HOW DO I GET A MORTGAGE?

 

How Do I Get A Loan?

 

AVOID FINANCIAL STRESS

 

By asking the right questions, and knowing exactly what your needs are, you can find the right loan for you. There are certain approaches that you can take while mortgage shopping that can cost or save you money.

It is still true that the better qualifications you have, the lower your interest rate will be. However, there are mortgages available for almost everyone; it's the interest rates or the down payments that vary.

Before speaking with a lender, know what monthly dollar amount you feel comfortable committing to. Then when you discuss mortgage pre-approval with your lender, it is easier for you to determine the monthly amount and what value of home the monthly amount translates into. Do not put yourself in the position where you will be paying more each month than you intended simply because the "dream" house requires it.

Do your research on the types of mortgages available to you and find the one that best suits your needs. There are a number of considerations to be made in terms of finding the best mortgage for each individual:

What type of market are you in - are the interest rates rising or falling?

Do you want a fixed mortgage rate - where you will always know what your payment is going to be?

What are your long-term goals - do you intend to resell the property - do you only need the mortgage for a short time? 

FIND A LENDER   
                                                                      

It used to be that buyers could go house shopping and when they have found their dream home, then they go to get pre-approved. However, in today's market, that has proven to be one of the least effective methods in landing the dream home.

Most lenders can pre-qualify you for a mortgage over the phone. Based on general questions about your income, debt, assets, and credit history, lenders can estimate how much mortgage you qualify for. However, being pre-qualified and pre-approved are different things. Pre-approval means that you have applied for a mortgage; you have filled out the mortgage application, received your credit report, and verified your employment, assets, etc. When you are pre-approved, you know exactly what the maximum loan amount will be.

A pre-qualified letter is not verified and in essence, does not count for much if you are competing with other buyers who are pre-approved. When you are pre-approved, you and the seller know exactly how much house you can afford. It gives you credibility as an interested buyer and lets the seller know immediately that you will qualify for a loan to buy their property. 

In addition to being pre-approved, it's important to be pre-approved with a legitimate lender. Legitimate lenders include: banks, mortgage bankers, credit unions, savings and loan associations, mortgage brokers, and online lenders.

Some lenders to avoid: those who lose a form or misplace a file, those who gather information from you in an unorganized manner, those who are not informed about interest rates, points or costs, and those who cannot provide you with the right information.

What can you expect on your first visit/contact with a lender?
   A mortgage lender will evaluate your financial history to determine your ability to secure a loan.
                                 
You will need to provide

Income/employment history
Monthly credit
Financial liabilities
Financial assets (money in bank, investments, retirement accounts, potential gift funds

To prepare for your consultation visit to a lender you should have documents on your most recent 2-year residence and employment history ready. (Recent grads who are newly employed are usually fine as school can be a part of the 2 year history without any problem.)

Routine documentation you should have available

Paycheck "stubs" for last 30 days
Proof of last two year's residence (home mortgage statements or current lease/rent)
Tax Returns for last two year's taxes 
Bank/asset/investment/retirement account statements (all pages) for last two years
Diploma or school transcript if a full time student during the past 2 years
Information on currently-owned real estate
Letters of Explanation for any derogatory credit history or employment  "gaps"
Correspondence with any creditors regarding disputed debt 

Other items that would be helpful include

Social Security Card

Drivers License

THE LOAN MARKET

Types of Loans

It is important to know that almost all loans are sold by the financial institutions making the loan. The lender you work with is the “originator.” Your loan is then sold in the “secondary market.” The largest buyers of loans are agencies called FNMA (Fannie Mae) FHLMC (Freddie Mac) and GNMA (Ginnie Mae). These huge organizations constitute the “secondary market” and write the rules for loans that they will buy. A lender must then follow the rules these agencies have written in order for the loan (borrower and property) to qualify as conventional or FHA. During the loan process your loan will be evaluated by an Underwriter. Their job is to make sure that the loan fits the guidelines for a particular program (FHA or conventional), so the loan can be sold.

