Real Estate Closing Costs--how to shop for a loan

[jay santos]

1. Find a loan officer that has access to a bunch of lenders. Ask them who they use, and make sure they have a good variety. If they're the kind of broker that does loans just for one bank, then you probably won't get as good of a deal.

2. Don't ask them for rates. Ask them point blank how much are they willing to do a loan for. Or say, "will you do a loan for half point profit and $300 loan processing fee?" Tell them you understand all the junk fees and the yield spread, and you are going to find someone who will do your loan for a half point. Call four or five and you will get at least one hungry loan officer. Some will say their boss won't let them go that deep, whatever, move on to the next one.

3. Sit down with your loan officer before you get started and go over a good faith estimate. Ask him where every single fee is going. Make sure they are all legit.

4. Fees. I group fees into three categories
a. Title company. You pay these to the title company or it goes for title related stuff. You may be able to negotiate these, but may be tougher. Closing fee, title insurance, endorsements, recording fee, doc prep, reconveyance, courier. This shouldn't total more than $400 outside of title insurance. Title insurance you can shop for more easily, but that will be like $700 on a $200K loan.

b. Lender. These fees go to the bank giving you a loan, and your loan officer doesn't get these. Underwriting/lender fee, doc prep, flood cert. Can total from $300 to $700--the main fee is the underwriting fee. You can only affect this by changing lenders.

c. Mortgage Company. Loan origination fee, credit report, processing fee, appraisal. Credit report costs $15. They will try to charge $50. Processing fee is legit at 300 or 350. Appraisal they may try to squeeze profit in. You can shop appraisers. The main thing is to get it all quoted up front in the good faith estimate.

5. Yield spread. This is the main thing to understand. Not publicizing yield spread is the reason loan officers can dupe consumers and make $5K on a loan they spend eight hours on.

Lenders (banks) publish rate sheets. They look something like this.


7.25 -3
7.125 -2
7 -1.5
6.875 -1
6.75 -.5
6.625 0
6.5 +.5
6.375 +1

When you ask a loan officer "what are rates today?" it's a loaded question. There is no one rate. There is a chart.

This means that if the loan officer delivers a loan at 7.25 for $200K (that meets the spec for that rate sheet), the bank/lender will pay the loan officer $6K. If the loan officer delivers loan at 6.625, lender doesn't pay anything for the loan. If the loan officer wants to deliver a 6.375 loan, the buyer must pay $2K at closing to lender.

So, when you call up a loan officer and ask for rates thinking you're comparing one company to another, the loan officer laughs in his head, knowing he has a sucker. If you want to compare, you ask the loan officer to read his rate chart and tell you the points for the given rate. Even if you ask him "par" (which means zero points) he will quote you -1 because he wants to keep the extra. Par to him means what he's willing to do the loan for, not par defined by the lender.

Another sneaky thing is that a rate chart won't show anything for par. It will go straight from -.5 to +.5, so the loan officer will steal that .5 and tell you it was the lowest you could get. Tell him, no we made a deal you would do the loan for total 0.5 and you charged me origination fee, so you use that extra .5 yield spread to pay that origination fee or to pay other closing costs.

P.S. junkie, I'm all for you making as much money as you can, just not on me. :)

[MikeWaters]

Hi my name is cougjunkie and you are FOS.

[hyrum]

1
c. Mortgage Company. Loan origination fee, credit report, processing fee, appraisal. Credit report costs $15. They will try to charge $50. Processing fee is legit at 300 or 350. Appraisal they may try to squeeze profit in. You can shop appraisers. The main thing is to get it all quoted up front in the good faith estimate.


Go direct to a few local lenders and ask for their rate with no points. I do and never have paid a "mortgage company" a cent. I can go to bankrate.com or Lending Tree and have some assurance they are fair rates. I can see if you have a sketchy credit report or are trying to really stretch your credit limit you might have to hire a guy to shop your deal for you.

[jay santos]

Go direct to a few local lenders and ask for their rate with no points. I do and never have paid a "mortgage company" a cent. I can go to bankrate.com or Lending Tree and have some assurance they are fair rates. I can see if you have a sketchy credit report or are trying to really stretch your credit limit you might have to hire a guy to shop your deal for you.

I don't know exactly how that works, but I'm thinking you would pay more that way than going to a mortgage broker and have them do it for you for half point. For example, if you called Zion's bank, they would certainly make more than a point on your loan. I don't know how bankrate.com or Lending Tree work, but I'm guessing they collect a nice yield spread and publish charts with a half or full point already taken out for their profit.

[BlueHair]

5. Yield spread. This is the main thing to understand. Not publicizing yield spread is the reason loan officers can dupe consumers and make $5K on a loan they spend eight hours on.

Brokers are required to list the yield spread on the Settlement Statements. Correspondent lenders are not required to disclose yield spread. Getting a home loan is like buying a car, you are going to pay one way or the other. If they advertise no closing costs, you can be sure they are making up the money on the rate. Shopping around for the hungry loan officer may save you a few bucks, but not much.

