If you want to own your Financial Freedom, one of the things you have to get good at is speaking with lenders. I admit, when I started running my family like a business, this intimidated me. It doesn’t now so I figured I would give you some tips for dealing with lenders like an old friend!

My dad once said that when you are looking for a loan, you are just shopping for money. You should be shopping for money at the most favorable terms possible! I like to make spreadsheets for each loan I am seeking to track the terms for each lender that I speak to. This gives me an easy comparison at who offers the best money. I offer you a template of that spreadsheet as a download right here:

Use this spreadsheet along with this checklist of questions, which I also offer to you as a free download here:

Lots of freebies today!

Before I sign off, I want to be 5,000% clear on what we are talking about so let’s go through some basic vocabulary that applies to the lending industry. Most of this is from our book, How To Pay Off Your Mortgage in Five Years so I’m not worried about copyright infringement.

Principal: This is the amount you borrowed. You needed $100,000 to buy a home? Surely your loan statement will have a number higher than $100,000 because of closing costs, filing fees, etc.. Still $100,000 is the principal. It is the amount you asked the bank to give you. 

Interest: It is the amount of money you have agreed to pay in order to borrow the principal above. It is the rate of money for money. For every dollar you need to borrow, you will pay that dollar back plus an additional percentage of that dollar to the bank. 

Equity: Equity is the amount of value in the house that belongs to you. If your home is worth $200,000 and you don’t owe any money on it, then you have $200,000 worth of equity in the home. That value is yours. But if you owe $100,000 on that $200,000 home, your equity is $100,000. This means that if you sold the house tomorrow for $200,000, you would pay the bank back $100,000 and keep $100,000. The $100,000 that you keep is your equity. 

Taxes and Insurance: You know what taxes are. You know what insurance is. You probably also know that when you secure a mortgage, you are obliged to pay for both taxes and insurance. Every property will be taxed and you must have insurance on your property for any lender to consider taking the risk of lending you money. Some lenders require that you add more money to your monthly payment so that they can keep it in an escrow account in order to pay the taxes and insurance for you. This adds to your monthly payment. We do NOT suggest you elect for one of these escrow accounts if given the choice. Some lenders do not give you the choice but instead require it.

PMI: If your lender considers your loan a little bit riskier than most, they may add an extra cost called Private Mortgage Insurance. For instance, say you can only put 10% of the purchase price on a down payment and you are asking the bank to pay for 90%. They consider you a riskier borrower. Say you have had a previous foreclosure on your credit. They consider you a riskier borrower. Your PMI may disappear once your loan value is below 80% of the property value. It may not. The point is that this is a fee. It does not pay down your principal balance. It is money you pay to the bank every month because they took a risk on loaning to you. You pay it and you will never see it again. 

Prepayment Penalty: This is a fee that a lender might charge you if you pay the loan off in less time than you have agreed upon. This is not common for most primary residence mortgage loans but is a bit more common for investment loans. Sometimes this is no big deal and sometimes it is. Sometimes it is on a sliding scale. For instance, I had a loan with a penalty if I paid off any more than 20% principal in any given year. This went away if I kept the loan for 5 years. It was a large enough loan that I did not plan to pay it off that quickly, although I did accelerate it a lot with the strategies we discuss in our book. Bottom line: If you think you want to pay your loan off early, do not agree to this! And if you do, be crystal clear on the terms! 

Points: Points are fees that are charged to create a new loan. One point is usually equal to 1% of the principal lending amount. Again, this is not common for most primary residence mortgage loans but is a bit more common for investment loans. These are a taxable expense but they can get costly. Try to avoid high-points loans if you can! 

Personal Guarantee: This is a promise that you personally will be responsible for the loan if your business does not pay it. It is not a cross-your-heart-hope-to-die kind of promise. It is a legal promise that would hold up in court if you were challenged and a lender could seize your personal assets if you default. Take it seriously. It does effect your credit and your bottom line. My mother suggests that you try to avoid these, although I am not really sure why. I always intend to pay off my loans and have no intention of stiffing lenders. But maybe she just worries about how this effects my personal credit? I don’t know but I do have personal guarantees on a few of my loans because: A Morris always pays her debts. 

Final Tips

I like to keep Dropbox folders at the ready with all of the things a lender usually requests. This way when they start sending me their lists of requirements for things like tax returns, bank statements, pay stubs, etc, I can just drag and drop in a matter of minutes. It also keeps me from crying. Which brings me to this confession:

I have never secured a loan that did not make me cry at least three times during the application process. This is extremely personal business. Someone is judging your financial fitness and that is uncomfortable. Plus, there is usually some dispute about something on your credit record or the appraisal amount. I once had to write a personal note saying that we did not own Whole Foods because our previous apartment was above the Whole Foods in Manhattan so a commercial address showed up on our address history. The lender required this to close the loan! Things just get loco sometimes so if you expect it, you can be more prepared to laugh about these silly things rather than cry.

Okay, now that you’ve made it this far, you are READY to talk to lenders without missing anything and without any surprises. I also just find that a little bit of confidence goes a long way with lenders. If they know you know your stuff, they will give it to you straight with respect and hopefully awesome service! Remember, you are a financial badass! If you’ve read this far down a blog post like this, then this fact is unequivocal!