Frequently Asked Questions:
What is a Mortgage Broker?
In the simplest definition, a mortgage broker is a lender that does everything a bank would do with respect to originating a mortgage except underwrite and fund the loan. The Lender that the broker sells the loan to is the lender who gives the borrower the approval and the money for the mortgage.
Well, then why should I choose a mortgage broker over a bank? Some of the answers why over 50% of all loans today in the United States (20% in 1985) are originated through mortgage brokers are listed below: A mortgage broker’s overhead is usually lower than a bank; therefore you may receive lower rates or lower fees than a bank. Mortgage brokers do not usually have high priced presidents and attorneys that banks have thus they don’t require the profit margin in a loan that a bank requires. There are a lot of different mortgage programs out there for consumers to choose from. A broker deals with numerous Lenders (banks, mortgage bankers, etc.). Because a mortgage broker has access to these programs and a bank usually only has access to what their bank offers you have many more options with a mortgage broker. A mortgage broker is a specialist. Mortgage brokers spend all their time concentrating on mortgage loans. A loan officer at a bank may work on mortgage loans, car loans, consumer loans, checking accounts etc. The average mortgage broker is usually more educated with respect to loans than the average bank loan officer. The loan officers at a mortgage broker are usually the best in their field. Loan officers through mortgage brokers work on commission and do not get paid unless the customer gets their loan. Loan officers at banks are salaried and usually salaried at a low amount. The good loan officers at banks usually leave to go work for a mortgage broker. Any bank at any one time may have good rates. This is called supply and demand. When a bank needs loans to fund their portfolio they improve their pricing (lower rates). When they have had their fill they decrease their pricing (raise rates). A mortgage broker has entered into contracts with numerous banks, therefore when a certain bank raises their rates a mortgage broker has another bank to choose from. Also, sometimes the banks with the best rates are out of state, a mortgage broker has access to these lenders where banks usually do not.
Why should I obtain my mortgage from Best Mortgage?
Best Mortgage specializes in helping home buyers and home owners identify the most cost-effective low-risk ways to finance and refinance homes. We get our compensation in the most professional, ethical way possible. Our income is derived from offering exemplary service and only when your purchase or refinance transaction is closed. We do not represent only one bank therefore we are not locked in to offerng the interest rates or programs of just one lender. Best Mortgage will accept credit customers ranging from "A" through "D". We also accept high debt ratios and hard to qualify income situations. For a FREE PRE-APROVED home loan with no nonsense anwers to your loan questions please contact one of our loan professionals.
What is the Nessesary Documentation For A Loan?
ALL LOAN APPLICATIONS Copy of your Purchase Contract, signed by all buyers and sellers (for purchase transactions). Original pay stub(s) covering the last 30 days, for all applicants (e.g., if you are paid twice per month, you would need to bring two pay stubs - continue to save your pay stubs until you close your loan). Original W-2 forms for the last two years, for each applicant. Name, address and phone number of landlord for the last 24 months, if you are currently renting or have rented in the past 24 months. Original 401K and IRA statements (if applicable). Original investment and deposit account statements for the past threee months, if applicable (e.g., mutual fund, checking and savings accounts). A Check in the amount of $325 for payment of the application deposit (funds necessary to order appraisal and credit report). Hazard Insurance Verification (Insurance policy must provide coverage in an amount equal to your loan amount and earthquake coverage). Real Estate Tax Information (A copy of your most recent City & County real estate tax statements).
IF YOU ARE SELF-EMPLOYED OR HAVE COMMISSION INCOME Copies of your last two years personal and business federal signed income tax returns (Please sign in "Blue Ink"). Year-to-date Profit and Losss Statement and Balance Sheet (self-employed only).
IF YOU HAVE BEEN DIVORCED
Complete signed copy of all divorce degrees, including any stipuations or modifications. Proof of receipt of child support payments for the last 24 months (only if you intend to use this income to qualify for your mortgage loan). Proof that child support payments are current if you are required to pay child support.
IF YOU HAVE DECLARED BANKRUPTCY IN THE LAST 7 YEARS
Copy of Petition/Decrees, Schedule o Creditors and copy of Discharge. Please write a letter of expanations on why you filed for banckruptcy.
If during the past two years you have a gap in your employment of 30 days or more, please include a letter explaining the reason for the gap in employment. If you are selling a present home, you will need to provide us with a copy of your signed HUD-1 Settlement Statement showing the amount of proceeds (if sale of you home is not complete, please provide us with your Realtor's "Estimate of Proceeds"). If you are relocated by your employer, please provide us with your company's relocation policy. If you have rental property we will need a copy of your current lease and copies of your last two years signed federal tax returns.
Why do interest rates go up and down all the time?
Because lenders pool mortgages into securities and then sell them in "the secondary market" where they are competing with other world-wide investment opportunities. These securities act similiar to corporate and treasury bonds and any inflationary news translates into smaller values for fixed-rate securities and necessitates a rise in mortgage interest rates. People in the mortgage business and borrowers hope for poor economic news which translates into little or no inflation and low mortgage interest rates.
What will the Lender look at when approving my Loan?
When underwriting a loan the lender is looking at three things:
Credit. Credit has to do with your past payment history as shown on your credit report. Generally a lender is looking for a minimum of 12 months of "on time" payments. Although, any derogatory marks will need to be explained.
