Importance of Reviewing Your Loan Estimate (LE)
We recently had a borrower come to us with a ridiculously low rate quote for a “no cost” loan from one of America’s largest mortgage banks.
The borrower insisted it was legitimate and asked us to match it, so we asked to see the other lender’s Loan Estimate or “LE.”
And sure enough – there were $9,000 of points buried into the loan.
The loan officer was offering a loan with “no out of pocket” costs, meaning that he had merely increased the borrower’s loan amount by enough to absorb ALL of the points and nonrecurring closing costs. The confused borrower, however, thought she was getting a “no cost” loan.
Yesterday, we had another borrower come to us with a ridiculously low rate quote for a 75% LTV cash out investment property loan; the loan officer had simply misquoted because he missed all of the “hits” or rate-increases that are associated with such a loan.
In any case, the above instances prompted me to write another blog about the tricks and/or mistakes lenders make when quoting rates.
Here are a few rate quote tricks/mistakes:
“No Cost” vs. “No Out of Pocket”
This is a classic ploy and it is what happened in the above instance. A true “no cost” loan means that the lender covers or pays all of the nonrecurring closing costs or one-time fees (title, escrow, appraisal, underwriting, etc.) on behalf of the borrower. With a “no out of pocket closing cost” loan, the lender still charges the borrower ALL of the standard closing costs (and points in many cases); the lender, however, increases the loan amount by enough to cover all of those costs so the borrower does not have to pay them “out of pocket” at close.
“No Cost” vs. “No Points/No Fees”
Many lenders quote “no points and no fees” loans, when it really only means no lender fees (“big banks” are notorious for this). Borrowers still have to pay for their appraisal fee, escrow fees, title insurance fees, notary fees, etc. These fees can easily add up to several thousand dollars, making “no fees” quotes very misleading.
Quoting Non-Existent Rates
Some lenders quote rates associated with very short-term lock periods (under 7 days for example) that WILL only be available once a loan is fully approved. So, if rates increase between the date the loan is submitted and the date the loan is approved, the borrower is out of luck. Similarly, many lenders also underquote rates during a borrower’s pre-approval stage, knowing they will not be held accountable to that rate because the borrower is usually weeks or even months away from going into contract – when the actual rate lock will be necessary and the loan officer can then say: ”oooh – sorry dude, rates have gone way up…”
Quoting Without A Full Scenario (Credit Score, LTV, Property Type)
This is a painfully common trick too. There are as many as 12 factors that affect every borrower’s individual interest rate, as set out in this blog. Some loan officers purposely misquote before knowing all of these factors in an effort to reel in borrowers, knowing that the actual interest will likely be higher once all of the factors are known. The loan officers simply hope they can convince the borrowers that the mistake was innocent and that the borrowers will not want to endure the time or cost (especially if they pay for an appraisal) that going to another lender might entail.
Manipulating Annual Percentage Rates (APRs) and Closing Costs
In this blog called 5 Misleading Closing Cost Tricks Big Banks Play, I illuminate a lot of closing cost tricks lenders play. These tricks include understating prepaid interest (which makes APRs artificially low), property taxes and hazard insurance. Lenders also sometimes understate 3rd party fees and eliminate “owner’s title insurance” altogether.
What should borrowers do to avoid these tricks?
They should only use lenders with stellar online reputations and reviews; make sure they are getting quoted rates that can actually be locked, and go over their Loan Estimates with a fine-toothed comb.
