As the Consumer Financial Protection Bureau strives to create more transparency within the mortgage industry, there are crucial homebuying truths that endure — and knowing what they are can help you to be better informed as a homebuyer. But don’t expect to hear them from your bank.
1. You Can Get a Better Deal Elsewhere
Fannie Mae and Freddie Mac publish mortgagee guidelines that banks use to originate loans. In addition, individual banks may place additional credit requirements on these guidelines to minimize their risk. Let’s say that Fannie Mae has a maximum debt-to-income ratio of 45%, but the bank that you’re applying with has a maximum debt ratio of 43%, conforming to the CFPB’s definition of a ‘qualified mortgage.’ Your bank will likely never tell you can get a better deal elsewhere, even though you probably can. When you work with a bank, you are limited to their programs and their products. Direct lenders, brokers and some smaller banks have access to more credit, which ultimately dictates whether or not your loan will move forward.
Caveat: A better loan offer elsewhere is not a better offer if it won’t close because you are unable to meet the loan guidelines. So make sure that you can meet the requirements of that “better deal” before you go for it.
2. Time Is Not Your Friend
Once you’ve locked in your interest rate, the clock is running – and time is now indeed money. Let’s say you’re nearing the end of your 30-day interest-rate lock, and you need an additional 15 days. Your lender might charge you as much as 0.25% of the loan amount – on a $300,000 loan, that’s $750 more in fees because you took an additional week to get your financial documentation back to the lender. Lock fees vary, as do rate lock policies among banks. Be informed, ask upfront. After you have chosen to lock your rate, get your financial documentation back to the lender in 24-48 hours as needed in the process. While this is recognizably an inconvenience, it will ensure that your loan closes in the timeframe in which the interest rate is locked.
FYI: The reason why interest rate lock extensions cost you is because if interest rates go up and you’re locked in at lower rate, your loan is less profitable, and therefore less desirable, to the end investor.
3. You’d Better Have a Ton of Equity
Equity is a crucial factor when applying for a mortgage. If you intend to get the absolute lowest possible interest rate the market will bear you’re going to need a minimum of 30% equity in your home — ideally more. Mortgage pricing adjusters (factors that drive mortgage costs) — like occupancy, credit score and loan-to-value — begin after a loan to value of 65%, or 35% equity. That means if you have 35% equity to finance a loan for an owner-occupied home, the pricing is going to be quite a bit better than if you have 25% down, for example. Loan officers will normally tell the borrower the minimum amount they need to get a mortgage, but not necessarily the minimum amount they need to get a mortgage with the best possible combination of rate and fees.
Here’s a nifty calculator you can use if you want to see how much home you can afford. Your credit score also has a big impact on that number.
4. Appraisers Hold All the Cards
Mortgage professionals who work in a non-banking capacity will be more likely to tell you that appraisers do hold all the cards. Loan professionals who work for a bank have more rules and requirements for originating than non-bank loan officers. Additionally, many bigger banks own the appraisal companies, subsequently getting a piece of the appraisal revenue. The Home Valuation Code of Conduct that arose in the aftermath of the financial collapse took away the ability for loan officers to have any direct access to appraisers, including the ordering and scheduling of the appraisal. Currently, the entire appraisal process is automated to meet federal compliance regulations.
Now, you may qualify for a mortgage on paper with your credit score, income, credit and debt, but the appraiser’s opinion of your home’s value can kill your mortgage, even though a different appraiser’s opinion of value may give you a green light. Even a $5,000 difference in value is enough to throw a loan off-course. Should your appraised value not meet expectations, you do have recourse. Ask a real estate agent friend to pull comps identifying neighboring houses not included in the appraisal report. Next, ask your bank to have a “re-consideration of value” performed with the new information. In most cases, it’s a 50/50 shot, as the loan industry has been forced to give appraisers absolute power.
The more clarity and understanding consumers have about the loan process, pricing and general guidelines, the more information they will have to make an educated choice. Always best to continually ask questions — and then some — throughout the transaction.