Credit scores have a huge impact on our lives. If you are
going to borrow money for a car or a home, the scores on
your credit report will help determine the loan amount
granted, and more importantly, the cost of your loan in
the form of interest rates and fees.
A while back, I went to a seminar where some of the
behind-the-scenes information was discussed.
First, some basics.
Credit scores range from 300-850 (some models may go to
900).
On the credit report, the top 4 reasons are listed as
to why the score is not perfect.
Originally, Fair, Isaac was asked to produce a model
that would predict the likelihood of a borrower having
a 90-day late in the next 24 months.
It is a dynamic modeling system, representing a moment in
time. The score can be different in the morning and afternoon
of the same day.
The model is weighted by the following factors:
35% of your score is based on history.
If there are lates, the model looks at recency, frequency,
and severity.
Recency:
There is a heavy impact if the late is within the last 6 months.
There is moderate impact if the late is within the 7-24 month
range.
There is little impact if the late is over 24 months ago.
Frequency:
Obviously the more often accounts are late, the more impact
on scores.
Severity:
The longer the late, the more impact on scores. For example
a 30-day late is less costly than a 60-day late which is less
costly than a 90-day late, etc.
Late payments and inquiries after a bankruptcy can be
costly to the score.
30% of your score is based on level of debt.
Higher credit card balances are an indicator of higher
likelihood of default.
Limited use of lots of available credit is favorable.
Don't close credit cards. This tends to skew your report
toward more recent credit and you lose the benefit of the
history of the old cards that will be closing.
Using cards to their maximum credit limit is less favorable.
Pay them down, spread the balances to existing cards,
or ask for increases to the credit limits.
Use 2-5 cards actively, meaning at least every 3-6 months.
HELOCs are scored as installment debt if the balance is
more than $30,000. This is more favorable in the credit
model. They are scored as revolving debt if less than $30,000,
and this is less favorable in the credit model.
15% of your score is based on length of credit history.
The model looks for a 30 year history.
Rotating revolving debt to new credit card at a high
balance-to-limit ratio works against the score. And,
as we said, closing the old card makes the credit history
look shorter, and does not score as well.
10% of your credit score is based on credit mix (open and
closed accounts).
Revolving debt has the most negative impact.
Finance company references hit the score the hardest.
Deferred payment accounts can be a problem. If you ever
make a payment on one before you have to, continue to
make even a small payment because the reporting system
is now activated to show it as a paying account, not a
deferred account. If you don't continue making even a
small payment, you will probably be reported with lates.
These deferred payment accounts also will report a high
balance on the report based on the add-on interest, and
will also show the inquiry. These are not invisible to the
credit report!
10% of your score is based on inquiries.
Inquiries stay on your report 2 years, they count in the
scoring for 1 year, and they actually show on your report
for 90 days.An inquiry can count for 2-15 points against
your score.
Companies can no longer run your credit without a signed
authorization.
Inquiries from auto companies within a 7-day period are
grouped as 1 inquiry.Inquiries from mortgage companies
within a 30-day period are grouped as 1 inquiry. Rolling
14-day inquries are considered as 1 inquiry. (Theoretically,
you could run the credit every 14 days for a mortgage and
have it only count as 1 inquiry).
Credit union inquiries can't always be determined: they
may be revolving (credit card), installment (auto), or mortgage.
Some statistics:
Median score is 720.
11% had a score >800 and had a default rate of 1%
29% had a score of 750-799 and had a default rate of 2%
20% had a score of 700-749 and had a default rate of 5%
16% had a score of 650-699 and had a default rate of 15%
11% had a score of 600-649 and had a default rate of 31%
7% had a score of 550-599 and had a default rate of 51%
5% had a score of 500-549 and had a default rate of 71%
1% had a score of <499 and had a default rate of 87%
As we take a look at the mortgage meltdown through the
prism of credit scoring we can see that even if there
were not a decline in property values, that the lenders
were putting themselves in a very vulnerable position.
Many programs allowed for scores of 640 or less, and they
allowed financing up to 100% without documenting income.
