Since the “Mortgage Meltdown” in late 2007, the rules around shopping for a new mortgage loan have changed significantly. Understanding the reasoning behind these changes and asking your loan officer essential questions can save you hours of time and disappointment when looking for your next home loan.
To set the scene, we must first look back at the booming real estate market that existed from 2001 to 2007. Increasing property values and incredibly inexpensive money available during this time subsequently laid the foundation for a hyper-competitive marketplace for mortgage services. Mortgage lenders began to spring up like mushrooms from 2002-2005, more than willing and capable of closing loans easily and quickly. Demand was extremely high, money was incredibly cheap and accessible, and the average mortgage lender could close a loan in less a week. With so much volume, the average lender didn’t care much about the borrower’s ability to repay the loan. The average borrower wasn’t as concerned about the credibility of the mortgage lender as long as they were getting the best deal. As a result, borrowers put their needs into the hands of the lowest bidder. Because lending was so easy, the loan officer did not have to have much experience or knowledge and could process a mortgage without much effort.
Fast forward to the present time: We no longer find ourselves in the perfect storm, but rather in its aftermath with new rules, tightening credit availability, increased lending standards, and massive regulatory change. In the wake of all of these changes, a new landscape has emerged requiring consumers and lenders to participate in a new and oftentimes arduous process. The days of choosing a mortgage lender based on interest rate and/or loan fees are gone. Consumers now need to investigate the mortgage lender, the loan officer and their respective credentials with more sensitivity and knowledge.
The good news is the mortgage industry was never meant to be a commodity based on interest rates and fees, but a service and experience provided to home buyers interested in purchasing property. When you obtain a mortgage, the loan officer (LO) is paramount in creating your experience. The LO’s primary responsibility is a fiduciary one. Their first duty is to assist the consumer in making the correct borrowing decision based on the factors that are specific to that consumer. Remember that a “one-size-fits-all” solution does not exist when it comes to any financial transaction, regardless of whether one is borrowing money or investing money. The second duty of the LO is to guide the client through the financing process. Regardless of the interest rates and closing costs, the LO is ultimately responsible for helping you navigate through the loan process to make the right financial decisions about your investment.
While price is certainly still a factor in your decision, it is important to remember that interest rates are set on the “secondary mortgage markets” and not set by the banks or direct lenders. Because pricing is so individualized to each person’s situation, a consumer cannot really measure if they are getting the “best” deal if price is the only determining factor. The consumer is also required to “lock” in a rate at some point during the loan process. As rates change on a daily basis, it would be difficult to guarantee the absolute lowest rate possible. The mortgage decision should be based on the individual needs of the consumer, their investment portfolio and their short & long term goals. Usually consumers have no idea what type of mortgage they want and/or need. I would say at least half of my clients initially choose the wrong mortgage until we discuss further their short-term and long-term financial goals and objectives. Pricing can vary over different mortgage types. Shopping around on price rather than goals and objectives can be a costly mistake, especially if you realize you have been shopping a mortgage loan that is not a good fit and interest rates have risen during this timeframe.
So how do you go about shopping for a mortgage loans these days? I recommend that you choose your loan officer in the same manner as you would choose any other service professional, such as an attorney or a CPA. Meet with the loan officer, interview them, ask good questions and check their credentials. The first red flag for you should be if the loan officer refuses to meet. In fact, I mention to all my potential clients that I view our first meeting as an interview for a job. During the meeting, I also recommend that you take good notes, determine the LO’s skill sets, and then make your decision to move forward or not.
On a side note, I am not saying interest rates and closing costs are unimportant. However, many consumers struggle to strike a balance between expertise and costs by treating their mortgage like a commodity. In fact, while you will repay the mortgage, the loan officer’s experience and dependability will help you determine the best loan, and those things cannot be commoditized. On a $500,000 investment, saving $50 is of little consequence. While you don’t want to overpay, recall the old adage, “do not be penny wise and pound foolish.” A good loan officer will always get you a competitive rate, but a competitive rate does not always come with a good loan officer. A good loan officer will make sure you close, and that is the goal.
Would you rather hire a loan officer providing a rate of 4.875% who ALWAYS closes on time and insures you make the correct borrowing decision, or the loan officer who provides a rate of 4.750% who MIGHT close on time, but doesn’t always provide good advice one way or the other, leaving you with nagging questions around whether you really made the best borrowing decision for your financial future.
Before you even start talking interest rates, you should be discussing things like:
- Your loan officer’s education and professional background? Do they have an established track record in the business?
- How well does your loan officer assess your needs? Do they immediately start quoting rates or do they complete detailed due diligence before a rate discussion is even approached? Most good loan officers do not “quote” rates without getting a full application and fully assessing the borrower’s scenario. Can they intelligently discuss and explain why certain programs or financing strategies are better than others?
- Do they have a deep understanding of all the tax advantages and/or implication of purchasing, owning and/or refinancing real estate? Do they know what the difference is between acquisition indebtedness and home equity indebtedness, and how that affects a homeowner’s the deductibility of mortgage interest.
- Ask yourself, how you got the loan officer’s name. All trustworthy loan officers work almost exclusively on referrals. Was the loan officer referred to you by your Realtor®, family, or co-workers? If the loan officer solicited you with a cold call, mailer, radio or T.V. ad, or worse entered your information into a lending website? Oftentimes, the “sales approach” is based on numbers not a relationship. I find that accountability is key. In other words, who takes responsibility if something goes wrong and works to correct the issues? Loan Officers who receive his/her prospects via referral translates into a that person being a trusted advisor, someone who has proven their ability to succeed.
Once you are comfortable with the loan officer, then it is appropriate to discuss what loan program will best suit your individual needs. And, remember to have fun! Buying a property can be a fun and rewarding experience when you have the right group of trusted advisors.
First Cal Colorado