| Selecting a Mortgage Lender
Hosted by Kenneth R. Harney
Syndicated Columnist
Wednesday, April 24, 2002; 1 p.m. EDT 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. 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). The transcript follows. 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.
Ken Harney: Hi everyone, welcome to the discussion today. I'm Ken Harney and I'm looking forward to answering your questions today so let's get started!
Washington, DC: If you were going to apply to get your own home mortgage this week, what fees would you pay, and which fees would you absolutely not pay? Ken Harney: Tough question!! There is a big problem with "junk" fees--stuff lenders and others stick onto the bill that are for little or no actual services. My best advice is to look at every fee, ask what it is for precisely, and then decide whether to negotiate about it.
Arlington, Va.: Hi - I am strongly considering purchasing my first home, so I'm new to the mortgage selection process. I have obtained my Fico Score (773), and am confident that I should qualify for a good loan with a decent rate. My question is, would you recommend doing business with an online-only finance company, considering my inexperience? Also, given my credit score, am I likely to find just as good of a deal at a local company or bank as I would online? I am also a member of two different credit unions. Ken Harney: With a 773 FICO you should be golden! You deserve--and should demand--the lowest rate and lowest fees from any lender you deal with. As to online--I think there are now a number of very reputable companies online that try to simplify the process for first timers. I like Lendin g Tree and E Loan, for examples.
Washington DC: Hi, thanks for hosting this...I so needed it. My question is: how long does it usually take to close on your financing? I just got the contract and the seller asked for a early settlement. I have less a month now and I only know the lender that the agent recommended. Any suggestion how to start? Ken Harney: Hi, if you explain your need for speed to your lender there is no question the deal can get done in less than a month. Just be out front about it from the start....
Bethesda, Md.: I am absolutely clueless about getting a mortgage. Is it best to go through my bank, or try one of the Internet mortgage finders? Are there a couple places that you would recommend - i.e. Washington Mutual, Bank of America, etc.? Ken Harney: Hi, lots of folks are clueless about this subject so don't feel lonely. In my mind the key to getting a good deal is incessant shopping--online, on the phone, wherever. Shopping not only gets you up to speed on rates and fees, it often reveals the big differences among various types of lenders. HAVE FUN
Bristow, Va.: With a DP of 5% only, my lender granted me a 2nd mortgage at 8.25% payable in 30 years (in lieu of PMI ). My lender advised me to pay the 2nd mortgage earlier than 30 years so I can build equity on the house at the soonest possible time. I was granted 6.875% on my first mortgage payable in 30 years, too.
Should I pay the 2nd mortgage sooner than the 30 years- is this good for tax break?
At what stage can I plan on refinancing my home?
Ken Harney: I would definitely go for a shorter term second. Not only is the interest rate on that portion of your total financing considerably higher, but its continued existence will indeed cut down on your equity accumulation. Pay off the first over the long term, get rid of the second ASAP.
South County Center: What is the best way to find current market rates? Anyway to estimate costs associated with refinancing? Ken Harney: Rates are posted all over the Net, on companies' own sites and at places like www.hsh.com, which collects data from over 2,000 lenders each week.
Centreville Va.: Hi I bought a home last year and got a single loan with PMI. Now I am considering a send mortgage to avoid PMI and build up equity against that. Is this possible without having to refinance ? I have a very low first mortgage interest rate. Thanks in advance Ken Harney: I don't see how getting a second at this stage will help you get rid of PMI. Once you have it, it's pretty much with you for at least several years, even if your equity has risen above 20 percent. If you want out of your current PMI, you'll need to refi.
Garden City, NY: I've heard all the conventional wisdom about improving your credit rating: pay bills on time, pay off credit card debt, etc. We've done all that in anticipation of buying our first home. My wife's has student loans that are the best deal I've got going right now, lower rates than most mortgages, but I'm concerned about debt/income ratio tanking our application. Is there any source for realistic estimates of how my credit rating will fare in the mortgage market? Sometimes I feel like a jackass chasing a carrot dangling from a stick, especially having just gotten done paying my taxes. Thanks. Ken Harney: Hi, I suggest you ask lenders whether they are using something called "Expanded Approvals"--it's a relatively little known underwriting concept from Fannie Mae (the investor), which allows folks such as yourself to qualify for low rates despite high ratios and even credit problems in the past. Check it out.
Manassas, Va.: Is it extremely difficult to find a home lender who can get you into a mortgage without all of the hassle of having all this money to put down and still get a good interest rate and affordable monthly payments? Can you suggest anyone to help me? Even though I have bad credit I am extremely dedicated to keeping a very decent roof over my and my child's head. Currently I pay $1,000 in monthly rent and that amount would be no problem for me to pay for a mortgage. I do find it difficult to be able to save anywhere from 5 percent to 20 percent toward the down payment and closing costs as most lenders tell me I need to be able to afford a mortgage. Please help! Ken Harney: There are actually quite a lot of loan programs that could fit your needs. I would talk with large mortgage lenders such as Bank of America or Washington Mutual and Countrywide. They all specialize in low downpayment mortgages for people with marginal credit.
