Are You a Shopper or a Client?
A mortgage shopper assumes responsibility for determining the type of
mortgage that best meets her needs, and finding the loan provider
offering the best (or close to the best) price on that mortgage. A
client places herself in the hands of a loan officer or mortgage broker
recommended by their real estate agent, or by a friend, relative or
business associate.
Being a client is much easier than being a shopper. It is the approach I
often use to purchase anything complicated, which a friend or colleague
understands better than me. It saves me from having to invest time
acquiring knowledge for which I will have no further use.
The easy way works best when the quality of referrals is high, and the
cost of making a mistake is low. In the case of mortgages, however,
these conditions don’t hold. Mortgage referrals are generally poor, for
a variety of reasons I have written about in the past, and the
consequences of a mistake can bedevil a borrower for years.
While mortgage shoppers can also make costly mistakes, they are
avoidable with a small investment in preparation. The purpose of this
article is to make that investment as painless as possible by pointing
to common mistakes that shoppers make.
Mistake 1: Select The Loan Provider Whose
Advertisement Catches Your Eye
The more money a mortgage lender spends on
advertising, the higher are its prices. This relationship, which I have
suspected for many years based on casual observation, was recently
confirmed by a rigorously researched study that appeared in the
Journal of Finance.
Moral: A shopper will do better by throwing a dart at the yellow page
listings for mortgage lenders than by responding to an ad.
Mistake 2: Select The Loan Provider Quoting The Best Price Over The Telephone Or In an Email
In most cases, this procedure will
identify not the lowest price lender but the biggest liar. In the trade
they are called “low-ballers’, they have neither the capacity nor the
intention of delivering the prices they quote.
Shoppers need to understand the difference
between posted prices
and quoted prices.
Posted prices are those that lenders distribute to their loan officers,
place on their web site, and on other web sites such as mine. The posted
price is the price the lender would lock to a qualified borrower whose
application has been fully processed. Lenders reset their posted prices
every morning, and sometimes during the day if secondary market prices
change materially during the day.
The quoted price is the price communicated to a shopper, it may be the
posted price, or it may be a low-ball price designed to rope you in and
move the process along until it is too late for you to back out. A
favored technique of loan officers solicited over the telephone is to
quote the price of a perfect deal, which will almost always be well
below the price of an actual deal – see Mistake 5 below. Since
posted prices will be reset many times while the loan is being
processed, the low-baller always has a plausible reason for not being
able to deliver the previously-quoted price.
Moral: You can’t shop effectively over the telephone.
Mistake 3: Shop Lender A Today And Lender B
Tomorrow
Because
of market volatility, prices obtained on different days are not
comparable. One of the important virtues of the multi-lender network is
that it allows shoppers to compare posted prices of multiple lenders at
the same point in time.
Moral: Unless you shop all sources on the same day, you are probably
wasting your time.
Mistake 4: Accept Partial Price Quotes
Mortgage prices are multi-dimensional, and if one dimension is omitted
you don’t have a complete quote. The price of a fixed-rate mortgage is
the interest rate, lender fees expressed as a percent of the loan amount
(“points”), and lenders fees of fixed dollar amount. The price of an
adjustable rate mortgage includes those, and in addition it includes the
index to which the future rate is tied, the margin that is added to the
index in resetting the rate, rate adjustment caps, and maximum and
minimum rates.
Some lenders have a bad habit of leaving out one or more components of
the price. One of the requirements to be a certified lender on my site
is that the prices posted must be complete.
Moral: Don’t deal with any lender whose price quotes are not complete.
Mistake 5: Allow Your Loan to be Priced Without Providing Accurate Information About All Price Determinants
As illustration, here is a hypothetical conversation between a loan
officer (LO) and a mortgage price shopper.
LO: Credit OK?
Shopper: Yeah
So the LO enters a score of 800 in his pricing system, and the mortgage
price quote is based on it. If the shopper elects to proceed, the LO
will order a credit report showing a score of 680, which raises the
mortgage price significantly. In this case, the shopper has no one to
blame but himself.
Mortgage prices vary with the following features of loan transactions:
loan purpose, property value, down payment, loan amount, property zip
code, credit score, property type, occupancy type, lock period, and
escrow waiver.
It is the shopper’s responsibility to make sure that the lender quoting
a price is basing that price on accurate information covering the items
cited above. This is one more reason to avoid shopping over the
telephone. Not many LOs will take the time to query the shopper while
entering the shopper’s information into a computer. More commonly,
lenders who quote prices over the telephone usually assume the
transaction features that command the lowest price, which almost always
generates a low-ball figure.
Where does a shopper go to shop fully-adjusted and complete prices? Some
individual lenders provide this facility on their web sites, though most
do not. The most efficient approach is the multi-lender network where
prices are fully adjusted and complete for all participating lenders. A
list of them, which includes mine, can be found on my web site.
Moral: If you don’t provide information on price determinants, you are
bound to be low-balled.
