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December 9, 2013

5 Steps To Picking The Best Mortgage Quote

You’ve probably been told the best way to get a good mortgage is to get a few quotes and comparison shop them.  So you took the time to do a few loan applications, but how do you compare the mortgage quotes and figure out which one really is the best for you?  The following 5 steps should provide you with a framework of how to compare and choose.  You could get the two quotes and use this post to compare them but it’s probably the most boring post I’ve written so I’d suggest you have me, or whoever your agent is, help you do this comparison then review it with you.

5 Steps to Picking the Right Mortgage Quote:

Step 1 –  Get a Good Faith Estimate (“GFE”) or cost estimate from all of the lenders you wish to compare:  

Any time a lender takes an application for a loan they are supposed to provide a Good Faith Estimate within 3 days to the potential borrower.  The GFE is a standardized government mandated format where the lender has to disclose (A) the origination charges, (B) the charges for all other settlement services and (A+B) the total estimated settlement charges.

There are a few benefits to receiving the GFE form rather than just a “cost estimate” that the lender gives you on their own form.  First of all, when the lender provides this GFE they are bound to actually close the loan with the cost estimates they provide.  Not all of the costs they quote have to be exact, there are different price change tolerances for different items on the GFE, but for some items they need to be exact and this is helpful to you as the consumer. If you just get a cost estimate the lender isn’t bound to meet those cost estimates at all.

Step 2 –  Make the Good Faith Estimates you’ve received “Apples to Apples” with a red pen markup:

Now that I have quotes from several lenders I can just look at the interest rate quoted and the closing costs and go with the lower ones, right?  Wrong!  This is where you have to do a little more work to make sure you are comparing two loans “apples to apples”.  When putting together your estimate the lender had to make quite a few assumptions and if we don’t comb through and make sure both lenders are working off the same set of assumptions it’s impossible to determine which one is the better deal.    For example, in Stapleton we have $475 in various fees that go to the Stapleton MCA (the HOA) and they are paid by the buyer at closing.  A mortgage lender who knows the area well will know to include those fees on his/her GFE whereas a mortgage lender from a huge national chain who isn’t even located in the state may unknowingly omit those fees…making his quote look $475 better when in reality it isn’t!  So below are the areas of the GFE or cost estimate that we need to adjust to make them the same so we can determine which quote really is the best deal.  For this part of the comparison I suggest you have a red pen and your loan cost estimates handy so you can make the changes as you go along.

Items to Adjust on the Cost Estimates:

Interest rate:  Once you have your two GFEs pick the rate that best suits your needs and have both lenders quote you at that same rate.  You should also mention that you want the “30 day pricing”.  That means they are both giving you rates based on their 30 day pricing sheet, again to make sure you are getting apples to apples.

Loan amount:  Make sure both lenders are working off the exact same loan amount.  If they aren’t it will affect some of the costs and make it tough to compare.

Loan Terms: Make sure they are both offering the quote based on the same terms.  If you want a 30 year fixed rate make sure both are priced that way.  If you compare a 30 year fixed rate to a 5 year adjustable rate mortgage it’s not a fair comparison.

Tax Reserves:  The lender has to collect taxes to put in escrow to pay for you when they are due.  To do this they have to make an assumption of how much they will cost and they have to decide how many months in advance they will collect.  Look at both GFEs and make sure they are making the same tax estimates.  If they are different pick one and make it the same for both using a red pen.  If they are the same just put a red check mark by it so you know you looked at it.   Remember, we need apples to apples.  (*Note that when I am helping  my buyer clients with this exercise I suggest they assume the higher amount between the two estimates…that way they are being conservative and hopefully their actually closing costs will come in lower than they budget for in advance)

Insurance Reserves/Prepaids:  Similar to taxes, the lender has to collect for insurance money to escrow and pay later.  They also need to collect for one full year of property insurance up front.  Since you are just applying and they don’t know your insurance company they have to make estimates for both of these items.  Look at both GFEs and make sure they are making the same insurance estimates for both of these two items.  (The full prepaid year amount and the smaller amount that will start your insurance escrow) If they are different pick one and make it the same for both using a red pen.  If they are the same put a check mark by them.

Aggregate Adjustment:  There are rules to how much a lender can escrow for a borrower and if the limit is exceeded the Aggregate Adjustment line item takes it down to where it should be.  If they are different pick one and make it the same for both using a red pen.  If they are the same just put a red check mark by it so you know you looked at it.  If one doesn’t have an Aggregate Adjustment that’s fine, just make sure you make it the same on both of them to keep it apples to apples.