Statistically, they had a 40% to 87% chance of default
before accepting the additional risks of high loans in
relation to the value of the home, and accepting the
borrowers' representation of their incomes!
Use these guidelines as you make decsions about your
credit activity. Remember that the credit bureaus have
created these "black box" modeling systems and that the
process is not transparent.
Be sure to do adequate research so that if you decide to
apply for credit, pay off some credit items, or close
accounts that you feel comfortable with the potential
consequences to your credit score.
Wednesday, September 24, 2008
Wednesday, September 10, 2008
Keeping Your Existing Home When Buying A New Home
There are times when a borrower wants to buy their new
home, but want to or need to hold onto their existing
home and use it as a rental property.
In the current market, there are many homeowners who
owe more on their homes than they are now worth. Also,
they see that they could buy a comparable home to the
one that they own for a much lower purchase price.
What has developed recently is that some homeowners
found a solution to their problem that the lending community
didn't anticipate.
Before they developed credit problems on their existing
home loans, they would purchase a new home. As part of
the qualifying for the new home, they would represent
that they would rent out their existing home and move
into the new one.
The underwriting guidelines that were in place allowed
a portion of the rental income to offset the expenses
on the soon-to-be-rental property. Specifically, 75%
of the rental income was allowed to be used. The guide-
lines recognized that there would be vacancies and
maintenance costs which is why they did not allow the
full rental income.
These homeowners were able to buy their new home at a
signicantly reduced price compared to what they paid
for their existing home. After closing, and recognizing
that there was no advantage to them keeping and main-
taining the home they just departed, let that home
revert back to the lender through default and fore-
closure.
At that point, their credit becamed impacted, but because
they had already purchased their new home that they were
planning on living in for quite some time, the bad credit
that developed didn't keep them from reaching their goal.
Because this became a significant trend, there are now
new underwriting guidelines for retaining the existing
home and purchasing a new home.
1. If the current primary residence is pending sale but
will not be closed prior to the closing date of the new
primary residence, the borrower will have to qualify for
both the current and new mortgage principal, interest,
taxes and insurance amounts (PITI). No potential
rental income offset will be allowed.
2. If the current primary residence will become a second
home and there is at least 30% documented equity in the
current home, the borrower will have to qualify for both
the current and new mortgage principal, interest, taxes
and insurance amounts. This requires that there are at
least two months of PITI for both properties.
3. If the current primary residence will become a second
home and there is not at least 30% documented equity in the
current home, the borrower will have to qualify for both the
current and new mortgage principal, interest, taxes and
insurance amounts. This requires that there are at
least six months of PITI for both properties.
4. If the current primary residence will become a rental
property and there is at least 30% documented equity
in the current home, they will allow the 75% of rental income
to offset the expenses on the existing home. No longer
can the borrower merely represent the proposed rental
income, though. They would require a fully executed lease
agreement and proof that a security deposit was received
from the tenant and deposited into the borrower's account.
5. If the current primary residence will become a rental
property and there is not at least 30% documented equity
in the current home, the borrower will have to qualify for
both the current and new mortgage principal, interest, taxes
and insurance amounts. This requires that there are at
least six months of PITI for both properties.
To document the existence of the the 30% equity position,
the borrower would have to provide a full appraisal of the
existing home.
The lenders are hopeful that by instituting these changes
that they will prevent or slow down the number of borrowers
who buy the new home and then send the keys back on the
old home.
If a borrower has little equity in the home, but have the
financial capacity to qualify for the expenses on both
homes, the lenders are thinking that they will not be as
tempted to damage their credit for the future.
If a borrower has a lot of equity in the home, they are
more willing to allow the rental income offset, because
it is much less likely that the owner will sacrifice 30%
or more of the equity of the home by defaulting. They
would probably sell the home in the open market before
letting the lender take it back.
This is further evidence that the underwriting guidelines
are attacking every element of the process that they
can identify as having contributed to losses or fraud.
