After leaving Siren Security, I took some time to decide what I wanted to do next. Working for a salary and getting a 1-3% “raise” (inflation adjustment) was starting to feel like Little League and I was ready to take my career to the Major Leagues. Motivated by the allure of monthly five figure commission checks I jumped into a sales career as a Mortgage Loan Originator (MLO). I’ll skip the Boiler Room environment, the morning YouTube videos as motivation and the 6 days a week/70 hour work week for a potential future post but here some notes from your (consumer) friendly neighborhood Mortgage Loan Originator. A what? Yes, your (consumer) friendly neighborhood Mortgage Loan Originator!
The CFPB (or The Bureau) was created after the 2008 subprime mortgage crisis: their main purpose is to “protect consumers from unfair, deceptive or abusive acts or practices.” Why was the CFBP created? Many borrowers were signing up for mortgages without a full understanding of their rate and term and being charged excessive fees ($5,000 “retainer” fee) which went straight into the lender’s coffers. Thus, the CFBP now requires borrowers to receive a Loan Estimate.
2) The Loan Estimate
The Loan Estimate is a three-page form you receive after applying for a mortgage which outlines important details such as interest rate, term, monthly payment, and closing costs. It is a standard form across all lenders, and the purpose of this form is to allow borrowers to shop around. Asking a lender for a loan estimate is an inquiry not a commitment.
3) Lenders don’t have to pull your credit report for a Loan Estimate
Since lenders can no longer keep the mortgage buying process mysterious, they will try everything to get and keep you in their ecosystem. Some lenders will immediately insist on pulling a copy of your credit report during the initial application. The benefit is they can give you a better estimate with a score on file, rather than having to rework an estimate later because the credit score was lower than the consumer stated. Consumers believe multiple mortgage inquiries will ding the credit score, and lenders try to capitalize on this thinking because they know consumers are less likely to go elsewhere if credit has already been pulled. In actuality…
As long as you get them within the same 45-day window. To reiterate: The impact on your credit is the same no matter how many lenders you consult, as long as the last credit check is within 45 days of the first check. It all counts as ONE inquiry.
5) Keep your emotions in check.
Real Estate Agents and Mortgage Loan Originators are trained to sell on emotion. The more excited they can get you about the house/mortgage the greater the probability of you signing the deal. It’s ok to share your goals and financial picture, just don’t allow them to use your emotions against you to close a sale.
6) You’re going to pay closing costs.
There are two ways lenders typically get paid: closing costs (origination charges) and/or by reselling the loan/servicing once the loan closes. Many times, I would speak to a client who wanted the lowest rate with no closing costs. You wouldn’t dine at a restaurant and then be surprised when then waiter brought you the bill, right? Closing costs are no different. Now on refinances, closing costs are rolled into the new loan but…
7) …it’s still MONEY.
One tactic lenders use to downplay the cost is that it’s not coming out of pocket, BUT you’re still paying for it regardless.
8) There is never just one “rate.”
Interest rates vary, widely. In today’s market, rates can be between 2.375% to 3.99%. Your rate will depended on the product (i.e. 15 year loan or 30 year loan, fixed vs adjustable), and what lenders call the Four Cs (not cut, clarity, color, carat): Capacity – your ability to repay (think debt to income ratio) Capital – how much reserves do you have in the bank? Collateral – value of property Credit – FICO score The stronger you are in each of these areas, the more aggressive a lender can be with the rate. Since every person’s situation is different, whenever someone asks “what’s the rate?”, well, it depends.
Points (“discount points”) let you pay more upfront or buydown to get a lower rate (you can also take a higher rate and pay less in closing – lender credit). The cost of points is one aspect of the loan’s closing costs.
Two things to remember when it comes to points:
1) Costs wise, one point is equal to one percent of the loan. As an example, if your loan amount is $300,000 and you pay 1 point to lower your rate, you are adding $3,000 in closing costs.
2) Rate wise, one point typically lowers your rate by 0.25%. If the par rate (rate with zero points) is 4%, paying one point will lower your rate to 3.75%. In simpler terms, paying points is prepaying interest. Is this a bad thing? Depends on your situation, but generally the longer you stay in the property (to recoup costs) the more it makes sense to pay points. However…
10) …don’t be so focused on the interest rate that you forget about APR.
APR is the true cost of the loan – it factors in the financing cost. While it may be nice to see a 2.75% rate, seeing a 3.25% APR may give you cause to pause.
11) If you pay a 30 year loan like a 15 year loan, it pays off in 15 years.
Don’t focus so much on “getting a lower rate” that you forget the obvious, if you can afford to make additional payments, it may be better than refinancing and spending significant money on closing costs.
12) Lender-created urgency is a myth.
An MLO will use assumptive language to control the conversation and will create urgency to get you to sign the documents and move forward TODAY. Any MLO that is confident with their offer shouldn’t be afraid of a client shopping around. Interest rates do fluctuate, but a rate that is available today will most likely be there tomorrow, so don’t be pressured into moving forward until you are 100% certain. The real reason MLOs create urgency is…
13) …they only get paid when the deal closes.
The CFPB is great for consumers as it created transparency and gave consumers the right to shop around and not feel handcuffed to a particular lender. As a result, lenders can no longer collect exorbitant upfront fees and are paid when the deal is finalized. Since the market is more competitive than ever, Mortgage Loan Originators…
14) …should be asking you for your business.
Make no mistake about it, whether you enter your information online or call a lender for “information,” MLOs see it as a sales call and they will (and should) ask for your business. At that point, it’s up to you whether you wish to move forward. If you decide to go in a different direction and want an MLO to stop calling you…
15) …pick up the phone to stop the calls.
MLOs are not customer service, they are in a production-based business and most are working on commission. Being paid after closing means you may move forward today but it’ll be 30 to 120 days before they see payment, so they are going to ask for your business. If you want them to stop calling, don’t send their call to voicemail or pick up and hang up (it’ll just keep the calls coming), answer and tell them you’re going elsewhere. If you want them to never call you again, explicitly tell them “Opt me out” and as per CFPB they are not to call you again.
16) “It ain’t over til it’s over”
You can get a loan estimate, pay a good faith deposit to move forward, have the appraisal done and still decide to back out before closing. At any point in the process, as long as you have not signed closing documents*, you can walk away from the deal. You’ll upset the Real Estate Agent and the MLO, but it is your right to do so (you do forfeit any earnest money/deposit).
*On refinances with a new lender, you have a 3 day right to rescission, meaning you have three days from closing to cancel the transaction and stick with your existing mortgage.