clients who took this advice and are forever grateful to me.
Apply for a back-up loan.
It isn't precisely a walk in the park to do the extra paperwork, I'll admit. But it isn't thirty years in purgatory either. There are issues to be aware of (most notable being the appraisal, about which more in another column), and extra charges to put up with from the appraiser, escrow and title companies. $100 to $200 if you handle it right, $500 or a little more if you don't. But this is likely the most cost effective insurance policy a consumer can buy today, and I'm going to harp on it until something changes this fact
Every so often I encounter a client who I'm certain has been lied to, and believes every word of it. I know what rates really are available, and at what cost. And this person has been quoted something where, if it were true, that loan officer not only isn't going to make money but is actually going to pay hundreds or thousands of dollars of their own money in order to get it for the client. Unless John or Jenny Consumer is a close relative or the loan officer literally owes them their life, it doesn't take a genius to figure out that that's not going to happen. (Some of the worst taking advantage of someone that I've observed on the part of loan officers has been from Uncle Bob, the first cousin they grew up with, or even Sister Sue, but I digress). So every once in a while, I volunteer to act as a back up loan. They cooperate with me for the paperwork, and I will do the work, knowing full well that if their primary loan goes through as advertised, it's all a waste of my time, effort, and money.
Every single time it's been my loan that they ended up getting.
Furthermore, there have been a lot of other situations where I wasn't 100 percent sure - the rate existed, and it was possible the loan officer might deliver something similar if they were willing to settle for a lot less compensation than most loan officers, and so I didn't make the offer, and they came back to me weeks later with "Can you still do that loan you talked about?" (The answer to this is ALWAYS no. Rates at every bank vary daily, and often within a day - even the sub prime lenders that publish rate books good for months have adjustments that change daily. This is part of the importance of a lock. But usually I can do something similar, and sometimes better if the rates have gone down).
Most consumers do not realize that there is not necessarily any correlation at all between the loan you sign an application for and the loan that gets delivered with the approved documents ready for a notarized signature. It's completely dependent upon the good will and good faith of that particular loan officer and the company they represent. Some are completely honest. Some are looking for extra bits and pieces of cash to pick up around the edges. And some will take the odd arm and leg from you if they figure they have the opportunity. Even those few companies that do guarantee their rates and closing costs up front are difficult to collect from if they should be stretching the truth. If I had a dollar for every time I told somebody that I didn't believe a rate was real and they responded, "I've got the paperwork on it," as if that settled the question (or made any difference at all), I would have quite a few dollars. Oh, most of the time from most companies, if they sign you up for a thirty year fixed rate mortgage, they will actually deliver a thirty year fixed rate mortgage, and the rate will generally be about comparable, albeit with two points and $2000 in extra closing costs they somehow forgot to mention (Quoth the loan officer: "Clumsy me!"). But until then, they'll be throwing around all kinds of rates on all kinds of loans just to get you to call, to come in, or sit down and talk. Once that happens, they are confident that their A salesmen (see my essay on A salesmen and B salesmen) will get you signed up.
If you have a back up loan, you've got something else waiting to go. Another arrow in your quiver. Plan B. Your fallback position is defended. You're not going to lose the house and the deposit and the extra money to prolong escrow if you don't sign these papers right now. You're not going to have to choose between completely missing the lowest rates available since your grandparents were children and are now unavailable and paying $6000 more than you were told for your refinance. You're not hanging out there all alone at the end of the process after discovering that your trust was completely misplaced Here you have a solid, bona fide alternative. Imagine yourself with the ability to say, "No, I'll just sign the other papers instead." You'd be amazed at the leverage this gives you, with both companies if need be.
