Full Loan Processing for Buyers

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What You Should Know When Shopping for a Mortgage

Housing may be a necessity, but real estate is certainly an investment. In fact, it’s the investment of choice for many. In a recent survey, “Bankrate.com” discovered that 25% of the “Financial Security Index Survey” respondents answered “Real Estate” to the question: “Which would be the best way to invest money you wouldn’t need for more than 10 years?”

Investment choices

For most people, their home is the single largest investment that they’ll make –and it’s worth spending some time to make sure that investment is financed using the best loan possible.

Sadly, though, nearly half of all mortgage buyers don’t end up shopping for a mortgage first. This is unfortunate since shopping around can lead to a far better loan; savings that could add up significantly over time. For example, finding a lender that could give you even a 1% lower interest rate can easily represent a savings of thousands of dollars –per year.

Shopping for a mortgage

Sometimes, seemingly small things can make a big difference over the long haul. Here is a great article on just how interest rate can influence your buying power by Ellen Pitts

For homebuyers and investors alike, it’s important to obtain a favorable loan in order to get ahead. Much like buying a home below market value is something that savvy investors look for; the terms of the loan will also have a big impact on your investment.

To help make the process a bit easier, we’re going to walk you through the process, showing you how to shop for a mortgage.

What You Should Know: The Consumer Financial Protection Bureau

While shopping for a mortgage may sound confusing and overwhelming, the process itself is relatively straightforward.

The Consumer Financial Protection Bureau (CPFB) has simplified the entire disclosure process in order protect consumers from predatory lenders. This means that rules are in place to help protect mortgage buyers. For example, mortgage brokers (but not lenders) must charge the same percentage on every deal, meaning they can’t just increase their margin “just because.” Other rules include the Ability-to-Repay (ATR) rule that requires lenders to make a reasonable, good-faith determination that prospective borrowers have the ability to repay their loans. These rules, and more help to provide strong protections for homeowners and are designed to help prevent risky lending practices which were common before the financial crash of 07/08.

With this in mind, there’s a lot that you can do, as a buyer, to find a loan that’s favorable. Let’s take a look at some steps that you’ll want to take when shopping for a loan.

Get Pre-Qualified

It’s an all-too-common scenario. A home buyer walks into a Realtor’s office to discuss buying a home. The buyer’s excited, and has been looking at properties online, and has a list of homes that they want to see. Unfortunately, though, the buyer hasn’t talked to a lender and hasn’t been prequalified. Sadly, it turns out that they can’t afford any of the homes that they were looking at. This is unfortunate and can be extremely disheartening.

To prevent this from happening, it’s a good idea to try to pre-qualify for a loan, before you start shopping. At Springs Homes, we do pre-qualification with home buyers as the first step in the home buying process. In order to pre-qualify, you’ll want to meet with a couple of lenders. You’ll give them some basic information about your current financial situation, including your credit score, wages, and the amount of money that you have for a down payment.

The goal at this stage is to see if you qualify for a loan, and if so, what terms you qualify for: how much can you borrow, and what type of loan you’ll be eligible for –such as a conventional loan, an FHA loan –a first-time homebuyer’s loan with a low-interest rate, or a VA loan.

Before you go, you’ll want to check your credit score. This will help lenders to see where you stand and will give you an idea about whether you should move forward with the mortgage lending process, or whether it may be better to wait a few months and work to improve your credit score. If you’re worried that asking for your credit score will hurt your credit, don’t be –you’re entitled to a free credit report every year. Generally, a score that’s lower than 760 can negatively impact the loan that you qualify for, and you may be required to pay a higher interest rate or pay a fee to keep the rate down.

Once you’ve taken a look at your credit score, you’ll know whether to move forward. If you proceed with the pre-qualification, you’ll want to ask your lender for a fee worksheet. This is a breakdown of the fees that they’ll be charging you, such as an origination fee and interest rate; as well as some costs that will be out of the lender’s control, including taxes and insurance. While the lender isn’t required to give you this, their refusal should certainly be a red flag and may indicate that you’ll want to shop elsewhere or go with a company that’s more transparent about their costs.

If your credit score is a bit lackluster, there are a few things you can do to bring your rating up.

Tips for Improving Your Credit:

  • Get a credit card –and make payments on time
  • Bring any past-due accounts current
  • Pay bills on time
  • Consider consolidating any credit card debt by moving it onto a card with a low-interest rate
  • Correct credit report errors
  • Become an authorized user on someone else’s card
  • Set up accounts with automatic payments
  • Try to maintain credit card balances that are lower than 30 percent of your credit limit

Start Home Shopping

Once you’re prequalified, you’ll have a much better idea about the type of properties that are within your price range. When shopping for a home, it’s generally a good idea to start out looking at properties that are on the low to mid-range of what you can afford, and then slowly raise the bar until you find a place that you’re happy with. You’ll also want to keep location in mind when searching. It’s one of the most important criteria for most people. Since it’s important to be near work, schools, and other places –it’ll be a key factor when making your decision. Plus, it’s one thing that can’t be changed unless you move again. You could always upgrade the kitchen at a later date, but location is something that’s a bit more difficult to change.

Full Loan Application

You’ve found a house, written an offer, and the offer has been accepted. Congratulations! This is an exciting stage of the home buying process.

Once you’ve reached this stage, you’ll want to send a copy of the contract to any lenders that you’re still considering after the pre-qualification process. You’ll also need to make a full loan application with any lender that you want to obtain a true estimate from.

