Shopping for my recent mortgage loan was a pain. It shouldn’t be this hard! I had hope for Zillow, but a recent quote request for my same loan only got two offers from lenders, both of which weren’t very good. Ah well. Until it gets better, here’s how I would go about things if I could go back and do it again.
The Primary Goal
The most common pitfall with mortgages is the classic bait-and-switch. They lure you in with a rock-bottom rate and low closing costs… until signing day when your final HUD-1 statement looks completely different. Fees get changed, and by then is really hard to back out. Good Faith Estimates are not legally binding, and there is no real penalty for lying on them. In addition, interest rates change every day. If they don’t list their rates publicly, how do you know if the next day you’re still getting their “best” rate? “Oops, rates went up!”
I think the best thing to do is to be prepared, so that when you are ready you can go out and obtain some firm rate quotes, and lock it in. I would not sleep well until I had a loan commitment from the lender, an agreement on closing costs, and a signed rate-lock letter.
I. Prep Work
- Learn about mortgages. Many people rely on their mortgage broker to tell them what kind of mortgage to get. This is nice, if you have a honest, unbiased broker. This is also how people got talked into 0% down subprime adjustable rate mortgages. I hate the idea of signing up for something you don’t understand. Some reading suggestions: Fixed or adjustable? Loan term? Paying Points?
- Fill out a Uniform Residential Loan Application. You’re gonna have to provide this information anyway, so why not do it ahead of time. Download it here.
- Save and/or make copies of all your supporting documentation. For a full-documentation loan, you will need at a minimum your last two months of paystubs, bank statements, and investment statements. (More assets is better, but for simplicity I only provided my primary accounts and left out the ones with tiny balances.) You’ll also your last two years of tax returns. If you’re self-employed, they’ll want two years of those returns as well, including your accounting books for this year. Collect whatever else might be important, including any divorce or bankruptcy paperwork.
- Get a copy of your credit report from all three bureaus. Getting reports should be free. A score is also helpful, but not necessary since they will pull their own scores anyways. See here for ways to get a free credit score. Check for inaccuracies, and get them fixed as soon as possible. File dispute forms online at each bureau, and follow up.
II. Find Potential Lenders
This part should be pretty easy. Suggestions:
- National credit unions – Navy Federal, Pentagon Federal (1st and 3rd largest in the US)
- Local credit unions and banks
- Huge national banks
- Upfront mortgage brokers
- References from Realtor, family, friends
- Websites, both from aggregators and direct lenders
If you’re in the military or have direct family in the military, check out Navy Federal Credit Union for some great rates. I’m trying to sign up my family member right now in preparation for our next mortgage.
Some of this is personal preference, but I think most brokers and websites have access to the same general rates for common conforming loans, because they rely on what the secondary wholesale market is providing. Credit unions and local banks sometimes lend their own money, which means their rates might be better (or worse).
Next time: Comparing Offers, Negotiating, etc.
The post is a new addition to my Experiences in Buying A Home.
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Next mortgage?!!???!!!??? Sheesh, ain’t one enough??? 🙂
Anyway, I did everything I could to take every advantage of a first time buyer’s situation…..(kept shopping ’til I found the biggest incentive as a first-time buyer)…..but this was back in ’95. I have no idea how things are today.
I refi’d in ’01 and that was a great decision, but I went w/ a local bank who had the pants beat off everybody based on the day I waited to lock in. (called every morning at 9am to find the rates for the day)
Counting down from today, I have about 8 days left ’til I can effectively consider myself……..MORTGAGE-FREE!!!!!!!!!
Mortgages are great help when needed, but not good as a collector’s item, imho!! 😉
As someone who’s just started creating a nest egg to have enough for a down payment in 6 or so years, this article is incredibly helpful. Thanks for this series.
Hi Jonathan,
Not to be nosy, but didn’t your wife get the mortgage on this home — so when you are speaking of getting a mortgage, are you buying another investment property in your own name already?
I imagine shopping ahead for the loan would vastly smooth things out. Besides being in a harder spot to back out of on signing day, you’ve already settled on the house. Getting a loan set up and THEN going house shopping would probably work much better.
I look forward to seeing the second part.
After all the nonsense that’s going on in the commercial mortgage market, I’m not going to use anything other than my CU for my refi in a couple of years. Or when they’re rates come down to 5.75. As a matter of principle, I would rather support the financial institutions that help their community and have there customers as stakeholders, not just just customers.
Mainly, I just want to be prepared. Might be helping to buy another house within the next 5 years for my parents (not the whole thing). Or they might buy it themselves and I’ll just help out. Maybe property prices will drop and I can find an rental opportunity.
