BEWARE of the BAD "Good Faith Estimate"

Smart people know to shop a couple of different Mortgage Companies for the best interest rate and closing cost combination.

1. Call a couple of lenders.
2. Inquire about interest rates and programs.
3. Select a program.
4. Get an estimate of closing costs.
5. Go with the best deal.

For example:
You are buying a $150,000 dollar home, with 5% down.
After comparing many lenders, you select the two that appear to be the best and compare notes:

• Both of the companies quote the exact same interest rate.
• Both tell you their closing costs.
• One lender's closing costs are $1,336 less!

You feel great... You've shopped, compared, and apparently saved a lot of money on your home mortgage.

CONGRATULATIONS - You just got screwed. You just paid $747 dollars more in closing costs than you needed to.

How did this happen? Easy! Shopping for a mortgage is complex at best -- even for the savvy previous homeowner. Daily rate changes, time sensitive lock-in periods, points, lender's fees... plus the emotional element of probably the largest purchase any of us will ever make. Throw in to this already murky stew the ingredients of tricky rate advertising, commissions for every officer, agent and broker who 'helps' in your transaction, and the obscure differences between 'rates' and 'fees.' It's no mystery that many buyers settle for a mortgage that exceeds their monetary means out of sheer exasperation!

Below is a REAL example of  two Good Faith Estimates. Both are for the exact same purchase, and given to one of my clients. One is from an Internet mortgage company from Florida, the other is from us (The Joe Metzler Mortgage Group - www.JoeMetzler.com ). The example above and below, and all calculation, were taken from these two real estimates.

The client originally was going to use the Florida Company because of the apparent savings.
Here are the MAJOR quoted cost differences:

How you got taken:

Their estimate appears to save you $1,336. But when you add up all costs (no matter what they call them), then factor in the seriously under-estimated items, plus the costs they simply left off their estimate, your REAL COST for using the 'cheaper' company is $747.00 HIGHER.

TRICK- No Origination: A significant (apparent) cost difference, and a major 'trick' selling point because it automatically appears as if the lender is a lot cheaper. REALITY - Add up their broker fee, processing fee, lock-in fee, higher rate, high underwriting fee, and other various junk fees. By the time you do this, it usually adds up to more than the standard 1% origination fee.

TRICK- No Lender Fees: A variation of the "no origination" trick. Some of the big Internet Mortgage Companies play this one pretty well. REALITY - There are still "third party" fees. Among these are fees for appraisal, courier, title insurance, state tax, and recording. The TRICK to the customer is that their "real" rate is actually higher than you are being quoted. You pay "loan discount points" to buy down the interest rate to their "great rate" (or about what everyone else is quoting). The "points" you pay them equal about what you would pay any other lender in "lender fees". This no lender fee statement makes them sound better than everyone else, when in reality, your costs are about the same, if not higher. - Nice trick huh?

Confused? It's simple, on a $100,000 loan:

Although NO LENDER FEE sounds like some significant saving, it really isn't. Plus you may actually pay MORE for that great loan! Are you comfortable using a lender who is trying to trick you?

Another "NO COST" or "LOW COST" option is achieved by simply increasing your interest rate. Everyone knows the TV commercial with; "I lost another loan to" statement. They claim a loan with $395 closing cost. Sounds great, but you should click here to read my article "Best Rate or Lowest Cost - Which is Best for You" You may be surprised.

TRICK- APR vs. Advertised rate: Do you understand APR? Most people don't! If a lender quotes a rate, by law, they must quote APR. REALITY - The lowest Rate or APR does not automatically mean the best deal. The further rate and APR are apart, the more you are paying in closing costs. If you don't understand APR, LEARN! Click here to read my article "APR vs. Rate - How you got screwed"

TRICK- Interest Rate: They appear to be charging the same interest rate: REALITY - You are either paying discount "points" to get the same rate, or they had added a ton of junk fees in order to give you their great rate.

TRICK- Days of Interest: They almost always quote only one day of interest. This is great if you close on the 30th of the month. You pay interest for the days in the month remaining after you close. REALITY - We always find out the exact closing date, then give you an accurate number. If you close on the 10th day of the month, you pay 20 days of interest. The difference between 1 day of interest and 20 days of interest can be several hundred, to over $1000 dollars.

TRICK- Reserves (Escrow's): They marked TBD (to be determined). When pressed, they usually state it is not part of "their" closing costs, or is unknown at this time. REALITY - You need to pay this at closing. We have charts to accurately determine what these fees will be based on your closing date.

TRICK- Title Company Charges: They usually only list item 1101, the closing fee. This fee is almost always within about $25.00 for all Title Companies. REALITY - There are a LOT more Title Company fees besides the 'closing fee' which you will need to pay at closing (title insurance, doc prep, name search, title exam, etc.). When pressed, they will say it is not part of 'their' closing costs, or is unknown at this time. Again, we have fee charts from the Title Companies, which accurately show these fees.

