A borrower’s mortgage worksheet:  who has the most advantageous financing

Entry into the world of real estate ownership is preceded by an intimidating hurdle: the ability to obtain purchase-assist financing. While preparing a loan application to submit to a lender is the catalyst which sets the machinery of the mortgage industry in motion, it is not the first step to be taken by a homebuyer. Before a potential homebuyer submits an application to any one lender, he should first interview multiple lenders (at least two) to compare their offers to determine the best financing options available to him. Forms exist for this interview process. [See first tuesday Form 320, below]

Editor’s note – This article and accompanying form deals only with fixed-rate mortgages (FRMs).  A homebuyer who wants to interview a lender about the more obstruse adjustable rate mortgage (ARM) products should refer to first tuesday Form 320-1.

Not all loans (or lenders) are created equal. For the curious, lenders offer a plethora of different mortgage types, rates and processing fees. Different lenders also have different down payment and credit score requirements. All these variations ultimately determine how much money a homebuyer will be able to borrow to purchase a home, and on what terms the financing will be arranged.

The inner workings of the lending industry are not understood by the typical prospective homebuyer.   Yet out of unquestioned trust of those who control money, homebuyers obediently limit themselves to working with just one lender. However, just as they would for any substantial purchase, prudent homebuyers should interview numerous lenders to determine the unique financing options offered by each. The difference between one lender’s loan package and another’s can easily equal  tens of thousands of dollars over the life of a mortgage.

Editor’s note – Ironically, studies show that the typical American spends twice as long shopping for and researching their car purchase than their mortgage. [For more information concerning a homebuyer’s need to research their various loan options before committing, see the May 2010 first tuesday article, Shop, Shop, Shop until you drop.]

But where does the homebuyer’s agent come into play? Equally as responsible for this comparison shopping is the buyer’s selling agent, called the transaction agent (TA) by the lenders. The TA owes a fiduciary duty to his homebuyer to ensure the buyer is advised and receives the information necessary to make an educated choice among available mortgages known to, or readily knowable by, the TA.

TAs need to arrange for — or at least strongly advise and encourage — their homebuyers to make appointments with a minimum of at least two different lenders to interview (and ultimately acquire loan pre-approval letters).  All government agencies make this recommendation and provide worksheets for homebuyers to quickly compare the quotes and conditions offered by different mortgage lenders.  A buyer’s credit score is only dinged once (5 to 8 points total) for shopping one or more lenders so long as all pre-approval interviews all occur with 15 days. [For more information concerning the oft misunderstood credit score, see the June 2010 first tuesday article, The FICO score delusion.]

Remember, an inherent adversarial relationship exists between a lender and borrower since the lender is selling a product – a loan – to potential customers. Buyers have the liberty to accept or reject a lender’s offer based on the representations made during the interview. If the buyer does not accept the lender’s terms, he is free to walk away from the lender’s offer without cost and take his business elsewhere. While lenders like to feel that they’re the ones who hold all the best cards, potential homebuyers have the ultimate ace up their sleeves – the ability to get financing from another lender – and TA’s would be wise to ensure their homebuyers know that they ultimately hold all the power.   Lenders are mere conduits supplying the public with cash which they too have borrowed but must lend.

Editor’s note – Current first tuesday students can access a fillable and saveable version of this form in the “first tuesday Forms Downloads and Updates” tab within their Student Homepage.