CHAPTER 5
Choosing a Mortgage Professional
One way to choose the type of mortgage that is right for you is to get what’s called a Good Faith Estimate from a few different lenders. But don’t take their advice at face value, because they may make more money on one type of mortgage than another. Instead, compare and contrast the advice you receive from each and consider that advice with a cynical eye.
You see, mortgage brokers and bankers do not have a legal obligation to find you the very best deal. They may get you a great deal because they are nice people or are competing hard for your business, but they do not have a fiduciary duty to you. As you work with them, never forget that these are salespeople, paid on commission. If you’re naive it will cost you. Knowing how they work—and, more importantly, how they’re paid—will help you SAVE BIG.
In this chapter, learn to SAVE BIG by:
• Getting three full-fledged Good Faith Estimates from the right sources.
• Comparing and contrasting not just interest rates but fees, too.
• Understanding how mortgage brokers and bankers make money—so you won’t be ripped off.
• Spotting hidden lender fees that can cost you tens of thousands.
Get Three Good Faith Estimates
Once you’ve settled on a mortgage type, many people think it’s time to talk interest rates. Don’t make the mistake of choosing a lender based on the interest rate alone. That’s a blunder that allows the lender to quote you an enticingly low rate, then hide astronomical fees in your closing costs. So hear this: An interest rate quote is not enough.
What you need are three full-fledged estimates, called Good Faith Estimates (GFEs), from three different types of lenders. More on who the players are in a moment. The Good Faith Estimate includes all the fees and charges you can expect to pay. This allows you to get a complete picture of each lender’s loan. Ask all three to base their estimates on paying zero discount points, because that makes it easier to compare them.
The Annual Percentage Rate Is Useless
The annual percentage rate (APR) is another creation of government bumblers. It’s your interest rate with fees added in. It’s supposed to help you shop and compare among loans, but it doesn’t work because every lender calculates it differently. Some include every single fee. Others leave fees out. Ignore the APR.
Ideally, you will ask for all three GFEs the same day. That way you’ll know you’re comparing and contrasting their actual offers, rather than rate fluctuations that occurred in the marketplace. Lenders are required by law to provide you a Good Faith Estimate within three days of your request. You shouldn’t have to pay an application fee to get the GFE. In fact, a new federal rule passed in July 2009 requires lenders to give you an estimate before charging you an application fee or any other fees.
If you provide your credit score (learn how to check your score in Chapter 19) and your loan amount, lenders should be able to work up a GFE. They should include the Truth in Lending form as well, which lists other important factors that we’ll discuss shortly.
Who to Get Them From
You should get your Good Faith Estimates from three different sources—one from a banker, one from a broker, and one from a mortgage website. That way you are cross- referencing all three different ways people get mortgages these days. Here are the pros and cons of each.
Banker
| Pro | Con |
|---|
| • Works directly for the bank, so fees may be lower because you don’t have to pay a third-party broker. | • Offers competitive loans that are better than sleazy brokers, but may not be as good as stellar brokers. |
| • Bank lends you its own money so is less likely to sell your loan to a loan servicer, which can be a headache. |
| • If you have excellent credit and a checking, savings, or investment account there, you may be able to get a discount on the interest rate. |
Broker
| Pro | Con |
|---|
| • Shops and compares wholesale lenders to find the best mortgage for you. Using a broker is like going to several banks because brokers work with multiple banks. | • Since they are not (usually) lending you their own money, they may have less incentive to build a trustworthy, long-term relationship. |
| • If you have marginal credit, a good broker can scour the mortgage world to find a lender who will approve you and give you a decent loan. | • Brokers are middlemen and middlemen must be paid. A broker’s compensation may be higher than an in-house banker’s. |
Website
| Pro | Con |
|---|
| • A quick and easy way to get multiple quotes. (Make sure you use a site that quotes rates from multiple banks, not just one.) | • Often unfamiliar with the closing customs and tax laws in your area, so unable to assist when questions arise. |
| • Best for refinancing where there are no purchase complications. All you need them to do is provide the money. | • May be just a lead-generating service, which means you will be deluged with annoying, aggressive sales calls. |
Refer to Referrals Carefully!
It’s always a good sign if a friend had a good experience, but you should not reveal the referral until after you’ve gotten the Good Faith Estimate. This counterintuitive advice comes from Carolyn Warren, author of Mortgage Rip-Offs and Money Savers. In her book, Carolyn, a former mortgage professional, explains, “Loan officers know that a referred client is a naive client who is not going to compare GFEs . . . you’re sealing your fate to pay an extra junk fee and probably a quarter to a half percent more in rate as well.” Yikes! Who knew!
