SHOPPING FOR A MORTGAGE ON LINE - EVERYTHING YOU NEED TO KNOW!

One of the best articles I have read explaining shopping for a mortgage online was written by Jack Guttentag (you can see more information about Professor Guttentag at the end of the article) and reproduced here with his gracious permission, I'm sure you will find this information of great interest. Although the article was last updated in 2006, the information still applies and should explain everything you need to know to shop for that mortgage online!

This article is on the why, which, and how of shopping for a mortgage on-line: why seek a mortgage this way, which sites are the best, and how do you shop effectively?

Why Shop For a Mortgage On-Line?

Shopping for a mortgage on-line involves finding the best price among the different single-lender web sites that price your mortgage. On-line mortgage shopping offers numerous advantages.

On-Line Prices Are Easier to Find and to Shop

If your loan is priced on a web site, it will be easy to find, and to compare to the quotes on other sites. In contrast, price quotes in the hard copy media are never provided in the detail required by most shoppers and are always out of date. Telephone and email quotes by brokers and loan officers cannot be relied on unless the borrower knows the source and has good reason to believe it is trustworthy.

On-Line Pricing Is Often Better

Lenders acquiring loans through their web sites avoid the costs of maintaining retail lending facilities, including the commissions paid to loan officers. Because of competition among on-line lenders, the cost savings are generally passed on to borrowers. Some sites warn users to expect higher prices if they go off-line.

Price Volatility Is Easier to Manage

The mortgage market is highly volatile. Lenders reset their prices every morning, and sometimes during the day. Unless price quotations from different loan providers are obtained at about the same point in time, they are not comparable.
This is a major problem in off-line shopping because it takes so long to obtain reliable price data. It is not a problem in on-line shopping because on-line price quotations can be quickly refreshed.

You Avoid Price "Low-Balling"

Low-ballers are loan providers who ensnare customers by quoting low prices they have no intention of delivering. The client is informed that the price will be locked at the “market price” prevailing at the time of the lock, but the market price is what the low-baller says it is. Invariably, the lock price is higher than the price quoted to a shopper for the identical loan at the same time.

On-line shoppers are not vulnerable to price low-balling because they can check their price on-line on the lock day. An on-line lender cannot quote different prices to shoppers and lockers.

You Avoid Third Party Settlement Cost Low-Balling

Some loan providers low-ball third party settlement costs, which they can’t be held to because they are “estimates”. Sometimes they do the opposite, marking them up in order to pocket the difference.
These practices usually work off-line, because information on third party costs typically is not provided until the shopper receives the Good Faith Estimate (GFE), which under the rules need not be given them until 3 business days after the lender has received the loan application. The only way to obtain more than one GFE as a check on the estimates is to apply to more than one lender, which is tedious and time-consuming.
In contrast, on-line shoppers can easily collect settlement cost information from multiple lenders at the same time they are shopping lender prices. Having multiple estimates is an excellent defense against low-balling or markups.

You Avoid Lender Fee Low-Balling

Some lenders low-ball their own fees, which under the rules are also considered “estimates”. While points, which are charges expressed as a percent of the loan amount, are included in a price lock, fees specified in dollars are not included. Some lenders deliberately inflate these fees as the borrower moves closer to closing. Home purchasers are the most vulnerable because they can lose the home if they don’t close on time.
This is not a hazard to on-line shoppers, however, because the shopping sites clearly identify their fees and many of them guarantee them. While others don’t explicitly guarantee their fees, displaying them on-line is almost as good, since the lender would have difficulty defending a different number at the closing table.

You Avoid Being Scammed When You Change Your Mind

Shoppers often change their mind about the deal. For example, they decide to switch from a 30-year FRM to a 5-1 ARM, pay points to lower the rate, make a larger down payment, waive escrows, etc. If an off-line loan provider figures that a customer is committed, the price of the new deal may be higher than the price that would be quoted to a new shopper. This cannot be done to an on-line shopper who can check the price of the new loan on-line.

On-Line Shopping Versus Use of Lead Generators

It is instructive to compare on-line shopping with getting a loan through a lead generation site (LGS), such as Lending Tree. LGSs collect information about you, and match it to up to 4 lenders who contact you to make offers. An advantage over shopping single-lender sites is that you only have to enter your financial information once. When you shop on-line, you must enter the information for each site you shop. That is the only advantage of LGSs.