Reading, Penn: Good afternoon! Wife and I have been in a credit counseling debt repayment program for a year now, and expect to be in for at least 4 more. We had no late payments or non-payments, were not defaulting on anything, just had way too much on credit cards. After we 'graduate' from the program, will mortgage lenders look at us and just laugh, or can we expect to get a mortgage, and at a reasonable rate? We're in our current house over 10 years, both have steady, long-term employment, but will be looking for a different house in 4-5 years. Thanks! Ken Harney: Hi, a couple of answers back I mentioned Fannie Mae's Expanded Approvals program. It is custom tailored for you! Rates range from the mid 7s to the mid 8s generally. The key is your performance on payments over the last couple of years, not your high debt ratios of the past. The counseling stuff should be a plus, not a minus.
Centreville Va.: I was in the impression that if your equity in the home is more than 20% then I wont be paying PMI. Is that true ? Ken Harney: Not precisely. If your downpayment is less than 20 percent at the start of the loan, then PMI is a virtual certainty (absent a second mortgage). Once you've got the loan, generally you are stuck with PMI for the first two years no matter what. Then, depending upon what your lender/servicer tells you, you may be able to cancel it. Ask your lender to send you a copy of its policy on PMI.
Fairfax, Va.: In a paid discussion from earlier this week, a question was asked about sellers who do not accept bids from persons with government-backed mortgages (in this case, FHA). I'm in the pre-approval process for an FHA mortgage (credit score of 760, but no money for downpayment) and was wondering how this might affect my homebuying experience. Is there any way I can counteract prejudices against FHA lendees, or any particular strategy I should follow? Ken Harney: With a credit score of 760, you don't really need to bother with FHA, even given your lack of downpayment. Talk to brokers and lenders to get a better picture of your options. There are literally dozens of low downpayment plans--down to zero downpayment--that would be right for you.
Fairfax Va.: Please explain what a bridge loan is? We need to find a way to buy another house without having to sell our house first to use the proceeds....to buy the other house. No one is accepting contingent contracts in this market. Ken Harney: Hi, a bridge loan is generally a short-term loan that provides you the money you need--temporarily--to swing the new purchase. Most large lenders and banks should be able to help with it. Alternatively, ask one or more Realtors for their recommendations--it's their job to know where to find bridge money.
Bethesda, Md.: Speaking of FICO scores, I can never get a feeling of what is too low. If 776 is "golden", how is a 675 (lower from 2 late payment in grad school, about 18 months ago)? Also, how bad would it be if I were married to a guy with no credit history - and a rejection or two b/c of the lack of credit history. We'd get more loan if we waited until we were married (next winter), but I think I could qualify for something decent on my own now and I am afraid his lack of credit history may pull us down. Ken Harney: A score of 675 is slightly below the national median, but well above the 620 cutoff point many lenders use to pricing higher. Why not go online and try some of the sites like Lending Tree or QuickenMortgage and see what you find....
Fairfax, Va.: What is PMI? and why has it been mentioned so much in this discussion? Ken Harney: PMI is private mortgage insurance. It is required by most lenders whenever an applicant's downpayment is less than 20 percent. Its proceeds protect the lender from loss in the event of your default or foreclosure.
Washington, D.C.: What's a FICO? Ken Harney: A FICO score is the most widely used tool to gauge your credit risk. Essentially it is a software model through which credit bureaus run your credit file. A high FICO--say 720 and higher--gets you the best loan rates. Below 620 you start getting whacked.
Sterling, Va.: Ken I have two questions to ask. First, if I get approved for a loan and I decide to shop around for a better loan, does that impact my credit rating/loan score? Also, I'm debt-free but am thinking of buying a new car. Should I hold off on purchasing a $15,000 car until I get approved? Does a car purchase effect my loan worthiness, all things being equal? Thanks. Ken Harney: On the first part of your question, it's always smarter to shop intensively first, then sign up with the lender offering you the best deal. If you pull out of a loan commitment, you could lose some money on fees. As to impact on credit scores of shopping--as long as you are shopping for the same type of loan--i.e., a mortgage--the "inquiries" made by successive lenders about your credit history shouldn't greatly impact your score. As to buying a car--why not delay until you have the mortgage locked up. You are going to look better credit wise if you are not saddled with high total monthly bills.
