- It has been awhile since I have written a blog, but I was with a customer a few days ago and the client was considering using me and another Loan Officer froma major bank. She selected me and my company to do business with; the surprise to me was the clients reasoning for her selection. I thought I would share them with everyone because it is important for consumers to know the truth about mortgage loans so that they never make the mistakes they made over the past few years.
Let me start with saying; there is no such thing as a bad mortgage product; the problem is not every mortgage product is for everyone. Originally the various mortgage products came about to service specific needs of certain tyoes of clients with specific goals. Where clients and the industry got in trouble was allowing the average consumer to use various mortgage products to secure financing where normal more appropriate mortgage products would not have allowed the client to purchase. When I consult with clients here are soe of the things that I tell them to think about:
- Is this your first home purchase
- How long do you see yourself living in this home
- How regular is your pay - are there significan fluctuations in your salary over the course of a year, like bonuses or commission
- Have you thought about any lifestyle changes that may occur by this purchase, like savings, food, utlilties, general upkeep of a home
Once I have established the clients perspective on a new home purchase, I think the ethical thing to do is to inform of tow things:
- A home purchase is a long term investment, usually 5+ years
- Think about the other things that will go into maintaining this home (utlilities, food, cable, etc.); and have you added this to your budget
Once all this is established and has been considered, then it is time for the client to understand a mortgage; here is what I think every ethical Loan Officer should tell a client:
- Under most circumstances the best type of mortgage in this market is probably a fixed rate
- If there is a pre-payment penalty, you need to understand the terms and the formula completely and know how long the penalty is for
- Most loans will require full documentation ( 2yrs. W-2's, bank Statements, pension statements)
- How we as Loan Officers get paid
How we get paid is what directly affects the client, that is why I tell all of my clients that there are two pieces of paper that are critical that they read and understand completely:
- Good Faith Estimate: Details in numerical form the cost of the enire transation (what it is going to cost the client to secure the financing and to close the loan)
- Truth-in-Lending: Details in numerical form the actual principal and interest payment throughout the life of the loan
Good Faith Estimate
- Loan Origination: What the Company will charge as a fee to do the loan
- Loan Discount: What it will cost to get attain a certain interest rate
- Normal closing costs and escrows as well as county and state fees to record the loan and sale of the property
The interesting thing that clients need to know that they may not, is that based on the interest that is offered, when we sell those loans to investors they pay us a commission for that loan based on the interest rate. This is in addition to what ever fee (points) we charge on the Good Faith. The lower the client forces use to go in interest rate, the less we make, which means the more we need to charge to give you that interest rate. So for example when you ask for a 4.5% interest rate verses 5.00% as an example you may have to pay (1/2 of a point to a full point) for that rate. You as the client have to decide if that is worth it to you. Example: $300,000 @ 5% = $1,610.46 (P&I) vs. $300,firstname.lastname@example.org% = $1,520.06 ($90.40 savings. But how do you feel about paying .50pt -1pt to get it ($1,500 - $3,000) on your closing costs. To breakeven on the additional costs means you would need to live in the house for (16-33 months).
I hope this information is useful for someone, I am going to continue to write about my industry and what I know to assist consumers in making informed decisions.