TRICK- Government Recording Fees: Out-state lenders almost NEVER list the Minnesota Mortgage Registration Tax. REALITY - This tax is .0024% of the loan amount, and can easily be several hundred, to thousands of dollars. Out-state lenders usually say they "didn't know about this fee" or put plus taxes on their estimates. Many local lenders usually say it isn't one of "their" closing costs.

TRICK- One Fee Quotes: These type of quotes usually sound good. It definitely appears to be easier to "compare" this way. REALITY - The vast majority of these type of quotes offer nothing great. Other than a great way to hide fees. In reality, your costs are usually about the same, if not higher. I ask, "Why are they afraid to show all costs?"

TRICK- Plus, plus, plus: Many lenders give quotes with a lot of "pluses" buried in the estimate. This allows their quote to sound better than others. REALITY: Add up all the pluses.

THE BOTTOM LINE
You don't have to use us - but don't get fooled into selecting your lender with false and misleading information. It is easy to be misled. By following these rules, you should always be able to make the correct apples-to-apples comparison:

#1 MOST IMPORTANT ITEM TO REMEMBER: ALL lenders have about the exact same costs for doing your loan - NO ONE can do your loan significantly cheaper than anyone else can, PERIOD. Anyone more than just a couple of hundred dollars cheaper than everyone else on an estimate is usually being deceptive. Anyone who quotes a rate more than 1/4 point lower than everyone else is also leaving something out of the equation - and I can just about guarantee in the end, you will actually pay MORE!

1. Always use a local lender, but never one with just one office (this automatically reduces your chances of being misled by about 90%). We have five offices in the metro area.
2. Make sure you are dealing with a local lender who understands local closings. Internet Mortgage Companies are notorious for screwing up loans, under-estimating Good Faith Estimates, and giving misleading interest rate quotes. Although you may have found us on the Internet - We are NOT an Internet Mortgage Company! We are a Twin Cities local lender with an Internet presence.
3. A couple hundred dollar difference in bottom line fees on an estimate is meaningless because of the variations in how lenders calculate costs. All estimates within a couple hundred dollars either way should be considered equal.
4. Don't fall for "we don't charge for" statements. Nothing is free, and YOU always pay. See the No Lender Fee example above.
5. Closing Costs / Lender Fee's. - Don't be fooled by "lender fee" statements. PAY CLOSE ATTENTION. Many lenders will give you a ridiculous number that has no bearing on your real total costs by saying "OUR closing costs" or "OUR lender fee's" are X amount. Ask instead for the "bottom line", the "total amount required to complete the transaction", or even "what is the exact penny I will need to bring to closing?" By asking in this manner, you eliminate 90% of the misleading games some lenders play in attempting to make their costs sound so much better than everyone else does. Also let them know in advance, that if the numbers at closing are significantly different than their estimate, that you will walk out without closing.
6. NEVER pay anything right up-front. You may be asked to pay a credit report fee up-front. This is OK, but why would you, when so many lenders don't require it. We don't! You may be asked to pay the appraisal fee in the beginning. This is also OK, as long as it is AFTER they have your full application, and AFTER you have seen the Good Faith Estimate. NEVER pay anything up-front other than appraisal and credit report (typically "Application Fees")
7. Ask the lender for a WRITTEN "Good Faith Estimate (GFE)" of settlement charges to verify if they are willing to put their pricing claims in writing. Make sure to tell them you want ALL costs from ALL sources involved in the transaction listed. You don't want anything listed as TBD (to be determined). If they don't know what a fee is, have them find out BEFORE they send you an estimate. Tell them you know RESPA requires their estimate to be ACCURATE.
8. COMPLETELY IGNORE any interest rate or closing cost estimate online. They are never right!
9. GET IT IN WRITING. Then review each Good Faith Estimate VERY carefully, especially if the estimate does not look exactly like a real final settlement statement (known as a HUD-1. Click on the REAL estimate link above to see what a HUD-1 settlement statement looks like). Double check to make sure that EVERY cost associated with your loan is listed. All REAL estimates should be very close in total dollar amounts (assuming the same loan scenario).
10. NEVER use an unknown lender who solicited you through the mail, or called you on the phone. These are by far the worst rip off, misleading, overcharging, predatory lenders that exist!
11. Download and view the "REAL" Good Faith Estimates listed above so you know what should be on your estimate.
12. Call or fax us with the other company's estimate. I will be happy to help you review them. If it is a GOOD "Good Faith Estimate" - I'll be the first to tell you!
     

    Joe Metzler Senior Mortgage Banker The Joe Metzler Mortgage Group Phone (651) 552-3681

    971 Sibley Memorial Hwy (Hwy 13) Saint Paul, MN 55118 Map Cell (651) 592-4460 - Fax (651) 994-6425

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