One problem with LGSs is that they do not provide any way to deal with price volatility. If the lenders contact you on different days, their prices are not comparable. Similarly, LGSs do not protect you against low-balling of prices or lender-fees, markups on third party settlement services, or over-charges when you change your mind about the deal.
Yes, the lenders who come to you through a LGS do compete for your loans, but that doesn’t mean that you will win. They may be competing to see who gets the opportunity to scam you.

Caveat: The Weakness of On-Line Shopping

All the advantages of on-line shopping cited above assume the shopper can price his particular deal on the sites being compared. A shopper with a FICO score of 500 who needs stated income documentation and cannot make a down payment, cannot price his loan on-line. If he goes to any of the good sites, he will be routed to a loan officer and has to face all the hazards discussed above that on-line shopping avoids.
But there is one exception. Any shopper who goes to Amerisave.com through my site is guaranteed the same markup off-line as on-line. Both the wholesale price and the markup are shown and guaranteed by Amerisave and by me. This is the first on-line site that reveals the wholesale price to the lender and is monitored for compliance with a fixed-markup rule.

Which Single-Lender Web Sites Are Worth Shopping?

Borrowers who shop for a mortgage on-line, for any of the reasons noted above, should only spend time on sites that price their loan. If a site doesn’t price the type of loan you want, with the features you require, don’t bother with it. You are on-line to shop, not to be seduced into making a phone call.

To help, I recently scored 20 sites for the depth and comprehensiveness of the information provided to shoppers. Of these, I considered 18 worth listing because they had some price functionality and showed all settlement costs.

The two highest ranked sites, http://www.amerisave.com/ and http://www.eloan.com/, meet all my requirements for the designation of Upfront Mortgage Lenders (UML). Among other things, UMLs provide a summary of all the market niches priced by the site, and disclose all the major features of their adjustable rate mortgages (ARMs). The two runners-up, http://www.mortgage.com/ (the site of ABN Amro), and http://www.indymac.com/, did neither, but they did cover many loan types and market niches.

Here is the complete list by score:
Amerisave.com (47)
Eloan.com (46)
Mortgage.com (42)
Indymac.com (37)
Greenpointmortgage.com (32)
Chasehomefinance.com (30)
Mortgage.etrade.com (29)
Charteronedirect.com (29)
Wamuhomeloans.com (26)
Bankofamerica.com (25)
Citimortgage.com (24)
Ditech.com (20)
Wachovia.com (19)
WellsFargo.com\mortgage (19)
Gmacmortgage.com (14)
Homeloancenter.com (14)
Infoloan.com (12)
INGdirect.com (12).

The Scoring System

A site with a higher score is one that prices a larger number of potential transactions, and provides shoppers with the information needed to make decisions. Here are some examples of the scoring system I used:
Mortgage Types and Features Priced by the Site

For every program they price beyond 15 and 30-year fixed-rate conventional loans, a site receives 1 point. This includes different types of ARMs, balloon loans, and FHA/VA loans. They also receive a point for disclosing each important ARM feature.

Down Payment Pricing

A site that allows the user to enter the down payment receives 2 points, and an additional point if the down payment can be less than 5%. If the site uses one down payment in all its pricing, but tells the user what that assumption is, it receives 1 point.

Settlement Cost Disclosures

A site that shows all settlement costs receives 1 point, another point if lender fees are segregated, another point if lender fees are guaranteed, another point if the guarantee includes the appraisal, another point if the guarantee includes the credit report, and 2 additional points if it covers all third party fees.

Rate-Point Options

A site receives 1 point if some of the mortgages are priced with multiple combinations of interest rate and points, an additional point if rates are shown for negative points (rebates), and a point if it explicitly prices no-cost loans.

Strengths in Coverage

11 of the 18 listed sites priced loans on second homes, loans on investment properties, and cash-out refinances. Most sites also priced loans on 2, 3 and 4-unit properties, as well as on condos. There were even 5 sites that priced loans on co-ops, and 3 that priced loans on manufactured homes.

15 of 18 sites priced loans with down payments specified by the shopper (rather than assumed by the site), and in 9 cases down payments could be less than 5%. Most of the 9 allowed zero down on at least some transactions.

17 of 18 sites provided different combinations of interest rate and points on at least some programs, and 14 included negative points (rebates).
All 18 sites showed total settlement costs, 12 segregated lender fees, and 9 explicitly guaranteed lender fees.

