It’s Not What You Think

Written by Posted On Thursday, 28 September 2023 00:00

I got an email from a good friend whom I’ve not seen in several years but we stay in touch with the occasional email or text. We live in different cities, different states, actually, so there’s not a lot of opportunity for a physical get-together. So anyway, I got a text the other day saying she was getting ready to buy a home and would I take a look at the loan documents sent to her. ‘Of course,’ I said.

So, she sent me her ‘loan docs’ and they weren’t loan docs in the strict sense. Instead, it was a Loan Cost Estimate with no property address listed. That’s common because the Estimate was sent to her before she picked out a home. I took a few moments to review and called her back and said that everything looked okay, save for the fact that I thought she might want to rethink the option of paying so many discount points. 4 to be exact.

I said that the points were way too high and suggested she look at trading so many points for a slightly higher rate. With her loan estimate, the difference in monthly payment was just about $40 per discount point paid. Her loan amount was estimated to be around $300,000 so $12,000 was a bit much. She said she knew that but wanted to get her payment down as low as possible. I did a little math with her and showed how the point/payment tradeoff didn’t work. Second, she said that her rate was 6.125% and that she was comfortable with that as the new payment would be similar to what she was paying in rent.

A week or so later, we talked again after she had located a property and put in an offer. The problem was that rates had moved quite a bit since her initial Estimate had been sent. Rates had moved up by almost 0.75%. I ran some numbers myself and told her that I wasn’t sure she would eventually qualify based upon her debt to income ratios. After another few days, she texted back and said that I was right, that the lender said she couldn’t afford what she wanted to borrow based upon current rates.

But my point in all this is, where was the loan officer? Why didn’t the loan officer tell her the maximum amount she could qualify for? Why didn’t the loan officer explain to her about locking in a rate and the potential impact of floating? And with rates moving up, why not give the heads up? Yes, borrowers review a Rate Lock form that informs them that rates can move until locking in, but borrowers are bewildered with paperwork at the outset. It’s easy to gloss over this particular form.  I understand that loan officers may not always have the time to update all clients about rate moves every day, but loan officers, especially in the city where my friend wanted to buy, weren't all that busy.

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David Reed

David Reed (Austin, TX) is the author of Mortgages 101, Mortgage Confidential, Your Successful Career as a Mortgage Broker , The Real Estate Investor's Guide to Financing, Your Guide to VA Loans and Decoding the New Mortgage Market. As a Senior Loan Officer and Mortgage Executive he closed more than 2,000 mortgage loans over the course of more than 20 years in commercial and residential mortgage lending. 

He has appeared on CNN, CNBC, Fox Business, Fox and Friends and the Today In New York show. His advice has appeared in the New York Times, Parade Magazine, Washington Post and Kiplinger's as well as in newspapers and magazines throughout the country. 

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