Determining the Best Deal (Step 3 Work Sheet)
Getting your best deal is directly related to how well you estimate how long you will have your loan for. Very important, I said loan, not home.
A national survey of lenders show that most people are in a home a little over ten years, but they are in a mortgage only 3.5 years. When I say "most people" I mean around 85%. Mortgage companies know this.
If a loan officer can get his borrower to think in 30 year blocks of time half of the battle is won. This part of the mortgage process can
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1) Do the Math
Most people believe they will be in their mortgage longer than 5 years, probably even you
Statistics do not lie. The exception are those people nearing retirement or those working a specific plan to pay off their home early. Other than that, you have an 85% chance of NOT being in your mortgage over 5 years.
Assuming I am right, let’s look at your mortgage mortgage in five year blocks of time, not 30 as the loan officer wants you to. You can use this simple worksheet to see which lender is offering you the lowest cost mortgage over the next 5 years.
Simply plug in the answers from your Step 2 worksheet and this spreadsheet will give you the cost on credit for all three lenders. The lowest number wins! Do this for each of the lenders and you will begin to see which lender is really offering the best deal.
To manually calculate your which deal is the best follow these easy steps:
If you are reasonably sure that you will be in the mortgage for an extended amount of time you may want to consider paying points to lower your interest rate. You can use our "should I pay points" calculator. This will tell you how long you need to stay in the mortgage to begin saving money.
2) Negotiating
Keep in mind there are companies with the business model of always quoting the lowest price then changing the numbers before closing. Competence and reputation should be a large part of your decision making process.
Blind Ballot Method – The blind ballot method is probably the least abrasive way of negotiating. Basically what you do is you call each of the lenders that have sent you GFE’s and you tell them that you will call them this evening with your decision. Let them know that your significant other will be home tonight to help you make the decision.
Before you hang up ask the LO "are you sure this is your very best offer"?" "My {Significant Other} will pick the best deal and we will probably use that person. I really have enjoyed working with you and wanted to make ure he picks you."
Once you have each LO’s best deal simply compare them to find the lowest overall cost. You can use this simple spreadsheet to calculate the five year cost of the loan. Usually during the interviews you will come across a LO or a company you are particularly fond of. If they are not the lowest quote you can call that person back and ask them to match or beat your best offer.
As a common courtesy, be sure to let everyone else that has quoted know that you have chosen another lender. I suggest that you do this by email to avoid any last ditch selling attempts. At this point a lot of LO’s will promise the world to derail your plans to use another lender. Stick to your guns. This method of negotiating will give you the best deal with the least amount of stress.
Commando Method – This is the method to use when you want your very best deal. I suggest that you narrow your focus down to two lenders at this time. By now you should have a good idea of who knows what they are talking about and who you feel comfortable working with. At this point you can anonymously share each of the competitors numbers with the other lender you are considering if you want to.
Once each lender is holding the other one’s numbers it’s time to go to work. You are going to compare four things :
Interest Rates – This is pretty self explanatory, the lowest rate wins. Remember to make sure each lender can lock the rate they promise for a minimum of 30 days, 45 preferably. Some lenders will quote 15 day rate locks or even try to float the rate until closing. When they do this they are gambling with your rate and could possibly have to raise it before closing. Make sure each lender is prepared to send you a lock confirmation upon your acceptance of their quote.
800 Block Closing Costs – If you remember earlier we discussed that all closing costs are broken down into blocks of numbers on the GFE’s. The 800 Block of numbers are the only set of fees that belong to the lender, so negotiating the other fees is pointless. The other fees are third party costs that will be the same from lender to lender. More about closing costs (new window).
Payments – Principal and interest payments only. Comparing payments that include your taxes and insurance allows the lender to be conservative with your taxes and insurance and show a lower payment. Taxes and insurance will be the same regardless of who you choose to facilitate your loan. It is important to have an idea what the principal, interest, taxes and insurance payment will be but not to compare by.
Programs – Make sure each lender is quoting the same program, i.e. 30 year fixed. At this point you should ask your least favorite lender to make some concessions to win your business on the fees or rate. The interest rates and fees should be pretty close at this point if you have had each lender quote you the way we described earlier. The fees are where most lenders are vulnerable. They will usually express their profit (Origination Point) in the form of a percentage, i.e. 1%, 2%. Your goal is to break away from looking at this number as a percentage and look at it as a dollar amount.
For example, if the loan amount is $250,000 and the lender is charging 1% origination this equals $2500. Try offering $2300, $2000 and breaking down that percentage point. The loan officer will probably say that they need to earn a full percentage point on the deal, but I have yet to see a LO who would not shave a hundred or two to close the deal. |
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Posts Tagged ‘Lenders Compete’
Step Three
Thursday, July 8th, 2010
. Stuff happens, we lose jobs, kids go to college, interest rates drop, we get relocated and so on.
