What should I know about mortgage auction sites like Lendingtreecom

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Mortgage auction sites such as LendingTree.com pull together a group of up to four lenders who bid for your loan. I once called them "lead-generation sites," because from a lender's perspective, that is what they do. A "lead" is a packet of information about a consumer in the market for a loan. Lenders pay for leads and auction sites are an important source of them.

I recently looked at nine mortgage auction sites: Cityloans.com, GetSmart.com, InterestRatesOnline. com, LendingTree.com, LoanApp.com, LoanHounds. com, LoanWeb.com, LowestMortgage.com, and Mort-gageExpo.com. While LendingTree is ahead of the others, their similarities are more important than their differences.

All of these sites essentially work the same way. The prospective borrower fills out a questionnaire covering the loan request, property, personal finances, and contact information. The sites use this information to select the lenders to whom the information is sent. Lenders then prepare an offer to the borrower based on the same information.

The sites send the information provided by applicants to "up to four" lenders, except for MortgageExpo. com, which sends it to only one. Lenders are selected based on prior information provided by the lenders regarding the types of loans, borrowers, and properties that they are prepared to consider. For example, an applicant with poor credit who wants to purchase a condominium would not be referred to a lender who has told the site it only wants loans to A-quality borrowers purchasing or refinancing single-family homes. Similarly, an applicant who doesn't want to document income or assets would not be sent to a lender who always requires full documentation.

In principle, the lender selection function performed by auction sites should be particularly valuable to borrowers with one or more challenging features, such as poor credit, incomplete documentation, or little cash. Such borrowers can avoid wasting time soliciting lenders who won't deal with them. How well the sites perform this function, however, is difficult to determine.

The lender-screening process employed by the auction sites also provides some protection against falling into the hands of rogues—lenders or mortgage brokers out to extract as much revenue as possible from every customer. The sites have every reason to bounce a lender who attracts multiple complaints from borrowers. Only LendingTree.com, however, has developed a rating system for its lenders based on reports from borrowers.

In sum, auction sites may be useful in screening out rogues and allowing borrowers with poor credit, incomplete documentation, or little cash to find lenders that deal in those market niches. Such borrowers will probably do better at auction sites than by throwing darts against the yellow pages or visiting single-lender sites. (With few exceptions, single-lender sites don't quote prices that apply to those borrowers.) Strong borrowers who can find their desired loans priced on single-lender sites will probably do better shopping those.

Here are some suggestions for using an auction site effectively:

  • Before using the site, decide whether you want a fixed- or adjustable-rate mortgage, as well as your preferred loan term, down payment, and points. Auctions can't work if the item being sold is not precisely defined. If necessary, do some homework. If you would rather not bother, see a mortgage broker.
  • Fill out the questionnaire as accurately and completely as you can. The information you provide is used with information the site has on the preferences of its lenders to match you with the lenders most likely to be interested in your loan.
  • Mortgage price information comes not from the site but from the lenders who contact you. The amount of price information they give you may depend on what you ask for. On fixed-rate mortgages, you need the interest rate, points, and dollar fees. While some lenders are not in the habit of providing their dollar fees in initial price quotes, you should insist upon it. On adjustable-rate mortgages, you need to know more than the rate, points, and loan fees; also ask the lenders for the interest rate index, margin, all rate adjustment caps, and maximum rate. With that information, you can use calculators 7b and 7c at www.mtgprofessor.com to see how the payment might change.
  • Receiving price quotes over the telephone is looking for trouble because you have nothing in writing. Ask lenders to e-mail or fax their prices to you.
  • The interest rate and points quoted to you by a lender apply only on the day you receive them. The lender is not bound to them the following day, since the market may have changed. For the same reason, it is not safe to compare a price received on Monday from one lender with a price received on Tuesday from another.
  • The prices that really matter are those quoted to you on the day you lock the loan with the lender. The lock means that the lender is committed to the prices.
  • Since locking imposes costs on lenders, they want some evidence of your commitment to the deal before they will lock. Their requirements vary widely, however, ranging from very little to a signed application to a signed application plus a nonrefundable payment. You are entitled to know at the outset exactly what each lender's requirements are and how long it should take if you do everything expected of you. Ask!
  • Since you selected the lender based on the initial price quote but it is the locked price that you are going to pay, you have a right to know how the lender will set the price on the day you lock. You need not accept a statement that the new price "will be at the market." The answer you are looking for is that the lock price will be the same as the price the lender is quoting to new customers on the identical loan on the same day. Ask if the lender has a Web site that contains up-to-date prices that you can use to monitor your price day by day. If it does not, ask the loan officer how he or she intends to demonstrate that you have received the correct price.
  • Unlike rates and points, loan fees are not market-driven. Unless you change one or more of the loan characteristics, there is seldom a good reason for these fees to change between the time you receive the initial price quote and the time you close. Some lenders will guarantee these fees in writing if you ask. They may even be willing to include appraisal fees and credit charges in the guarantee, because they order them and know how much they cost.

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