I always say it, but it bears repeating: You have to plan
ahead and start the conversation about what you are trying
to accomplish before you get involved in that new trans-
action.
Underwriting guidelines are more restrictive than at
anytime in recent memory, and they are changing
constantly.
Do not rely on old information or anecdotal stories from
your friends and co-workers.
Call me so that we can deal with your specific facts and
your unique qualifications.
home, but want to or need to hold onto their existing
home and use it as a rental property.
In the current market, there are many homeowners who
owe more on their homes than they are now worth. Also,
they see that they could buy a comparable home to the
one that they own for a much lower purchase price.
What has developed recently is that some homeowners
found a solution to their problem that the lending community
didn't anticipate.
Before they developed credit problems on their existing
home loans, they would purchase a new home. As part of
the qualifying for the new home, they would represent
that they would rent out their existing home and move
into the new one.
The underwriting guidelines that were in place allowed
a portion of the rental income to offset the expenses
on the soon-to-be-rental property. Specifically, 75%
of the rental income was allowed to be used. The guide-
lines recognized that there would be vacancies and
maintenance costs which is why they did not allow the
full rental income.
These homeowners were able to buy their new home at a
signicantly reduced price compared to what they paid
for their existing home. After closing, and recognizing
that there was no advantage to them keeping and main-
taining the home they just departed, let that home
revert back to the lender through default and fore-
closure.
At that point, their credit becamed impacted, but because
they had already purchased their new home that they were
planning on living in for quite some time, the bad credit
that developed didn't keep them from reaching their goal.
Because this became a significant trend, there are now
new underwriting guidelines for retaining the existing
home and purchasing a new home.
1. If the current primary residence is pending sale but
will not be closed prior to the closing date of the new
primary residence, the borrower will have to qualify for
both the current and new mortgage principal, interest,
taxes and insurance amounts (PITI). No potential
rental income offset will be allowed.
2. If the current primary residence will become a second
home and there is at least 30% documented equity in the
current home, the borrower will have to qualify for both
the current and new mortgage principal, interest, taxes
and insurance amounts. This requires that there are at
least two months of PITI for both properties.
3. If the current primary residence will become a second
home and there is not at least 30% documented equity in the
current home, the borrower will have to qualify for both the
current and new mortgage principal, interest, taxes and
insurance amounts. This requires that there are at
least six months of PITI for both properties.
4. If the current primary residence will become a rental
property and there is at least 30% documented equity
in the current home, they will allow the 75% of rental income
to offset the expenses on the existing home. No longer
can the borrower merely represent the proposed rental
income, though. They would require a fully executed lease
agreement and proof that a security deposit was received
from the tenant and deposited into the borrower's account.
5. If the current primary residence will become a rental
property and there is not at least 30% documented equity
in the current home, the borrower will have to qualify for
both the current and new mortgage principal, interest, taxes
and insurance amounts. This requires that there are at
least six months of PITI for both properties.
To document the existence of the the 30% equity position,
the borrower would have to provide a full appraisal of the
existing home.
The lenders are hopeful that by instituting these changes
that they will prevent or slow down the number of borrowers
who buy the new home and then send the keys back on the
old home.
If a borrower has little equity in the home, but have the
financial capacity to qualify for the expenses on both
homes, the lenders are thinking that they will not be as
tempted to damage their credit for the future.
If a borrower has a lot of equity in the home, they are
more willing to allow the rental income offset, because
it is much less likely that the owner will sacrifice 30%
or more of the equity of the home by defaulting. They
would probably sell the home in the open market before
letting the lender take it back.
This is further evidence that the underwriting guidelines
are attacking every element of the process that they
can identify as having contributed to losses or fraud.
I always say it, but it bears repeating: You have to plan
ahead and start the conversation about what you are trying
to accomplish before you get involved in that new trans-
action.
Underwriting guidelines are more restrictive than at
anytime in recent memory, and they are changing
constantly.
Do not rely on old information or anecdotal stories from
your friends and co-workers.
Call me so that we can deal with your specific facts and
your unique qualifications.
