In the "olden" days, when someone wanted a home loan they walked downtown to the neighborhood bank or savings & loan. If the bank had extra funds laying around and considered you a good credit risk, they would lend you the money from their own funds. this was generally the only way to get a mortgage loan. The banks would then "portfolio" the loan, or make it an asset of the bank, and you were in business. You generally had to have 20% down payment, and they had to like the way you looked.

It doesn't work like that anymore. Most of the money for home loans comes from three major institutions. What this means is that the money for your loan doesn't come from the bank (unless you go to a bank and they portfolio your loan). It comes from one of three places if it's a conforming loan:

          Fannie Mae (FNMA - Federal National Mortgage Association)

         Freddie Mac (FHLMC Federal Home Loan Mortgage Corporation)

         Ginnie Mae (GNMA Government National Mortgage Association).

If your loan is a non-conforming or subprime loan, the money generally comes from other "investors", such as large groups who have made their money from other places, and are willing to take a greater risk. But the process is the same. This is how it works now.

You talk to practically any lender and apply for a loan. They do all the processing and verifications and finally, you own the house and now you have a home loan and you make mortgage payments.  You might be making payments to the company who originated your loan, or your loan might be transferred to another institution.  The
company you make your payments to very rarely owns your loan.  They are the
"servicer" of your mortgage.  They are called the servicer because they are
simply "servicing" your loan for the institution that does own it. You won't
know the difference because you will be dealing with the servicing company from
start to finish, and it is the law of the land that the terms of your mortgage
cannot change. Just remember that the mortgage industry is one of the
most highly regulated industries in the country, just like banking and
securities, for your protection.

You see, what happens behind the scenes is that your loan got packaged into a "pool" with a lot of other loans and sold off to one of the three institutions listed above, or a servicer in the case of a non-conforming loan.  The servicer of your loan gets a monthly fee from the investor for processing payments and taking care of your loan.  This fee is usually only 3/8ths of a percent or so, but the amount adds up.  There are companies that service  billions of dollars of home loans.  Three-eighths of a percent on a billion dollars is a tidy income.

In fact, mortgage servicing is where lenders make the real money.  The entire system of originating mortgages, including wholesale lenders, mortgage brokers and mortgage bankers is designed so that servicers get loans into their portfolio -- hopefully at a "break even" level -- but often at a loss.  Mortgage servicing is where they make their profit.

Once your loan has been packaged into a pool and sold to Fannie Mae, Freddie Mac, or Ginnie Mae, or a servicer, the lender gets additional funds so they can make more loans (to service in their portfolio) and sell to those institutions, so they can get more money to make more loans, and so on....

This is the cycle that allows institutions to lend you money. Pretty simple really. This is what happens next.

Mortgage Backed Securities

Once Freddie Mac, Ginnie Mae, and Fannie purchase the pools, they break them down into smaller ownership parcels.  These are called "mortgage backed securities."  Each security represents a small ownership interest, not in your specific loan, but in the pool of which your loan is only one part.  The risk is therefore diversified and it is a very safe investment.

The mortgage backed securities are sold on Wall Street to institutions or individuals looking for a safe investment, but one that earns a higher interest rate than treasury bonds.  You may even own some as part of your retirement fund or investment portfolio.   Perhaps you have heard of Ginnie Mae bonds?  Those are securities backed by the mortgages on FHA and VA loans.

By selling the bonds, Ginnie Mae, Freddie Mac, and Fannie Mae obtain new funds to buy new pools so lenders can get more money to lend to new borrowers. And the cycle continues.

So when you make your payment, the servicer gets to keep their tiny part, and the majority is passed on to the investor.  Then the investor passes on the majority of it to the individual or institutional investor in the mortgage backed securities.

From time to time your loan may be transferred from the company where you have been making your payment to another company. Again, the terms of your loan cannot change. They aren't selling your loan again, just the right to service your loan.

There are exceptions.

Loans above $300,750 do not conform to Fannie Mae and Freddie Mac guidelines, and they fall into the category of "non-conforming" loans, or "jumbo" loans. These loans are packaged into different pools and sold to different investors (kind of like a subprime loan), not Freddie Mac or Fannie Mae. Then they are securitized and for the most part, sold as mortgage backed securities as well.

This buying and selling of mortgages and mortgage backed securities is called "mortgage banking," and it is the backbone of the mortgage business.

