There is ample information to help today’s home buyer identify their personal financial needs and the kind of loans available to meet those needs. The most important steps in shopping for a loan, and the ones that may be the easiest to neglect, is knowing “how to compare various loan options and select a lender”.
Many prospective borrowers “shop” for a loan by calling various lenders and merely inquiring about the interest rate. Unfortunately, one cannot judge a loan by its interest rate alone. Let’s look at several items to compare:
Interest rates: We’ve already indicated that the lowest rate loan advertised may not necessarily be the best loan for you. Every loan is accompanied by a cost in the form of “points”. Usually called an “origination fee”, each “point” represents one percent (1%) of the loan amount. A lender measures the “return on the loan” by a combination of interest rate and points charged. Thus, a lower interest rate may require the payment of higher points. One must analyze carefully the combination that best meets your particular needs.
While initial start rates and points on Adjustable Rate Mortgages (ARM’s) can vary significantly, fixed rate loans are much the same for all lenders. The reason for the conformity of fixed rate loans is that each loan is generally sold into the secondary market, called Fannie Mae or Freddie Mac. It is these secondary market sources that establish the fixed rate loan standards. So, beware of the one rate quote that is much better than anyone else provides. . .remember, “if it appears too good to be true”, be careful, it usually is. This is just one more reason why it is important to select a lender that takes the time to explain all loan details to you from the very beginning of the transaction . . . rather than be surprised at the end of the loan process, when it is too late to do anything about it. Trust your intuition to determine if you feel that you can rely upon the information you are receiving.
Origination Fee vs Discount Fee: These terms are sometimes used interchangeably and can sometimes be used to confuse a borrower. An origination fee represents a “charge” for acquiring the loan. This most typically is quoted in “points” . . . one “point” equals 1% of the loan amount borrowed. Discount points or fee is most often found when acquiring a government loan (FHA or VA) as a way of acquiring an interest rate that is less than the current market rate. For instance, if one can acquire a 6% interest rate for zero discount points, a 5.75% rate might cost the borrower one (1%) discount point . . . in essence, the borrower is “buying down” the interest rate via the payment of discount points. A confusion can be created when a lender declares that “they will charge no discount points” but the borrower later discovers that there is still an “origination fee” to be paid, as is the case in most government financing.
Loan Fees: There are numerous other fees that typically accompany acquiring a loan. These can include appraisal, credit report, tax service, document preparation, and others. A borrower will also be charged escrow and title fees, impound account charges (if required or requested), homeowner’s insurance premiums, etc. These latter fees are sometimes not considered “loan fees” and are not quoted in your estimate of costs. A more accurate accounting will include ALL estimated costs.
Some lenders absorb some or all of the above mentioned loan fees in one “quoted” origination fee, which can then be higher than the normal one percent. The objective is often to make the borrower believe that no loan fees are being charged. Regardless of how the costs are identified, be aware that the borrower ends up paying them. In most cases, you may be best served by a complete enumeration of all the fees you can expect with your loan. Lending regulations requires a lender to provide a “truth in lending” disclosure and other disclosures within three days of accepting a loan application. While these initial forms represent “estimates”, they should provide a borrower a fairly clear picture of anticipated interest rate and costs for acquiring financing.
Loan Approval Process: This can be a major consideration in some circumstances. You want an accurate prediction of your ability to qualify and the time period for completion of the process. Depending upon the type of loan you require, it is reasonable to expect that most loan transactions can be completed within 30 to 45 days. Unexpected credit difficulties, the need to save additional cash or other unusual situations will lengthen this process. Sometimes, a longer escrow period is requested by either the buyer or seller in the transaction.
More and more loans are submitted on an “automated underwriting” basis. This technology can speed up the process considerably. The process, under some circumstances, also allows for more flexibility in approving borrowers. But there can be complications. The old adage “garbage in, garbage out” definitely applies to loan submissions via this technology. The information submitted must be eventually “documented” and if there are discrepancies it can cause confusion and delay in the process and sometimes a denial at the last moment. So, providing accurate information for submission to the automated program is essential.
One of the more frustrating circumstances for a borrower is to have the interest rate increase during the loan process. A reputable lender will commit to a quoted interest rate via a “lock in” procedure and guarantee the interest rate for a stated period of time. Most lock in periods are for 30 to 60 day periods. Longer guarantee periods can be acquired, usually requiring an additional fee for the risk factor involved for the lender. Misunderstanding can occur around when a borrower can actually “lock the rate”. Typically, a borrower must have entered into a purchase contract before being able to lock an interest rate. Be sure to understand how this process can best be used in your particular purchase or refinance situation.
Finding the Right Lender: You are the best judge of which lender will best represent you. Typically, you will trust your intuition as you talk to various lenders. Your final selection will probably depend on who you believe is knowledgeable, can help you understand all loan aspects, who has a variety of loan products from which to choose and who will be available to assist you through the entire loan process. A lender’s goal should be to help each borrower to acquire the “best” loan toward helping the borrower achieve his/her current and future financial goals. A purchase or refinance loan represents a major investment and borrowers must be confident that the lender they select will always function with the borrower’s “best interest in mind”.