When Mike and Rita Hopper wanted to buy a Virginia rental property in 2013, they applied for a mortgage through a loan officer they’d been happy with before. This time, though, just days from closing, they almost walked away from the loan.
A doctor and an attorney living in Arlington, the Hoppers had to produce what felt like endless documents, including Rita’s birth certificate. When asked by the bank for the tax returns from each partner in Mike’s medical practice, they refused. Only after their loan officer went to bat for them did the bank stand down.
The Hoppers’ loan application was caught in the seismic shifts caused by the Dodd-Frank Wall Street Reform and Consumer Protection Act, legislation triggered by the country’s 2008 financial crisis. Changes were meant to protect consumers from the liberal lending that had contributed to a wave of home foreclosures.
Not all banks and credit unions survived Dodd-Frank changes—some consolidated or closed. It was tough on borrowers, too, some of whom had trouble qualifying. The silver lining was greater transparency and compliance from lenders, easier-to-understand forms, and better resources, such as the Consumer Financial Protection Bureau. The love child of the Dodd-Frank act, CFPB was intended to educate consumers and make the financial industry treat consumers more fairly.
If you’re in the market for a mortgage, or will be soon, here’s what you need to know about the process these days—and the looming changes that may be coming.
Changing Regulation
The current administration’s preference for less regulation may mean a loosening of Dodd-Frank bank requirements and a softening of enforcement from CFPB. If these changes occur, they could both ease the mortgage process and place some borrowers at risk.
“Rolling back recent protection is a bad idea for the market and for society as a whole,” says Alys Cohen of the National Consumer Law Center. She sees pending legislative changes in the Economic Growth, Regulatory Relief, and Consumer Protection Act as “poking holes in reasonable protections,” especially for people of color. As it currently stands, regulators require banks to report a slew of loan details, allowing regulators to track the characteristics of loans made to consumers of a certain race or ethnicity. This bill, if passed, would exempt 85 percent of banks from reporting this expanded data set to regulators.
David Stevens, president and CEO of the Mortgage Bankers Association, says any unwinding of protections can harm the lending industry as well. “Consumer protections level the playing field for the mortgage industry,” he explains, preventing lenders from undercutting one another with lower-cost, higher-risk loans.
Educating Yourself
Even though the rules that currently exist mean banks are making fewer risky loans, the onus is still on the homebuyer to understand the process and know what to ask and what to expect.
“If you’re financially stable and strong enough to purchase a home, you have the financial obligation to do research on the loan,” says Stevens, who served as an Obama-era assistant secretary for housing as well as federal housing commissioner at HUD and, before that, president and chief operating officer of Long & Foster Companies. “There’s still going to be bad actors. It’s more important than ever to be an educated consumer.”
When Stevens’s own daughter recently bought a house in Arlington, he gave her the same advice: Compare offers among three lenders. “You shop around for a car. You shop for luggage online,” he says. “For God’s sake, shop for a mortgage.”
There’s no law that restricts consumers from applying for loans through multiple lenders. In fact, CFPB rulemaking supports comparing loans: Lenders must provide borrowers with a Loan Estimate within three business days of receiving an application. Armed with standardized forms from different lenders, buyers can compare based on estimated interest rates, monthly payments, and total closing costs, along with other mandatory details such as prepayment penalties. Hold onto that Loan Estimate—at closing, borrowers are advised to use the initial document as a comparison against the required Closing Disclosure form and to understand the reason for any differences. CFPB offers a detailed explanation of these forms and how to compare offers. (Search “Know Before You Owe“).
The type of loan also matters. Ask your loan officer if the loan is compliant with the Qualified Mortgage rule, meaning the lender has made a good-faith effort to determine if you can make the payments.
And no, each inquiry for a similar loan within a given period (generally 14 to 45 days) won’t hurt your credit score. Credit-scoring calculations make accommodations for loan shopping and bundle them into one inquiry.
To guide the process, Ruth Susswein of the nonprofit Consumer Action, suggests consulting CFPB’s online mortgage guide. Its checklists, terms, estimation tools, and explanations of the mortgage process are easy to understand and up to date. Websites for the Mortgage Bankers Association and National Consumer Law Center also offer solid guidance.
Choosing the Right Lender
Almost a quarter of homebuyers regret their choice of mortgage lender. J.D. Power reports that among customers who weren’t happy, 72 percent said it was because they felt pressured into selecting a particular mortgage product.
That was the case for Heather and David Noble. Although the Arlington couple wasn’t house-hunting, when they found out that a property they loved was on the market, they decided to jump at the opportunity. They went to a lender recommended by their real-estate agent.
“In the moment, the recommendations and referrals we were given felt helpful,” Heather says. “But when I look back, I have some regrets. I wish we had taken more time to make those decisions.” When it came to homeowner’s insurance, she says their lender discouraged them from using an alternate quote they’d found. She also wishes she had looked into other options for private mortgage insurance—she was told, incorrectly, that the fee would stay on the mortgage for only two years. In the end, Heather says, they felt “highly encouraged” to use the lender’s recommended companies.
