Should I shop around for a mortgage lender?

Dave,

Simple question: should I shop around for a lender? I’ve heard it’s good to interview a few different real estate agents before starting the home buying process. Is it the same thought for lenders or are they all pretty much the same across the board because of regulations, etc.?

Thanks man!
Gregg, Fruita

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Gregg,

Clearly you have read my column and realize I can be pretty verbose, but in this instance I think I can keep it fairly short! It is really pretty simple, no two lenders are the same and it is in your best interest to shop around and I am not necessarily talking about shopping around for the best interest rate!

Just like in real estate or any other profession, you want to find someone who works in lending full time! They should have years of experience and knowledge. Most importantly he or she should be up on all the latest lending requirements and programs and know what it will take for you to get a loan approved. I know everyone is human and can make mistakes, however it still amazes me at the sloppiness/last minute rush that some mortgage lenders put their clients through when it comes down to crunch time. I understand there is a load of paperwork that is required from the buyer when obtaining a loan and getting all that paperwork processed is a time consuming process that requires systems and processes to ensure proper handling. As with anything you have to ask questions! 

Some simple questions to find out more about your prospective lender might be:

1. What kind of experience do you and your team have? If they don’t have a team working with them, move on….There are too many details that can get overlooked.

2. Can I get references? If they don’t readily hand them over, move on.

3. How much time do you need to fund? If they hesitate or say more than 45-60 days, move on (30 -45 days is typical).

4. Can you guarantee an on time close? Most should not hesitate to give you a firm closing date. Remember you MUST be timely in document submission. Many times, it is not the lender, it’s the buyer who is dragging their feet and that causes a loan to either not close or delay closing.

5. What are my estimated closing costs and are there any other fees or costs I should know about? They should be able to provide you a good faith estimate of all your costs right up front.

“Experience matters! I know cost is always part of the equation, however knowledge, experience, track record and reputation are more important.”

Clearly you should find out about the interest rate and the closing costs each lender will charge. However, I will drop this little nugget on you…you will not care or be worried about your interest rate and closing costs if your loan hits a major snag 4 days prior to closing and you lose your dream home. Imagine having to scurry about looking for a short term rental or ponder moving in with the in-laws for a few months while you sort out your homelessness. NO THANK YOU! Experience matters! I know cost is always part of the equation, however knowledge, experience, track record and reputation are more important. Trust me, when a deal starts to go bad, you will throw cost out the window in trade for someone who knows their way around a difficult deal and can find a way to get it closed. Even more important is to find a lender that never lets you get near a situation like I described above. 

Like everything else, do your homework on your lender. No two lenders are created equal and some are better than others. That being said, we have some wonderful lenders in this town who do an excellent job and are really quality people! Another good way to evaluate a lender is by reading online reviews. 

So much for keeping it short! I guess there’s always next time. I hope this helped.

Dave Kimbrough
The Kimbrough Team

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Have a question? Ask Dave!

Is it appropriate for buyers to ask sellers to pay their closing costs?

Dave,

We just listed our home for sale and our agent informed us that buyers in our price range are going to ask US to pay THEIR closing costs....I was floored. I have never asked anyone to pay my closing costs when I have purchased any of our homes and certainly do not have much interest in paying them on a buyers’ behalf. I am going to have my own costs to pay, without paying theirs too. We do not feel like we should pay someone to purchase our home. The whole thing just does not make sense to us and when we asked her why, she just said, “it is the way it works now-a-days.” I agreed and just moved on, but it still does not sit well with us. Could you please give us a better explanation of why we will be required to pay the buyers’ closing costs?

Les and Joanna, Grand Junction

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Les and Joanna,

I can assure you, you are not the only sellers I have heard this from, “if they can’t afford to pay their own closing costs, they certainly can’t afford to buy my home.” Seller paid closing costs must be somewhat of a newer trend, as it is my sellers who are generally over the age of 50 that have a real disdain for seller paid closing costs. They are fundamentally opposed to it. I really believe most of the time it is not the costs involved, it is the lack of understanding and the generational gap of a time when you just did not ask for help. Remember, you are not required to pay the closing costs, but let me see if I can make a case for why you should!

There are a few reasons why this has become quite the trend in home buying. First, the lenders will generally allow a seller to pay up to 3.5% of the homes purchase price towards the buyers’ closing costs.  If the seller agrees to participate by paying the buyers’ closing costs, this lessens the buyers’ “cash burden” at close and thus allows them to purchase the property with less money out of their own pocket. This leads us to our second reason this practice has become so vogue, many buyers in today’s market are “cash poor.”

“It really is quite simple, you are paying their closing costs to lessen their cash requirements at close and thus increasing the size of the overall buyer pool.”

