Simply The Best Loans

Please note the statistical information in the following post is from the Commonwealth of Virginia, however, the overall outline of the differences in regulations governing different types of lenders may apply in other states as well. For those living elsewhere in the US, you should review the regulations for your particular state.

In 2006, The State Corporation Commission of Virginia reported the number of mortgage lenders and brokers it supervised at 2,952. Not included in this number, however, are federal banks, credit unions or commercial banks with “National” or “N.A.” in the name. What does this mean to Virginia consumers?

All mortgage brokers and wholesale lenders are required, by law, to disclose all fees, yield spread premiums, etc. paid on the settlement statement (HUD-1) at closing, since they are licensed by the SCC. Banks, however, are not. Consumers can be duped into believing they are saving money when dealing with these institutions because the fees they would normally find on their settlement statement from a mortgage broker or wholesale lender do not have to be disclosed by the banks. In addition, because the disclosure rules are not consistent across all institutions, some banks advertise programs that appear to the consumer as having ‘no fees’.

Any loan, no matter who the lender is or what loan program the consumer qualifies for, has costs associated with it. NO LENDER DOES LOANS FOR FREE!!! If the institution lending money to the borrower claims there is no cost for the loan, it only means the cost is not transparent to the borrower. It has been buried in the loan as a higher interest rate, a yield spread, a prepayment penalty, the loan balance or a combination thereof.

Borrowers should always ask the credit score(s) being used to determine their qualification by any lender. If their credit score is 720 or higher, special programs usually do not provide any savings to them and are better off with a conventional fixed-rate program. Sales pitches for ‘Special or First-Time Buyer Programs’ are unnecessary because these programs generally have a higher cost built-in to the program due to their broader underwriting guidelines and are specifically designed for borrowers with less-than-superior credit. Therefore, they are not cost-effective for a borrower with excellent credit.

The slow down in new mortgage applications in recent months has caused lenders to begin advertising ‘no closing costs’ loans as a means of soliciting new applications. Unless the borrower is well informed on the mortgage process and able to clearly read ‘the fine print’ of all the disclosures thoroughly and understand them, the likelihood that they may pay costs that they are unaware of is fairly significant.

This is one more area within the mortgage industry where advertising hype and inequitable regulation can result in higher costs to consumers.

Consumers will not be able to make their best mortgage choice until the mortgage process, all disclosures and fees are transparent to them, regardless of whether the lender is a broker, wholesale lender, credit union or federal bank.

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Finally, whether purchasing or refinancing, once your loan is approved, your loan officer should confirm your loan commitment from the lender and provide you with a closing date. If you are purchasing, the date set is the day the loan transaction will occur. If you are refinancing, the closing date is the day you will sign all the new loan documents and your new loan will actually fund and record three days from the date you sign the documents. This means that if you are doing a cash-out refinance, you will not be given a check for the money you are cashing-out until the 3 days have passed and your new loan has been recorded. At any point during the 3 day period, if you chose, you can change your mind about the loan and withdraw without penalty.

No matter what type of loan you need or how much you need to borrow, your loan officer’s job is to make the process clear and easy for you. Your questions and concerns should be addressed and any issues that arise addressed immediately. By working with you, your realtor and closing agent, your loan officer should make the entire loan process seamless and stress-free.

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Fourth, once you have contracted to purchase a home, completed the loan application and provided all required documents to your loan officer, your loan will be submitted for underwriting. Once the underwriting process has been completed, your loan officer should tell you the results. Make sure that your loan officer reviews your underwriting results and lets you know if it impacts the terms that you had outlined on your Good Faith Estimate.

You should know once underwriting has been completed if you will have any adjustments to the terms outlined on your GFE. If there are, it may affect your interest rate or other terms of your loan. It is your loan officer’s job to review your credit, income, debt and loan options well enough that your underwriting should not present any unexpected results. However, if something should arise, your loan officer should bring it to your attention immediately.