Wednesday, August 27, 2008
Underwriting Tightened to Avoid Recurring Problems
As the mortgage crisis has unfolded, a recurring theme
has been: "How did it get this bad? Why didn't someone
take a closer look at what they were doing?"
Over the past several years prior to the mortgage
market's upheaval, there is no doubt that the process
had gotten very lax. It may be fair to say that all
the parties to the process thought that someone else
was making sure that everything was done properly.
The reality was that each step was done well enough
to advance it to the next level, but that no one took
ultimate responsibility for making sure that it was
all done correctly.
That has changed now.
Underwriters are now taking a very close look - a very
close look - at all elements of your application package.
Let's take a look at some of the areas that there is
more scrutiny, based on some recent experiences.
Employment:
Underwriting guidelines have always focused on job
stability over the previous two years. This does
not mean that you cannot change jobs, but the lender
is looking for continuity in a career field, and
lateral or upward moves to the new job.
For a person who receives hourly pay or a salary,
copies of W-2 forms for the last two years, a current
year-to-date paystub, and a verification of employment
(VOE) form that is completed by the employer would be
necessary.
The underwriters are now very diligent about cross-
checking all of these documents for any inconsistencies
and requiring clarification and letters of explanantion
for them. No matter how insignificant the discrepancy
may be, the underwriter wants it explained and they want
to make an assessment on all the facts.
What this means to you is that when we meet, we need to
discuss your situation and make sure that we have a
tight timeline and that all the numbers fit together
well. We want the presentation to the lender to be
very clean.
Self-Employment:
The two-year time requirement is also the guideline
for a person in business for themselves, or who derive
their income from commissions.
In this case, the lender wants two years of federal
tax returns, and possibly a current year profit-and-
loss statement.
If the income has increased from year-to-year, the
lender will average the income. If the income has
decreased, they will tend to use the lower figure
for what they define as stable income. They have
no way to assess whether income that is moving
downward is an aberration or truly a trend.
What this means to you is that you may need to think
ahead if you are planning to purchase or refinance
in the near future. Recognizing that the lender is
going to use the same information for income that you
are using to minimize your tax obligation may allow
you to make different choices when you put your tax
information together.
Asset Verification:
Verification of your bank accounts, investment accounts,
and retirement funds are important for the lender's review.
The guideline is to show current balances, as well as
the average balance for the last 60-90 days. The
lender is interested in seeing that the funds are
stable and seasoned in your name. If there have been
recent large deposits, the current balance and the
average balance will reveal the disparity.
The lender will want to know the source of the funds
that have recently arrived in your accounts. They will
need to come from a reasonable and acceptable source.
Deposits from bonuses, gifts from family members, or sale
proceeds from assets would typically be acceptable.
Deposits from personal loans, credit card advances, or
from unexplainable sources may not be acceptable.
What this means to you is that you need to pull together
your money well in advance of your loan application, or
be able to explain all the "new money" that arrives in
your accounts.
There is no substitute for strategic planning in advance.
Credit History:
Credit scores have become the big thing in mortgage
lending.
If you don't know your credit scores, and what is on
your credit report before you start the application
process, you could be unpleasantly surprised when you
are trying to obtain your home loan.
Increasingly, the lenders are offering their best
loan terms for borrowers with higher credit scores.
At one time, scores of 680 or more put borrowers in the
best position. Now, it is not uncommon for lenders to
want scores above 740 to offer preferential terms.
If you order your credit report in advance, you can
have the opportunity to make sure that all the items
are reported properly. And, if they are not, you can
get them corrected, processed through TransUnion,
Equifax, and Experian, and get your report re-scored
so that you can present the best possible picture to
the lender.
The underwriters will use the middle of the three
scores for the basis of the loan request, or if only
two scores are available, they use the lesser of the
two.
You are probably finding a recurring theme here.
Plan ahead. Take the time to sit down with me, fill
out some paperwork, run your credit report and let
me have the opportunity to assess your credit quali-
fications in light of current underwriting guidelines.