Also, NavyFed rates are great, and I actually found out about them in the middle of buying my house but didn’t have time to get a loan with them. I have family in the military, but they are not members. So they need to join first, and then I need to join as a direct relative. My friend is using them now for a refinance, I’ll see how he likes them.
Thus far, the information put forth is very good. I question the fact that you must supply thorough details with regards to your assets (such as your investment statements), as they should not be part of the equation (debt-to-income and credit play the main parts). I have not run across these myself.
Also, I have a good community bank locally here that I prefer to deal with. They have comparable rates to the local credit unions (which is very interesting to me, seeing as how credit unions do not pay taxes and are not required to reinvest money in the community by their regulators).
I liked the fact that my community bank also does not SELL loans (this apparently is very hard to come by now-adays). Nothing better than getting a 1/8% better rate, close on the loan, then get a letter that your loan has been sold to somewhere in Nebraska (no knock on Nebraska…only that I live in Pennsylvania) and you have to mail payments elsewhere and call an ‘800’ number for service, versus walking in to a brick-and-mortar office to deal with a CSR.
In closing, the point that you must clean up your credit report cannot be under-emphasized. If you have some blips on your credit that may negatively affect your credit score, a bank that still performs manual underwriting may be able to get around those blips if you have solid debt-to-income and the issues on the credit score are not too serious. Looking forward to Part II of this article!
Asset statements are mainly to prove you can afford down payment and all closing costs.
Yes, that’s what I meant by funding loans themselves, local institutions tend to keep more loans in-house and service it themselves. I suppose it doesn’t make that much difference, but it’s nice for customer service reasons.
No matter what the market we have ALWAYS locked our rate in. I’d rather risk paying a slightly higher rate than having a surprise. I don’t think I hardly know anyone who didn’t have a nasty surprise when they signed their loan docs. We’ve bought 2 homes and refied quite a few times. A rate lock makes the process immensely easier. We’ve never had any last minute surprises – except maybe for a few dollars in fees. OF course the beauty of rate lock is that you can sometimes just give up your deposit and take the lower rate if rates go down. I don’t think I have ever been in a situation when rates went down though. But I have had people look at me like I am crazy for locking in rates in certain markets. (The same people who got nasty surprises).
One mortgage is plenty for me, but I think we’ve had 6 mortgages in our young lives. We moved up and refied our rate over time from 8% to 5%. I am sure it is reasonable Jonathan will have another mortgage in his lifetime. 😉
Having been through the mill with mortgages from brokers and large national banks here’s what I’ve learned lately (changes every year)
1) You cannot exceed 10 mortgages. If you are buying a home your current home mortgage won’t count but if you are seeking an investor loan your current home mortgages counts in the total. HELOC’s count don’t forget.
2) Lender take off at least 25% of your net rental income. Please be advised to plan two years taxes IN ADVANCE for these tax form reviews. Take off 25% of your P&I and know that figure. Lenders always take the mortgage PITI off of your credit report and it’s inflated due to taxes and insurance included in the figure. Make them change it on the application. Check what they’re counting.
Also supply leases (no less than a year) with your documentation. If not leases, affadavits that your tenants are paying what they’re paying.
3) Go down and sit with the lender. Do not let them take an application over the phone. Last year they loaded in a “north” designation on my mortgage application which threw out any hope of a paper saver loan which I needed because “north” is a deadbeat housing area. Garbage in, garbage out. In my opinion, they prefer to talk you out of a face to face visit so they can tweak your income. Protect yourself against this type of treatment because it is rampant.
4)Good faith estimates must be provided 24 hrs. ahead of closing “if available” so that’s why you don’t get one until hours before closing. They know a tight schedule benefits them. The rule is weak on this.
5) If you are seeking a small loan against a property and want a HELOC tell the loan officer when he orders the appraisal to do a complete job. No junior in training appraisers. A quickie appraisal will be low and your HELOC interest rate will be high because of the resulting ltv from the quickie appraisal. The amount offered will be reduced as well.
Good luck.
Definitely check out pricelinemortgage.com …. I used it and got great service and a great rate. You do need to stay on top of your representative but it worked out great for us with a much better rate than we could find elsewhere. Check it out.
Jonathan,
Do you think you got in at the perfect time? If you could do it over, would you have waited it? Done it earlier?
Hey…what’s the deal with “buyer will pay closing costs”. I’ve been hearing this a lot these days. Seems to me, I’d rather have the equivalent taken off of the asking price.
Looking to buy your next “home” in French Polynesia or Bali? Need a maid?
Are you volunteering, James? 🙂
I did a search for “bungalow” on Flickr, and this image came up first. I thought it was beautiful, and almost surreal.
Part 2 has the type of bungalow I was actually looking for…