People sure are talking a lot about refinances these days – maybe it is because there is a boat load of short-term ARMs resetting over the next few years; or maybe it is because rising interest rates have short-term loan holders jumpy. Whatever the case may be – if you are out shopping for a refinance of your current home loan (subprime or prime) then you need these 8 steps. Using these 8 steps will save you at least $2,500, probably much more. So consider this Blown Mortgage’s mortgage refinance coupon – and you don’t even have to buy anything from us to redeem.
- Get a baseline
- Get three referrals
- Get your act (documentation) together
- Select your lenders
- Review Good Faith Estimates and Programs
- Get copies of your lock confirmation and loan approval
- Bring GFE, lock and loan approval to signing
Get a Baseline
How can you enter the arena when you don’t know the rules of the game? Do these three things first:
- Go to the Wall Street Journal’s Money and Rates page. Know what the average interest rate is on the type of loan you are considering.
- Go to MyFICO.com and obtain a copy of your credit scores & report. Get all three scores.
- Get familiar with a few different mortgage terms like amortization, interest only, impounds, etc. Even if you don’t know it all sounding more savvy will save you hundreds of dollars right off the bat.
Get Three Referrals
The single best way to ensure getting a great mortgage is:
- Working with someone who has a great reputation and;
- Knowing your stuff.
Where do you get those three referrals from? Try any of these sources:
- Your relatives, friends, co-workers or neighbors (in that order) who had a great experience
- Your CPA who has handled your taxes for several years
- An attorney you trust
- Someone from your church
Google those referrals-seriously-and see what comes up. Learn about each of your referrals and see what has been written about them. Check them out at your State’s regulatory agencies and Better Business Bureau to see if their business practices have gained any unfavorable action. Drop any with red flags immediately. Find 3 that pass the first test to get to the next step.
Interview Your Referrals
Set aside 20 minutes to interview each referral. Don’t talk rates and programs – talk about their background, experience, company culture, personal belief systems and more. Talk about goals, long-term plans and more. Ask lots of questions. See which one is a fit for your personality. Who makes you feel comfortable and understood?
Have Your Act (documentation) Together
Have the following documentation organized and at your disposal. You can keep it in a file folder, scan it to your computer or put it on a CD; just have it ready to go for when you choose your lender:
- Your last 2 year’s W2 statements or tax returns for yourself (and your spouse if they’ll be on the loan as well)
- Your last 2 paystubs available
- A copy of your current mortgage bill
- A copy of your hazard insurance declaration page
If you have any alternative sources of income (like social security or pension) be sure to have those award letters as well. If you are self-employed you will need items like your last 2 years K-1 and business profit and loss statements.
Select Your Lenders
Choose the two lenders that had the best combination out of your research in steps two and three. Call the lenders and inform them of your decision to work with them. Send them the documentation above. Once they’ve received it spend 15 minutes on the phone talking about the type of program, payment and closing costs you are expecting. Ask them both for quotes and Good Faith Estimates for the loan or loans you are seeking. Ask for one GFE for each loan. (e.g. If you want to compare a fixed loan and an ARM ask for GFE’s for both.)
Review the Good Faith Estimates
Take a look at the GFE from each lender. NOTE: We are not looking for lowest costs or rate. We are looking for HONESTY and honesty is in the accuracy and completeness of the document. Look for the following items on your GFE:
- origination points
- appraisal fee
- title fee
- escrow fee
- processing fee
- underwriting fee
- document prep fee
- notary fee
- recording fee
- tax service fee
These are all relatively standard fees that will typically be on a loan in one form or another. If any of these are absent inquire as to how they’ll be paid. Sometimes different lenders call fees different things or don’t charge for certain items. Also look to see if impounds are being collected for taxes and insurance if you requested those to be included in your loan. Ask your lender to go over the fees line by line with you. The more complete the document the better. While this may make the loan look more expensive rest assured that you are getting a fairly accurate estimate on your closing costs. Now, ask them if they’ll guarantee the final fees within a range of no more than $500 dollars. Try to determine how confident your lender is in the estimate they sent you.