What is an FHA Loan?
The FHA loan is a government insured loan that was instituted to assist buyers with minimal cash to purchase a home and first time buyers. This program requires that the buyer invest a minimum of 3% of the purchase price. Part of that can be a minimal down payment of 2.25% plus some closing costs. Sometimes the buyer can negotiate for the seller to pay the remaining costs.

FHA loans have more lenient guidelines for borrower credit history, allow for all or part of the funds needed by the borrower to be a gift, and has stricter requirements on the property’s condition for the protection of the borrower.

What is a Conventional Loan?
A conventional loan is a loan that meets the standards of the “conventional” secondary marketplace. There are two types of conventional loans, Conforming & Non-Conforming. Conforming loans usually fit neatly into the box of rules and are under the prescribed maximum loan amount set each year. Both the borrower and the property fit the typical scenarios and there is nothing unusual.

Loans over the “conforming” loan amount or loans that have some facet outside the box either related to the borrower or the property are called Non-Conforming loans. A loan can be Non-Conforming if the borrower is unable to document their income or assets, or their credit scores are low, or if the property is unusual for the area or if the loan amount or program is designated Non-Conforming.

What's the Difference Between a Fixed Rate and an Adjustable Rate?

Fixed Rate Mortgage:
A fixed rate mortgage is one in which your monthly principal and interest payment will always be the same for the life of the loan. The benefit is that you always know what your principal and interest costs are. Fixed Rate loans are usually amortized (paid in full) over a period of 30, 20 or 15 years. Your monthly payments are predictable over the life of the loan. (Keep in mind that your monthly mortgage payment may include principal and interest AND 1/12 of your annual property taxes and home owners’ insurance. So although the principal and interest will remain steady, the taxes and insurance amounts can vary.)

Adjustable Rate Mortgage:
With an adjustable rate mortgage (ARM), the interest rate may fluctuate which makes the payment change during the life of the loan. ARMs start off with a fixed interest rate for a determined period of time (1, 3, 5, 7, 10yrs.) and then adjust annually after that. Typically, the shorter the fixed term is, the lower the initial rate. The lower rate means lower payments for that period of time. Once the rate adjusts, the payments can go up if the interest rate is higher. Most loans adjust annually after the fixed rate period.

ARM’s adjust based on the combination of the index and the margin. The index is the predetermined indicator that establishes the basis for the rate adjustment. The index can be the 12 Month Treasury Average (MTA), the 1 year LIBOR rate, the 1 year Treasury Note, or Prime Rate, or several other accepted indicators. The index is the rate for the particular indicator on a particular date (usually the anniversary of the loan). The index is a number that changes daily, the margin is a static single number, usually 2.25-3.00% that is added to the index. When you add the index and the margin together, you get the new rate.

Both types of loans have their benefits and pitfalls. For example, a fixed rate mortgage is appealing because you always know what your payment will be. On the other hand, when interest rates are high and falling, choosing the adjustable rate mortgage may be favored because the initial interest rate will be lower than fixed and the interest rate may drop in the future, resulting in smaller monthly payments. However, with an adjustable rate mortgage you run the risk of ending up with a higher payment should the interest rate increase during the life of the loan.

An ARM may be advisable if you intend to be in the home for a short time (the fixed rate term or less). Many people know they will be moving in 3-5 years or less and chose to take advantage of the lower rate to have a lower payment or afford more house.  If you intend to stay in the house for a long time, the fixed rate loan and its predictability may be preferable in a rising rate environment.

What is a “No-Cost-30-Year Fixed Rate Mortgage?

There really is no such thing as a "no-cost" mortgage loan. There are always costs, such as appraisal fees, escrow fees, title insurance fees, document fees, processing fees, flood certification fees, recording fees, notary fees, tax service fees, wire fees, and so on, depending on whether the loan is a purchase or a refinance. The term "no-cost" actually means that your lender is paying the costs of the loan. All a "no cost" loan means is that there is no cost to you, the borrower.   Except that you pay a higher interest rate.

