Mortgage Q&A: Lenders must teach borrowers

By Henry Savage, Special to THE WASHINGTON TIMES | Friday, August 29, 2008

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I want to share a true story. I got a call this week from a first-time home buyer who found my name through this column. The woman told me that three weeks earlier, she had been the winning bidder to purchase a foreclosure in Maryland. The purchase price is $160,000, and she is providing 20 percent as a down payment.

She called a relative in the mortgage business to apply for a mortgage loan. Her relative sent her some forms to fill out and sign. She filled out the information the best she could, signed the papers and sent them back. She heard nothing from the loan officer for three weeks and decided to call. The loan officer told her the application was being processed and not to worry. Her settlement date was a week away. She started suspecting that this isn't the way the mortgage process should go, so she called me.

She told me she had photocopied all the forms she had signed. I asked her to e-mail them to me. When I opened the file, I literally was speechless. Here's a sampling of what came to me:

• The application was blank with the exception of the applicant's name, address, Social Security number and employer.

• The Good Faith Estimate was blank with the exception of a couple of lender fees disclosed.

• There was no interest rate lock-in form. In fact, there was no mention of interest rate or type of mortgage program anywhere in the paperwork.

After receiving this shoddy paperwork, I asked her if the loan officer had asked her for any employment, income or asset information. She told me she had expected to provide pay stubs, bank statements and such things, but no one had asked her for anything.

I then asked her if the loan officer ever reviewed the forms and explained the purpose of each disclosure. She reiterated that she simply had filled out the application and signed the forms. She told me she had no idea what she was signing.

Folks, this is a disgraceful picture. The story makes me ashamed to be in the business. I would like to use today's column to describe the service this woman should have received.

First, the loan officer should have requested a copy of the contract. The contract will specify the details of the transaction, such as property address, price, settlement date and amount to be financed.

The loan officer should then set up a time for consultation. While a face-to-face meeting is sometimes preferable, I have found that telephone interviews work just as well. During this interview, it is the loan officer's duty to cover several very important steps in the home-buying process.

The loan officer must qualify the borrower to make sure there will not be any problems in underwriting. Actually, this step should be done before the home search. The loan officer must review the borrower's credit report, income and assets to ensure that she is financially capable of repaying the loan requested.

The loan officer must educate the borrower and help her establish objectives. He must explain all the practical mortgage programs available. The loan officer should explain the difference between adjustable rates, fixed rates and shorter- and longer-term amortizations. The loan officer should then make recommendations based upon the borrower's objectives.

The loan officer must gather all the information necessary to obtain a loan approval. If he gathers the information haphazardly, there are likely to be questions or problems in underwriting.

The loan officer must review every disclosure and form to be signed. He is responsible for ensuring that the borrower understands the closing costs and what each fee covers. He is responsible for ensuring that the borrower knows her interest rate, monthly payment and cash needed. In fact, the borrower must not only know these numbers, but also have a solid understanding of how the numbers were calculated. The loan officer must welcome any and all questions and answer them clearly and accurately.

The bottom line is this: A borrower should never arrive at the settlement table with surprises. The papers she signs to purchase the home should reflect numbers that are reasonably accurate to those provided by the loan officer at the time of application. If this isn't the case, the loan officer didn't do his job.

• Henry Savage is president of PMC Mortgage in Alexandria. Reach him by e-mail at henrysavage@ pmcmortgage.com.

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