Step Two
Thursday, July 8th, 2010
Credit Review & Receive Quotes
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I cannot stress this point enough, if you have credit issues it is imperative that you get a copy of your credit bureau before proceeding. Lenders make the majority of their "big deals" on customers that thought they had good credit only to find out their scores were low. Many times the bureaus have reported something in error and the LO can have the credit report rescored.
You can get a free credit report from all three bureaus once a year at this website. However, they will almost always make you wait for several weeks to get it and it does not contain the FICO scores. I suggest that you spend the $30 – $40 bucks and get all three credit bureaus with scores. The extra few bucks that you spend for the scores and the tri-merge can literally save you thousands of dollars.
Tutorial Step Two – Goals (Step Two Checklist)
1) The Approval Phone Call
After you finish the introductory call and or the credit call, you will get what loan officers call "the closing call" or the approval phone call . The LO is going to attempt to "close" you on this phone call. Your goal is to get everything on your checklist filled out and then put them off until you have all of the lenders quotes and can make a smart choice.
I suggest that you let the LO feel as if you are leaning in their direction but have to get back with them at a certain time in the future. The key here is to do what you say. If you say you will let then know at a certain time, keep your word.
Keep in mind, the LO has probably invested an hour or so of their time coming up with the approval or quote. As tough as it may be you should let each lender know when you have chosen another lender, I suggest an email.
I also suggest that you do not use the excuse "I am comparing all the offers and will get back with you" when excusing yourself from the closing call. Doing this only invites another sales pitch or elevates the first one.
"I have to discuss this with my spouse" is a popular excuse. Again, letting them know that their offer sounds pretty good will keep them at bay until you can make a decision.
2) Filling Out the Checklist
The first thing you should do for the third phone call is to grab your checklist for step two. Knowing the variables of the loan approval or quote is crucial to ensuring that your loan officer keeps his or her end of the deal.
Many loan officers will “shoot from the hip” when they initially quote you. Then they use these same variables as the excuse to change the rates or closing cost of your loan before closing.
If you have all the variables written down that pertain to the loan, you have effectively eliminated the ability of the LO to increase the fees or interest rate.
The first question to the LO should be, "did you email/fax me the Good Faith Estimates"? If they have not, politely excuse yourself from the phone call until it arrives. Do not discuss numbers and rates without having them in front of you, you will lose.
The 5 Main Variables to a Mortgage Are:
Its not extremely important that you know how to arrive at all of these variables, after all, this is what you pay the lender to do. However, it is important to know the answers to these questions.
These are the key factors that will determine your rate, program, closing costs and overall eligibility. If your loan changes from the quote to the closing table it will be one of these variables that changed it.
Having the answers to these variables up front from your LO will let them know you are watching the deal closely. It will also allow you to understand if the deal does have to change due to unavoidable circumstances. We will touch on each of them briefly, but for the purposes of this tutorial we will not go in depth.
Loan to Value - There is a saying in the mortgage business,"equity is king", and it is. No one variable swings as much weight on a mortgage as the loan verses value does. This is often called the" LTV" or loan to value.
If you have a lot of equity in your home this can trump almost every other variable under it. A lot of loan officers will play hard and fast with this ratio and your appraisal value during the initial quote.
You want to ask the LO to use a conservative figure here. If the LO estimates your home’s value too high, you can pay higher fees/ rates or have your loan declined all together if the appraisal comes in too low.
You should ask the LO what does my house HAVE to appraise at to get these numbers and what if it doesn’t’? Loan to value Ratios are in 5% increments i.e. 75%, 80%, 85% etc. Ask the LO what loan to value ratio (LTV) she is using for this approval and write it down.
Loan approvals are LTV dependant and so are the loan amounts. Meaning, if I approve you for an $80,000 loan at 80% based on an appraisal of $100,000, your loan amount will stay at 80% regardless of the appraisal. If the appraisal is higher, so is your loan amount and if it is lower, so is your loan amount. More about Loan to Value.
Debt to Income Ratio (DTI)- This is the banks view of your capacity to repay the loan, another huge variable that makes or breaks many of deals. All you are trying to do here is to avoid a rookie mistake.
Most kids that worked at Starbucks last year can’t spell mortgage, let alone calculate a debt to income ratio. This ratio is simply your total debt payments (as shown on your credit bureau) divided by your gross wages.
If this ratio is too high you do not get the loan or you have to move to a riskier documentation class. On an average, your DTI should be between 45% – 50%, however this is very ambiguous due to different compensating factors. For example, if your loan to value was very low as discussed above. More on Debt to Income Ratios.
