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Step 3: Negotiate Your Loan

There is a process you will go through as you purchase a home. It is similar for most individuals who borrow to purchase a home. It utilizes the services of a number of different professionals including realtors, lenders, title insurance, and escrow professionals (see Chart 1).

The key players in this process are the realtors and mortgage brokers. Realtors, or real estate brokers, are individuals or companies who act as intermediaries between sellers and buyers of real estate. Unless stated otherwise, they represent the seller and the seller’s interests, and are paid by the seller. Generally, sellers pay a commission to the realtor for selling the property, which is split between the listing realtor, the realtor who listed the property, and the selling realtor, the realtor who brought the buyer of the property to the seller. The commission is generally a percentage of the value of the property and may range from 5-7% or more. Realtors may also be contracted to act as a “buyer’s agent,” wherein they represent the buyer’s interest and are paid by the buyer instead of the seller.
Mortgage brokers are individuals or companies which arrange loans between the Lenders, those who have money to lend for mortgage loans, and borrowers. Traditionally, banks and other lending institutions sold their own products. However, as the markets for mortgages became more competitive, the mortgage brokerage industry evolved and broadened beyond banks.

Mortgage brokers make money three ways: origination fees, discount points, and backend bonuses. Origination fees are the costs and profits on making the loan. Discount Points are payments by the borrower to lower the Loan interest rate. Finally, backend bonuses are bonuses paid to the mortgage broker by the Lender if they get a higher interest rate than the lender requires.

There is a relationship between discount points you pay and the broker’s backend bonus. The objective in borrowing for a home is to minimize three areas: the interest rate you pay, the points you pay (origination and discount points), and the mortgage broker’s backend bonus. How do you minimize these three areas? Following are a few ideas.

  1. Talk with multiple mortgage brokers. Make this a competitive process. Remember that multiple institutions requesting your credit report and score within a specific period of time are only counted as a single request on your credit score. Get multiple bids.
  2. Compare rates and points across different brokers from different companies. This will give you a general idea of general rates and points, which can be very helpful.
  3. Look at the minimum interest rate they will let you buy down to. Perhaps that is close to the Lender’s required rate. Once you have a feel for that rate, it may give you an indication of what the mortgage broker’s backend bonus would be.
  4. Once you find the best rate and points from the multiple mortgage brokers you checked on, go to your favorite broker and ask them to beat the best offer by ¼% and you will go with him/her.

Title insurance is insurance to protect the buyers of property against loss due to title defects, liens, or other matters. Title insurance is required by lenders and borrowers to ensure there are no risks due to title concerns.

Escrow accounts are accounts set up by the Lender for the purpose of holding funds to pay property taxes and insurance during the period of a mortgage.

See Below for Chart 1: The Lending Process.

Historically, banks lent money to borrowers to purchase homes, and kept these loans on their books till maturity. However, with the further development of the US financial system, an increasing number of different financial institutions and lenders have come into existence which has increased competitiveness in this area and which have helped reduce the borrowing costs for borrowers.

The Lending Process.png308.19 KB

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