Self-Serve-Realty

Mortgage

How Much House Can You Afford?

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 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. Auto or life insurance is not considered a debt.

A 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.

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. FHA guidelines state that a 29/41 qualifying ratio is acceptable. VA guidelines do not have a front ratio at all, but the guideline for the back ratio is 41.

Example: If you make $5000 a month, with 33/38 qualifying ratio guidelines, your maximum monthly housing cost should be around $1650. Including your consumer debt, your monthly housing and credit expenditures should be around $1900 as a maximum.

Your Down Payment Affects Everything

Your First Step Toward Buying a Home

When preparing to buy a home, the first thing many homebuyers do is look at "homes for sale" ads in newspapers, magazines and listings on the internet. Some potential buyers read "how-to" articles like this one. The next thing you should do – before you call on an ad, before you talk to a Realtor, before you shop for interest rates – is look at your savings.

Why?

Because determining how much money you have available for down payment and closing costs affects almost every aspect of buying a home – including how you write your purchase offer, the loan programs you qualify for, and shopping for interest rates.

Mortgage Programs

If you only have enough available for a minimum down payment, your choices of loan program will be limited to only a few types of mortgages. If someone is giving you a gift for all or part of the down payment, your options are also limited. If you have enough for the down payment, but need the lender or seller to cover all or part of your closing costs, this further limits your options. If you borrow all or a portion of the down payment from your 401K or retirement plan, different loan programs have different rules on how you qualify.

Of course, if you have enough for a large down payment, then you have lots of choices.

Your loan choices include such varied programs as conventional fixed rate loans, adjustable rate mortgages, buydowns, VA, FHA, graduated payment mortgages and all the varieties of each.

Shopping Rates

A very important reason you need to have at least some idea of your down payment is for shopping interest rates. Some loan programs charge a slightly higher interest rate for minimal down payments. Plus, the interest rates for different loan programs are not the same. For example, conventional, VA, and FHA all offer fixed rate loans. However, the rates vary from one program to another.

If you shop lenders by phone, the loan officer will be able to tell which programs fit and quote you rates accordingly. However, if you are shopping on the internet, you have to have some idea of your loan program on your own.

Writing Your Offer

Another reason you need to have a clue about your down payment is because it affects how you write your offer to purchase a home. Not only are you required to put your down payment information in the offer, but different loan programs have different rules which also affect how you write your offer. This is especially important when dealing with FHA and VA loans.

If you are asking the seller to pay all or part of your closing costs, you have to be certain your loan program allows what you are asking. For smaller down payments, lenders allow the seller to pay less closing costs than for larger down payments. Some loan programs will allow a seller to pay certain types of costs, but not others.

Finally, your down payment also affects your ability to qualify for a loan. When you make a small down payment, lenders are fairly strict about having you conform to their underwriting guidelines. For larger down payments, they will tend to make allowances or exceptions to the rules.

Conclusion

As you can see, the down payment affects every choice you make when you buy a home. Although you should look at ads, familiarize yourself with neighborhoods, learn about prices, and read as much as you can - when you get ready to take action – the first thing you should do is figure out how much money you have available for the purchase.

Documenting Your Assets – Verifying Your Down Payment

When buying a home, it is not enough to just "come up" with the money. With the exception of "no asset verification" loans, lenders want to verify where the money comes from. This is partially a quality control feature to protect against fraud, and partially an underwriting tool to determine your qualifications as a borrower.

If you can document the funds come from your personal savings, the lender is more confident of your strength as a borrower. A savings history indicates a level of stability.

In addition, if you can verify you have additional assets that are not needed for the down payment, it is important to document those, too. Additional assets are "reserves" you can draw upon during times of trouble, such as unemployment, medical emergencies, and similar occurrences. Additional assets can also help to document that you have a history of saving money, which makes you a more dependable borrower.

It is extremely important to completely document the paper trail of any funds you use for down payment and closing costs. The sections that follow offer guidance on both verifying assets and documenting them as a source of your down payment.

Where Does the Money Come From for Mortgage Loans?

The Olden Days

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.

It doesn’t generally work like that anymore. Most of the money for home loans comes from three major institutions:

Fannie Mae (FNMA - Federal National Mortgage Association)
Freddie Mac (FHLMC – Federal Home Loan Mortgage Corporation)
Ginnie Mae (GNMA – Government National Mortgage Association).

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 have been 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 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. 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 over 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, 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, and so on....

This is the cycle that allows institutions to lend you money.

Types of Mortgage Lenders

It used to be fairly easy to put a term to a lender that accurately described them and the types of mortgages they originated. Time, the S&L problems of the late eighties, and a maturing marketplace have served to "blend" those differences. Some old adjectives barely apply now and are rarely used.

