HOMEOWNERS GUIDE. Mistakes Nearly Everyone Makes. Dirty Tricks of the Mortgage Industry. Secrets About Your Credit Score

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1 HOMEOWNERS GUIDE How to Avoid the Mistakes Nearly Everyone Makes When Getting a Home Loan 5 Mistakes Nearly Everyone Makes 4 Dirty Tricks of the Mortgage Industry 3 Secrets About Your Credit Score Imnp 2 1 Must Demands of Any Mortgage Broker Set of Questions that Will Extract the Truth from Any Mortgage Broker This report is provided to you as a free service from: Vintage Lending (801) Clint@vintagelending.com

2 #1 5 Mistakes Nearly Everyone Makes Focusing Solely on Interest Rates Spending your day calling around asking what is your lowest rate? is almost always a waste of your time. First off, the guy on the other end of the phone has no idea of your credit or income qualifications for a loan. Secondly, you have no way of knowing if they are offering an honest quote or just trying to sucker you in. Keep in mind that a.125% increase in the rate only raises your payment $8 a month per $100,000 borrowed not a significant amount. Blindly focusing on getting a low interest rate may also lead to making the following sacrifices on important terms that can cost you thousands of dollars in the long run. Adjustable Rate Mortgage A rate-only focus can cause you to miss the fact that your loan is an Adjustable Rate Mortgage. This type of mortgage isn t always a good idea if fixed rates aren t much higher. Furthermore, rates historically go up as much as 5% in just a few years. Reduced Tax Benefits Focusing only on rate can also minimize your tax deductions on your mortgage payment. Oftentimes, getting that low rate requires mortgage insurance, which is not tax deductible. Alternative loan strategies can get you the same payment along with the tax benefits. Paying Points Sometimes, people will pay discount points to get a lower interest rate. A point is 1% of the loan amount that is paid to the lender to lower your interest rate. That s $1,000 for every $100,000 borrowed. This cost to your lender will usually save you.25% in your rate ($16/month on $100,000 loan). Usually, you ll need 5 years of monthly payment savings to pay for the cost of the discount points. Because the Blindly focusing on getting a low interest rate average home loan in America stays in place for only 4 years, most consumers who pay for may lead to making sacrifices on important discount points never get their money back. terms that can cost you thousands of dollars. 1

3 #2 Thinking a Bank Will Have the Best Loan Most people start looking for a home loan at their bank. Unfortunately, if you stop there, you limit your options for mortgage programs. If you continue your search to mortgage brokers, you will find that they have many more loan options that your bank has to offer. Each has its strengths. The bank can modify their rules if they want to do your loan bad enough. A mortgage broker uses many different banks to accomplish your goals. The graph below compares relative strengths for each in relevant categories. Number of Programs Number of Lenders Speed of Process Underwriting Flexibility Disclosure of Fees Motivation to Close Your Loan Speed of Exception Approval Creating Competition for Your Loan Bank Broker #3 Paying Junk Fees Sixteen different people work on your loan before everything is said and done. Each person will be paid, but how do you figure out which fees are legitimate and which are simply profit maximizing fees for the loan officer? Loan officers list fees and costs of your loan on a form called the Good Faith Estimate. They are required to get this form to you within 72 hours of filling out the application. These fees and costs should match your final closing costs when you close on your loan. Watch out for loan officers that emphasize the estimate in the Good Faith Estimate. If they don t match, you have to wait 3 days before your loan can close! You could lose your loan lock, or worse, the contract on the home you re buying. 2

4 Below, we outline which fees legitimately compensate the people working on your loan called Hard Costs. We also list fees that can appear to be legitimate, but aren t. This is because they only MAXIMIZE PROFITS for the loan officer and mortgage, they are called Junk Fees. You should refuse to pay for these. Hard Cost Fees Junk Fees Fee Name Actual Fee Ranges Fee Name What you should pay? Origination Fee 1% of your loan amount, paid to mortgage company for managing your file Administration Fee Don t pay any of your money Appraisal Fee $495-$595, unless property is a rental, add $200 Application Fee Don t pay any of your money Credit Report $15-$45 each (sometimes two are needed) Lock Fee Don t pay any of your money Underwriting $395-$995, fee varies by lender Broker Fee Don t pay any of your money Wire Transfer $5-$25, determined by lender Discount Points to Broker Don t pay any of your money Tax Service Fee $15-$70, determined by lender Origination Fee Anything more than 1% of your loan amount Document Preparation $50-$100, determined by title\escrow Company Credit Report Anything more than $15-$18 each Closing Fee $75-$150, determined by title\escrow company Appraisal Fee Anything more than $400- $500 for your home Recording Fee Flood Certification $40-$75, determined by your county Around $20, paid to lender Paying Any Junk Fee is TOO Much! Processing Fee $300-$495 paid to processor, can be broker staff 3

