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by Dave Uhlig Like me, you are probably bombarded by lenders and mortgage brokers falling over themselves to lend you money. Every day, my mailbox is flooded with junk mail from optimistic lenders informing me that they can lower my interest rate, pay off my bills and stop global warming... if I just pick up a phone and call them right away. As a mortgage professional, I know that these companies need someone to pay for their huge direct mail campaigns and TV ads. You know the ads I'm talking about.... the ones where they promise no lender fees or closing costs and then they flash a 500-word disclosure in .087 seconds in which they state that basically, they were just kidding. Guess who pays for that direct mail campaign and those catchyTV ads? Yep, it's you. Want to see just how much you'll pay? Click here (or right click and choose "save target as....") to view an actual estimate of loan charges that was sent to one of my clients by perhaps the biggest of the "Megalenders". You've seen their ads thousands of times and they are owned by the finance division of one of the largest car producers in the world. Click here to see my comments on these charges. I called the lender's rep who prepared the loan to question and posed as my client's friend, as she is a senior and wanted me to ask some questions about the fees. I asked the loan rep about some of the fees and what about those TV ads that promised "no lender fees" and "no closing costs"? The loan rep came up with more creative excuses than a five year old who broke his parent's prized art piece. He also proceeded to bad-mouth mortgage brokers (in an ironic twist) as being greedy and not disclosing true loan costs. Let me sort through the hype (and downright misleading information produced by the so-called "discount lenders" and the "Megalenders") and give you the inside scoop on the lending process. This is the information that lenders don't want you to know:
Have you heard the old expression "if it sounds
too good to be true, then it probably is"?
Companies that advertise these "teaser" rates
know that only a very small percentage of the
population will qualify for these loan packages.
Just call any company that advertises these
unrealistic rates and you will see what I mean.
They are just trying to get their phones to
ring. In my opinion, it reflects poorly on the
mortgage industry. It's nothing more than the
old "bait and switch" and in my opinion, it
should be outlawed as it is in other industries.
Probably not. Here's why: Banks offer mortgage brokers wholesale rates that are lower than those offered directly to their own customers. Why? Because there are many mortgage brokers and we provide banks with customers that they would not normally see. The rates that mortgage brokers get are low enough to provide a competitive rate to the client while having some room for the broker to make a profit for their services. Another important advantage of using a mortgage broker is that we have access to literally hundreds of lenders. This allows us to "shop" your loan, based on your unique needs in order to find you the best loan package. Finally, most banks offer limited loan packages and generally, they are only "full doc" loans, which means that many borrowers do not meet their very strict requirements. Borrowers with less-than-perfect credit or those who cannot document their income or assets are often left out in the cold.
That depends on many factors. First, let me explain the three ways that mortgage brokers can make money. First, a mortgage broker can charge a percent of the loan amount, which is generally referred to making money "up front". This amount varies, but is generally between one and three percent of the loan amount, depending on the complexity of the loan and the anticipated amount of work involved. We call this "up front" because if you are buying a home, this fee will add on to the amount of money you must have at closing. Second, a mortgage broker can make money "on the back end". Remember how I explained that banks make loans available to brokers at lower rates than they offer their own customers? Let's say that ABC Bank offers Mr. Buyer a rate of 7.5% on a mortgage. Mr. Buyer thinks he can get a better rate and calls a mortgage broker. After reviewing Mr. Buyer's credit and income, the mortgage broker sees that he can get Mr. Buyer a rate of 6.75% from ABC Bank. If the mortgage broker "sells" this loan to Mr. Buyer at 6.75%, it is called "par". If the mortgage broker adds .25% to the interest rate, he will get paid a commission by ABC Bank because over 30 years, ABC Bank will make thousands of dollars more than if the loan was at "par". We refer to this as "on the back end" because it does not come out of Mr. Buyer's pocket at closing. However, it must be disclosed on the settlement statement at closing that ABC Bank is paying the broker a commission. THIS IS IMPORTANT: If Mr. Buyer worked directly with ABC Bank, they would not have to disclose that they are actually selling the loan at a higher rate than Mr. Buyer qualifies for. The third way a mortgage broker makes money is by charging miscellaneous fees, such as a "processing fee", "administrative fee" or some similar-sounding fee.