With all of the changes that have occurred in the
mortgage lending business, and how conservative
underwriting has become, it is the best way to help
you understand what to expect.
has been: "How did it get this bad? Why didn't someone
take a closer look at what they were doing?"
Over the past several years prior to the mortgage
market's upheaval, there is no doubt that the process
had gotten very lax. It may be fair to say that all
the parties to the process thought that someone else
was making sure that everything was done properly.
The reality was that each step was done well enough
to advance it to the next level, but that no one took
ultimate responsibility for making sure that it was
all done correctly.
That has changed now.
Underwriters are now taking a very close look - a very
close look - at all elements of your application package.
Let's take a look at some of the areas that there is
more scrutiny, based on some recent experiences.
Employment:
Underwriting guidelines have always focused on job
stability over the previous two years. This does
not mean that you cannot change jobs, but the lender
is looking for continuity in a career field, and
lateral or upward moves to the new job.
For a person who receives hourly pay or a salary,
copies of W-2 forms for the last two years, a current
year-to-date paystub, and a verification of employment
(VOE) form that is completed by the employer would be
necessary.
The underwriters are now very diligent about cross-
checking all of these documents for any inconsistencies
and requiring clarification and letters of explanantion
for them. No matter how insignificant the discrepancy
may be, the underwriter wants it explained and they want
to make an assessment on all the facts.
What this means to you is that when we meet, we need to
discuss your situation and make sure that we have a
tight timeline and that all the numbers fit together
well. We want the presentation to the lender to be
very clean.
Self-Employment:
The two-year time requirement is also the guideline
for a person in business for themselves, or who derive
their income from commissions.
In this case, the lender wants two years of federal
tax returns, and possibly a current year profit-and-
loss statement.
If the income has increased from year-to-year, the
lender will average the income. If the income has
decreased, they will tend to use the lower figure
for what they define as stable income. They have
no way to assess whether income that is moving
downward is an aberration or truly a trend.
What this means to you is that you may need to think
ahead if you are planning to purchase or refinance
in the near future. Recognizing that the lender is
going to use the same information for income that you
are using to minimize your tax obligation may allow
you to make different choices when you put your tax
information together.
Asset Verification:
Verification of your bank accounts, investment accounts,
and retirement funds are important for the lender's review.
The guideline is to show current balances, as well as
the average balance for the last 60-90 days. The
lender is interested in seeing that the funds are
stable and seasoned in your name. If there have been
recent large deposits, the current balance and the
average balance will reveal the disparity.
The lender will want to know the source of the funds
that have recently arrived in your accounts. They will
need to come from a reasonable and acceptable source.
Deposits from bonuses, gifts from family members, or sale
proceeds from assets would typically be acceptable.
Deposits from personal loans, credit card advances, or
from unexplainable sources may not be acceptable.
What this means to you is that you need to pull together
your money well in advance of your loan application, or
be able to explain all the "new money" that arrives in
your accounts.
There is no substitute for strategic planning in advance.
Credit History:
Credit scores have become the big thing in mortgage
lending.
If you don't know your credit scores, and what is on
your credit report before you start the application
process, you could be unpleasantly surprised when you
are trying to obtain your home loan.
Increasingly, the lenders are offering their best
loan terms for borrowers with higher credit scores.
At one time, scores of 680 or more put borrowers in the
best position. Now, it is not uncommon for lenders to
want scores above 740 to offer preferential terms.
If you order your credit report in advance, you can
have the opportunity to make sure that all the items
are reported properly. And, if they are not, you can
get them corrected, processed through TransUnion,
Equifax, and Experian, and get your report re-scored
so that you can present the best possible picture to
the lender.
The underwriters will use the middle of the three
scores for the basis of the loan request, or if only
two scores are available, they use the lesser of the
two.
You are probably finding a recurring theme here.
Plan ahead. Take the time to sit down with me, fill
out some paperwork, run your credit report and let
me have the opportunity to assess your credit quali-
fications in light of current underwriting guidelines.
With all of the changes that have occurred in the
mortgage lending business, and how conservative
underwriting has become, it is the best way to help
you understand what to expect.
