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Loan Programs

UP2 Choosing a Mortgage Originator

You’re no sucker. You’ve done your homework. Shopped around. Called several of those mortgage lenders in the Sunday paper mortgage rate guide, and received a slew of quotes and good faith estimates. So now, you pick the one that has the lowest cost or APR and live happily ever after, right?

That’s the way it ought to work. But in reality the chances are that 35% of the mortgage rate quotes you received were not legitimate. A recent survey of California mortgage loan applicants found that 70% of borrowers indicated that the terms they received at closing on mortgage loans from sub-prime mortgage lenders differed significantly from the terms they had been promised at the time of application or at an earlier stage of the mortgage loan process. Other mortgage industry surveys reveal that the “bait and switch” routine in mortgage lending occurs in more than 35% of conforming mortgage loan transactions (non-sub-prime).

How does the “bait and switch” routine work?  Lenders provide rate quotes and cost estimates to a borrower at the time of application. Some don’t even bother to “put it in writing”.  The borrower relies on these quotes and applies for a mortgage loan with the lender offering the favorable quote.  Later, at the time the applicant decides to lock or on the day of closing or possibly only days before, the lender informs the borrower that the lender cannot honor the original quote.  The lender’s representative will provide a variety of reasons or excuses why they can’t provide the promised terms (some which sound completely plausible) or in more flagrant cases of abuse will simply tell the borrower “tough luck”.  Sitting at the closing table with the moving van parked in the street the borrower will reluctantly accept the modified terms rather than risk a breach of contract or the embarrassment of not proceeding with closing.

And the difference between what is promised and what is actually received is often significant. On larger loan amounts the variance in fees from one lender to another at a particular rate might vary by as much as $10,000.

There is no sure way of avoiding this trap, but there are a few rules that can be followed that will minimize the chance that you’ll be a victim.

Pick the Lender before the Loan

Before you begin obtaining quotes and cost estimates from lenders, do a little research to narrow down the list of available candidates. Before you pick the loan, pick the lenders.  Here are a few tips that will reduce the chance of ending up with a “bad apple”.

Use a local mortgage originator. Using a mortgage originator that is based in the state in which the subject property is located makes sense. There are a variety of reasons, the least of which is that if something does go awry, you’ll be able to seek legal recourse in the courts of your state. Texas law governing real estate is unique. One example is that Texas is the only state that does not use title policy forms promulgated by the ALTA. In our review of out-of-state lender websites their estimates of third party closing costs such as title insurance premiums were notoriously inaccurate.)

Search in Google (or another search engine) for complaint information.  Try searching the keywords “XYZ complaints” and “XYZ ripoff” in an internet search engine (where “XYZ” is replaced with the name of the company you making inquiries about).  If a company has a bad reputation you’ll likely find a few negative review or “Ripoff Reports” posted on the internet.  Avoid the companies that don’t keep their noses clean.

Visit the BBB website. Check the Better Business Bureau’s list of company records to determine whether a company has had complaints filed with the BBB.  You should access the local BBB website in the geographical region for the home office of the mortgage lender.  In some cases the company is not listed. Steer clear of a company that’s not listed on any BBB website.  That means that they have not been in business for a sufficient period of time to be reliable.  You should also avoid those companies that have had complaints filed with the BBB, even if they were resolved to the satisfaction of the customer. Do you really want to have to file a complaint to get a resolution to a problem with a lender?  And keep in mind that for every complaint filed against a lender there are seven that go unreported according to BBB research.  The safest course of action is to only deal with companies who have had no complaints filed with the BBB within the past three years.  Here’s a portal with links to information about the BBB complaint histories of several companies doing business in Texas.  Here’s a link to our company’s report with the Dallas BBB.

Read reviews on mortgage industry directories. Read the reviews and check the ratings in the industry’s top mortgage lender directories.  Of more than 70 lenders participating in the LendingTree.com network in Texas AmeriFund is only one of four that had a perfect 5 of 5 star rating.  Read the reviews on the LT lender directory here.

Use lenders with online rate quotes. If you’re going to use the internet as a tool for locating the best mortgage you should also limit yourself to those lenders that provide an online rate quote for your program. Don’t waste your time with companies that don’t provide the relevant information in their online quotes. At a bare minimum the quote should provide the rate, the annual percentage rate (APR) and an indication of the total “lender” or “loan” fees (or “finance charges”).

 If you haven’t already read AmeriFund’s Guide to Understanding the Good Faith Estimate and Guide to Understanding Annual Percentage Rate I suggest you do so before beginning the comparison of quotes from various lenders, and our Guide on Shopping for the Best Deal and Improving the Odds: Play Two Hands.