Using a good lender can avoid this situation, but what’s the best way to find such a professional? Friends and neighbors can make referrals, of course. Real-estate agents can, too—and they’re ostensibly more reliable these days as disclosure has become the status quo for most financial arrangements between agents and loan officers (along with almost anyone else in the mortgage business).
Consumers can identify referrals with possible financial or business arrangements between mortgage professionals—often evident when a flier or web content from an agent advertising a house for sale includes the name of a mortgage company or other settlement-service provider. That said, not all real-estate brochures with the name of a mortgage company indicate a financial arrangement. Nor do they indicate questionable referrals. Recommendations to lenders or settlement services may simply be based on a history of good service.
Adam Messersmith of NASA Federal Credit Union suggests that consumers do their own research, comparing costs and services: “If you don’t spend time doing your due diligence as a consumer, you can get overcharged for things like settlement services. There are so many complexities to this transaction that can easily be glossed over.”
You can also directly ask the mortgage professional about his or her relationship to a recommended business—and learn a lot from the answer. Jim Connolly of Long & Foster says interactions with a good lender or settlement company should feel low-key and upfront. If you feel pressured to go with your real-estate agent or lender’s recommendation, as the Nobles did, you might want to keep looking.
Connolly’s other advice? After checking at least three lender options, which might include banks, credit unions, and mortgage banks, “make sure it’s someone who is responsive.” (For a rundown of types of lenders, see page 128.) The company you choose, he says, can affect your home’s sale: “In the DC market, you have to be competitive and quick.” Connolly has found that submitting a bid with a local lender recognized by the seller’s agent as “responsive, honest, and able to deliver the mortgage on time” can give buyers an edge.
As of press time, consumers could check a lender’s reputation on the CFPB website, which maintains a database of complaints against mortgage companies. Though the CFPB doesn’t address each individual grievance, the platform allows consumers who feel mistreated to file a public complaint. By doing so, “you are empowering consumers to make better choices before they, too, get into the same rut you are in,” says Susswein. Mortgage shoppers can also check lender ratings at nmlsconsumeraccess.org, J.D. Power, and the Better Business Bureau. (In late April, acting CFPB director Mick Mulvaney proposed shielding the database from public view, which would mean it might no longer be an option for consumers.)
When Things Go Wrong
Despite the steeper qualifications for mortgages, home sales can fall through prior to closing.
Blame some of the failures on unscrupulous lenders who advertise unrealistic rates—vastly different from what ends up on the Closing Disclosure form. With decreasing enforcement and the possibility of changing requirements, borrowers need to be wary of bait-and-switch lenders: View with particular suspicion low rates as well as offers made after you’ve provided very little documentation. Carefully check out lenders who ask for fees upfront. CFPB and the Federal Trade Commission both provide guidelines.
Loans also can fall through because there’s less wiggle room for last-minute scrambles if a lender fails to collect all the necessary information or if the borrower isn’t initially upfront or turns out to have a more complex financial profile. That’s where a good loan officer matters, helping borrowers anticipate paperwork requests and thus avoiding unnecessary delays and missed closings.
Waived home inspections can likewise create problems. This popular bidding technique can give buyers an edge in Washington’s competitive market, but it can backfire. Because an appraisal is, with few exceptions, a nonnegotiable part of the closing, the deal can grind to a halt if the appraiser discovers enough issues with the property to lower its value significantly.
While problems are at times unavoidable, some lenders offer a closing guarantee, such as $1,000 toward closing costs or payment of the first month’s mortgage. If yours proposes this option, you might ask how often he or she has had to pay.
Don’t Be Afraid to Negotiate
Shireen and Aaron Dodini of Arlington spent this past winter shopping for a vacation home. They found a lakefront getaway perfect for their family of six. As of May, they were shopping for mortgages.
Although a potential lender will lay out projected costs in a Loan Estimate, Aaron says all the lenders “were willing to negotiate to some degree—offering incentives that amounted to about $3,000 in savings on origination fees, a straight-up cash credit, and covering some of the closing costs. Once I told them we had better offers on the table, they threw in more incentives and credits.”
This type of negotiation does require you to keep an eye on every line item. When lenders are asked to adjust one fee or rate, they may raise another.
You might have the most luck trying to negotiate “origination fees,” which vary by lender, and the application fee, which some will waive. Borrowers can also negotiate for loan terms most suited to their financial profile, such as putting less than 20 percent down, along with buying down points, thereby lowering the interest rate.
While fees, interest rates, and loan terms matter, other factors, such as the availability and experience of the loan officer, can also determine if you go to closing—or plod through more open houses. Whatever the initial terms, “if they speak in a language you don’t understand and don’t offer to explain,” says UN Federal Credit Union’s Sylvia Setash, “keep looking.”
This article appeared in the June 2018 issue of Washingtonian.
