Mortgage shoppers should have some understanding of the major steps involved in obtaining a mortgage, which have been impacted by several recent developments. The process begins with an initial contact with a lender, and ends with a closed loan.
While there are many differences in the ways that lenders operate, they must comply with the same or very similar laws and regulations, they use the same or very similar technology, and they sell their loans in the same secondary markets. For these reasons, the similarities among lenders in how they process loans are more important than the differences.
Of course, the scoundrels that dot the mortgage landscape have their own procedures that may be very different. Potential borrowers who know what to expect from honest lenders are positioned to smell trouble if they encounter the very different approach of a scoundrel.
In writing this article, I was helped greatly by Jack Pritchard of Home-Account, whose knowledge of mortgage operations is second to none. Home-Account is a site where consumers can shop among a group of mortgage banks.
Step 1: Borrower interviews lenders to select one with which to proceed. See my concluding comment on making this selection.
Step 2: Borrower contacts the selected lender to get price and perhaps other information bearing on whether or not to proceed further with that particular lender. The typical borrower wants a price quote. The lender wants the borrower to provide enough information to permit a preliminary judgment regarding whether the borrower will qualify and what the price will be. The borrower will respond, using telephone or e-mail, by providing undocumented information covering credit, income, assets and property,
Step 3: Lender assesses preliminary information, and reports favorable results back to the borrower with a request to move ahead. If the borrower assents, the lender requests the borrower’s Social Security number so that the borrower’s credit record can be accessed, and also asks for income and asset documentation.
Step 4: Borrower provides the information required to move to the next stage. At this stage if not done earlier, borrower and lender agree on the type of loan that best suits the borrower.
Step 5: Lender assesses the borrower’s credit report and documentation, completes the borrower’s written application form, and prepares a packet of documents including a Good Faith Estimate (GFE) and Truth in Lending (TIL) disclosures. These disclosures contain the terms of the loan being offered. …CONTINUED
Since prices are reset every day, the lender may provide the borrower an opportunity to lock the prices before receiving the documents. (If the documents are sent out overnight, the prices in them expire before the borrower sees them.) The lender explains how long a lock period is needed to be safe. The period has become longer recently, partly because of regulation-induced delays in obtaining property appraisals.
If the terms in the disclosure documents are not locked the same day they are set, the borrower is vulnerable to gamesmanship by the lender in setting new terms. Any changes in the terms from those in the disclosure documents should mirror the market, but because the borrower at this point is heavily committed, the lender may be tempted to cheat.
However, under new disclosure rules that became effective this year, the lender must issue a new set of disclosures if the annual percentage rate (APR) on the new terms offered differs from those on the documents already provided by more than 0.125 percent. Further, except for credit report fees, which are small, no fees can be collected from the borrower prior to receipt of the final disclosures.
The re-disclosure rule and the inability to charge fees prior to final disclosures encourage honest lenders to encourage borrowers to lock immediately, even though this involves some risk. Because the house has not yet been appraised, the title has not been searched, and the borrower’s income and assets have not been verified, an unexpected surprise on any of those could invalidate the lock.
Cheating lenders who aim to escalate the price after the borrower is committed will not offer an immediate lock.
Step 6: The lender sends out the disclosure package, roughly 45 pages, which requires the borrower’s signatures. The package also includes instructions regarding documents that have to be returned with the signed disclosures. Meanwhile, the lender orders an appraisal and verifies the borrower’s income and assets. Either the borrower or the lender must order title insurance.
The biggest potential stumbling block at this stage is the appraisal. If it comes back 5 percent below what was expected, it will probably increase the interest rate or mortgage insurance premium, which will probably increase the APR by 0.125 percent or more, which will require a delay and a new set of disclosures.
Recently, I ran into a case where everything else was perfect, but the appraisal report came back without an appraisal because there were no transactions on comparable properties within reasonable distance of the subject property. Obviously, that killed the deal.
Step 7: This is the closing, but it should begin two or three days before the day when the documents are all signed. The borrower should have an opportunity to review all the numbers on the closing documents and compare them to earlier disclosures, without feeling pressured.
Concluding comment: In interviewing lenders today, I would ask whether they will give me an opportunity to lock the terms in the GFE. The scoundrel will probably tell you that "it is better to allow the price to float — that way we can take advantage of a dip in the market to get a better price."
What the scoundrel means is that as the loan gets closer to closing, it becomes too late for the borrower to back out, and the lender can take advantage. Since borrowers can’t forecast rates any better than professors, there is no advantage to the borrower in allowing the price to float. I would also seek assurances that I will have access to closing documents at least 48 hours before the settlement day.
The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.
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