Fire,
Aim, Ready
This
may sound funny to you, but “Fire, Ready,
Aim” is an accurate way of describing the
way that many people shop for a mortgage. So many
people make fundamental errors when shopping for
a lender that it is worth of some serious discussion.
In fact, my 22 years in the mortgage business
convinces me that the primary reason so many people
are unhappy with their mortgage experience is that
most of them, unfortunately, start with the lender
search process, when it should be the last thing
they do. This fundamental flaw starts them on
a path that results in unhappiness and wasted money.
In
other articles I have discussed, or will discuss,
the preparatory steps that should be taken prior
to selecting a lender but let me review them briefly.
First, acknowledge that this is an important task,
one where effort will be rewarded. Most people expend
more effort in figuring out what kind of DVD player
to get than how to get a mortgage. Don’t be in
that group. To that point, you should educate yourself.
Read one of the books about the mortgage process.
Second, set your goals, and only then figure out
which of the many products offered best helps you
meet those goals. Third, ascertain how long you
are going to be in the home as it affects how many
points you want to pay. Now you are prepared to
start looking for a lender.
Next,
you should understand that most loans are commodities.
There is simply no difference in the product characteristics
between one 30-year fixed rate loan, for example,
and another. The overwhelming majority of loans
these days are sold to FannieMae and FreddieMac.
Your “lender,” regardless of whether it is a bank
or S&L or mortgage banker or a mortgage broker
is merely a middle-man in the process, someone who
funds your loan and then immediately sells it to
one of those agencies. This also applies to the
overwhelming majority of other similar loans too.
Even Jumbo loans, those over $300,700 are sold to
a relatively small handful of Wall Street firms,
and they are highly price competitive among lenders
who are trying to be competitive.
That
said, this brings me to a second and related point:
no one lender ever has the best price on more than
a small range of products. Most lenders today
offer 20 types of loans but their intention is to
be highly competitive on only the smaller group
of loans that they feel represents their core market.
One lender I deal with on Conforming loans – FannieMae
and FreddieMac loans – has almost never been competitive
on Jumbo products. They just don’t care about
selling them, so they do not price them aggressively
like the ones on which we do business. With this
knowledge, then, you come to realize that shopping
for a loan requires that you first determine what
you are shopping for.
More
specifically, let’s say that you determine that
you are only going to be in your home for another
5 years. That says that you only need to find
a lender with competitive pricing on the 5-year
balloon loans and 5 year ARM’s. You don’t care
what their rates are on 30-year fixed rate loans
because that isn’t what you want anyway.
Remember
that even though you have narrowed your search,
you are still dealing with a very competitive market
because FreddieMac buys most of these 5 year loans.
The means that any lender you are likely to deal
with is selling your loan to FreddieMac a week after
it funds.
Next,
you must remember that shopping for a mortgage by
calling lenders and asking about rates has a serious
flaw: lender representatives frequently do not tell
you the truth. Unfortunately, under the law that
governs real estate disclosures, there are effectively
no penalties for lying. Consequently, there are
loan reps who have been attracted to the mortgage
business because, frankly, they can lie and get
away with it. In the short run, a rep that lies
can make more money than the honest guy at the next
desk. Who would you rather deal with? Well, you
probably said, “The honest guy, of course.” Then
let me ask you how you expect to ascertain this,
if all you ask is, “What are your rates?”
The
key to finding an honest loan rep then, lies in
finding someone who has dealt with him and who will
give you a referral. Ask ten friends who are homeowners
and one or two of them will have dealt with a hero,
someone who will treat you the same way. You can
then interview those who have been recommended to
you and talk with them about rates for the 5-year
loan that you are interested in. If you’re dealing
with a mortgage broker, he will have access to many
lenders and will know which one of them is pricing
5-year products aggressively.
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