Collateral. Collateral has to do with Loan-to-Value ratio's. An LTV ratio is simply your loan amount divided by the value of your property. The lower the LTV the better from a lenders perspective. Purchases on primary residences will have LTV's which are higher than re-finances, second homes, and investment properties. Depending on your situation you may be able to obtain a mortgage with as little as 0% . However, any LTV greater than 80% will require Private Mortgage Insurance. and, Capacity.
Capacity has to do with your ability to repay your obligations. This is generally measured by two ratios. The first ratio measures your ability to repay your housing related debt. It is calculated by taking your total mortgage payment, including taxes and insurance, and dividing by your gross (before tax) monthly income. Generally, this ratio should be 28% or less. The second ratio measures your ability to repay your total monthly debt. It is calculated by taking your total monthly fixed debts and dividing by your gross monthly income. This ratio should be no more than 33%.
Note: Although these are the standards for the industry, strengths in one catagory may offset weaknesses in other catagories.
What is a FICO Score? And Why does it matter?
A FICO score is a numeric representation of your credit profile. The higher the FICO score the better credit risk you are. FICO is a product of Fair, Isaac Company. They are based on years of computer modeling aimed at predicting who might be a credit risk. Their purpose is to reduce the cost of examining a credit report and speed mortgage approvals. The important negative factors are: bankruptcies, delinquencies, credit lates, collections, too many "tapped out" credit lines, "too much" credit, too little credit history. It will become more important than ever to keep a good or perfect credit history.
If you hear of two products,Loan Prospector or Desktop Underwriter, these are nothing more than Automated Underwriting Systems created by Freddie Mac and Fannie Mae to speed up your approval process. If a lender runs your loan through one of these systems they will have a loan decision in about 24 hours. Downpayment You can purchase a home with as little as 5% downpayment and there are special cases where 0% down is sufficient. If your downpayment is less than 20% of the purchase price, or 20% of the appraisal for a refinance you will need Private Insurance (PMI). The downpayment must be well-documented. That is, you must show, for example, bank statements proving that you have had the money for at least 2 months. If the source of the downpayment is a gift from a relative you will need: a "gift letter" statements from the accounts of the gift-giver showing that they have had it for at least 2 months. a copy of the check from them to you and a copy of the deposit slip showing it going into your account. The purpose of all this is to make sure that the downpayment is not a loan and most especially not coming from the seller.
Private Mortgage Insurance Private Mortgage Insurance (PMI) is needed on all loans where the loan-to-value (the loan amount divided by the value of the property) exceeds 80%. (There are some examples of "self-insured" loans where the rate is increased and there is no formal PMI but you pay one way or another.) The mortgage insurance premium depends on the loan-to-value ratio. It is 4-tiered: 80.01%-85.00%, 85.01% to 90.00%, 90.01% to 95.00% and 95.01% to 100% each step costing more. The mortgage insurance also depends on the loan amount and the type of loan. Adjustable rate loans have higher premiums than fixed rate loans. At the present time you can choose between monthly and annual premiums. The PMI is given by a different party than the lender. Your lender will send a copy of your loan application package to the MI company for their approval. Among the loan documents you will sign at closing is a PMI agreement. Your lender will collect the PMI payment along with your principle and interest. It is usual that when your loan-to-value equals or exceeds 80% your property tax is also collected. PMI policies usually have "escape" clauses describing under what conditions you can stop paying PMI. It is necessary that you read the PMI policy to determine this. Make no assumptions.
Prequalifying is a process whereby a loan officer takes information about you, either ver the telephone or face-to-face and indicates how big a loan of a particular type you will qualify for. The lender would then give you a "prequalification letter" which is of considerable value in dealing with a Realtor or a potential seller. Realtors and sellers are interested in dealing with people whom they know to be able to get the loan necessary to close the deal. Most lenders prefer to get the income and asset information from you, get a loan application and prequalifying credit report and then write the letter. Preapproval Preapproval is a step beyond prequalifying. In a preapproval you are actually approved for an amount and for a certain type of loan. The preapproval is contingent you finding or making an offer on a property. With a preapproval you can close the loan faster and often will find your offer more acceptable to the seller. Sometimes sellers are anxious and will take somewhat less in price from someone who can close quickly.
Rate Locks The interest rate on your loan is not set until your lender confirms your rate lock. Your loan must close before the "lock expiration" date or you can lose your rate lock. You can lock your rate before your loan is approved, you can even lock your rate before your loan is submitted. In general, you can get a 45 day rate lock for an extra 0.125 in rate or 0.5 points in cost. It must be noted that the cost for extended locks can vary significantly with the volatility of the market. When rates are volatile long term locks are more expensive.
Is my loan going to get sold?
You should assume that your loan will be sold. The "servicing" on your loan is a marketable security and your lender can sell your servicing. The good news is that this tends to keep interest rates low. The annoying thing is that your loan may get sold a couple of times in the first year and you have to keep track of whom you have to pay. This is an inconvenience, particularly since they may be in another state and time zone. But it is an inconvenience that we all put up with for the sake of lower rates. As part of the loan documents you will be asked to sign a form granting recognition to the fact that your loan may be sold. You will also be provided with a form from the lender indication what percentage of their loans have been resold in recent years. Keep in mind that there is a Federal regulation which gives you the ability to make payments to your old lender for a period of time after your loan is sold. This will protect you from having your payment reported as "late" if you send it to the old lender soon after it is sold. Protect your rights in this regard.