What does a consumer need to do to get a fair loan around here anyway? Or better yet, how does one not get taken when searching for a new loan?
What covers the front pages of many newspapers or Web sites is a smattering of people who have lost their homes or otherwise suffered with an overpriced loan product -- everything from title companies profiting in a kickback scheme to lenders over-promising and under-delivering on closing costs and rates.
Let's lift the lid on the loan process to see what can be done about the mistakes people make. Just a note -- loan originators, loan officers and brokers all fit into one category that I call "loan salespeople." Their goal is to sell you a loan and, unfortunately, the polite MBAs are more dangerous then the loud and reckless "I-can-sell-a-loan-to-an-Eskimo" type.
Understandably, many people don't know much about the business of loans and loan salesmen are quick to sniff this out.
The first question a loan salesperson may ask is, "How did you happen to hear about us?" Depending on your answer, and the questions that will follow, he or she will figure out that you perhaps are the kind of person who hasn't done much research, you will listen to someone who referred you, will not shop around and will react to Web pages with pretty pictures and to postive friendly conversations.
The questions may not be part of a well-rehearsed script, but you can bet that hidden deep inside a loan salesperson's head is a check-off list, and the salesperson is checking off the items on that list as you talk. I have interviewed many loan officers and sat with them when they take calls or meet with people and, believe me, they will always have an impression about the borrower after a few minutes, and the odds are that impression will be pretty accurate.
So while the opening conversation may seem to be idle chit-chat, rest assured -- it's not. Your unguarded comments will be used to the salesperson's advantage. There are training courses out there for lenders that teach them how to ask friendly questions.
For example, you tell the loan salesperson you want the loan to upgrade a room. He or she will ask you why, and you innocently will say that you want your daughter to have a nice new room. "Oh, really, what color?" asks the loan arranger. Purple, you say.
Rest assured, as the process moves along, the salesperson will keep you focused and will continuously remind you that your goal is to "paint a nice new purple room." The salesman seems to understand your deepest needs, to truly care that the room is done professionally to ensure your daughter's complete happiness.
It's easy to forget that your goal is not a purple room, it's a loan at the best price and terms possible.
After the initial chit-chat comes the loan application, another step down the flower-strewn path, during which you supply more information that will be used against you later in the loan process. Loan salespeople call it "beating up the customer."
Without practice, research or doing much homework consumers blindly answer questions as if they are filling out a humorous quiz from Cosmopolitan magazine. Have you gone on the internet and downloaded a copy of a blank loan application, looked at the questions and understood them before talking to a loan salesperson? You should.
When I was in the business, I had an Assistant Attorney General type a loan application with all the paperwork done like a professional. I was amazed, and because she was on top of it despite her hectic schedule, a divorce, outstanding bills, she got one of the best rates and beat me down on the closing cost. I absolutely loved her.
Get A Monitor
One of the best ways to help yourself get the best deal possible is to use a "loan monitor." This is not a person who is a referral from a cousin or a broker who talks "really gooood". They are not mentors because your goal is not to start a new religion or climb up the loan-career ladder. But they are people who have experienced what you will go through, and are willing to look at your paperwork, and show you theirs.
Your loan monitor can be mom or dad, or a friend who has already fought the battle. They must be near enough to you so you can show them the paperwork and ask questions. Remember to discuss their history of frustration and how they overcame it. Go over their paperwork, start asking questions, write down your own check list.
When you see your monitor's old Deed of Trust, Note, their Conveyance paper, or their first Truth In Lending, make notes about them. You will be getting the same paperwork.
Of course, the best loan monitors are those who are in the business but who promise only to give you advice, not to sell you a loan, profit from referrals or sell your info.
It would be like taking your friend who is a mechanic to another garage. What magical things would you think can happen? You would probably get the best and fastest service at a reduced price. And all the while you would know you were not being taken for a ride. That is what I and my fellow "mortgage geeks" do for borrowers at www.loantactics.com.
It is most important to realize that the loan industry is basically a big machine, just like the health care industry, the automotive industry or the legal system. Many loan salespeople are the products of a "sink or swim" training program. Most don't even own their own homes, yet they make decisions for you.
But the industry does have web sites, computers, software, advertisements, happy managers, lawyers, lobbyists, all intent on doing some sort of business with or to you. The industry makes billions of dollars, and it always wants more. So comparison shopping is a must, but that doesn't mean you go to one place, wait, then go to another person and wait.
Get a copy of the first loan application (known as a 1003) and then send that to another lender or lenders with all the paperwork the first one asked you for and then compare the results.
By the way, it is a myth that your credit will be hurt by submitting multiple applications. If you do it within 14 days increments, it may count less then 25 points against your FICO.
Other important points:
The Appraisal Don't be rushed into an appraisal. Loan salespeople want you to sign up for one immediately. Yes, you want to move fast and I have seen orders for appraisals take one day up to several weeks depending on the location and workload. Some 30% to 40% of loans do not get funded for various reasons with some mortgage companies. That means that you will have paid for something that will not help you.
The Commission Don't ask your loan salesperson to reduce his or her commission right away. You start that conversation and you will be locked into the game of, "Well you don't expect me to do it for free, you wouldn't work for free, would you?" comeback. Your strongest defense is having done your homework and putting the prices in black and white on a piece of paper. Then you can beat up on the salesperson.
Check Them Out Go to ConsumerAffairs.com's mortgage section or your state government web site, or your loan monitor, and check the background of these companies and/or their brokers. Google it if you want to, you will be amazed what you will find out. Do this for the title companies too. I found a broker in MySpace.com, and reading his lust for drugs and girls made me not recommend him to my clients.
Paperwork Ask for paperwork. What kind? In this order:
• copy of your credit report,
• Good Faith Estimates,
• Truth in Lending,
• Loan Commitment,
• Lock Commitment,
• Preliminarys and HUD-1 (a day or more before closing).
You may not know what this pile of paper means, or how to use it to your benefit, but your loan monitor will.
Be ready for an emotional roller coaster. It really is true that your mortgage will probably be the most expensive transaction of your lifetime, so don't be surprised if it's emotionally draining.
It's important not to give up. I have seen it so many times -- people become frozen like a deer in the headlights. I can hear the silence on the phone or read the emotions between the lines in the emails. It is combination of information explosion and aimless direction that may kill your will.
Like sharks, the loan salesperson will smell your fear. And this is where "bait and switch" tactics are implemented, never in the beginning of your loan. It is a last-ditch effort to get the numbers on their side and extra dollars in their pocket.
You also need to remember that, according to Senate testimony on the Real Estate Settlement Procedures Act (RESPA), 83% of borrowers will get stuck with a higher closing cost and rate than promised. That should make your blood boil -- and, more importantly, it should make you vow that you will be ready and able to be among the 17% who get the deal they went after in the first place.
You can protect yourself. You can get the mortgage that's right for you, with a competitive interest rate, few to no points and low closing costs. But you have to work at it -- do your homework, get good help, pay attention and don't lose your nerve.
Dieter Brunner is a former mortgage broker. He is now a principal in the LoanTactics.com Web site.