Negotiate with the lenders on their fees and charges. Work to lower fees that you feel are excessive, repetitive or nebulous in nature. Ask for clarification on all fees and their reason for being charged. While you should grind your loan officer a little realize that they and the lender need to be compensated for their time. You should work for a discount, but should not expect the loan for free. The exception is if you choose a no-cost or no-points (two different things) loan where you pay a higher interest rate over the life of the loan to eliminate closing costs.
Sign the GFE and application from the lender of your choice (the one you feel most comfortable with, not the cheapest!) and inform the other lender that you are holding their offer as a backup offer if anything should turn sour with your lender of choice. Be honest, its a good karma thing.
Get Copies of the Lock Confirmation and Underwriting Approval
Want to know the nasty secret about Good Faith Estimates and Truth-in-Lending disclosures you get from brokers and banks? They are not guaranteed, they are not binding and they are not required to be by law. So Good Faith Estimates are esentially worth the paper they are printed on. That is why I said we are not shopping by Good Faith Estimates. One of the biggest mistakes when shopping for a refinance is to shop by comparing GFE’s. It’s a sure way to lead you straight to the most unsavory of originators.
What we want to see is REAL proof that we’re approved for the loan we were quoted. Do this by the following methods:
- Once you’ve sent in all of your documentation and chosen a loan program the loan officer should be able to lock your rate. A rate is not yours until it is locked with the investor or secondary marketing department. What you want is a copy of the rate lock with the investor or with their secondary marketing department. Ask them to scan and email you a copy. NOTE: Some times it may make sense to “float” your interest rate and lock at a later time. If you choose this route initially make sure that when you decide to lock you receive a copy of this document that same day.
- After your documentation and application is submitted to your originator give them 72 business hours to return to you with a fully underwritten approval. Some originators may do it faster, some slower, but 72 hours is an adequate amount of time to get an approval once you’ve provided the above documentation and signed application. You want them to send you a fully-underwritten loan approval. A loan approval will show you your exact interest rate, terms of the loan, prepayment penalty, any buydown or discount points charged to you for the interest rate, your decision FICO score and any outstanding conditions needed prior to funding your loan. This approval is how your loan is scheduled to fund with the bank. If there is anything wrong here it needs to be fixed immediately.
With those two documents (along with the GFE) in tow you are in good shape to know where your loan is going to come out.
Bring the GFE, Lock and Loan Approval to Signing
Now is the moment of truth. The remaining conditions on the approval have been cleared and your loan is ready for you to sign and fund. Before you agree to set up the signing of your loan do the following:
- Request a copy of the Estimated HUD-1 (settlement statement) to be sent to you for review 24 hours prior to signing
- Compare the Estimated HUD to the GFE
- The fees should be within the range specified during your first call
- If there is a large discrepancy tell them to get the fees in-line with what they originally sent you
- Once you are comfortable that the fees are in-line with your expectations set up the signing
When at the signing of your loan reaffirm the following:
- Compare the Final HUD to the Estimated HUD that you signed off on; ensure the fees are consistent
- Compare the terms of the note to the rate lock – confirm rate, term of the loans and any prepayment penalty
- Review the prepayment penalty language to ensure that it matches the approval – check to ensure that the number of months match up (24 for 2 years; 36 for 3 years; 60 for 5 years, etc.) Also ensure that the prepayment penalty is either hard (payable no matter what) or soft (payable only upon refinancing) as agreed with your lender
- Review the ARM rider (if you have an adjustable rate mortgage) to ensure that the first rate adjustment is the appropriate time in the future
Congratulations – You Have the Loan You Actually Chose!
If you follow the above 8 steps you will end up with a better mortgage than you would have otherwise received going in blind. You will save yourself at least $2,500 – perhaps much, much more. You will feel confident that you were not taken advantage of and that you worked with a trusted partner who delivered on what they promised. Feel free to have a beer or glass of wine, you deserve it!
Remember, if at any point after signing you feel uneasy about the loan you have 3 days to rescind (cancel) your loan (on your primary residence during a refinance only) by faxing and mailing in your Right to Rescind.
If you’ve taken the above 8 steps you’ll most likely not have to worry about rescinding. Great job! Now pass the 8 steps and a confident referral on to a friend and save them some money too!