The other day I received a call from a gentleman looking to refinance out of his 2-year adjustable rate home mortgage (2/28 ARM) that is now variable. These home loans are typically reserved for subprime borrowers due to a poor credit rating. Although this is not an ideal loan, he wasn’t in too bad of shape because he put a serious 20% down when he purchased the property. I couldn’t help but think that this guy took the 2-year ARM for a good reason (bad credit?). This wasn’t the case however. After running his credit and seeing that he had plenty of credit depth and an impeccable credit rating going back 12 years, I asked him why he took the 2-year ARM. Unfortunately this gentlemen had been duped!
He went into the story of how the original loan officer offered him an incredible rate for what he thought was for a 30-year fixed loan, and the closing costs he quoted him were half what he thought they would be, so all in all it seemed like an incredible deal at the time. The rest of the process went smoothly until the day of closing when he found out that the 30-year fixed rate was actually for a 2-year ARM with a 3-year hard prepayment penalty, and the closing costs ended up being twice what he imagined. None the less, the gentlemen went on to sign the closing documents because the loan officer said that he would refinance him out of this loan for free. He also had nothing in hand to call this loan officer out with since the loan officer never gave him three vital documents that could have avoided this serious train wreck… and he didn’t know to ask for them.
Here are the three documents you need to ask for when applying for a mortgage that will help keep your loan officer honest:
- Good Faith Estimate (GFE) - This will break down all of the closing costs of the loan. These numbers are very difficult to get exact but the loan officer should never be off more than a couple hundred dollars.
- Truth in Lending Statement (TIL) - This document will disclose several important numbers but most importantly the Annual Percentage Rate, and whether the loan has a prepayment penalty or not.
- Financing Agreement - This document right here is gold and you should have a financing agreement early on whether the rate is locked or floating. The loan officer should issue this to you not only for your protection, but also for his since it lays out whether the rate is locked or if it is floating, the loan type, rate and any points being charged. If you’ve locked your loan in, you should immediately request this document as it tells you when the rate was locked and for how long the rate lock is good for. A lot of people feel that with just a GFE they are covered, but really it’s the financing agreement that gives you the most assurance of the loan you are being offered and keeps the loan officer honest. This is your insurance should anything change at, or prior to closing.
With these three items in hand you are now empowered to call the loan officer the day of closing to ask why your financing agreement says you are locked at a rate of 6.5% but the rate on the final loan papers is 7%, or why he is charging 2 points instead of the 1 on the GFE. You actually have a signed financing agreement from both parties that states your loan program, rate and points being charged. So any deviation from this is a call for action! A GFE on it’s own does not have as much power because as the name of the document states, “Good Faith Estimate” so don’t think you’re ‘good to go’ without your financing agreement.
If you keep these three documents in mind when applying for a loan you are insuring a smooth process. Not all loan officers conduct business in this manner so please don’t feel that I am saying that all loan officers need to be kept within arms reach. Like in many professions, the bad loan officers ruin it for the good ones, but none-the-less all loan officer should be offering these documents to you. You shouldn’t have to ask for them… Oh, and in case you are wondering, the loan officer I mentioned previously was never to be found by the home buyer after the closing– so there goes the “free” refinance…