Realtors are definitely worth the 3% commission. If you are the buyer, you don't have to pay anything. Sellers don't realize how much money realtors spend on their behalf advertising. Sure, you could do for sale by owner, but unless you really know what you are doing, you could end up spending a lot more than 3%.

[jay santos]

Brokers are required to list the yield spread on the Settlement Statements. Correspondent lenders are not required to disclose yield spread. Getting a home loan is like buying a car, you are going to pay one way or the other. If they advertise no closing costs, you can be sure they are making up the money on the rate. Shopping around for the hungry loan officer may save you a few bucks, but not much.

Realtors are definitely worth the 3% commission. If you are the buyer, you don't have to pay anything. Sellers don't realize how much money realtors spend on their behalf advertising. Sure, you could do for sale by owner, but unless you really know what you are doing, you could end up spending a lot more than 3%.

If several thousand dollars = a few bucks to you, then you are right. If not, I can show you multiple settlement statements where I paid 1/2 point in closing costs (including yield spread) for my loan.

As for realtors, I was in the business for a short time while I finished school at BYU. The typical realtor would never spend more than $500 on advertising and usually less than $200. Realtors know that the MLS sells your property. Advertising is usually done as an investment to propspect for new clients.

[BlueHair]

If several thousand dollars = a few bucks to you, then you are right. If not, I can show you multiple settlement statements where I paid 1/2 point in closing costs (including yield spread) for my loan.

I think cheap loans can be found. If you paid 1/2 point total, you got a screaming deal. Mortgage companies could not operate on that margin if they gave that deal to everyone. Most companies need at least 2 points to stay in business. My point is most mortgage companies will offer 1/2 point origination to get you in the door, then charge more for something else to make up the difference.

To me not hiring a realtor is like changing your own oil or fixing your own car. It can be done, but why bother? Sure, you have to pay a mechanic $50 an hour (which seems steep), but it would take me 10 hours to do what he can do in one. Like I said, if you know what you are doing, go for it. I think the average person would be better off hiring a professional.

[MikeWaters]

bluehair, point me to the advertising that realtors are doing in neighborhoods around me.

1. listed in MLS
2. For sale sign
3. a few houses in a free circular dropped around supermarkets

what else?

[jay santos]

bluehair, point me to the advertising that realtors are doing in neighborhoods around me.

1. listed in MLS
2. For sale sign
3. a few houses in a free circular dropped around supermarkets

what else?

It's rare (and ineffective--as far as trying to sell a house) to do much else. Advertising for a realtor is self promotion not promotion for your listings.

[jay santos]

I think cheap loans can be found. If you paid 1/2 point total, you got a screaming deal. Mortgage companies could not operate on that margin if they gave that deal to everyone. Most companies need at least 2 points to stay in business. My point is most mortgage companies will offer 1/2 point origination to get you in the door, then charge more for something else to make up the difference.

To me not hiring a realtor is like changing your own oil or fixing your own car. It can be done, but why bother? Sure, you have to pay a mechanic $50 an hour (which seems steep), but it would take me 10 hours to do what he can do in one. Like I said, if you know what you are doing, go for it. I think the average person would be better off hiring a professional.

Of course mortgage companies will offer you 1/2 point origination to get you in the door and charge you something else. That something else is called yield spread. If someone goes into the deal fulling understand my original post, they won't get taken for that extra 2 points. If you feel guilty making your loan officer do your loan for 1/2 point, then give him one point or even two points. The principle is to agree in advance and not let him take you unfairly. Loan officers can't make a living on 1/2 point because their volume is too low. It only takes 8 hours of work to close a loan. As a consumer, I'm not excited about paying someone six grand for one hard day's work.

As for paying a realtor: I wouldn't try to sell a home on my own. The MLS sells your home quickly and for more than you'll make selling your home on your own on average. There are major anti-consumer dynamics in that industry, but for now there's not much the consumer can do to fight it.

[MikeWaters]

Jay I thought there were some discount broker services that allow your home to be on MLS for a lot cheaper.

[jay santos]

Jay I thought there were some discount broker services that allow your home to be on MLS for a lot cheaper.

I'm sure there are some options available. I know some realtors will ignore those listings out of principle. I think the best you might find is to cut your commission from the standard 6% down to 4% by finding a listing agent who will keep 1% and offer the buyer's agent the standard 3%.

[BlueHair]

Maybe I should use these money saving principles in the rest of my life. When I go to pay my restaurant bill - Ask the owner to see the actual prices of the food, figure the actual time the chef spent in cooking my food, then negotiate what I will pay. I figure I could also save some cash on the tip. $60 dinner X .20 % = $12. The waitress spent maximum of 10 minutes on me. That's $72 per hour. What a rip off! I could have gotten that drink refill on my own. Man, restaurants screw you. They spend way too much money advertising. Their volume must be too low. Too many restaurants. Hopefully the market will correct itself and drive some of these restaurants out of business so we can have lower prices. We all know less competition equals lower prices.

