This is a surprisingly common occurrence: A buyer comes to us with a ridiculously low rate quote from another lender and insists that we match it.
We then ask to see the Loan Estimate (LE) that sets out all the fees.
And – invariably, we find $10,000 of points or origination fees buried in the loan.
We then find out that the loan officer had sold a loan with “no out-of-pocket costs,” meaning that he merely increased the buyer’s loan amount by enough to absorb ALL of the points and nonrecurring closing costs.
The confused buyer, however, thought she was getting a “no cost” loan.
This and similar issues take place so often that I feel compelled to repeat this blog from time to time.
Here Are 5 Misleading Rate Quoting Tricks:
“No Cost” vs. “No Out-of-Pocket:” This is a classic ploy and it is what happened in the above instance. A true “no cost” loan means that the lender covers or pays all of the nonrecurring closing costs or one-time fees (title, escrow, appraisal, underwriting, etc.) on behalf of the buyer. With a “no out-of-pocket closing cost” loan, the lender still charges the buyer ALL of the standard closing costs (and points in many cases); the lender, however, increases the loan amount by enough to cover all of those costs so the buyer does not have to pay them “out of pocket” at close.
“No Cost” vs. “No Points/No Fees:” Many lenders quote “no points and no fees” loans, when it really only means no lender fees (“big banks” are notorious for this). Buyers still have to pay for their appraisal fee, escrow fees, title insurance fees, notary fees, etc. These fees can easily add up to several thousand dollars, making “no fees” quotes very misleading.
Quoting Non-Existent Rates: Some lenders quote rates associated with very short-term lock periods (under 7 days for example) that WILL only be available once a loan is fully approved. So, if rates increase between the date the loan is submitted and the date the loan is approved, the buyer is out of luck. Similarly, many lenders also underquote rates during a buyer’s pre-approval stage, knowing they will not be held accountable for that rate because the buyer is usually weeks or even months away from going into contract. At that time, when the actual rate lock is necessary, the loan officer can then say: ”oooh – sorry dude, rates have gone way up…” I might add that this is happening for real right now – but it is because rates have actually gone up and NOT because we quoted an artificially low rate during the pre-approval stage.
Quoting Without A Full Scenario (credit score, LTV, property type): This is a painfully common trick too. There are as many as 13 factors that affect every buyer’s individual interest rate, as set out in this blog. Some loan officers purposely misquote before knowing all of these factors in an effort to reel in buyers, knowing that the actual interest will likely be higher once all of the factors are known. The loan officers simply hope they can convince the buyers that the mistake was innocent and that the buyers will not want to endure the time or cost (especially if they pay for an appraisal) that going to another lender might entail.
Manipulating Annual Percentage Rates (APRs) and Closing Costs: In this blog called 5 Misleading Closing Cost Tricks Big Banks Play, I illuminate a lot of closing cost tricks lenders play – often to manipulate APRs, which is amazingly easy to do! These tricks include understating prepaid interest (which makes APRs artificially low), property taxes and hazard insurance. Lenders also sometimes understate 3rd party fees and eliminate “owner’s title insurance” altogether – which also reduced APRs.
What Should Buyers Do To Avoid These Tricks?
They should only use lenders with stellar online reputations and reviews, make sure they are getting quoted rates that can actually be locked, and go over their Loan Estimates with a fine-toothed comb.