Understand How Loans Are Priced:
A variation of the no-cost loan is the "no points" loan, or even the "no points, no lender fees" loan. On these loans you pay all the costs associated with buying a house or refinancing, but you do not have to pay the lender associated fees or points. However, since lenders and loan officers do not do anything for free, the profit has to come from somewhere.

So where does it come from?

First, you have to understand how loans are priced and how mortgage lenders and loan officers earn income. Each morning mortgage companies create rate sheets for loan officers. The rates usually change slightly from day to day. In volatile markets they change several times a day. On the rate sheet, there are many different programs, including the thirty year fixed rate.

There will be one column which will list several different interest rates and another column that lists the "cost" for that particular rate. For example: 

 

   Rate                 Cost
                          (points)

        ======       =========

    6.250%            2.000 
   6.375%            1.500
   6.500%            1.000
   6.625%            0.500
   6.750%            0.000
     6.875%           (0.500) 
     7.000%           (1.000) 
    7.125%           (1.500)
    7.250%           (2.000)

In the above example, 6.75% has a "par" price, which means it has a zero cost. The lower in rate you go, the higher the cost, or "points." A point is equal to one percent of the loan amount. The parentheses in the cost column for the higher interest rates indicates a negative number. For example, (1.500) equals -1.500, which means instead of having a cost associated with the loan, the lender is willing to pay out money for those interest rates. This is called "premium" or "rebate" pricing.

Zero Cost Loans:

How Mortgage Companies and Loan Officers Make Money...
The above rate sheet is not a rate sheet designed for public review. In fact, most lenders have a policy that the public cannot see their internal rate sheet. This rate sheet is designed for loan officers and the cost column is the loan officer's cost, not the cost to the borrower. When the loan officer quotes you an interest rate, he will add on a certain amount, usually one to one and a half points. Most companies leave it up to the loan officer's discretion how much to add on to the base cost. However, they usually require at least a minimum add-on, which is usually one point.

The loan officer's commission depends on his "split" with the company and can vary. He receives a portion of the add-on and the rest goes to the company.

If we assume the loan officer is adding on one point, and you were willing to pay one point for your loan, then your rate would be (according to this rate sheet) 6.75%. You would pay one percentage point and receive an interest rate of six and three-quarters. If you wanted a lower rate and were willing to pay two points, you could get six and a half percent. If you wanted a "no points" loan, then your rate would be seven percent. The loan officer and the mortgage company would split the one point rebate, listed as (1.000) on the rate sheet. 

See how it works...
In addition to the cost noted on the rate sheet above, lenders have certain other fees they like to collect, too. These can include document fees, processing fees, underwriting fees, warehouse fees, flood certification fees, wire transfer fees, tax service fees, and so on. Usually, you will not be charged all of these fees, it is just that different lenders call them different things. Some of them are legitimate costs to the lender and some of them are simply fees designed to generate additional income to the mortgage company. They are customary in today's mortgage market and can vary from around $600 to $1300. In addition, there will usually be an appraisal fee and a credit report fee. Appraisals and credit reports are usually contracted out to independent companies even though these are considered to be lender fees.

Note that it is common for companies who charge higher fees to have a slightly lower interest rate and companies that charge lower fees will usually have a slightly higher interest rate. So if you shop entirely based on fees, you may actually spend more money in the long run because your interest rate may be higher.

The point is that if you want a "no points - no lender fees" loan, then on our rate sheet above, you may get an interest rate of 7.125%. That is because the loan officer has to bump the interest rate even further than on a "no points" loan in order to cover his own company's fees.

