How to Shop For Your Mortgage Loan-Part 2

Last edition, we started laying out some guidelines
for helping you to shop for your mortgage loan.

The beginning topics were:

1. Know Your Outcome.
2. Be Realistic.

As mentioned in Part 1, realize that these "steps"
are fluid and part of a dynamic process. Don't
think of them as purely sequential, to be taken
one after another. In fact, topics 3, 4, and 5 are
pieces of a puzzle that will help you pull a workable
picture together for you.

Now, on to the next topic:

3. Choosing A Lender

You need to do proper research to make your best
decision. But how do you know who to trust for
solid information?

I suggest that you get recommendations from
people you know who have more experience or
who know the reliable players in the local market.

Ask your real estate agent for names of mortgage
originators. Although there are cases where real
estate agents and lenders work together in an
unhealthy manner, the best agents want their
clients to be served well, and want their transactions
to come to a successful conclusion as smoothly
as possible.

Ask your work associates if they had a good
experience with their lender and get recommendations
from them.

Treat print ads and radio ads with the understanding
that those ads are designed to get the lender's
phone to ring. If they are quoting interest rates,
realize that the quotes may be outdated by the time
you respond. Some lenders deliberately promote
very low rates, knowing that they won't have to deliver
them, but giving them the opportunity to start the
process with the borrower. Reality is presented at
a later date, sometimes when it is too late for the
borrower to make a change.

You should get 5-10 solid recommendations from
your trusted sources and additionally may want to
give a call to some of the advertising lenders.

As you make your research calls, think of it as an
interview process. You are going to do the hiring
of a loan originator to help you reach your goal.

Gathering loan data will be important, but I would
recommend that you also focus on the manner in
which your questions are answered, and how helpful,
considerate, and caring the originator is.

Does the originator:

A. Return your calls in a reasonable period of time?

B. Ask lots of questions to make sure that they
understand your situation, or do they offer a solution
before diagnosing what is appropriate?

C. Have a limited array of loan products that they
try to fit you into, or are they taking your needs and
qualifications to find the best match from the
marketplace?

D. Give you a feeling of transparency about the
transaction? You deserve straight answers to
your questions so that you can make an informed
decision that serves you well.

As you talk to several lenders, you will learn some
new things as you go along. If you can ascertain
a "red flag" that may be troublesome, make sure
you ask about that with each lender. How each
one answers that question may give you important
insights as to who you want to work with.


4. Deciding on a loan product.

As you speak with various lenders, you are going to
get some ideas about loan products that are both
appropriate for your situation, and that may be
approvable under current guidelines.

Unfortunately, sometimes the loan that best fits
your needs may not be available based on your
qualifications.

Factors that affect that availability can include:

A. Credit Score
B. Stability of employment, or self-employment.
C. Stability and adequacy of income.
D. Property considerations.
E. Amount of down payment.
F. Amount of cash reserves after closing.
G. Percentage of monthly obligations in relation to
your income.

I would suggest that as you gather information from
your loan originator prospects, you also get their
top 2 or 3 loan product recommendations.

These recommendations should be based on their
complete understanding of your situation, your
needs, your goals and their interpretation of current
underwriting guidelines.

Have them state their case as to why they think
these are appropriate loan choices for you. Again,
this type of discussion allows you to determine
the quality of the originator. Are they trying to make
the best match for you based on your needs, or
are they just trying to sell you a loan?

If you have 5-10 potential lenders and each of them
offer 2-3 loan program choices to you, you will probably
find that there are at least 3-5 loan programs
that end up receiving high recommendations over and
over. Hopefully, these 3-5 choices will also be ones
that you find acceptable, and you can narrow your
focus to the rates and fees.


5. Assessing Rates and Costs

The mortgage market is dynamic.

It is not uncommon for the 25-30 lenders with whom
I work to offer rates first thing in the morning, and as
the money markets unfold during the day, to make
adjustments up or down to reflect the market activity.

To give yourself, and your loan originator finalists,
the best opportunity to get accurate information you
should get quotes from each of them on the same
day, and hopefully all in the morning or all in the
afternoon.

