One might imagine that the majority of prospective homebuyers would spend a great deal of time considering the financing needed to fund the purchase of what will likely be their biggest asset ever — their home. Surprisingly, however, that is not the case. Studies show Americans spend twice as long shopping for and researching their car purchase as they do the type of mortgage they want for their home.
The different types of mortgages, rates and lender fees, as well as the downpayment and credit score requirements, all play a huge role in the sum of money a homebuyer will ultimately pay to finance the purchase of a home. While most prospective homebuyers limit themselves to working with just one lender, they need to shop around to improve on the terms the first lender offers, just as they would for any other purchase. The difference between one lender’s offer and another’s can easily equate to thousands – if not tens of thousands of dollars over the life of a mortgage.
To accommodate the homebuyer’s inquiry into loans available from other lenders and counter the fact that lenders are all too willing to take advantage of ill-informed customers who do not understand they need to shop for a loan, new federal rules mandate the preparation of a three-page good faith estimate (GFE) by the lender. It is to be handed to the homebuyer on application for a mortgage so the homebuyer can use it to compare the terms and costs offered by multiple lenders. [For more information on the California version of the GFE form see February 2010, first tuesday article, February Forms.]
first tuesday take: If a buyer gets ripped off by a mortgage lender due to the buyer’s lack of research, the lender is not at fault as some would lead you to believe. An adversarial relationship exists between lender and borrower, as well as the lender and the buyer’s agent, since the lender is selling a product – a loan – to potential customers. Consequently, buyers have the liberty to accept or reject a lender’s offer. If the buyer does not accept the lender’s terms, he is free to walk away from the lender’s proposal without cost.
Thus, homebuyers are responsible for informing themselves by soliciting quotes from multiple lenders and comparing the alternative types of mortgages and loan costs. Otherwise, they cannot make intelligent, well-informed decisions as to which available loan program offers the most advantageous terms.
Equally as responsible for this comparison shopping is the buyer’s selling agent. Agents and brokers are the gatekeepers standing between the consuming population and the real estate marketplace, which necessarily includes mortgages. It is the selling agent’s fiduciary duty owed to their buyers to ensure that their buyers acquire the information necessary to make an educated choice among available mortgages known to, or knowable by, the agent.
Selling agents are obligated to shepherd their buyers through the loan information gap created by the client’s ignorance and the lender’s silence about the real estate market and available mortgage options. Simply put, advise and counsel your buyers to the full extent of your knowledge.
Agents need to arrange for — or at least advise and encourage — their buyers to make appointments with a minimum of two different lenders in order to acquire multiple loan pre-approval letters. Obtaining loan pre-approvals and submitting applications to multiple lenders on entering into a purchase agreement will not have a heavy adverse impact on a buyer’s credit score, provided he complete his “shopping” within a 45-day period.
Further, the cost for multiple loan applications is to be viewed as a “premium” paid to ensure the buyer he will actually receive a mortgage arranged on the best possible terms and at the least cost. Only after initially receiving different quotes from two or more lenders will a buyer be able to make that informed decision to start the loan process.
With the long-term financial impact that a loan brings, the best advice for a homebuyer in need of a mortgage is to “shop, shop, shop until you drop,” then decide on the best deal. [For more information on shopping around see May 2009 first tuesday article, Loan applications initiate the loan process.]
Re: Why Americans Get Ripped Off on Mortgage Loans, from The Wall Street Journal