Buying a home is an exhilarating and exhausting process, one that tests the wits and resolve of even experienced buyers. And some of the very people you turn to for guidance might not always have your best interests in mind.
Some of the industry’s sales tactics can make it unnecessarily difficult for you to shop around, or to claim down payment assistance packages designed to encourage homeownership.
To be clear, today’s mortgage market is a kiddie pool compared to the shark-infested waters of 20 years ago. The Great Recession led to a flurry of regulations that cracked down on the abusive home lending industry practices that created the mortgage meltdown of 2008 and the foreclosure crisis that dragged on for years after that.
Even so, borrowers can misstep and cost themselves money, and you can’t always count on others to look out for your best interests. As you wade into the market for a mortgage, here are three potential traps you should know how to avoid.
Mortgage trap: That long, amiable conversation with a loan officer is designed to keep you from shopping around
As mortgage volumes have slowed in recent years, some major lenders have adopted a new strategy: They draw you into an involved discussion with a friendly loan officer who keeps you on the phone for an extended period. The chat serves to build rapport, but also makes you feel as if comparison shopping is just too time-consuming.
“They definitely want to make that conversation long, drawn out. ‘What kind of pets do you have? What are your kids’ names?’” says Shawn Malkou, managing broker at X2 Mortgage, a mortgage brokerage in Chandler, Ariz.
In one case, Malkou spoke to a borrower who had locked in a mortgage offer with a rate half a point higher and closing costs that were $5,000 more than the competing offer Malkou could secure.
“When I said that, the client said, ‘It’s not that big of a deal,’” Malkou says. “That’s a massive difference. But there was still a lot of pushback from the homeowner about not wanting to redo that process. Most borrowers go with the first lender they talk to.”
Short-circuiting the shopping process is all too common, says Scott Harris, founder of Magnetic Real Estate in New York City and author of The Pursuit of Home: A Real Estate Guide to Achieving the American Dream.
“The reason people don’t [mortgage comparison shop] is because it’s so painful,” he says. “The pain of going through the mortgage process is real. People just say, ‘OK, this is a good-enough rate.’”
Benjamin Schieken, founder of mortgage shopping site Fincast, says the long conversations are an example of big lenders using consumer psychology in their favor.
“It’s smart business, it’s just not good for consumers,” he says. “You just need to provide six specific pieces of information to get a mortgage. You could make that conversation last less than 30 seconds. But consumers don’t know that.”
Part of the impetus behind the long conversations is for the loan officer to create camaraderie and persuade the borrower that the relationship outweighs any potential savings.
Avoid the trap
Carve out time to shop for a mortgage. While you might feel locked in after a long phone conversation, you’re still free to look for a better offer.
Get at least three offers from lenders. Shopping around for a rate that’s mere percentage points lower can potentially save you thousands of dollars over the course of mortgage repayment. Also, compare fees and types of lenders, such as a small or big bank, online company and a credit union. Similarly, you might check with a mortgage broker, who can shop offers from various lenders.
Bankrate can also help you shop for a competitive offer across multiple lenders. On any given day, it’s not uncommon to see Bankrate’s advertised rates at a full percentage point lower than on the lender’s own website. The point is it pays to shop around, and can cost you big time to take the first offer you see.
Be prepared for what’s actually required. A mortgage application requires six pieces of information: the borrower’s name, income and Social Security number, the property address, the purchase price and the loan amount. If the loan officer wants to carry on a longer conversation than that, feel free to politely let them know you need the call to move along — but with the knowledge that the person on the other end of the line probably has more practice at this conversation than you do.
All of this requires some time and hassle. Mortgage rates vary based on a number of factors, including your credit score, your debt-to-income ratio and your loan-to-value ratio, so you’ll have to provide some details to lenders. The upside: If you find a better deal, you might save thousands of dollars over the life of the loan.
Mortgage trap: The loan officer or mortgage broker tells you down payment assistance programs aren’t worth the hassle
Home prices remain at record levels, and that has created an affordability squeeze, especially for first-time homebuyers. There is a workaround, though: Down payment assistance programs, which are offered by every state as a way to encourage homeownership. Combine state programs with federal and local initiatives, and nearly 2,700 down payment programs are active nationally, says Rob Chrane, CEO of Down Payment Resource, a company that tracks homebuyer assistance initiatives.
Many buyers and even real estate agents are unaware of these programs. Chrane says that while 80 percent of borrowers using Federal Housing Administration mortgages are eligible for down payment assistance, just 15 percent receive it. That means buyers are missing out on real money.
But the amounts can range much higher. In some cases, buyers — with the help of savvy loan officers — cobble together six-figure down payment assistance packages. Dozens of down payment programs now offer more than $100,000 in assistance. In one particularly large example, the City of San Francisco extends up to $500,000 in down payment assistance to first-time buyers, reflecting a housing market where the median home sale price is well above $1 million.
The twist: Qualifying for down payment assistance takes time and effort. Buyers typically must complete a first-time buyer course. And maximizing the programs means applying not just to your state housing finance agency but also to other entities, such as your city or county housing program, your employer and perhaps the Federal Home Loan Bank.
All those steps and paperwork create extra work for loan officers, so many mortgage professionals don’t even mention the availability of down payment assistance. If the borrower brings it up, Chrane says, the loan officer might respond with an objection, such as “These programs take too long and sellers don’t like them,” or, “We don’t really do those kinds of loans.”
“Homebuyers never make it into the system because a loan officer effectively discourages them at hello,” Chrane says.
The stakes vary, but for some would-be buyers, the cost could be that they continue renting rather than becoming homeowners.
“It’s worth noting that this isn’t just extra work avoidance,” Chrane says. “It also intersects with bias — borrowers most in need of down payment assistance tend to be first-time buyers, lower-income households and disproportionately people of color. Discouragement at this stage magnifies disparities in homeownership.”
Avoid the trap
Research down payment assistance programs available in your state and municipality. If you’re a first-time buyer who meets the income requirements, start the process of applying and look for a loan officer or real estate agent who can guide you through the process.
Here’s where to start
To find your state’s program, check out Bankrate’s state-by-state guide. And Down Payment Resource, a private company, provides various resources for homebuyers, real estate agents and lenders, including an eligibility and assistance look-up tool.
Mortgage trap: Lender fees can vary widely — but not in an obvious way
The regulations enacted after the financial crisis have reined in the worst abuses in the mortgage industry, but lenders still have wiggle room to charge some fees.
“Lender fees are a big variable,” says Jeffrey Ruben, president of WSFS Home Lending at WSFS Bank in Wilmington, Del. “We are legally permitted to charge borrowers credit check fees, flood certification fees, tax service fees, overnight delivery fees, wire fees. We’re allowed to charge them, but we don’t have to charge them.”
And there’s the challenge, Ruben says. While his company doesn’t pass on such fees to borrowers, lenders can charge you for some or all of them.
Just to make things even more complex, some other types of fees, such as appraisals and government recording, are almost always passed through to the buyer. The average tab for closing costs is about $3,000, not including recording fees and taxes, according to LodeStar Software Solutions.
Avoid the trap
Regulators encourage borrowers and lenders to focus on the annual percentage rate (APR), which rolls in the costs of fees to calculate a more accurate rate. “You need to consider the cost of that loan, and not just look at the interest rate,” Ruben says.
Fees that could be negotiable:
•Credit check
•Flood certification
•Tax service
•Overnight delivery
•Wire fee
The bottom line
The days of predatory mortgage lending are long gone. The mortgage industry has shifted to subtler ways of discouraging you from getting the best deal. By understanding where the pitfalls are, you can avoid common traps.