Give your lenders a filled in Uniform Residential Loan Application (Form 1003) and ask for a Good Faith Estimate quote
Form 1003: https://www.efanniemae.com/sf/formsdocs/forms/1003.jsp
Form GFE2: http://www.lenderhomepage.com/Forms/Good%20Faith%20Estimate.pdf
I have been working with clients who ask about how the rates are moving on a day to day basis and I have to say that it is a challenge to predict whether rates will go up or go down. Different loans are based on different indexes and most of those indexes move according to demand for U.S. Treasury notes (fixed rate mortgages) or willingness of European banks to lend to each other ( LIBOR is used with many variable rate mortgages). In the last half of 2007, the FED has lowered its short term target rate by 1/2 percent and yet long term rates reflected in mortgages have not gone down. This is due to the difference between the cost of short term and long term funds. The financial markets are still awaiting the announcements of further bank losses due to the exposure to subprime and other over-leveraged loans going bad. So, the risk of committing funds to loan out for mortgages for the long term is still high and may go higher. Therefore investors in mortgages are requiring higher interest rates to cover that risk.
I recommend that clients get Good Faith Estimates from multiple lenders and compare them. You may not be able to predict the interest rate going up or down from day to day, but by doing some comparative shopping you are at least assured of getting an apples to apples comparison of the full costs of mortgage funds from different lenders. I know that it may seem awkward to ask multiple lenders to bid on your business and your realtor probably is encouraging you to use one lender that he or she has confidence in. But, comparison shopping is truly the best way to make sure that you are getting the best value.
Do let the lenders know that you are comparing good faith estimates. And do make the process of giving a good faith estimate simple for the lenders. I suggest making sure that you have the following information in an organized format for the lenders to process.
1. Your estimate of the market value of your property. This is usually your hoped for value and will need to be validated by a professional appraisal, but recent comparable sales in your neighborhood will be relevant.
2. The loan amount required. The LTV (loan to value) ratio can be anywhere from 50%-90% depending on the total dollar amount being requested.
3. If you are thinking of a second mortgage in addition to the first mortgage, be aware that seconds are in very limited supply these days. Lenders in a market with values that may be flat or even decline are reluctant to loan on seconds since they are less secure than the first mortgage. The lender will have to calculate a CLTV ratio of first and second mortgage to value of the property.
4. Your gross income from all sources will be used to calculate a DTI ratio. This is the mortgage debt divided by gross income. There will be DTI ratio limits based on the loan amount.
5. Your FICO credit score. Usually the midpoint score of the three credit reporting agencies (TransUnion, Experian, EquiFax) will be used to qualify your loan. Each lender will need to officially request your FICO score, but you should know your score from working with the first lender and make sure that you take steps to increase your score in whatever simple ways are available to you. For example, just paying down some credit card balances to under 30% of the line of credit can help improve your score by 5-10 points.
6. These days you are in an advantageous position if you chose to process a Full Documentation loan. These are more available than Stated Income loans. Full documentation loans are for employees with income documented on W-2 forms; stated income loans are more appropriate for independent contractors receiving 1099 forms.
7. You need to inform your lender of the purpose of the loan and how long you intend to retain the loan. The typical loan averages 3 years before it is refinanced and the typical homeowner stays in a home for 7 years. You plans will affect which kind of loan product is most appropriate for you. For example, if you only plan to be in a home for 7 years perhaps an adjustable rate mortgage with fixed payments for seven years will be more economical than a fixed rate mortgage. Adjustable mortgages are typically available at a lower starting interest rate than a fixed rate mortgage.
With this information in hand you can request quotes from different lenders, whether they be different banks or mortgage brokers. A bank will typically sell you a loan product from the bank. A mortgage broker works with multiple banking lenders and can be a source of some comparison shopping. Naturally banks and mortgage brokers have their own fee structures as well, so it may make sense to shop around for multiple banks and brokers to get the best sense of value. Value is not only about interest rate. Make sure to compare the full closing costs on the Good Faith Estimate across all of your lenders. Make sure that you are not being quoted a product that can surprise you later on. For example, avoid prepayment penalties. If you accept a lower rate loan that has a three year hard prepayment penalty, if you find you need to sell or refinance the property within three years you will have to pay a penalty fee of up to 3% of the loan amount. Know about these pitfalls and avoid them. Avoid working with loan agents of banks or brokers that are not up front with you on matters such as these.
Since I encourage getting comparables, I am willing to work with you to help structure your RFQ, request for quotes. My philosophy is that in order to secure your business I should be able to meet and beat any other bank or broker quote. And so, I am happy to do the work of preparing a quote for you as long as you are willing to share the other quotes so I can be of help in making sure that you are comparing apples to apples. I give you a spreadsheet of all the quotes on one page. If I cannot beat the other quotes I will tell you so. My goal is to help you make a good decision so you will have confidence in.
I don’t expect to win every client’s business. By by offering to help you make a good decision, I do expect to earn your trust and hence the opportunity to do business in the future.
Best regards,
Chosen Cheng
408 802-0658