Wednesday, August 13, 2008
How to Shop For Your Mortgage Loan-Part 3
The two previous editions of this newsletter outlined
steps you can take to put you in a good position to
select your mortgage lender and the loan product that
will serve you the best.
Those steps were:
1. Know your outcome.
2. Be realistic.
3. Choosing a lender.
4. Deciding on a loan product.
5. Assessing rates and costs.
There are a couple of other items that would be
important to assess as you do your loan research.
A. Understand the trade-off between paying a
higher interest rate and zero points vs. paying a
lower interest rate and some points.
When you are offered a zero-point loan, you need
to realize that you are not getting something for
free.
A lender may be willing to create a loan for you
without requiring you to pay discount points (a
fee designed to "buy-down" the interest rate) or
to pay origination points (a fee designed to pay
the mortgage originator for their services).
The lender will absorb the cost of paying the
origination fee, but they will charge you, the
borrower, a slightly higher interest rate for doing
so.
Let's take a look at an example based on a loan
amount of $300,000:
30-year fixed rate of 6.625% with zero points, or
30-year fixed rate of 6.375% with a loan fee of 1 point.
Payments at 6.625% will be $1,920.93. Payments
will be lowered to $1,871.61 at the 6.375% rate, but
it will cost you $3,000.00 to obtain the lower rate
(1% of the loan amount = 1 point).
If you compare the 1/4% reduction of interest rate
vs. the cost, it would take you 4 years to recoup your
investment of the 1 point fee.
If you compare the difference in payments of $49.32
per month to the cost of $3,000.00, you will
calculate that it will take almost 61 months to recover
the 1 point cost.
So, if you have the resources to pay the loan fee,
and you plan on keeping the loan in place for at
least 4-5 years, it would be wise to go with the
lower interest rate. After the break-even points,
all the benefits of the lower interest rate will work
in your favor.
Whenever you are offered choices of interest
rates and loan fees, you should do a similar
analysis so that you have a good idea of the
wisdom of paying a higher interest rate, or paying
higher loan fees.
It is an important consideration as you finalize
the terms of your loan so that it is suitable for you
based on your time horizons.
B. Be sure to ask about whether there will be a
prepayment fee on your loan.
A prepayment fee, also known as a prepayment
penalty, is a clause included in your loan contract
that allows the lender to charge an additional fee
if you pay the loan off within the first three or five
years (depending on the clause).
The typical clause allows you to pay up to 20%
of the original loan amount each year without
paying any prepayment fee. If you should pay
more than the 20%, or pay the loan in full - which
is much more likely - you would be subject to
paying 6 months interest on the amount over
the 20%.
Let's do a calculation based on a loan amount
of $300,000 at 6.625%:
You would be allowed to pay 20%, that is $60,000,
with no penalty. If you paid the loan in full, the
remaining $240,000 would be subject to a 6 month's
interest charge.
Your prepayment fee would be $240,000 times
6.625% (.06625), which gives you the annual
interest, divided by 2, which gives you the figure
for 6 months. $240,000 x .06625 / 2 = $7,950.00.
If you even think that there is a likelihood that you
will pay off the loan within the prescribed 3- or 5-
year period, you would be much better negotiating
the prepayment fee away at the beginning of the
transaction.
Although each loan program may offer different
terms, a good rule of thumb may be that it would
cost you 1/4 point more in the loan fees at
origination to keep the prepayment clause out of
your loan contract.
The math becomes very simple at this point. Pay
$750 more at loan origination (1/4 of 1% of $300,000)
to avoid any possibility of paying as much as $7,950.00
if you were to pay off the loan early.
If you are convinced, however, that you will keep the
loan beyond the 3- or 5-year period, you can save
the additional fee at loan origination and never have
to deal with the prepayment fee either.
Ask lots of questions of your mortgage representative.
Make sure that they explain things so that you can
understand them. If they are unable to clearly
communicate the concepts and the math, you are
facing a situation where the loan product may not
be providing the benefits that you expect.
steps you can take to put you in a good position to
select your mortgage lender and the loan product that
will serve you the best.