[MikeWaters]

Maybe I should use these money saving principles in the rest of my life. When I go to pay my restaurant bill - Ask the owner to see the actual prices of the food, figure the actual time the chef spent in cooking my food, then negotiate what I will pay. I figure I could also save some cash on the tip. $60 dinner X .20 % = $12. The waitress spent maximum of 10 minutes on me. That's $72 per hour. What a rip off! I could have gotten that drink refill on my own. Man, restaurants screw you. They spend way too much money advertising. Their volume must be too low. Too many restaurants. Hopefully the market will correct itself and drive some of these restaurants out of business so we can have lower prices. We all know less competition equals lower prices.

are you aware of the number of restaurants that go out of business every year?

THe great thing is we now live in the information age, and people that profited based on other people's ignorance, and lack of access to information, are going to be in a world of hurt. Realtors are among those people.

[jay santos]

Maybe I should use these money saving principles in the rest of my life. When I go to pay my restaurant bill - Ask the owner to see the actual prices of the food, figure the actual time the chef spent in cooking my food, then negotiate what I will pay. I figure I could also save some cash on the tip. $60 dinner X .20 % = $12. The waitress spent maximum of 10 minutes on me. That's $72 per hour. What a rip off! I could have gotten that drink refill on my own. Man, restaurants screw you. They spend way too much money advertising. Their volume must be too low. Too many restaurants. Hopefully the market will correct itself and drive some of these restaurants out of business so we can have lower prices. We all know less competition equals lower prices.

Someone making $72 I can live with. I've paid plumbers $200 an hour, which is tough, but sometimes you're stuck. I paid a doctor $1,200 for a 20 minute surgery. That's tough, too, but what can you do? I'm not going to pay a loan officer $6,000 for a day's worth of work if I have other options.

[Donuthole]

So, as someone who is going to be closing on a house within the next 2 weeks, your recommendation is what?

Start calling lenders and asking them if they'll do my loan for 1/2 a point?

[hyrum]

I don't know exactly how that works, but I'm thinking you would pay more that way than going to a mortgage broker and have them do it for you for half point. For example, if you called Zion's bank, they would certainly make more than a point on your loan. I don't know how bankrate.com or Lending Tree work, but I'm guessing they collect a nice yield spread and publish charts with a half or full point already taken out for their profit.

Lending Tree doesn't "publish" anything. You request quotes on their site and lenders reply direct to you with their rate bids.

Why lenders don't necessarily get their "pound of flesh" at closing: from a WSJ article...

"Lending institutions are fighting to win business from consumers with good credit, many of which may be hesitant to buy, refinance or move up in the current housing market.

"It's a very competitive marketplace," says Terry Francisco, a spokesman for Bank of America Corp. in Charlotte, N.C. "We watch our competition closely."

One of the reasons banks want to make conventional loans is that consumers often end up with several products from the lender, including savings accounts, credit cards and checking accounts.

"We find that someone who has a mortgage with us will have about five products in addition to the mortgage," says Mr. Francisco.
...

The current demand for home buyers with good credit makes it even more important for potential borrowers to shop around for the best deals. Individuals should check with their local credit union and bank, especially if they have existing accounts with those institutions.
"

[jay santos]

So, as someone who is going to be closing on a house within the next 2 weeks, your recommendation is what?

Start calling lenders and asking them if they'll do my loan for 1/2 a point?


You're closing in two weeks or getting ready to make an offer in two weeks? Closing in two weeks, you must already have your loan started, I would think. If you're getting ready to buy, I would suggest just what I said in first post in this thread. Tell him you have great credit, all the documentation ready, and this is a slam dunk loan for him. You're going to call people to see who will give you the best deal. Tell him you understand yield spread and want to go over the good faith in detail. Tell him you're calling 4 or 5 loan officers to see who will give you the best deal and let him offer an amount. If you get a guy doing it for a point, the next guy might offer to do it for a half point.

[Donuthole]

You're closing in two weeks or getting ready to make an offer in two weeks? Closing in two weeks, you must already have your loan started, I would think. If you're getting ready to buy, I would suggest just what I said in first post in this thread. Tell him you have great credit, all the documentation ready, and this is a slam dunk loan for him. You're going to call people to see who will give you the best deal. Tell him you understand yield spread and want to go over the good faith in detail. Tell him you're calling 4 or 5 loan officers to see who will give you the best deal and let him offer an amount. If you get a guy doing it for a point, the next guy might offer to do it for a half point.

We built through a builder, but we're not required to use a specific lender. We have been working with the suggested lender from the builder, but we've had enough problems and difficulty in communication with them that I'd like to look elsewhere. Is it possible to go to someone and get a loan and close on it in a 2 week time period?

[jay santos]

We built through a builder, but we're not required to use a specific lender. We have been working with the suggested lender from the builder, but we've had enough problems and difficulty in communication with them that I'd like to look elsewhere. Is it possible to go to someone and get a loan and close on it in a 2 week time period?

Possible. But probably takes away your negotiating position.

[MikeWaters]

bump