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Selecting a Mortgage Lender
Hosted by Kenneth R. Harney
Syndicated Columnist
Thursday, June 21, 2001; 1 p.m. EST
Lenders are forever saying how easy it is for anyone -- regardless of credit history -- to borrow and buy a home these days. But are the claims really true? And are the loans fair and affordable? What should consumers look for in a lender as they buy real estate? And are online lenders all they're cracked up to be?
Kenneth R. Harney is the author of the nationally syndicated column "The Nation's Housing," and understands the ins and outs of loans, mortgages, tax laws and legislation important to both buyers and sellers. He was online to answer your questions Thursday, June 21.
The transcript follows.
Harney is the managing director of The National Real Estate Development Center, which sponsors professional education conferences for public agencies, developers, mortgage executives and real estate attorneys. He also runs his own consulting firm based in Chevy Chase, Md., and is co-founder of the Housing and Development Reporter, published by Warren, Gorham & Lamont, Inc. An honors graduate of Princeton University, Harney did graduate work at the University of Pennsylvania. He has written two books: "Beating Inflation With Real Estate" (Random House, 1979) and "Exchange Your Real Estate: Why Pay Taxes?" (National Real Estate Development Center, 1993).
Editor's Note: Washingtonpost.com moderators retain editorial control
over Live Online discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions.
Lanham, Md.: Mr. Harney,
Just how easy is it to obtain a loan with less than perfect credit?
Kenneth R. Harney: It depends on how imperfect your credit is. But compared with a few years ago, people with imperfect credit can find far more mortgages available to them today and at a lower interest rate. Talk to your mortgage broker for details.
Lanham, Md.: What's the real deal when you get to the table the day of settlement? I went through all the steps required in securing a preapproved loan, accumulated enough monies for down payment and closing the deal. When that day came my husband and I were very excited to be receiving the keys to our new home, only to be told that there was another $2,000 needed. If we did not have the monies they would approve us for another loan which would increase our note to another $300. What's going on? I've heard similar stories and people have actually walked away from the table disgusted, angry, and feeling deceived.
Kenneth R. Harney: One of at least two things is going on: either you were a victim of bait and switch, where the lender intentionally forces you to choose between a costlier loan or no loan at all; or, your lender was simply incompetent and improperly estimated the costs up front. By the way, did you receive a "Good Faith Estimate" form three days after applying for the loan from your lender? If not, you may have the basis for legal action.
Reston, Va.: My husband and I are currently looking for a lender, and I was wondering if it is a good idea to be prequalified with a few lenders, and then lock in with the one with the lowest rates and fees?
Kenneth R. Harney: Sounds like a good strategy to me. As long as you're not incurring application fees with each lender.
Falls Church, Va.: To PMI or not to PMI? Should I pays three points, or a higher interest rate (straight 95/5 loan) to get rid of PMI at closing (so called lender-paid), or put that $12K in improvements so as to argue after a year (with reappraisal in hand)that it has met the 20 percent rule. In other words, has the change in law really worked a change in lender's willingness to remove the PMI?
Kenneth R. Harney: For starters, you would not be able to get rid of PMI after the first year in any event. The shortest period allowed by Fannie Mae and Freddie Mac is two years. The more typical period necessary for cancellation at 80% is five years. As to the pros and cons of a 95/5 loan, versus PMI, you'll need simply to do the math in your specific case. Good luck.
Alexandria, Va.: We are looking to buy a house in the near future. We don't have a good credit history but I have heard there are a lot of different types of loans out there besides the three or four basics that might help us out. I have been searching the Web for these different loans and have come up with nothing. Where should I be looking for information on this?
Kenneth R. Harney: The web is great for plain vanilla loans. But if you really want to locate a "subprime" mortgage, you'd do better by talking to a few mortgage brokers. Most brokers deal with several dozen different lenders, some of whom specialize in helping people with sub-par credit. Obviously, with imperfect credit, you're going to be charged a higher interest rate and maybe higher fees.
Alexandria, Va.: Who are FNMA and FHLMC? Are they special loan programs?
Kenneth R. Harney: FNMA is popularly known as Fannie Mae. FHLMC is Freddie Mac. Both are Congressionally-chartered companies that buy loans from mortgage bankers and other mortgage lenders. They make no loans to the consumer directly. However, they currently buy about 60% of all mortgage loans made in the U.S.
District Buyer: Thanks for sharing your expertise in this chat.
I am currently renting and thinking about buying in the District or close in. With interest rates as low as they are does it make sense for me to buy now -- knowing I will need to take out an 80/20 no money down loan (I know I qualify for such a loan) or should I wait until early next year when I could have saved enough money for at least a 5 percent down payment? I am looking to buy a condo or townhouse. My current monthly rent is very low.
Kenneth R. Harney: I wouldn't attempt to make my buy or no-buy decision based on interest rates. More important would be: have I seen a house or condo that really fits my needs? have I accumulated enough capital to make a downpayment on that house at the price they are asking? If I were you, I would shop the market every weekend looking at houses or condos, becoming an expert on the various neighborhoods where I might want to live, and meeting the real estate agents who specialize in those areas and can be a great source of information. Good luck.
