Carolyn Warren, author of Homebuyers Beware, shares her tips about how to get a low mortgage interest rate, improve your FICO score, and avoid scams and bogus lender fees. She also reveals the secret commission that lenders make on loans, what you should never say to a loan officer, and more.

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Do you need more advice about getting a mortgage?
Read her book, Homebuyers Beware.

Sometimes it seems like there are dozens of different kinds of home loans available. Kind of walk us through the most common types of mortgages and talk about choosing the right one that will meet your needs.

That’s a great question. I’ll break it down into two steps. First, you want to choose the correct loan type for your situation. An FHA loan is commonly called the first-time homebuyers loan, because it only requires 3.5% down payment. A conventional loan is 5-10%, so if you have a larger down payment, you want to go with a conventional loan, but if you need a minimum down payment, then you choose the FHA loan. After that, you want to choose either a fixed rate or an adjustable rate. And there are some adjustable rate programs that are not rip-offs. If you only plan to stay in the property for five years or less, you can save yourself a lot of money in interest by taking a loan that’s fixed for the first five years, and then turns adjustable. But in general, when rates are low, you want to pick a fixed rate. When rates are high, pick an adjustable rate to save money, and refinance when rates go down. Right now, rates are low, so fixed rates are very popular.

What kind of credit history are you going to need to get approved for the best home loan rates? Give us your tips for improving your FICO score.

Especially now, a lot of people are asking that because of the new guidelines. 720 is the new 620. For the best loan in all of the loan programs, you want to have at least a 720 score. With an FHA loan, you only need a score of 620, so it’s much more generous. People with lower scores do not have to be discouraged and think that can’t get a home. They can with the FHA loan, and again, that’s only 3.5% down payment. There are some lenders that will go lower than 620. 580 is the lowest score I’m seeing right now, but expect to pay significantly higher interest rates if that’s the case. In my opinion, it’s better to take the extra time, clean up your credit and get to that 620 score. First of all, check for accuracy. A lot of times, people have old late payments or collections that should have dropped off their credit report that are still there. Sometimes people have family member’s credit merged onto their credit report, and they might be negative things that are dragging their score down. One of the fastest ways to raise your credit score is to lower your debt ratio. So if you have credit cards that are maxed out or near the limit, by paying those down, you will instantly increase your score. If your credit card balance is 50% or more of the allowable limit, you are getting docked serious points on your credit score. So simply by paying that down, you’re going to see a great improvement.


What if you’ve had some late payments or, maybe worst case scenario, a bankruptcy or a foreclosure. Is it pretty much game-over at that point?

Not at all. The FHA loan always has been and still is, the most generous for credit. If you had a former bankruptcy, FHA requires 24 months seasoning after the bankruptcy, and it’s very forgiving of a hardship or a mistake that you may have made in the past, a lot of people went through something like a medical emergency, maybe a bad divorce, maybe they just ran up too much credit card debt, they were young, didn’t understand, or made a mistake. Bankruptcy ended up being the best choice for them in that situation. With FHA, it’s very forgiving of that, you just want to have clean credit after the bankruptcy. There are still sub-prime loans out there that are equity-based, not credit score driven. So you can have bankruptcies, foreclosures, all kinds of ugly credit, and they don’t care as long as you give them sufficient collateral or a large enough down payment. That usually requires 30% down. Some people have that, because they may have inherited money, or come into cash in another way, and they’ll go ahead and take an equity-based loan. With those loans, you can expect to pay a higher interest rate, of course, so you’re looking at 9% and up.

When you open the yellow pages, there’s page after page of mortgage brokers, banks, credit unions, direct lenders, third-party originators, on and on. Where are you going to get the absolute best deal on a mortgage, and which of them should you definitely avoid?

That is a key question, and I’m glad you asked it, because it’s one of the most common questions that people are asking now. The key is, you do not choose by institution. You choose by individual loan officer. Here’s what I mean and here’s why. You can go to the same mortgage lender, whether it’s a mortgage broker or a bank or a direct lender, and by going to two different loan officers, you can get completely different quotes for interest rate and for fees, because the loan officer has a certain amount of control over that. What you want to do is get a loan worksheet. This is a preliminary form of a good faith estimate that will show you all of the costs that go into the loan, and you just call up and say, “Hi, I’d like to get a loan worksheet from you to find out what costs and rates are today, I’m looking for a $250,000 loan, I’m going to put 10% down,” or whatever your scenario is. In Homebuyers Beware and Mortgage Rip-offs, I recommend make three phone calls, ask one smart question. That’s all you have to do. It makes your shopping very simple. Call three lenders—two mortgage brokers, one bank—and the reason I recommend calling two mortgage brokers, is that each mortgage broker is going to have 5-10 favorite wholesale lenders that they shop with, so by calling a mortgage broker, in effect, you are shopping 5-10 different lenders. So if you call two brokers and one bank, that is plenty of shopping around. Then by looking at their written loan worksheet, you can compare their fees and then it’s easy to see which is the cheapest loan and the best one to get. There are excellent, ethical, honest loan officers and direct lenders, and banks, and mortgage brokers. There are also greedy loan sharks at all of those institutions. You really have to shop by individual loan officer, that’s key. It’s unfair and inaccurate to say that all banks are cheaper or all banks are more expensive. You can’t categorize any type of institution that way.