What Is a Loan Estimate? Obtaining a Loan Estimate

The Loan Estimate form is a three-page document that lenders are required by law to give you after you apply for a loan. This form helps borrowers to understand the full cost of the mortgage, including fees and interest. It’s an easy way to compare mortgage options and can help you to discover which lender is offering the best loan.

Since October 3, 2015, the Loan Estimate has replaced the good faith estimate and the Truth in Lending Disclosure –except in the case of “Reverse Mortgages.”

The new form is set up to be simpler, and to eliminate any kind of closing table or last-minute bait and switch, thereby protecting uninitiated consumers. For an excellent detailed line by line description of the Loan Estimate Form, have a look at The Consumer Financial Protection Bureau’s website.

The Loan Estimate must be given to the borrower within three business days of loan application.

To submit an application all that is required is:

  • Your name
  • Your income
  • The property address
  • An estimate of the value of the property
  • The desired loan amount

Note: Your loan officer cannot require you to provide documents verifying this information before providing you with a Loan Estimate.

You’re not required to provide written documentation to obtain a Loan Estimate, and the only fee that can be charged is a small upfront fee for pulling your credit report, usually no more than $20.

Comparing Loan Estimates

It makes financial sense to shop around for the lowest interest rate that you qualify for –and the loan with the most favorable conditions. Fortunately, Loan Estimate forms make it easy to compare lenders.

Once you’ve obtained your Loan Estimates, you’ll want to take the time to look at what different lenders are offering. Comparing Loan Estimates is an important part of the home-buying process, and the best way to shop around for a mortgage.

The two areas that you’ll want to pay special attention to are origination fees and the interest rate. You can also look at things like prepayment penalties, what a late payment will cost you, and whether the lender intends to process your loan or sell it –if this matters to you. You’ll also want to check to see if there’s a balloon payment –a large one-time payment at the end of the loan term. Make sure you take the time to look at these different terms and conditions. The last thing you’d want is any surprises after closing.

You’ll also want to ensure that the monthly payments match your expectations and that you’ll have enough funds to pay your estimated cash to close.

If you find anything that you’re not sure about or if you have any questions, be sure to talk to the lender. They’ll be able to answer any questions you have.

Note: Make sure you compare the total dollar amounts if you’re looking at different-length terms. For example, a 15-year mortgage will have a higher interest rate, but will cost less in the long run because you’ll pay off the debt 15 years earlier.

Finally, keep in mind that while a loan is a commodity, the lender is not. An inexperienced or unprofessional lender can cost you hundreds if not thousands of dollars. For instance, missed closing dates, or neglecting to lock in an interest rate could all cost you significantly. Before you go with a lender, take the time to ensure that they’re experienced and reputable. Talk with people that you know to see if they have anyone they recommend, and research potential lenders online to see what people are saying.

Remember: the right loan can have a significant impact on your investment –so it’s worth taking some time to get this right. By shopping around, you can increase your chances of securing a lower interest rate, so do your research and find a lender that’s right for you.

Additional Resources for Shopping for a Mortgage:

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Understanding Loan Commitment

The loan commitment is the beginning of the final stage in the home mortgage financing process. It is the lender’s conditional promise to offer a mortgage loan to a specific buyer for a specific property.

Two conditions must be met before a loan commitment can become a full approval:

Condition #1: The property must meet the standards of the lender in terms of value and condition. Lenders need to be sure the property is a reasonably sound investment because they could acquire the property if the buyer were to default on the loan.
Condition #2: The buyer’s finances must meet the standards of the lender. The lender needs to evaluate the buyer’s ability to repay the loan.This typically means confirming that the buyer’s financial situation has not changed since the pre-approval was granted. For example:

  • Major purchases, especially those that increase the buyer’s total debt, negatively impact the buyer’s ability to repay the loan.
  • Missing a payment negatively impacts the buyer’s creditworthiness.
  • A change in income, perhaps because of a change in employment, alters the buyer’s original debt to income ratios.

Both Realtors and lenders will advise home buyers to avoid making any major purchases, job changes or late payments in between the time they make loan application and close on a house. Unfortunately, buyers often underestimate the seriousness of this warning. They see loan commitment as a green light to move on with their lives and go out and make purchases to prepare for that new life. This can leave them with a bunch of new stuff and no place to keep it.

The loan commitment is not some legally binding guarantee of a mortgage. It’s simply a signal from the lender to all parties in the transaction that the deal is on track and can proceed to the final stage of the mortgage process as planned. This is a reassurance to the seller who has taken their home off the market (and off the radar of other potential buyers) in anticipation of closing this sale. It is also helpful to the Realtors® who are investing time and energy into closing the transaction smoothly.

The loan commitment comes in the form of a letter. This letter outlines:

  • The type of mortgage being obtained
  • The amount of money being borrowed
  • The terms or length of the repayment period
  • The agreed-upon interest rate

Here is a Sample Loan Commitment Letter:

Attention:

[Real Estate Agent]
[Real Estate Company]RE:
[Client Name]
[Subject Property]

This letter is to inform you that I have reviewed:

  • Borrower’s income, credit & asset documentation
  • Loan amount
  • Interest rate
  • Loan type

Based on my assessment of these items, [Client Name] has been approved for a [Type of Home Loan] to purchase the subject property at the offer price of [$$$,000] and terms listed in the purchase contract.
Please note this approval is subject to the following conditions:

  • Fully executed sales contract
  • Acceptable appraisal meeting or exceeding sales price
  • Acceptable title insurance
  • Acceptable home owner’s insurance coverage
  • Verification of all information supplied at the time of application.

