Beginner's Information: February 2008 Archives

Every so often, someone who thinks they're a wit sends me a copy of The Rules For Relationships According To Women. Unlike those rules, which might have been funny around the time Nefertiti was a debutante, these rules are real and they are not based upon caprice.

Very recently, I was walking through a grocery store parking lot and heard someone screaming on their cell phone, "It wasn't my fault! The broker told me not to make that payment, and then they didn't pay the loan off on time!" Which leads me to Rule Number One: It is YOUR responsibility to make all payments on time. Nobody else. Your name is on that contract, not theirs. Under text that says essentially, "I agree to repay this loan on these terms." When you are in the process of refinancing, make it a point of paying that mortgage on time and in full. The worst thing that will happen is that you will get a check back a couple weeks later. Whereas if you blow the payment off, you are taking the risk, as happened to this person, that some incompetent person doing your new loan will not get the loan done in time to make the payment date. On the sixteenth, there's a penalty due. On the thirty-first day, it hits your credit, where it can conceivably make a difference of 150 points. And if the lender is getting ready to fund the loan the next day and runs your credit then and sees your drop, the terms of your loan just got worse, if they can fund the loan at all. It is the mark of a bad loan officer to tell you not to make your payments. A good one will specifically tell you to continue to make payments on time. I haven't blown a rate lock in a very long time, but there's always the possibility it might happen and the loan takes longer than I think it will. Don't let it happen to you. Make your payments on time, whatever you're doing.

Corollary to Rule Number One: You are responsible for getting it to them. All of this nice convenient stuff about mailing a check or sending the payment online is quite a convenience, but they do not legally have to do it. Your grandparents had to walk the check (or the money) in every month. You can still do this if your lender has branches and you suddenly remember on the 15th that you forgot to make your mortgage payment. Many lenders are very forgiving about this. But they don't have to be,

If that payment doesn't get made on time, it is your fault. End of discussion. If you mailed it off on time and it got lost in the mail, you are the one that owes the penalty. If you transferred the money online, and it somehow doesn't get credited to the right account, it is your fault. These don't happen often, but they do happen. The lenders are actually pretty forgiving about it, provided you can convince them that the payment was made. You have a receipt, a canceled check, something that says you made the payment in full and on time. If you're good enough about paying on time, sending the check on the first even though it's not officially late until the 16th, they're pretty forgiving about checks that get lost. On the other hand, if you are always paying on the last possible day, the lender is going to regard that late fee as the least they are due. While you are at it, always include something with your account number on it when you send the money. Write it on the check, include a coupon, put it in comments. Otherwise the lender could conceivably end up misapplying the funds of the check, especially if they figure to use the address on the check, and you're making a payment on another property. Most of the time they do get it right. But if they don't, it's your fault. If they get the payment with all of the necessary information and misapply it, that's their fault. If they didn't get it, on time or at all, or missing some important information, it's your fault.

There is no rule two, at least that I can think of right now. There is only one rule, but you violate it at your extreme disadvantage.

Caveat Emptor

I just moved into a rental house with an option to buy. I figure I can probably save up around $40-45k for a down payment in three years. how should i save? The Roth IRA tax loophole for first time home buyers maxes out at $10k and takes 5 years anyway. It sounds dumb, but the best safe short term investment I can think of is savings bonds. There has to be something better!

Your major constraints here are a relatively short time frame and you want a certain amount of safety. The idea of investing the money is that you want to get more money, not lose your investment savings.

So if you're going to move outside the realm of guaranteed investments for this purpose, you are going to worship at the altar of diversification. Stocks generally go up, but can go down (roughly 28 percent of all years since records have been kept), and indeed, are not anything like a panacea. Therefore, if you're going to risk the stock market or the bond market in order to obtain their higher returns, you're going to want to diversify, diversify, diversify in order to prevent anything short of a general market decline from ruining your investment.

With that firmly in mind, individual stocks are probably not a good idea. If successful, the idea is that the income will be mostly capital gains, which are taxes at a lower rate. Unfortunately for this idea, it's hard to get an efficient and diversified individual stock investment for less than $100k. At $100,000, you've got a down payment to be extremely proud of.

The same with individual bonds to an even greater extent. When most bonds run in $10,000 to $50,000 denominations, diversifying is not really an option when you're just trying to save up for a down payment. If one of them suffered a significant downgrade, your price would take a hit.

