The mortgage industry is intensely competitive.  At Steel Blue 1 we are looking to build relationships not get you in the door quick and out even faster.  When searching for a mortgage avoid these top 10 things lenders will do and then search prudently for your loan.

1.  " I advertise bogus rates I can't deliver."

The number one way I make money is by making the telephones ring.  If I can get you to call me, chances are I can convince you to use me as your lender.  The more people I can get to call my office to check on rates, the more business I  can generate.  To make the phones ring I advertise lowball rates in the newspaper (or on the web).  Then, when you call me wanting that rate, I say that yes, those rates were available when I submitted my ad, but right now, unfortunately, the rates are higher because 'the market has changed'.
How to avoid this:  This is the most common trick in the industry.  Legally, a lender must be able to show that the rates they advertised in the newspaper (or web) were actually available on the date their ad was submitted.  Because of this a lender cannot just advertise any absurdly low rate.  The lender can, however, advertise a "break-even" rate.  This rate is so low that the lender doesn't make any money (or very little money) on the transaction.  They could give out loans at this rate if they had to, but they would go broke doing it. 
By advertising "break-even" rates the lender technically meets the letter of the law (but not the spirit of the law).  If a bank regulator wants to see how the lender could have advertised such low rates, the lender just points to his "break-even" rate, which was technically available on the date the ad was submitted, but alas, is now long gone.  In reality no one actually gets this rate.

How to avoid this:  First, be skeptical of advertised rates.  Most of them are out of date by the time you see them.  This is usually by design.

Second, remember the old adage, ' if it looks too good to be true...it probably is'".  Mortgage lending is a very competitive business.  If a lender's rates are dramatically lower than the competition, there's a chance that something fishy is going on.

Finally, you should only work with lenders that can give you real-time, all-the-time rate quotes that you can lock-in right now.

 2.  " When I lower your rate, I raise your fees".

 If my competition is quoting 7%, I'll quote you 6.75% and just add more junk fees to your closing costs.  I won't charge you any points, so I can still claim to be offering a "No-Point Loan".  I'll just raise the "processing fee", or add an "administrative fee" or something similar.  It all works out the same for me, I still make plenty of money.  I use this trick many different ways.  Whatever it is you're mainly focusing on (low rate, no points, no closing costs), I'll make sure you get it.  Then, I'll just adjust the other factors to my favor.  If I lower your rate, I raise your fees.  If I lower your fees, I raise your rate.  It's just like the grocery store - when they have a sale on milk they raise the price of cat food.  In the end they still make the same amount of money (or more).  Basically, I know you're not very educated about the mortgage process, so I use that against you.

How to avoid this:   Getting a great mortgage deal means getting a low rate AND low fees.  Nail down the lender on fees.  Make sure the lender will guarantee that their fees (the costs that the lender has control over) will not change.  A lot of lenders won't do this.
Special note to web shoppers:  Have you ever noticed that lenders seldom list their fees online?  There's a reason for this.  First, it forces you to call them (trick #1, see above) and second, it tricks you into focusing on just one thing - the rate.  Most people assume that all lenders' fees are pretty much the same, but in reality they vary widely.  Be suspicious of lenders who offer a great rate online but don't list their fees.  This is probably where they're making their big money.

 3.  " My costs are 'estimates' and I can raise them at closing ... and it's legal."

That's right, when I provide you with an estimate of closing costs, it's just that...an estimate.  I don't have to guarantee anything.  There are legitimate reasons why this is legal, but I know how to stretch these rules.  For instance, I cannot add fees at closing that weren't initially disclosed (like tacking on a "processing fee" that you knew nothing about), but I can raise the fees that were initially disclosed.  If I quoted you a processing fee of $50 when you applied for the loan, at closing I can raise that to $150 or $200 or whatever I like.

How to avoid this:   Same as question #2.   Make sure the lender will guarantee their fees.  At Steel Blue 1, we might lose money doing this, but overall it helps us attract new business.

4. " I don't want you to lock-in the rate right away."

