COMPARING LOANS AND LENDER
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
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
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
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”.
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