Lets face it, as a society we largely live hand to mouth and save very little, although our saving habits have become somewhat better since the fiscal crisis of the past several years. Statisticbrain.com reports (numbers verified 12-26-2013) the average American family has a savings account balance of $3,800 and 25% of American families have no savings at all and 40% of families have no plan or savings for retirement! I think it is safe to say that we are a “cash poor” society and the more cash it takes to purchase a home, the fewer buyers there will be who will be able to buy. It really is quite simple, you are paying their closing costs to lessen their cash requirements at close and thus increasing the size of the overall buyer pool. By saving the upfront cash expense of closing costs, the buyer may also be wanting to make some improvements or updates to the home after closing and keeping some cash in reserve will allow them to do just that. Keep in mind that it is by no means, “every buyer” who “needs” the closing costs paid on their behalf. Many buyers choose to have their closing costs paid by the seller, as this allows them to “roll” their closing costs into their loan.

By rolling their closing costs into their loan, a loan that they likely have at around 4%, it requires them to take less cash out of other investments that may be performing at a higher rate of return than the 4% they are borrowing at. If I have an investment at a 10% return, then why take money away from that investment to pay down a loan at 4%? As a society we have become obsessed with our “rate of return” on our investments. In today’s world if you tell someone to take money away from a 10% return investment to simply lessen their borrowed amount on a 4% loan, they would look at you like you were crazy and I must admit, there is some truth to that line of thinking. 

As you can see, there are several reasons why buyers will ask you to pay their closing costs and you can be assured that if you refuse, many buyers will move on to another property, especially in the under $300k price range. I always advise my sellers to pay the closing costs and negotiate from a bottom line sales price (their net), rather than getting caught up in who is paying what closing costs. Just ask your real estate agent to give you a net sheet so you can see what your walk away number will be and negotiate off your net amount, as this is the only number you should really be concerned about. I hope this helped.

Dave Kimbrough
The Kimbrough Team
RE/MAX 4000, Inc.

Are Inspectors Liable if an Inspection Report Has Errors?

Dear Dave,

We have our home under contract and the buyers ordered a home inspection. The home inspection report contains four substantial errors in the areas of heating, cooling, plumbing and sewer system. The inspector misidentified a sprinkler valve as a sewer service cap and reported a possible "active sewer leak" in that area which is nowhere near the sewer line. The inspector may have scared the buyers out of this purchase through these errors, time will tell. 

I was surprised to find that home inspectors are not licensed through the state of Colorado which seems ridiculous considering one unlicensed man's opinion can derail a deal for the seller's agent, buyer’s agent, sellers and buyers. Do inspectors typically buy Errors & Omissions insurance and what has your experience been with sellers suing the inspector after a report filled with errors kills a deal?

Thanks,

Shawn, Loma

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Shawn,

Ugh…I hate this for you! I hate it when things like this happen to unsuspecting and undeserving people.  The picture you are painting here is certainly an ugly one, however a painting that I have seen far too often on varying levels. First, I am sorry about your circumstances and I truly do feel for you and your family. It is likely that your first question was “how is this possible?” and after that answer settled in, feelings of total frustration, disbelief and outrage! Let me start by saying that inspectors are people too and mistakes are just part of being human! That being said, it certainly does not excuse them or make them any more forgivable when the errors appear to be as egregious as these might have been.

Home inspectors are not licensed by the state and are not governed by the state or required to have any amount of standardized or required training. Colorado is one of 20 states that has not adopted ANY licensing requirements. I must admit that most of the local home inspectors do a great job, but I believe they often lose sight of what they are really doing and why they are really there. Believe me, I feel your pain…I personally believe that where home inspectors get themselves in trouble is the same with all of us…they speak before they stop and think something through. Often times they provide an answer or draw a conclusion without really knowing and that is where big problems can start.

“Home buyers trust their home inspectors and trust is a very powerful thing!”

There is a life lesson in this and that is that if you don’t know something, don’t say something that may or may not be true. Explain that you don’t know, but will find out! Sometimes you run across things that you don’t know or are not sure of, and instead of blurting out an answer, you should dig a little deeper to gain full understanding before speaking or drawing a conclusion. We all know that it’s hard to take back words or correct an incorrect report. When it gets to that point, many times the damage has been done. An even bigger issue involved here is trust!

Home buyers trust their home inspectors and trust is a very powerful thing! When you said that the inspector may have scared the buyers off, unfortunately I am confident the home inspector is clueless about his unknown super power: trust. Listen, when a home inspector says it, it MUST be true, at least in the eyes of the buyer. Many times, especially in young home buyers, what an inspector says is treated like the gospel. I believe most home inspectors do not have any idea how much home buyer’s trust what they say and when it is wrong, it can have cataclysmic consequences on a home purchase and everybody suffers.  

I do not believe most, if any, home inspectors carry E & O insurance and, in fact, I believe it is a common practice that the maximum amount of liability for most home inspection contracts is the price of the home inspection. That means that if you paid $400 for the home inspection, the home inspector’s maximum liability would be $400! Lastly, I do not have any experience with sellers suing a home inspector for a faulty report, although I have had many who wanted to. Unfortunately, sometimes mistakes are made and from time to time it can have a significant negative impact that can cause a deal to crumble.

Shawn, I am sorry about your situation and I am hopeful things will work out. Remember, things really do work out for a reason, even if you don’t know the reason. Control what you can control and trust that the rest is meant to be! : ) I know, easier said than done!

Dave Kimbrough
The Kimbrough Team