Next on the list is government savings bonds and bank CDs. These offer a guaranteed return. The problems are that it's a mediocre return at best, and it's all ordinary income. Still, 5.5% or so for bank CDs is safe and secure, even if it reduces to about 4% after taxes. US Treasury securities have a four year minimum holding period to get their guarantee. Me? I stopped loaning the government money twenty years ago.

All of the various insurance products are a bad idea. You're saving for something you want within five years, not something forty years away or trying to insure a possible loss. Nor does the tax treatment help. Secure commodities investment is one of those oxymorons like plastic glass.

Finally, there are mutual funds. These are diversified by their very nature. In fact, my usual complaint is that they are too diversified, but in this case, that's actually good. Pick a good fund family that covers all of the major asset classes, including bonds. Yes, you pay management fees (and advisement fees or a sales load if you are smart, to help keep you from over-reacting to short term market events), but you can average nine to 13 percent per year, pretax, seven to ten afterward. A large portion of gains will be capital gains, taxed at lower rates than ordinary income. This isn't a certain or guaranteed investment, and can lose some of your principal, even all of it in theory. Nonetheless if you're comfortable taking what is in my estimation a small amount of risk, it can really pay off.

Caveat Emptor

FYI, I attended a class on FHA mortgages, FHA Secure and down payment assistance programs this morning. I'll probably have two or possibly three articles in the next week or so. In the meantime, if I can help with a loan in California, please Contact me.

We still do not have hard numbers on what the new FHA and conforming loan limits will be. Nobody does. I've heard estimates that say anywhere from another week to another eight weeks before all of that information is available. In the meantime, I must point out that, as I said in Conforming Loan Limits and the Economic Stimulus Package, the enabling legislation says that the limit can be up to 125% of the median sales value in your MSA most recent information here in pdf), up to a limit of $729,750. In other words, it will not be more, but it very well could be less. Nobody knows until Fannie and Freddie, and the FHA separately, publish their new guidelines. There is no safe harbor guess, no matter where you live, and all speculation will do in advance of publication of the actual numbers is get people mad or disappointed when the actual numbers hit.

If you live in California and want some strategies that make sense for you in a purchase or loan, Contact me. Otherwise, we all need to wait for official announcements from Fannie, Freddie, and the FHA, and I am planning at least two articles out of this morning's information.

Is a VA Loan a Good Deal?

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Veterans Administration, or VA loans, are government guaranteed loans available to veterans and active duty members of the armed services, that enable them to purchase homes for not money down. In fact, VA loans go up to 103 percent of purchase price to allow for some closing costs as well.

VA loans are a unique creature in the world of mortgages. Because there is a government guarantee on the loan, they are available, usually at the same rate, whether your credit is perfect or abysmal. They have a qualification limit equal to the conforming loan limit from Fannie Mae and Freddie Mac, $417,000 as of this writing.

Now, the Veterans Administration runs a website where you can get all kinds of information on VA loans, but I'm going to touch some high points.

VA loans are available both for purchase and for refinance. There is a streamlined program for pure interest rate reductions that can sometimes be at documents in as little as a week. This is called the Interest Rate Reduction Refinance Loan program, or IRRRL, but usually just called a VA streamline. There is, or so I understand, a cash out program as well, but I've never done one of those.

All VA loans have two important feature: Government Guarantee and Assumability. The government will guarantee a certain percentage (usually 25% of the original loan amount), which is more than enough to persuade most lenders that these are loans worthy of a fairly low rate, as they are low risk. A person with a VA loan can allow anyone else to assume it, with the approval of the lender and the VA. They have to prove they qualify for the loan, and the veteran still has some responsibility for the loan. Last I checked, prepayment penalties on these loans were prohibited.

Now the bad news. Even with the government guarantee, the rate/cost trade-off isn't the best. Most VA lenders want two at least two discount points for their VA loans, a fact which makes low cost and zero cost VA loans problematical. Even with those discount points, the rate will probably not be as good as A paper. Veterans with good credit, particularly if they have a good amount of equity or a decent sized down payment, will generally be able to obtain a better rate at a lower cost in the A paper marketplace. Even so called A paper "jumbo" loans over the $417,000 limit, or A paper "stated income" loans, will usually have a significantly lower rate/cost trade-off than the VA loan. They're better than just about all sub-prime loans, but they lose out to A paper.