Mortgage Bankers

A true Mortgage Banker is a lender that is large enough to originate loans and create pools of loans which they sell directly to Fannie Mae, Freddie Mac, Ginnie Mae, jumbo loan investors, and others. Any company that does this is considered to be a mortgage banker. They can very greatly in size. Some may service the loans they originate, but not all of them will. Most true mortgage bankers have wholesale lending divisions.

Examples of two of the largest mortgage bankers are Countrywide Home Loans and Wells Fargo Mortgage. One is associated with a bank and the other is not, but both are most correctly classified as mortgage bankers.

A lot of companies call themselves mortgage bankers and some deserve the title. For others, it is mostly marketing.

Mortgage Brokers

Mortgage Brokers are companies that originate loans with the intention of brokering them to wholesale lending institutions. A broker has established relationships with these companies. Underwriting and funding takes place at the wholesale lender. Many mortgage brokers are also correspondents, which is why many of them also claim to be mortgage bankers.

Mortgage brokers deal with lending institutions that have a wholesale loan department.

Wholesale Lenders

Most mortgage bankers and portfolio lenders also act as wholesale lenders, catering to mortgage brokers for loan origination. Some wholesale lenders do not even have their own retail branches, relying 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 mortgage broker then adds on his fee. The result for the borrower is that the loan costs about the same as if he obtained a loan directly from a retail branch of the wholesale lender.

The Advantages of Different Types of Mortgage Lenders

What kind of lender is "best?"

If you talk to a loan officer, he (or she) will probably say the lender they work for is "the best" and give you a list of reasons why. If you meet the same loan officer years later and he works for a different kind of lender, he will give you a list of reasons why that type of lender is better.

Realtors have differing opinions and, as a group, their opinions have changed over time. In the past, most would often recommend portfolio lenders - because they almost always closed the deal. As time passed, mortgage bankers and mortgage brokers became more important, and agents switched along with the changing times.

Most often a Realtor will direct you to a specific loan officer who has demonstrated a track record of service and reliability -- or a loan officer who works for a lender affiliated with their real estate office.

It is often more important to choose a good loan officer, not the institution. Loan officers have two jobs. One is to be your advocate in getting the loan approved. The other is to deliver quality loans. You want someone who has proven dependable and ethical in the past -- someone you can trust.

As for lending institutions, each type of lender has strengths and weaknesses. Quality within each branch or office can vary, depending on the loan officer, the support staff, and a variety of other factors.

When Realtors or Builders Recommend a Lender

If your Realtor or builder make a suggestion for a lender, be sure to talk to that lender. There are several reasons they make recommendations.

One reason Realtors and builders make suggestions is because they want to recommend someone reliable. Reliability is important to you, so that you don`t end up with a horror story to tell. Reliability is also important to the seller, the agents, and everyone involved in your transaction because is the deal doesn`t close, everyone walks away with nothing.

When agents and builders recommend lenders, they often develop a certain amount of "clout" in dealing with those lenders. This can help in a situation where you need to cut through "red tape" and get something done quickly.

When buying a new home, dealing with a recommended lender is often very important. This is because there are a lot of intricacies involved in new homes that do not exist when buying resale. If you "shop" around to find your own lender, you may end up with someone who quotes a great rate and is great with refinances or resales, but has no experience with new homes. This can lead to problems or delays.

Over the last ten years, real estate companies and builders have built up their own mortgage brokerages. "Bundled services" like this make sense because it adds another profit center to the company. This is useful because it helps real estate companies to offset higher commission splits with their agents.

In the early days of "bundled services," the loan officers and staff were often sub-par and the quality of service may not have been so great. Things have improved since then. However, because this is "captured business," sometimes these lenders don`t have as much incentive to offer you great deals or lower rates. All you have to do is let them know you are "shopping rates" and they will probably work toward accommodating you as much as possible.

Never automatically disqualify a recommended lender, but be sure to be ask questions about any relationships between the lending company and your builder or real estate agent`s company. That will help you be more vigilant on getting the best interest rate and the lowest costs.

CONCLUSION

Make sure to do a little shopping for yourself. By knowing the interest rates of the market and making sure your loan officer knows you are looking at rates from other institutions, you can use that as leverage to make sure you are obtaining the best combination of service and lowest rates.

For a Quick Easy Loan Approval:

Things to Have Ready When You Apply For a Loan

It used to be that lenders mailed out verifications to employers, banks, mortgage companies, and so on, in order to verify the data supplied by borrowers. Nowadays, things move faster. "Alternate documentation" has become more widely used.