I love it when you wait until right before closing to lock your rate.   I'll even encourage this with the "possibility" of lower rates if you wait.  Why do I do this?  Well, if I know that you can't go to another lender before closing (since there's not enough time to get you approved) I can stick you with a higher rate and you can't do anything about it.  You must take my higher rate or you can't close.  A higher rate for you means more money for me.

How to avoid this:   Don't wait too long to lock-in your rate.  When you lock your rate you do so for a fixed period of time, typically 30, 45, or 60 days.  You must close your deal within that time period or your lock '"expires" and you risk losing that rate.

Sometimes the rates are lower for shorter-term lock periods.  The rate for a 45 day lock is usually slightly lower than the rate for a 60 day lock.

This is how lenders get you to wait.  They say that you may lock-in today if you like, but if you wait another week or two you can lock-in for a shorter term (say 30 vs. 45 days) and "possibly" get a lower rate.  As you might have already guessed, the lower rate never shows up.  If the overall rates have dropped, the lender will just say that nothing has happened.  You'll eventually lock-in at the original rate and the lender will make a lot more money.  And... there's nothing you can do about it.  You don't even know you're getting taken.

So...don't be tempted by the rates on short-term locks.  If you wait too long and your lender tries to give you a bad rate, there might not be enough time left to switch lenders.  Then you're stuck.

 5.  " I'll quote you a great rate over the phone, but it will change by the time you apply and lock-in."

If I make it so you can’t lock-in right away, I can quote you a bogus rate.   It goes something like this... I give you a great rate over the phone but I tell you that before you can lock-in you must first complete some paperwork.  By the time the paperwork is completed and you are ready to lock-in the rate, the ‘market has changed’ and the rates are higher.  Chances are you’ll still use me though, because you don’t want to go through the hassle of completing all that paperwork again with another lender.

How to avoid this:   Work only with lenders that will let you lock-in the current rate immediately, without any delaying tactics.  You should be able to lock-in your rate immediately, either over the phone, online, or in person.  You should be able to lock-in your rate before you apply for your loan, and you should be under no obligation to complete the transaction with that particular lender.

6. " If I know you can't lock-in right now, I'll quote you a fake rate." 

Similar to #5, but  I use this on people who don't yet have a property under contract or who aren't closing for over 60 days.  If the going rate is 7% and you tell me that you don't have a house under contract yet, I'll quote you 6.75% or 6.5%.  I do this because I know you can't lock-in yet (you can't lock until you have a property) and I want you to apply with me.  Don't worry, I'll stick you with a higher rate later.  If you call my bluff and say "Oh, by the way, we do have a property under contract and want to lock-in right now", I'll just use the trick in #5.

How to avoid this:   It's hard to compare rates if you can't lock-in.  Some otherwise well-meaning lenders use this trick just because they know all the other lenders are using it, and they don't want to be left out of the competition for your business.  To them, rate quotes are meaningless if they know you can't lock-in, so they lowball the rate up front to get you in the door.  The higher rate comes later.

Here's a trick you can use: To keep lenders honest, you have to lie a bit.  Always say that you are closing within 60 days or less, even if you don't have a house under contract yet.  This forces lenders to be a bit more accurate when quoting rates, since they may actually have to lock the rate they quote you.  (Just make sure you get your story straight ahead of time.  Know the exact fake closing date as well as the fake purchase price, loan amount, etc.).

By keeping lenders somewhat honest you should be able to comparison shop and see who has the lowest rates (provided the lenders don't use any other tricks, like #5).

 7.  " If another lender beats my rate I'll try to confuse you."

This is the old bait-n-switch (sort of).  If my competition is quoting you a really low rate on a 30 year fixed rate loan and I know I can't beat it, I'll try to sell you a 5 year ARM, or a 7 year ARM, or a 20 year fixed, or whatever.  The idea is that you're focusing mainly on getting a low rate, so you may not care much if we switch loan programs.  You'd be surprised how often this works.

