You hear the commercials everyday on the radio. You see the billboards along the highway. 'No Points,' 'No Closing Costs.'
The mortgage industry has become extremely competitive in recent years, with literally tens of thousands of licensed brokers in California alone. How did it get this way? In recent years with interest rates at record lows it was an easy way for even inexperienced people to make a ton of money with little training, and no experience. The calls to refinance came pouring in. If you could answer the phone you could make good money in the real estate lending business.
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I'm not trying to slander real estate professionals. Most are very good at what they do. It is simply that in any field as over crowded as this one has become you will find those who will bend the truth, who will forget to mention certain things, prevaricate or outright lie to get your business.
Let's set the record straight, shall we? Nobody does this for free. I myself have seven children and a beautiful wife to support. I need to get paid. For my pay I provide a quality service. Most of us in this industry work on commission; the funny thing is I get to set my own commission on each and every loan, by charging 'points.'
You may have heard the term 'points.' What is a point? Simply this, a point is one percent of the loan amount. It's called origination, or points. If I charge 3 three points on a $100,000 loan it equals $3000. I get to decide how many points I'm going to charge. The law in most states limits the number of points I can charge. To go beyond that is usury, and simply not allowed. That limit is as high as 6% in California or even higher in some states. I myself very seldom charge more than three points. I also seldom charge less than three points. The number of points being charged is disclosed along with all other closing costs on the Good Faith Estimate or GFE.
A word on GFEs, they are an estimate, and some less scrupulous lenders really make the most of that fact. When I do one I try to be as close to actual costs as possible or even a little high. Sometimes things as simple as the day the loan closes or the amount a notary will charge can affect the actual amounts. On every loan I do I build in a pad of $250. The reason is simple. I estimate everything on the high side of reasonable and put in the pad, because I've never had a client complain that they got $31,000 at closing instead of the $30,000 they asked for. Now imagine you needed to refinance and take $30,000 cash out, and I delivered on $28,712 instead of the $30,000 you needed.
Make sure your loan professional discloses ALL fees and not just his own. Often they will show you only the fees that broker is charging and not put in the title insurance fee, or the escrow fee, or any other third party fees. Ask, "Are these all the fees I'll pay?" If the answer is "No," run don't walk to an honest loan officer.
Typically the only part the loan officer gets paid on is the origination. Of that they will usually get a split with the broker. I've seen splits that range from a flat $500, to anything from 25% to 85%. The broker in most places makes their money from the other fees. Application fees, processing fees, admin fees, tax service fee, underwriting fee, wire transfer fee, and more. Some are legitimate some are merely padding the price of the loan.
Points are not the only way we get paid. We also can get a rebate from the lender. Let's say I went to a lender with your file and they quote me an interest rate of 6.5%. I turn around and tell you I can get you 7%. For this I receive a one-point rebate from the lender. While at first glance this may seem sneaky and dishonest, remember I'm getting a wholesale rate. If you went there direct you would not receive the 6.5% rate. They offer it to me with room for me to make a profit. Some lenders will limit how much I can raise the rate from what they offer me.
The base rate that they offer is called 'par.' Those of you who are golfers will understand the term. It means basically the base rate. Even. No adjustment up or down. That rate can go up for a rebate, or it can go down, IF you buy it down. Often when doing this you are only buying it down for a specific period so beware.
These are the biggest two ways to get paid but there are others. Let's say you took out a 'Pay-Option-Arm' or 'Pick-A-Pay' type loan. This loan comes with the opportunity to choose one of four payment options each and every month for five years. You might choose to make a 15-year, or 30 year fully amortized payment. You could also choose interest only, or even a minimum payment based on 1% interest, with the rest of the true rate tacked onto the backside of your loan. Fully discussing this loan is a subject for another article, but suffice it to say this loan can be perfect or a disaster and you'd better understand the ups and the downs of it from the beginning.
