4 secrets to successful mortgage negotiations

Dear Dollar Diva,
How can I save money on a home mortgage? Can you give me a list of closing costs and how much each item should cost?

Roberto

Dear Roberto,
There are four key ingredients in a mortgage negotiation: (1) your creditworthiness: the better it is, the better the deal you can make; (2) closing costs: everything’s negotiable; (3) points: these can be expensive, but also tax deductible; (4) mortgage rate: depends on risk, points and closing costs.

The Diva addresses closing costs and how much they should cost right after she talks about creditworthiness; first things first.

1. Your creditworthiness
Long before you start mortgage-shopping, get copies of your credit reports from the three major credit-reporting agencies and a copy of your “FICO score” from Fair Isaac. The agencies collect information about your bill-paying history. Fair Isaac boils that information down to a single three-digit number that lenders use to determine your creditworthiness. You want to know what’s on the reports and clean up any errors before they reach the lenders’ eyes.

For $12.50, you can get a copy of your FICO score and Equifax credit report. You’ll also get an explanation of the FICO score and what you can do to improve it in the future.

You should also get copies of your credit reports from the other two major credit-reporting agencies, TransUnion and Experian. The cost will vary, depending on where you live and whether you’ve been turned down for credit, but shouldn’t be more than $9 apiece.

It’s highly unlikely that your credit report will be perfect. The Diva’s ” How to fix my credit report” will tell you what to do if you find mistakes on it.

Knocking down unsecured debt and building up savings will make you more creditworthy, so start now. Cut your expenses, work overtime, sell stuff you don’t need and sock away your tax refund. Putting less than 20 percent down labels you “risky,” and lenders are risk averse. They may give you a mortgage, but they’ll make you pay for private mortgage insurance (PMI) to compensate for the perceived risk.

2. Closing costs
Closing costs fall into the following categories:

  • Lender/broker fees:
    These are charged for services provided by the broker or lending institution. They include items such as administration fees, application fees, document preparation and loan processing fees. All are negotiable. Your job is to get as many of them waived as possible.
  • Third-party and government fees:
    These are fees that the lender has to pay to others to complete the mortgage process, such as appraisals, attorney fees, flood certification, title insurance, recording fees and taxes. You don’t mind reimbursing the lender for reasonable out-of-pocket costs, but don’t be shy about asking for a price reduction if you think you’re being gouged. If a lender wants to charge you $65 for a $9 credit report, challenge it.

Bankrate.com recently did a study on closing costs and compiled a list of fees charged by lenders and mortgage brokers showing average, highest and lowest costs reported by the survey participants. For more on the survey and a link to the results read ” A close-up look at closing costs.” This is must reading.

When you’re shopping around for a mortgage, question every fee and ask if it can be waived or negotiated. After talking to a half-dozen lenders, you’ll know the answers before you ask the questions; that’s called knowledge, and knowledge is power when cutting a deal.

3. Points
Points come in two varieties:

  • Origination fees: This is another name for lender’s fees. They’re expressed in terms of points and are tax deductible, as long as they are not paid in lieu of other closing costs. For more on the tax-deductibility of points, read the Diva’s ” Mortgage points, fees and the IRS — what’s deductible and when?”
  • Prepaid interest: This is interest that’s paid up front and it’s what most people think of when they think “points.” These points will lower your interest rate and are tax-deductible. But think twice about paying them if you only plan to own your home for a short period or you expect to refinance in a couple of years. Read the Diva’s ” When do you pay points?” for a quick-and-dirty calculation that will help you compare a mortgage with points vs. a mortgage without them.

4. Mortgage ratesBankrate.com’s mortgage page will give you an idea of the going rate for a mortgage. But each mortgage deal is unique, and the only way you can know what your rate will be is by shopping around. Talk to at least a half-dozen lenders or brokers; anything less could hurt your pocketbook.

Your mortgage transaction will consist of the points, closing costs and mortgage rate you and your lender negotiate. Your lender knows the profit margin it wants to make on the deal and will juggle the three components to get there. You need to know what you want to pay for the deal so you’ll know when to dig in your heels and when to acquiesce. If you have sterling credit and enough cash to make a healthy down payment, you’re in the catbird seat.

For some more insights into the mortgage process read the ” 10 things every mortgage shopper should know.”

— Updated: June 14, 2006