When lenders compete, borrowers might not always win.
In fact, borrowers could lose big. It's up to borrowers to figure out their financial situation, know how much house they can afford and not use a mortgage as an excuse to overspend.
Part of that process involves getting finances in order, finding a lender and getting matched with a loan product that suits that person's financial picture.
In the fourth quarter of 2006, 1.19 percent of 43.5 million outstanding loans were in the foreclosure process, according to the Mortgage Bankers Association. That's up 20 basis points over the fourth quarter of 2005.
Mortgage Bankers Association Chairman John Robbins said only a small percentage of delinquencies occur because borrowers don't manage their credit well.
He cautioned that there is a lot more to home ownership than a monthly payment, such as taxes and maintenance costs.
Once prospective borrowers figure out how much they can spend on a monthly payment, then they can think about getting a mortgage.
"I would recommend they start with a 30-year fixed mortgage," Robbins said. "It's the safest because you never have to worry about whether the interest rates are going to go up.You've eliminated any upsided risk."
He said consumers should start with the most conservative product and then, depending on their income, they can move to products with more risk.
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Choosing A Loan
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| Call at least five lenders. Shop for the specific loan product you have chosen. Ask for the exact interest rates and the total commission and fees for the loan product. Find a mortgage with the best rates and fees. If it's a no-fee loan, ask what the yield spread premium is, which is the markup on the interest rate of the mortgage brokers can earn above the lender's rate. Lock in the loan for 60 days.
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Source: John Robbins
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Thirty-year fixed mortgages might not always be borrowers' first choice.
"Fifty to 60 percent of borrowers should use nothing but a fixed-rate mortgage," said Ron Cahalan, author of 'Lenders Are Liars.' "If they're using anything else, they're buying more house than they can afford."
Cahalan said he's worked in the mortgage industry for 26 years and that 30 percent of loan officers don't counsel borrowers on the risks.
"You, as a borrower, need to ask all the right questions. Will the payments go up? If so, what's the worst case scenario?" Cahalan asked.
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Questions To Ask Your Lender
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| What's your expertise? How long have you been in the business? Once you're comfortable talking to a lender, ask about specific products. What products do you recommend and why? What are the risks? What's the worst-case scenario? |
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Source: Ron Cahalan
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Exotic Loan Products
Adjustable rate mortgages, or hybrid loans, which carry both a fixed and adjustable interest rate, are typically geared toward those who anticipate their income is going to increase, who are going to live in a home a short time or borrowers whose overall financial picture is ideal for the loan.
Cahalan said the problem is that lenders were putting people into these products who shouldn't be in them, especially during the real estate market boom.
"The lender is made out to be the bad guy," he said. "The borrower does have some responsibility for those problems."
Cahalan said half of the borrowers used exotic loan products because they were buying more house than they could afford.
When To Buy
Your credit score can impact if or how much house you can buy, so housing affordability can be a concern to someone with less-than-perfect credit.
In some instances, home ownership might not be ideal depending on a person's financial situation.
A prospective buyer whose credit score is not high is seen as a higher lending risk and might only be eligible for a subprime loan.
"Most subprime borrowers should never be buying in the first place," Cahalan said.
He said subprime loans are for those who have had credit problems in the past, have a good job and are turning their credit around. He said less than 25 percent of subprime borrowers fit that mold.
"I don't think anyone with a 580 credit score should be buying a house," he said.
Randi Livon, a mortgage banker with
Residential Mortgage Group in Minnesota, said that a 680 credit score would be really good, and a score of at least 620 would leave buyers with options that "aren't dangerous."
Cahalan said most subprime borrowers want to buy homes to make money.
"Now they are looking like the victim of the big, bad lender," he said.
Teaching About Lending
Colin Robertson, chief writer for
TheTruthAboutMortgage.com, stressed that because lenders are in the business of getting loans funded, borrowers must educate themselves.
"Any bank or lender can overcharge you or throw you for a loop," he said in an e-mail interview. "It's up to the borrower to educate themselves to ensure they make informed decisions and avoid the typical traps inexperienced borrowers fall into."
Robertson suggested deciding what loan programs work for them before meeting with a lender. Otherwise they will likely see products that fit the loan officer's personal agenda.
"Some loan programs tend to carry higher commissions; you better bet they'll be the first ones you see," Robertson said.
Catch 22
For consumers who are determined to shoehorn a mortgage into their budget to get a home they can't afford, know-how might not help.
"Unfortunately, the mortgage industry rarely advises against buying more house because they use the product to get you into the house instead of asking first: Is this the right thing to do?" Cahalan said.
He said the problem is that if lenders don't help buyers get a loan, they will simply move on to a different lender to get what they want.
"Most don't say, 'Is this the loan for me?'" Cahalan said. "They say, 'Can you get me into this loan?'"
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