Alternate documentation means that underwriting answers can be obtained with information supplied directly from the borrower instead of waiting around for verifications to come back in the mail.

The following page lists the items you will most likely need to speed the processing of your home loan. Items may differ according to whether your loan is a confoming (Fannie Mae or Freddie Mac), non-conforming (jumbo) loan, government loan, or a portfolio loan.

Verifications are still mailed out, but usually as part of quality control procedures.

Closing Costs When Buying or Refinancing a Home

When you talk to a lender, they usually prepare a "Good Faith Estimate" of closing costs. Sometimes they will give it to you right away, but they are only required to mail it to you within three business days of application.

Because the lender is the one who prepares the estimate, many buyers associate all the closing costs with the lender. This is not correct. The lender is only preparing an estimate of the costs you may incur when buying or refinancing and is not required to list all potential costs. Nor does the lender know what all the costs are actually going to be. The estimate is an educated guess based on past experience. Some things will get left out. Always anticipate the actual costs are going to be more than the estimate.

When comparing two lenders, don`t look at the "total" cost. Only compare the costs actually charged by each lender. Both lenders are only making informed guesses about costs charged by others.

The next page is a detailed summary of costs you may have to pay when you buy or refinance your home. The costs are listed in the order that they should appear on a Good Faith Estimate you obtain from a mortgage lender.

There are two broad categories of closing costs. Non-recurring closing costs are items that are paid once and you never pay again. Recurring closing costs are items you pay time and again over the course of home ownership, such as property taxes and homeowner’s insurance.

Some of the items that appear here do not traditionally appear on a lender`s Good Faith Estimate and lenders are not required to show all of these items.

Mortgage Rates and Pricing

"What is your rate today?" prospective borrowers ask when they call up a mortgage lender shopping for rates. 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.

A Loan Officer`s Rate Sheet

Every morning a loan officer gets a rate sheet - or a number of them. Mortgage bankers get the rate sheet from their company. Mortgage brokers get rate sheets from a number of wholesale 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.

Below is a sample of one section of a rate sheet for thirty-year fixed rate loans.

Rate		Cost
.	.	.
6.250%		2.000
6.375%		1.500
6.500%		1.000
6.625%		0.500
6.750%		0.000
6.875%		(.500)
7.000%		(1.000)
7.125%		(1.500)
7.250%		(1.875)
7.375%		(2.125)
7.500%		(2.375)
The rate sheet shows the interest rate and the "cost" to the loan officer, expressed in "points." One point is equal to one percent of the loan. Pricing the Loan Different rates have different costs. Higher rates don`t cost as much as lower rates. This is because the lender is going to earn more in interest over the life of the loan, so it makes sense to charge less. Conversely, it makes sense to charge more for a lower interest rate, because the lender will earn less interest over the long term. Zero points is called "par" pricing. Numbers in parentheses indicate "premium" or "rebate" pricing, meaning that instead of having a "cost," money is actually paid back to the loan officer and the branch for originating a loan at that rate. Almost all loan officers are paid on commission. The amount earned by the loan officer and the branch is subject to a "split" -- just like real estate agents. Part of it goes to the loan officer and part goes to the branch. Any fees that are not part of the points go to the branch (or company) and are not subject to the split. Quoting Rates to You Before quoting you an interest rate, the loan officer will add on how much he and his branch want to earn. The branch or company sets a policy on how little that can be (the minimum amount the loan officer adds on to his cost) but does not want to overcharge borrowers either (so they set a maximum the loan officer can charge) Between that minimum and maximum, the loan officer has a great deal of flexibility. For example, say the loan officer decides he and his branch are going to earn one point. When you call and ask for a rate quote, he will add one point to the cost of the loan and quote you that rate. According to the rate sheet above, seven percent will cost you zero points. Six and three-quarters percent will cost you one point. In our example, at 7.125% the loan officer and branch would earn one point and have some money left over. This could be used to pay some of the fees (processing, documents, etc), which is how you get a "no fees -no points" mortgage. You just pay a higher interest rate. copyright 2002 by Terry Light and RealEstate ABC

Mortgage Rates and Pricing

Shopping for Rates

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 and lock-in periods, 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.

That isn`t shopping for interest rates.

When you call a lender to shop for rates, you have to know at least two things: how many points you want to pay and how long you want to lock in the rate. You don`t have to really intend to lock in the rate, but you have to give them all the same parameters so that you get meaningful quotes. You also have to get your quotes all on the same day.

By the way, you can`t trust ads in the newspaper, on the radio or on television. Ads are generally placed at least a day in advance. Since rates change every day, ad quotes aren`t reliable.

Is the Quote Reliable?

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.