January 21st, 2021 9:37 AM by Gregg Mower
This post is written to help people understand the disclosure process when applying for a home loan. We know that you do not apply for a home loan every day, however, you do need knowledge of the basic process, so you are not overly confused. It is a common occurrence when we originate a home loan whether it be an FHA, VA, or Conventional loan for a purchase of a house or a Refinance that our borrowers have questions on the disclosures that are mandatory that we send out on every home loan. The biggest question lately has been the way we have to show our clients how much money is being made on their transactions. You will see this only occur on loans that Mortgage Brokers originate as the laws are as such that makes a Mortgage Broker disclose more thoroughly than Banks and Mortgage Bankers. This came out of the Mortgage crisis of 2008-11.
The disclosures I am referring to are the Loan Estimate specifically as this is the document that outlines the fees you the borrower will be paying. This document is not entirely accurate, however, which makes explaining it even more difficult as there are actually more fees disclosed on the Loan Estimate than you will actually have to pay. As a borrower, you will be given a Loan Estimate many times throughout the process of the home loan. Current law makes loan originators provide the loan estimate to their clients every time a material fact of the transaction changes. The initial Loan Estimate is sent out within 3 days of an originator receiving a complete loan application. As a Mortgage Broker, we send ours to our clients from our processing system (webcaster) and the client can electronically sign those. Then when we submit the file to a lender that lender must send out a Loan Estimate and disclosures too. This can be confusing to our clients as to why they are getting multiple sets of disclosures that are relatively the same. The answer is that it is the law, more specifically the Dodd-Frank lending Act of 2008 set by the Obama administration, makes all lenders and Broker abide by or lose our licenses.
The Loan Estimate was designed to give a consumer the ability to “shop” around for the best mortgage terms. What it really did is take an old form we provided before, the Good Faith Estimate of Costs, that was one page and turn it into a 10-page form detailing all the cost that could be possible in the loan transaction and make it so Mortgage Companies have to give it to all applicants. This changed the playing field for Mortgage Companies and Banks in that the new law was more stringent upon Mortgage Brokers than Mortgage Bankers and Big Banks in that a Mortgage Broker must show in big bold print how much money is being generated to the Brokerage from the Loan being requested whereas Banks and Mortgage Bankers do not have to provide that information. This confuses customers when the only costs that matter to a consumer are what the actual monthly payment is and what the costs to close are. For example, a refinance client may go to their bank and ask the banker about refinancing their home and the banker gives them a Loan Estimate and nowhere on their estimate do you see how much money the Bank is making from your home loan. Then you come to a Mortgage Broker and they offer you a better interest rate and a lower payment with fewer costs, but they show that they are making $10,000 for originating your loan and that is all the client can now see not the actual savings they are getting by going to the Mortgage Broker. The reality to a client should only be what is the monthly payment and how much is it costing me to get that, and 9 out of 10 times the Mortgage Broker will win that on both fronts.
This is a daily occurrence for Mortgage Brokers across the country even though they are offering a lower payment and lower costs, clients are fixated on the money on the line that shows how much money is going to the Brokerage. All the other institutions make the same amount of money and, in most cases, significantly more. The reality is that Mortgage Brokers make less per transaction than Mortgage Bankers or Banks they are just must show you how much money is made on a loan transaction where the others don’t. In comparison to Realtors who will sell your home for a 5-6% commission getting a loan becomes significantly less, in the 2-2.5% range, and most of the time you are not paying the fee as the lender is paying the fee to the Mortgage Broker.
This brings me to the 2 additional ways a Mortgage Broker must give you a Loan Estimate. A Mortgage Broker is either paid by the Lender or paid by the Borrower or as we say in the industry Lender paid or Borrower Paid compensation. The reality is that if a Mortgage Broker is offering you a loan with Borrower paid commission that Broker is probably lowering the actual negotiated “Lender Paid Compensation they have set up with the lender they are selling the loan to. In other words, if you are seeing on the front page of the Loan Estimate “X” amount in commissions to the Broker you are actually paying less than it would have been if the Funding Lender was paying the Broker directly (Lender Paid). You see a Mortgage Broker cannot charge more than what they have negotiated as “Lender Paid” compensation with the Funding Lender, but they can charge less and by charging less it automatically, by law becomes, “Borrower Paid” Compensation and is disclosed differently. The disclosure law is actually counterintuitive meaning it was designed to help consumers “shop” for a mortgage and in actuality, it hinders their ability to shop for a home loan.
In addition to the different ways, a Mortgage Broker has to disclose their compensation (Lender Paid or Borrower Paid) these disclosures will be sent out a minimum of 4 times in every loan transaction. Why, you ask? Like I said before the Loan Estimate must be sent out upon the initial loan application and most of the time the loan is not “locked” yet with a lender so to stay in compliance the Mortgage Broker must send out the initial disclosures within 3 days of the loan application, so the first set of disclosures are generally going to change as the Borrower figures out exactly what interest rate and cost scenario best fits their needs. Once they do figure this out with their Loan Officer, then they will lock the loan with a Funding Lender. The part most borrowers don’t fully understand is that although we sent out disclosures “initially” and the loan was not actually determined by the borrower, yet the Mortgage Broker can’t proceed to process the loan or order an appraisal until the “initial” set of disclosures are signed (whether they look right to the borrower or not). This confuses more borrowers as there are so many documents within the “initial” disclosure package that must be signed they are confused as to why they must continue to sign the same documents over and over. Note that when I say “sign” it is all done digitally with electronic signatures. Most lenders we submit our loans to, will have a Borrower Portal or a website that our clients will have access to “sign” disclosures electronically.
The 3rd time a Borrower will sign or acknowledge disclosures will be 3 days prior to signing the final set of disclosures in front of a Notary. This 3rd set is referred to as the Closing Disclosures or “CD”. The CD is now becoming more accurate as we are closer to the actual closing date. Up unit now we called the disclosures estimates to this point as we have no way of knowing the funding date when we start a home loan transaction. Once the closing date is finalized then the last and final set (number 4) of disclosures will be sent to the settlement agent (escrow officer) and they will prepare the final estimate of costs. This final estimate will be what the borrower will be paying or getting back from the loan whether it is a refinance or a loan to purchase a home. Until this point, everything has been the best guess with a tolerance of .125% up or down in the cost of the loan. Generally, the cost and payment will not change dramatically from the initial Loan Estimate to the final numbers unless there are changes in the contract if you are buying a home or if you are refinancing and the payoff is higher than expected, or if the borrower needs more money to pay more bills or needs more money for home improvement. We have had many borrowers over the years that are confused by this process and feel that if they sign anything they will have to go through with the loan when this is just not true, the Borrower is the boss and can change anything at any time, just know if you do change anything you will be getting a new set of disclosures. I hope this has helped with some of the loan maze or gauntlet you must go through when trying to get a home loan. Here at MAE Capital Mortgage, we are here to hold your hand through the maze and help you get to the other side with the lowest payment and costs available in the market today.