Shopping for a Mortgage these days can be like walking on a minefield and discovering too late in the process that your home re-finance or purchase will not be going to closing on time or not at all.
The mortgage industry can be a minefield for consumers who are not educated enough about the process and don't know where not to step. Here is a partial summary of potential hazards and how not to become their victims.
1. Mortgage Industry/Market Volatility and Obsolete Prices 2. Incomplete or Misread Loan Scenarios 3. Mortgage Price and/or Interest Rate Low-Balling 4. Settlement Cost Low-Balling (before final HUD) 5. Lender Fee and/or Interest Rate Escalations 6. None Existent or Fake Rate Locks 7. Contract Bullying 8. Financial Inducement to Overcharge
1. Mortgage Industry/Market Volatility and Obsolete Prices: because mortgage prices are reset every day and sometimes in my experience three times within the same day, price comparisons from different loan providers may be invalid if not made at the same point in time. I have been a radio show host for 3.5 years and a listener has e-mailed me about the following question: "I shopped a few lenders using the telephone to contact those who looked most promising based on the rates published in the local newspaper. When I went back to the one with the best prices, however, I was told that those prices no longer valid. Is there any way I can avoid starting the process allover again?"
I'm afraid not. Most mortgage lenders/brokers change their prices daily, generally in the morning after the secondary markets opens, and sometimes they will change them during the day as well. This is a major problem for shoppers using traditional distribution channels, since prices collected from lender one on Monday and from lender two on Tuesday will not be comparable if the market has changed in the meantime. Prices advertised in newspapers are out of date when they are printed. A newspaper that publishes price information in its Monday edition, for example, is reporting Friday's prices. On Monday when the paper hits the street, lenders have already posted new prices.
The Internet can ease the pain of shoppers trying to stay abreast of the market. For one thing, it provides more current information than the printed media. But not all mortgage web sites provide current data. The great majority of single-lender sites are not kept current. Multi-lender referral sites, which provide price information on hundreds or even thousands of lenders, are dependent on the lenders to keep their information up to date, which some do but many don't. Some of the prices posted on the Internet, therefore, are even more out of date than those in the newspapers.
In most cases when consumers are shopping around based on interest rate only, it serves as a red flag to the banker or broker because only the uneducated consumer not knowing the mortgage process would result to shopping around based on interest rates only. The interest rate that a consumer will be able to secure for a mortgage will depend on their credit score, income, assets, income to debt ratio and other factors which makes it unique to the individual characteristics of the consumer. This is a very challenging concept for consumers to realize because they have been trained and bombarded by the different media advertisements to make that phone call.
2. Incomplete or Misread Loan Scenarios: because mortgage prices depend on a wide variety of consumer characteristics such as: income, credit, assets, property type, and other characteristics, misclassification and consequent miss-pricing, accidental or deliberate on the part of the banker or broker are very common in the mortgage industry especially if they have been in business less then three years.
Lenders vary the terms they offer to consumers based on loan amount, consumer’s income, types of employment, credit, assets and property characteristics that they believe affect the risk or cost of the loan to them. Lenders consider loans that are used to purchase a property for investment riskier than loans used to purchase a property that will be occupied as a primary residence by the consumer. To compensate lenders for the risk, these loans carry a much higher interest rate than that on loans for primary residences.
Here are some other factors that could have the same effect of an increase in interest rate:
The borrower does not have permanent residency in the US. There is a co-borrower who won't live in the home. There will be a second mortgage on the house. The house is a condominium with more than 4 stories. The borrower wants to avoid tax and insurance escrow payments on a monthly bases and wants to be responsible paying them.
The number of different types of characteristics are enormous because of all the different combinations of the features that define a specific market segment, such as those listed above. Mortgage shoppers need to understand that no lender operates in every market segment, and the narrower the market segment, the fewer the lenders. A lender may be very investor friendly catering their mortgage products to property investors for example. Another thing shoppers need to understand is that the lender offering the best deal in one market segment is very unlikely to be the one offering the best deal in another market segment. This is one of the major reason why mortgage brokers have become such a major part of the mortgage market in recent years. Since mortgage brokers deal with multiple lenders, they are positioned (as consumers are not) to identify the lenders and investors who operate in a particular market segment, and select the best of the available solutions for a specific transaction.
To shop effectively, consumers need to make sure that they locate themselves or their broker’s will in the correct market segment beforehand. Otherwise, the shopper does not know whether the information collected from them reflects the special market segment pricing or not. It also helps to have some idea of how your particular market segment is priced. Below is a list of the major market segment factors:
Mortgage Market Segments
All the factors listed below are used by at least some lenders in pricing mortgages.
Transaction Characteristics:
1. Loan Amount
2. Desired Lock Period in Days (15-30-60-90)
3. Down Payment (As Percent of Property Value)
4. Mortgage Terms
Property if Not Single-Family Detached:
5. Two-Family
6. Three-Family
7. Four-Family
8. Co-op (Building Is Owned by a Cooperative Association)
9. Condominium (Borrowers Owns Unit in a Project in Which Some Facilities Are Owned in Common)
10. Condominium More Than Four Stories High
11. Manufactured (House Was Not Built on Site)
12. Attached ("Twin", "Triplex", "Row")
13. Planned Unit Development (House Is Located In a PUD with a Homeowners Association that Charges Dues)
Loan Purpose if Not to Purchase for Occupancy as Permanent Residence:
14. Purchase Second Home (Vacation Home)
15. Refinance
16. Cash-Out Refinance (Loan is Larger than Old Loan Balance By an Amount Larger than the Settlement Costs)
17. Investment (Home is Being Purchased to Rent Out)
Documentation If Not Standard:
18. Alternative Documentation (Borrower Wants to Provide Payroll and Bank Statements Rather than Wait For Verification of Information from Employer and Bank)
19. Documentation for Self-Employed (Borrower Wants to Use Special Documentation Requirements Available for the Self-Employed)
20. No Income Verification (Borrower Doesn't Want Reported Income to Be Verified by the Lender)
21. No Asset Verification (Borrower Doesn't Want Reported Assets to Be Verified by the Lender)
22. "No Docs" (Borrower Doesn't Want Reported Income or Assets to Be Verified by the Lender)
23. No Income Ratios (Borrower Doesn't Want Income to Be Used in Determining Qualifications)
24. Streamlined Refinance (Borrower Wants the Reduced Documentation Requirements Available on Refinances Only)
Special Borrower Characteristics
25. Non-Occupant Co-Borrower (One of the Borrowers Won't Be Living in the House)
26. Subordinate Financing (There will be a Second Mortgage on the property when the new loan is made)
27. Non-Permanent Resident Alien (Borrower is employed in the US but is not a US citizen or permanent resident)
28. Non-Permanent Non-Resident Alien (Borrower is not a US Citizen and is not employed in the US)
29. Waiver of Escrows (Borrower wants to be responsible for payment of Taxes and Insurance)
And the most important consumer segmentation is the borrower's credit score. Lenders always check the borrower's credit, and usually rely heavily on a single measure of creditworthiness called the "FICO score".
FICO scores range up to 850, which is a perfect score. Some lenders, for example, provide the lowest prices only to borrowers with scores above 680. Those between 620 and 680 pay a rate higher on a 30-year fixed-rate loan. Between 600 and 620 they pay even more. And between 580 and 600 they pay even more, and more... There is no uniformity in how these scores are used, however, and other lenders may use different cutoff points.
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