Bethesda, Md.: Hi, I bought my first home in the fall. I have a question about the data on the HUD form. My lender had a 1% origination fee (point), but then had a 1% discount, so my understanding is that I didn't pay any points-it was a wash. But what exactly is the purpose of having the loan as plus 1% then minus 1%? Ken Harney: Unfortunately, the term "discount" in this context doesn't mean you're getting a break. I suspect that if you look back at the HUD 1 you will find that you were charged 1 point for origination and another point in loan discount. I bet you paid two points, not zero points.
Capitol Hill, DC: We are thinking of refinancing our condo. We are two years into a 7/23, with 7 per cent interest for the first seven years. We have about 50 per cent equity right now, thanks to rising property values. Should we refinance? Note: we are not certain how long we'll stay in our condo - anywhere between 6 months and 5 years. Ken Harney: If you already have a 7 percent rate, I would stick with it for awhile longer. Why pay refi fees or go to all the trouble when you're doing pretty well relative to the prevailing market right now?
Alexandria, Va.: Speaking of FICO scores, how can I go about finding what mine is? Ken Harney: You can go to www.myfico.com and obtain your FICO based on your credit file from Equifax. Cost is $12.95. Bear in mind, however, that the FICOs lenders pull at application from the two other credit repositories--TransUnion and Experian--may be different.
Vienna, Va.: In working with a large bank should I consider having an independent attorney review the mortgage papers or would that be a waste of time/money? Someone I work with went through the process a few months ago and was hit with unexpected fees at closing. Ken Harney: Sounds like that particular lawyer was a waste. Generally speaking, you probably don't need a lawyer to review your papers. But if there are any complexities associated with the house or the type of loan you're applying for, a good lawyer could be a good idea.
Washington, D.C: Hi Ken. I am currently looking to purchase my first house or condo. A year ago I moved in with my mother so that I could pay off many of my credit cards. I still have a couple lingering. My credit score has improved but not by much...(544)also, I have long term employment(10yrs). Will a I be considered for a mortgage loan or be laughed at? I was considering FHA. Any suggestions? Thanks and have a great day. Ken Harney: FHA is a good way to go for you. FHA doesn't pay a lot of attention to your score.
Arlington, Va.: When negotiating a loan, when are you committed to a particular lender - when you "lock" or when you fill out the loan application? Also, how persistent should a potential lender be? I am a complete novice. I was recently in a situation where I got a first quote, second came in better, first matched it, then second came in lower. . . I locked with the second, but the first kept calling saying I was unethical and he had done a lot of work on my loan (calculating closing cost estimates and monthly payments). I was reduced to tears! I told him flat out I was through working with him. Thank god for caller id! Ken Harney: That loan officer was a cry baby. You are not committed to a particular lender until you sign the application and the lender approves (and signs) the commitment. The rate lock is simply part of that transaction and normally wouldn't occur unless you were approved.
Washington DC: My husband and I both have FICO scores in the upper 700's but do not have 20% for a down payment. Should we expect to pay a slightly higher interest rate than if we have the 20%? Ken Harney: Your high scores will get you a very good rate. You will still probably have to pay PMI, private mortgage insurance, which will add to your monthly payment.
Points again: Well, the 1-% discount actually had a minus sign in front of it--something like a $900 origination fee, then -$900 discount on the loan. Still think I paid two points? If so, I need to submit a new 1040! Ken Harney: I suspect you did pay two points...take another look at the docs.
Washington D.C.: I have all of my credit card loans and my car loan through my credit union. I was told by a lender the other day that credit unions do not report favorable credit payments to credit bureaus, and thus they don't help your credit. Considering I don't have any credit cards or loans outside of the credit union, this would definitely hurt my chances of financing a house? Do you know if this is true, and, if so, what steps I should take to counteract it? Ken Harney: Credit unions report payment info to the credit repositories just like other lenders, as far as I know. If yours doesn't--and you should ask about it--I would consider changing where I bank.
Springfield, Va.: Is it true that a "gauge" for figuring out how much you'll qualify for is three times your gross annual salary (combined if you're married)? Assuming great credit and considerable monthly debt (two car payments). Say your combined salaries equal $130,000 will you qualify for a $390,000 home? Again, based on great credit as well. Ken Harney: Back a decade or two ago, there were easy rules of thumb on income vs. maximum house price (e.g., double your gross household annual income.) Today, however, different lenders have very different thresholds and requirements--much more generous in many cases. So a $130k income could well qualify you for a $390k home, provided you have some money for the downpayment. Check around and you'll see how widely standards differ. Also talk to Realtors--they often are in touch with lenders they know can make whatever you need happen.
Arlington, Va.: Re: 8.25% second mortgage - HOW do you pay this off faster? Double the payments? Refinance the 2nd in a couple of years? We are first time homebuyers with the same deal. Ken Harney: Pay it off quickly any way you can--whether by periodic lump sums to principal or additions to principal on your monthly payments. You could also refinance the whole combination (1st and 2nd) a few years down the road if rates look attractive. The point is: get rid of the 8 1/4 and stick with the lower.