I am looking forward to working with you towards the successful close of this transaction. You can trust that my team will keep you informed every step of the way.

If you have any questions or need additional information, please feel free to contact me.

Sincerely,
The Buyer’s Lender

[Today’s Date]

The Difference Between Pre-Qualification, Pre-Approval, and Loan Commitment

Many buyers are confused by the loan qualification process. The terms “pre-qualification”, “pre-approval”, and “loan commitment” all sound like they might mean the same thing. But they are, in fact, all different stages of the mortgage approval process. Buyers should progress through each stage in order.

Stage 1: Pre-Qualification

Pre-qualification simply provides a guideline for how much money buyers can afford to spend on a home, given their financial situation. Buyers can get pre-qualified online in minutes. Because pre-qualification is helpful in determining a housing budget, buyers should get pre-qualified before they even begin looking at homes. This will ensure that they are looking in the correct price range.

For more information on pre-qualification, visit our Mortgage Pre-Qualification Guide.

Stage 2: Pre-Approval

Pre-approval goes a step further; it looks at the buyers’ creditworthiness and the likelihood that they will repay the loan.

Pre-approval requires a credit check by a lender.

This stage should be completed before making an offer on a house. Offers from pre-approved buyers are stronger than offers from buyers who are only pre-qualified. Pre-approval demonstrates to the seller that the buyer is serious and most likely will be able to obtain financing to close the deal. Again, sellers do not want to take their house off the market unless they are fairly certain the transaction will be completed.

If you’d like more information on pre-approval, read our article, What is the Difference Between Pre-Qualification and Pre-Approval?

Stage 3: Loan Commitment

Once the buyer’s offer on a home is accepted by the seller, the buyer can request loan estimates from multiple lenders to find the lender offering the best terms.

And once a lender has been selected, the lender will review the file and provide a loan commitment letter confirming their intention to provide funding for the purchase, as long as both the property and the buyer’s financials meet the lender’s criteria.

You’ll notice that, unlike the pre-qualification and pre-approval, which each evaluate only the buyer, the loan commitment conditions require an evaluation of both the buyer and their chosen property.

To satisfy the condition relating to the buyer’s financials, the buyer must provide up-to-date documentation of their financial position, source(s) of income, and creditworthiness.

To satisfy the condition relating to the property, the property must appraise for the purchase price (or greater) and may need to pass a physical inspection.

 

Path to Loan Commitment

The Buying Process Leading Up to the Loan Commitment

To clarify how the pre-qualification, pre-approval, and loan commitment all fit into the big picture, here is a look at the steps in the buying process leading up to the loan commitment:

  1. Buyers obtain pre-qualification so they know what price ranges to consider.
  2. Buyers start house-hunting.
  3. Buyers obtain pre-approval from a lender so they will able to make a strong offer on a house when the time comes.
  4. Buyers make an offer on a house (accompanied by the pre-approval letter).
  5. The offer is accepted, creating a purchase contract. The contract will outline dates and deadlines for contingencies, including a finance contingency for the buyer to obtain a home loan.
  6. The buyer sends the contract to all lenders they are considering for the home loan.
    Within three days, each of the lenders to which the buyers applied will provide a loan estimate.
  7. The buyers evaluate the loan estimates and choose the lender offering the best loan option for their situation.

From this point, the chosen lender can provide the Loan Commitment Letter and move the transaction into the final stage of the financing process.

The Final Stage of the Financing Process

To reiterate, the loan commitment is conditional, so the loan commitment letter does not constitute official approval of the loan. Official approval can only be granted after the two conditions are met.

This final stage of the financing process includes evaluations to satisfy those two conditions:

    • The buyer’s financials and creditworthiness will be thoroughly reviewed and documented.
    • The chosen property will be appraised and its condition will be assessed.

Evaluating the Buyer

You’ll recall that buyers have already been pre-qualified and pre-approved by this point. But now is the time the lender will really scrutinize the buyer’s financials, credit, and source of income.

Buyers will need to provide complete documentation to confirm that they are financially stable and likely able to accept this new debt in addition to their existing debt payments and other living expenses. Buyers will need to provide their most recent financial documents to show that their financial position has not changed since their pre-approval.

This typically includes:

  • account statements for all checking, saving, and investment accounts
  • loan statements for any other current real estate owned by the buyer
  • paycheck stubs showing year-to-date earnings
  • most recent W-2 or I-9 tax forms
  • statements for any new debts not yet listed on the credit report

The lender will also contact the buyer’s employer multiple time throughout the course of the loan application process to confirm that the buyer is still employed in good standing.

Condition of Loan Commitment

Failing to Meet the Buyer Condition of the Loan Commitment

It is possible for the buyer to fail to meet the condition of the loan commitment, whereby losing their loan commitment and even their pre-approval.

Lenders are looking for financially stable borrowers. And any disruption in a buyer’s finances during the loan application process can return the process to square one. Examples of behavior that could result in a revocation of the loan commitment and pre-approval include:

  • Employment changes (a reduction in hours, a lay-off, or even accepting a new job)
  • Late or missed payments on any debt, bill, or even rent
  • Applying for another loan (perhaps an auto or a business loan)
  • Legal issues, including marriage and divorce
  • Closing a credit card account or settling an old debt (both of which alter your credit score)
  • Making a large deposit or taking a large withdrawal (which will make the lender question where your money comes from and where it goes)

As a general rule, buyers should avoid doing anything that might change their financial position from the time pre-approval is granted until the close of escrow.

