At Goldman Sachs I covered large banks and mortgage lenders (among other financial services companies), and learned the ins & outs of how they make money. When I set out to get my first mortgage that came in handy - the industry was frankly very dirty and it took professional expertise to not get hosed.
Hidden fees, poor disclosures, misaligned incentives and professionals saying stuff that was straight up false abounded.
Shopping for a mortgage felt like this:
There’s still a lot you have to watch out for today, but the Dodd-Frank Act has made it easier. (Dodd Frank = the major piece of financial legislation that came out of the Great Financial Crisis of 2008)
The Dodd-Frank Act made it illegal for brokers to get paid more if the client were put into a higher cost loan.
Yes, that used to happen, all the time. (Sidebar: the insurance industry still works like this, which is ludicrous, but that’s a topic for another post.)
Here at AboveBoard we are not mortgage brokers. (I go into how we work at AboveBoard here, but the short of it is we have a fee-only fiduciary wealth management business and a licensed independent life & disability insurance brokerage)
However, the topic of getting a mortgage comes up often enough with clients that I thought it made sense to write about it.
Side note for NYC coop-dwellers: always first ask the question, "do you handle loans for coop apartments?". You will save yourself a lot of time and hassle by finding out asap if a lender just doesn’t lend on coops (some do not, but overall you certainly have options).
1) Call different providers of mortgages to get initial price indications
Your goal is to get a picture of what’s available to you in the market. Different mortgage providers have different business models, can do different things for you, and often have different approaches to what they’ll offer you.
That’s why I recommend checking at least one from each of these categories:
Large banks - I generally check Wells Fargo and Chase, but you can check other large banks if you want (know that Wells & Chase are the largest in the market, which is why I like to start there).
Don’t assume that if you’re working with a mortgage broker they are checking the large banks for you. The large banks shut down their work with brokers coming out of the financial crisis, so I’d recommend calling directly to make sure you know what they’ve got.
Non-bank lenders - Quicken Loans is an example of a lender that’s not a bank. To be clear, they’re not a broker. Sometimes people get confused about whether they’re talking to a broker or lender (a broker represents many lenders, whereas a lender is actually the entity that would lend to you, and is not going to look elsewhere for you).
Local / regional bank - Checking out a local branch’s offering in one more channel to check (you don’t have to go in, you can just call them). You might find there’s some overlap between this category and brokers, i.e. brokers who represent banks in this category.
Broker - this can be a local brokerage you find through Yelp or personal referral, or it can be an initially-online venue, like Zillow. They don’t actually lend money themselves, they work with different lenders and route you to one.
As noted above, remember that many larger banks don’t operate through the broker channel anymore, so it’s good to check them yourself.
I often find that the large banks are faster to adjust their rates - when rates are going up, a credit union that hasn’t quite gotten around to increasing prices is often the best option, and when rates fall, it’s the large banks that often quickly reflect that in their rates and deliver the best option.
What Happens When You Talk to Mortgage Professionals
When you talk to mortgage professionals, they will ask you questions about your income, your assets, any existing debt you have, your credit score, and the property you’re seeking a mortgage on (approximate market value, how you use the property, how much money down, etc.). They are not being nosy, they need this info to give you any reliable indication of pricing.
The rate is key, but it’s only part of the picture. You want to make sure they’re quoting you with zero points and you want an estimate of closing costs.
The Dodd-Frank Act produced something that will help you here: The Loan Estimate. The Loan Estimate might be my favorite piece of consumer financial protection disclosure. I love it because it’s nicely designed to present useful information, and you don’t need a law degree or professional finance experience to understand it.
Things You Can Say When Asking for Mortgage Quotes
- “Are the rates you’re quoting me assuming zero points?”
- If they push back on that, you can say “I’ll decide on points later. For now, I want zero-point quotes so I can compare my options”
- “Can you give me a range of what I could expect my Loan Estimate to say for Closing Costs, if I choose to move forward in the process with you? I understand you can’t give an exact number at this point, but I’m sure you guys have done this with enough other borrowers that you have a decent inkling of where the Loan Estimate would shake out if I moved forward with you.”
- If they push back on giving you any numbers, you can say, “I understand you can’t give me an exact number, and that’s not what I’m looking for at this phase. I’m looking for a reasonable range of what I could expect my Loan Estimate to say if I moved forward in the process with you.”
- It’s frankly kind of ridiculous if they try to tell you they can’t possibly give an estimated non-binding range. You can sometimes extract the info with, “your company has clearly done other loans in my zip code, you’ve filled out Loan Estimates for other, similarly situated clients. I’m not looking for a guarantee or even a single number, but I can’t imagine you have no idea whatsoever - surely you guys are more experienced than that.”*
*If you’re saying this to a mortgage professional, then you need to think seriously about whether it’s worth working with this person at all. The quoting process is a bit like “dating” - if they’re acting like this now, imagine what it would be like if you take it to the next level (applying). Spoiler alert: it won’t get better.
2) Once you have 3 (or more) indications in hand, negotiate.
Mortgage professionals are generally laser-focused on getting your business, and your job is to see if you’re actually getting the best deal they have for you.
There are limits to what they can do (your 800+ credit score does not make you a more attractive credit than the US Treasury) but oftentimes what they first indicate is not the best offer they have.
Take your “two best” indications and call the 2nd-best option. Tell them about your best option. Ask if they can improve on it for you.
If 2nd place offers something better than 1st place, call previously-1st place and tell them what 2nd-turn-1st place is offering you.
It’s possible that your initial best option is truly your best. Call them and ask for a concession anyway. You can say something like, “the closing costs look a bit high, is there any room for you to discount any of those?
If you’re doing a refinance, time might be your friend. Particularly at the larger banks, they update their rate sheets very frequently, oftentimes throughout the day. If the initial quote is right around what you currently have or is just a bit better (but maybe not enough better to be worth the hassle), then just tell them the rate at which you’d do it.
Example: “If your rate sheets changed and you found you could refinance me at [rate] for a [loan product you want, e.g. 30 year fixed or 5/1 ARM], then I might be interested in moving forward.”
3) Get It In Writing
To make sure you and the mortgage professional who you think has your best option are truly on the same page, send them an email briefly noting your understanding of what they have said to you.
This process ensures accurate understanding, and has the additional benefit that financial institutions generally are much more attuned to what’s in writing vs. what is said over the phone. That’s because email “sticks around” and can be read by regulators, lawyers, judges, etc.
Before applying, I recommend writing an email to your contact at your “winning offer”.
Example of what you could write (obviously insert the details of your situation):
Hi [mortgage professional's name],
I believe I'm ready to move forward on the mortgage we discussed, but first wanted to make sure I'm understanding the terms correctly and that we're on the same page.
Below are the things I understood from our conversation - please let me know if anything is inaccurate.
- 3.75% for $1.2 million 7/1 ARM (0 points), assuming excellent credit score & property value of at least $1.5 million
- $6,000-$7,500 estimated closing costs, i.e. what shows up on the Loan Estimate should be in this approximate range
Now you’re ready to move forward with an application!