Alexandria, Va.: We are considering purchasing a new condo in a brand new development (in the process of being built). The builder gave us two names of mortgage companies. We went to one for pre-approval. By going with the lender recommended by the builder, the builder is supposed to pay 1 percent of the origination fee (I think that is what it is called) and some of the closing costs. Before we sign a contract, should we consider other lenders or are these incentives worthwhile? Also, if we have been pre-approved, must we use this same lender? Thanks.
Kenneth R. Harney: Definitely check out competing lenders. Builders and developers who either own or control mortgage lending operations often can offer incentives to purchasers that are superior to what's available from competing lenders. However, as you compare outside lenders to the builder's lender, make sure you are comparing the whole deal -- all fees, estimated closing costs, etc. It is in this area that builder-affiliated lenders sometimes try to recoup the incentive or carrot they dangled in front of the buyer.
Arlington, Va.: What's considered "imperfect" credit? Anything below 850? My FICO score was 756. Should I be worried?
Kenneth R. Harney: My answer to you with a 756 FICO: Don't worry, be happy! Any FICO score above 700 is considered excellent credit, even though a small percentage of FICO scores go as high as 850.
Arlington, Va.: My real estate agent, whom I like and trust, says he can help us find a loan -- he's very knowledgeable on this topic. Do you think this is a good idea or should I do my own shopping around?
Kenneth R. Harney: Both! Your agent may well be helpful on finding a loan but I would definitely shop the web and talk to individual mortgage brokers before deciding on a particular loan. The more you know about the alternatives available to you, the better off you'll be.
Sterling, Va.: We are purchasing a new home. We have selected a lender, much to the advice of our real estate agent.
Question: If floating, how can you track the mortgage rate on a daily basis to know when to lock in?
Waiting for the lender to call and give you a cheaper rate doesn't seem to be working.
Kenneth R. Harney: Can't you arrange with the loan officer to keep an eye on rates? After all it's in his or her interest to close you rather than lose you. If the lender won't call you, then call him or her once a day or several times a week. You can also track rates on line such as at www.hsh.com
Alexandria, Va.: If I am refinancing, and the mortgage I'm seeking is 80 percent or less of my house's value, would I still have to have PMI?
Kenneth R. Harney: Assuming the appraisal confirms your opinion, you should not need PMI.
Washington, D.C.: Hello! I have been thinking about this for while and really hope you can provide some insight. I am a 24-year-old working in D.C. I would like to buy a home when I turn 28. I do not have any loans or debts. My only monthly expenses are food, rent, phone, etc. My salary is in the high 20s. Is it realistic of me to want to buy a home in four years? What should I do to prepare? Please help!
Kenneth R. Harney: With an income in the low 20's, you're going to have to save to accumulate a downpayment. In the meantime, start looking into areas you'd like to live in and look at the prices they are asking. Good luck.
Washington, D.C.: I'm purchasing a townhouse in Montgomery County Maryland and putting down 20 percent. I'm also going with builder financing. I've read that if you put 20 percent down it's better to pay your own taxes than to escrow. My loan officer seems to be discouraging the do it on my own method. What is your opinion on escrowing taxes?
Thanks.
Kenneth R. Harney: Many lenders require escrowing of property taxes and insurance. You can attempt to negotiate that requirement away but often lenders are not calling the shots themselves -- they have to march to the tune given to them by investors who buy the loans.
Washington, D.C.: I happen to have the luck to be in a credit union. Is there any value to even bothering with banks? I have a 785 FICO, that will be going up rapidly (elimination of most other debt), so I don't know if there may actually be deals out there. The simple interest of a CU is awfully tough to beat by one of those rip off "coupon/book" style loans.
Kenneth R. Harney: Congratulations on your high FICO score. Shop around outside the credit union and you just may find a lender who will beat their deal.
Herndon, Va.: Hi Mr. Harney, I am trying to decide between an FHA 3 percent down loan, and a zero-down loan. The FHA has slightly lower rate, but I would have to pay PMI. With this particular zero-down loan, there is no PMI. Based on this information, can you give me any advice on which loan would be a better value in the long run? Thank you!
Kenneth R. Harney: A couple of clarifications here: FHA loans never carry "PMI. They do carry mortgage insurance premium charges however. Is your Zero down loan a conventional (non-FHA) mortgage? If so, such loans always carry Private Mortgage Insurance (PMI). As to the rate differential -- run the numbers on both loans calculating your monthly costs (including the mortgage insurance) and I think you'll have your answer.
22204: I obtained an excellent FHA loan (after Jan. 1, 2001) which included their version of PMI. My question is when can I try to eliminate it.
The wrinkle is that I bought my home under market value and believe I my loan amount is already about 75 percent of the market value.
Kenneth R. Harney: Under current FHA rules, you will have no right to request cancellation of premiums. Instead, FHA itself will terminate collection of premiums when you have paid down the loan enough to have 20% equity. Secretary Martinez of HUD told me in a recent interview that he favored revisiting this policy in order to allow borrower-requested cancellations at some point. As an alternative, you may want to consider refinancing at some point with a conventional lender.