Massachusetts Realtor Bill Gassett has a great article that explains 14 things a home buyer can do to inadvertently get a mortgage pre-approval revoked.

Evaluating the Property

Evaluation of the property always includes an appraisal and often includes an inspection of the physical condition of the property.

The Appraisal

The lender will order an appraisal, to be paid for by the buyer, and a licensed appraiser will assess the chosen property. The appraiser’s assessment compares the chosen property to similar properties in the area that have recently sold, which allows the appraiser to determine the value of the chosen property under current market conditions. For more information on the appraisal process, check out What You Need to Know About Appraisals.

The property’s appraised value must be greater than, or equal to, the contracted purchase price to meet the condition of the loan commitment. This is mainly to protect the lender from loaning money on a property that doesn’t provide enough collateral for its loan.

Appraisers have also started to require inspections, or even repairs, of items that materially affect the value of the home (like the roof, heating and cooling systems, or electrical work).

The Physical Condition

The physical condition of the property itself may also be considered during the property evaluation.

The standards for the physical condition of the property depend heavily on the type of loan for which the buyer has applied. This is because many home loans are packaged by type and sold on the secondary market to investors. Government-backed loans, such as FHA and VA loans, will have more stringent requirements than standard conventional loans. Learn more by reading Everything You Need to Know About Mortgages.

Regardless of loan type, the lender needs to factor in any health and safety issues including lead paint, water intrusion, and potential electrical hazards. Lenders are also concerned about any issues that could potentially damage the structure. Cracks in the foundation, termite infestations and defects in construction could all disqualify a property.

If material defects are identified, they may need to be repaired to satisfy the condition of the loan commitment. Afterward, the Appraiser may need to review any repairs or replacements and update the appraisal accordingly.

It should also be noted that not all home loans will cover all residential property types. For example, it can be difficult for manufactured homes (often called mobile homes) to qualify for a VA loan.

Failing to Meet the Property Condition of the Loan Commitment

It is possible for the property to fail to meet the condition of the loan commitment and to cause the buyer to lose their loan commitment.

The most common reasons properties fail to meet the conditions of the loan commitment include:

  • Appraising for a value under the agreed-upon purchase price
  • Existing health or safety issues
  • Structural concerns
  • A mismatch of the loan type with the property type

Final Approval of the Home Loan

Final approval for a home loan can be given only after the two conditions of the loan commitment are satisfied. This is the very last step of the home mortgage financing process and typically occurs immediately before the close of escrow.

Until then, buyers should remain exceedingly careful with their finances to ensure a smooth transition from pre-qualification, through pre-approval, through the loan commitment, and finally, to full approval of their loan.

Additional Resources:

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Good Faith Estimates

In previous articles, we discussed loan pre-approval and pre-qualification, which occur when a borrower makes a loan application. The big takeaway from this process will ultimately be a “Good Faith Estimate” or (GFE). This is a form that details the basic information about the terms of the loan for which you have applied as well as a breakdown of the estimated costs associated with acquiring that loan.

The Good Faith Estimate is a requirement of the Real Estate Settlement Procedures Act (RESPA). The idea behind the GFE is to give the borrower a way to compare costs between lenders. The lender is required to provide you with a GFE within three business days of completing the loan application.

There is a catch though, in order to have a completed loan application, the lender needs a property address. Since you are in the pre-approval stage, you probably won’t have a property address yet. In this case, you can get something from the lender called a “fee sheet” this is a cost breakdown, similar to the GFE. The fee sheet is essentially a rough draft of the Good Faith Estimate. Fee sheets are an easier way to comparison shop without a specific property address.

Once you do have a property under contract, make sure the lender provides you with a “Good Faith Estimate” within 3 days of application. It’s a good idea to share the Good Faith Estimate with your Realtor, they should be able to explain what the fees are for and which ones are appropriate.

Understanding Clouded Titles

Understanding Clouded Titles

When you buy a house you certainly don’t want to inherit someone else’s debts or legal problems. This is one reason for a Title Insurance policy. Title Insurance protects or insures that you have “Clear Title” to your property. Clear Title means that there are no liens, claims, judgments or problems with the title. The aim is to define the undisputed owner of the property. If you are buying the property, we want that to be, you!

What is a Clouded Title?

When the title to a property is not “Clear” we refer to it as “Clouded”. Title clouds hurt both the value as well as the marketability of a property. Clouds could include the following:

  • Mechanic’s lien-These are lien rights given to contractors. This is used for the purpose of securing the payment for work performed.
  • Homeowner’s Association Assessment Lien- For HOA fees and/or violations.
  • Federal or State Tax Lien
  • Judgement Lien- These liens are generally created when someone wins a lawsuit against you and then records that judgment against your property.
  • Misspelled property’s address on a deed that conveys title
  • A mortgage lien whose repayment hasn’t been officially recorded
  • Deed which has been signed but was not properly recorded
  • Easement that has not been properly recorded
  • Unpaid property taxes
  • Failure to transfer property rights (mineral rights, etc.) to the appropriate owner.
  • Pending lawsuits (lis pendens) over ownership rights to the property.

How to Clear a Clouded Title

Clouds on title can be resolved in a couple of different ways. The most common method is by initiating a quit-claim deed. Once the lien holder has proof that the lien has been satisfied, they would sign the quitclaim deed. This releases any interest the lien holder has in the property.