When you’re evaluating a particular mortgage professional, what are some questions you should ask them? What are some signs, obvious or not, that they may not be a good choice?

First of all, number one is ask for a loan worksheet, because you want to be able to look at all of their fees in writing. Secondly, ask them what their closing time is. There are some lenders that are so busy, they’re at 90 days. On the other hand, there are other lenders that can close in 3 weeks. You don’t want to get locked in with a lender that’s going to take 90 days to close when you need a 30 day closing, so that’s very important. And by the way, an interest rate lock for 90 days, costs more than a 30 day. Ask them, “do you disclose your yield spread premium?” That lets them know that you are educated about the mortgage process and that you want fair pricing. Yield spread premium is the secret backend commission that they make on the loan. By law, mortgage brokers are required to disclose it, although not all of them do. Banks are not required to disclose it, although they do have it, and the same with direct lenders. But asking that question and listening to how they answer, that’ll give you a lot of information as to how upfront they are with disclosing their fees. Now banks and direct lenders, even though they don’t have to disclose it, there’s nothing that prevents them from disclosing it. If they dance all around the topic and say, “oh, we don’t have it because we’re this and that,” that tells you that their covering up part of the pricing. It can be a very telling question.

Speaking of that, how do mortgage brokers make their money? Who’s paying their commission and how much are they making?

Mortgage brokers, bankers, direct lenders, they all get paid when they make a sale. No sale, no profit coming into the institution, no paycheck. They’re all getting paid by you! The higher price the loan is, the more money they make. Some loan officers try to say, “oh, we don’t get paid that way,” but that’s not true. There might be a few direct lenders that pay a base salary plus a bonus, but almost all loan officers are getting paid on commission, and you’re paying it. One of the biggest lies out there is this: “my loans are cheaper because I work at a bank,” or “my loans are cheaper because I work at a direct lender.” That’s not true—there’s no type of institution that has cheaper loans. That’s a marketing ploy. You don’t want to fall for that.

What are some of the tricks that the mortgage industry uses to hide fees or otherwise cause you to pay more for your mortgage than you need to? What kind of rip-offs are you likely to encounter?

One day, I was driving down the road and had my radio on, and I heard a mortgage company advertising, “we have a secret loan that nobody else knows about. This is a unique source of money. The lenders don’t want you to know about this because they don’t make any money on it. Call in and get your cheaper loan!” Of course, working in the mortgage business, I thought, that’s funny, there are no secret, unique sources of money. So I pulled over to the side of the road, pulled out my cell phone and I called them up. Fortunately, I got the manager, and I said, “hello, I just heard your advertisement. I work in the mortgage business and I don’t know about any secret source of money.” The manager laughed and he said, “well, that’s true, we do make money on all of the loans, but as a marketing strategy, it works.” In other words, he was being dishonest on the radio telling people they didn’t make any money on their loans. There’s no such thing as a charity mortgage. All lenders are in business to make money. If they say that we don’t make any money on this loan, that’s just not true. One of the tricks or marketing ploys, is to say, “we have a secret source of money,” or “we’re cheaper for this or that reason.” It’s just not true. Money comes from Federal National Mortgage Association, commonly called Fannie Mae or from Freddie Mac, and then there are other investors that will loan money, but there’s nobody that has a secret source of money where they don’t make any profit on the loan. And if you hear anything like that, that’s a marketing ploy. Another trick is to hide some of their fees on the loan worksheet by scattering them around the page. I’ve seen loan worksheets from lenders where they’ll put some of their fees, such as an underwriting fee or a processing fee, up near the top of the page, and then down at the bottom in a right-hand column, they’ll put another fee, like doc drawer fee, thinking, oh, you won’t notice that, you’re just going to look at the top left and see the underwriting fees, and then down at the bottom, hiding below the title or escrow fees or property taxes and insurance, they’ll sneak in another lender fee or two. My personal pet peeve is the e-mail fee. Can you imagine charging somebody $70-$200 for an e-mail? That’s coming up more and more often now. The e-mail fee is often charged by the escrow company, because nowadays, loan documents are all sent electronically. It doesn’t matter if you’re two blocks down the street or if you’re going from east coast to west coast, loan documents are sent via e-mail. The closing agent, which could be the title representative or an escrow company or sometimes even the attorney, they receive the loan documents by e-mail. And in addition to their customary closing fee, some of them have tacked on a $200 e-mail fee on top of that. That’s pure junk! And I want everyone to object to that. One of the ways that we can clean up the dirty side of lending is just by objecting right up front to bogus, needless junk fees like that. And when everyone is rejecting them, then they won’t be able to charge them anymore. E-mail fees, by the way, are fairly new. Five years ago, we did not see e-mail fees. Some lenders have duplicate fees. They’ll have an admin fee plus an underwriting fee plus a processing fee, plus a commitment fee, plus a doc drawer fee—you look at all those fees and you think, why are there five lender fees here? That’s another thing to look out for. An underwriting fee is okay, but if they’re charging an underwriting fee and an administration fee, then that’s charging for the same thing twice with different words.

