Give us a sample of blood and your first born if you want this mortgage…
The mortgage process is very personal, watch the video and discover why.

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Which lender should I choose?

Shopping for a mortgage lender can be a confusing, nerve racking, and difficult process.  Basing your decision on fees or interest rate will often times cost you at the closing table resulting in additional dollars, lost time, or the loss of a home you had your heart set on.

Be wary as you step into the shell game of interest rate quotes.  Some lenders will quote a lower than market rate in an effort to obtain a loan application from you.  These loan officers know that once you submit a loan application and the paper work it will be more difficult to switch mid stream.  Look for honesty and transparency when it comes to deciding on a loan officer.

Mortgage interest rates are like stocks.  Both are volatile and subject to change at any moment.  Additionally there is a difference between a quote and a rate lock.  A quote is typically provided while shopping for a lender and good for that moment in time.  Locking in the rate happens after loan application.  Three things are needed to accurately quote and lock an interest rate.

1. Complete loan application - Your interest rate is determined by a myriad of variables like your credit score, down payment, loan amount, type of property, purchase or refinance, and on and on and on.  Accurate quotes and locking in rates are impossible with out a complete loan application.

2. Property address - Mortgage interest rate locks are tied to the property.  An executed earnest money contract is required for purchase transactions.

3. Known closing date - An executed earnest money contract with an estimated closing date will do for a purchase.  A refinance in most instances will require 30 to 45 days to close and fund.

With out these three items you are getting a skewed or best guess quote.  Financing a home is the biggest financial decision most people make.  When you need surgery do you go to the cheapest surgeon?  An honest and competent mortgage professional will guide you to the closing table with the least amount of pain.

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1. Prequalifying - The most important step in the process.  It is in your best interest, prior to shopping for a new home, to talk to a loan officer.  The guidelines for the mortgage industry are constantly changing and what was an approveable loan last month might not be this month.  The prequalifying process is an informal discussion which will encompass your employment, income, assets, debts, and credit to make an initial determination about your financing options. For more information about prequalifying see my post “What is the Mortgage Prequalifying Process?”.

2. Loan Application - The formal step of the process.  Your loan officer will ask for documentation to support the information provided during the prequalifying step.  He/she will ask for two years tax returns w-2’s and 1099’s, a recent paycheck stub, and most recent bank/investment/retirement statements.  It is from these documents that a loan application is completed and the ideal loan program is determined.

3. Loan Processing - The verification step of the process. After the loan application is completed your loan file is handed off to a loan processor.  It is the job of the loan processor to verifiy the information provided in the loan application, gather additional documents to meet investor guidelines, and prepare the file for submission to underwriting. The processor coordinates the underwriting and closing process, collects documents needed from the title company, along with the buyers insurance company to obtain home owners insurance information.  The loan officer leads the show.  The processor is the stage manager making sure everything comes together on time.

4. Loan Underwriting - The validation step of the process.  When the file is completely processed it proceeds to underwriting.  The underwriter reviews the loan file to ensure that it meets the guidelines of the investor and will approve, suspend or deny the loan.  The underwriter typically requests additional information (called conditions) to support an approval.  If the loan file is suspended the underwriter will tell us what other information will be needed to get an approval.  If the loan file is declined the underwriter will tell us what factors caused the denial (ideally the loan officer caught these factors at prequalification).  After underwriting the file goes back to the processor and if the loan is approved it is on to closing and funding.

5. Loan Closing and Funding - The money and keys step of the process.  With a clear approval your loan file is ready to move to the closing department. The closing department for the mortgage company works with the title company to verify that all fees and other loan costs are accurately reflected on a HUD1 settlement statement.  When a final settlement statement is determined loan documents will be released to the title company where you will go to close your purchase.  The title company acts as a disinterested third party ensuring the closing goes according to the sales contract and the loan closing instructions from the mortgage company.  The title company will also collect and distribute all funds.  Prior to showing up for closing you will want to obtain a cashiers check for the amount shown as “cash from borrower” on page one of the HUD1 settlement statement.  Make sure to bring your check book and your drivers license as well.  Once you and the seller have signed all of the closing documents your loan funds, money is distributed by the title company, and you get the keys to your new home.

Under the big top of mortgage financing there is a lot going on.  With a good loan officer as the ring leader a complicated process will become an enjoyable show.

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1. How much of a mortgage payment can you comfortably afford to make every month? A monthly mortgage payment is comprised of PITI, or the principal and interest payment on the amount borrowed along with monthly property taxes, monthly home owners insurance payment and depending on down payment percent a mortgage insurance premium.