Documentation Type – Documentation type is simply how we back up what you put down on the application. The best rates are fully documented loans (Full Doc), meaning we back up everything you put down on the application with supporting documents, i.e. pay stubs and asset accounts.
The worst rates are no document loans (No Doc), where you basically sign your name 80 times and get a mortgage. There are a few levels in between these two extremes. These are called "Doc Type" Interest rates are only an assignment of risk by the lender.
The higher the risk the higher the rate. If I quote your loan as a "Full Doc" loan before I receive your pay stub and w2 statements I could be using incorrect figures. Most borrowers embellish their income on mortgage applications or calculate it differently than underwriters do. It is common to have to change to a lower doc type after seeing income documents.
This is why I tell borrowers to send this income information over in advance. Some borrowers will send income documents to one lender and not the rest. Then they will pick the lender with the lowest quote.
This is insane! The lowest quote will almost always be the one without the income documents because they are using your income numbers, not what the underwriter uses. The purpose of this whole exercise is to get 4 relevant offers based on the same relevant facts. More on Doc Types.
Public Records – This usually pertains to bankruptcy, foreclosures, liens and judgments. The bottom line is this, to get your best interest rate you must go with a loan that is guaranteed by a government agency.
All lenders use these agencies and they are called Fannie Mae, Freddie Mac, FHA and VA. All of the agencies fund conforming loans. Meaning, when you conform to their guidelines they guarantee to the lender that they will buy this loan. This lowers the lender’s risk and gives you a better rate.
Each of these agencies have general rules about Bankruptcy, Foreclosure, Liens and Judgments. These are usually reported in the "Public Records" section of your credit bureau. If you do not have a copy of your credit bureau, ask your LO if anything appears in this section. If so ask them if this will interfere with your loan approval.
Mortgage History – No other variable except loan to value, LTV, is given as much weight as this one. I have seen borrowers with $200,000 in assets and equity be turned down or given a higher rate for having one mortgage late reported on their bureau.
A "mortgage late" is described as paying your mortgage over 30 days late from the due date. Any late payments received less than 30 days are not reported and does not affect your mortgage approval.
However, banks count when the check "hits" the bank not when you sent it. If you bounce a check,then they will count the day it clears. Ask your lender if you have any late payments on your bureau.
TAKE A DEEP BREATH, WERE ALMOST DONE!
3) Comparing Good Faith Estimates
Remember, if the first three words at the very top of the paper do not read "Good Faith Estimate", you are looking at a spreadsheet. It is not going to compare everything evenly and most likely is an attempt to disguise something the LO doesn’t want you to see.
At this point I am sure you have stressed the words "Good Faith Estimate" more than once. If the LO is unable to deliver a true GFE I recommend that you exclude him or her immediately from your decision.
We are only concerned with 4 variables on the Good Faith Estimates. Remember, you will have two GFE’s from each lender and you need to record these 4 variables on your checklist for each GFE for each lender.
I know … BUT it’s the price of a good deal. Trust me on this, there is a method to my madness. Open up this blank GFE here and print it so that you can easily find each of these variables. The 4 GFE variables are:
3. Review Each of the Good Faith Estimates with EVERY Lender
If you do nothing else up to this point, do this. Review every GFE that EVERY lender sends to you on the phone with the LO. Remember our sample GFE? Open it here. Look at the the different sections.
It is extremely important that you understand the lender only controls the 800 block of fees (in blue above) and the rest are third party fees. This means all of the other sections will be the same from lender to lender.
We are going to ask EVERY LO about every one of these sections. This exercise is not to compare the costs, we already know these from adding up the 800 block of fees. What we are doing is trying to see how experienced the LO is.
Go over each and every section on the phone with the LO and play ignorant. Ask her what each and every section means. Wait for the long pauses, the stumbling, and wrong answers. You will soon be able to tell the experienced loan officers from the newbies. Remember, newbies make more mistakes and this must be weighed in your decision.
This is the time that each of the LO’s are going to try to "close" you, at least the good ones. Do not negotiate at this time.
Do not tell the LO that you are considering other lenders, this will only cause the LO to grill you about the other offers. Simply bow out of the situation by saying you need to speak to your significant other.
You may want to assure them that you are going to move forward and that everything looks good. Give them a time frame and move on to the next lender.
You should now have all of the information you need to compare all of the offers. You should have a good idea who you like and dislike, who you trust and do not trust.
