(PRWEB) September 17, 2004
It's not uncommon in real estate to come across bad financial advice. However, on rare occasions that advise or counsel is so preposterous, it just begs to be addressed.
You see, financial specialists have the tendency to say, "shop for a rate". However, rate is only one factor to be considered when looking for a home loan, and it's not even the most important.
Bad advice is easy to give. As a matter of fact, any advice is easy to give. Recently a very popular MSNBC financial expert wrote an article, published in Yahoo's financial section, which implied if your FICO score is lower than 600, you can expect to pay an extremely high rate of interest on your mortgage.
The reality is, if you have challenged credit, don't let any "professional advise giver" tell you, or imply, that you can expect to pay a 9% interest rate on your mortgage.
This is just nonsense!
Any "advise giver" that would state this either has no industry product knowledge or is inadequately prepared to address such an important financial issue without providing the reader full disclosure of the options, alternatives and corrective actions. Especially with so much money at stake for the borrower.
Last year Fannie Mae issued a statement, which said that 50% of higher interest rate home buyers could have qualified for a lower interest rate conventional loan product. (As published by http://www.mortgagemag.com.) How many homebuyers ended up with those much higher rates from bad advise?
With a little pre application work, you can in fact have a 500 to 600 FICO score and get just as nice an interest rate as someone with a 680 to 750 FICO score on a standard 30-year conventional fixed loan. How?
By using the FHA loan program. (Homebuyers can learn more by going to http://www.fhahomeloanmortgage.com) This program alone can save the credit challenged tens of thousands of dollars in the first two years of home ownership. Since the FHA program is credit driven and does not take into consideration credit scores, many prospective home buyers have more low rate alternatives than most doom and gloom Âadvice giversÂ imply.
What is an FHA loan? Nothing more than a conventional mortgage insured by HUD. The interest rates for this program are equal to the rates any ÂAÂ credit borrower would receive on a like kind program, and in some instances, they can actually be lower.
Everyone in the finance industy, including consultants, owes it to every home buyer to fully disclose all the facts and alternatives that help homebuyers avoid home loans that charge excessively high market rates!
Poor credit means higher risk home buyers need better education, preparation and tools to buy their first home the right way, the first time. Not resignation and acceptance of interest rates that increase their risk of default and potentially compound credit problems. (see our free credit repair steps for home buyers here: http://www.fhahomeloanmortgage.com/credit_repair.shtml)
What every homebuyer should understand is there are risks and benefits with every mortgage product on the market, from the sub-prime market to the True No Documentation mortgage. Each has its place in helping prospective home buyers become home owners.
Each of these programs is designed to meet the needs of a niche clientele. "Specialty Programs" have special pricing because in reality, it means you as the borrower are either hiding something, need extensive credit exceptions in underwriting, or are unable to provide the full documentation needed for standard loan programs.
This entails a higher risk to the investor and thus a higher rate of interest, regardless of your credit score. However, it is important to note that credit score does play a big role in determining just how much of a rate penalty you receive on these specialty products.
Frankly, you could do a risk reward analysis, and "how to", for every type of mortgage product, including finance options with down payment assistance, and for everyone of them there will be winners and losers. The losers usually occur, more often than not, with bad counsel!
So how can you know when you are falling victim to bad advise? Start by recognizing that you are unique. Because you are unique, your situation requires specific answers to specific questions that relate to your specific needs. In order for any homebuyer to get answers, they must know the right questions to ask relevant to their situation. "Shop for a rate" simply doesn't cut it and cheats you, the homebuyer, out of valuable information that could save you thousands by selecting a mortgage product that fits your life style.
Today's market trends say the biggest factor in the average homebuyers mortgage decision is not life of loan, but the short-term cost of money over a 3 to 5 year period. Frankly, most new homebuyers are younger and just starting out with plans for family and upgrades. Many have made credit errors from their youthful lack of understanding just how important their credit really is and end up being placed in specialty programs for qualifying.
Regardless of your credit, every mortgage consultation you receive should factor your; short term financial goals, long term financial goals, your money personality (very important when selecting a loan program that protects your interest), your risk comfort, payment savings, reinvestment return (for savers and investors), product benefits, local market risks and the projected home appreciation. While there are other questions, they trickle into client specific question which are developed by you through your interview process.
In addition, hundreds of thousands of potential first time homebuyers across the country begin the process, yet lack funds to make a down payment. These homebuyers should ask specific questions relevant to their needs.
Does your prospective lender know where to get down payment grants and do they help you through the grant approval process? (see http://www.downpaymentsolutions.com for these resources)
Do they know how to create a down payment where no down payment existed, even when you're not eligible for a government grant?
Does your prospective lender know how, and when, to do any legal creative financing that not only meets your down payment needs, but also your need for closing costs?
Does your loan officer understand credit and how to help the credit challenged buyers quickly gain FICO points or prepare for a loan?
Does your loan officer have the expertise to take a home buyer with a 500ish MID FICO score and get that home buyer a rate equal to the prevailing conventional market rate on a 30 year fixed rate loan?