2. Who do you work for, how long you have been there, your position, how much and how you get paid? A recent pay check stub will help with this information.  For income qualifying purposes mortgage investors use your gross monthly income which is what you earn prior to taxes and everything else being deducted.  Take your gross monthly earnings, divide it by 41%  and you get the amount of debt including the new house payment (PITI) you are allowed to have for most mortgage investor guidelines.  Two years of average income (documented by tax returns) will be used if you are self employed, work as contract labor, earn commission or receive large bonuses (you absolutely need to talk to a loan officer if this is your case).

3. How much cash do you have available to close on the purchase of a home? Cash to close is made up of three variables the down payment, closing costs, and prepaid items.  Down payment is the cash investment required for a mortgage.  Closing costs are the actual costs to close the loan.  Prepaid items are costs that set up the loan for property tax/insurance reserves and eventual payment, daily interest from the closing date to the end of the month for the mortgage, along with a one year home owners insurance premium due at closing.  Do you have any retirement accounts or brokerage accounts?  Some programs allow the use of a 401K loan as a down payment to buy a home.

4. How much debt are you obligated to pay on a monthly basis? You will need to know the monthly amount owed for each fixed payment like car notes, child support, student loans and personal loans.  You will also need to know the minimum monthly payment due on credit card or revolving debt.  Your monthly credit obligations plus the mortgage payment (PITI) are divided by your gross monthly income to determine your qualifying ratios, remember 41% is generally the maximum guideline.

5. Would you describe your credit rating as excellent, good, fair, poor? If it is fair or poor what caused it?  Everyones idea of credit rating is different and a good loan officer can help you understand your rating prior to pulling a credit report.

When I think about the mortgage prequalifying process one word comes to mind “honor”.  Prequalifying is about honoring the client where they are right now regardless of their current circumstances.  Excellent credit or poor credit, lots of cash available for down payment or limited funds it does not matter.  Everyone can achieve the dream of home ownership it is a simple function of timing and preparation.  The process of prequalifying for a mortgage leads to two positive options. Yes, you can buy a home today or you need a game plan so you can buy tomorrow.

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Did you know that:

30% of your credit score is impacted by the category called “amounts owed”.  Credit card balances fall into this category.
20% of your score is impacted by the category called “credit utilization”.
Utilization means the amount of available credit you are using at the time of your score.
Credit utilization rate is calculated by dividing the account’s outstanding balance by the credit limit.
The higher the utilization, the greater the lowering impact to your credit score.
50% of your score is impacted by your holiday shopping habits.

Credit holiday FAQ’s & tips:

Does applying for many new credit accounts at holidays hurt your score more than applying for just one?
Yes, generally the fewer the better.

Should I use just one card for all holiday purchases?
No, it is better to spread out the debt, due to utilization shown above.
1 card “maxed out” is worse then 2 cards each with 50% balances.

What does a “maxed out” card balance do to my score?
If your score is in high 700’s=  score will drop by 25-45 points.
If you score is in the high 600’s= score will drop by 10-30 points.

Ooops I shopped too much, what if I have to pay late after the holidays?
If your score is in high 700’s= score will drop 90-110 points by a late pay.
If your score is in high 600’s= score will drop 60-80 points by a late pay.

In mortgage lending you are your credit score.  A drop below 720 and 680 will make a big difference in the world of financing

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You’re probably asking “Mortgage Mike, what has changed?”  Let me recap the program highlights and shed some light on the opportunities for the next five months.

Recap:

1. Tax credit is 10% of purchase price up to $8000 for first time home buyers.

2. To qualify for the tax credit buyers cannot have owned a home in the last 3 years.

3. The incentive is a tax credit which can applied to the next year income tax or can be claimed by filing an amended return for the previous year.  No advance credit can be claimed prior to property purchase.

Opportunities:

1. Income limits have been raised to $125,000 for single filing taxpayers and $225,000 for joint filing taxpayers.

2. Current home owners can qualify for the credit up to $6500 if they owned and occupied a home as their primary residence for five consecutive years of the last eight.

3. Military personnel who have been on active duty between January 1 2009 and May 1 2010 will receive the credit up to June 30 2011.

4. The tax credit has been extended for sales contacts dated up to 4/30/2010 and closing by 6/30/2010.

Benefits:

1. Increase in income limits mean more buyers qualify for the tax credit, ie larger pool of buyers.

2. The more income a person makes the more house they can afford, ie higher sales price homes available for credit.

3. Increased income limits open up a higher priced portion of the home for sale inventory, ie larger pool of homes to buy.

4. Incentives for move up buyers creates a cycle of sales which helps to boost the housing industry, ie two for one.

Mortgage Mike says “You have five months to take advantage of the tax credit.  Make hay while the sun is shining buy or sell a home today!”