Washington, D.C.: The lender is really immaterial, I think. Obviously, you want a legitimate firm, but the terms are what you should focus on, right? After all, your mortgage will be bought and sold many times. The original lender will be a distant memory, but the terms and rate on the loan will live on (until you refinance).
Kenneth R. Harney: Sounds basically correct to me. However, some lenders do make it a point to specialize in consumer service. That should be a factor you keep in mind in shopping -- ask realtors, friends, colleagues for recommendations on the quality of service of lenders.
Washington, D.C.: How does one find out their FICO score?
Kenneth R. Harney: You can go on line to www.myfico.com or to www.equifax.com and for a $12.95 fee obtain your FICO through Equifax.
Rockville, Md.: I have $60K left on my mortgage with recent houses in my townhouse development selling for $200K. I have considered refinancing for the max I can get without PMI, then taking the cash plus some additional savings and buying a second (retirement) property for cash. I would eventually move to this second property and sell my first home -- though this is probably five or more years away. I figured this method would let me cash in on the real estate appreciation in both markets -- plus I could continue to get a tax deduction on my first home. Your thoughts? Is this a wise way to invest my savings -- which aren't doing too much in the stock market these days?
Kenneth R. Harney: Buying a second home in your situation may well be a good investment. However, I have a couple of questions: What are you going to be doing with the second home while you wait to retire? Are you going to be renting it out or visiting it on weekends? Can you afford the property taxes, maintenance, etc. on two homes? If you're going to rent it to help cover the costs, are you prepared to be a landlord? I personally wouldn't treat a second home primarily as an investment. The stock market may be soft right now but some real estate markets a year from now may be even softer.
Clinton, Md.: What does the lender look for in terms of credit? If there were some past delinquencies but you have been current for the last year, does this have a great affect on the chance of you getting a mortgage loan (but the income is over $150,000 joint)? Does the lender pull payment history from a previous mortgage or do they go by the credit bureau?
Kenneth R. Harney: The lender is likely to pull credit information on you from several large credit bureaus. Those credit reports will have information on any prior delinquencies (including mortgage payments). Before applying for a mortgage loan, why not order your credit reports from each of the three major bureaus (Equifax, Transunion and Experian). That way, you'll know what the lender will see and can correct any incorrect information that might be contained in the reports.
Alexandria, Va.: It was my understanding that prequalification is worthless, particularly today when there are a gazillion mortgage calculators on the Internet, where you can easily estimate how much you'll probably qualify for.
Kenneth R. Harney: In terms of shopping for a house, you are in a far stronger position if you have a pre-qualification letter from a lender.
Kensington, Md.: We're planning to buy a home in Montgomery County this year, but have unusual circumstances regarding the mortgage. Although we have strong earning potential, I'm home with a new baby and my husband is establishing his own business, so we currently have very little income. Nevertheless, we're confident we can handle the mortgage we want with funds we've set aside, and we'll have a large down payment (greater than 50 percent of the price of the home). Our FICO scores are in the high 700's. Are there particular lenders or brokers that might be better for us? Will we have a tough time qualifying due to our (current) lack of income? Also, will we have to settle for higher than market rates, and if so, how much higher is reasonable?
Kenneth R. Harney: The good news for you is that some lenders have programs in which borrowers need not demonstrate their current incomes. They are generally called "low or no doc" loans. They are pretty much reserved for people with the highest credit scores, so you may be an ideal candidate.
Washington, D.C.: I have a first loan for 7 5/8, and a second at 9 1/2. (I wanted to avoid PMI.) The house has appreciated in value over the last four years, and I think it might be worth refinancing now, and having just one loan at about 7 percent. Some questions: When I refinance, should I look for a zero point loan? Is a zero point loan different from a no-cost refinancing? Is it possible to get a zero point loan, and roll the cost of the refinance into the outstanding balance? If I increase the outstanding balance, is this going to complicate my annual tax return?
Kenneth R. Harney: Zero cost loans involve rolling all points and closing costs into the interest rate. zero point loans simply roll the points into the loan amount or into the interest rate. Neither type of loan should complicate your tax return.
Northern Virginia: Are mortgage brokers regulated in any way? I worry that they're not giving me all of the information, or not suggesting the best loan program for me because another generates more fees.
Kenneth R. Harney: Mortgage brokers generally are less heavily regulated than mortgage bankers and certainly less than banks. And it is true that some brokers have been known to push borrowers into loan programs that benefit the brokers rather than the borrower. The solution to this problem is to shop multiple brokers and become familiar with all the competing loan programs that may fit your needs.
McLean, Va.: Are there any first-time buyer incentives in Virginia, like the tax credit in D.C.?
Kenneth R. Harney: To my knowledge, there are no local tax credit programs in Virginia.
washingtonpost.com:
That was our last question today. Thanks so much to Kenneth Harney, and to everyone who joined us.
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