FINANCING & MORTGAGES

By Markus Lehmann, Part 3

Mortgage Sources

When shopping for a home loan, borrowers will discover that there are several types of lenders and brokers, who engage in the origination of mortgage loans.

Most homebuyers probably don’t care who is holding their mortgage, but it is still good to know the different kinds of mortgagors, such as the institutional lender, lender and mortgage broker.

Savings and loan associations and mutual savings banks are depository institutions that mainly offer checking and saving accounts. They use their customer deposits to make loans.

Many of those institutions offer mortgage loans, which they either keep in their portfolio or sell for profit.

The employees, who are working for depository institutions with customers on mortgages, are usually called loan officers and don’t have to be licensed.

Commercial banks specialize in short term and business loans, but also offer mortgages for residential and commercial financing.

Most of the commercial banks are portfolio lenders, which means that they keep the mortgage in their own loan portfolios and are not very likely to sell the loan.

Employees, who are working for commercial banks with customers on mortgages, are usually called loan officers and don’t have to be licensed.

Credit Unions sometimes offer mortgages to their members.

Credit unions are usually lenders for small and short terms loans, but may offer certain kinds of home loans.

Some credit unions offer home loan specials only to a certain group of members, because they are employees of a member corporation.

It’s up to the borrower to find out if his employer works with a certain credit union on such “XYZ corporation employees only” mortgage specials.

The people working for a credit union with customers on mortgages, are called loan officers and don’t have to be licensed.

Lender or Mortgage Bankers are companies who create mortgages, usually aiming at selling them to other investors (such as investment houses, banks, pension funds. etc).

Depending on the state, lender or mortgage bankers have to maintain a certain net worth and must comply with the state’s mortgage lender regulations.

The people working with clients on mortgages for lenders are called loan officers. If working for mortgage bankers, they are called mortgage bankers and / or loan officers.

Mortgage Broker Businesses are companies which are working with many different lenders, banks and institutional lenders.

Mortgage broker businesses never use their own money when originating loans. Instead, they find a lender with a loan program which will work for the requirements of the borrower and then originate the loan for the lender chosen. They can help the borrower in finding a loan, even when the borrower’s circumstances aren’t perfect or are very challenged.

People working for mortgage broker businesses have to be licensed by the state they are working in and are called licensed mortgage brokers.

Correspondent Lenders are companies which can both act as a mortgage broker business (and originate loans for other lenders) or can originate a loan with their own money and be the actual lender. However, even if a correspondent lender originates a loan with its own funds, the loan has to be transferred to another lender or bank, etc. within 4 months.

People who originate mortgages for correspondent lenders are called loan officers and don’t have to be licensed.

Mortgage Broker, Loan Officer and Loan Processor

When arranging financing for the purchase of real estate, borrowers are most likely to meet people from the financial field who have various titles.

Most of the people in financial institutions, lender or mortgage brokerage businesses, are called either loan officer, mortgage banker or mortgage broker

Depending upon the borrower’s situation, it can make a big difference to know the meaning behind the title.

Mortgage Broker

In Florida, only people with a license from the State of Florida are legally permitted to call themselves “mortgage broker” or “licensed mortgage broker”.

A licensed mortgage broker can work as an employee or as an independent contractor for a mortgage brokerage business (called an associate) or as an independent contractor for a mortgage lender.

In order to obtain a mortgage broker license in the state of Florida, the person has to attend classroom education, pass a state test and be subject to an extensive background check.

A licensed mortgage broker can apply for his own mortgage brokerage business license after 12 months of work experience in the mortgage field.

The mortgage broker works as the intermediary and protects the interests of the borrower as well as those of the lender.

A mortgage broker is not tied to only one lender, but rather works with many lenders and. as result of that, can have access to hundreds of loan programs.

Having a wide selection of loan programs to choose from is especially advantageous for borrowers with challenged credit, lack of documentation or who have unusual situations.