Those steps were:
1. Know your outcome.
2. Be realistic.
3. Choosing a lender.
4. Deciding on a loan product.
5. Assessing rates and costs.
There are a couple of other items that would be
important to assess as you do your loan research.
A. Understand the trade-off between paying a
higher interest rate and zero points vs. paying a
lower interest rate and some points.
When you are offered a zero-point loan, you need
to realize that you are not getting something for
free.
A lender may be willing to create a loan for you
without requiring you to pay discount points (a
fee designed to "buy-down" the interest rate) or
to pay origination points (a fee designed to pay
the mortgage originator for their services).
The lender will absorb the cost of paying the
origination fee, but they will charge you, the
borrower, a slightly higher interest rate for doing
so.
Let's take a look at an example based on a loan
amount of $300,000:
30-year fixed rate of 6.625% with zero points, or
30-year fixed rate of 6.375% with a loan fee of 1 point.
Payments at 6.625% will be $1,920.93. Payments
will be lowered to $1,871.61 at the 6.375% rate, but
it will cost you $3,000.00 to obtain the lower rate
(1% of the loan amount = 1 point).
If you compare the 1/4% reduction of interest rate
vs. the cost, it would take you 4 years to recoup your
investment of the 1 point fee.
If you compare the difference in payments of $49.32
per month to the cost of $3,000.00, you will
calculate that it will take almost 61 months to recover
the 1 point cost.
So, if you have the resources to pay the loan fee,
and you plan on keeping the loan in place for at
least 4-5 years, it would be wise to go with the
lower interest rate. After the break-even points,
all the benefits of the lower interest rate will work
in your favor.
Whenever you are offered choices of interest
rates and loan fees, you should do a similar
analysis so that you have a good idea of the
wisdom of paying a higher interest rate, or paying
higher loan fees.
It is an important consideration as you finalize
the terms of your loan so that it is suitable for you
based on your time horizons.
B. Be sure to ask about whether there will be a
prepayment fee on your loan.
A prepayment fee, also known as a prepayment
penalty, is a clause included in your loan contract
that allows the lender to charge an additional fee
if you pay the loan off within the first three or five
years (depending on the clause).
The typical clause allows you to pay up to 20%
of the original loan amount each year without
paying any prepayment fee. If you should pay
more than the 20%, or pay the loan in full - which
is much more likely - you would be subject to
paying 6 months interest on the amount over
the 20%.
Let's do a calculation based on a loan amount
of $300,000 at 6.625%:
You would be allowed to pay 20%, that is $60,000,
with no penalty. If you paid the loan in full, the
remaining $240,000 would be subject to a 6 month's
interest charge.
Your prepayment fee would be $240,000 times
6.625% (.06625), which gives you the annual
interest, divided by 2, which gives you the figure
for 6 months. $240,000 x .06625 / 2 = $7,950.00.
If you even think that there is a likelihood that you
will pay off the loan within the prescribed 3- or 5-
year period, you would be much better negotiating
the prepayment fee away at the beginning of the
transaction.
Although each loan program may offer different
terms, a good rule of thumb may be that it would
cost you 1/4 point more in the loan fees at
origination to keep the prepayment clause out of
your loan contract.
The math becomes very simple at this point. Pay
$750 more at loan origination (1/4 of 1% of $300,000)
to avoid any possibility of paying as much as $7,950.00
if you were to pay off the loan early.
If you are convinced, however, that you will keep the
loan beyond the 3- or 5-year period, you can save
the additional fee at loan origination and never have
to deal with the prepayment fee either.
Ask lots of questions of your mortgage representative.
Make sure that they explain things so that you can
understand them. If they are unable to clearly
communicate the concepts and the math, you are
facing a situation where the loan product may not
be providing the benefits that you expect.
Wednesday, July 30, 2008
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.
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.
Wednesday, July 16, 2008
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.
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.
Wednesday, July 2, 2008
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!
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!
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