If you want to watch someone experience a truly amazing level of discomfort, tell your average loan officer or real estate agent that you're signing up for a back up loan with someone else. Most of them will say literally anything and do their absolute best to talk you out of it. I'll admit, even I would be momentarily nonplussed. I would hope that I would respond with "Okay. How do you want to handle the appraisal?" (assuming that it hadn't already been done) secure in the knowledge that I actually intend to deliver the loan I said on precisely those terms. You see, given the circumstances, I don't think you're doing anything wrong. If you asked me, I'd have to agree you were simply being prudent. Because until I actually put the final documents in front of you for your signature, there literally is no way for me to prove that I intend to deliver that loan on those terms. (There are a lot of red flags that if a consumer runs across them mean the loan officer isn't going to deliver the loan promised, but a competent loan officer can conceal them. There's also one thing that happens on every loan that looks like a big red flag, but isn't one at all). There's a lot of paper I can put in front of you that makes it look like I intend to deliver the loan I promised. None of it actually means anything in the way of a guarantee. At the present time, the only form or piece of paperwork that a loan officer cannot play games with is a form called the HUD-1 - and that doesn't come until the very end of the process. So until then, what you're really relying upon is the loan officer's good will to deliver the loan they signed you up for, on the terms you signed up for. Some fully intend to deliver the exact terms of every loan, and some will tell you anything to get you to sign up. Guess which the short-term dynamics of the marketplace favor. Here's a hint: If the loan officer can't get you to sign up for a loan, there's an absolute gold-plated guarantee they won't make anything.
If you shop multiple alternatives like you should for a mortgage, it's quite likely somebody is going to tell you that the best rate you've been quoted doesn't really exist, at least not at the level of closing costs indicated. That's your perfect opening. Ask them "So will you volunteer to be my back up loan?" They're going to try to talk you into going with them, of course, and forgetting that other guy, not to mention all this heretical, unheard-of, ridiculous nonsense about back up loans. Disregarding the fact that a back-up loan gives you leverage over them, a way to force them to actually deliver what you sign up for or something similar, they want you to put money in their pocket and not the other loan officer's.
Not too long ago, I had one of my clients tell me that somebody had told her I wouldn't be making anything if I delivered the loan I promised. "Okay," I thought, "She has a fair enough concern. There's no way for her to know I actually intend to deliver this loan, and certainly no way real way to prove it until the HUD 1 is ready at signing. Just because it's me doesn't mean anything to her until I've actually got the track record of delivering what I quote." Keeping this in mind, I told her something consistent with what I'm telling you right now. Offer to do the loan documents to make the other guy her backup if he was that certain - if he was wrong, the only cost would be that his work would be uncompensated, something loan officers get used to, and if he was right, he'd be right there ready to close his loan and get paid. (The other loan officer declined. She ended up with my loan - on exactly the terms quoted at time of lock).
Indeed, in my experience, it is more likely that the person who tells you something isn't real may well be telling you the truth. Getting angry at them is about like getting angry at someone who's trying to prevent you from being conned. The constructive response is to make them your back up loan. This doesn't mean that the person who gave you the best quote necessarily doesn't intend to deliver. They could just be comfortable making less per loan than the competition. And this doesn't mean you shouldn't get back to the guy who gave you the low quote with some pretty pointed questions, including the information that you're signing up for a back-up loan. Make the calls and stick to your guns. Maybe you'll end up signing up with the second guy as a primary and find a different provider for your back up. It'll depend upon factors I can't see from here. But find the back uploan, if you can. If you can't, it likely means that the guy who quotes you the lowest rate is quoting you something that at least exists, and he could potentially deliver if he actually wants to. But there is no way to prove he wants to. Which is precisely the reason you need the backup.
Word to the wise: Do follow up on both loans. Sign the application documents for both loan officers; provide your copies to both of them. And make certain, to the extent you can, that both loan officers are actually doing their work. The backup loan is useless as leverage if it's not actually ready to go at about the same time as the primary. (This is one indicator as to which of the two loan officers knows what they're doing. It has happened that on the last day to sign and still fund within deadline, I had my back-up loan ready to go, and the primary loan officer didn't have theirs ready despite a head start. So I suppose I can't prove the other loan wasn't real - but it sure wasn't ready on time, and that's unreal enough to be another reason why you want to apply for a back up loan!
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