For clients, finding the perfect house and having their offer accepted is harder than ever these days. So too is finding the right mortgage, which can make finding the right home feel like the easy part of the homebuying process.
Since the mortgage meltdown of the late 2000s, many new rules have been adopted and a federal government agency — the Consumer Financial Protection Bureau — is now dedicated to weeding out the scams and deceptive lending practices that brought the global financial system to its knees nearly 15 years ago. Getting the best mortgage deal, however, remains a formidable challenge for consumers.
Indeed, mortgage companies often ensure that there is no way to simply compare their offerings side by side, as consumers are likely to do when buying something like car insurance. This task is not simply about comparing mortgage apples to oranges but also to pears, pineapples and pretty much any other kind of fruit you can imagine.
Lenders and originators can help their prospective clients decipher the process and alleviate some common misconceptions. This is especially true when it comes to the closing costs. With the proper guidance, clients can then begin to understand how the system works and eventually know where they stand in their quest to get the best deal.
Blurred lines
A common mistake among consumers is to conflate the origination fee with the other costs to close the transaction. For many borrowers, this confusion may feel like it’s by design. Mortgage terms can easily blur the lines between fees and interest, which ultimately make figuring out the total cost of the loan nearly impossible.
An origination fee is what the lender charges to originate a loan. It is an upfront cost that is meant to cover such expenses as validating the borrower’s income, employment and credit. Depending on the lender, it also may include underwriting and funding costs or more general administrative expenses. So far, so good.
Other charges, of course, also come in the form of upfront fees while covering a wider array of costs — such as locking in a rate, hiring an attorney or servicing the borrower’s property taxes. Verification of deposit also may be charged here. The big difference is that while an origination fee usually refers to a single fee for a single service, the other charges may be broken down into as many line items as the lender desires.
So, rather than seeing a single “origination fee” tied to arranging the mortgage funds, a borrower is typically confronted with many fees that are divided into sections. Some are common and others less so. They may, for example, see a fee for flood certification (depending on where the house is located), an appraisal fee, a credit report fee and so on.
Benchmark standard
This matters to the consumer because if they are comparing multiple lenders, the lack of conformity makes the cost comparison very difficult. Ultimately, anyone buying a home wants to be able to calculate all of the fees to a number that can be benchmarked from one lender to the next.
If all of the fees were contained in the same section of the borrower’s loan estimate, receiving these numbers and comparing offers would be a breeze. But federally insured lenders, for example, are not required to provide an itemization of the amount financed as long they furnish a “good faith estimate” as defined by the Real Estate Settlement Procedures Act.
How then, your client might ask, will they know the true rate to be paid on their mortgage (aka its actual cost)? After all, any fees that they pay are an added cost of the loan, whether they are labeled as fees or interest. It’s the same principle as buying a car: If you put more money down, either with a higher deposit or by paying fees out of pocket, and your payment remains the same, you are effectively paying a higher interest rate or annual percentage rate (APR).
The vast majority of borrowers won’t know the true cost of their mortgage because some lenders play a shell game with the fees. Nor is it uncommon to see additional fees or even higher interest rates at closing when a buyer is desperate to get the deal done. Worse, as the housing market has become far more competitive of late, the buyer’s leverage to get a good deal on both a home and a mortgage has largely evaporated.
What is needed is for the borrower to see the true costs of a mortgage presented in a single number. This could be accomplished by either an APR, a total of payments made over the life of the loan or both. It should be the same information for every lender and borrowers must be able to lock it until closing. Only then will the playing field be leveled for the homebuyer. ●