      
Types of Mortgage Lenders

It used to be fairly easy to put a term to a lender that accurately described the different types of mortgage lenders and the types of mortgages they originated.  Time, the S&L problems more than a decade ago, and a maturing marketplace have served to "blend" those differences. The only types of lenders you are likely to encounter today are a Mortgage Broker, a Bank, Wholesale lender, or a Credit Union.

Mortgage Brokers

Mortgage brokers deal with lending institutions that have a wholesale loan department. They originate loans and then broker them to these wholesale lending institutions. A good broker has established relationships with many wholesale lenders, and it is due to these relationships that a Mortgage Broker is the best place (in our experience) to seek your loan. Basically, wholesale lenders use mortgage brokers as their loan officers, but we don't work for the lenders - we work for you. The wholesale lenders offer a lower rate to the broker, and the rate is passed on to you. Typically, it's about the same, and often lower than you would get using a bank or credit union.

Not only can a broker provide you with the best rates on your loan, but the broker can provide you with both conforming and non-conforming or subprime loans, which a bank or credit union can not or will not do. It is common for a borrower to go to his bank or credit union, then call us and get a better rate. Mortgage loans are a broker’s only “product” so the factors that go into a bank or credit union decision are not present when dealing with a broker. Additionally, the process does not drag out for months like it may at a bank or credit  union, only to find out that they decided that they do not want to do the loan. This is not a factor with a broker. If there are no surprises as to the information you provide the broker, if we say you will get the loan, you will. You will get your answer immediately, or within 24 hours. Basically, Mortgage Brokers perform all the mortgage functions of a bank or credit union, except we do it faster and more reliably.

Mortgage brokers learn the "hot points", or niches, of various wholesale lenders and can handpick the lender for a borrower which may be unique in some way.   He will be able to submit your loan to either a portfolio lender or a mortgage banker.  Another advantage is that, if a loan gets declined for some reason, they can simply repackage the loan and submit it to another wholesale lender.

One additional advantage is that mortgage brokers tend to attract a high number of the most qualified loan officers. This is not universal, because mortgage brokers also serve as the training ground for those just entering the business. If you have a new loan officer and there is something unique about you or the property you are buying, there could be a problem on the horizon that an experienced loan officer would have anticipated. However, because mortgage loans are the broker's only product, he is readily available (in a good brokerage) to all loan officers in the office in the solving of any problems the loan officer may encounter.

Some wholesale lenders have their own retail branches such as you may see in the storefronts in shopping centers,  but most wholesale lenders rely 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 result for the borrower is that  the rate that the borrower gets is lower than if he obtained a loan directly from a retail branch of the wholesale lender.

Borrowers cannot get access to the wholesale divisions of mortgage bankers and portfolio lenders without going through a broker.

Banks and Credit Unions

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 are 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 banks and credit unions. 

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.

If you apply for a loan with a bank or credit union and you are declined, that's it.  You're done. If you still think you should be able to qualify for a loan, you have to start over somewhere else. That's why it's better to start with a lender, such as a mortgage broker, who considers every aspect of your circumstances from the beginning of the process and can give you better loans and service from the start. A good mortgage broker has so many sources of funding that it is rare that a loan is turned down.

...." Banks reject well over 50% of requests for mortgage loans"

        

What lenders consider when making a loan..

So we've come full circle - only now it's better. The new climate has allowed us to act as the banker's of old, meaning that we take you as an individual, look at your circumstances, and make the loan - not only for the best borrowers, but for everyone. And we don't have all the other things that might distract a banker from your loan, such as whether or not you have an account with him, or if you have some liquid assets that you're willing to deposit and possibly offer as collateral for his loan. Mortgages are our only product and service, so we intend to make the loan. You will have an answer within 24 hours, and usually during our initial conversation.


There are several factors lenders look at when making a loan. The important thing to remember is that there are exceptions to just about everything, and because the wholesale lenders are becoming so competitive, generally there is nothing written in stone, and there is a great deal of flexibility. If one lender cannot provide an exception to one aspect of a loan, another can. That is why dealing with a broker is the best thing you can do when seeking a loan. Don’t get bogged down in the calculations shown below (this is supposed to be fun) -  you can let the loan officer do this for you. He or she can do all these calculations quickly and accurately.