Get Some Insider Insight
Author and former mortgage professional Carolyn Warren has been there as a mortgage broker herself. If you want more detail than I can provide about the murky mortgage world, Carolyn’s books are your essential source. She is now my mortgage guru, and I felt that way even before I found out that Mortgage Rip-Offs and Money Savers was published by Wiley, same as my book. (Kiss, kiss!) Carolyn has now written a second book called Homebuyers Beware: Who’s Ripping You Off Now? It’s chock full of the latest information on mortgages and credit. Carolyn Warren is passionate about helping homebuyers and it shows. OK, commercial over, on with the show!
After you’ve scrutinized your Good Faith Estimate, then you can drop your friend’s name.
Often real estate agents refer people to mortgage professionals. That’s fine. They’re in the business and should know good people. But never make your agent’s referral your only stop because, although kickbacks are illegal, they are a very real part of the real estate world. And you can guess who ends up paying for that favor: you.
Actually, I obtained my own mortgage through a banker my agent sent me to, but I went to her last. When I was buying my house, at first I thought it would be easier and cheaper to use the same lender that had financed my condo. We had a relationship, right? Ha! The company quoted me a decent rate and when I grilled the loan officer about fees, he swore they were low. But when I got the actual Good Faith Estimate, it included a $5,000 loan origination fee that the loan officer hadn’t mentioned despite my intense questioning. Sleazy!
Next, I was offered a better deal by a mortgage broker who I knew and trusted. I would have done fine with that mortgage. But then I decided to get one more GFE. What do you know, the best loan offer of all came from the banker my agent had referred me to. That loan had a lower rate and zero origination fee. That’s why you want three Good Faith Estimates. You just never know where the best deal will be.
Here’s how shopping around among mortgage professionals helped me SAVE BIG:
Benefit of Getting Three Good Faith Estimates| Fees charged by first lender | $ 6,105 |
| Fees charged by third lender | 1,105 |
| BIG SAVINGS = | $5,000 |
How Mortgage Brokers and Bankers Make Money
I remember going on a shoot with a Good Morning America producer who was buying her first condo. In between interviews, she was frantically fielding phone calls from her mortgage broker about what type of loan she wanted. Since I’m a consumer reporter—and a buttinski—I started whispering questions for her to ask the guy. The number one thing I wanted her to ask was, “How much do I pay you for arranging this loan for me?” So she asked. The broker acted like she was stupid and answered, “Why, you don’t pay me a thing. The bank pays me for bringing in your business.” As I will explain, that answer was both the truth—and a total lie.
Trust me, when you take out a mortgage, you pay the mortgage broker or the internal loan officer for their services. That payment is in the form of either a loan origination fee, a broker’s fee, a yield spread premium, or a combination of these fees. In this section I explain what each fee is for and when to pay it or avoid it. When I say you should avoid a fee, it just means you will be paying one of the other types of fees instead, because it is more advantageous to your situation. You will be paying at least one of these fees. Nobody works for free.
Loan Origination Fees
Loan origination fees are usually item number 801 on the Good Faith Estimate. A loan origination fee is one portion of the broker’s or lender’s profit. If you are working with an outside mortgage broker, the loan origination fee is part of their compensation for arranging your loan. If you are working directly with a bank, the loan origination fee may go to your loan officer, or may be absorbed as general profit on your loan.
Loan origination fees are usually charged as a percentage of the loan amount. One percent is a typical loan origination fee paid by people with good credit. The percentage may rise to 1.25 percent if it’s a very small loan of less than $100,000, because smaller loans take just as much work and the loan officer wants to make a decent commission. You will also pay more if you have subprime credit, because arranging a loan for you is more difficult. Expect to pay 3 percent for a decent-size loan, as much as 5 percent if the loan is $100,000 or less.
When to Pay a Loan Origination Fee A lot of lenders will brag that they’re offering you a loan with no origination fee. But if there’s no origination fee, you’re still paying the mortgage broker or loan officer for their work, you’re just paying some other way. Here’s when you should pay—or avoid—a loan origination fee.
Pay It • If you plan to stay in the house a long time, it’s better to pay a loan origination fee, because it’s a one-time fee, paid at closing, that doesn’t affect your interest rate.
• Loan origination fees are tax deductible, so it is better to pay a loan origination fee than some random fee that doesn’t give you a write-off.
