Loan Negotiation is not an option- it is an important step in getting a loan
A borrower can and should negotiate with a bank, a broker, and a private money lender on loan terms and fees before closing. The optimal time to negotiate is during the initial application and pre-approval phase, especially after receiving a Loan Estimate, a loan proposal, or an LOI.
Key Negotiable Loan Terms and Fees
Borrowers can negotiate various aspects of their loan offers. The ability to negotiate effectively often depends on having a strong financial profile (high credit score, low debt-to-income ratio, large down payment) and having compared offers from multiple lenders.
- Interest Rate: While market forces influence rates, lenders have some flexibility and may match or beat a competitor's lower offer.
- Lender Fees: Many fees charged directly by the lender, such as application, origination, processing, and underwriting fees, can be reduced or waived entirely.
- Discount Points: You can negotiate the number of points you pay upfront to lower your interest rate.
- Third-Party Services: For services like title insurance, pest inspection, and appraisals, you can shop around for the best price and ask your lender to use a different, less expensive provider.
- Loan Covenants and Penalties: In some cases, borrowers can negotiate for the removal of prepayment penalties or the relaxation of certain financial conditions (covenants).
Negotiation Tips for Borrowers
- Shop Around: Obtain Loan Estimates, LOIS, or other proposals from at least three to four different lenders to understand the market and leverage competing offers during negotiation. Get multiple loan offers. Start now.
- Be Prepared: Gather all your financial documentation (pay stubs, tax returns, bank statements, a schedule of real estate, and a credit report) to present yourself as a low-risk, well-qualified borrower. For a hard money loan, your best ticket is a low LTV, and for your experience.
- Write up your resume: Leder will be more flexible if you demonstrate your past experience. How many properties have you sold in the past 5 years? How many properties have you managed? How many properties have you fixed?
- For construction, rehab, and fix-and-flip: Show your contractor license, if you are not a contractor and have no experience, show the resume of the contractor you plan to use.
- Be Specific: Instead of asking for a "better deal," be specific (e.g., "Can you match a competitor's offer of X% interest rate, or waive the $500 origination fee?").
- Get Everything in Writing: Ensure all agreed-upon changes to terms or fees are documented in writing before signing the final loan papers.
- Act Early: Start negotiations early in the process. Attempting significant changes just days before closing can cause delays and may not be possible.
Non-Negotiable Items
Some costs are set by external government authorities or are standard third-party costs and are generally non-negotiable:
- Government recording and transfer taxes/fees
- Credit report fees
- Property taxes and government-imposed insurance premiums (like FHA/VA mortgage insurance)
Never sign any documents at closing if the terms are not what you were promised, and be prepared to walk away or ask the seller for more time if necessary.
If your current lender won't budge on rates or fees, you should leverage competition by shopping for a better offer elsewhere, consider the timing of your application, evaluate your own financial profile, and, as a last resort, be prepared to walk away and find a different lender.
Strategies to Use Competition
The most effective strategy when a lender won't negotiate is to present a better offer from a competitor. Lenders often have some flexibility to match or beat a rival's terms to win your business.
- Gather Competing Loan Estimates: Obtain official Loan Estimates from at least three to four other lenders. These standardized forms make it easy to compare interest rates, APRs, and fees side-by-side.compared offers from multiple lenders.
- For commercial and hard money loans: Use the Lendersa compare loan module
- Present the Best Offer: Share the best competing Loan Estimate with your current lender and specifically ask them to match or beat the terms.
- Highlight Your Strong Profile: Remind your lender of your strong financial standing (e.g., high credit score, significant down payment, stable income) to reinforce why you are a desirable, low-risk client they should want to retain.
Evaluate Your Financial Standing
Your negotiation power is directly tied to how attractive you are as a borrower. If the lender isn't budging, you might need to improve your financial profile:
- Improve Your Credit Score: A higher credit score can unlock better rates and give you more negotiation leverage.
- Lower Your Debt-to-Income (DTI) Ratio: Reducing existing debt makes you a less risky borrower.
- Increase Your Down Payment: A larger down payment reduces the loan amount and the lender's risk.
Consider the Timing
Market conditions and the timing of your application play a role in a lender's flexibility.
- Market Rates: In a rising interest rate environment, lenders may have less flexibility to offer lower rates. Conversely, during periods of stable or falling rates, they may be more accommodating.
- Early Negotiation: The best time to negotiate is early in the pre-approval process. Trying to negotiate right before closing can be difficult due to time constraints.
Be Prepared to Switch Lenders
If, after trying all the above strategies, your current lender remains inflexible, your final option is to switch to the competitor offering better terms.
- Don't Feel Trapped: You are not obligated to work with a lender until you have signed the final closing documents.
- Weigh the Costs: Ensure the savings from the better rate or lower fees at the new lender outweigh any minor costs you may have already incurred with the original lender (like an appraisal fee).
By demonstrating that you are serious and have viable alternatives, you increase the likelihood that your initial lender will reconsider their position, or you will find a better deal elsewhere.