Bristow Va.: Under what different scenarios would you recommend refinancing? Ken Harney: As a general rule, refinancing makes sense when you can both lower your rate (monthly payments) enough to counteract the cost of the transaction within 18-24 months. Sometimes you can find a broker or lender who will do a no-closing cost refi--i.e., a lower rate that also incorporates (finances) the normal closing fees such as title insurance, appraisal etc.
Closing on Friday!!: When can I expect to get a HUD 1 with the "final" numbers for settlement?? Thanks!!
Ken Harney: At the very least, if you are closing Friday you should expect--no, demand--your final HUD-1 no later than Thursday. Otherwise, how can you review all the charges and fees, and have questions ready for the settlement table? Remind your lender/closing agent that under federal law, you have a right to see the HUD-1 a day ahead.
Silver Spring, Md.: Ken;
A couple of years ago we were forced to accept somewhat less than agreeable rates on a mortgage. Knowing this, the lender added in a prepayment penalty clause. I understood that these were illegal in Maryland. Am I right? Ken Harney: You're asking a legal question and I am not an attorney. However, I believe in Maryland, state law prohibits prepayment penalties on most conventional home purchase loans. There are exceptions, however, and for those I suggest you consult a lawyer.
Washington D.C.: I have strong credit and in getting financing lined up for a first-ever home buy--a condo--the mortgage broker told me that with 3 percent down, I could get low rate and with no mortgage insurance. Is this a good deal? It sounds good? I could afford to put more than 3 percent down, but that's all that's required for this particular rate. Ken Harney: I would be a little suspicious. When you put down 3 percent you almost always have to pay PMI--unless, that is, you are paying FHA premiums, which are simply another form of insurance. Also, why does the broker want you to pay just 3 percent when you are able to put in more? I would double-check this rate against others in the market, and frankly, I would question the broker on fees.....
Reston, Va.: What is the typical APR that lenders charge? And what is it? Ken Harney: There is no "typical" APR lenders charge. Annual Percentage Rates vary all over the place, depending on type of loan and the credit quality of the borrower, downpayment etc etc,etc. Of course, lower is usually better....
Hyattsville, Md.: Thanks for taking my question, would you recommend go for a ARM if we do not plan to stay in the first condo we just bought for longer than 5-7 years? Ken Harney: A "hybrid" ARM might suit your needs. You can find some that have a fixed rate for the first 3, 5 or 7 years, then switch to annual adjustable. The rates tend to be a little lower than 30-year fixed.
Silver Spring, Md.: Why don't lenders offer second mortgages on non-owner occupied property? Can you recommend a source for this type of financing? Ken Harney: Non-owner occupied properties are considered higher risk. Check with one or more mortgage brokers for your second--it's a somewhat specialized product, but brokers are adept at locating sources.
Washington, DC: For religious reasons of avoiding a mortgage based upon interest, I am considering using a mortgage company that basically purchases the property as a co-owner, from whom I would purchase equity in the house over a period of 15 or 30 years. The mortgage company's liquidity is provided by a special arrangement with Freddie Mac, and the total cost to me would be competitive with an interest-based mortgage. My question is how a seller would view such a mortgage if I could provide the standard qualification and commitment letters from the mortgage company. How much less competitive would my offer be? Ken Harney: With Freddie Mac backing the program, I can't see why your financing arrangement would be of any concern to a seller.
Orono, Maine: Ken, it may interest people to know that they can shop around even if they opt to use a mortgage broker. A lot of large wholesale lenders make their rate-sheets available on the Internet. It seems to me that if you walk into a broker without a stack of them in-hand, you are doing yourself a disservice. Ken Harney: Good point, thanks.
Washington, D.C.: Hi Ken: I hope you can help me. I'm thinking of buying my first place -- my ideal would be a two-bedroom condo somewhere in the city. I'd like to buy sometime this summer. I only have about $6-7,000 to put down. That doesn't seem like very much to me. I also have an old 401(k) worth about $6,000, about $10,000 in student loans and a very stable job in government intelligence with a decent salary. Do you think I'm a good candidate for a loan and as a buyer? What are some things that you can suggest that I look for as a first time buyer? I've been working on educating myself on this stuff for a while now. Thanks so much! Ken Harney: I would get the ball rolling by looking at the sort of condos you're likely to want to buy. Talk to real estate agents who are showing them or listing them. Motivated agents can be a great resource if you pump them for information on financing sources and options. With the cash you have on hand, you should be able to swing a purchase. Good luck!
Ken Harney: Hey folks, nice chatting with you all, but I gotta go! See you next time, Ken
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