If you have good credit but not much of a down payment, the VA loan can be an option worth exploring. VA loans have no mortgage insurance requirement (aka PMI), that purpose being served by the government guarantee, and so splitting your loan into a first and a second mortgage in order to avoid mortgage insurance, with the second being at a higher rate, is generally not necessary, and your full loan amount can be at the lower rate of the first mortgage. But be careful, because once again, most VA lenders want their two discount points, and maybe more. You might want to read my article on the Trade-off between Rate and Cost in Real Estate Loans and Why You Should Ignore APR for more as to why. Nevertheless, this could go either way and is well worth shopping the loan both ways.

If you have rotten credit, a VA loan can be the only way you can purchase a home, particularly if you have no down payment. Since credit is irrelevant and there's a government guarantee, I used to know a couple lenders that didn't bother to run credit for VA loans. Even the ones that do, it's just a checked box that plays no part in the decision making and underwriting process. Furthermore, you get a rate of a sort that would normally be available only to someone with a much higher credit score than yours.

Now in addition to relatively high closing costs, there are some other games that get played with Veterans Administration loans, of which the Rate Buydown is probably the most pernicious and widespread. But if you're one of those veterans who thought they could never be approved for a loan on a home, VA loans can make it happen where nothing else could.

UPDATE 2/14/2008: With 100% financing programs difficult to come by right now, the fact that second trust deeds don't want to lend over 90% of the value of a property currently, and PMI rates skyrocketing, VA loans have become the absolute best route for 100% financing as of this update. I did the math, and the fact that VA loans are the only 100% financing available right now without PMI or lender paid mortgage insurance saves someone making San Diego Area Median Income over $600 per month, which works out to qualifying for the loan with over $1400 per month less income - $17,000 per year.

Caveat Emptor

Disasters and the Mortgage

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after Katrina I am upside down with my mortgage. my house is uninhabitable. My flood insurance check doesn't payoff the mortgage. How can i get a short payoff due to financial hardship - i.e. relocation loss of jobs and steady income?

This is one of the hard truths about mortgages. They are a contract between you and the lender to pay back a certain amount of money that you borrowed in order to purchase that property. They have nothing to do with any unforeseen hardship, and if you do not pay that money back, in full and on schedule, you can anticipate negative consequences no matter how good the underlying reason. Especially to your credit, and those are going to be long term consequences indeed.

Now unforeseen disasters, like Katrina, Earthquakes, floods, fires etcetera, are one of the biggest reasons why things go wrong with your ability to repay that money. Something happens to the property and now you can't live in it, and you do need to pay for housing elsewhere. Furthermore, in widespread disasters like floods and earthquakes, since your job may no longer be there, you may have to relocate a considerable distance away in order to find work, and have difficulty paying your mortgage even if your property, in particular, came through just fine.

There are several issues that trap the unwary or uninformed consumer. Homeowner's Insurance in general is the first of these. Many lenders in other states have requirements that the property be insured for the full amount of all mortgages against the property. This requirement is illegal in California (and a few other states), and actually is counter-productive as this implies that the objective is to pay off the lenders, when the objective of insurance is to repair the damage. The phrase that California lenders look for in the policies of homeowners insurance that any lender can and all lenders do require is "Full replacement value." In other words, the insurer must agree to bring the property back to being in the same condition it was in prior to the covered event that caused the damage. Nonetheless, there are many properties where this kind of coverage is not available, most often due to their location in areas vulnerable to periodic fires. In such instances, you can expect lenders to require significantly larger down payments and charge higher interest rates, if they are willing to lend against the property at all. Since in the current "Everybody buys with 100 percent financing" trend this severely impacts your ability to sell your property, and therefore the value you will receive for it, you should be advised of the difficulty before you purchase the property, no matter how much you have for the down payment. An agent who doesn't tell you about this issue on properties where it is an issue is either incompetent, or not looking out for your best interest.

