Mortgage shoppers
should have some understanding of the major steps involved in obtaining
a mortgage, which have been impacted by several recent developments. The
process begins with an initial contact with a lender, and ends with a
closed loan. While there are many differences in the ways that lenders
operate, they must comply with the same or very similar laws and
regulations, they use the same or very similar technology, and they sell
their loans in the same secondary markets. For these reasons, the
similarities among lenders in how they process loans are more important
than the differences.
Of course, the
scoundrels that dot the mortgage landscape have their own procedures
that may be very different. Potential borrowers who know what to expect
from honest lenders are positioned to smell trouble if they encounter
the very different approach of a scoundrel.
In writing this
article, I was helped greatly by Jack Pritchard of Home-Account, whose
knowledge of mortgage operations is second to none.
Step 1: Borrower
interviews lenders to select one with which to proceed. See my
concluding comment on making this selection.
Step 2: Borrower
contacts the selected lender to get price and perhaps other information
bearing on whether or not to proceed further with that particular
lender. The typical borrower wants a price quote. The lender wants the
borrower to provide enough information to permit a preliminary judgment
regarding whether the borrower will qualify, and what the price will be.
The borrower will respond, using
telephone or email, by providing undocumented information covering
credit, income, assets, and property,
Step 3: Lender
assesses preliminary information, and reports favorable results back to
the borrower with a request to move ahead. If the borrower assents, the
lender requests the borrower’s social security number so that the
borrower’s credit record can be accessed, and also asks for income and
asset documentation.
Step 4: Borrower
provides the information required to move to the next stage. At this
stage if not done earlier, borrower and lender agree on the type of loan
that best suits the borrower.
Step 5: Lender
assesses the borrower’s credit report and documentation, completes the
borrower’s written application form, prepares a packet of documents
including a Good Faith Estimate (GFE) and Truth in Lending (TIL)
disclosures. These disclosures contain the terms of the loan being
offered.
Since prices are
reset every day, the lender may provide the borrower an opportunity to
lock the prices before receiving the documents. (If the documents are
sent out over-night, the prices in them expire before the borrower sees
them.) The lender explains how long a lock period is needed to be safe.
The period has become longer recently, partly because of
regulation-induced delays in obtaining property appraisals.
If the terms in the
disclosure documents are not locked the same day they are set, the
borrower is vulnerable to gamesmanship by the lender in setting new
terms. Any changes in the terms from those in the disclosure documents
should mirror the market but because the borrower at this point is
heavily committed, the lender may be tempted to cheat. However, under
new disclosure rules that became effective this year, the lender must
issue a new set of disclosures if the APR on the new terms offered
differs from those on the documents already provided by more than .125%.
Further, except for credit report fees which are small, no fees can be
collected from the borrower prior to receipt of the final disclosures.
The re-disclosure
rule and the inability to charge fees prior to final disclosures
encourages honest lenders to encourage borrowers to lock immediately,
even though this involves some risk. Because the house has not yet been
appraised, the title has not been searched, and the borrower’s income
and assets have not been verified, an unexpected surprise on any of
those could invalidate the lock. Cheating lenders who aim to escalate
the price after the borrower is committed will not offer an immediate
lock.
Step 6: The lender
sends out the disclosure package, roughly 45 pages, that requires the
borrower’s signatures. The package also includes instructions regarding
documents that have to be returned with the signed disclosures.
Meanwhile, the lender orders an appraisal and verifies the borrower’s
income and assets. Either the borrower or the lender must order title
insurance.
The biggest
potential stumbling block at this stage is the appraisal. If it comes
back 5% below what was expected, it will probably increase the interest
rate or mortgage insurance premium, which will probably increase the APR
by .125% or more, which will require a delay and a new set of
disclosures. Recently I ran into a case where everything else was
perfect, but the appraisal report came back without an appraisal because
there were no transactions on comparable properties within reasonable
distance of the subject property. Obviously that killed the deal.
Step 7: This is the
closing, but it should begin 2 or 3 days before the day when the
documents are all signed. The borrower should have an opportunity to
review all the numbers on the closing documents and compare them to
earlier disclosures, without feeling pressured.
Concluding Comment:
In interviewing lenders today, I would ask whether or not they will give
me an opportunity to lock the terms on the GFE. The scoundrel will
probably tell you that “it is better to allow the price to float, that
way we can take advantage of a dip in the market to get a better price.”
What the scoundrel means is that as the loan moves toward closing, it
becomes too late for the borrower to back out, and the lender can take
advantage. Since borrowers can’t forecast rates any better than
professors, there is no advantage to the borrower in allowing the price
to float. I would also seek assurances that I will have access to
closing documents at least 48 hours before the settlement day.