Negotiating a Home Mortgage Loan
If you are looking for a home mortgage, the most important advice is to shop around for the best rate. Compare the annual percentage rates (APRs) offered by various lenders and brokers. This may be the largest and most important loan you get during your lifetime.
The law entitles you to a good-faith estimate setting forth all loan and settlement charges before you agree to the loan and pay any fees (Real Estate Settlement Procedures Act, 12 U.S.C. §2601 et seq.). You have the right to know what fees are not refundable if you decide to cancel or not proceed with the loan agreement.
Check if you are eligible for a loan insured through the Federal Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs or similar programs operated by cities or states. These programs usually require a smaller down payment. Under FHA programs, for example, persons with a Fair Isaac Corporation (FICO) score above 580 may qualify for a 3.5 percent down payment. Borrowers with lower scores may have to put down at least 10 percent. There is an upfront charge of 2.25 percent for mortgage insurance.
Mortgage loans can have a fixed-interest rate or a variable-interest rate. Fixed-rate loans have the same principal and interest payments throughout the duration of the loan term. Variable-rate loans, or adjustable-rate mortgages, can have any one of a number of “indexes” and “margins” that will determine how and when the rate and payment amount change. The length of the loan can be up to forty years. Loans may have equal monthly payments, changing payments, or a large “balloon” payments after a certain number of years.
The price of a home mortgage loan is often stated in terms of an interest rate, points, and other fees. A “point” is a fee that equals 1 percent of the loan amount. Often, you can pay fewer points in exchange for a higher interest rate or more points for a lower rate.
Find out if your loan will have a charge or a fee for paying all or part of the loan before payment is due (“prepayment penalty”).
Fees and charges that you may have to pay upon application include application fees, appraisal fees, loan-processing fees, and credit report fees. Fees that you may have to pay before closing include those for a new survey, mortgage insurance, and title insurance. Also ask about fees for document preparation, underwriting, and flood certification.
Mortgage insurance is insurance protecting the lender against your default. Lenders often require mortgage insurance for loans where the down payment is less than 20 percent of the sales price. Mortgage insurance may be billed monthly, annually, by an initial lump sum, or through some combination of these practices. Mortgage insurance is not credit insurance, which pays off a mortgage in the event of the borrower’s death or disability. Although you are charged for mortgage insurance, you derive no benefit from it other than being able to get the loan. If you should default on the loan and the mortgage insurance company has to make good on the insurance, it generally has the right to sue you for the amount it paid.
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“Locking in” your rate or points at the time of application or during the processing of your loan will keep the rate and/or points from changing until settlement or closing of the escrow process. Ask if there is a fee to lock in the rate and whether the fee reduces the amount you have to pay for points. Find out the length of the lock-in period, what happens if it expires, and whether the lock-in fee is refundable if your application is rejected.
Find out if mortgage insurance is required and how much it will cost. It may be possible to cancel mortgage insurance at some point, such as when your loan balance is reduced to a certain amount.
You may also be offered “lender-paid” mortgage insurance (LPMI). Under LPMI plans, the lender purchases the mortgage insurance and pays the premiums to the insurer. The lender will increase your interest rate to pay for the premiums.
In addition to principal and interest, part of your monthly payment may be deposited into an escrow account (also known as a reserve or impound account) so that your lender or servicer can pay your real estate taxes, property insurance, mortgage insurance, and/or flood insurance. Ask if you will be required to set up an escrow or impound account for taxes and insurance payments.
Most lenders will not lend you money to buy a home in a flood-hazard area unless you pay for flood insurance. Some government loan programs will not allow you to purchase a home that is located in a flood-hazard area. Your lender may charge you a fee to check for flood hazards. You should be notified if flood insurance is required.
Many mortgage loans are arranged by brokers. Brokers offer to find you a mortgage lender willing to make you a loan. Some brokers act as your representative; some operate as an independent business and may not be acting in your interest. Your mortgage broker may be paid by the lender, by you as the borrower, or both.
You have the right to ask your mortgage broker to explain exactly what it will do for you—including whether the broker is representing you—and to have that set forth in a written agreement. You also have the right to know how much the mortgage broker is getting paid by you and the lender for your loan.
The website of the Department of Housing and Urban Development offers the resource "Shopping for Your Home Loan," which addresses the entire process of purchasing real estate (http://portal.hud.gov/hudportal/documents/huddoc?id=DOC_12893.pdf).
A 2013 study by the Consumer Financial Protection Bureau found that about half of mortgage borrowers don’t shop for credit (https://www.consumerfinance.gov/about-us/blog/nearly-half-of-mortgage-borrowers-dont-shop-around-when-they-buy-a-home/). Most borrowers consider only a single lender or broker before deciding where to apply, apply with only a single lender or broker (77 percent), and rely on information from people with something to sell (70 percent), who cannot be relied upon to provide unbiased information. A significant number consider it important to have an established relationship with the lender, which substantially reduces the likelihood that they will look elsewhere for a better deal. Needless to say, such behavior is likely to result in consumers paying more than necessary. Although many of the riskier features are no longer permitted or available, there are significant differences among mortgage loans and terms.
The Truth in Lending Act (TILA) gives a homeowner rescission rights when the principal residence is used to secure an extension of credit for a purpose other than for the initial purchase or construction of the residence (15 U.S.C. §1635; 12 C.F.R. §1026.23). A creditor must furnish two properly filled-out copies of a notice of the right to cancel to everyone whose ownership interest in the principal residence is subject to the creditor’s security interest. This is not limited to the borrower; for example, a resident spouse or child who is listed on the title has the right to cancel and must be notified of that right. The rescission right is not limited to real property but also includes mobile homes and interests in cooperative apartments. A residence held in a land trust is also covered if the other requirements (personal purpose, etc.) are satisfied.
The right to cancel normally extends for three business days using a peculiar definition of business day (i.e., excluding federal holidays and Sundays, but not Saturdays) (15 U.S.C. §1635(a)). However, if a creditor fails to furnish the “material disclosures” (listed at 12 C.F.R. §1026.23 n.48) and two properly filled-out notices of the right to cancel to each person entitled thereto, the right continues until (a) the creditor cures the violation by providing new disclosures and a new cancellation period and conforming the loan terms to the disclosures, (b) the property is sold, or (c) three years expire (12 C.F.R. §1026.23(a)(3)). The right may be asserted against any assignee of the loan (15 U.S.C. §1641(c)).
WARNING
The right to cancel is not, and should not be considered as, a substitute for shopping for credit prior to signing a deal when you are not under time pressure.
Summary
Shop around for the best rate on a home mortgage. This is the most important credit transaction most people engage in, and it should be entered into with care.