Another issue with homeowner's insurance is that you must keep the insured amount reflective of your home's current value. If you bought ten years ago here in San Diego, you probably paid about $150,000 for a three bedroom single family residence. I don't know of any single family residences below about $350,000 now, and most are in the mid 400s or higher. The insurance companies, quite reasonably I might add, take the position that even if you have "full replacement value" coverage, your home is only insured for $150,000, and is worth $450,000, you are not insuring it for the full value and will not pay the full bill for any repairs even if it is only for $100,000. In such a case, it's been a while since I went over the figures that are the legal basis for the math, but in this particular instance, I get that the insurance company will pay $41,666 out of that $100,000 repair bill in this particular instance. The threshold is legally if you had the property insured to at least eighty percent (80%) of its actual value, they will pay the full bill, but you only had it insured to 33 percent of the value, and therefore they will only pay 33/80ths of the bill. So once every couple of years (more often in markets rising 20% per year!) talk to your insurance company about making certain your property is properly insured. Yes, you'll pay more money, but it is a trivial amount compared to the cold hard fact above. My first property has multiplied in value by about three and one half times, and the difference between the insurance premium then and the insurance premium now is less than fifty percent. Now some insurers (mine among them) have a good record of not invoking the 80 percent rule I'm talking about here and paying the full amount, but this is a matter of company policy, not legal requirement, and it can be changed at any time and no matter how benevolent they are, if the disaster is bad enough they will have no choice. Furthermore, those folks who keep their coverage updated are de facto paying for those who don't under such a policy, and for those who do make a habit of keeping their insurance coverage updated may find more competitive rates with other insurers.

Two things everybody needs to be warned about is that no regular policy of homeowner's insurance, not even the vaunted H.O.3 policy with the H.O. 15 endorsement, covers against flood or earthquake. If possible flood or earthquake is an issue where you are, you need to buy a special policy to be covered by them. Flood and earthquake policies usually have a higher deductible than a basic homeowner's policy, and the reason for this is simple: solvency of the insurer and price of the insurance. Flood and earthquake are typically widespread devastating disasters that make for major damage over a widespread area. If the deductible was smaller, the price of the added policy would need to be much higher, as paying off such claims strains the financial resources of even the strongest insurer. Now if you're buying on stable soil atop the highest ridge line for miles around, flood insurance is probably not a worry for you. I sit roughly two tenths of a mile from a creek bed, but the amount of territory it drains is relatively small, only a of couple square miles, as the big watercourses go well away from where I sit and there are large hills between me and them. On the other hand, being in California, I've had earthquake insurance since the day I bought the property.

One more thing with flood insurance: There is a federally mandated thirty day waiting period between application and payment of premium and the time it goes into effect. This is to prevent, for instance, people in New Orleans waiting until there is a hurricane headed their way and rushing out and buying flood insurance, then canceling it and asking for a return of their premiums afterwards. I think the thirty day requirement is waivable to the extent that it can go into effect on the day you buy your property, but talk to your insurance agent.

Now, one final thing to be aware of. The value of the land itself is not insured, only the value of the improvements to that land. If a flood goes through your land, the land will still be there afterwards (and research riparian rights sometime if you're worried it will not be - another thing a good agent should warn you about if it's relevant). So if, like many in San Diego, you bought the property for $500,000, but it only cost the builder $200,000 to put the property together, the value of the land is obviously $300,000, right? Well, your mortgage is for eighty percent or ninety percent of the value of the improvements plus the land. Let's say 80%, $400,000, although I suspect that's on the low side of both mean and median. So when a disaster destroys the improvements (i.e. the home) and your insurer sends you a check to rebuild those improvements, that $200,000 check is obviously not going to cover the full amount of the mortgage. What do you do?

Well, that's where the importance of a good insurance policy, that will cover the costs of housing while you rebuild in addition to the costs of rebuilding the home in the first place, comes in. You'll also need to learn the value and importance of managing cash flow versus amount you may owe, but that's a subject for another essay and you should consult a good professional financial person if you haven't learned this before said happens in any case. Trying to learn that financial skill "as you go" is a recipe for guaranteed disaster. Furthermore, no matter how good your policy of insurance is, there is always a deductible and there are always extra expenses of rebuilding that you need or desire to undertake because it's the best and cheapest time to do so. This illustrates the value of building up and maintaining an emergency fund that you can access, because even if the finished property will be worth far more, no regulated lender will touch a refinance for cash out while the property is still under repair. A "hard money" lender might lend you new money, but they require so much equity in the property "as it sits right now" that this is not an option for the vast majority of all property owners. And in the meantime, you must keep up all payments required under the original loan contract you agreed to.