If you want a "no cost" loan, then the loan officer has to bump your interest rate even further. That is because all of the costs on your purchase or refinance do not come from the lender. The escrow or settlement company involved in your transaction will charge a fee which must be paid. The lender will require title insurance and the title insurance company charges a fee for providing this insurance. If your new lender requires information from your homeowner's association (if you have one) then the homeowner's association will most likely charge a fee for providing those documents. If you are refinancing, your current lender will usually charge at least two fees: a "demand" fee, and a "reconveyance" fee. The demand fee is charged simply for providing payoff information. The reconveyance fee is charged because your current lender prepares a document which releases your property as collateral for their outstanding loan. This document is called a reconveyance.

These charges will add about another point to how much the loan officer must collect in premium pricing in order to cover the costs associated with your refinance or purchase. For a zero cost loan, he will normally need to collect somewhere in the neighborhood of two and a half points. Because points are a percentage of your loan amount and most of the costs are fixed, it takes fewer points to provide zero costs on higher loan amounts. On smaller loan amounts it takes more. One percent of $200,000 is two thousand dollars and one percent of $100,000 is only $1000, so you can see how it is easier to cover costs on larger loans. 

Does it makes sense to do a zero cost loan?
On a $200,000 thirty year fixed rate loan, the difference in monthly mortgage payments will be about $87, using the example rate sheet on the first page. Over thirty years, it works out that you will pay more than $30,000 extra for getting a zero cost loan. So if you intend to remain in the home for a long period of time it just doesn't make sense.

Suppose you intend to stay for only five years? On a purchase, using the $200,000 example, if you stayed longer than fifty-five months, it would make more sense to pay your own costs and get the lower interest rate. If you kept the loan for a shorter time, then it makes more sense to pay zero costs and get a higher interest rate.

Except for one thing...

If you knew you were only going to be staying in the home for five years you would probably not want a thirty year fixed rate, anyway. You would get a loan which has a fixed payment for the first five years, then convert to an adjustable or whatever fixed rates are five years from now. These loans have an interest rate almost a half percent lower than thirty year fixed rate loans. Since it is practically impossible to do a zero cost loan on this type of loan, you would have to compare a zero cost thirty year fixed rate loan to paying points on a loan with a fixed payment for five years.

The difference in payments would be about $150. The two and a half point rebate equals $5000. Working out the math, if you stayed in the home longer than thirty-three months, it would make more sense to pay the points and get the loan with the five year fixed rate.

Finally, carry the discussion one step further. Suppose you know you are going to be in the new loan for less than three years? Doesn't it make sense to get a "zero cost" loan then?

No.

Then you get an adjustable rate loan. As long as the start rate is two percent lower than the current fixed rate, you cannot lose. The first year you will save a lot of money. The second year you will probably break even. The third year, you will probably give up some of the savings from the first year, but not all of them.

"Zero cost" loans just don't make sense for Homebuyers.
But they sound really good in an advertisement. 

Exceptions ...
On a FHA Streamline Refinance Without an Appraisal (not a purchase - which is what the article talks about), it makes sense to do a zero cost loan. This is mostly because the new loan has to be exactly the same amount as the existing balance of the current loan.

• If the Homebuyer only has enough money for down payment and none to cover closing costs, PLUS no arrangement can be made for the seller to pay closing costs, then zero costs may make sense (however, I would still recommend negotiating terms with the homeseller - be willing to pay a higher price in exchange for the seller paying your costs).

 

Which Mortgage is Best?

There are literally dozens of loan products and hundreds of combinations of these products. A good Loan Consultant will listen to your needs, evaluate your situation and should recommend loan scenarios that fit your need. A home loan should fit into your overall financial plan, help meet your long and short term financial goals with the desired monthly payment and equity position.
Just calling around for the best rates on a 30 year mortgage could cost you thousands of dollars over the life of your loan if you don’t get the loan that best fits your needs. There is so much more to the home loan process than just rates. A professional loan consultation is a vital first step in the process and is usually at no cost to you.