You should also have a good idea of who is experienced and who is not experienced. Hopefully you have done your homework and found all of the lenders to be business worthy and of good reputation. If not, you should exclude that lender from your decision making process. NOW WE NEGOTIATE! |
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Step One
Thursday, July 8th, 2010
Before you Apply – Print Your Checklist
Get ready, set, go! First things first, go ahead and print out your first check list (Step One Checklist ). You want to have this handy so that you can refer to it when you start fielding the phone calls. Look over the sheet so that you are familiar with the questions you should ask the lender.
When you fill out the online application, you will receive phone calls almost immediately. Each phone call should last about 10 – 15 minutes and they will come about 60 seconds to 30 minutes after hitting the “send” button.
You will also get about a ½ dozen automated emails. Disregard these; they rarely apply to any one persons situation. |
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Your Goals for Step One: (Print Checklist)
Note: Focus on these three goals for right now, do not try to negotiate during the first call. This will come soon enough. Keep this in mind, by law you will know every single detail of the loan before you commit. If you do not like the numbers you have lost nothing but a little time.
1. Gather and Share Information
Remember, it’s the lenders’ job is to gather information and to become your friend. Your job is to give the information, be friendly and not to be befriended, this is business.
Loan officers are trained to use a two or three call process with internet leads. The first call is designed to build rapport and to gather information. The second call is to review your credit and the third is designed to close the deal. Most customers are ill-equip ed to make the right decision by call three and usually will pick the first lender they spoke with. Lenders know this.
The loan officer’s job is to drag the first phone call out as long as they can. The reasoning behind this is to wear you down so that you spend less time with the competition. Ultimately, 55% of all "lenders compete" applicants opt to use the first lender that calls and this can be attributed to this tactic.
During your first phone call you should be gathering as much information about them as they are you. This will help you do your homework after the call ends. The rates, terms and closing costs are all saved for the next step. Your focus should be the questions on the call one checklist. How long has she been with her company? How long has he been in the business?
Note: Make sure that you are share the correct information with the LO. and do not omit anything important about your scenario.
Most of the “surprise closings” you hear about are not the result of a dishonest loan officer, they are the result of inexperienced ones who do not ask enough questions. Chances are, if you have a three minute phone interview from a loan officer who was in the food service industry last year you can expect a low quote and a lot of surprises.
There are over 255 conforming products alone, each having over 30 pages in guidelines. When a loan officer makes a mistake it costs you time and money. For this reason alone, make sure you are communicating everything that is needed for him to give you an accurate quote. You should be ready to fax or communicate the following information during or after the first phone call:
2. Communicate What You Want
You should communicate exactly what you want the same exact way with each lender. You will be tempted to spend less and less time with each lender that asks the same questions as the one before them asked. Bite the bullet and do a full application with each lender, you never know which lender will be able to offer the best deal.
Next, Let them know which type of mortgage programs you are interested in hearing about i.e. 30 year fixed. You can find out more about mortgage programs here. Next, (this is very important) communicate to the LO that you would like to receive 2 separate quotes for this loan program, each on a separate GOOD FAITH ESTIMATE.
This is important to understand:
Lenders make a profit one of two ways. They will raise the interest rate higher than they buy the money for OR they will inflate the closing costs higher than it cost to close the loan. There are no exceptions.
By asking for these two different quotes, you are effectively asking the lender to show you her lowest rate (with points) and her lowest fees (without points). Make sense? This gives you the answer to the two biggest secrets that lenders usually try to dance around.
3. Research the Lender Online
Your last goal is to find out as much about the company as you can between the first and second call. We are going to try and weed out the lower rated lenders and focus on the better ones.
First you need to head over to the Better Business Bureau, (Opens a New Window), this will tell you if the company has any unresolved complaints. This is why the checklist up top asks you to get the complete name and address of the lender. There most likely are multiple lenders with this name. Make sure you get their company name and address when you speak with the lender the first time.
Keep in mind, the number of complaints may be a result of the volume the company has done and not a direct reflection of their customer service. Meaning, a company with one complaint and only 100 loans completed is worse than a company with ten complaints and over 5000 loans completed. Make sense? Step two is where we will begin to collect all of the the variables of the lenders home equity loan offer.
The last stop is to a website that you must take with a grain of salt. They are a public forum that usually only attracts angry customers. You should not use this website in whole to make a decision about your prospective lender. Rather, you should use it to spot specific weaknesses in that lender and make sure you avoid them. This website can be reached here and all you need to do is search the lender’s name. |
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Lenders Compete
Saturday, March 15th, 2008
Who Wins When Lenders Compete?
Long ago mortgage websites on the web were merely placards and billboards for brick and mortar established mortgage companies and were very rarely seen. A little known company called Lending Tree changed mortgages online and offline forever with their revolutionary approach to mortgages. It is nothing short of miraculous how many mortgage companies have since then adapted the Lending Tree business model as their central point of contact with their customers. (more…)