5 In short, a purchase loan will usually have closing costs in the 3% to 3.5% range. Loans larger than $250,000 have costs of typically 2.5% to 3.0%. A refinance will usually range between 2.5% to 3% in closing costs. If your closing costs are higher than these numbers or you are seeing junk fees, think about finding a better lender. #4 Choosing a Relative or a Buddy as Your Loan Officer Many times you don t know who to use as your loan officer, so you use a relative or a buddy. Before you choose a friend or relative as your loan officer, consider the following questions: Will trusting your friend/relative keep you from shopping around or scrutinizing the loan like you should? Will you actually speak your mind when you need to about the process? In the event you get frustrated, can you walk away if necessary? Can your relationship withstand the stress of disagreements? How might other friends or family react if negative feelings for either party emerge? How comfortable are you in having this person know very intimate details about the value of your home, how much you make, what you have in savings, or what your credit looks like? If you feel confident in your choice after carefully taking into account these questions, you probably can trust your friend/relative. You simply must consider and accept the risks. #5 Using Out-of-State or Internet-only Mortgage Companies Mortgage companies employ more advertising mediums than ever before. These ads can be very convincing, yet can you trust their claims? Today, mortgage companies use the Internet more than ever. They also have no problem soliciting you by telephone during dinnertime. Advertising via the Internet or telephone should be carefully examined. Things to watch out for when dealing with voices over the phone or words on an are: 1. Be sure they are accountable to you and deliver the deal they promised. If you can t reach out and touch them, chances are, they won t think twice about changing the deal. 2. Be sure you don t pay the added costs for processing the loan from a distance. Long distance phone and fax line charges, overnight shipping, out-of-state title company and appraisal services, all cost these companies more in order to close a loan than it costs a local company to do the same loan. The chart below compares the relevant issues between a local company and an out-of-state or Internetonly mortgage company. 4

6 Local Company Out-of-State Total Fees Paid Lower Higher Interest Rates Lower Usually higher Loan Officer Trust Higher Harder to establish Will I Get The Deal I Was Promised? More likely Less likely Working for Your Referrals and Repeat Business More important Advertising and Overhead Lower Higher Not important 4 Dirty Tricks of the Mortgage Industry #1 Offering a Rate They Know You Can t Have You have probably heard misleading rates advertised on the radio. So often the loan they are talking about is something for which only 20-25% of Americans can qualify. The rest of America will pay money to buy the rate down. Another trick is selling a 30 year loan which makes you think you have a fixed rate, when really you get an adjustable rate that jumps up after 1 to 6 months. The companies believe so much in their ability to convince you to stay with them after their bait and switch that they consistently use these tricks. No company should even mention rates until they know the specifics of your loan. Loan officers need to understand your credit and employment situation before they can effectively prepare a valid interest rate quote. #2 Adding Extra Fees at Closing Adding rates and fees is another tactic still alive and well in the mortgage industry. Some loan officers will make excuses about how fees depend upon what day of the month you close or on which lender, title, or escrow company is chosen. In reality a mortgage company has no excuse for not guaranteeing the fees they control: the origination and processing fees. As mentioned earlier, the costs and fees outlined in your Good Faith Estimate should match exactly with the fees that are charged when closing. Lenders know the time of closing is a particularly vulnerable time for you. You are less likely to remember details of your Good Faith Estimate. You also have reduced options at this point, as you have already invested your time and money with them. As a result, unscrupulous lenders know they have you in a corner. 5

