Homeward Bound: How to navigate and understand mortgages
It feels like no matter where you turn, there’s someone looking to get you into a new mortgage. With TV commercials advertising completely-online loans, billboards boasting mortgages with no closing costs, and pushy neighborhood loan officers trying to get you to refinance your house, there is no shortage of options. But how do you know which are good deals and which are just too good to be true?
A post-recession era
Understanding today’s mortgage climate requires a quick look at the past.
“I’m really not exaggerating when I say almost everything has changed since 2007,” says Teresa Whitehead, CEO of Citywide Home Loans. For those with a short memory, 2007 was when the real estate bubble not only burst, but exploded with such force that it helped create the Great Recession. Pre-2007 mortgages were often issued quickly and recklessly, allowing borrowers to qualify for loans they couldn’t really afford.
There are now a slew of regulations to prevent that from happening again. Underwriting criteria has tightened significantly, and lenders are now required to give borrowers a settlement statement that shows all loan costs four days before closing.
“The odds of you getting in over your head are now significantly less they were back then,” Whitehead says.
Though the added regulations are good for consumers, they tend to slow down the process. Loans that may have closed in two weeks before the recession now take 30 – 45 days to complete.
The most significant change from a decade ago is that interest rates have largely been standardized. According to Whitehead, “Rates don’t vary as much lender to lender as they once did, and programs and products are all very much the same.”
Too good to be true?
Despite most lenders offering the same interest rates, there always seems to be a few who are offering better deals. Justin Brown, senior mortgage strategist at Security National Mortgage, says there are a few explanations.
The first is that some advertised prices only reflect the interest rate, rather than the annual percentage rate (APR) which accounts for all fees associated with the loan. “Everyone wants the lowest rate, but it’s important to understand the full cost,” Brown says. “If you’re paying higher closing costs or buying points to get a lower interest rate, you may end up paying more in the long run.”
Another reason some rates are so low is because they reflect the exception, not the rule. “That low advertised rate may technically be available,” Brown explains, “but only to people who fit in the small box of super-high credit score, high loan-to-value ratio and perfect work history.”
Though a quick internet search can give you a good idea of best-case-scenario rates, the best way to get a personalized rate is to meet with a loan officer, he says.
What to look for in a lender
After years of sluggish sales, Utah’s home market is now red hot. “We’re back in a market where you list your house, and within 24 to 48 hours you can expect multiple full-price offers and sometimes offers above the asking prices,” Whitehead says.
In such a seller’s market, buyers need to make sure their lender can get the loan funded quickly or risk losing the home to a backup offer. One of the first questions you should ask a lender is the average time it takes for them to close a loan. If it’s close to 30 days, you could be in for a tight squeeze. If it’s longer than 30 days, you should look for a different lender.
The next step is to ask about rates. Make sure the lender gives you a loan summary or good faith estimate that breaks out each of the fees and shows the total cost. If you’re comparing lenders, it’s important to do so on the same day. Much like interest rates, fees can fluctuate with the market and even change daily.
It’s also a good idea to get a feel for the loan officer’s level of experience. If you’re a model borrower, any lender will do. But if your situation is even a little out of the ordinary—you’re self-employed, you have a higher debt ratio, you’re using a co-signer—you’ll want to make sure that your loan officer knows how to deal with it.
Whether your loan is easy or complicated, you’ll have to do deliver a lot of documentation to your loan officer. Make sure the lender has processes in place to let you know when items are due so you can keep up with the tight deadlines.
“Even if you’ve bought houses in the past, the process is very different today,” Whitehead says. “Whether it’s your first home or your fifth, buying a home is a very emotional experience and one of the biggest financial transactions in your life. You really need somebody you trust to walk you through the process.”