The second and more complicated method is through the commencement of the action to quiet title. This is an actual lawsuit that determines the validity of any challenges or claims to the title of a property. The outcome would “quiet” any claims and/or challenges to the title.

Why Getting Clear Title is Important

It is certainly best to take care of these issues prior to putting a property on the market but unfortunately, this isn’t always possible. Homeowners are often surprised to find liens from subcontractors they have no knowledge of. Additionally, improperly recorded easements are often surprises that are discovered only upon a new survey or Improvement Location Certificate.

Title clouds are generally resolvable with the right knowledge and a little legwork. This is why the choice of a Title Company is essential during a real estate transaction. If you have any questions about “Clouded Titles” please give me a call.

What is a Clouded Title

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Everything You Need to Know About Mortgages

Over the last few years, 75-80% of American home buyers have required a mortgage to purchase their home. Yet most of us understand very little about the mortgage industry.

This is largely due to the fact that we, as borrowers, actually only see a small portion of the overall mortgage picture. Borrowers are involved in the pre-qualification and application process for a new loan, of course, but after the purchase closes, we simply make our monthly mortgage payments as scheduled, and give very little (if any!) thought to the evolution of our loan.

But it’s important for buyers to understand the basics of the bigger mortgage industry picture, especially how money flows in the mortgage world, where it comes from and where it goes.

Knowing how the money flows through the mortgage industry helps borrowers understand some of the quirks of home loan applications. You’ll be able to better tolerate the paperwork and the aggravation of applying for a mortgage if you can see why the paperwork and documentation are necessary for the lender to approve the loan.

Did you know that much of your mortgage payment could actually end up on Wall Street? For that reason, some of the loan origination paperwork is required specifically to protect investors. It may still be a hassle to provide months of financial documentation to finalize your loan, but it helps to know that there is a reason behind these requirements.

In this article we’ll look at the basics of the mortgage industry, primarily focusing on how the money flows through the mortgage world.

Three Tiers of Mortgage Lending

There are three tiers of mortgage lending: The Loan Origination, The middleman, and The Secondary Market.

The Loan Origination

The loan origination tier is the one most familiar to borrowers because it requires their direct involvement. Loan origination is the process by which a borrower applies for a new home loan, and the lender processes the borrower’s application. The loan origination tier is complete when the lender either declines the application or approves the application and disburses the funds. As a buyer, you can choose one of the four primary types of lenders to work with through the loan origination tier: Correspondent Lenders, Direct Lenders, Mortgage Brokers, and Portfolio Banks.

Correspondent Lenders

Correspondent lenders are smaller companies with some of their own money to lend to buyers. They may be on the small side, but there are many in operation. Correspondent lenders are like the “Mom and Pop Shops” of the mortgage world.

The strength of correspondent lenders lies in their service and their relationships in the community. Their originators or salespeople (aka loan officers) typically provide a personal level of service that larger lenders can’t match. And borrows often choose correspondent lenders based on personal relationships and trust. Good correspondent lenders receive lots of referral work from their satisfied customers in the local community.

But here’s where correspondent lending gets interesting: to make sure they have enough money to originate new loans to new buyers, correspondent lenders will sell most of their loans, through investors, to “mortgage aggregators” like Fannie Mae and Freddie Mac (more on Fannie and Freddie coming up!). This allows correspondent lenders to maintain a high level of liquidity, so they can have cash available to finance more loans.

Here’s an example of how correspondent lending works

Correspondent Lending

Who are Fannie Mae and Freddie Mac?

Fannie Mae and Freddie Mac are government entities that provide liquidity, stability, and affordability to the mortgage market. They exist to act as “mortgage aggregators”, which means they buy loan portfolios from loan originators to replenish the fund’s originators have available to re-loan. Fannie and Freddie may hold these portfolios as-is, or they may package them into “mortgage-backed securities” (MBSs) to sell on Wall Street.

This process serves two main purposes:

  1. It ensures that loan originators have a continuous, stable supply of money to lend to buyers, and
  2. It encourages investors to invest in MBSs by increasing the credibility of the investments through government involvement. Additional MBS investors provide more money to fund real estate loans so the cycle can repeat.

Because of this relatively complex system, correspondent lenders must be very cautious when approving home loans. If a loan was underwritten incorrectly, for example, the lender might be forced to buy it back from the secondary market, which would cut into the amount of money they would have available to originate new loans. So you can expect correspondent lenders to be thorough and ask for more than the minimum requirements during the home loan application process.

You may have noticed that the loans are sold back to Fannie Mae and Freddie Mac through an investor. Who are these investors? They’re typically big players in the mortgage industry (large enough organizations to have accounts with Fannie Mae and Freddie Mac). In fact, many of these investors are Direct Lenders, which is the next option in our list of the four primary types of lenders to work with through the loan origination tier.

Direct Lenders

Direct Lenders are the “Big Guns” of the mortgage industry. Think of the big banks like Chase and Wells Fargo.

Direct lenders will keep some of the loans they originate in-house as part of their portfolio, but they will sell off many of the loans to mortgage aggregators through investors, just like we saw with correspondent lenders.

In fact, direct lenders each have a division which functions as a correspondent lender in the origination tier. But they also each have a department that packages the loans and offers them for sale on the secondary market. Furthermore, they have their own money and underwriters.