Caveat Emptor

This is one of those commercial gambits I keep seeing that has nothing intrinsically wrong with it, and yet it is most often a tactic employed by the more costly loan providers. In short, sharks and scam artists.

The basic come-on is this: Loan provider offers to pay for your appraisal if you do the loan with them. They often use such come ons as "free appraisal!"

TANSTAAFL. Repeat after me. TANSTAAFL. There Ain't No Such Thing As A Free Lunch. "Free" stuff has an ugly habit of being the most expensive there is, and this particular come-on is no exception. Offer you a few hundred with the left hand while picking multiple thousands out of your pocket with the right. If you want to be an educated consumer, engrave TANSTAAFL upon your soul.

What's going on here is that they are trying to make it look like you're getting something free. You're not. They may front the cash for the appraisal, but in all but a few cases you're going to get explicitly charged in the end. Even for those people whose final loan papers does not show an appraisal charge, they are charging it to you somewhere else. Odds are that they're charging it about ten times over somewhere else. Either in origination or yield spread, one way or another you are going to pay for this appraisal. Actually, you are likely going to pay for that appraisal several times over. People are strange about cash. Many folks, if told they don't have to lay out $300 to $500 for an appraisal, will choose loan providers where the proposed rate is 1/4 to one half a percent (or more!) higher than competing loans, with closing costs thousands of dollars higher. They are getting the cost of that appraisal all right. In this scenario, they're making half a point to one point more than anyone else on the same loan, plus all of the extra closing costs. That's if they're a broker. If they're a direct lender, the difference is between a point and a half and two and a half points, more if there's a prepayment penalty!

Low cost loan providers do not pay for your appraisal. The loan providers who pay for the appraisal are paying not only for your appraisal, but the appraisal of all the people who cancel, and a good margin besides. Not to mention that this loan provider completely controls the appraisal, leaving them in control of what happens if you actually notice their huge fees when you go to sign loan documents, and decide you want to go somewhere else. This is one of the ways that loan providers avoid competing on price, by pretending to give you something for free. I say "pretend" because they are not giving you anything for free. I do not understand that normally competent adults who are well aware what "free" really means in other contexts will think it means they're getting a benefit. But just like the "buy one, get one free" offers that jack the price up threefold first, this is only a good bargain if the few hundred dollars it saves you stays saved, rather than giving you $400 with one hand while taking $6000 with the other, through higher loan rates and costs. Rate and cost trade-offs on real estate loans vary constantly. You can't know what the best bargain is right now unless you price it out right now.

Caveat Emptor

One of the things I keep getting told by people is that my loans are the same as everybody else's. I quoted a 5.625% with no points a few days ago, and got told, "That's the same rate someone else quoted me!"

Rate, yes, but what's the cost of getting that loan? There's always a tradeoff between rate and cost, and focusing only on the rate ignores half of that very important equation.

It turned out that they other folks wanted to charge him more than a point for the exact same loan I was able to do for zero. Seeing as this was a $340,000 balance payoff, it was the difference between a new balance of $343,000, with a payment of $1974.50 and monthly cost of interest of $1607.81, versus about $346,500 with a payment of $1994.64 and monthly cost of interest of $1624.22. Don't think that's a lot? Then consider the difference of $3500 in what you owe and $16.41 per month in cost of interest, every month you keep the loan.

I've heard similar things from people I was offering a lower rate to, for less money. For instance, that was a 5.375% loan with a bit less than a point at that time. So for actually a bit less than a balance of $346,500, he could have had an interest rate of 5.375. In the interest of keeping things simple, I'll even use the same balance when it would have been a little less. That drops the payments to $1940.30 and the monthly cost of interest drops to $1552.03, saving over $70 per month! If you keep it a statistical average 28 months, that saves you $1960! If you keep it the full 30 years, that's a difference of over $19,000! But I can't tell you how many times I've heard, "Is that all you can save me?" Hello! Do you really need a better reason that thousands of dollars?

It just doesn't seem like all that much, because people think in terms of payment. Clever salesfolk will seize upon this as a method of selling inferior loans to people who don't know any better. Salesfolk, after all, get the difference in pay for the loan right away. Therefore, they understand in their bones what a big difference those small differences make over time. If you multiply it out, you should understand as well. This is all real money coming out of your pocket!

