The home mortgage market is a minefield for consumers shopping for a mortgage. For those with a short attention span, here is a summary of the hazards, followed by a summary of my preferred ways to avoid them.

  Quick Tips on Major Shopping Hazards

February 10, 2006, Revised May 12, 2006, July 20, 2007, January 18, 2011, January 12, 2012 Postscript

January 12, 2012 Postscript

The development of my Certified Lender Network (CLN) more or less makes this article obsolete. Rather than delete it, I decided it might be instructive to leave it as is but add comments on how the CLN eliminates or modifies the hazard. These comments are italicized. For a description of the CLN, see Finding a Mortgage on the Professor's Certified Lender Network. 

Shopping Hazards You Want to Avoid

The home mortgage market is a minefield for consumers shopping for a mortgage. For those with a short attention span, here is a summary of the hazards, followed by a summary of my preferred ways to avoid them. For a more comprehensive approach, see How to Shop For a Mortgage.


Market Volatility and Obsolete Prices:
Because mortgage prices are reset every day, and sometimes within the day, price comparisons from different loan providers may be invalid if not made at the same point in time. Read Can I Avoid Mortgage Prices That Have Lapsed?

Comment: The prices of all lenders on the CLN are live when seen by the borrower, hence lapsed prices are not a problem.

Market Niche Misclassification:
Because mortgage prices depend on a wide variety of borrower, property, and transaction characteristics, misclassification and consequent miss-pricing, accidental or deliberate, are common. Read What Mortgage Market Niche Are You In?

Comment: Because borrowers have access to lender prices without loan officer intermediation, they cannot be misclassified as a way of raising the price.

Mortgage Price Low-Balling: Because loan providers in a volatile market cannot be held to price quotations, some of them deliberately quote mortgage prices below those they can deliver in order to hook the client. Read Can I Rely on Mortgage Price Quotes? 

Comment: Because borrowers have access to lender prices without loan officer intermediation, loan officers cannot low-ball.

Settlement Cost Low-Balling: Because loan providers do not always know the exact prices of services provided by third parties, and they can’t be held to the figures they provide on the Good Faith Estimate of Settlement (GFE), some of them deliberately underestimate in order to hook clients who shop total settlement costs. Read How to Shop Settlement Costs.

Comment: Borrowers using the CLN can check the prices of title insurance and mortgage insurance from competitive carriers quoting prices on the site. If their prices are lower than those quoted by the carriers recommended by the lender, the borrower can switch carriers.

Lender Fee Escalation: Because fixed-dollar fees charged by lenders are also “estimates” on the GFE and are not locked along with the interest rate and points, some lenders find new fees as loans approach the closing. Read Legal Thievery at the Closing Table. However, the new GFE introduced in 2010 makes fee escalation difficult, see The New GFE Will Help Borrowers.

Comment: On the CLN, fee escalation is not possible because the borrower has access to all lender fees, and can verify that the fees charged him are the same as those being quoted to shoppers.

Incomplete Price Information on ARMs: Because adjustable rate mortgages (ARMs) have important features that affect the interest rate after the initial rate period ends, which features are not mandated disclosures, some loan providers leave borrowers in the dark regarding what can happen in the future to the rate and payment on their ARM. Read ARM Disclosures: Government Drops the Ball.

Comment: Certified Network Lenders are required to provide complete price information on ARMs to the network for use by borrowers.

Fake Rate Locks:
Because the points charged on a loan decline as the lock period shortens, some mortgage brokers pocket the price increment by telling borrowers they are locked for the longer period while not actually locking with the lender until shortly before closing. This exposes the borrower to a rate spike which the broker would not be able to cover. Read Did You Pay For Insurance You Didn’t Get?

Comment: Because there are no brokers involved in the network and loan officers are not involved in loan pricing, there can be no fake locks.

Contract Chicanery: Because borrowers don’t receive the note that spells out their obligations until closing, at which time they can be overwhelmed with documents that require their signature, some loan providers, in contradiction to their oral representations, will slip provisions into the note that increase its value to the loan provider at the expense of the borrower. The most common is a prepayment penalty clause. Read Lies Mortgage Shopper Hear.

Comment: This doesn't happen on the CLN because the network has a "one-strike-and you're-out" policy and would result in the lender being kicked off.

Financial Inducement to Overcharge:
Underlying other shopping hazards is the fact that most loan providers make more money on a transaction if they can induce the borrower to pay more.  Read What Is a Mortgage Overage?  

Comment: While the network does not get involved in the compensation policies of participating lenders, their loan officers do not have the power to overcharge borrowers, so what they might like to do is irrelevant.

The Mortgage Professor’s 4-Step Approach to Avoiding These Hazards

1.     Be the Selector, Don’t Be Selected, Don’t Respond to Solicitations (Except to Say “No”).

Not every loan provider who solicits is a predator, but all predators solicit. Hence, your chances of avoiding a predator are better if you thrown a dart at the yellow pages than if you accept a solicitation.

2. Decide Whether To Price Shop, Or Retain An Expert To Shop For You.

 Price shop if:

You like to be in full control of the process.
You are prepared to invest time in educating yourself.
You are comfortable with a computer (no need to be a geek).
You have good credit.
You can document your income and assets. 

If you shop on-line, I have done the heavy lifting for you by certifying those lenders who provide all the information that borrowers need to shop effectively. See Upfront Mortgage Lenders.

3.     If You Elect to Retain an Expert, Select Among Those Who Guarantee Their Markups

These include Upfront Mortgage Brokers, they are listed at Upfront Mortgage Brokers. 

UMBs will negotiate a fee for their services in advance, and then pass through to you the best wholesale price they can find. Their motif is transparency. Other brokers act as independent contractors, and view their mark up of the wholesale price as nobody’s business but theirs. 

A second option is to access Amerisave through my site. Amerisave is an Upfront Mortgage Lender that discloses and guarantees its markup, which is also guaranteed by me if you access them through this site. Click on Fixed-Markup Lender.

4. Decide the Major Features of Your Loan

This is necessary if shopping on-line, less needed if using a UMB because you can discuss it with the broker. For tutorials on the major features, go to Tutorials on Selecting Mortgage Features.

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