Avoid It • If you know you will not live in the home very long, you should avoid paying a loan origination fee, because the house won’t have time to appreciate enough to recover this fee when you sell.
• A loan origination fee is also a bad idea if you are short on cash for closing, because it’s yet another payment that is due at the settlement table.
Mortgage Broker’s Fees
The mortgage broker’s fee is really the same as the origination fee, except that it’s for third-party mortgage brokers only, not internal bank loan officers. You will typically see the mortgage broker’s fee listed as item number 808 on your Good Faith Estimate. Brokers are supposed to list their fee because they are third-party middlemen. Bankers charge a fee, too, but they don’t have to list theirs. At least it’s refreshingly plain English: A broker’s fee is a fee that goes to the broker.
The most common mortgage broker’s fee is 1 percent of the loan amount. Like the origination fee, it is tax deductible. You will see variations on the percentage listed because brokers don’t like you to think about how much you’re paying them—especially when they’re competing with bankers. So they may describe part of their fee as a loan origination fee and part as a broker’s fee, or they may not list anything under “Mortgage Broker’s Fee” at all, opting instead to list their entire fee as an origination fee.
When to Pay a Mortgage Broker’s Fee Once again, the key to realize is that if you don’t see a mortgage broker’s fee listed, you are still paying it some way, somehow. The pros and cons of paying a mortgage broker’s fee are the same as for an origination fee.
Pay It • If you plan to stay in the house a long time.
• If you have a choice between this and some other fee that is not tax deductible.
Avoid It • If you don’t plan to live there long.
• If you don’t have enough cash for closing.
Yield Spread Premiums
If you are working with a mortgage broker, something called the yield spread premium (YSP) may be listed on line 1303 of your Good Faith Estimate. You will also see fine print there, in parentheses, which says “Not paid out of loan proceeds.” You might think, “Phew, one fee that I don’t have to worry about because I’m not paying it,” but you would be wrong. You are paying it—many times over.
Here’s how it works. If a broker can get you to agree to an interest rate that is higher than the going rate on the open market—called the par rate—the broker earns a bonus called a yield spread premium. In other words, the wholesale lender is rewarding the broker for the difference—the spread—between the par rate and the rate they sold you.
This yield spread premium bonus is calculated as a percentage of the loan amount, usually 1 percent—often more. You don’t pay the actual YSP fee, but you pay a higher interest rate each and every time you make a mortgage payment over the life of your loan, which could cost you tens of thousands of dollars. Think this won’t happen to you? Think again. Yield spread premiums are regular, routine. For example, according to the Center for Responsible Lending, 85 to 90 percent of subprime mortgages are yield spread premium deals.
If you are working directly with a bank, they do not have to list their yield spread premium. In fact, often bankers deny that they have yield spread premiums, but many do. If you are not paying an origination fee to the bank, then you are probably paying a yield spread premium. It’s one or the other, unless the bank makes its up-front profit in some other way, like large application and closing fees.
So what’s a savvy borrower to do? In her book
Mortgage Rip-offs and Money Savers, Carolyn Warren suggests asking three simple questions:
1. What is the par rate on this loan? If the lender tells you the par rate on the loan is 6 percent, when you were offered 7 percent, then you’ll know you are paying a full percentage point more than the rock-bottom rate of the day.
2. What is the yield spread premium on this loan? If the yield spread premium is $5,000 on a $250,000 loan, you know the broker is making a 2 percent yield spread premium bonus on your loan.
3. If rates go down, will you lock the loan in at a lower rate or pocket the YSP? If they know that you know that many mortgage brokers fail to lock in lower interest rates for their customers just so they can make a bigger yield spread premium for themselves, chances are they won’t do that to you.
Just by asking these questions, you will be putting the lender on notice that you know what you’re doing—and, more importantly, that you know what they’re doing. I wouldn’t be surprised if you shame them into making you a better offer. Getting those three Good Faith Estimates also helps protect you from paying an exorbitant interest rate with a yield spread premium. After all, the lenders are competing with each other. But if you learn all the offers you’ve received are higher than par rate with juicy yield spread premiums for the broker, either negotiate them down or get additional offers.
When to Pay a Yield Spread Premium I’ve probably made yield spread premiums sound so evil that you’re wondering why there is a section about when to pay them. Well, there are certain narrow circumstances when YSPs are actually helpful. Even though you don’t pay the yield spread premium bonus directly, I’m deliberately using that wording, because you do pay it in the form of an inflated interest rate.