7 This is especially true on a purchase, where you are dealing with tight time frames in your purchase contract. You think twice about potentially losing your dream home, or being sued by the Realtors or the seller of your dream home. Even on a refinance, many borrowers will bite their tongue, take the beating, and live with the lousy terms of the loan because they don t want to start the process all over again. Don t let this happen to you, take your Good Faith Estimate to closing and make sure the fees match. #3 Increasing Your Rate Just Before Closing Increasing the interest rate at the end of the process is another dirty trick. This happens 15 to 20% of the time. Make sure your interest rate matches the rate you have been quoted all along, or refuse to sign the papers. The loan officer wants to get the loan done as much as you do, so force them to give you the quoted rate. #4 Sweeping the Ugly Gotchas Under the Rug Some features of your home loan serve as necessary evils. These features can be great, because they allow you to get a home with less than 20% down or help you keep your payments down for the first few years of the loan. You simply need to understand all the features of your loan in order to make an informed choice. These features can sound like bad news to the people getting the loan, so loan officers tend to avoid direct conversations about them. Sadly, loan officers forget to disclose or explain these features 31% of the time. Find out if your loan has any of the following features long before you go to closing. Mortgage Insurance Mortgage insurance is used to protect the lender in the event you stop paying on the loan. Lending banks require mortgage insurance for loans greater than 80% of a home s value. The cost of the insurance is simply added into your monthly payment. Mortgage insurance is a good thing when you want to buy a home with less than 20% down. Just keep in mind the mortgage insurance part of your payment is not tax deductible. Sadly, loan officers forget to disclose or explain negative loan features 31% of the time. Prepayment Penalties We don t see these very much, but a prepayment penalty subjects you to a fee if you payoff your loan before an allotted time period. When a prepayment penalty is added to a loan, the interest rate is lowered. If you plan on keeping a loan for at least as long as the prepayment time period, then a prepayment penalty really doesn t matter and will only help you get a lower mortgage payment. If you refinance or sell your home before the prepayment period is over, you will be charged a fee of typically 5% of the loan amount. That s $5000 for every $100,000 borrowed. Ouch! Adjustable Rates Adjustable Rate Mortgages are popular because they offer interest rates that are lower than a standard 30 year fixed loan, usually by about.375%. On an Adjustable Rate Mortgage, the interest rate is 6

8 only fixed for a number of months. These are great for people who think they are going to keep their loan for 3-5 years. A growing number of people, as mentioned before, are realizing that the average loan stays on the books for only 4 years and don t want to pay the higher 30 year fixed interest rate. The first month after the fixed period ends, the rate and payment will go up! It could increase as high as 5% that month (can happen on a 5/1 ARM, the most common adjustable rate loan). You should be aware of the limits of the loan so you are prepared to refinance or adjust your budget to make the payments. If you are considering an ARM, ask your loan officer for the caps on rate increases. These numbers define how much the rate can go up each time the rate can change. On the popular 5/1 ARM which has a fixed interest rate for five years and will adjust one time per year after that the caps are usually 5\2\5 which means the rate can increase a maximum of 5% the first rate change (this is the first 5 of the 5\2\5), a maximum of 2% each of the rest of the rate changes (the 2), and a total of 5% above the start rate (the last 5 in the 5\2\5). 3 Secrets about Your Credit Score Shhh 93% of loan officers don t even know these! On a purchase, your credit score determines your rate AND how much money you must put down. On a refinance, it determines your rate AND what percentage of the home s value you can borrow. Credit score also determines how much financial documentation you must provide to get your loan. You will want to carefully protect your score. Before we tell you the secrets, please don t let more than one company pull your credit report as you are shopping for the right loan\mortgage company! Ask for your credit scores and for a copy of the credit report. Repeatedly accessing your information can cost you up to 12 points of your score per credit check. This mistake could cost you your loan approval! Repeatedly accessing your information can cost you up to 12 points of your score per Now, the secrets Secret #1: Keep the balances of your credit accounts at 60% or below the high balance or credit limit. This increases your credit score immediately. credit check. Secret #2: Draw credit from quality companies. Consider two people with the exact payment, balance, and charging history. Let s say person #1 is utilizing Sears, Mervyns and Penny s. If #2 were charging with Nordstrom, Neiman-Marcus and American Express, the scores of #2 would be higher. 7

