How to Look for a Mortgage: Advice from a Former Loan Officer

As a former loan officer and manager in the home financing department of a major regional bank, I am asked all the time to provide some of my most frequently asked questions as advice when looking for a mortgage. Feel free to use this advice for yourself, friends and family.

How should consumers prepare when applying for a mortgage?

Get all your ducks in a row. When you apply for a mortgage you should know everything about your income, your savings, retirement accounts, credit, etc. Get a free credit report and study it. Look online for how-to type websites on preparing for a mortgage application. Lastly, if you have an accountant or a financial adviser, use them! If you trust them then ask for a referral. That way the loan officer has to content with making you happy and his referral source (your accountant or financial adviser.)

Get pre-qualified. All reputable lenders offer free pre-qualifications. By getting pre-qualified you know how much you can afford. Knowing how much you can afford based on your current income and savings is key.

What are the best tips for finding a lender (what should you look for in one)?

Ask lots of questions. Ask anything, even if it sounds simple or absurdly ignorant. Never let a lender pressure you into "glossing over" any question you have. You have to find a lender that is part therapist, part financial adviser and part teacher. If you don't feel comfortable with a particular loan officer then find another because there are a lot of fish in the sea and like a relationship life is too short to be in a bad one.

Also, shop around and never, ever let a loan officer "pressure" you into taking an application. I always offer my clients the opportunity to "think everything over." If the loan officer is thrusting a pen at you asking to take the loan that day before you leave his office then he's not a trustworthy loan officer. I have the confidence that I have given my clients the entire picture and all the information they need to make a decision.

But don't just ask the simple questions. Spend time talking to the loan officer. Most people come at it all backwards. They pick up the phone and dial twenty-seven different places and ask, "What's your rate?" and hang up. You'd have better luck at the horse race track. Anyone will tell you what you want to hear. What they don't tell you is - how long that rate is good for, how your personal profile will affect the rate, and how much it's going to cost you to get that rate.

While you contribute probably 6% of your salary to your 401K and you probably trust no more than 5%, possibly as much as 10% of your income, if you can afford it, to your financial adviser, the average citizen must allocate a minimum of 28% of his or her gross income to her mortgage! Sometimes that number goes as high as 35-40% if you're stretching it a little. Yet most people rely on fly-by-night Mortgage Brokers called the AAA Loan Co that they found on the back of a matchbook.

Advice for applying for and selecting a mortgage?

When you apply for a mortgage ask this question: What alternatives do I have if this loan doesn't work out? The mortgage process is long and complicated, and regulations are written out very precisely. A very small item may interrupt the process and you want to be ready with an alternative right away so you and your loan officer do not waste time scrambling at the last minute to find another affordable product that fits your needs.

If you don't understand how a mortgage product works then that program is probably not for you. If you can't have your accountant explain it to you then it's not the program for you.

Disclose everything. Tell the loan officer how much you make, how your credit history has been, what your savings are now and what you can save in the future. One last thing is to tell the Loan Officer about any relatives who may be able to provide gift funds in an emergency.

A good loan officer will do the service of putting all your assets and liabilities on paper so you can see the situation you are in and what you need to do to improve or change it.

With foreclosure filings up into the triple digit percentages in some states in 2007, what is your advice for analyzing a mortgage before taking it on?

I never recommend borrowing up to the maximum allowed even though some programs allow up to 100% financing. This could get you in trouble down the road if prices fall, especially with a large interest-only loan or even one that is adjustable.

Unless you are really financially savvy, I never recommend anyone take what is called an option ARM. These loan programs offer low initial payments and an option to pay one of three other amortized payments, but human nature lends itself to paying the lowest payment possible. While this sounds like the Interest-Only mortgage with more flexibility, it is not. The teaser payment is so low that it will actually accrue interest on top of your balance leading to what is called a Negative Amortization. This means over time, your mortgage balance will actually increase. Even worse, after a short term the low payment goes away and your loan converts to an adjustable rate mortgage. The jump is usually very high from the initial payment leading to severe payment shock for the borrower.