If working with a conscientious loan officer, you will be kept abreast of your loan’s progress. Even under the best of circumstances, underwriters can set unexpected conditions which could impact your loan differently than the loan officer initially outlined. Your loan officer should notify you immediately of any conditions set by the underwriter that are unexpected. Remember, the underwriter’s job is to find a reason to deny the loan.

Don’t be alarmed if your loan officer tells you that the underwriter has asked for something that seems out-of-the-ordinary or trivial. The best thing to do, whenever possible, is to provide the underwriter with whatever information they request as quickly as possible.

Again, a good loan officer will guide you through this aspect of the loan process easily. Continued, part 5, Closing.

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Third, your loan officer should tell you what type of loan programs you qualify for and explain their differences so that you can make a proactive decision about the type of loan you want.

Do you want a fixed rate loan?

Do you want a “no down payment” loan?

Will you have to pay PMI (private mortgage insurance)?

Can you use gift money? Is there a prepayment penalty?

Can you make interest-only payments?

These are just some of the many variables loan programs can offer. In providing this information, your loan officer should explain the meaning of each aspect of the loan as well as outlining the pros and cons of each program. Make sure you understand how the program works, what your payments will be now and in the future. If aspects of the loan program can change such as the interest rate, make sure you understand how and when the rate can change. Always ask for details and answers when you don’t understand.

Continued, Part 4, The Underwriting Process–

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Second, your loan officer, once you are pre-qualified for a mortgage within a specific dollar range, should provide you with a detailed Good Faith Estimate (GFE). The GFE is a federally mandated form.

It will give very specific information regarding your loan amount, proposed interest rate, term (years) of the loan, and principal and interest payment. It will give you general estimates of other loan fees. Lender fees will include amounts for processing, underwriting, wire transfer, flood certificate, etc. The closing agent (usually a real estate attorney or title company) will have fees for title insurance, deed of trust, courier and preparation of closing documents.

The GFE will also indicate fees charged by state and local government, recording of documents at local courthouse, and taxes. You should question any fees that are not explained or not listed here. Many first time home buyers don’t know that a survey is required only if requested by the lender. Those refinancing don’t know that they can save almost 50% of the cost of their title insurance if they provide a copy of their current owner’s title policy to the closing agent.

Make sure that your loan officer addresses these items with you as well. –Continued, Part 3, Loan programs

When applying for a mortgage to buy a house, whether it’s your first or fifth, there is certain information your loan officer should tell you. It doesn’t matter whether you are applying for your mortgage with your local bank or with a mortgage broker, the information you want is the same.

First, your loan officer will have to pull a credit report to accurately qualify you for a mortgage. If you are qualified without having your credit pulled by the loan officer, then your qualification is not necessarily going to mean that you would actually qualify for a loan. In such a situation, the qualification would only mean that your debt to income ratio falls within the lender’s guidelines.

Assuming that the loan officer has pulled a credit report, they should tell you what your credit scores are. Credit scores over 620 are considered acceptable and/or average credit. Credit scores over 720 imply that you have an excellent credit history. Your credit report will also indicate if you have had any late payments, have any accounts in collections or have any judgment outstanding. If you find that any one of these kinds of things showing on your report—don’t panic. Unfortunately, it is becoming more and more common that such items are being reported in error. If this is the case, your loan officer should provide you with all pertinent information from the report so that you can investigate the situation and have it corrected.

For credit issues that need to be addressed (e.g. Collection accounts or outstanding judgments) your loan officer should offer you information for what you need to do in order for your issue to be addressed and pass the underwriting requirements for a loan. (For further information on correcting credit reports and addressing credit issues, see www.protectyourgoodcredit.com)

A complete pre-qualification for a mortgage loan will include a review of your gross monthly income, your monthly debt (total of minimum payments on all accounts, not including rent or current mortgage payment or utilities), and your credit scores. Once completed, your loan officer should provide you with a pre-qualification letter for your real estate agent or for the seller of the home you wish to purchase. Pre-qualification should not be confused with pre-approval. To be pre-approved for a loan, your loan officer must submit a completed loan application and a credit report to a lender for underwriting. The application will either be denied or approved pending certain underwriting conditions being met. Loan commitment is given by the lender only after all conditions are met and the loan is ready to schedule for closing. It is very important to understand these distinctions as both realtors and many loan officers will often use the terms interchangeably despite their specific differences. –Continued in Part II-The Good Faith Estimate.