Unfortunately, no. This is just another example of deceptive marketing by lenders and mortgage brokers. Lenders decide if they will loan money based on risk factors. The more risk involved for them, the higher return they expect (which translates into a higher interest rate for you). Risk factors that lenders look at:
Credit Score The bottom line is that there are loan packages available if some of these risk factors are present, but there have to be some positive factors to offset these negatives. For example, if your credit is bad, it is going to be harder to get 100% financing (which means the bank will charge you a higher rate). If you are putting 20% down, no problem. If you have good credit, you can get a "stated" loan (no-income-verification). But even in that type of loan, it will be tough if you have changed jobs outside your field within the last two years. So, it is true that people with bad credit can get a mortgage. And it is also true that 100% financing is available. But, combining those two risk factors together will limit the loan packages available and you will absolutely pay a higher interest rate. It is unfortunate that the public has been mislead into believing that anyone can get a mortgage. A reputable mortgage broker can tell a client within a day or two whether they will be able to get a loan. For those occasions when the answer is "no", the client should be educated on how to improve their chances in the future.
Possibly. With the rise in bankruptcy filings in the past decade, more and more lenders are offering post-bankruptcy loans to attract this segment of the population. Again, bankruptcy is a risk factor, so in the short term (less than one year) it will probably have to be offset by a fair-sized down payment or if you are refinancing, a large amount of equity in your home.
Take a look at that good faith estimate from that TV "Megalender". See all those lines that say t/b/d? They are either being lazy and not taking the time to calculate all your true costs or they are concerned that you will have "sticker shock" when you see the amount of money required by lenders at closing for such things as escrowing (pre-paying) your property taxes, homeowner's insurance, government fees for recording the documents and for doc stamps (basically, a tax by the State of Florida). All of these fees (commonly called "pre-pays") are required by every lender (with a few exceptions). However, not everyone is honest enough to give you an accurate quote of what these fees will actually be. I don't play that game with my clients. I would rather give a realistic estimate of what closing costs will be from the very beginning rather than a day before closing, when it is too late to back out. I am proud to say that each and every one of my clients has discovered at closing that my earlier estimates of costs are within dollars, NOT thousands of dollars!
First of all, this is what I call a "lazy good faith estimate". All mortgage brokers and lenders are required to provide a "good faith estimate" of what the borrowers total cost of obtaining a loan will be. This includes the lender's or broker's fee for doing the work, government fees such as recording the new mortgage and pre-paid reserves held by the lender (if you wish to have the lender pay your insurance and taxes for you each year). I provide all my clients with a true, line-by-line good faith estimate, which breaks down all fees in great detail, just like they will see on their settlement statement at closing. Sure, it takes me three times as long to prepare as the "Megalenders" lazy estimate, but I feel it is my duty to inform my client where every penny of their hard-earned money is going to. Here is my analysis of the "Megalenders" fees: Line 0801: Loan Origination Fee. $1,200.00. Yep, that's pure profit to pay for those nice TV ads. So much for "no lender fees"! Line 0802: Loan Discount. $125.00. Well, this is actually an error (optimistic view) or downright fraud (pessimistic view). 2.000% of a $61,000.00 loan is $1,220.00 (the same number as line 0801), not $125.00. When my client got to closing, which would it be? Would she have been charged $1,220.00 twice (lines 0801 and 0802) = $2,440.00? I have an idea, but I won't pass judgment here. So much for "no lender fees"! Line 0812: Ditech fee? $1,375.00. So much for "no lender fees"! Sure sounds like a "fee" to me! Line 1115: Document signing fee. $225.00. Are you kidding me? Unlike a local mortgage broker (like myself, but not all local mortgage specialists) who attends every loan closing with my client at an actual title company office, Ditech was going to do this entire closing by mail. They're going to charge my client $225.00 for her to read 20 pages of complicated instructions, sign her own papers, drive to a notary (and pay $5.00 per signature) and drop the package in a Fed Ex box? She's paying them to do all this work herself? So much for "no lender fees"! So how much would my client have paid in lender fees to this "Megalender" who promises no lender fees? If you believe that Line 0802 is actually $125.00 and %2.000 is an error, then she would have paid $2,925.00 in lender fees to a company that advertises "NO LENDER FEES". If you believe that Line 0802 is actually another $1,220.00 and the $125.00 is an error, then she would have paid $4,020.00 in lender fees to a company that advertises "NO LENDER FEES". Ironically, the loan officer for the "Megalender" miscalculated (optimistic view) or downplayed (pessimistic view) the actual costs of various government fees and prepays, which will in fact be higher. Makes you want to record that slick TV ad and read that 500-word disclosure very carefully, doesn't it?
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