How to avoid this:   Compare apples to apples.  Don't compare one lender's 30 year fixed rate loan to another lender's 5/1 ARM.  They are two different loan types with two different rate structures. 
Overall, first try to decide what kind of loan you want, then shop just for that type of loan.  If you change your mind halfway through the process, that's OK,  just don't go with the first lender who proposes an alternative.  Check around.

Note:  The easiest type of loan to shop for is a 30 year fixed.  This is the most basic and common type of loan out there.  Everyone's 30 year fixed loan is basically the same.  You just have to compare rate and fees (but watch out for prepayment penalties).  In contrast, adjustable rate loans (ARMs) have many more variables to consider when trying to get the best deal (index, margin, caps, etc).  This makes it a bit harder to compare ARMs.

 8.  " I won't disclose all of your closing costs."

 I'll give you the truth... just not the whole truth.  When you ask me what your costs will be, I'll tell you what my fees are, but not necessarily everyone else's.  This makes me look like the low-cost lender, even though I'm probably not.  Ok, ok, ok... when I give you a 'Good Faith Estimate' I have to include these other costs (title fees, etc), but I routinely leave out certain items (transfer taxes, attorney's fees, inspection fees, and others).  I want you to think that I have the lowest fees out there, and since you look only at the bottom line, this trick usually works.

How to avoid this:   Compare cost estimates between lenders.  If one lists a certain fee and another doesn't, find out why.  Don't just assume that the fee is not charged.  It's possible that the lender "forgot" to include that fee to make his total costs look lower.

Lenders only have control over their own fees (lender fees).  All the other fees in the transaction are set by other parties (title companies, attorneys, etc.) and should be the same regardless of which lender you choose.  The estimates of these other fees, however, may differ widely between lenders.  Lenders know that they can lowball these estimated third-party fees to make themselves look better.  They know that you only concentrate on the bottom line, so if they give you a low estimate they look like the low-cost lender. 

Lenders usually don't get in trouble for doing this, and you end up with a surprise at closing.  Regardless of the lender's estimates of these third-party fees, you still have to pay the actual cost.

 9.  " Don't tell anyone, but those web sites where banks compete for your business are no big deal."

It's such a joke...everyone thinks they're getting such a great deal from these "compete for your business" web sites.  The only thing these sites do is generate sales leads for brokers.  They are paid a fee to be listed on their site (i.e. advertise) and they direct customers back to the broker.  They can't even offer these customers the broker’s  lowest rates.  The broker even has to jack up rates to cover the advertising fees they incur by using these sites in the first place.  In some cases these sites charge tens of thousands of dollars just to be listed.  These "compete for your business" companies aren't even lenders, they're just another middle-man in the process...a middle-man who gets paid quite well. 

How to avoid this:   It's true, advertising is very expensive.  Someone has to pay for it ... and that someone is usually you. 

10. "The more money  you give me up front, the more I can screw with you."

If you give money for an application fee or a lock fee (or whatever a lender can get from you), they know that there's very little chance that you'll dump them for another lender.  Once you've committed money to them, they know you're not going anywhere.  And, once you apply for the loan, chances are you'll finish with them - even if I treat you poorly and give you a bad deal !   All you want is to get the deal over with, and you can't imagine starting this process over again with another lender.  They know this and take advantage of it.

How to avoid this:   Lock your rate before you apply.  Get the lender to guarantee their fees in writing.  Don't pay large up-front fees.  Make sure you get something for the fees you do pay (example: we make you pay $8.75 up-front, but it's for your credit report and you'll get a copy of it).  Finally, be prepared to walk if the lender tries any funny stuff.  It'll be a hassle, but you'll be happier in the end.

 Summary

The only way to get the best mortgage deal is to comparison shop.  You may find the best deal with us, or you may find that deal elsewhere.  You won't know until you look.  The entire reason for this "Top 10" list is to help you learn how to shop for the best mortgage deal, and hopefully how to avoid some of the industry's common traps as well.  Now that you know what to look for, check out the rest of our site.  We feel if we create a good experience along with the true and competitive rates, we can build a relationship for years to come.

What Most Brokers Won’t Tell You

(but Steel Blue 1 will!)

(This includes banks, too!)