We just learned of a military couple near Washington, DC who lined up a mortgage with a famous "dot com" mortgage company they found on the Internet. The rate was set for 6 percent, and there were no problems with the loan or the couple. We call it a simple, straight-up deal. At the closing, the rate was mysteriously pegged at 7.25 percent, and there was no one at the lender who could be contacted. The choice was to swallow the 125 basis point increase (the difference between 6 percent and 7.25 percent) or lose the house. That series of events is not out of the ordinary, and it inspired this article.
Some Legitimate Reasons for a Change in Your Loan
The loan process can be long and labor intensive. There are many hands on each loan and many good reasons why your deal can change or collapse. Here are just a few examples of reasons why you should not be too upset.
- Credit. Did you do something with your credit during the process, such as purchase a recreational bus?
- Delays. Did you fail to respond quickly and efficiently to requests for documents, such as septic certificates (the seller gets these), account statements (please make copies of both sides), etc.?
- Title. Is there a problem with the title, such as seller fraud on an old transaction?
- Appraisal. Did the appraisal come in lower than your purchase price?
- Ratio. Did one of your ratios, such as your debt to income ratio, fail to measure up to the rules because you couldn't prove some or all of your income or some child support obligation popped up?
- Non warrantable condo. Perhaps the ugliest of all bear traps -- did the underwriter discover that there are more than 40 percent of the units in your condo that are owned by people who don't live in them? Hint: deal over.
- Contract irregularity. Does your purchase contract make sense? Does it have the words "or assigns" in the purchaser section? Do the purchasers' names match the borrowers' names on the loan?
- Document irregularity. Is there any irregularity in the documents surrounding your financial health such that delays are caused?
One of the documents in your loan package will be the truth in lending (TIL) statement. It will specify the rate. (It will also specify the annual percentage rate (APR) that accounts for all of the costs of the deal as if they were packed into the loan. It's the actual percentage rate on the deal and it absolutely, positively has to be at or higher than your note rate. The APR is not what we want you to focus on just now. We'll talk about it some other time.) If the rate changes for reasons other than delay, get a copy of the guideline that was encountered. Look at the written rules that forced the change and have the loan officer transmit the guideline with a written indication that this is the guideline that caused the problem. If that cannot happen, you have a red flag that could mean trouble. Your banker/ broker could be stealing from you. Look at the math. If the rate mysteriously went up a quarter of a point (i.e., 0.25 percent) on a $300,000 mortgage, you just lost $17,460 over the 30-year life of your mortgage.
Points. These are percentage points that can be used to compensate the lender for its trouble. They can be zero, as in "no points," or they can be high to "buy down" the rate. (More about this later, but suffice it to say that if you add points upfront, your rate can go way, way down.) The question is how these points move in the deal and what the banker tells you about why they exist. The red flag that means trouble here is when there is any unexplained change whatsoever in the points between your signed application and the closing. Focus your eyes on the section of the good faith estimate (GFE) that says origination points and discount points. It should match precisely the section in the Department of Housing and Urban Development (HUD) - 1 settlement statement that will be issued to you at closing. (HUD is the cabinet-level Federal agency that deals with housing laws. This statement is the standard tool for protecting you.) If there was only one point in the deal (either origination or discount) upfront in your GFE, and suddenly there are three points in the HUD - 1 settlement statement at closing about which you were unaware -- and there is no legitimate justification -- your banker/broker could be stealing from you. It is helpful for you to know that the person who is your banker/broker may not have added the points. They could have come from someone in the processing of the loan. But you know what? The banker/broker always has to sign the "fee sheet" and there he indicates that he knew about the larceny before the documents were even prepared. Look at the math. A surprise point at the end of the deal can mean that a $300,000 mortgage just cost you $3,000 extra cash at the closing. Ouch!
Closing costs. Section 800 of both the GFE and the HUD - 1 settlement statement match up and both state the lender's costs. These are the costs for processing, underwriting, administration, origination, discount, and so on. This is where the lender's upfront costs to you are specified. By Federal law they must be identical for each of their loans. Watch this section -- it is easy to see if the numbers change between your GFE provided to you at the application and the final HUD - 1 settlement statement at closing. These sections should not change unless there is a legitimate reason. The key here is likely to be the area specifying the points, but all items should be scrutinized carefully. Except for the discussion on rates, these are the items that compensate the lenders. The bad guys will insert extra costs here and pocket them at the closing.
