Shopping for a mortgage can be a confusing undertaking, even for a well-informed consumer. This report provides a brief overview of the mortgage industry, defines terms that consumers come across during the application process, suggests tips for evaluating advertisements for mortgages, and lists important questions that consumers should ask before applying for a mortgage.
There are many types of lenders and even more kinds of loans. The variety of lenders, however, can be broken down into two basic types: mortgage brokers and mortgage bankers. Mortgage brokers negotiate and secure mortgage loans from third party lenders for a fee. A good broker "shops" for a mortgage with favorable terms on behalf of the consumer but cannot guarantee acceptance into any specific loan program and cannot promise any specific loan terms or conditions. Mortgage bankers, depository institutions, and financial service organizations, however, usually provide loans directly to consumers, so they decide whether consumers will be approved for mortgages and they set the terms of the mortgage as well.
Mortgage rates and point structures can be hand tailored to meet individual needs. Traditional 15- or 30-year mortgages are increasingly being replaced by mortgages with more personalized features. Consumers should consider the length of time they plan to stay in the home, how much they can spend on a down payment, the rate of return the consumer is receiving from other investments in relation to the mortgage's interest rate, and many other factors. An experienced mortgage broker or banker can be instrumental in explaining the choices available and the pros and cons of each type of loan, so that the consumer can make an informed choice.
Mortgage Loan- A loan made to an applicant secured by real property.
Point- A fee calculated as 1% of the amount of the loan.
Prevailing Rate- The mortgage loan interest rate set by the mortgage broker, banker, or lending institution after issuing a mortgage commitment but prior to the closing date.
APR- Stands for Annual Percentage Rate of interest on a mortgage. Consumers should make sure that all quoted interest rates are APRs.
Application Fee- Fee paid to a mortgage broker, banker, or lending institution when applying for a mortgage loan. The application fee includes the charges for soliciting, processing, placing, and negotiating the mortgage.
Appraisal Fee- Fee charged to determine the value of the property to be purchased.
Credit Reporting Fee- Fee charged for a credit check on the mortgage applicant.
Commitment- Written offer to make a mortgage loan signed by a mortgage banker or lending institution.
Commitment Agreement- A mortgage commitment that is accepted by the applicant.
Commitment Fee- A fee paid to the lender that binds the lender to make the mortgage loan. A consumer pays this fee when he or she accepts the commitment. Commitment fees can only be accepted for written commitments. Commitment fees must be fully refunded if the title is not acceptable or the appraisal report is unfavorable.
Lock-In Agreement- Agreement between lender and applicant for a mortgage loan at a set interest rate and point structure. This agreement must specify the time frame of the lock in, the ramifications if the consumer provides incomplete or incorrect credit information, and whether the lock-in fee is refundable or if it will be applied toward the closing costs. The agreement must also state the terms and conditions of refunds. Applicants that do not lock in rates will pay the prevailing rate on their mortgages.
Lock-In Fee- Fee paid to the lender in exchange for locking in a mortgage loan at a specified interest rate and point structure. Consumers should be sure to inquire whether the lock-in fee is refundable or whether it is applied to closing costs.
Income Verification Mortgage- A mortgage loan that is negotiated based, in part, on the applicant's disclosure of his or her income, via pay stubs and income tax returns.
No Income Check Mortgage- A mortgage loan that is negotiated without the disclosure of the applicant's income. Generally, these loans carry much higher interest rates than full income verification mortgages.
Many consumers begin their search for a mortgage by reviewing printed advertisements in newspapers or magazines. Television commercials are also being used more frequently as a means of advertising mortgages and other loan products. Consumers should be aware of the following regulations that govern advertising within the mortgage industry and should avoid brokers or bankers that do not follow these guidelines or that use misleading language. When reading advertisements, consumers should consider the following:
Questions To Ask
Regardless of the loan you choose and whether you obtain it from a mortgage broker, mortgage banker, or lending institution, there are many questions that consumers need to ask in order to avoid unexpected fees or terms. Consumers should avoid lenders who are not forthcoming with direct answers.
Is Your Broker Licensed?
Make sure that any broker you use is registered with the New York State Banking Department. Request the names of the lenders that the mortgage broker uses for placing loans.
What Is the Manager's Name and Phone Number?
For all types of lenders, consumers should find out the name and telephone number of a manager who can field problems that may arise during the application process.
How Much Are Application, Credit Reporting, and Appraisal Fees?
Application fees can go by many names. One of the first questions to ask is how much money it will cost to apply for a mortgage with the company. Be sure to ask the amount of any application or processing fees, appraisal fees, credit reporting fees, and any other miscellaneous fees. Application fees vary, but credit checks average about $65 per person and appraisals for single family homes about $250.
Are Fees Refundable?
How much, if any, of those fees is refundable if you are denied financing, and how much, if any, of the fees is refundable if you decide not to go ahead with the mortgage? Many lenders will apply application fees to the closing costs, but keep in mind that is not the same as a refund, because you will lose the money if there is no closing.
Request Copies of Documents.
Credit report fees and appraisal fees are generally not refundable once the work is performed, but lenders are required by law to provide applicants with copies of those documents. However, consumers must ask for them. Credit reports and appraisals may be reusable with other lenders for 30 to 90 days. Also, note that an applicant who has doubts about being approved for a mortgage due to bad credit can ask the lender to perform a credit check to determine the likelihood of the mortgage's approval, before ordering an appraisal.
How Soon Can You Close?
Many lenders advertise closings within a specific time frame. Because time is of the essence in most home purchases, consumers should ask how long it will take to get a mortgage commitment once the proper documentation has been provided to the lender, and how long after receiving a commitment will the closing occur. Find out the percentage of closings that actually go through within the time frame stated by the lender. Finally, ask the lender if any application fees will be returned to you if a mortgage commitment is delayed because of negligence on the part of the lender. Note that some lenders, particularly those that charge high application fees, take on more applications than can possibly be processed in a timely manner.
What Are the Interest Rate and Points on the Mortgage?
It is imperative to ask about the interest rate and point structure, because these rates fluctuate daily. Be sure to ask whether the quoted point structure includes all points, or just points to the bank, and whether points are worked into the interest rate of the mortgage. If you are interested in the quoted rate and structure, ask if you can lock it in. Find out if there is a lock-in fee, if that fee is refundable, and the length of time that you can lock in the rate.