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As a former professor at the University of Pennsylvania Wharton School of Business, Jack Guttentag is well known as “the Mortgage Professor“. He’s also the driving forced behind Upfront Mortgage Brokers or lenders that disclose their fees. Today, he’s a syndicated columnist.

Currently he’s running a series on the subprime crisis:

Subprime Crisis, Part I: The Causes of Default

Subprime Crisis, Part II: The Lender Role

Subprime Crisis, Part III: State of the Market

Today he posted his fourth segment:

Subprime Crisis, Part IV: What Should the Government Do?

Rather than summarize these articles, I just wanted to post the links to these articles for people to discover. For the most part these articles aren’t lengthy diatribes. Enjoy!

Q: How do I save on closing costs?

A: To save on closing costs, you need either strong negotiating skills or a lot of time on your hands to shop.

Strong negotiating skills: When dealing with a lender one on one, you need to realize that everything is negotiable. It’s a matter of who’s going to pay what. If you don’t want to pay for an appraisal, a credit report, a processing fee, etc. you can let the lender pay for them but you may get a higher rate. Some lenders pay for your appraisal especially if you’re a referral or a repeat customer. Some lenders charge an application fee on their good faith estimates only to waive it at closing. Have your lender explain each fee. If they have trouble explaining a fee or if they say “don’t worry about this fee” or you should choose another lender.

Lot of time on your hands to shop: Have lenders compete for your business. However, when lenders compete you have to remember that not every lender plays by the rules. One lender may give you the deal of a lifetime just to get your business and surprise you with a higher rate or costs at closing. Make sure you shop on the same day as well since rates change daily and make sure you only compare the lender portion of the good faith estimates (section 800) since some lenders may not include title and government fees.

The real answer is caveat emptor.

One of the most disappointing experiences in my young career as a mortgage professional is when potential borrowers called me to let me know that they were going with the real estate agent’s lender. Their exact words were “We liked you better but we got a better deal.” The bad news came on the heels of me working til 12 AM the night before getting the loan documents ready to submit to underwriting the next day. It was a bitter pill to swallow.

Whether or not my potential borrowers did in fact get a “better deal” is highly unlikely. More often than not, borrowers end up with higher rates than what they were initially quoted. The stark reality of the mortgage business is that it’s super competitive. However, with competition comes deceit and fraud. When you swim with sharks, the sharks call it “salesmanship” or “doing whatever it takes to get the deal.”

When I meet with borrowers that I know are rate shopping, I challenge them to be more BS sensitive than RATE sensitive. I also tell my borrowers how to shop for a mortgage, following three simple rules:

1. Shop on the same day. Rates change every day, sometimes during the day. So shopping on different days or different weeks is not very effective.
2. Get a good faith estimate then compare only the 800 section. These fees are what lenders charge. The title fees, reserves, government recording fees, etc. are variable.
3. Buy Tylenol or Advil. Shopping for a mortgage is a headache and if you choose poorly, expect your headache to get worse.

Last rule…. if a lender says “I can get you the best rate” or “I can beat my competitors rate”, you should seriously consider another lender. As lenders, we all lend money from the same pool, so there’s not much discrepancy in rate but a huge discrepancy in service. So shop wisely!

The TIL is a disclosure document, that goes over APR and total fees packaged into the loan. The TIL, allows the borrowers to compare “apples to apples” with different mortgage loans. APR has no effect on the payment amount just the amount of fees financed into the loan.

The Truth In Lending (TIL) will also show the payment schedule for you loan. If you have a Fixed Rate Loan the TIL will show you what your Principal and Interest payments will be for the entire loan. If you have an Adjustable Rate Mortgage (ARM) the TIL will show what the payments are during any fixed period and an estimate of what may happen during the adjustable period. The TIL also shows the total amount of all payments on the loan. It is common for this number to be two or three times the original amount of your loan.

One of the information on the Truth-in-Lending disclosure form that draws the most attention is the Annual Percentage Rate (APR). The APR is almost always higher than the interest rate the loan officer quotes at application. One need not be alarmed. This is due to the fact that the APR is calculated by adding other fees that are associated with the mortgage process, such as underwriting fee and processing fee, to the qualifying interest rate. The APR is not used for calculation of the monthly payments. It is only meant to show the total cost of the loan, with the applicable fees included.

