The “Run, Don’t Walk” Checklist
Many folks believe getting a handful of Good Faith Estimates and picking the company with the lowest cost estimate is the right way to shop for a mortgage.
After 15 years in the mortgage industry, I can unequivocally say…boy, is that wrong!
Once folks learn the frivolity of using estimates, the most asked question I hear is, “If estimates are out, how do I pick one mortgage company over another?”. To answer that question, I put together the “Run, Don’t Walk” Checklist for mortgage shoppers. To use the checklist, remember, if the company or loan officer you’re evaluating, possess, says, or demonstrates any item on list: Run, Don’t Walk!
Well, here we go: The Checklist
1. It’s a bank…you know, Countrywide, Wells Fargo, Washington Mutual etc, Banks are not the low cost providers of mortgage money…big surprise, right! And they don’t have to disclose their overage (ie. YSP or SRP).
2. They don’t have you sign anything: no application, good faith estimate etc. (self-explanatory)
3. They have you sign blank documents. Signing blank documents is worse than no documents.
4. They are a friend or family member…once you learn the truth, so long friend.
5. They verbally lock loans…no lender lock confirmation. If they won’t send you a lender lock confirmation, they are hiding the YSP.
6. They play stupid or get irritated when you mention YSP (yield spread premium).
7. They promote loans with a pre-payment penalty. They make more YSP with a pre-payment penalty unless the lock confirmation shows otherwise.
8. They are uncomfortable or irritated discussing their compensation. If they can’t discuss and explain their total compensation without equivocation, run!
9. They push adjustable rate mortgages (adjustable rate mortgage) when your hold period is 5 plus years or when the market has obviously changed to an increasing rate market.
10. They push an interest only loan when your hold period is 5 plus years or when the market has obviously changed to an increasing rate market. Interest only loans typically are used to obfuscate the underlying adjustable rate.
11. They push an FHA and VA loans when they haven’t attempted a conventional loan approval first. Conventional lending now provides 100% and bruised credit programs which formerly were the main reason for the FHA and VA programs. They are now obsolete.
12. They push a sub-prime or bruised credit loan without attempting an “A” credit loan first.
13. They do not get immediate computer approval.
14. They insist on a personal meeting for application designed to pressure you into signing.
15. They promote a “fixed fee” or “No-Cost” loan…there is no such thing! Yield spread premium rate hiking will cost you thousands over the life of the loan.
16. They won’t disclose their exact total compensation. This includes all revenue generated by origination fees, mortgage broker fees, processing fees, and all “back-end” compensation also known as yield spread premiums (for brokers ) or service release premiums (for banks ).
17. They push an interest-only loan and tell you to pay extra principal payments.
18. They promote adjustable rate mortgages in an increasing interest market.
19. They can’t explain how the adjustable rate mortgage index and margin come together to make an adjustable rate mortgage rate.
20. They can’t explain what the initial, periodic, and lifetime caps on an adjustable rate mortgage are.
21. They don’t know the difference between a convertible and a non-convertible adjustable rate mortgage.
22. They push negative amortizing loans like the “pick-a-payment” or “option” adjustable rate mortgages so predominant in radio and TV advertising these days.
23. They don’t know the difference between payment caps and rate caps on adjustable rate mortgages.
24. They work part-time in the mortgage business.
25. They are new to the business and therefore lacking in experience.
26. They were referred by a website lead portal like LendingTree and others. These lending sites increase the cost of the loan. In the case of LendingTree, the increase cost is over $ 700!
27. They were referred by a real estate agent. They will probably be related to the loan officer or have some financial arrangement that will increase the cost of the loan for you.
28. They work for the builder mortgage company. See 27 above.
29. They work for the real estate mortgage company. See 27 above
30. They are also your insurance agent or financial planner. See 27 above.
31. They claim or allow you to assume, you can get the lowest rate simultaneously with a No-Cost or Flat Fee loan. An example is when you see a low rate on a Ditech commercial flashed right next to a flat fee offer of $ 395…they don’t go together, but you’ll only discover that after you call.
32. They use massive TV or Radio Ad campaigns. The cost of those ads gets re-couped by increased cost to you. Yield spread premium to the rescue!
33. They collect a huge deposit. As in the case of LendingTree, where they collect a NON-refundable $ 600!
34. They quote you a rate without first gathering important, rate-changing, information like, type of loan, credit score, loan-to-value, and income qualifying vs. stated income, etc.
35. They don’t mention mortgage insurance when the loan to value is over 80%.
36. They can’t get a loan done in less than 30 days.
37. They push “pay off your credit cards” with a Home Equity Loan. These loans are by definition adjustable rate loans usually based on the Prime Rate which changes with each Fed change…not good.
This checklist should be used with a healthy dose of common sense. I always tell folks to trust their instincts as well. Knowing that your “BS meter” is going off at high volume should not be ignored. Thid checlist allows you to ask the loan officer the question, get the answer, and then listen for the alarm to sound. Of course, if you don’t listen for the alarm and act on it, no amount of advice will help you.