Direct lenders process high volumes of loans, so they can often offer the lowest interest rates to borrowers.

One thing direct lenders don’t do is to help you compare interest rates and terms with other direct lenders. Borrowers need to apply with each direct lender individually to see the rates and terms for which they qualify with each direct lender.

This can be a time-consuming process for buyers as home loan applications can be lengthy, and the financial documentation required to officially approve a home loan can be excessive. But, as I mentioned, direct lenders can usually offer the lowest rates, and selecting the right direct lender could potentially save buyers tens of thousands of dollars in interest over the course of the loan.

Here’s an example of how direct lending works

How Direct Lending Works

Mortgage Brokers

For buyers who aren’t willing to invest the time applying to individual direct lenders, there are mortgage brokers. Mortgage brokers shop direct lenders to find you the best mortgage terms available for your unique circumstances.

Mortgage brokers don’t have their own money or their own underwriters; they simply act as a middleman to match borrowers with lenders. Mortgage brokers can compare wholesale mortgage rates from a large number of lenders at once to find the best options for buyers.

As a borrower, your mortgage broker will provide you with offers from various lenders, you can decide which lender you’re interested in dealing with, and your mortgage broker will present your file to the chosen lender and wait for approval. Mortgage brokers do a lot of the legwork for you, working on your behalf with the lender.

You should know that pricing with mortgage brokers can be just as competitive as with direct lenders. This just depends on how much compensation the broker needs to make on the deal.

Mortgage brokers are an especially good option for borrowers who have trouble qualifying for a mortgage from correspondent and direct lenders, or for borrowers who need to finance tricky deals. Brokers have insider knowledge of multiple lending partners, so they can find solutions to some complex qualification and financing issues.

Here’s an example of how a Mortgage Broker works

How a Broker Works

Portfolio Banks

Portfolio Banks are usually credit unions or savings and loan institutions. First Bank or BBVA Compass Bank are two portfolio banks in Colorado.

Unlike correspondent lenders and direct lenders, portfolio banks originate loans for their own portfolio; portfolio banks don’t originate loans to be sold into the secondary market.

Because the loans aren’t originated for sale on the secondary market, portfolio banks have much greater flexibility, which can seriously benefit borrowers. For instance, Portfolio Banks can:

  • Approve borrowers with fewer qualifications
  • Work with smaller down payments
  • Offer higher maximum loan limits
  • Waive requirements on property condition
  • Originate loans on multiple properties (even if the buyer already owns properties with existing mortgages).

There are four main types of portfolio loans: Balance Sheet Loans, Blanket Mortgages, Jumbo Loans, and Cash-Out Refinancing.

Balance Sheet Loans

A balance sheet loan is a loan that a lender keeps on its balance sheet (as opposed to selling the loan). Balance sheet loans don’t comply with Fannie Mae’s loan guidelines, or they may be otherwise unsuitable to sell in the secondary market. They typically have different regulations and requirements, making them comparatively flexible.

Blanket Mortgages

A blanket mortgage is a portfolio loan that finances two or more investment properties under a single mortgage. Blanket mortgages help investors buy, sell, and hold multiple investment properties at a given time.

Jumbo Loans

A jumbo portfolio loan is a portfolio loan that exceeds the maximum loan limits outlined by Fannie Mae.

Cash-Out Refinancing

A cash-out refinance is the act of refinancing an existing investment property with a new long-term loan in order to extract equity in the form of cash from the property. A cash-out refinance loan term is between 15 and 30 years.

The Middleman

After the loan origination tier, where loans are processed and funds are distributed, most loans are passed to the middleman tier.

In the middleman tier, loan originators sell loans to middlemen, who package them into large portfolios to be sold on the secondary market.

Who are these middlemen? In the simplest terms, middlemen are institutions with relationships to mortgage aggregators.

Middlemen are usually (but not always) direct lenders like Chase and Wells Fargo. This can be confusing because direct lenders also originate loans as mentioned previously. But because they are giant firms, they have separate departments available to handle loan originations functions and middleman functions.

There are strict guidelines for the loans that get packaged into portfolios. This is especially true when government agencies like Fannie Mae, Freddie Mac, and Ginnie Mae are involved. I’ve touched on Fannie Mae and Freddie Mac as mortgage aggregators. Ginnie Mae performs the same function as Fannie and Freddie, but specifically for government-guaranteed loans like VA and FHA loans.

Each individual loan’s file is reviewed by a dedicated auditor before the loan is added to a portfolio. If the file doesn’t meet all the guidelines, the originating lender is required to buy back the loan. The originating lender is then holding an “unsellable” loan, restricting their liquidity since their money is tied up in a loan that can’t be sold. This is why mortgage companies rigidly follow all the rules and meet all the requirements during the loan origination tier.

It’s important to note that, while middlemen sell these packaged loans on the secondary market, they retain the servicing of the individual loans (collecting payments, issuing account statements, etc.). This servicing provides another income stream for the middleman.

Now that the middlemen have packaged the loans into portfolios, we can move on to the final tier of mortgage lending: the secondary market.

The Secondary Market

The secondary market is where mortgage loan portfolios and servicing rights are bought and sold between four parties: Mortgage Originators, Mortgage Aggregators, Securities Dealers, and Investors.

Mortgage Originators

Mortgage Originators are the institutions introduced in our discussion of the loan origination tier (correspondent lenders, direct lenders, mortgage brokers, and portfolio banks). They work with borrowers to complete the mortgage application process and distribute the funds.