You think that everything’s all set and you’re sitting at the closing table, but then, all of a sudden, there’s trouble. Talk about some of the problems that can crop up at closing and what you can do to avoid them.

One of the good things about the new lending laws of 2010 is that it is now illegal for a lender to have a brand new surprise lending fee pop up at the signing table. They can’t do that. When they give you their three page good faith estimate, then that is considered a contractually binding document, and the lender fees can’t change. They can go down, but they can’t increase. Most of the lending laws of 2010 are not helping borrowers and they’re even costing them more, but that is one good aspect of the new law. No more bait-and-switch at the signing table. Nonetheless, there are still surprises that can come up near the end that can cause problems for your loan. This will usually happen right before loan documents are going to be drawn, you’re down to the last few days of the loan process, and then a surprise can pop up. One of the things that can cause this to happen is sometimes people get really excited about the new house they’re going to buy, so they go out shopping. They’ll buy furniture for the new house, appliances for their new house, open charge accounts to pay for these, and suddenly their debt ratio goes up. Surprise, now they no longer qualify because they just set themselves up for all these new payments. One of the biggest mistakes people make, do not take out or open up any new credit or any new installment loans until after your loan closes. Especially now in 2010 lenders are checking per the new Fannie Mae guidelines to see that you have not acquired any new debt. Whatever you do, don’t raise your debt ratio while your loan is in progress.

You’ve mentioned a few pitfalls that people can run into. In your opinion, what are the biggest mistakes that homebuyers make in the mortgage process?

Well, one mistake, especially first time homebuyers, is not doing any shopping around for a loan. They’ll get a referral from their real estate agent, and then just go with that person. One of the things that so-called mortgage gurus or trainers of loan officers say, is really develop your real estate referral business, because those people do not shop around and you can make more money off of them. You must not blindly accept a referral without doing any price comparison at all. That’s one mistake people make. Another mistake is not educating themselves. I think it’s very important to know the basics of how the mortgage loan process works. It’s not difficult, all you have to do is pick up a good book or two and read through it and you will be very empowered and educated, because when people call up a loan officer and they say, “hello, I’d like to buy a house and I really don’t know anything about this process and I’m really going to have to trust you to just guide me through it step-by-step,” that is like holding up a big sign that says, “I’m naive, please charge me more.” And I can guarantee you that you will be charged more if you do that. Educate yourself, that way, you can call up and be confident, and you can say, “I’m a first-time homebuyer, I’d like to buy a house in the $250,000 range, I’m going to put down 3.5% for an FHA loan, I’d love to have a good faith estimate or a loan worksheet from you, and by the way, do you disclose yield spread premium?” If you call up like that, they’re going to say, whoa, this is somebody who really knows what he’s doing. And they’re going to put forth their very best offer to you, because they know that that’s what they’re going to have to do in order to gain your business. Then, when you have your loan officer chosen, don’t be shy about asking questions. Ask all the questions you want. Everyone is very happy to help you, but don’t hand your power over to somebody else.

Any other great tips for getting the best deal on a mortgage?

I think that having good credit and a good down payment is going to empower you. When people know what they can qualify for, then they feel empowered. Doing the loan worksheet comparison and seeing it in writing, it makes it really clear for people. Then you’re not going to have a surprise at the end because you see, well, this is what the fees are, I see that I have to pay for title insurance, it’s going to be about this much, my property taxes are going to be about this much, then they’re going to proceed with confidence. Otherwise, a lot of people feel like they’re driving down the road with a blindfold on, and that can be a little scary, because they have no idea how much money they’re going to need up front, they don’t know what they’re credit is like—just by doing a little bit of homework ahead of time and being prepared, you’re going to go into the process with confidence and you’re going to be able to get excellent financing and feel very good about your transaction.

Carolyn Warren is the author of several books including Homebuyers Beware: Who’s Ripping You Off Now?