You should know how long your proposed escrow
period is going to be. If you are purchasing, it will
be stipulated in your purchase contract. If you are
refinancing, it may be based on how long the
lender needs to work their way through your file
after it rises to the top of their incoming business.

Let's say that the escrow period will be 45 days.
You need to ask each of your lenders what the
rate and fee quote would be if you locked that
day for a 45-day period. Rate locks are often
offered for 15-, 30-, 45- and 60-day periods.
You have to compare apples to apples to avoid
misunderstandings and confusion.

Through your initial conversations with the loan
originators, you should have had the opportunity
to explore the comparisons of interest rate quotes
with zero points, 1/2 point, 1 point, and maybe 2
points. Make sure that all of your originators are
quoting based on the same terms.

In addition to the loan origination fees, ask
specifically what other loan-related fees will be
charged by that lender. These may include loan
processing fees, administrative fees, and document
preparation fees.

Other fees that will be part of your closing costs
will include escrow fees, title fees, appraisal and
credit report costs, notary and sign-up fees, and
pro-rations of interest, taxes, and insurance. For the
most part, these costs will be the same no matter
which lender you select. But be clear on all of your
anticipated charges, and make sure to understand
which ones end up with your lender.

You can see that these three steps give you an
opportunity to interview and gather information, with
you circling in on your final choice.

If you are diligent about including all of these
recommendations in your search pattern, I think
that you will discover the right person with whom
to work, and you will give yourself an opportunity
to feel confident that you are make good decisions.

How to Shop For Your Mortgage Loan-Part I

In speaking with clients and potential clients,
I find that borrowers' approaches to researching
their mortgage alternatives range from a well-
directed process to a sincere, but ineffective
procedure.

Some of these borrowers are willing to accept
guidance to help them achieve their goals.
Others forge ahead stubbornly, thinking they
are on the right path, and may reach their goals
less by design than by good fortune.

Please use the following outline as a way to conduct
your mortgage research. Also, please understand
that these steps are fluid in nature, and that you
will pick up important information throughout the
process. Don't think that you have to complete
one step before starting another.

1. Know your outcome.

I often ask my clients, "If things go exactly as you
would like, what would that result look like?"

With all of the details that they have to consider,
they may have never thought about that before.

But, it is important to know what the goals are.
Their outcome that they define can be aided by
answering these types of questions:

How long will you be owning this home? (Their
answers may be influenced by being a first-time
buyer, a move-up buyer, or settling in for the
bulk of their adult lives. Also, how long their
children will be in a particular school district
often helps decide this question. Career plans
come into play as well.)

How long would you anticipate having this mortgage
in place? (This may be a much different question
than the first one. They may need an initial home
loan that gives them immediate benefits but
is not designed for the long-term. They may be
anticipating additional funds that will allow them
to pay down, or pay off, the loan after it is created.)

What is your risk tolerance? (Would you rather
consider loans that will never change, but whose
interest rate and payments may be slightly higher,
or consider loans that provide a lesser element of
stability and that offer lower rates and payments.)

How much of your available funds do you want to
invest? (Some people want to put as much down
payment as possible to keep their loan balance and
payments low. Others want to put little down, keep
their funds more liquid, and leverage off the use
of the lender's funds.)

How much do you want to budget for the housing
expense: mortgage payment, property taxes, insurance
and/or homeowner's fees? (There are many times that
I may be able to obtain loan approval for a higher
monthly payment than the borrower is comfortable with.
I never want to over-obligate my client, and this
question allows us to get the topic on the table so
we can have a frank discussion.)

As you might guess, the client's perfect outcome may
not be compatible with lending guidelines.

But I can tell you from my experience, that it is very
gratifying to hit the client's target! And when we
can't, we both know where the adjustments are being
made and why they are necessary or recommended.

2. Be realistic.

As you talk with the various lenders and gather
information, you are going to be getting some feedback
as to what is possible for your situation.

Your better loan representatives will be able to
discuss lender guidelines and educate you as to what
is approvable in today's market.

In early 2007, we were in an entirely different
lending environment. Loans approaching 100% of the
value of the home, or that allowed for approval
without verification of income or assets, or
certain more exotic loan products were readily
available then. But not now.