On this type of loan all kinds of promises are made. "I can do it for Zero points! One point! 1.5 points!" Whatever.
The reason is the high backend rebate. It may not be charged to you directly but your still paying for it.
The rebates on this can be as high as 3.4 points. Selling you on a three-year prepayment penalty does that. It also means a higher fully indexed interest rate. If you're getting into this loan for the 1% payment only, then maybe you don't care. If your real estate market is going up faster than the loan amount is climbing, maybe you don't care. If you are getting into this type of loan, make sure you're asking about the rebate. If you are being charged points up front and the loan officer is getting a high backend rebate he's ripping you off. One or the other, or a reasonable combination of both. One point up front combined with a 2.5-point rebate is reasonable. It makes the total commission 3.5 points. Two and a half up front and 1.75, for a total of 4.25 is a little high, in most cases. Sometimes the amount of work involved justifies the extra pay. As a general rule I think three points is fair to all concerned.
How do you know what your loan officer is making on the back? It is disclosed, but you need to know what you are looking at. It's called 'yield spread premium' or YSP. Be careful of this though. Just because you don't see it does not mean it's not there. When your loan officer is selling you a loan from his own company, he does not need to disclose the YSP. The YSP is what the 'broker' charges over what the lender offers. If dealing direct with the lender there is no YSP. Even if the loan officer can get you that 6.5% and sells you the 7% instead, because he woks for the lender there is no YSP. Ask if he is a broker or direct lender. As with almost anything either can be sold well.
If he's a direct lender he'll say things like "Our money, our rules." Or "we can control it all because we don't have to play by the other guys rules."
If he's a broker he'll say "I deal with 30, 50, 200 lenders so I'll get you the best deal."
Reality is that while where I work we're approved with over 50 different lenders I'll price a loan with no more than half a dozen and usually I know before I begin who will get the deal. Each loan is different and one of the reasons I get paid is to know who does this kind of loan. Is it 'A' paper or sub-prime? Is it a single-family residence, or a condo? Is it investment property of primary residence? Do we need to do a stated income loan or full doc?
I get paid for my expertise. I get paid because I not only take your loan to the guy with the best interest rate but also to the guy will get it done quickly and efficiently. If for example you were borrowing $200,000 at 7.25% your monthly payment would be $1364.35. What if you turned down the guy who told you he could get it at 7.5% even though you thought he was the more qualified? You're chasing the rate. How much did that save you? At 7.5% that same $200,000 costs you $1398.61 per month. The difference is only $34.26 per month. Now let's say you go with the cheaper guy. He came in cheapest because he was chasing your business. When you don't know what you're doing the only way to compete is to try to undercut the other guy on price.
For $34 a month you get a guy who maybe can't even get it done. The lender has poor service so the loan doesn't close on time and someone else buys your dream house.
For $34 a month I'll take your loan to someone who will make it happen smoothly and quickly.
As with anything you get what you pay for. Quality service costs a little more. Beware of the guys who are either too cheap or too costly. Either is a sign to beware of.
Too cheap and they are chasing your business because they really need it. Maybe they are very good and just really want to give you, a total stranger the deal of the century. Possibly they are that good and just in a slump. It happens.
Too expensive and they are gouging you. Trying to make all their money off this one loan.
If they are in the business for the long term, they'll want to build a relationship of trust with you. I want all my clients to come back again and again. Ideally I'll help them into their first house. Refinance it for them so they can improve on it, and then help them buy a bigger and better house when they start growing their family. Maybe we'll refinance it to pay off the kid's college loans. Then when the last kid is safely on his own, I'll help them downsize into a beautiful condo by the beach.
This kind of relationship only happens when there is trust going both ways. That trust is only built by providing quality service and sound advice.
Your home is typically the single largest investment of your life. Don't trust it to just anyone. Make sure you understand how much you're being charged and why. Pay for expertise. Pay for honesty and integrity. Don't pay for inexperience or to pad a greedy loan officer's already overstuffed pockets.
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