How Do I Know If I Am Getting A Good Rate?

Wow. Any loan officer that has been in the business for more than 20 minutes has heard this question. Without selling you ANYTHING, let me give you a couple quick pointers to help determine if the rate, points and fees you are getting quoted are actually competitive.

First, you need to understand how the person originating your mortgage will be compensated. After all, we don't do this for free. I get paid one of two ways. I can give you the absolute best rate that you qualify for and get paid a fee by you directly in the form of a broker fee or origination fee. This is normally expressed in terms of "points", 1 point representing 1 percent of the loan amount. I can also be paid by the lender to sell you a rate higher than what you qualify for which will require less upfront points, sometimes no points at all. The "premium" being paid to the loan originator represents a "yield spread", so you may see the term YSP or yield spread premium on your settlement statement. Sometimes, the premium paid by the bank is high enough (because the interest rate is so high ) to even pay closing costs. This is part of the way lenders offer no closing cost loans. The fees have to get paid, they are just paid out of the proceeds of the loan because the borrower is willing to pay an above-market rate. It is important to understand that points and fees are directly related.

So how do you compare fees? You need a GFE or good faith estimate that is as accurate as possible. Quotes over the phone or internet are completely useless unless accompanied by a good faith estimate correctly filled out by the loan officer after reviewing your application, credit and desired loan program. Comparing two estimates side by side and line by line will help illuminate any extra fees. Keep in mind that some GFE's will not include title fees, recording fees or taxes, title insurance, etc. just to appear that the fees are lower. Also, a rate may not be available unless you lock it in that day.

Another indication of loan comparison is (or should be) the Annual Percentage Rate or APR. All things being equal, a higher APR compared to a similar loan with a lower APR would reflect a higher cost to the borrower. Keeping that in mind, most Truth in Lending statements are not filled out correctly, so the APR does not reflect true costs. This is most common with adjustable rate mortgages. If your APR is significantly higher than your interest rate, be sure to understand why.

Remember, you DESERVE (and we are required to provide) an accurate and complete Good Faith Estimate within 3 days of completing your loan application and anytime your loan terms change, unless there has been an improvement.

About the Author: Brian Piper is a Senior Loan Officer with East West Mortgage in Vienna Virginia, one of the largest brokers in the country. Also online at http://www.virginialoanpro.com/

Are Stated Income Loans BAD?

Are stated income loans BAD?

It seems like open season right now on lenders who have issued Stated Income loans over the last several years. Here is a brief introduction to stated income loans.

Historically, when applying for a mortgage, potential borrowers would take their paycheck stubs and the (hefty) down-payment to their local bank, sit down with a loan officer and a stack of forms and begin the process of loan qualification. The bank would consider the credit profile of the borrower, the capacity to repay the mortgage (income) and the collateral securing the bank’s interest in the loan. These have been referred to as the Three C’s, although I have heard of the Four, Five and even Six C’s of mortgages, depending on which training program you look at. Based on a set of guidelines, a loan application will be approved or denied based on easy to define characteristics. This is a pretty straight-forward process, but is based on a complete understanding of a borrower’s earnings as documented by W-2s and paycheck stubs.

Now let’s consider a self employed borrower. Income calculations are suddenly much more complex, sometimes even impossible. The IRS will determine income based on your tax returns, but a self employed borrower has deductions which reduce his/her taxable income which a wage-earner will not have. Although the money deposited to each bank account could be identical in both cases, the taxable income can be drastically different. When you consider the number of people who have multiple jobs, or receive income that is difficult to verify (paid in cash) then it is easy to understand how the traditional mortgage qualification process does not fairly evaluate the ability of a potential borrower to repay the loan.