Mortgage Aggregators

Mortgage Aggregators are the groups that purchase the loan packages from the middlemen and securitize them into mortgage-backed securities (MBSs) I mentioned earlier. This includes Fannie Mae, Freddie Mac, and Ginnie Mae. Aggregators make their money by purchasing individual mortgages at lower prices and then selling the pooled MBSs at a higher premium.

Currently, Fannie Mae and Freddie Mac are both limited to purchasing loans of $424,100 or less. This figure is reevaluated every year to accommodate changes in real estate prices.

Once Fannie Mae, Freddie Mac, and Ginnie Mae have purchased the loans, they are converted into mortgage securities and bonds and offered as trading commodities. It’s interesting to note that, because Ginnie Mae handles government-guaranteed loans, their yield is generally higher than those of Fannie Mae or Freddie Mac.

Securities Dealers

Securities dealers are the Wall Street brokerage firms that offer MBSs on the stock market.

Investors

Investors are those who trade in MBSs. MBSs are a reasonably secure investment simply because people generally pay their mortgages unless there is some extenuating circumstance preventing them from doing so. So MBSs will always be in demand, and there will always be a market for them.

The U.S. government currently holds over a trillion dollars in U.S.-originated MBSs, but it started selling off some of its MBS holdings in 2017. Foreign governments, pension funds, insurance companies, banks, GSEs (Government-Sponsored Enterprises), and hedge funds all invest heavily in mortgages.

The Purpose of the Secondary Market

As I mentioned briefly in the introduction to Fannie Mae and Freddie Mac earlier in this article, the main purpose of the secondary mortgage market is to support originating lenders in lending more money to potential homeowners.

The secondary market serves this purpose by 1) buying the originated loans to provide a continuous, stable supply of money to lenders and 2) lending credibility to the MBSs as investments to encourage stock market investors to invest in MBS’s so more money can be available for lending.

Conclusion

Many buyers are confused and frustrated by the home loan application process and the requirements of mortgage lenders. But a peek behind the curtain at the additional tiers of mortgage lending helps to explain the reasoning behind the process and requirements in place.

Once you understand the flow of money within the mortgage world, and how your personal home loan is only one small piece of a much bigger picture, the strict qualification criteria and documentation requirements make more sense.

So when your loan officer asks you to provide months of bank statements, letters of explanation for the terms of your employment, or proof of residency from two addresses ago, remember that you’re doing it, not just for yourself and your new home, but for Fannie Mae and Freddie Mac and the strength of the American mortgage market.

Additional Resources:

  • Mortgage Overlays-Correspondent lenders are the lifeblood of the mortgage industry. Sometimes they get overly cautious about their ability to sell their loans into the secondary market. Luke Skar over at madisonmortgageguys.com explains what overlays are. Now that you understand where the money flows, I think you’ll find this interesting.
  • Should I go with a mortgage broker or a bank?– Conor MacEvilly over at MySeattleHomeSearch.com looks at the decision to use a Mortgage Broker or a Bank/Direct Lender. This is a more detailed look into the subject than we were able get to here and a great read.
  • Fourteen Ways to Get Your Mortgage Unapproved-Now that you understand the importance of the secondary mortgage market and just how much mortgage lenders depend on it. I think your love this article by Bill Gassett over at MaxRealEstateExposure.com. Bill looks at the classic things homebuyers can do to fumble the ball just before the cross the goal line.
  • Why Can’t I Get a Mortgage?– Kyle Hiscock from the RochesterRealEstateBlog.com looks at the top-5 reasons buyers can’t get a mortgage (hint, they all involve not being able to resell the loan into the “Secondary Mortgage Market).
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How Are Title Costs Determined?

The title insurance industry is unique in that regulation by the state serves as a natural check on profits. Rates by title companies are ultimately set in response to competition in the marketplace. However, if the competition does not lead to fair rates, the state steps in stating that rates cannot be “excessive, inadequate, or unfairly discriminatory”.

There are a number of things you can do to monitor the cost of your title insurance. Below are five steps you can take.

Do your research

Title insurance is a two-part transaction. The first part covers the property’s history to determine if there are any unpaid loans or liens. The second part insures you against future discoveries or problems with the property. Insurance companies are allowed to set their own rates, so it pays to spend some time comparing policies to make sure you get the best possible deal. Visit Home Closing 101 to find title insurance companies in Colorado Springs who are members of the American Land Title Association.

Ask about add-on fees

These may include mail and courier charges, copy fees and fees for searches and certificates. You have the right to ask a company to reduce or drop these fees.

Ask about a “reissue rate”

If your home has been refinanced or sold within the last 5 years, you may qualify for discounts up to 50%.

Ask about Endorsements

An endorsement is a rider attached to a Mortgage or an Owner policy to expand or limit the policy coverage. Attaching an endorsement to the policy adapts the coverage to meet the needs of the insured. Examples of common endorsements are: Condominium Endorsement, Mineral Endorsement, Encroachments on Easements, just to mention a few. By issuing an endorsement, the insurer may take on additional risk normally not covered under the policy. A premium is usually charged for issuing an endorsement.

Don’t rely on a single recommendation

Ask for two or three companies that your real estate agent recommends.

For a list of title insurance companies in Colorado and their fee schedules visit DORA or Colorado Department of Regulatory Agencies or Network Closing.

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How Do You Choose a Good Title Company?