Far and away the biggest component of any new loan is what you already owe, or what you've agreed to pay to acquire the property. This can make differences seem small, but I guarantee it wouldn't seem small if someone was asking you for $3500 cash out of your pocket! .I've said this before, but don't let cash make you stupid. $70 per month is $70 per month, every month for as long as you keep the loan, and money added to what you owe with this loan will quite likely still be there when you sell or refinance, converting it into a strict liability. That's money you won't have, and additional interest you'll pay because you don't have it!

The differences may appear to be marginal, but they're not. Would you rather add $3500 to what you owe, where you'll pay interest on it, or keep it in your pocket, or at least out of your mortgage balance? No, it's not paying off your mortgage entirely, but it is saving you money. Over time - and most people will have mortgages for the rest of their working lives - it makes a substantial difference. If you refinance every three years, this makes a difference of $35,000 over thirty years. Would you like that money in your pocket? If not, why don't you hit my tip jar up there on the right? If you're not getting any use out of the money, I certainly can.

Caveat Emptor

"What mortgage fees can i recover after loan denial" was a search I got. The answer is basically, "None."

Indeed, one of your search criteria should be mortgage providers that don't charge anything up front, except maybe a credit check fee. Those are about $20, and you should be prepared to spend that $20 several times over while you're shopping lenders. If you're worried about twenty dollars when you are applying for a mortgage, chances are that you shouldn't apply.

Now many lenders want you to make a deposit that varies from a few hundred dollars to one or even two percent of the loan amount. Deposits are charged by lenders who want to get you committed to the loan, and they do it for at least two reasons. The first is psychological commitment. Usually when I mention things like that, I get people who immediately come back with, "Those kind of mind games don't work with me!" I'm not looking for an argument, and with most folks, I don't know their past history well enough to come up with an example, but this phenomenon is essentially universal as far as humans go, and those few not subject to it are probably suffering from some other more debilitating psychological problem. In fact, the normal progression of a loan is a series of commitments upon your part. The decision to talk to potential providers. The application.

After the application, lenders want the originals of your documentation and money. The original documents are requested so that you cannot shop or apply for a loan elsewhere. I, as a loan officer, do not need your original documents for anything I can think of at the moment. I need the original of the loan application and a couple other items you fill out with me, but not of your pay stubs, your taxes, your insurance bill, or any other documents you have pre-existing. Copies are just fine for any lender I do business with, so long as they are clean and readable.

The next step is to get money out of you. If all they want is the credit report fee of about $20, that's fine and normal. Credit Reports cost money, and if you're just shopping around, a loan provider has two choices: raise their loan prices slightly so that they charge those people who finalize their loans more, or charge folks whatever the cost is to run credit when they apply.

But many loan providers want more than the credit check fee. A lot more. They want a deposit that varies from several hundred dollars to one percent of the loan amount, even two percent in some cases. They might say it's for the appraisal, and usually at least part of it does go to the appraiser. Nonetheless, you should not give it to them. I've had my clients tell me about the tales they've been told, about how that money is to pay the appraiser. The appraisal should be paid for when the appraiser does the work. As I've said before, you want to be the one who orders the appraisal, and therefore controls it. I've had clients tell me about loan providers who only use "in house" appraisers. Well, those "in house" appraisers are drawing a salary and requiring "in house" appraisers is usually indicative of lenders who aren't competitive on price.

The reason they really want larger amounts of money out of you upfront is two-fold. First, it builds that psychological commitment I talked about a while back. Second, it makes you financially committed to a loan, which tremendously raises the level of psychological commitment. It means they've got some of your cash. Most people don't really understand loans, not deep down where it really matters. Consider, for a moment, which you would rather have: $400 cash, or a loan that costs $5000 less (not so incidentally making a difference of $25 on the monthly payment), but is otherwise identical. Dispassionately sitting there on the monitor in front of you, the choice seems obvious. You're going to have to pay that $5000 back sometime, and in the meantime you're paying interest on it. But move it to a situation where these potential clients have already put down a $400 deposit with an overpriced loan provider, and the vast majority of them won't sign up for my loan, even though I'm willing to guarantee my loan quote and the other company isn't willing to guarantee theirs. Why? Because they're thinking of that $400 in cash that came out of their checking account, not the $5000 in extra balance on their mortgage. Companies want that deposit to stop you from going elsewhere, to a loan provider that can do the loan (or, more importantly, is willing to do the loan) for much less money. Practically speaking, they're not only guaranteeing themselves a certain amount of money, they are guaranteeing that the client won't change their mind about their loan.

