You Better Shop Around

Some 92% of homebuyers finance their purchase with a mortgage, according to the National Association of Realtors. Yet only 8% of buyers started their house hunt with a call to a bank or mortgage lender. Sound backward? It is. But Houston homeowners Anjuan and Aneika Simmons did it the right way. When the Simmonses started searching for a home, they examined their finances to determine how much they could afford to spend. “We went online and used different sites that had tools and calculators to help you decide whether you want a fixed- or variable-rate mortgage,” says Anjuan. “Then, we did the math on how much of our income we wanted to spend on our mortgage [payment].”

Anjuan, 35, an IT consultant, and Aneika, 36, a business professor at Sam Houston State University, took mortgage shopping just as seriously as the process of finding the right home. In today’s climate of stricter lending guidelines, taking an educated approach to finding a mortgage isn’t just smart, it’s essential. A 2009 study by the National Association of Realtors revealed that nearly a third of home buyers found their mortgage application and approval process to be more difficult than they expected. Another 2009 survey of real estate professionals suggested that more than half of failed home sale transactions fizzled due to mortgage-related issues, including the inability to qualify under tighter standards.

So, how should you shop for a home loan? And what’s the smart approach to selecting the right loan? Here are some steps to guide you:

Step 1: Do your “home” work–assess your financial status. Before meeting with a lender, gather a basic snapshot of all personal financial information the lender will request from you. Order a copy of your credit report and scores from all three bureaus: Experian, Equifax, and TransUnion. The Simmonses found errors they were able to correct before talking with a mortgage professional. Although a banker or mortgage broker will eventually pull copies of your credit reports, you should walk in knowing your score so you’ll know if the figure they give you seems off.

Also, be clear on how much cash you have available for down payment and/or closing costs before talking with a mortgage broker or bank. Gather financial documentation, including tax returns for the past two years, your most recent W-2 or 1099 forms, and the last two months of bank statements. Showing up prepared puts you in a power position and communicates you’re an informed consumer who  needs to be taken seriously.

(Continued on Page 2)
Most important, know how much you’re prepared to spend on monthly mortgage payments including other home-related expenses such as property taxes, insurance, homeowners’ association dues, and private mortgage insurance (necessary on loans with less than a 20% down payment). Mortgage lenders can actually overestimate the affordability of mortgage payment because their pricing may not take into account additional expenses. Line items such as savings, investments, and school tuition are not considered when mortgage lenders calculate what you can afford.

To figure out what you can actually afford, tally all monthly expenses and compare the amount to your monthly income. The goal is for total expenses, including all costs of owning your new home, to be less than 40% to 45% of your gross monthly income, according to conventional lending guidelines.

Step 2: Understand the product. Since the collapse of the subprime mortgage market, there are fewer exotic home loan products available. But there are still important mortgage variables a borrower must understand.

Research the type of mortgage that suits you best. Determine whether you want an adjustable- or fixed-rate loan. Most buyers may want a 30-year fixed-rate mortgage–unless they plan to move from the home within a short period, in which case a five-year adjustable-rate mortgage might make sense. “We knew we wanted a 30-year fixed-rate and didn’t consider anything else,” Anjuan says. “We typically avoid risk and knew we’d prefer to be locked in at a fixed rate, and not take the risk of a variable rate swinging high and driving the payment up.”

Next, decide whether you want to pay an origination fee or discount points (prepaid interest borrowers can purchase that lowers the amount of interest they will have to pay on subsequent payments). Also choose the time frame for the loan product you prefer; 15-, 30- or even 40-year terms are available. The interest rate and total amount of interest a borrower will pay over time increase proportionally with the term of the loan.

Step 3: Decide how you’ll loan shop. Figure out whether you want to shop for a loan on your own by collecting rate quotes from different banks or work with a mortgage broker whose job is to help you identify loans from a host of lenders. Shopping on your own isn’t likely to save you much money. Many bank loan representatives are licensed brokers who get paid a commission. As with mortgage brokers, if you pay a bank loan representative’s origination fee up front, your interest rate will be lower. If you elect not to pay it up front, you will pay it over time by virtue of a higher interest rate.