The remainder of the closing costs are not in the purview of the lender and should be examined for accuracy and legitimacy. Whatever problems erupt in those other sections almost certainly do not have anything to do with banker/broker larceny.
Terms. If you are buying an exotic loan, such as an interest-only adjustable rate mortgage (ARM) or an option ARM, have your banker provide you with a copy of the note that will be signed. Don't be satisfied with the disclosure that they put in front of you -- it's okay, but not definitive. It's easy for them to provide a copy of the note. Read the note for the terms that will apply. There could be blanks in this document to account for things that have not been certified just yet. The rate will not be specified at this time. What you are seeking are the words that will apply to your deal. What if suddenly there is a prepayment penalty that you did not expect, and the banker/broker is pocketing the quarter point saved in the deal? For your comfort, the notes are usually about 3 to 5 pages long and not too difficult to understand -- the Queen's English (that language understood by the largest number of people on earth) must be easily understood or the courts will not enforce it.
Within a zone of reason, the deal should be allowed to change a little bit at the closing compared with how it was formed when you applied. If you see a note and a HUD - 1 settlement statement that vary significantly from your deal, and there is no legitimate reason for the change, then there is a problem that needs to be conquered immediately. You should have your original GFE and TIL statement in your possession. Those documents must clearly show that you are right. Point out the discrepancy and ask for the terms you believe you deserve. Nine times out of 10 you will get what you want. One time out of 10 you will need to withdraw from the deal to be safe. (Your deposit will almost certainly be returned unless you had no financing contingency.)
How to Prevent Becoming a Victim
It is tough to come up with generalizations that work in all cases. Here are some indicators that could be helpful. No, you don't need to check all the boxes, but you do need to check out your banker/broker with your own due diligence. This is a process where you are driving down the chances of your becoming a victim of larceny or fraud. Try answering these questions.
Integrity. What makes you believe that your banker/broker has the requisite honesty, fear of shame, skill, sense of responsibility, personal achievement, and sense of loyalty to you regarding your loan? Is he former military? (Double check.) Is he known personally by anyone you know and trust? Did someone you know use this banker before with good experience?
Fiduciary perspective. Why do you believe that your banker/broker believes that he has a fiduciary responsibility over your financial affairs? Why do you believe that he would not take more money than he deserves when no one is looking?
Licenses. Does your banker/broker have any licenses that are active that force him to abide by strict rules of behavior? Is he also a securities broker, certified public accountant, or attorney? Does he have anything to lose if there is a complaint about grand larceny? Have any complaints ever been issued against him for any reason?
Federal oversight. Is your banker/ broker employed by a federally chartered bank or lender? This means that he is controlled by the Comptroller of the Currency or the Office of Thrift Supervision. This is no guarantee, but it does mean that if he commits larceny or fraud, he can and should lose his charter. For the comptroller, contact [ http://www.occ.treas.gov/mail1.htm]. For the Office of Thrift Supervision, contact [http://www.ots.treas.gov/resultsort.cfm?catNumber=35&dl=25 &edit=1].
Membership in the Mortgage Bankers Association (MBA). If all else fails to convince you that you have a banker/broker of sufficient character, try this test. Is your banker/broker a member of the MBA? Does the company employing your banker/ broker require all of its loan officers to take an ongoing regimen of MBA courses that drill them in knowing the laws and how to stick to the deal they originated? These courses are called continuing education, and only the good lenders have these programs. Is your banker/broker a registered candidate to become a certified mortgage banker (CMB)? (This award is managed by the MBA and it is a big deal to add CMB behind your name if you are a mortgage banker.) Better yet, does he already hold that title? MBA membership is no guarantee, but it is an indication that your banker/broker is paying attention to delivering a quality product in an expeditious, effective, and honest way, fully complying with the laws. MBA members normally have the right stuff. Dial 800 - 793 - 6222 and tap the option for membership. They will be quick to confirm that your banker/broker is working for a member.
Buyer beware on mortgages. The industry is full of wonderfully diligent and highly skilled people who would make any profession proud. You should perform your own due diligence and reach your own conclusions about your banker/broker. Check him out behind his back. If something doesn't add up, your banker/broker may be hiding a serious problem. There are plenty of good bankers/brokers out there poised to deliver the best in products and services while protecting you from harm. Make your selection of banker/broker part of your borrowing process, and you will almost certainly come out far ahead of those who leap for a rate on some dot com without looking at the banker/broker who will be handling the deal. The bonus? You will win a relationship that should work well now and later when you need another loan.