The APR is what you should use to compare mortgages if you are shopping. This will take into consideration any fees and points that are being charged. If you compare 2 lenders on the same loan amount and interest rate, the lower APR will tell you which loan you are being charged less fees on.

The APR on the Truth in Lending statement can be a bit misleading for customers as the underlying formula used to calculate Annual Percentage Rate on mortgages incorporates many fees which are not amortized into the loan. Please discuss this point with your loan officer or mortgage banker.

Depending on which state you live in, your mortgage professional may be required to provide you with a TIL Disclosure within three business days from the day you filled out an application for a mortgage.

The TIL is a document that is better used for comparing loan programs versus just comparing interest rates because you are taking into consideration all costs of acquiring the loan. One thing to look at closely is what items are checked marked on the GFE to be included in the Annual Percentage Rate on the TIL. The fees which need to be included in the APR are outlined by the federal government but that doesn’t mean that every broker is using the guidelines properly.

Always check your TIL for whether or not you have a pre-payment penalty.

Mortgage lenders are required to give you a truth in lending (TIL) statement containing information on the annual percentage rate, the finance charge, the amount financed, and the total payments required.

A form of mortgage in which the lender makes periodic payments to the borrower, using the borrowers equity in the home as security. For older owners who have a lot of equity in their home, this can be used as income. The loan does not need to be repaid until the borrower sells the property or moves into a retirement community.

When you sell your home or no longer use it for your primary residence, you or your estate must repay the lender for the cash received from the reverse mortgage, plus interest and service fees. Any remaining equity belongs to you or your heirs. It’s important to remember that you can never owe more than the home’s appraised value when it is sold. None of your other assets will be affected by your reverse mortgage loan.

Reverse mortgages are a great way for an elderly person or couple to supplement income, especially if they are only getting social security as retirement income.

Any principal and interest accrued over the life of the loan is due and payable in one lump sum when the last borrower in the home is no longer the primary resident. In most cases, the amount that is due can be paid either by the selling of the home (where the difference of the selling price and remaining debt is left with the heirs), or refinancing the reverse debt with a traditional mortgage.

This is a great income supplement for those who need it.

A reverse mortgage is an agreement allowing a homeowner to borrow against home equity and receive tax-free payments until the total principal and interest reaches the credit limit of equity.

In reference to the HECM (most popular reverse mortgage), the fees associated with this loan are as follows: 1) Maximum of 2% origination fee based on the lesser of FHA’s lending limit or the home’s appraised value; 2) Closing costs such as title, escrow, appraisal, etc; 3) 2% charged by HUD on the lesser of lending limit or home value for initial mortgage insurance premium; 4) Monthly servicing fee of between $25 and $30 that is set aside initially and added to the loan balance as the loan progresses.

Loan to Value calculations, Credit requirements (FICO scores), and Debt to Income calculations are not used in determining how much a borrower can access in equity. For the HECM program, the amount that can be borrowed is based on the lesser of home value or lending limit, age of youngest borrower in the home, and an interest rate.

A Reverse Mortgage is a financial tool which provides seniors 62 years of age and older with funds from the equity in their homes. Generally speaking, no payments are made on a reverse mortgage until the borrower moves or the property is sold. The final repayment obligation is designed to not exceed the proceeds from the sale of the home.

There are currently 3 reverse mortgage programs available. The most popular reverse mortgage program is the FHA insured Home Equity Conversion Mortgage (HECM). The second program is the Fannie Mae Home Keeper, and the third is a jumbo reverse mortgage (cash account) offered by Financial Freedom. With the exception of the Home Keeper, the HECM and the Cash Account can be structured in different ways (i.e. interest rate adjustment for HECM, point variation on the Cash Account).

Possible income source for those who are on social security or limited fixed income.

A Reverse Mortgage borrower cannot be forced out of his/her home. Nor will he ever owe more than the value of his house. Reverse Mortgages are “non-recourse” loans, meaning in the rare case of drastic declines in home prices, the homeowner can never be held liable beyond the value of the subject home.