Does your loan officer have enough integrity to tell you when you can't afford a home, even if you can qualify using an Alt A Product or the wrong product?
As you can see, there are many important questions you need answers to during the initial interview with your prospective loan officer. While "professional advice givers" say shop rates and closing costs, that is the worst way you, as a homebuyer, can shop for your mortgage. This process costs many homebuyers thousands upon thousands of dollars every month. It just seems to be the popular and easy out for "advise givers" as dollars you see are much easier to factor than dollars you don't.
As a professional, my philosophy with rate shoppers is, "do you want the rate today, or do you want the rate you'll actually get?"
While rate is an important factor, every homebuyer needs to understand rates change every day, and on an active market day, rates can change by the hour depending on which direction mortgage backed securities are moving. The fact is, all conventional investment money comes from three sources (Fannie, Freddie and Gennie ).
Since mortgage money comes from mortgage-backed securities, homebuyers should recognize that money costs every investment lender basically the same amount. This means on any given day, rates could vary up to .25% depending upon when a lender updates their rates to reflect changes in securities market.
Rate hedgers, in our industry, have a great advantage as they quote rates based upon where they think the market is moving since no rate is guaranteed until it's officially locked. This is a very common practice used by the type of person that will take advantage of clients. However, try locking a rate with a hedger and you'll be surprised at the points, or added fees, that show up after the fact should the rate hedger be wrong on his market projection.
A buyer who rate shops may be getting quoted today's rate from one company, tomorrows rate from another, and a bet on next weeks rate from a third. It's like comparing apples, to oranges, to pears and the client will never know what they're getting much less whether the mortgage product theyÂre buying fits their needs.
In addition, there is a great misconception about closing costs. Homebuyers need to understand that lenders only have control over lender fees. Yes, in fact, the more challenged your credit is, the higher these fees will be. However, for homebuyers with good credit (Typically a 620 mid FICO score or above), using standard products and underwriting, it's silly and misleading to say, "shop closing costs" as the home owner/buyer/seller typically has control over 75% of all the fees associated with closing their loan! Can you imagine? Lender fees, in most instances, equal less than 20% of the total costs to close, or in real dollars around $800.00 to $1200.00 depending on the program type. The rest are just estimated because they are third party charges outside the lenders control.
With credit challenged homebuyers, you can use the FHA loan program to buy your home for far less than any alternative loan program available. Your closing costs typically will be higher, however, your rate will be equal to the prevailing conventional mortgage rate. Credit challenged home buyers need to ask themselves is it better to pay 2% more in closing costs and get a 6% fixed 30 year loan, or pay the same 2% origination and get a 9% adjustable rate mortgage with a short fixed period.
In the end, the decision on the program any homebuyer makes will be based upon the questions you ask, the questions your loan officer asks, your needs/money sense, the range of products you're presented to choose from and the ability of your loan officer to create a viable solution for you.
The wrong program can at worst cause you to lose your home to foreclosure, and at best will cost you 7% to 15% of the amount financed to get out of. Once you close, you risk wasting the initial cost of the closing, the interest over a industry required 12 month seasoning period, in addition to any pre-payment penalty associated with the loan. Yes, odds say, when you get bad advise on a program, you'll get stuck with a pre-payment penalty to. A very expensive decision indeed.
Shopping a mortgage rates and closing costs is no different than buying a car without ever seeing it. This is not a car you're buying and mortgage companies are not car dealers. Your new home is an investment and should be treated in every way as an investment. You want and need to maximize your return while at the same time, minimize your costs and exposure. However, quality counsel is not free and comes with a price.
To many professional Âadvise giversÂ have devalued the quality of counsel a homebuyer receives, inadvertently costing thousands their homes and even more home owners in the form of real dollars lost in their investment through poor program choices.
Homebuyers should ask themselves; Âhow much is that great counsel worth to me?Â Is it worth an extra $300.00 in lender fees or 2% in origination fees to get the right loan program and protect my future home and credit?
Professional Âadvice giversÂ like to tell home buyers to shop rate and closing costs. As a professional mortgage lender, I know the right way to shop is by the quality of the consultation you receive from your loan representative, the product range they offer and knowledge they provide. This must be every homebuyers number one priority. Once a homebuyer understands what program best meets their needs, they can then negotiate rate with a loan representative they trust.
One need only look at todays record default rate in the mortgage industry to realize just how important good counsel, from experienced professionals, really is. Especially for first time homebuyers who need a credible expert to tell them Âno, this is to much home for your incomeÂ or Âthis is not the right loan program for your money personalityÂ.
Home buyers certainly canÂt count on a professional Âadvice giverÂ to be by there side, and most Real Estate professional will Âup-saleÂ these home buyers all day in order to increase their commissions, especially since many have no idea what the homebuyer means are.
The average homebuyer only has the Mortgage Professional to protect them from making poor financial choices.
About the author:
George Chaney started his career in banking in 1989. He has written and sold over 20 successful finance related websites in addition to working with TC Bradley, the author of "Buy With No Credit" an amazon.com best seller.
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