Mortgage Counceling Guidelines

Many of our clients are "first-time" homebuyers so this article is tailored to that segment of our client base. If you are reading this as an experienced homebuyer, please be understanding if some of this information seems too detailed for you. Under the Common Law of Agency, one of the responsibilities of any "agent" is to protect the best interest of their principal. As part of our counseling role as buyer agents we assist clients to protect their interest in the mortgage loan process. Recognizing that we also have an ethical responsibility not to undertake specialized services for which we are not qualified, the amount of counseling provided will vary among agents.

Homebuyer's-Team asks clients to make contact with several mortgage lenders to obtain "Good-Faith Estimates" before an offer is made on a property. The primary reason we suggest getting "Good-Faith Estimates" is that it provides a homebuyer two critical figures they need to know before purchasing a property. Those two figures are (1) their total estimated monthly payment and (2) their total estimated funds needed to close. There are a number of additional reasons that action benefits clients in negotiating the purchase of a property as well as benefiting them in negotiating the cost of their financing.

Total Estimated Monthly Payment

Before making a commitment on the purchase of a property a buyer needs to know and be comfortable with the approximate monthly payment on the property they want to purchase. As an example, let's assume your current monthly payment for an apartment or on your present home is $900 to $1,000. Your comfort level on purchasing a property may be to limit your monthly mortgage payment to $1,000 or $1,200 even if you qualify for a much larger loan on a more expensive property.

For most homebuyers making a 5% or 10% down payment on a house, about two-thirds of the monthly payment is repayment of the principal and interest on the loan. The other one-third of the payment is made up of taxes and insurance.

Having an estimate allows you to make decisions about limiting the price range of the properties you consider to purchase as well as decisions about how much down payment to make on the purchase. The idea is to back into the price range of the property you want to purchase unless you already know exactly what you want in the location you want and what home prices are in that location.

Total Estimated Funds Needed to Close

This figure is the amount of money you can expect to bring to a title company the day you purchase a property. It is made up of (1) the amount of "earnest money" you provide when a contract is accepted, (2) the amount of the loan you obtain, (3) the charges you pay to the mortgage lender and title company to process the transaction, and (4) the amount of reserves for taxes and insurance set up in an "escrow" account to be held by the lender. If you have $5,000 or $10,000 in savings and investments you need to know that the amount of estimated funds needed to complete the purchase is not $15,000 or $20,000. By estimating this figure before making an offer you can again make decisions about the price range of property to consider or the amount of down payment to make to be comfortable in proceeding with the purchase of a property.

"Good-Faith Estimate" Interest Rates

When a "Good-Faith Estimate" is obtained before a contract is offered on a property the interest rate on the day the estimate is prepared is not as important as the relative difference in the interest rates among lenders. We suggest that buyers not commit to any lender until they are ready to make an offer on a property. If one lender is significantly higher in the interest rate they quote on a "Good-Faith Estimate" then we can address that when it is time to choose among lenders. Nearly all mortgage companies are structured with "loan officers" whose personal compensation is solely or primarily from the "origination point" charged on a mortgage loan. Our clients are encouraged to compare lenders by obtaining "par" quotes (on conventional, conforming loans). "Par" means a fixed-rate quote without any loan origination or discount points. Lenders that normally quote a one-point origination fee can simply incorporate that point into a slightly higher rate to make it a "par" quote. The "par" quotation puts the lenders on an equal basis for quoting rates. Unfortunately, the only time you will see a loan officer is when the application is completed. In those cases you may find having a "loan officer" isn't all that important. We encourage our clients to contact several lenders by telephone or through the internet to obtain "Good-Faith Estimates" to compare before providing any money to a mortgage lender. We assist clients by providing the names of mortgage lenders where our clients have been pleased with both the interest rate on their loan and the quality of service provided. What is important is the overall quality of service provided by the mortgage company, not just the efforts of a particular loan officer. As an exhibit to this article we have prepared a sample "Good Faith Estimate" to use in evaluating mortgage lenders. Please refer to this sample "Good-Faith Estimate" as you review the following:

Junk Fees

In the #800 series of Good Faith Estimates there are discretionary fees that have various names depending upon the mortgage lender. Whether they are called "processing fees", "warehouse fees", "investor fees", "loan administration fees", underwriting fees", or whatever, there will be a minimum of about $650 in "junk fees". We ask lenders to meet the competition by capping junk fees at $600 for our client. Sadly we have seen people bagged for $1,000 to $1,200 in "junk fees" that were discretionary and therefore negotiable. This is the most important section of the sample form to compare lenders since many of these charges are negotiable and within the control of each lender so we have provided columns to compare lenders.

Insurance and Escrow

In the #900 and #1000 series the lender is collecting funds in advance to insure that the property is covered by insurance for one full year in advance. Additionally, the lender generally establishes an "escrow account" to collect for taxes to be paid at the end of the year and for the renewal of the insurance policy after 12 months. Depending upon the time of year the escrow may vary in the amount of money set aside. Figures in this section of the form should be the same among lenders so don’t be concerned with differences of estimates between lenders. For that reason the sample form does not have blanks to compare lenders.

Homebuyer's-Team assists clients in reviewing the "Good-Faith Estimates" of several lenders. In that review we cover other issues to consider in selecting a lender.

Interest Rate Float Down

This is not an item on the "Good-Faith Estimate" but clients should be aware of whether a lender offers this service. Wherever possible, we want our clients to have the interest rate protection of the lower of the 30-year fixed-rate on the day they make application or the interest rate on the day they deliver a contact to the mortgage company. That "lock is based upon their qualifying amount and is good for a 30-day period from the time they make application. We do not want our clients to have to pay for this "float down" feature by paying a 1/4 or 1/2 point fee to the lender.

Certainly "good service" is a criteria in selecting any mortgage lender or any other service provider. Anyone who does not have a reputation of good service that can be confirmed through other agents is not recommended to our clients. We also believe that the underwriting function should be as close as possible to the mortgage office to insure good service. There are many fine mortgage lenders. Part of our fiduciary responsibility to our clients is to assist them in obtaining a mortgage loan at the lowest possible overall cost to them.

Sample "Good-Faith Estimate"

Lender #1 Lender #2

800 Items Payable in Connection with Loan

801 Loan Origination Fee ________ ________

802 Appraisal Fee ________ ________

803 Credit Report ________ ________

804 Tax Related Service Fee ________ ________

805 Flood Certificate ________ ________

806 Wire Transfer Fee ________ ________

807 Courier Fee ________ ________

808 Lender's Inspection Fee ________ ________

809 Underwriting Fee ________ ________

810 Administration Fee ________ ________

811 Processing Fee ________ ________

812 Mortgage Broker Fee ________ ________

900 Items Required by Lender to be Paid in Advance

901 _____ days of interest to the end of the month

902 Hazard Insurance Premium (one-year in advance)

1000 Reserves Required by Lender (Escrow Account)

1001 Hazard Insurance (___ months @ ______)

1002 Taxes (___ months @ ______)

1100 Title Charges

1101 Escrow Fee

1002 Attorney fee

1003 Title Insurance (buyer's portion)

1004 Courier Fees

1200 Government Recording and Transfer Charges

1201 Recording Fees

1300 Additional Settlement Charges

1301 Survey

1302 Pest Inspection

1303 Homeowner's Association Transfer Fee