A reverse mortgage allows homeowners that are 62 and older to unlock a portion of the equity in their home without having to make a monthly repayment. The amount that they can unlock will be determined by a combination of three things: 1)Youngest borrower’s age 2) Lesser of their home’s value or a lending limit (HECM and FNMA) 3) An interest rate.

There are three basic types of reverse mortgage are: single-purpose reverse mortgages, which are offered by some state and local government agencies and nonprofit organizations; federally-insured reverse mortgages, which are known as Home Equity Conversion Mortgages (HECMs), and are backed by the U. S. Department of Housing and Urban Development (HUD); and proprietary reverse mortgages, which are private loans that are backed by the companies that develop them.

Reverse mortgage loan advances are not taxable, and generally do not affect Social Security or Medicare benefits. You retain the title to your home and do not have to make monthly repayments. The loan must be repaid when the last surviving borrower dies, sells the home, or no longer lives in the home as a principal residence. In the HECM program, a borrower can live in a nursing home or other medical facility for up to 12 months before the loan becomes due and payable.

You can get your money in a lump sum or monthly payments.

There are no credit requirements. Only that you need to 62 years of age or older and have sufficient equity.

You maintain complete ownership of your home.

If you are a senior at least 62 years old who is “house rich, but cash poor”, a reverse mortgage may be a viable option to help get you the cash you need. Whether paid to you in lump sum or in installments, reverse mortgages require no payments from your side and are generally not taxable and generally don’t impact social security or Medicare benefits.

Because this loan must be the first lien on the home, any existing mortgage balance must be paid with the proceeds of the reverse mortgage. For instance, if the amount that can be borrowed from the reverse is $100,000 and the existing mortgage balance on the home is $50,000, the $50,000 will be paid with the amount available from the reverse ($100,000) and the remaining balance ($50,000) will be available to the homeowner. The homeowner can elect to convert the $50,000 into a monthly payment, place it in a line of credit, take any or all of the amount at closing, or any combination of the three.

The amount of cash that a borrower can receive is based on a formula of factors that include age of the youngest borrower, the interest rate, value of the home and the county where the home is located.

Also called a jumbo loan. Conventional home mortgages not eligible for sale and delivery to either Fannie Mae (FNMA) or Freddie Mac (FHLMC) because of various reasons, including loan amount, loan characteristics or underwriting guidelines. Nonconforming loans usually incur a rate and origination fee premium.

With the emergence of new lenders and programs to the mortgage market on a weekly basis there is a loan program for just about anyone whether conforming or non-conforming. Just check with you online Mortgage Professional to see what you qualify for.

Conforming loan limits will adjust to $400,000 in most states in December.

A Non-conforming loan simply means a loan that is outside of the standard guidelines set by Fannie Mae and Freddie Mac (the two government-sponsored enterprises that insure loans on the secondary mortgage market). Non-conforming loans have no set guidelines and vary widely from lender to lender. But most often non-conforming loans are mortgages that have larger loan balances, require less documentation, and have flexible credit score requirements. These loans carry an additional risk to the lender and as such the rates are higher.

Non-conforming loans have less stringent rules on fees that can apply to your loan, so review the details carefully.

The demand for nonconforming loans is gaining strength at just about the right time. Its growing presence is throwing lifelines to a record number of perplexed homeowners facing higher sales prices or stiff documentation requirements.

Non conforming loans has strict loan-to-value guidelines.

Conforming loans are available now with Stated Income, Stated Assets or “SIVA”

A Non Conforming Loan is a loan with an unpaid principal balance or an unexpired term that exceeds lending limitations established by the principal purchasers and guarantors of the secondary mortgage market; the Federal Home Loan Mortgage Corporation, and the Federal National Mortgage Association.

Jumbo loans are one type of non-conforming loans, due to the loan amounts exceeding the maximum limits adopted by FNMA and FHLMC. Besides exceeding the loan amount limits, loans can be non-conforming for other reasons, such as the borrower’s credit profile, income/employment situations, cash reserves, property type, etc.