When buying or selling your Colorado Springs home you most likely do the appropriate research before choosing your real estate agent, your lender, your moving company and others. But did you know that you also have the right to choose your title company? In other blog posts, we explained the importance of title insurance and how the costs are determined. So, it is critical to choose a reputable, experienced company to ensure that you have a smooth and hassle-free transaction.

Below are 9 questions you should ask when searching for a title company.

Is my Money Safe?

Make sure that the company has a fully staffed escrow and accounting department dedicated to protecting your funds. Ask for a written guarantee that the company does not disclose your personal information to anyone not involved in the transaction and find out if they carry fidelity coverage and errors and omission insurance.

Is the Title Company Financially Stable?

To make sure that the title underwriter is financially stable, check the Demotech website, which issues Financial Stability Ratings (FSRs) for title underwriters.

Is the Title Company a Neutral Third Party?

Some title companies are owned by lenders, real estate firms or builders which may cause a conflict of interest. Your Title Insurance company should be independent and unbiased to ensure that the transaction closes according to the terms of the contract, without any complications.

Is the Rate Quoted Much Lower than What Other Companies are Charging?

Below market premiums may indicate a lack of experience, subpar service or insufficient financial and accounting controls.

In Addition to the Premium, are there Other Fees and Charges?

Ask about fees for electronic delivery, overnight courier, cashier’s check, release tracking, wire transfers and other charges that may add up to be more than the amount charged by reputable title companies. 

Make sure you have all the associated fees in writing before signing any agreement.

Does the Title Company Conduct Thorough Title Searches and Report All Exceptions?

Title companies are required to perform a “reasonable examination” for every transaction, which includes providing you with actual documents for any exceptions (e.g. liens, unpaid taxes). Your title company must identify, disclose and resolve all issues prior to closing.

Is the Title Company Locally Owned and Operated?

Beware of a title company which outsources production of the title commitment and portions of the closing process overseas. A local company will be more knowledgeable about Colorado Springs real estate laws and customs as well as the local real estate market.

Are the Employees of the Title Company Licensed?

In Colorado, title underwriters, agent companies, and agents are licensed through the Colorado Division of Insurance. Any title company employee who provides rate information to the public must have a license. By Colorado law, salespeople, title examiners, and searchers must be licensed. The Division of Insurance also regulates activities and has the right to audit files, impose fines for improper actions, discipline agents and take other corrective action.

Is the Title Company a Member of the American Land Title Association (ALTA)?

The professional/lobbying organization for the title insurance industry is the American Land Title Association (ALTA). In 2007, ALTA launched the “The Title Industry Consumer Initiative” which details the association’s strategy for improving industry oversight and educating and protecting consumers. You can learn more about the Consumer Initiative on the ALTA Web site.

Thank you to Sara Martin of Land Title Guarantee Company for providing the above information.

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Why Do I Need Title Insurance?

Title insurance is just one of the many things that appear on your home buying settlement sheet, but it’s also one of the most important.

The Colorado Springs property you are buying has probably gone through several changes of ownership over the years (unless it’s new construction). One of the necessary procedures during the home buying process is a title search.

The search must be done before any property changes owners in Colorado so that the deed can be recorded and registered to the new homeowner. The search reviews the “chain of title”—the history of everybody who has owned the property through its present owners. What title insurance does is protect you against any expected discoveries that may arise during the title search. For example, there may be unpaid real estate taxes or mortgages, outstanding liens, or errors in the legal description of the property.

Title insurance guarantees that, if any issue in the ownership records arises during the search, the insurer will either fix the problem, compensate you for any potential loss or defend you against any action that may occur as a result. Title insurance protects you against matters that have already occurred and that were not caused by any wrongdoing on your part. It gives you peace of mind knowing that once the buying transaction is complete, you are protected against any claims on your property.

There are two basic forms of title insurance:

Owners’s Title Insurance – 
Owner’s title insurance covers you as owner of the property, and the policy is generally issued for the amount you paid to purchase the property.

Lender’s Title Insurance – Lender’s title Insurance covers your lender’s interests in the property and is usually issued in an amount equal to the loan. In Colorado Springs, the buyer and seller may negotiate who pays for the Owner’s title insurance policy. The buyer generally pays for the Lender’s title insurance policy.

Obama Directs FHA to Reduce Mortgage Insurance Premiums

On January 26th, the Federal Housing Administration reduced its mortgage insurance premiums by 50 points, from 1.35% to 0.85%. This was by executive order from President Obama. The cuts will help more than 800,000 homeowners save about $900 per year and existing homeowners who refinance will see similar savings.  The White House estimates that the lower premiums will enable up to 250,000 new buyers to purchase a home. FHA raised its mortgage insurance premiums as a result of the financial meltdown and foreclosure crisis. Now, home values are on the rise, jobs are improving and foreclosures have fallen to the lowest level since 2006. FHA will not need another bailout due to improving financial conditions. I’m hopeful that this will have a significant positive impact for many borrowers and the housing market.

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Homes for Sale in Colorado Springs, Colorado Springs Real Estate

Phone Number:

719.388.4000

Address:

Springs Homes
703 N. Tejon St. Suite E
Colorado Springs, CO 80903

Meet Springs Homes

There is nothing average about Springs Homes. Everything we do crackles with intention and intensity, because we believe that strategy always wins when employed by confident, knowledgeable and trustworthy agents.

We list and sell homes across the entire Pikes Peak region. Additionally, Springs Homes offers property management services. We work with a select few home builders in order to provide our clients with new construction options as well as resale opportunities.

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