One issue that continues to arise as a result of the high level of appreciation in many housing markets, is buyers’ understanding the difference between the appraised value of a property versus the sales price. In a hot market, a seller may ask and receive a higher price for his/her property but, if the buyer is getting a conventional residential home mortgage, the lender will require an independent appraisal of the property which measures value based on many aspects of the property and recent comparable sales in the area. Usually to be considered a fair comp for value, the sale must have taken place within the last 6 months.

The lender will often order a “review appraisal” which involves the submitted appraisal being double-checked by the lender’s own appraisal department. The lender can even order an additional inspection by their own appraiser if they question or have issue with some aspect of the submitted appraisal. If the lender determines the value to be less than the sales price and/or the submitted appraised value, the loan will reflect the reduced value which can impact the monies needed by the buyer to close.

For instance, a buyer contracts to purchase a home priced at $250k even though comparable sales in the neighborhood top out at $240k. The property is appraised for $250k and the loan and appraisal are submitted to the lender. The lender’s underwriter questions the value and orders an internal review. The review appraiser reviews the submitted appraisal, area comps and other appropriate market information and determines the property is over-valued by $10k. The buyer is at that point forced to either: walk away, negotiate a lower sales price or pay the $10k out-of-pocket since the loan amount will now be calculated on a lower value. If the buyer was getting 100% financing, the $10k difference would be paid by the buyer at closing in addition to closing costs.

Since most borrowers that seek 100% financing are doing so because they don’t have funds to put toward a down payment, the above scenario could create numerous problems for the buyer. One of the best ways for a buyer to protect him/herself is to work with a professional Realtor that has done a market analysis of the property and comparable sales for the neighborhood. If there is any question about value, the Realtor can ensure the contract for sale includes language which will protect the buyer and give him/her options for re-negotiating or canceling the contract should the appraisal or lender review not support the sales price.

Loan programs require certain criteria for qualification. In addition to meeting this criteria, the borrower’s particular financial picture such as credit score, the loan amount, the loan-to-value (the percentage of the loan amount as it relates to the sale price or appraised value), the choice of loan program, and/or the type of property can all contribute to changing the cost of the loan.

As previously outlined, lenders quote interest rates with corresponding yield spread premiums. Then the lender has pricing adjustments for all the different variables possible for one loan. Pricing adjustments can be as little as .125 percent of the loan amount up to 5% percent or more of the loan amount. Calculating these pricing adjustments correctly for a specific loan can be one of a loan officers biggest challenges.

Rate sheets vary from lender to lender, program adjustments vary from program to program and everyone’s financial picture is different. With so many variables going into the determination of loan terms, it is virtually impossible for a consumer to compare apples to apples in shopping for a mortgage. It can also be counter-productive for a borrower to attempt to do so.

If a borrower is “shopping” a mortgage with multiple companies s/he risks having too many credit checks, getting confusing or misleading information and possibly having duplication of upfront service fees for appraisals, credit reports, etc. The advantage to working with a professional mortgage broker is to have an experienced professional do the shopping and evaluating for you and then give you an overview of your best options. The broker’s focus is to get the borrower the best possible terms for his/her financial circumstances and needs.

While yield spread premiums (YSP) are rebates offered each day by lenders for any interest rate over the daily par rate, the YSP is also the tool loan officers use to offset lender adjustment fees to the consumer. Every loan program with every lender can have “adjustments” to the interest rate or hits as they are called by loan officers. Whenever a loan officer issues a good faith estimate to a client, s/he must be sure to either charge for these adjustments or cover the cost by quoting a rate with YSP that will offset it.