So do you get it back if the loan is denied? Nope. At least I've never been told about an instance where it happened. That money was a good faith deposit. Legally, it was an incentive for that loan provider to do the work of that loan, all of which costs money. Provably costs money, I might add. The loan processor doesn't work for free. The underwriter doesn't work for free. The escrow officer doesn't work for free. The appraiser doesn't, the title company doesn't. Nobody works for free. Phone calls and copies and word processors to generate all of your documents from the title commitment to the loan documents. Some documents are the same for every loan and can be computer generated. Others, like the title commitment, require humans to enter literally everything on them.

Now, a deposit isn't necessary. In fact, you can find loan providers out there (I'm one of them) who routinely work the whole loan on speculation of it funding. They might ask you to pay for the credit report up front, but everything else is paid for as the work is done. You write the check to the appraiser when they do the work. You might ask the advantages to the consumer of this. That advantage is that these loan providers are not holding your money hostage. This means that if the loan falls apart because the loan provider told you they could do the loan and they couldn't, they're out the money, not you. This means that if you find a more competitive loan, there's no reason why you can't apply for that one instead. This means if your back up loan is ready to go and this one isn't, all you've spent is the $20 for a credit check. You're not out hundreds to thousands of dollars that were in the deposit.

So if a loan provider asks for a large cash deposit up front to begin the loan, chances are that you shouldn't give it to them. Particularly if they won't guarantee their loan quote, chances are they are trying to lock you into their loan by holding your money hostage, and when you discover at closing that they tacked thousands of dollars onto the loan charges that they conveniently "forgot" to tell you about or pretended didn't exist ("Escrow's a third party charge. We don't have to tell them about it until afterwards"), and now you are facing a choice between forfeiting your deposit and signing off on a loan that's not what you agreed to when you gave them that deposit. Better not to face that choice, by not agreeing to pay anything beyond the credit fee up front.

Caveat Emptor

Just like "we'll beat any deal!" in any other competitive sales endeavor, this is a game. Actually, it's even more of a game for loans than it is anywhere else, used cars included. What they are hoping is that you'll go there last, and tell them what the best thing you've been quoted, and then they can sell you on their loan and most people will go with them, because "we're here, not there."

The first issue is that anyone can give a low quote. It's like the old joke, "Your lips are moving." Unless they guarantee that quote, that's all they're doing: flapping their gums. All a quote is is an estimate, and I've more than adequately covered the games it is legal to play with a Mortgage Loan Disclosure Statement (as the Good Faith Estimate is now known in California). By itself, A low quote means nothing. Loan officers can, legally, quote you one loan and deliver a completely different loan at a completely different rate with a completely different (higher, or course) closing cost. Without some kind of Loan Quote Guarantee, a quote isn't worth the paper a verbal contract is printed on.

The second issue is that even if they are quoting a loan they intend to deliver, unless they are quoting to the exact same standard, the quote game favors the lender who pretends third party costs don't exist, who pretends that you're not going to get zonked for the add-ons that you are going to get zonked for at the end of the process, the lender who quotes based upon a loan that you do not qualify for. Are you going to pay these costs? Absolutely. Would you rather know about them at the beginning, so you can make an informed choice, or get blindsided at closing (assuming you even notice)?

The third issue is that they are looking for safe harbor, and they're hoping you give it to them. If someone brings them everyone else's quotes, they know what everyone else has talked up, how big the lies are that the prospect has been told, and they just have to tell one that's a little bit better. This is trivial when you've got all that information you've been freely given. This is called false competition. You've metaphorically given them a mark, and told them to "tell a more attractive story than this one." Easy enough in a storytelling context - tell the same story with a little more sex - and even easier with loans.

A good loan officer has no need to know what quote you've been given to tell you what the best loan they can deliver is. Tell them to quote you the best loan they can without this information. Ask them if they'll guarantee that quote, because a quote that isn't guaranteed - as in they pay any difference, not you - is worthless. That's how you can choose the best rate that can really be delivered, not by allowing someone the advantage of knowing how much they have to lie to get the business.

Caveat Emptor

 



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