Non-conforming loans typically have a higher rate and different requirements for your down payment.

These loans are possible. The lender will give the broker a commission if you take a loan with a higher rate then what you qualify for at even (par) pricing. So if you qualify for a 7% and take a 7.5% instead then the lender will compensate the broker. The broker then uses this compensation to cover all of your fees for the loan plus pays himself. In the end you can get a loan for no points and no fees and the broker still gets paid for the work.

Another way to have fewer out of pocket costs associated with acquiring a loan and still get a decent rate is to work with the seller of the property and ask for 3% seller contribution. You can use this to pay for closing costs and/or down payment. This is becoming more and more common these days and most state promulgated contracts provide a place for this amount. In hot markets it may not be as easy to get this accomplished.

If you have a home that you believe you will live in for the rest of your life (or at least a long time) then it will be in your best interest to take the lower interest rate and pay the closing costs. The closing costs can most often be made back within the first 3-5 years of your loan; whereas in taking the no closing cost loan with a higher interest rate, you are stuck with that higher rate and payment for the life of the loan.

Have your mortgage broker calculate the exact length of time you should be in your home in order to have a no cost loan, and paying higher interest, make sense. Basically you take the costs you saved and divide by the increased monthly mortgage payment. This will tell you how many months you can have this mortgage before it starts costing you to have chosen the “no cost” mortgage.

No Points No Fees or Zero Closing Cost loans are usually not available on smaller loan amounts.

Often its best to pay the points. Have your broker figure out which way you come out ahead.

There are Mortgage Brokers and Agents who have special pricing available with the banks they work with, and who have worked out special pricing with their title and escrow companies. Some of these Brokers can offer borrowers a Cost Free Refinance, at truly competitive interest rates. Make sure to always compare the Good Faith Estimates(GFE) between the brokers/banks you are considering doing business with. The GFE’s will show your total costs as well as the interest rate and APR.

If you are planning to stay in your home for 1-2 years you should consider a zero cost loan.

Such a program may end up costing you significantly more in the long-run depending on the loan type.

Be careful of those that tout “no fee loan,” when in reality they only intend on not charging origination points or processing fees. In this particular case the lender still will be charging all other fees associated with the loan. A Good Faith Estimate should dispel what is really being paid for or assumed in the financing.

The no points or no fee loans are best for short term loans. If it is a property that you plan on living in for a short time than the thousands that you save in fees will be greater than the savings for the first few years allowing you to close your mortgage with less money out of your pocket or a lesser loan amount.

Not all No Fees Loans are created equal. Some No Fees loans require the home buyer to pay for home inspection and appraisal report. Others only mean no lender fees. Applicants are still required to pay for third party fee such as recording fee, taxes, insurance, etc. When shopping for No Fee loans, it is important to compare the Good Faith Estimates and find out what exactly are being paid by the lenders.

Become an educated consumer and directly ask the lender what is included in the “no fees” loan and if it covers third party fees. Then ask how it will effect your interest rate.

The key thing for the borrower to realize is that in a No Points No Fee Loan is does not mean that the points and fees are simply being given away. They are just being paid for in a different way. What way is right for you will depend on your individual situation. Unfortunately, much of the advertising for a No Point No Fee Loan implies the opposite, that the lender is giving away these costs. Smart consumers need to understand that they are being way to naive if they believe that to be true.

As an example, consider a no-down-payment auto lease, where the dealer still expects you to pay taxes, tag, fees and freight. The down-payment in this example would equate to the lender fees, but your local city and/or county government still expects (requires) you to pay the county tax, and you must pay to record the deeds, etc. A complete, detailed good faith estimate, or GFE, will highlight line by line what fees you are being asked to pay.

Looking for a house without getting pre-approved. Do not confuse a pre-approval with a pre-qualification. When you are pre-approved you become like a CASH BUYER and have more negotiating clout with the seller.

Have an inspection done by a professional. Don’t take the sellers word that they have made repairs. Unless you are buying a new house where you have warranties on most equipment, it is highly recommended that you get a property inspection, a roof inspection, and a termite inspection. This way, you know exactly what you are buying. Inspection reports can be great negotiating tools when it comes to asking the seller to make repairs. If a professional home inspector states that certain repairs be done, the seller is more likely to agree to do them.