Weaknesses in Coverage

While shoppers can find every type of ARM offered on multiple sites, only Amerisave, ELoan and Chase Mortgage (ranked number 5) disclose the index and its current value, the margin, and all rate caps – information needed to make intelligent decisions. If you price an ARM on any other site, you will have to contact them to fill in the blanks.

Except for Amerisave, ELoan and Indy Mac, the sites assume your credit is excellent. Shoppers with scores below 620 cannot yet shop effectively on-line.

On-line shoppers also do best if they can fully document their income and assets. Only 5 sites have a “stated income” option, and none offer “no docs”.

While a lower-ranked site has less coverage, there is always the possibility that it prices your loan and a higher-ranked site does not.

How Do You Shop On-Line?

Here are the steps in using these sites effectively.

1. Decide Whether You Are a Shopper
On-line shopping is not for those who are computer-phobic or mortgage-allergic. If you feel overwhelmed by the complexity of mortgages, and don’t have the time, energy or desire to educate yourself about them, internet shopping is not for you. Select an Upfront Mortgage Broker (UMB) to shop for you.

2. Determine Whether You Qualify For on-Line Shopping
You can’t shop on-line unless your particular deal is priced on-line by at least some lenders. For the most part, this excludes borrowers with poor credit. If you have a credit score below 620, most of the sites will deal with you, but off-line – “Bad credit? Call us”.

Single lender sites vary greatly in the extent of their niche adjustments. The trick is to determine whether the questions posed by a site have captured your particular niche adjustments. If you are buying a two-family house, for example, and you are asked about “Type of Property” with “Two-family house” one possible answer, then you know that they adjust for that.

On-line shoppers also do best if they can fully document their income and assets. Only 5 of the 18 sites have a “stated income” option under which the lender verifies the source but not the amount of income. None price “no-doc” loans.

3. Decide the Mortgage Features You Want
You can’t compare prices of different loan providers accurately unless you can specify exactly what you are shopping for. When you shop for an automobile, you decide beforehand that you want, e.g., a 4-door Toyota Corolla with Bose speaker system 102, red trim, etc. Similarly, when you shop for a mortgage, you should know the type of mortgage you want – whether fixed-rate (FRM) or adjustable rate (ARM), and if the latter, what kind. You should also know your preferred term, points, down payment, lock period, and options including interest-only, prepayment penalty and waiver of escrows.

4. Identify Sites That Price Loans With the Features You Want
I have done most of the spadework for you by developing tables that show the loan coverage of the 18 sites.

For example, you want a 10-year FRM with zero down. The tables show that lenders 1, 2, 3, 7, 9, 10 and 13 offer 10-year FRMs, but of this group, only 1, 2, 3 and 13 also price loans with down payments of less than 5%. Hence, you can concentrate on these four sites.

5. Compare Multiple-Price Quotes From Different Sites
If you are selecting an FRM, you must consider both rate and total lender costs, which includes points and all other lender fees. Assuming you are seeking the best deal on the 10-year FRM from lenders 1, 2, 3 and 13:
a. At lender 2’s site, find the rate that is closest to the number of points you previously decided you wanted to pay.

b. Calculate the dollar value of these points and add it to the lender’s fixed-dollar fees to get the total lender fee for that rate.

c. Now go to lenders 1, 3 and 13 and repeat the process for the same rate. Since lenders usually quote rates in increments of 1/8%, you should be able to find the exact same rate.

d. Holding the rate constant at the 4 sites, the best deal is the one with the lowest total lender fees.

6. Comparing Prices of ARMs

On ARMs with initial rate periods of 3, 5, 7 or 10-years, follow the same procedure. If you are 99% confident you will be out of the house before the end of the initial rate period, take the ARM with the lowest total fees at the same rate.

If you are not sure that you will be out before the end of the initial rate period, you should consider what might happen to the rate at that time. That will depend on the rate index, margin, and rate caps, which may differ between lenders.

It could turn out, for example, that the 5-year ARM with the lowest cost over 5 years leaves you more exposed to higher interest rates after 5 years. In that event, you need to decide whether the cost saving is worth the added risk.

Borrowers who opt for an ARM with an initial rate period of 12 months or less can use much the same technique, but instead of comparing the initial rate, they should compare the index plus margin. At the end of the short initial rate period, the rate is reset at index plus margin, subject to any caps.

If two ARMs are identical but you had to call one lender to obtain information on the margin or caps, select the other.
Copyright Jack Guttentag 2006

The writer is Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at http://www.mtgprofessor.com/

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