Notes on mortgage shopping

I was meaning to post this a while ago, but these are the notes I took when I was shopping for a mortgage and closing the purchase of our first house. It was quite a process. As a first-time borrower, I felt like I was at constant risk of these expert lenders taking advantage of my naiveté, especially given all the stories from mortgage crisis. So, I spent a lot of time reading and double-checking. I try here to lay out what I took away from the process, without biasing it toward any decisions my wife and I made pertaining to our own situation.

Original Disclaimer: These are the notes of one person (me) who has bought exactly one home with exactly one mortgage. I am not an expert. I have no qualifications. I’m just a dude. This might be useful as a starting point, but I highly suggest you do your own research and confirm your conclusions with advice from an expert you trust.

Updated Disclaimer: I now actually work for a mortgage company! I’m not a licensed loan officer, so I’m still not qualified to give advice. But I know far more about mortgages than I did in 2017. I’ve made some slight updates, but the knowledge I’ve gained at work largely has validated my reflections from a few years ago.

Also, note that this piece reflects my experience shopping for a conforming mortgage. It’s the most common type of mortgage, but there are others:

• FHA loans – these have expanded criteria, to broaden access to home ownership.
• VA loans – these are for American Veterans.
• Jumbo loans – these are for loan amounts that exceed the conforming loan limit for the county the property is in.

I don’t have personal experience with these other loan types.

• Start well in advance
  • Check your credit reports and get your credit in shape. There are all sorts of seemingly arbitrary things that count for or against your score that you can control, given enough time.
  • Get your assets in the accounts of the person with the best credit at least 2 months in advance, including any gifts from family.
  • Read the Consumer Financial Protection Bureau’s toolkit (https://www.consumerfinance.gov/know-before-you-owe/). It is really comprehensive.
• Get a preapproval
  • If you’re making an offer that involves a mortgage, you’ll want a preapproval. This lets the seller know that you’re reasonably likely to be able to get the loan to close the offer.
  • If your realtor has a lender they work with, this can be handy for getting quick preapprovals as you make offers.
  • A preapproval is not a commitment from either the lender or the buyer to actually get a mortgage.
• Shopping for the mortgage
  • Figure out what you want.
    • Your major variables are closing costs, monthly payments on the early part of the loan and monthly payments on the later part of the loan. All of these feed into total cost of the loan — what you will pay by the end of the loan if you follow the payment schedule.
    • The general principle is that near-term cost reduction will increase your total cost. Certainty about monthly payments will also increase your total cost.
    • Are you more protective of your upfront (closing) costs or your monthly payments?
    • You do not have to pay 20% down, in most cases. If you’re paying less than 20% down, you will have to pay private mortgage insurances (PMI).
      • Borrower-paid PMI (BPMI) will cost you until you hit 20% equity. This may be longer than you think. If you pay 5% down, standard (straight-line) amortization will take roughly 10 years to hit 20% equity.
      • Lender-paid PMI (LPMI) costs less per month than BPMI, but you will pay it over the entire lifetime of the loan.
    • Do you see yourself in the home less than 10 years?
      • If so, options like lender-paid PMI and 10/1 adjustable-rate mortgage (ARM) could have some advantages.
        • LPMI promises higher cost years 10-30 in return for lower costs the first 10 years.
        • 10/1 ARM brings yearly fluctuations after year 10 (best if you’re going to move early or interest rates are high today).
          • ARMs have a whole bunch more options, so make sure you understand them.
          • The CFPB’s booklet is required reading (http://files.consumerfinance.gov/f/201204_CFPB_ARMs-brochure.pdf).
    • Find a lender who is willing to give you a bunch of quotes for different scenarios, ideally on CFPB’s standard Loan Estimate form.
    • If buying with your spouse, they will take the median credit score of both borrowers, and then use the lower person. See if you can qualify for your loan with only the assets of the person with the best credit. This could make a big difference.
  • Shop around
    • This will take you about 2 full days, if you want to do a good job. Just prepare for that.
    • Don’t be afraid of the credit inquiries (http://themortgagereports.com/413/credit-check-fico-mortgage-rates).
    • Follow the mortgage rates, and see if there are any clear upward or downward trends. This should influence your decision of whether to seek a “rate lock”. Lenders will pressure you to lock if rates are trending upward, so educate yourself. (http://www.mortgagenewsdaily.com/data/30-year-mortgage-rates.aspx).
    • Get official quotes on a CFPB Loan Estimate form.
      • Ask for this form specifically, not an informal worksheet (http://www.washingtonpost.com/wp-dyn/content/article/2010/02/25/AR2010022506626.html). Lenders often will give you their own proprietary quote forms, but these are not regulated and required to be accurate in the same way as a Loan Estimate.
      • This is the only way you can really compare quotes, and even then it’s tricky because lenders put certain costs in different boxes. So, separate the costs and credits that actually come from the lender, not taxes, insurances, and title fees, which they do not control.
        • Add up boxes A & B, and subtract any credits from box J. This is the loan’s relative cost for closing.
        • Add up principle, interest and PMI payments. This is the loan’s relative monthly cost.
        • Consider when important loan milestones are for the loan, and what happens afterward (20% equity for borrower-paid PMI, 10 years for 10/1 ARM).
      • Avoid paying a deposit until you have finished all your negotiations. Once you’ve paid deposit, you’ve conceded significant leverage.
      • So-called “discount points” seem to be the way lenders adjust loans on a fine-grained level. Loans we looked at had interest rates that varied in 0.125% steps, which seems like kind of a large gap. Lenders use points and credits to adjust costs on a more fine-grained level.
    • Play each lender against the quotes from the forms from other lenders.
      • They won’t take soft quotes without the official estimate form seriously, because they know soft quotes aren’t worth the paper they’re printed on.
      • Be professional, because you might have to go back to a lender you turned down if another deal fall through.
      • They will use all sorts of sales techniques. They will try to make you feel bad for negotiating. Tell them, “at the end of the day, I’m trying to find the best deal for my family for the next 30 years.”
    • Online reviews
      • People write reviews online when they experience problems, and they often tell the story to deflect blame from themselves. So take reviews with a grain of salt.
      • Compare providers by relative levels of complaints.
      • Understand who will be servicing your loan, and check their online ratings. Many originators immediately sell your loan and it can bounce around between servicers, which can be disruptive to automatic payments, etc.
• Preparing for closing
  • Make sure to leave plenty of time for closing.
  • You will likely be transferred from the sales agent you got to know to staff that is in charge of closing. Hold them accountable and if you have to, complain to your sales agent if they aren’t doing a good job. Although the sales agent doesn’t have direct power, they are the one who will be mentioned in bad Yelp reviews, so they will be invested.
  • There is a seemingly unending trail of documents to produce and paperwork to sign. Do it as expediently as possible.
  • Proactively reach out to the lender if there are any snags on your end or delays on theirs. Check-in regularly to make sure you’re still on track to meet the closing date.
  • Pick your accounts to use for your proof-of-assets for closing the loan.
    • Avoid any large transactions or one-off transfers. Now is not the time to receive big gifts from family members.
    • If you want to do something, run it by your lender, so they can advise you on any potential impact on underwriting.
  • The final deal doesn’t happen until you sign that paperwork. The disclosure form will be reprinted at multiple stages. Make sure nothing of import changes.