Remember that just because a mortgage broker or a bank, says that you can afford the home you are looking at, does not mean that you can actually afford, or feel comfortable with, the monthly payments. Know exactly what the monthly payments are, including taxes, insurance, association fees (if applicable), and any other fees that may be associated with the home on a monthly/yearly basis. Once you know the total cost of owning that home, then decide if it is affordable, while taking into consideration all of your other monthly bills. The last thing you would want to do is rush into a house, that you are unable to afford in the long run.

Do not choose a lender just because they have the lowest rate. Not getting a written good faith estimate. While rate is important, look at the overall cost of your loan. This includes looking at the APR, the loan fees, as well as the discount and origination points.

Get your rate lock in writing. Get a written statement which details the interest rate, the length of the rate lock, and detail about the program. This will save you a lot of trouble if rates increase.

Many Realtors will not show you homes before being pre-approved because they do not want to waste your time, their time, and the seller’s time.

Do not sign documents without reading them. Do not sign documents in a hurry. Whenever possible try to get documents that you will be signing ahead of time so you can review them. It is advisable to ask for a copy of all loan papers you are signing a few days ahead of the close of escrow. This way you can review them and get your questions answered. Do not expect to read all the documents during the closing - there is rarely enough time for that.

Always order a title search and purchase title insurance for the property you are buying. Mortgage banks always require a title search and title insurance. Even if you are buying from a trusted relative or friend and pay with cash or have the seller provide financing, without involving a bank loan, don’t be tempted to skip title search to save on closing costs. The fact is, title defects can stem from a time before the sellers took possession of the property. While the title insurance the sellers purchased when they bought the home protects them for as long as they own the home, that policy does not protect you. The one-time cost of a title search and title insurance may save you from a potential investment disaster.

Do not bid on a house that you have only looked at once. Many home buyers are busy with their lives like everyone else, so they look at homes when they have time, evenings and weekends. Make sure if you find a home you like, you go back and walk through it again at least once at a different time.

If there is something unusual about the home or the property that you think you can fix once you own it, make sure you know what you are getting into. Get estimates for the work, talk to a contractor, or your local government to see if you will need any special permits. DO NOT go on the word of your realtor, home inspector or appraiser, they are all very knowledgeable and can give you guidance, but ask others as well. You don’t want to end up in a home with a huge eye-sore that you can do nothing about.

If there is something in particular that is on the property that you want to remain with the property when you purchase it then make sure it’s in the contract. You can avoid many headaches by putting everything in writing. This also means any repairs that show up on the inspection report you will want the seller to do before you purchase should be put in writing.

One of the most common mistakes Buyers make when purchasing a home is assuming that sellers are the ones who pay real estate commissions along with other closing expenses and seller’s concessions. One way or the other, this money comes from the buyer.

If you are looking for a mortgage and need the services of a reputable mortgage broker there are many ways to find one. You can do an internet search for a mortgage broker in your city. You can also look in the phone book under mortgages.

It is a good idea to check with any applicable Mortgage Professional Associations, when looking for a reputable mortgage broker. For example Mortgage Bankers Association(MBA), the National Association of Mortgage Brokers(NAMB), and in California, the California Association of Mortgage Brokers(CAMB) - And many others located Nation wide.

You may also have your realtor or any friends or family members refer you to a mortgage broker they have used in the past.

Reputable mortgage brokers charge rates and fees that do not vary based on age, gender, race, religion, or national origin. If you feel you have been discriminated against contact your state licensing authority to file a complaint.

In most states, mortgage brokers are licensed by the state government. Always make sure that your mortgage broker has a current, valid and proper license. In addition, in many states it is easy to check if the broker has had any violations recorded against his license.

Make sure when searching for a broker that you first find a good, knowledgeable broker that makes you feel at ease, has knowledge of the programs available, and is someone that you can work with. Once you find this then it is time to talk rates and fees but make sure and find a good broker first.

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