Have your plan of attack ready in order to secure the most deals and generate the optimal income.
Imagine that you offer a killer mortgage product, one that borrowers want and few other lenders have. Suppose your processing system allows you to take your loan applications to the closing table one or two weeks faster than everyone else. What if your transaction costs and fees are significantly less than all the banks and brokers in your market? Any of these selling points would give you a strong competitive advantage to approach and capture more business. All of them put together would make you virtually invincible.
The reality is that few, if any loan originators, enjoy a major competitive advantage in any market today. While you feel your "service" may distinguish you, the fact is that all originators feel the same way about "their" service. Along with equally good service, most banks and brokers offer pretty much the same products, have comparable turn around times and charge identical fees as the next lender. That leaves only one playing field left to compete upon: rates.
Since essentially most lenders "buy" their money from the same source, mortgage interest rates today are like prices at the gas pump: everyone is within a few pennies of each other. The real test comes down to how much of your commission you want to keep and how much you are willing to give away in order to beat a competitor and win a borrower's business.
As consumers grow savvier every day and loans become harder to find, originators need to think carefully about their strategy for quoting and/or negotiating a rate in order to land a deal and a new borrower. Essentially you have three options:
The first option is to offer your best rate and stick to your guns. If a borrower tells you he can get a better rate elsewhere or asks you to come down on your rate to earn his business, your response is: "The interest rate is what it is. I offer all of my customers my best rate from the very beginning. There might me some lender out there who will quote you a lower rate, but getting a home loan is much more than that. I provide my clients with good rates, affordable closing costs, fast turn around and expert help and advice. But the rate is something I cannot change." No doubt you will lose some deals with this immovable approach, but you will never have to worry about what you quoted to whom, and you'll keep 100% of the commission income you work for on every transaction you close.
The second option is to start high. Some originators automatically add a half-point in discount or a quarter in rate on their initial quote to a borrower. If the borrower moves forward, the originator makes an overage on the transaction. If the borrower shops the offer and asks for a better rate, the originator has some "wiggle room" to play with, allowing him to come down in rate (or points) without affecting his commission. The originator says to his borrower: "I want your business, and as a sign of that, I am willing to lower my rate by one quarter of a percent and reduce my own commission to do your loan."
The obvious downside to this strategy is that the initial higher rate quote may turn some prospects away and cost you potential business. The upsides are saving a loan you might lose to a competitor who is offering a more attractive rate and possible overage income.
The third option is to reduce your rate and take a cut in income in order to land a borrower. You offer your best rate upfront, and if the borrower says it will take a lower rate to earn his business, you come off that rate (at a loss) and try to win the deal. By quoting the market rate at the beginning you can attract as many prospects as the next competitor, and by coming off your rate when asked, you can save a deal when you need to.
Clearly, this approach can be the most costly of the three. Originators who are in the habit of lowering their rate in order to land a borrower often addict themselves to this practice on nearly every loan. They give up thousands in commission income every year. And while this option will save you some deals, you can become known as a negotiable-type lender (much like a car salesman) willing to "horse trade" and discount his price to acquire a customer's business.
All three options have their plusses and minuses you should consider, and it would be wise to decide upon which alternative you want to employ. Many mortgage clients I speak with now believe we are on the verge of the next great rate war in the home financing industry. With loan programs, delivery times and closing costs all similar among lenders now, borrowers are shopping their choices more aggressively, and it becomes more and more about getting the best rate they can find. If you, too, see a rate war on the horizon, make sure you have a plan of attack to help you win.
Douglas Smith is founder and president of Douglas Smith & Associates, a training, speaking and coaching firm based in Asheville, N.C. He can be contacted at 877-430-2329 and his website is