The amount of loan program rate hits can be based on numerous factors such as credit score, loan size, loan-to-value (LTV), property location, loan type (cash-out refinance versus rate/term refinance), etc. These adjustments can total as little as .125% of the loan amount and go up to several percentage points of the loan amount. If paid by the borrower, this could mean thousands in extra fees for closing.

Industry practice is to cover the adjustments by the YSP rather than charge them directly to the borrower. Since YSP’s are usually odd numbers, if the hits or adjustments on a loan are .75% and closest YSP to offset this charge is .875%, the loan officer would be paid the .125% net rebate at settlement. This net rebate is paid outside of closing or POC and does not come out of the borrower’s funds at settlement. It is paid to the loan officer by the lender.

Next, loan program adjustments and their affect on interest rates.

Yield Spread Premium—a percentage of a point that is offered as a rebate on particular rate of interest by a lender. Rate Discount—a percentage of a point charged to the borrower for a particular rate of interest.

Recent news on mortgage industry practices indicates consumers must become not only more educated about the borrowing process but more vigilant in reviewing the information provided to them by lenders. While regulators attempt to protect consumers with an ever increasing number of forms and mandated disclosures, real protection for consumers will only come when they are educated about the process and able to easily decipher the information they are given about their loan terms and settlement fees.

Hidden costs continue to be the bane of most consumers. One item that some consider hidden is the yield spread premium (YSP) that lenders quote on their daily rate sheets. There are those that would claim the YSP is a hidden fee even when it is disclosed on every settlement statement and clearly indicated as being paid outside of closing (POC).

While it is possible for unscrupulous loan officers to use this as a means to make more money on a loan than they would otherwise, reputable loan officers and mortgage brokers make borrowers aware of the YSP and disclose when and where it comes into play during their loan process.

To fully explain how this works, you must understand how lenders quote interest rates on a daily basis. Most lenders publish a rate sheet which shows a rate spread of somewhere between 1 and 2 points. On the lower end, a given interest rate will either cost the borrower a percentage of a point or will offer a YSP of a percentage of a point. The rate closest to or at 0.0 is considered the par rate for that day.

To illustrate, the chart below is what a lender will issue to its loan officers at the opening of each day. Rates can also fluctuate numerous times throughout the day as market conditions change. New rate sheets are re-issued during the course of the day as well. The following rate chart is from a rate sheet issued by a lender this past Friday. These rates are for a conventional conforming 30-year fixed rate mortgage.

Rate 15-Day 30-Day
5.125 3.125 3.250
5.250 2.375 2.500
5.375 1.750 1.875
5.500 1.125 1.250
5.625 0.500 0.625
5.750 0.000 0.125
5.875 (0.500) (0.375)
6.000 (1.000) (0.875)
6.125 (1.500) (1.375)
6.250 (2.000) (1.875)
6.375 (2.500) (2.375)
6.500 (2.625) (2.500)
6.625 (3.000) (2.875)
6.750 (3.125) (3.000)

Reading this chart a loan officer would know a borrower buying a new home wanting to lock a 5.25% interest rate for 30 days would have to pay the lender 2.5% in discount points plus any other adjustments the lender requires for property location, loan size, credit scores, program costs, etc. Par rate for this lender was 5.75% for a 15-day lock. If the borrower wanted 5.75% and to lock for 30 days, it would cost the borrower .125% of the loan amount in discount points.

If the borrower did not want to pay any points for loan origination or loan adjustment fees, the loan officer could quote the borrower a rate that offered a YSP to cover those costs. The yield spread is indicated by the parentheses around the numbers following the interest based on either a 15- or 30-day lock period. If the cost of origination and lender adjustments for credit, program, property location, etc. added up to 2.5% in points, the loan officer could quote a 6.5% rate of interest and lock for 30 days. With this rate, the borrower would have no fees for origination or lender loan adjustments at settlement which would significantly lower his/her closing costs.

Next, lender loan adjustments offset by YSP.