9 Secret #3: Reduce unsolicited credit offers and insurance quotes. If you only need 10 to 15 points higher on your score to get the loan, you can do something about it right now. And, you can see a difference in five business days. Go to This is a website that is sponsored by the three credit bureaus. By filling in your name, address, birthday and social security number, the bureaus will no longer allow you to receive unsolicited credit card offers or insurance quotes. About 70% of the time, the applicants to this site see an increase in their credit scores in just five business days. If the credit card opt-out doesn t get you what you need, as much as 15 points. rapid-rescoring is another popular way to improve scores. This is a quick but somewhat expensive way of removing errors on your report. After obtaining proof of an error, the bureaus then recalculate the scores based on the updated information. This usually costs around $60 per credit line update for each of the three bureaus. Most times the scores go up, but not always. Usually, being able to get a better loan justifies the expense of these services. 2 Reducing unsolicited credit offers and insurance quotes can increase your credit score Must-Demands from Any Loan Officer #1 An Explanation of All Terms of Your Loan Your loan officer should not surprise you at loan closing. Insist that he or she explains the terms of your loan and how they affect your future. Before you sign the closing papers, you should know the important facts about your loan. Is it a fixed rate or can the rate adjust? How long is it fixed for? How much can it go up? Is there a prepayment penalty? If so, for how long, and how much will it cost if you have to pay it. Is there mortgage insurance? Will the loan balance go down, stay the same or increase over time? #2 Guarantees that Fees and Rate Will Match Quotes You can t afford a bait and switch. Your options are limited if you discover at closing you ve been tricked. You need to know long before closing that the loan officer can be trusted to give you the rate and fees that he or she promised. Your rates and fees should be guaranteed, and if they are not, you should be compensated. 8

10 1 Set of Questions that Will Extract the Truth from Any Loan Officer? How will you decide which loan is best for me? This question will help you determine if the mortgage company is acting in their best interest or yours. According to industry experts, less than 17% of loan officers actually find out the clients future needs and then search for the best loan for their client. Most loan officers will ask a few questions about what you are looking for, and then find the easiest loan that will fit what you asked for. A much better approach for the mortgage company is to: Ask a series of discovery questions that will uncover what your true needs are in terms of rates, payments, closing costs, fees, credit issues and more; Narrow down the list of options that might fit your needs; Review the pros and cons of each option; Help you choose the loan that is in your very best interest; Review the entire process they will go through to get the loan; then Review what they will do to avoid the pitfalls and annoyances of getting a mortgage.? When will I be told about the ugly stuff such as pre-payment penalties, mortgage insurance, if my loan balance doesn t pay down or can increase, interest rates that are not fixed, etc.? If your loan has features that loans officers tend to avoid talking about, you need to know about them when your loan is locked, and long BEFORE you re closing. No surprises. When these features are included, loan officers forget to talk about them about 31% of the time. According to industry experts, less than 17% of loan officers actually find out the clients future needs and then search for the best loan for their client. 9

11 ? Do you guarantee your Good Faith Estimate will match the final total of fees? What is your guarantee? Can they be trusted to charge you only what they promised? Remember, closing fees charged by the broker only match the promised fees 70-80% of the time. Find out what your loan officer does, and if they happen to guarantee this amount, what is the guarantee? You don t have time to wait for re-disclosure of the changes. Your loan lock, your rate and payment, and your purchase contract are all on the line.? Do you guarantee the rate you quote me? Can they be trusted to give you the rate promised all along? There are so many excuses why they don t, but they all boil down to the loan officer wanting to make more money. Trouble is, about 15-20% of the time, the final rate doesn t match the quoted rate.? What s your rating with the Better Business Bureau? And do you have any complaints against your company with the state? Where can I find your listing? According to the Better Business Bureau, mortgage lending is the second most inquired about industry. Yet, most home loan shoppers don t think to check with the Better Business Bureau or the department for your state that regulates mortgage companies. If you don t check, you are asking to get burned by the bad guys. The cost of getting burned on your mortgage will range anywhere from losing earnest money on a home you really wanted to buy ($500- $20,000) to paying 3% of your loan amount in closing costs (to trade your bad loan for the one you should have had in the first place) to lawsuits with a seller or the realtors in the transaction. Be careful, and check around. This doesn t guarantee your mortgage company is great, just that someone hasn t yet made the effort to complain. If you still have questions about any part of this report or your loan process, feel free to call us at (801) We'll be happy to answer your questions, and steer you in the right direction, even if you don't need a home loan from us. If you are ready for a loan consultation right now, give us a call at (801) First and foremost, let's make sure you never make a mortgage mistake again! 10