(Continued on Page 3)
Mortgage brokers generally have access to more lenders than buyers working on their own, according to the Federal Reserve Board’s online consumer guide “Looking for the Best Mortgage” . As a result, brokers may offer a wider range of loan options.  Also, says Yvonne Hemmingsen, mortgage broker with Diversified Capital Funding in Pleasanton, California: “Mortgage brokers are typically more flexible and available to you and your real estate agent. Brokers are often more readily available [than bank loan representatives] to provide preapprovals and payment quotes while you’re house hunting on a Sunday afternoon.”

Be warned: Although good, ethical brokers will try to find the most advantageous deal for you, they have no obligation to do so, according to the Federal Reserve’s guide. Also, “a mortgage broker shops around within the network they deal with,” says Greg McBride, senior financial analyst at Bankrate.com. “But is that really the best deal

you can score? The best deal may be something you find yourself. Cast a wide net, including your current financial institution and local credit unions.” Bankrate has a search engine that helps buyers see what rates are available in their area.

The Simmonses decided to go it alone. They were emboldened by the fact that a trusted relative was in the real estate business and that Aneika had bought a townhome before they were married. “We shopped around and decided that we would go to the lender that would give us the best deal,” says Anjuan. Their strategy was to get one approval and then use that documentation of their strong qualifications to seek other offers. “We wanted our bank’s pre-approval in hand to negotiate,” he continues. “Once we had that, we went through the process of getting quotes from a variety of other lenders.”

Step 4: Apply for loans and compare offers. When you submit a loan application to an individual bank or mortgage broker, they must offer you a written Good Faith Estimate (GFE) no later than three days after you apply. To facilitate comparison shopping, the federal Department of Housing and Urban Development (HUD) regulates which fees must be disclosed by a lender on a GFE and publishes the form that every lender must use to make these loan quotes or disclosures. Anjuan says, “In our mind, a loan quote wasn’t an offer until it was written down.” Anjuan and Aneika collected GFEs from five lenders before making a final decision.

(Continued on Page 4)
This year, HUD revised the GFE form to address concerns voiced by subprime-era borrowers who alleged that some lenders quoted a low interest rate or low monthly payment while not disclosing critical loan features such as heavy prepayment penalties and terms under which the mortgage payment would jump sharply shortly after closing. The new GFE provides a clear summary of the key loan terms on the first page. On the third page, borrowers now get a loan “shopping chart” that walks

them through the process of reviewing several GFEs. (Learn more about the new GFE and comparison shopping for home loans at www.hud.gov/respa).

Before comparing the loans you’ve been offered, look at all the GFEs to be certain they are based on loans with the same or similar down payment amount, origination fee, points (if any) and term (the loan’s time period in years). Also, know the FICO score each mortgage broker or loan representative used in preparing the quote; they should be virtually identical. Once you’ve made sure the loans you’re reviewing are similar, compare interest rates, other fees, and the overall monthly payment. Remember time is of the essence because interest rates change daily.

Your understanding of various loan qualities will be key when comparing mortgages. “We were mostly concerned about the interest rate,” says Anjuan. “We understood that you spend most of the mortgage paying off interest. The only other consideration that we had was the reputation of the lender. We wanted to work with a lender we had heard of, a bank that had been around for a long time.”

Taking control of their home loan shopping experience worked for the Simmonses. Their builder offered special rates and terms through the builder’s preferred lender, but even after negotiating, that lender couldn’t beat the deal the Simmonses had obtained elsewhere on their own. “It came down to numbers, and we just couldn’t get them to meet the numbers that we wanted,” Anjuan says. Their clarity regarding what they could afford put them in good stead. Neighbors have moved in and out of their subdivision, but the Simmonses have stayed put and have also been able to keep Aneika’s townhome as an investment property. For years to come, they anticipate being able to enjoy the fruits of their labor: a place for themselves and their three children, Koveil, 5, Kyric, 4, and Vicia, 2, to call home.

Tara-Nicholle Nelson is a real estate broker, an attorney, and an author of two real estate guides.