Shopping for a mortgage can be a confusing undertaking, even for a
well-informed consumer. This report provides a brief overview of the
mortgage industry, defines terms that consumers come across during the
application process, suggests tips for evaluating advertisements for
mortgages, and lists important questions that consumers should ask
before applying for a mortgage.
There are many types of lenders and even more kinds of loans. The
variety of lenders, however, can be broken down into two basic types:
mortgage brokers and mortgage bankers. Mortgage brokers negotiate and
secure mortgage loans from third party lenders for a fee. A good broker
"shops" for a mortgage with favorable terms on behalf of the consumer
but cannot guarantee acceptance into any specific loan program and
cannot promise any specific loan terms or conditions. Mortgage bankers,
depository institutions, and financial service organizations, however,
usually provide loans directly to consumers, so they decide whether
consumers will be approved for mortgages and they set the terms of the
mortgage as well.
Mortgage rates and point structures can be hand tailored to meet
individual needs. Traditional 15- or 30-year mortgages are increasingly
being replaced by mortgages with more personalized features. Consumers
should consider the length of time they plan to stay in the home, how
much they can spend on a down payment, the rate of return the consumer
is receiving from other investments in relation to the mortgage's
interest rate, and many other factors. An experienced mortgage broker
or banker can be instrumental in explaining the choices available and
the pros and cons of each type of loan, so that the consumer can make
an informed choice.
Definitions
Mortgage Loan- A loan made to an applicant secured by real property.
Point- A fee calculated as 1% of the amount of the loan.
Prevailing Rate-
The mortgage loan interest rate set by the mortgage broker, banker, or
lending institution after issuing a mortgage commitment but prior to
the closing date.
APR- Stands for Annual Percentage
Rate of interest on a mortgage. Consumers should make sure that all
quoted interest rates are APRs.
Application Fee- Fee
paid to a mortgage broker, banker, or lending institution when applying
for a mortgage loan. The application fee includes the charges for
soliciting, processing, placing, and negotiating the mortgage.
Appraisal Fee- Fee charged to determine the value of the property to be purchased.
Credit Reporting Fee- Fee charged for a credit check on the mortgage applicant.
Commitment- Written offer to make a mortgage loan signed by a mortgage banker or lending institution.
Commitment Agreement- A mortgage commitment that is accepted by the applicant.
Commitment Fee- A
fee paid to the lender that binds the lender to make the mortgage loan.
A consumer pays this fee when he or she accepts the commitment.
Commitment fees can only be accepted for written commitments.
Commitment fees must be fully refunded if the title is not acceptable
or the appraisal report is unfavorable.
Lock-In Agreement- Agreement
between lender and applicant for a mortgage loan at a set interest rate
and point structure. This agreement must specify the time frame of the
lock in, the ramifications if the consumer provides incomplete or
incorrect credit information, and whether the lock-in fee is refundable
or if it will be applied toward the closing costs. The agreement must
also state the terms and conditions of refunds. Applicants that do not
lock in rates will pay the prevailing rate on their mortgages.
Lock-In Fee- Fee
paid to the lender in exchange for locking in a mortgage loan at a
specified interest rate and point structure. Consumers should be sure
to inquire whether the lock-in fee is refundable or whether it is
applied to closing costs.
Income Verification Mortgage- A
mortgage loan that is negotiated based, in part, on the applicant's
disclosure of his or her income, via pay stubs and income tax returns.
No Income Check Mortgage- A
mortgage loan that is negotiated without the disclosure of the
applicant's income. Generally, these loans carry much higher interest
rates than full income verification mortgages.
Reading Advertisements
Many consumers begin their search for a mortgage by reviewing printed
advertisements in newspapers or magazines. Television commercials are
also being used more frequently as a means of advertising mortgages and
other loan products. Consumers should be aware of the following
regulations that govern advertising within the mortgage industry and
should avoid brokers or bankers that do not follow these guidelines or
that use misleading language. When reading advertisements, consumers
should consider the following:
-
All ads must indicate that the broker is registered and that the broker
or lending institution will not necessarily make loans to all
applicants.