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Dodd: Home Credit Deal ‘Done’
Investor’s Business Daily (10/28/09) P. A1
Key Democrats have reached a consensus on extending the first-time home buyer tax credit, due to expire on Nov. 30, announced Senate Banking Committee Chairman Chris Dodd, D-Conn. Bloomberg, meanwhile, reported that the chamber is close to an agreement that would extend the incentive to home transactions that are under contract — not closed — by April 30. Although the amount of the credit would fall 10 percent to $7,290, the tax break would be opened up to filers who have owned their current residence for a minimum of five years.

The credit crunch for mortgages has all but shut down the jumbo loan market, we need the higher loan limits to stay in place or we will see an even smaller pool of qualified buyers.  Let your representatives in congress know the importance of maintaining the higher loan limits for FNMA, FHLMC, and FHA.

MBA Trade Groups Press Congress on Higher Loan Limits

Sorohan, Mike
The Mortgage Bankers Association and other industry trade groups sent a letter this week to leadership of the House and Senate urging Congress to pass legislation “as soon as possible” to extend current higher loan limits for Fannie Mae, Freddie Mac and FHA.

The Oct. 26 letter, signed by MBA, the National Association of Home Builders and the National Association of Realtors, called the current $625,000 loan limits (nearly $730,000 in high-cost areas), set to expire on Dec. 31, a “key component of the economic recovery efforts because they help make affordable loans available for a broader spectrum of consumers who want to purchase a home or refinance an existing mortgage.”

“Even though the temporary limits do not expire until the end of this year, obtaining financing is already becoming more difficult and expensive for many borrowers,” the letter said. “Therefore, we request Congress extend the limits as soon as possible so as not to jeopardize the fragile recovery.”

The letter noted that uncertainty in the industry as to whether the loan limits would continue has had an effect on underwriting, inhibiting borrowers’ ability to obtain financing.

“Some lenders have stopped underwriting certain loans at the current interest rate because lenders are uncertain whether they will be able to sell the loans, and are unable or unwilling to retain them in their own portfolios,” the letter said. “The result is that borrowers are being unnecessarily denied financing because of uncertainty about expiring loan limits. Consumers cannot lock in current interest rates beyond 60 days for loans more than $625,500. As a result, loans that do not close before year-end will need to be re-underwritten and possibly then declined because of the higher interest rate and resulting mortgage payment.”

The letter also observes that an immediate extension of loan limits is necessary in order to provide sufficient time for FHA, the Federal Housing Finance Agency and the GSEs to conduct market assessments, provide guidance and implement them. “For example, the current loan limits, set by the American Recovery and Reinvestment Act of 2009, did not become fully operational until four months after the law was enacted,” it said.

Sen. Patty Murray, D-Wash., reportedly has drafted an amendment that would extend the loan limits. An aide to Murray told Dow Jones this week that Murray would attach the legislation to a stop-gap funding measure that could be considered by the Senate this week.

“We believe these temporary limits have benefited the mortgage industry and consumers during what has been a turbulent period for our nation’s economy,” the trades letter said. “In light of the continuing weakness in the secondary market, we urge Congress to take action so that the GSEs and FHA can be permitted to continue providing capital to support loans to families across America.”

The letter went to House Speaker Nancy Pelosi, D-Calif.; House Minority Leader John Boehner, R-Ohio; Senate Majority Leader Harry Reid, D-Nev.; and Senate Minority Leader Mitch McConnell, R-Ky.

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Cost Concerns Surface Over Home-Buyer Credit
Wall Street Journal (10/15/09) P. A6; McKinnon, John D.
Some analysts and Capitol Hill legislators fret about the cost and usefulness of the tax credit for first-time home buyers, which provides an $8,000 tax credit and is set to expire at the end of next month. While many in the housing market have lauded it as a stabilizing force in home sales, several House Democrats are unwilling to sign off on an extension or expansion of the credit if it is not offset with tax hikes or spending cuts. Proponents want the tax break to be extended at least to next summer, made available to all home buyers, and the income limits raised to $150,000 for an individual and/or $300,000 for a couple — a move that would cost as much as $16.7 billion. Some elected officials propose taking back unspent money from the $787 billion stimulus bill to fund the cost.

Great news form the Fed!  Now is a great time to buy as low interest rates make home ownership more affordable.  Inflation fears may drive rates up in the coming months though, keep your fingers crossed they don’t….

Fed Leaders Differed on Outlook
Washington Post (10/15/09) P. A16; Irwin, Neil
Federal Reserve policymakers voted unanimously to keep its target interest rate near zero and to phase out by March a program that buys mortgage-backed securities, at the Sept. 22-23 session of the Federal Open Market Committee; but minutes and recent speeches suggest that they have different ideas on how quickly to scale back the aggressive actions taken to help boost the economy. Fed leaders worry that inflation could take off in the coming months and years, and some members believe that increasing the maximum amount of MBS purchases could quickly reduce economic slack. Officials more concerned about inflation, meanwhile, are more likely to favor raising interest rates.