If you are hearing of your neighbor's or co-worker's
loan experience, it's important to understand that
each borrower's profile is unique, and it is to be
assessed in light of the lending guidelines at the
time.

Even now, we are experiencing something of a moving
target with regard to guidelines. As investors
have left the market, lenders have had to change
the guidelines for the types of loans that they
will originate.

Sometimes, this happens in the middle of a trans-
action we are processing for a client. We can do
our research, get the loan request started, and
by the time we are ready to submit the loan to the
lender, the guidelines have changed.

If you had decided to apply with a direct lender and
this happened, you would have to start all over
again with a new lender, possibly having to pay
for additional appraisals and credit reports.

If you were with a mortgage broker like me, your
application, appraisal and credit report can be
directed to a different lender with compatible
guidelines to your situation.

It is important to remember that your loan application
is not a redemption coupon, but it is a request
for the lender to consider and hopefully approve.

It is always great when the process goes smoothly and
there are no big surprises. But, be prepared for
some obstacles to surface and work with people that
you know are giving you information that is researched
to the best of their abilities.

To be continued: Choosing a Lender, Deciding on a Loan
Product, and Assessing Rates and Costs.

Breaking the Underwriting Code

The major advantage of being a mortgage broker is
that we have access to many lenders.

In addition to the banks and major mortgage companies,
we also have lenders that serve niches in the market-
place.

For those loans up to $417,000, commonly known as
conforming loans because they conform to guidelines
for purchase by Fannie Mae (FNMA) and Freddie Mac
(FHLMC), there are many lenders who create these
loans because of their marketability.

The Stimulus Act allows for FNMA and FHLMC to temporarily
purchase loans up to $697,500 in San Diego, through the
end of this year. These are commonly called conforming-
jumbos.

Jumbo loans, traditionally those above $417,000 and now
temporarily for those above $697,500, are purchased
through Wall Street by institutional investors.

After the "mortgage meltdown" that began about a year
ago, the jumbo investors left the market. They had
lost confidence in the quality of the loans that were
in their investment pool.

FNMA and FHLMC tightened up their guidelines, but loan
approvals with them are more predictable and the process
is more straight forward.

We are able to submit loan request electronically and
to receive automatic approvals immediately. The lenders
will always verify the figures that we use in the submission
when we submit the physical file, but we can know the list
of conditions for the approval right away.

The key here is that if FNMA and FHLMC are willing to
approve the loan through the electronic system, they are
in essence telling the lender that they will purchase
the loan from them. The lender is willing to make the
loan as approved, because the risk of them creating a
loan that the investor (in this case, FNMA and FHLMC)
will not purchase has been been eliminated.

In the jumbo category, however, what we are encountering
now is some extremely conservative underwriting. Since
there is a less predictable process for when the investor
will commit to purchasing that loan, the lender wants to
leave no doubt that if they create the loan, that they
can sell the loan. Typically, lenders do not want to keep
big loans in their own portfolio because they have rate
risk if interest rates go up.

Many underwriters are in CYA mode. We can call that
"Cover Your Apathy" for our purposes. These underwriters
are more interested in making sure that they create
a bullet-proof file than they are in granting the loan.
They are equally happy to approve or decline a loan, as
long as there is no room for criticism of their decision.

It's almost as if they have forgotten about evaluating the
borrower's qualifications and assessing reasonable
risk. Instead they want to over-document the files and
analyze the numbers in the most conservative way possible.

All of this stems from the lack of investors in the
jumbo market. If there were more investors, and the
market was more liquid, the lenders' underwriters could
make more reasonable judgments knowing that they had a
high probability of selling the loan.

But, just because some of the lenders are in this mode
does not mean that they all are.

I am constantly evaluating the underwriting patterns of
our lenders. I know who is reasonable and who is
squeezing the files real tightly. I know who can work
quickly and who has a backlog that is in front of our
request.

As you make a decision to work with someone to obtain
your mortgage loan, seek professionals who can advise
you about market reality, who help you prioritize what
is important to you, and can educate you so that you
make informed decisions.

Feel free to call me for a recommendation. Don't be
surprised when I recommend Doug Brennecke!