- No
mortgages may be advertised unless that mortgage is available to a
reasonable number of qualified applicants who respond to the ad on the
next business day. Consumers should watch out for "bait and switch"
advertising. Many disreputable lenders will advertise very low rates to
attract applicants but will not be able to actually offer the low rates
to a significant number of borrowers. If an advertised mortgage rate
looks too good to be true, it probably is.
- The Banking
Department of the State of New York considers it fraudulent to
advertise "immediate approval" or "immediate closing" of a mortgage
loan. Consumers should note that mortgages are subject to approval
based on credit history, income verification, appraisal value of the
home to be purchased, and other factors. Therefore, almost all
approvals are far from immediate. If an ad offers "telephone approval,"
find out the terms and conditions of that offer, because even telephone
approval is usually subject to subsequent verification of information.
Similarly, if an ad offers "no income check" mortgages, watch out for
much higher interest rates than those available for income verification
mortgages.
- The Banking Department also considers it
fraudulent to advertise a "no point" loan when points are payable at
commitment or closing. Consumers should know that some mortgage brokers
advertise "no point" loans but then charge several points at the
closing for their fee. For this reason, consumers should always clarify
whether the rate and point structure of a mortgage includes total
points.
Questions To Ask
Regardless of the loan you choose and whether you obtain it from a
mortgage broker, mortgage banker, or lending institution, there are
many questions that consumers need to ask in order to avoid unexpected
fees or terms. Consumers should avoid lenders who are not forthcoming
with direct answers.
Is Your Broker Licensed?
Make sure that any broker you use is registered with the New York State
Banking Department. Request the names of the lenders that the mortgage
broker uses for placing loans.
What Is the Manager's Name and Phone Number?
For all types of lenders, consumers should find out the name and
telephone number of a manager who can field problems that may arise
during the application process.
How Much Are Application, Credit Reporting, and Appraisal Fees?
Application fees can go by many names. One of the first questions to
ask is how much money it will cost to apply for a mortgage with the
company. Be sure to ask the amount of any application or processing
fees, appraisal fees, credit reporting fees, and any other
miscellaneous fees. Application fees vary, but credit checks average
about $65 per person and appraisals for single family homes about $250.
Are Fees Refundable?
How much, if any, of those fees is refundable if you are denied
financing, and how much, if any, of the fees is refundable if you
decide not to go ahead with the mortgage? Many lenders will apply
application fees to the closing costs, but keep in mind that is not the
same as a refund, because you will lose the money if there is no
closing.
Request Copies of Documents.
Credit report fees and appraisal fees are generally not refundable once
the work is performed, but lenders are required by law to provide
applicants with copies of those documents. However, consumers must ask
for them. Credit reports and appraisals may be reusable with other
lenders for 30 to 90 days. Also, note that an applicant who has doubts
about being approved for a mortgage due to bad credit can ask the
lender to perform a credit check to determine the likelihood of the
mortgage's approval, before ordering an appraisal.
How Soon Can You Close?
Many lenders advertise closings within a specific time frame. Because
time is of the essence in most home purchases, consumers should ask how
long it will take to get a mortgage commitment once the proper
documentation has been provided to the lender, and how long after
receiving a commitment will the closing occur. Find out the percentage
of closings that actually go through within the time frame stated by
the lender. Finally, ask the lender if any application fees will be
returned to you if a mortgage commitment is delayed because of
negligence on the part of the lender. Note that some lenders,
particularly those that charge high application fees, take on more
applications than can possibly be processed in a timely manner.
What Are the Interest Rate and Points on the Mortgage?
It is imperative to ask about the interest rate and point structure,
because these rates fluctuate daily. Be sure to ask whether the quoted
point structure includes all points, or just points to the bank, and
whether points are worked into the interest rate of the mortgage. If
you are interested in the quoted rate and structure, ask if you can
lock it in. Find out if there is a lock-in fee, if that fee is
refundable, and the length of time that you can lock in the rate.