In other news, the Mortgage Bankers Association is cranking up their efforts to slow down the implementation of the new good faith estimate and HUD 1 settlement statement.  From what I have seen the new forms make shopping for a mortgage clear as mud.  Lets hope they succeed. The simple solution would be to make the current good faith estimate and the current HUD 1 settlement statement look the same, but alas that would be too easy.

MBA, Trade Groups Warn HUD of RESPA ‘Train Wreck’

Sorohan, Mike
The Mortgage Bankers Association and other industry trade groups, in a strongly worded letter to HUD, warned that proposed changes to the Real Estate Settlement Procedures Act and confusion over implementation could lead to a mortgage market compliance “train wreck.”

Related posts:

1. Credit Reporting Errors Costing Us $1000’s Credit reporting errors are driving up cost of financing...

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Long-Term Mortgages Nearly Hit Record Low
Chicago Sun-Times (10/09/09) Knowles, Francine

Thirty-year, fixed mortgages moved closer to the all-time low of 4.82 percent reached in May, falling to 4.87 percent this week from 4.94 percent a week ago, according to Freddie Mac. Homeowners who refinance have an opportunity to reduce their payment on a 30-year, fixed loan for $200,000 by nearly $134 a month from a year ago, when long-term rates averaged 5.94 percent. Also, 15-year loans fell to 4.33 percent, and five-year adjustable-rate mortgages dropped to 4.35 percent; but one-year ARMs rose to 4.53 percent.

The Chairman of the Mortgage Bankers Association of America, David Kittle, was on capitol hill yesterday testifying before congress on several key issues.  One of the issues being the expansion of the home buying tax credit.

Kittle also called on Congress to extend and expand the $8,000 first-time home buyer tax credit, which he said has helped to moderate the decline in home prices by stimulating demand.

“Allowing the credit to expire would put in jeopardy the recent signs of recovery we are beginning to see in the housing market,” Kittle said. “Congress should act quickly in order to avoid a potential rush of borrowers overwhelming lenders and settlement service vendors by demanding to close before the tax credit expires on November 30, 2009. In fact, not only should the credit be extended, it should be expanded. Congress should extend it to all home buyers and increase the credit up to $15,000. In addition, Congress should make it available immediately, so that a borrower does not need to wait until his or her next tax return, but instead can use it to help make a downpayment on the house or pay closing costs.”

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1.  Real Estate Settlement and Procedures Act changes, the new Good Faith Estimate and HUD1 Settlement Statement forms and requirements.

Proposed effective date January 1st 2010.  HUD has finally come up an “easier” way for consumers to shop for mortgages.  I commend the effort but it I think it will actually make it difficult and more confusing.  Here is a link to see the revised FAQ document created by HUD  http://www.hud.gov/offices/hsg/ramh/res/resparulefaqs.pdf .  It is a 43 page document so brace yourself.  All changes are proposed and some good ones are getting attention .  The original new settlement statement eliminated the separate line item for tax deductible points paid by the borrower, effectively eliminating the ability to write off points paid for a mortgage on tax returns.  HUD has agreed to put the separate line item reporting back on the settlement statement.

2.  Bill to Solve FHA Finance Issue

or Mike’s new title “How to Ensure a Stagnant Economy by Restricting the Last Common Sense Home Finance Option“

National Mortgage News (10/05/09) P. 3; Collins, Brian
Rep. Scott Garrett, R-N.J., has rolled out a bill that would increase the down payment requirement of the FHA to 5 percent from 3.5 percent and bar closing costs from being rolled into loans insured by the agency. “As we have learned repeatedly throughout the mortgage crisis, the amount of equity a homeowner has in their home directly correlates to the credit risk associated to their mortgage,” said Garrett, who sits on the House Financial Services Committee. He also hopes to address financial issues at FHA by having the General Accountability Office determine the appropriate capital and leverage ratios for the agency’s single-family program.

Mike’s opinion:

As quoted above “The amount of equity a homeowner has in their home directly correlates to the credit risk associated to their mortgage”.  How about increasing the mortgage insurance premium for loans that are less than 5% but more than 3.5%?  FHA is a government insured program.  Insurance is a trade off between risk and premium dollars charged, price the insurance accordingly.  Also, housing is the back bone of our economy.  Increasing the down payment to 5% will eliminate a large population of the first time home buyer market which in turn will hamper the recovery.

3.  HR 3590, introduced to extend the the first time home buyer tax credit for an additional 12 months to thousands of military, Foreign Service, and intelligence agency personnel who have been posted abroad since 2009.

Mike’s opinion:

Fantastic!  Now lets really stimulate the economy by extending it to all home buyers and increasing the credit to $15,000.

A penny for your thoughts….

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