Choosing a MORTGAGE Lender

MUDs

Many buyers - especially first time home buyers - "shop" for a lender by looking for the lowest interest rate.

There is much more to the mortgage process than getting a good rate! All lenders and investors are working - and making their income - in the same financial market. As a result, getting a good interest rate very often results in high "junk" fees at closing (sometimes as high as $1200 more that what was shown on the Good Faith Estimate!), and poor service that may result in rates that were never locked, or a loan that never closes!

Avoid costly mistakes. An experienced REALTOR has worked with many mortgage lenders, and generally can suggest several who will do an excellent job for you at a competitive rate.

Some questions you might ask a prospective lender:

• How long have YOU been working in the mortgage loan business? (Important - When interest rates are low, a lot of loan officers get into the business for "easy money" in refinancing homes. A person’s being in another branch of "real estate" is not enough! Work with an experienced loan officer.)

• What is the name and phone number of the person who will actually be working on ("processing") my loan application? How accessible is this Processor?

• Tell me about your loan fees. What fees will I be paying before closing? (You should only pay for the consolidated credit report, approximately $65, and an appraisal fee when you find a home.) What will I have to pay at closing?

• When will I get my Good Faith Estimate regarding the costs of the loan? Does this estimate include the Loan Origination Fee?

• How long can I lock-in a rate? What is the fee? If interest rates go down, can I relock at the lower rate? If so, what will it cost? Will I get this lock in writing?

• What documentation will I need to provide to get a mortgage?

• How long will it take to obtain loan approval and be ready to close? (In Texas, this should seldom take more than 14-30 days.)

• I plan to relocate within ___ years. Can you compare ARMs (adjustable rate mortgages) and fixed-rate mortgages so I can see which will save me the most money? What other programs does your company offer?

• Other than with 20% down, how can I avoid private mortgage insurance?

OPTION PERIOD

Hypothetical situation: "The last time we purchased a home in Texas, we agreed to a repair limit (such as $500) when we wrote the contract. We didn’t know what shape the home was in, the seller disclosed no problems, we guessed at the amount of repairs the home might have and put that figure into our offer. After we did our inspections, the amount actually came to $1500. The seller refused to do them, per our contract for $500, but we had to move quickly so we bought the home and have had to do them ourselves."

Texas no longer has an Earnest Money Contract, but rather an "option contract." It does NOT provide for:

1.   An agreed dollar limit on what the seller will spend toward repairs.
2.   Designation of repairs from inspections.
3.   Obtaining repair estimates.
4.   Allowing seller or buyer to back out if repairs run over budget.
5.   Setting time limits to make the choices.
6.   Arranging and completing repairs before closing.

Texas now offers two choices:

Buyer sided - an OPTION to buy, favoring the buyer.
Seller sided - an "as is" sale, favoring the seller.

Almost all offers are now an OPTION offer, giving the buyer an option to purchase the home. The seller agrees to sell, IF the buyer wants to buy. The buyer does not make a firm promise to purchase the home. With a promise on the seller’s side and no commitment on the part of the buyer, this could not be a contract – unless the buyer pays for this option. An option contract requires option money.

The option money is usually in the form of a check made payable to the seller. The seller keeps the money if the buyer decides not to purchase the home. The buyer is purchasing a period of time, during which presumably the buyer will inspect the property, get repair estimates, negotiate any items of major concern with the seller, and then make a decision to buy or not to buy the home. This cannot be done for free, because the seller suffers a loss by keeping the property tied up in contract and not really on the market.

How long is the option period? In practice, about 10 days. Less than this has proven to make it difficult to have inspections scheduled, report received and still leave time to work out any repair problems. More than this amount of time keeps a home off the active market for too long.

How much is the option fee? In practice, about $100 (less if a seller will accept it; more if a buyer wants to strengthen the offer). There is little doubt that the amount should be much greater, but the buyer is seldom willing to pay more than necessary. The option money needs to be enough to make the contract binding and enforceable between the seller and buyer.

The option fee is NOT earnest money. Earnest money is refundable during the option period, then "goes hard" at the end of the period.

How are repairs handled? In practice, the buyer may request that certain repairs identified by the inspector be completed. The seller is under no obligation to complete them, but then the buyer might refuse to buy the home. The seller must disclose the inspection report or repair information to subsequent buyers.

Here’s a likely scenario:

The buyer and seller sign the contract.

The buyer has inspections and (buyer or seller) gets repair estimates.

The buyer writes the seller, requesting certain repairs, at the seller’s expense.

The seller agrees to all (or a portion) or the request. This is put into a new agreement.

The option period is concluded and the sale is closed.

There is no pre-agreed amount of funds the seller is committed in advance to spend on repairs. Therefore, the buyer cannot be too sure the seller will agree to pay for anything at all. The seller may refuse to pay for them. However, the seller will not be able to pay for repairs from a position of know what the buyer’s inspectors say, and based on repair estimates. All of this information will be received during the option period of the contract (usually the first 10 days), which is a much more knowledgeable position from the old days, when the seller and the buyer were just shooting in the dark and guessing what might be needed in repairs. The seller will also be able to see more clearly the disadvantage of not paying for repairs that are really needed, and the seller who refuses to close will be stuck with making these same repairs for the next buyer.

How do we know that the option period is over? IF the buyer does not give WRITTEN NOTICE to kill the option, then the buyer will be deemed to have accepted the property as agreed in writing by   both parties, or "as is."

(Above information by Jim Wiedemer, attorney)