Debt-to-Income Ratios

To determine your maximum mortgage amount, lenders use guidelines called debt-to-income ratios. This is simply the percentage of your monthly gross income (before taxes) that is used to pay your monthly debts.  Because there are two calculations, there is a "front" ratio and a "back" ratio and they are generally written in the following format:  33/38. The most common back ratio used today by the wholesale lenders is  45 all the way up to 55.

The front ratio is the percentage of your monthly gross income (before taxes) that is used to pay your housing costs, including principal, interest, taxes, insurance, mortgage insurance (when applicable) and homeowners association fees (when applicable).  The back ratio is the same thing, only it also includes your monthly consumer debt.  Consumer debt can be car payments, credit card debt, installment loans, and similar related expenses. Only items that appear on your credit report are considered – utilities, phone bills, and auto or life insurance is not considered a debt.

It used to be that the most common guideline for debt-to-income ratios is 33/38.  A borrower's housing costs consume thirty-three percent of their monthly income.  Add their monthly consumer debt to the housing costs, and it should take no more than thirty-eight percent of their monthly income to meet those obligations. No more. Loans are now made with much higher debt ratios and even no debt ratios.

The guidelines are just guidelines and they are flexible.  If you make a small down payment, the guidelines are more rigid.  If you have marginal credit, the guidelines are more rigid.  If you make a larger down payment or have sterling credit, the guidelines are less rigid.  The guidelines also vary according to loan program. 

Step One - Calculating Your Monthly Income

This section is for informational purposes only. Because of the different types of loans available, and the different considerations that only your loan officer is aware of, we don't want you to make a decision as to whether you qualify for a loan ased on your calculations alone. Let your loan officer do this for you.

When a loan officer pre-qualifies you, he works backwards to figure your maximum mortgage amount.  You can do the same thing.  The first step is to determine your monthly income.   Lenders only count income they can document through paperwork, but the types of paperwork that are required now are varied and designed to make the loan.

If you are a salaried employee, it's easy.  Get out your paycheck.  If you get paid twice a month, multiply by two.  If you are paid every two weeks, then you multiply by 26 (the number of pay periods in a year) and divide by twelve.  If you are an hourly employee who works a straight forty hours a week and don't earn overtime income, then it's easy, too.  Look at your paycheck, multiply your hourly rate by 40, multiply that total by 52, then divide by twelve.

If you earn overtime, bonuses, or commissions,they average your income from those sources over the last two years, then add that to your regular salary or hourly monthly income.  If you want a shortcut that is usually close, get out your W2 forms for the last two years.  Add them together and divide by twenty-four.  That is your monthly income.

If you are a teacher, a nurse, a seasonal employee, in construction, or earn only part-time income -- you can use that shortcut, too.  Add the figures from your last two years W2's, then divide by 24.  It generally gets you close.

If you are self-employed or receive 1099 income, then you generally need a two-year track record, but some lenders are now requiring only one year and other types of exceptions are made.  Lenders go by what you declare to the IRS as income, since that is documentable with the 1099’s or tax returns.  Since some self-employed people overstate their expenses, this may understate your income.  Look at the Schedule C of your tax returns for the last two years and the number at the bottom that says "profit" is your annual income.  You can add any depreciation to that figure.  Add them together and divide by twenty-four. If the income isn't’t enough, what is generally done by a broker is to provide you with a stated income loan.

There are variations and exceptions (like those who own their own corporations) but the above will cover most people.

Step Two - Working Backward

Once you have calculated your monthly income, multiply it by the back ratio for your particular loan.  For generic purposes, it is fairly easy to work with thirty-eight.  Take 38% of your monthly income or multiply it by .38.  That tells you the maximum the lender wants you to spend on your housing costs and monthly consumer debt combined.

Now get out your bills and total them up to determine what you spend monthly on debt.  Do not include your auto insurance or your utilities.  Just creditors.  For credit cards, use the minimum required monthly payment unless it is less than ten dollars.  The rest should be fairly straightforward.

Deduct that amount from the total the lender wants you to spend on 
housing costs and consumer debt combined.  Now you know the maximum the 
lender wants you to spend for housing costs, unless the figure is greater than 
33% of your monthly income (there are many exceptions, of course).

Step Three - a Little Guesswork

The next step requires a little guesswork.  If you have a vague idea of what price you might qualify for, you can estimate what your annual property taxes and homeowners insurance might cost.  From there, you can easily calculate the monthly equivalent.  Subtract those figures from your maximum monthly housing costs total.