Prepaid Interest:  Depending on when your lender estimates you’ll close, they assumed how much interest you’ll need to prepay for that first month.  Look at the prepaid interest assumption for both lenders.  If they are different pick one and make it the same for both using a red pen.  If they are the same put a red check mark by them.

Title Services:  The closing cost of the title company closing the transaction as well as the costs of providing both an owner’s policy and lender’s policy are all estimates made by the lender.  Find all 3 of these items on the GFE or cost estimate and and make sure they are making the same title services estimates.  If they are different pick one amount for each of the 3 items and make it is the same for all 3 of them on each GFE using a red pen.  If the same, put the red check mark by them.

Misc Differences:  Before we move on review both GFEs or cost estimates for any unusual items.  For example, when building a new home the buyer typically pays for the survey.  One lender may know that and include it and the other may not.  In that example take the red pen and add that expense to the GFE that is missing it so we have an accurate comparison.

Earnest Money and Down payment:  Look at both GFEs or cost estimates and make sure that if one lender is subtracting out the down payment and earnest money then you make sure the other is doing that as well.  It doesn’t matter if they are or not, just make sure both of them are the same.  If one is taking into account the $5k you put down already in earnest money and the other isn’t your not going to have an apples to apples comparison, it’s going to be off by $5k.

Now that we have marked up the GFES or cost estimates with our red pen and made them apples to apples start from the top of each GFE or cost estimate and add up all the expenses to reflect the changes we made in red.  At the bottom in red write “Adjusted Closing Costs” and put down the new total.

Step 3 –  Compare the total estimated settlement charges now that we’ve made them apples to apples:

Once you’ve completed all the adjustments made in Step 2 you can compare the quotes by looking at the “Adjusted Closing Costs” figured at the bottom each that you wrote in red. Now the one with the smaller “Adjusted Closing Costs” total at the bottom is most likely the best deal. 

Step 4 –  Summarize your findings and provide them to the more expensive lender:

I think it’s wise to share your findings with the lender that has taken the time to give you a quote but thus far is not the cheapest option.  I’d propose you scan in both of your red marked up cost estimates and send them to that lender explaining your findings.  If you explain the adjustments you’ve made and ask them if you missed anything you may learn of some things you overlooked.  You also get a chance to see how the lender reacts and see if the lender really seems to care about you and your transaction.  Will they be annoyed you shopped them against another lender?  A good mortgage lender will take the long term view and want the best for you, even if that means telling you to go with the other guy who has the best deal for you on this particular transaction.   As a service provider myself, I can tell you it’s always nice when a prospective client tells me their thought process and why they are considering making a decision to use another provider rather than just doing it and telling  me after the fact.  (*Note that I always value when a service provider gives me their best deal up front.  I’m always a little skeptical of the provider who tries to lower their pricing once they know they are competing and their client is shopping around…shouldn’t they have just given you their best deal on day 1?  Just my way of looking at it…)

Step 5 – Make your selection and thank the lender who you didn’t select for their time and effort:

Now that you have the info it’s time to make your choice.  Don’t forget to consider the service provider’s personality, time in business, local market experience and responsiveness when making your selection.  (Price is one thing but it’s not the only thing!)  Regarding the reminder to say thank you…no, I’m not giving you a lesson on manners here.  (I’m sure you always say please and thank you, right?)  It’s important that you thank the mortgage lender that you didn’t select and let them know that if something changes you will come back to them.  I have seen on multiple occasions where a borrower is promised a great deal only to find out down the road it was too good to be true.  You may need a lender to save you if that first deal falls through and who better than the one who already knows you and your situation?  Don’t burn this bridge by neglecting to thank them for their efforts.

I hope this information has been helpful to you as you try to figure out who has the best loan for you and your situation.  I don’t pretend that this is a real easy process, it can be a hassle to sort through.  (I’m actually surprised you are still awake and reading at this point, congrats for your diligence!)  Ideally you have a mortgage broker and a real estate broker who will help you through this part of the process.

When putting together this blog post I sought input from a friend and active mortgage broker in the Stapleton, Justin Ross of Stapleton Mortgage.   I want to thank Justin for spending a good part of his morning one day answering questions for me.  Justin can be reached at (303) 399-2154 if you’d like to speak with him about a mortgage and my contact info is below if you have questions.

I’m active as a real estate broker in the Stapleton market.  If I can be of service as a local broker or if you just have a question I’m always happy to help.

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