The beginnings of the reduced documentation loan reflected a shift towards stricter Credit and Collateral considerations and less stringent Capacity evaluation. Since these loans involved more risk, the rate reflected a higher profit potential for the lender, and we now have a reduced documentation loan. Don’t believe the hype that just because there were less stringent documentation requirements that these were bad loan products. Typically, the credit standards are much higher in terms of FICO score and qualifying tradelines, and the properties are reviewed more intensely as well. The problem with many of these loans revolves around the willingness of borrowers and/or loan officers to inflate the income in order to qualify borrowers for larger loans. THIS IS FRAUD AND WAS NOT THE REASON BANKS ISSUED REDUCED DOC LOANS. To make matters worse, most of these mortgages are Adjustable Rate Mortgages (ARM’s), so now we find borrowers who really couldn’t afford the loan faced with rising interest rates making these loans even less affordable. When coupled with 100% financing and lower property values, we now have the “Perfect Storm”. Borrowers who have no/limited down-payment at risk are much more likely to walk away from the problem. Without the ability to refinance, due to higher rates and/or decreasing property values, there really aren’t many options for a lot of these situations.

Could this have been prevented?

Looking back, there are some obvious factors which certainly compounded the problem and we are currently seeing corrections in the mortgage market to move back to stability. Going back to our Three C’s, we are seeing more stringent guidelines in each area.

Credit: score requirements are higher now than in the recent past, especially for the best interest rates.

Capacity: Most lenders have ceased issuing stated loans, especially for borrowers who are NOT self-employed or do not derive most of their income from self-employment

Collateral: SHOW ME THE MONEY! Expect to bring a down-payment. The 100% loans for first-time homebuyers with limited credit, limited assets and who cannot document sufficient income have gone away.


About the Author: Brian Piper is a Senior Loan Officer with East West Mortgage in Vienna Virginia, one of the largest brokers in the country. Also on the web at www.VirginiaLoanPro.com

Have You Talked to your Loan Officer Lately?

If you are deep in the loan process, I hope your loan officer is keeping you informed. Or at least, as informed as possible. Lenders seem to be dropping off like crazy right now. Loans submitted to lenders, some even "clear to close", are eclipsed by the dreaded " thank you for your past business, but we are ceasing operation" email. You think the Nigerian-millions-waiting-for-your-bank-account email is rampant, just take a look at the number of lenders shutting down.

www.ml-implode.com

OUCH!

What does this mean for a borrower? TALK TO YOUR LOAN OFFICER (assuming he/she is still employed). With lenders shutting down daily, it is harder to find program guidelines than it is to find a rate.

The Math of Interest Only Mortgages

The Fundamental Question: Does An Interest Only Mortgage Save Me Money?

So here is an example of the math of a hypothetical 30 year mortgage compared to the same mortgage with an interest only option for the first 5 years.

$350,000 for 30 years fixed at 7.0%

The traditional payment, principal and interest, would be 359 payments of $2328.56 and 1 final payment of $2326.94 for a total of $838,279.98

That same mortgage making interest only payments for the first five years would give you 60 payments of $2041.61, then 299 payments of $2474.73 and 1 final payment of $2471.50 for a total of $864,616.97 for a difference of $26,336.99 .

While your payment during the first 5 years saves you roughly $287 per month, you will then pay almost $147 more per month for the next 299 months in order to pay the mortgage off by the end of the 30 year term.

Is this a good deal? Well, it can be under certain situations and there are some assumptions built in as well. First of all, most home buyers do not stay in the same home (not to mention the same loan) for the full 30 years. The balance of monthly savings will come at the expense of a higher payoff when you sell. Plan on refinancing? Again, since you have no idea what the prevailing rates will be, you cannot predict the benefit of financing a higher loan balance (since you have not paid down the principal) with a lower interest rate, EVEN IF IT IS AVAILABLE. Quick math, interest only for 5 years at 7% then refinance down to 6.5% for another 30 years would actually cost you $80,625 MORE than the original fully amortized 30 year mortgage. This does not included ANY points of fees of the refinance and it is typical to pay just a touch more (higher interest rate) for a mortgage with an interest only option.

A lot of math, I know. PLEASE PLEASE PLEASE consider how much saving a couple hundred dollars can cost you, and make an extra payment here and there to cut as much long-term interest as possible.