If you are buying a condominium (or an area with HOA fees), subtract out an approximate figure to cover homeowners association fees. What you are left with is your maximum principal and interest payment.

The Final Step

This is one that you will probably not be able to perform, because you don’t know what your interest rate will be. And that is the amount of the loan you qualify for.  For those “perfect” borrowers who have a general idea of what the prevailing interest rate on that day for a conforming loan and they know that they have excellent credit, they can use the mortgage calculators. For everyone else, their rate will be dependent on their credit score and the amount of the loan relative to the value of the property, and must depend on the loan officer to assist them with this.

If the figure is less than you expected (or need), lenders know programs that will help "boost" you higher in qualifying.  Plus, they will do what you just did for free, they are much more experienced at the various nuances involved, and you will have no obligation to use them as your lender. 

         

For a Quick Easy Loan Approval As you might imagine, the lender will want to verify some things about you as your loan is approved – things like income, credit, assets, and so forth. You do not need anything when you first talk with your loan officer. As a matter of fact, you won’t know what types of documentation to provide your loan officer until after he or she has spoken with you. The items listed on the Loan application Info page of the site will give you an idea of the types of things the lender may ask for, and they will vary depending on your situation. Remember – you will not need anything when you first talk to your loan officer for pre-qualification. The loan officer will know what you will need after your first conversation with him and will have you start putting your documentation together at that time. And the quicker you provide the "docs" to your loan officer, the sooner you will have the keys to your home. So don't dawdle. Loan Application Info

 

Income Items W2 forms for the last two years Most recent pay stubs covering a 30 day period Federal tax returns (1040s) for the last two years, if: you are self-employed earn regular income from capital gains earn sizable interest income, etc. earn more than 25% of your income from commissions or bonuses own rental property or are in a career where you are likely to take non-reimbursed business expenses). Year-to-Date Profit and Loss Statement (for self employed) Corporate or Partnership tax returns (if you own more than 25% of the business) Pension Award letter (for retired individuals) Social Security Award letters (for those on Social Security) Asset Items Bank statements for previous two months (sometimes three) on all accounts. All pages, even if you don't think them important. Statements for two months on all stocks, mutual funds, bonds, etcetera Copy of latest 401K statement (or other retirement assets because they can count as reserves) Explanations for any large deposits and source of those funds Copy of HUD1 Settlement Statement on recent sales of homes Copy of Estimated HUD1 Settlement Statement if a previous home is for sale, but not yet closed Gift letter (if some of the funds come as a gift from a family member - the lender will supply a blank form) Gifts can also require: Verification of donors ability to make the gift (bank statement) Copy of the check used to make the gift Copy of the deposit receipt showing the funds deposited into bank account or escrow Note:  many get their statements of various kinds over the internet and these are not always acceptable to lenders, especially when the printed version does not contain the borrower's name, account number, and the name of the institution.

 

Credit Items Landlords name, address, and phone number (if you rent - for verification of rental) Explanations for any of the following items which may appear on your credit report: Late payments Credit inquiries in the last 90 days Charge-offs CollectionS Judgments Liens Copy of bankruptcy papers if you have filed bankruptcy within the last seven years Other Copy of purchase agreement (if you have already made an offer) To document receipt of child support (if you desire to show it as income) Copy of Divorce Settlement (to show the amount) Copies of twelve months canceled checks to document actual receipt of funds Copy of social security Card (or other documentation of social security number) Copy of Drivers license VA Loans Copy of your most recent monthly mortgage bill The following cannot hurt to have ready, but are not as necessary as they once were: Copy of Note on existing loan Copy of HUD1 Settlement Statement on existing loan

      

Mortgage Rates and Pricing  "What's my rate going to be ?" prospective borrowers ask when they call us .  Well, there isn't just one rate.  There is a choice of rates and the rates are very similar from one lender to the next - perhaps identical in the case of conforming loans. But even then your rate may be different from the "vanilla" rate because of the features you choose on the loan, or the amount you borrow relative to the value of the house, and a myriad of other factors. A Loan Officer's Rate Sheet Every morning a loan officer gets a rate sheet - or a number of them. On a subprime loan, rates are usually good for 14-30 days, so the loan officer doesn't get rate sheets everyday from subprime or non-conforming lenders.  They come in across the fax machine, across the computer, or through various secure web sites requiring confidential user names and passwords.  On volatile days, there may be revisions to the rate sheets.  There have been times when rate sheets were revised more than five times in one day. These rate sheets are not designed for public view.  They are for loan officers' eyes only because they represent the "cost" of a loan to the loan officer, not the cost to the borrower.