 

TYPES OF MORTGAGE LENDERS

Who Are They?

Mortgage Bankers
Mortgage Bankers are lenders that are large enough to originate loans and create pools of loans which they sell directly to Fannie Mae, Freddie Mac, Ginnie Mae, jumbo loan investors, and others. Any company that does this is considered to be a mortgage banker.

Some companies don't sell directly to those major investors, but sell their loans to the mortgage bankers. They often refer to themselves as mortgage bankers as well. Since they are actually engaging in the selling of loans, there is some justification for using this label. The point is that you cannot reliably determine the size or strength of a particular lender based on whether or not they identify themselves as a mortgage banker.

Portfolio lenders
An institution which is lending their own money and originating loans for itself is called a "portfolio lender." This is because they are lending for their own portfolio of loans and not worried about being able to immediately sell them on the secondary market. Because of this, they don't have to obey Fannie/Freddie guidelines and can create their own rules for determining credit worthiness. Usually these institutions are larger banks and savings & loans.

Quite often only a portion of their loan programs are "portfolio" product. If they are offering fixed rate loans or government loans, they are certainly engaging in mortgage banking as well as portfolio lending.

Once a borrower has made the payments on a portfolio loan for over a year without any late payments, the loan is considered to be "seasoned." Once a loan has a track history of timely payments it becomes marketable, even if it does not meet Freddie/Fannie guidelines.

Selling these "seasoned" loans frees up more money for the "portfolio" lender to make more loans. If they are sold, they are packaged into pools and sold on the secondary market. You will probably not even realize your loan is sold because, quite likely, you will still make your loan payments to the same lender, which has now become your "servicer."

Direct Lenders
Lenders are considered to be direct lenders if they fund their own loans. A "direct lender" can range anywhere from the biggest lender to a very tiny one. Banks and savings & loans obviously have deposits they can use to fund loans with, but they usually use "warehouse lines of credit" from which they draw the money to fund the loans. Smaller institutions also have warehouse lines of credit from which they draw money to fund loans.

Direct lenders usually fit into the category of mortgage bankers or portfolio lenders, but not always.

One way you used to be able to distinguish a direct lender was from the fact that the loan documents were drawn up in their name, but this is no longer the case. Even the tiniest mortgage broker can make arrangements to fund loans in their own name nowadays.

Correspondents
Correspondent is usually a term that refers to a company which originates and closes home loans in their own name, then sells them individually to a larger lender, called a sponsor. The sponsor acts as the mortgage banker, re-selling the loan to Ginnie Mae, Fannie Mae, or Freddie Mac as part of a pool. The correspondent may fund the loans themselves or funding may take place from the larger company. Either way, the loan is usually underwritten by the sponsor.

It is almost like being a mortgage broker, except that there is usually a very strong relationship between the correspondent and their sponsor.

Mortgage Brokers
Mortgage Brokers are companies that originate loans with the intention of brokering them to lending institutions. A broker has established relationships with these companies. Underwriting and funding takes place at the larger institutions. Many mortgage brokers are also correspondents.

Mortgage brokers deal with lending institutions that have a wholesale loan department.

Wholesale Lenders
Most mortgage bankers and portfolio lenders also act as wholesale lenders, catering to mortgage brokers for loan origination. Some wholesale lenders do not even have their own retail branches, relying solely on mortgage brokers for their loans. These wholesale divisions offer loans to mortgage brokers at a lower cost than their retail branches offer them to the general public. The mortgage broker then adds on his fee. The result for the borrower is that the loan costs about the same as if he obtained a loan directly from a retail branch of the wholesale lender.

Banks and Savings & Loans
Banks and savings & loans usually operate as portfolio lenders, mortgage bankers, or some combination of both.

Credit Unions
Credit Unions usually seem to operate as correspondents, although a large one could act as a portfolio lender or a mortgage banker. 
 

 

I will be happy to assist you in finding a lender for a consultation.