Need A Mortgage... Negotiate

Posted by Nick Niesen on October 29th, 2010

The life of money-making is one undertaken under compulsion and wealth is evidently not the good we are seeking; for it is merely useful for the sake of something else - Aristotle

For most, the cost of purchasing a home is the biggest financial decision of their lives and with the escalation of home prices over the past decade, shopping for a new home can be a bit traumatic when that perfect place is out of reach.

Although, you must be realistic in looking for homes that fall within your budget there are things you can do that will help stretch your dollar and get you into the house you've always dreamed of.

The process of buying a house really comes down to how much you can afford.

The first step in the mortgage process is getting pre-qualified. In essence, when a loan officer pre-qualifies you for a mortgage (purchase or refinance) they work backwards to figure the maximum mortgage amount you can afford or that you qualify for according to the lending guidelines.

Here is brief overview of how they do it. First of all, you need to understand that lenders only count income that can be documented. If you can't provide documentation of income then it can't be used.

Here are few examples: It's easy to determine income if you are an employee on a salary. If you get paid twice a month then your income is simply multiplied by 24 to determine your yearly income. If you are paid every two weeks then your income is multiplied by 26 to determine your yearly income.

If you are an hourly employee with little overtime then it's also fairly straightforward. However, it gets a little trickier if you work a bunch of overtime, receive commissions or bonuses because that portion of your income varies. What usually happens for borrowers that fit into this category is that the previous two years W2 forms are simply used and the past 2 or 3 months of actual income is used and then everything is averaged to determine monthly income.

For self-employed or 1099 borrowers income is pretty much determined by what your net income indicates from you tax return. This is usually shown on Schedule C at the bottom where it indicates "profit" and with most lenders they want a two-year track record.

However, more and more lenders, even lenders that focus on borrowers with less than stellar credit have become more creative in recent years and have programs that require less documentation. Some programs only require bank statements to verify income and there's even programs called "Stated" that simply use the industry average income for a particular profession, in a particular area of the country, without requiring any verification of income.

Other ways to stretch your dollar when it comes to getting a mortgage is to pay close attention to all the fees. All fees are listed on the Good Faith Estimate which is required to be shown and explained to all borrowers before a loan can be approved.

A key factor to remember in trying to secure any mortgage is that many of the fees, including the interest rate are negotiable. It's kind-of an industry secret, especially when it comes to interest rates, that interest rates are set in stone and out of the lenders hands but that simply is not the case.

The actual interest rate you receive is up to the loan officer, and it can vary by up to a full point, even more is some instances, for borrowers with bad credit. The reasons behind this are beyond the scope of this article but the bottom line is this? don't be afraid to question your interest rate, regardless of what you've been quoted, because there's a good change you can get it lowered by an eighth or quarter or perhaps even more.

Fees are another dirty little secret of the mortgage industry because most are negotiable. One of the biggest fees is the origination fee, which is normally 1% of the loan amount. This fee is simply all profit for the lender or broker and is totally negotiable. Don't be afraid to question this and get it down to a fixed dollar amount you can live with, especially for high loan amounts.

Other negotiable fees include: appraisal fees, processing fees, credit report fees, closing fees and lender fees. Lender fees are common for borrowers with bad credit and in some instances it's as high a $995. This is an actual fee that the lender is charging the broker but if you question it the broker can go to the lender and tell them that this deal is dead if they don't lower the fee and in many cases they will lower it significantly.

Remember, loan officers and lenders only make money if the loan goes through so it's in there best interest to do whatever it takes to make sure that happens. So? if you're prepared to walk from the deal because you feel the fees are too high or the interest rate is too high they will, in most instances, work with you. However, you must be realistic and if you expect virtually no closing costs and an unrealistically low 30 year fixed interest rate when you've got bad credit it's not going to happen.

In summary, shop around and after you get the best deal then go to work and negotiate, negotiate, and negotiate the fees and the rate. And by the way, you can do this with good credit or bad credit, whether you are buying your first home, your tenth home or simply refinancing your current mortgage. Follow these guidelines and you could save hundreds, even thousands in closing costs and perhaps secure a lower interest rate that will save you money each and every month.

Tip - For options in finding the best mortgage, new or refinance, check out the links below.