 So how do I get the best rate?

All the "experts" tell you to "shop for rates" -- but they don't tell you how to shop for rates.  Without an understanding of how loans are priced, calling up a lender to find out their interest rate could provide you with mostly useless information.  If you simply call up and ask for interest rates, a lender can tell you anything.  One lender may quote a "floating" rate (seven or twelve day lock) and another may quote you a forty-five day lock.  Another lender may quote you the rate for two points and another may quote you the rate for one point.  If you call lenders on different days, you could get widely different quotes because rates don't stay the same every day. 

Your rate will depend on a number of factors, but basically it is based on your credit score and the Loan to Value (LTV). Then it is determined what type of loan is best for you - conforming, non-conforming, full documentation or stated income, fixed or adjustable, 15 or 30 or even 40 year term, and other factors that can be determined only in a discussion with your loan officer. that is why a good loan officer will ask you a lot of questions that may seem to have no bearing on getting a loan, but they are of the utmost importance if the loan officer is to ensure that he designs the loan that is best for you.

By the way, you can't trust ads in the newspaper, on the radio or on television.  These rates are generally teaser rates or rates that are for loans not suitable, and even dangerous, for the typical borrower. However, we will be glad to discuss the types of loans you hear about in those types of ads.

Lenders know when you're just calling up to get a rate quote.  They know you are calling up their competitors.  When you ask for a rate quote for a specific lock-in period paying a specific amount of points, most lenders will give you a reliable quote.  But you're applying pressure for a great quote.  You let the loan officer know you're "shopping around."  You want the "best deal."

What do you think happens?

At least one loan officer will lie to you. If he doesn't fudge the rate, he doesn't have a shot at your loan because someone else will lie to you.  Plus, you can't check anywhere to see if he is telling the truth.  You're not likely to immediately fill out an application and lock in the false rate you were quoted.  You're going to keep calling around and shopping and maybe tomorrow you'll call back whoever gave you the best quote.

Truthful, ethical loan officers will not get your loan.

By the time you are ready to really lock in your interest rate, you'll be quoted accurately -- or maybe not.  If someone would lie to you to get the loan, they aren't ethical.  They may jack up your rate at the end of the deal when your options are limited.  You probably won't even realize he's doing it because you aren't shopping interest rates anymore.

How to Really Shop for a Lender

The best way is to get a referral (from a Realtor or a friend), then shop other lenders.  Do it properly, telling the lenders how much you are willing to pay in points and how long you want to lock in the rate.  Make all your calls on the same day.  Tell the lender you have already filled out an application and that you are willing to fax it in, so the rate has to be something he can deliver.  Get the best quote under those conditions, then call the lender who was referred to you.  Tell him what you found out and he will tell you if it is real or not -- and whether he will match it.  Then you choose your lender.

 The "Home Wealth" Effect

In America, the most common way to accumulate wealth is through home ownership. At the time of a survey conducted by the National Association of Realtors, the "average" homeowner has $50,000 in "unrealized wealth" in their home.  Those families with incomes over $75,000 averaged $100,000 in "unrealized wealth."  Families with incomes less than $40,000 averaged $40,000 in unrealized wealth. "Unrealized wealth" just means your house is worth more than what you owe on it.  This is also called "equity."  Savings.  You own an asset that appreciates in value. 
 
Over the last year, the "average" house increased 7.1% in value.  Since the "average" house is worth $153,300, that means in one year the "average" homeowner accumulated $10,884 in wealth -- by doing nothing more than making a mortgage payment (plus taxes and insurance).  Since interest and property taxes reduce your taxable income, the federal government is subsidizing this increase in "home wealth."
 
Three out of four homeowners say their "home wealth" is greater than their "stock wealth."
The most common way to "tap in" to unrealized wealth is to refinance and pull cash out of the home, get a home equity line of credit or sell your home.  At least forty percent of those who sell their home use some of the money to buy a bigger, better, or newer home.
 
Renting does not accumulate wealth.
 
As a general rule, homes appreciate between four and six percent a year.  Some years may be more, some less. That's a fairly decent rate of return for a conservative investment, but it is not the whole story. Your "return on investment" is much higher than four to six percent.  This is partly because you are "leveraging" your investment and because the tax laws subsidize home purchasing.