How to Negotiate with a Lender: What to Negotiate in a Mortgage
To put yourself in a position to negotiate with a lender, you have to remember that the lender is not doing you any kind of a favor by lending you money. It’s a mutually (or should be) beneficial trans action. You need money; the lender needs interest. If your needs match, it’s a deal. Strictly business. Thus, when you march into a mortgage broker or direct lender’s office, you’re on equal footing.
You need each other.
It’s usually more difficult to negotiate with a direct lender such as a bank or savings and loan because you generally don’t get the opportunity to talk to the right person. You usually talk to a loan salesperson who sim ply mouths the lender’s policy. “We have loan A, loan B, or loan c. Take your pick.” If you can get in to see an officer who has discretionary powers, it is possible to get a loan tailored to your needs. That’s why it’s sometimes best to deal with a small lending institution instead of a giant one—or better still, a mortgage broker who has the ear of the lender.
Conforming or Nonconforming?
Perhaps the first thing to determine is whether or not you qualify for a conforming loan. As noted earlier, a conforming loan is one that meets the underwriting standards of Freddie Mac or Fannie Mae, the two huge quasi-government secondary lenders.
As of this writing, these mortgages cannot be for more than $359,650. Further, the underwriter sets the parameters of the loan— the minimum down payment, minimum credit score, and other qualifications. These mortgages are resold on the secondary market by the lender with whom you deal in large groups of loans. And generally the interest rate is set by the terms of that sale.
Thus, if you qualify for a conforming Ioan (because it usually is the best deal out there), there’s very little leeway to negotiate with the lender. But there is some. For one thing, you can argue over the “garbage fees,” largely unnecessary costs some lenders tack on to boost their profits. The lender must give you an estimate of these as soon as you apply for the loan. For another, you can negotiate the interest rate/points mix. (Remember, a point is equal to 1 percent of the mortgage amount and is paid up front.) When comparing points and interest rates, it’s usually the case that points arc equal to roughly one-fourth to one-eighth of a percent in interest. Thus, if you want to lower the interest rate, you can offer to pay more points. If you want fewer points, you can offer to pay a higher interest rate.
What the lender is actually looking for is yield. This is the true return on the mortgage from all sources, including points and rate. It is close to what you see when you are told the APR (annual percentage rate). The lender is looking to get a certain yield. As long as you can give that yield, you can often jostle the mix used to get it in a variety of ways.
Check out the mortgage finance market just as you check out the real estate market. Local papers often report on the volume of financing in the real estate section of papers. Local real estate brokers can also tell about this market, as can mortgage brokers, who often are quite candid about conditions. If you hear that new financing and refinancing are at all time highs, figure you have little room to negotiate. On the other hand, if you read that lenders are laying people off because there is so little financing, your negotiating room just took a big jump.
Your ability to negotiate a nonconforming loan may be significantly better than it would be with a conforming loan. Nonconforming loans may be subprime loans (offered to those with credit problems) or portfolio loans (those kept by a financial institution in its loan “portfolio,” hence the name). If the lender is going to hold the mortgage itself, then the parameters are determined by the lender … and may be widely negotiable. On the other hand, if yours is a sub prime loan, then the lender will often, and sometimes arbiưarily, jack up both the points and interest rate it demands. You can, of course, argue. ‘You can point out that you’re a better credit risk than the lender is assuming based on information you could submit (such as that you were out of work for a time because of illness, but you’re now well and holding down a steady job).
You may negotiate price, points, terms, and other costs with both portfolio and subprime lenders. Depending on the market (how many applications they have), they may be surprisingly flexible. These lenders are eager to make secure loans, often to the point of being highly competitive. If you’re a good wheeler and dealer and can show why yours is a particularly secure loan, you may get a better rate and terms.
Do They Want to Lend You Money?
The bottom line is that when you go to a lender—be it bank, savings and loan, credit union, mortgage banker, or someone else—it’s not that you’re asking for a favor. The lender wants to give you a mort gage. After all, that’s how they make their profit. If there are no borrowers, they are out of business. Thus, once again, things become negotiable. Often it’s just a matter of getting to the person who will listen . . . and who has the power to make a decision.