Pay It • If you need to keep your closing costs down because you are short of cash, you can compensate the broker or loan officer by paying a yield spread premium instead of a loan origination fee. You pay less up front, more later.
• If you have no money at all for closing costs, you could pay an even bigger yield spread premium in exchange for the broker crediting you enough money to cover all your closing costs. The credit is given at closing.
Avoid It • If you are already paying an origination fee or broker’s fee on the front end, there are very few circumstances in which you should also pay a YSP on the back end. That’s double dipping—unless the YSP is helping you with closing costs. Add up the total commission the broker is making and decide whether it’s fair.
• If you plan to live in the home for a long time, a YSP is bad for you because it means you will be paying an inflated interest rate for a long time. You want the rock-bottom rate, because you will be paying that mortgage for years to come. You’d be better off paying a one-time loan origination fee than a YSP.
How to Compare Good Faith Estimates
Now that you have three Good Faith Estimates from three different types of sources in your hands—and you know how those sources get paid—you need to figure out how to compare the GFEs effectively. The Good Faith Estimate is a standard government form (don’t accept GFEs that come in some other format), but lenders still manage to vary the wording and numbering enough so that you’re stuck comparing apples to oranges.
Never fear! I buckled down and did the hard work for you so you can compare one lender to another. I divided the Good Faith Estimate into the three key categories that you should compare and contrast:
1. Loan terms.
2. Lender profit.
3. Miscellaneous lender fees.
I have grouped items together that you should consider together, but they are not always in the same order on the GFE itself. What can I say? It’s an illogical government form. To overcome this, I’ve noted the section or line item where each charge is usually found. Use my list to deconstruct your three Good Faith Estimates so you can compare apples to apples—or maybe a better metaphor is compare watermelons to watermelons, since some of these fees are huge!
Loan Terms
Make sure the following loan terms are the same from lender to lender so you are making an accurate comparison.
• Loan Amount—top of form. Make sure your loan amount is accurate and that all three lenders have used the same amount.
• Interest Rate—top of form. Duh. Of course, you want to know what interest rate each lender is offering.
• Loan Discount, also called “Discount Points” or “Discount Fee”—top of form or usually item #802. Make sure all three lenders are basing their interest rates on paying zero discount points, for easy comparison. You can add points later if you wish.
Lender Profit
Add up the total amount of profit each lender is making, by gleaning the numbers from these line items:
• Loan Origination Fee—usually item 801. This is one place where the lender’s profit will be listed. Compare and contrast.
• Mortgage Broker’s Fee—usually item 808. This line item is for third-party brokers, not bankers. It is part of the broker’s profit.
• Yield Spread Premium—usually item 1303. This is the YSP, that back-end broker’s fee I told you about. As I explained, the wholesale lender pays the broker this fee, but you are really the one covering it by paying a higher interest rate.
Miscellaneous Lender Fees
Add up all of these smaller charges—miscellaneous lender fees—without worrying about the specific wording from lender to lender.
• Items Payable in Connection with Loan—section 800. This line shows the lender’s miscellaneous charges. If, by chance, the loan origination fee, mortgage broker’s fee, or discount points are listed here, count them separately, because we have dealt with those previously. You’re left with a series of smaller charges like application fee, processing fee, appraisal, credit report, and tax service fee. Total them up.
• Additional Settlement Charges—section 1300. If there is a yield spread premium, it will be listed in this section, but separate it out and compare it when you are comparing lender profit, as shown earlier. Lenders often list some of their other miscellaneous fees down in this section, perhaps to break them up a bit so they look less imposing. Common charges in this section are survey fee and pest inspection. Add all fees listed in this section to the “Items Payable in Connection with Loan” and then compare the miscellaneous lender fees from one GFE to the next.
Charges You Don’t Need to Worry About—Yet You will see other charges on your Good Faith Estimate, like hazard insurance (section 900), property taxes (section 1000), title charges (section 1100), and government transfer charges (section 1200). You can ignore these for purposes of comparing loans because these prices are set by other entities.
BIG TIPS
• Get three full-fledged Good Faith Estimates.
• Don’t tell a mortgage professional that you were referred to him—at first.
• Consider the interest rate and the closing fees before choosing a lender.
• Pay either a loan origination fee/broker’s fee or a yield spread premium, depending which is more advantageous to you.
• Compare and contrast the lenders’ Good Faith Estimates, using the breakdown I provided.
