December 16th, 2009 12:32 PM

Understanding GFE's - 7 Steps to Obtain the Best Loan Possible

Novice short sale investors, homebuyers and even experienced real estate agents often fail to fully understand the basics about GFE's or Good Faith Estimates. Unfortunately, what you don't know can hurt you (or at least your bank account); take time to sort through the complex lingo in order to obtain the best loan rates with these definitive don'ts:

1. Don't use a lead generation website to obtain mortgage quotes. Last week at the shortsales blog we covered this topic in depth but suffice to say, lead generation websites are often more trouble than they are worth.

2. Don't rely exclusively on interest rates. Origination fees, underwriting fees, discount fees and a host of other expenses frequently drive up the total cost of a loan making the ultra-low interest rate quite expensive, in fact, it's not unusual to see the total cost of the loan go up by as much as 3 percent or even more.

3. Don't believe marketing ploys about low/no fees. Mortgage lenders throughout the nation advertise 'No origination fees" but replace it with "Discount fees" instead. Be sure to carefully review the small print and obtain a Good Faith Estimate outlining all fees and interest rates.

4. Don't rely upon APR. So far most short sale investors and savvy homebuyers probably are not surprised by the interest rates and fees since they have been told to ask about APR (annual percentage rate); unfortunately, it's not as foolproof as it may seem. Lenders do not disclose every fee when quoting the APR. Instead, it is optional which fees to include and which not to include. Contrary to popular opinion, comparing APR's will NOT automatically result in the lowest cost mortgage. Again, it is necessary to obtain a Good Faith Estimate to obtain a rudimentary quote.

5. Don't rely on verbal quotes. Plain and simple, they are  nearly worthless. A Good Faith Estimate is essential to review the term, interest rate, closing costs and payment amount. However, avoid lenders or brokers that expect payment up front for "pulling your social security number" in order to obtain a GFE. especially when dealing with unknown online vendors.

6. Don't assume the GFE represents the interest rate you will eventually pay. Remember, this is a good faith estimate not a rate lock. Interest rates and other fees may rise or fall by the time you "lock in" a rate or are ready to buy. It's also a good idea to ask a few additional questions before accepting the GFE at face value:

Question: Will I have to open an account or make a minimal deposit at this bank/facility in order to obtain this rate?

Rationale: Many lenders quote the best rates for their own clients. If you do not currently maintain a checking or savings account with that provider it may be necessary to do so in order to obtain the best rate.

Question: Will I need to sign-up for automatic payments in order to obtain this rate?

Rationale: An increasingly common stipulation in order to obtain the lowest possible rate.

Question: How much will PMI run?

Rationale: PMI or Private Mortgage Insurance can add hundreds or even thousands of dollars annually to the cost of the loan. Most buyers are not able to select the PMI Provider so be sure to ask.
Question: Do I need to use a specific builder to obtain this rate?

Rationale: Many lenders have local 'builder incentives' in place when purchasing certain properties. Make sure the quoted rates apply to all properties not just one specific property.

7. Ask your lender to remove the underwriting fee and processing fee (as well as any others possible) and include them under the Origination Fee category instead. By doing so, you will obtain a valuable tax deduction without incurring additional cost.

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