Loan Officer/Mortgage Banker

A person who is employed by a mortgage lender or financial institution to take loan applications and originate mortgage loans is often called a loan officer or mortgage banker.

As long as a person works W2 employed for a licensed lender or financial institution, there are no requirements from the state of Florida in regards to any kind of formal training, state exam or background check.

A loan officer can usually only offer you the loan programs of the lender they are working for, unless their lender also acts as a mortgage brokerage business and offers other mortgage lenders loan programs.

Loan officers, especially from financial Institutions (banks. etc), are limited to an often small selection of loans. Most banks don’t even offer mortgage programs for people with less than perfect credit or with lack of documentation.

A borrower in an unusual situation, with lack of documentation or challenged credit, can waste valuable time by working with a loan officer who is employed by a lender, who will only provide financing to the ideal (so called A-Borrower) loan applicant.

Since loan officers are employed and paid directly by a lender or financial institution, they are more likely to protect the sole interests of their employer.

Loan officers working for correspondent lenders are, in many cases, working as licensed mortgage brokers, especially if their company offers loan products from other lenders.

Loan Processor

Once a borrower has applied for a mortgage and the loan processing (collecting, preparing and submitting of loan documentation) starts, most mortgage applicants will have to work with the loan processor of the mortgage brokerage business or lender.

The loan officer or mortgage broker takes the loan application and places the loan with a lender and loan program.

After the loan has been placed, the loan processor will start collecting and preparing all documents for submission to the lender’s underwriting department. The processor can be seen as an assistant to the loan officer or mortgage broker.

Depending on the work structure of the brokerage or lender, the processor will communicate and coordinate everything between the lender, closing company and the borrower and usually makes sure that the loan will be closed on time.

Even though the loan processor is the one mostly involved in the loan processing, a good mortgage broker or loan officer should still be very involved and frequently communicate with the borrower until the loan is funded.

Processing Your Loan Application

By: The Department of Housing and Urban Development (HUD)

There are several federal laws which provide you with protection during the processing of your loan. The Equal Credit Opportunity Act ("ECOA"), the Fair Housing Act, and the Fair Credit Reporting Act ("FCRA") prohibit discrimination and provide you with the right to certain credit information.

No Discrimination. ECOA prohibits lenders from discriminating against credit applicants on the basis of race, color, religion, national origin, sex, marital status, age, the fact that all or part of the applicant's income comes from any public assistance program, or the fact that the applicant has exercised any right under any federal consumer credit protection law. To help government agencies monitor ECOA compliance, your lender or mortgage broker must request certain information regarding your race, sex, marital status and age when taking your loan application.

The Fair Housing Act also prohibits discrimination in residential real estate transactions on the basis of race, color, religion, sex, handicap, familial status or national origin. This prohibition applies to both the sale of a home to you and the decision by a lender to give you a loan to help pay for that home. Finally, your locality or state may also have a law, which prohibits discrimination.

Frequently, there are differences in the types and amounts of settlement costs charged to the borrower -- for example, some borrowers are charged greater fees for mortgages depending on their credit worthiness. These differences may be justified or they may be unlawfully discriminatory. It is important that you examine your settlement documents closely, especially lines 808-811 on the HUD-1 settlement statement, and do not hesitate to compare your settlement costs with those of your friends and neighbors.

If you feel that you have been discriminated against by a lender or anyone else in the home buying process, you may file a private legal action against that person or complain to a state, local or federal administrative agency. You may want to talk to an attorney; or you may want to ask the federal agency that enforces ECOA (the Board of Governors of the Federal Reserve System) or the Fair Housing Act (HUD) about your rights under these laws.

Prompt Action/Notification of Action Taken. Your lender or mortgage broker must act on your application and inform you of the action taken no later than 30 days after it is considered complete. The 30 day period will not begin until you provide to your lender or mortgage broker with all of the material and information requested.

Statement of Reasons for Denial. If your application is denied, ECOA requires your lender or mortgage broker to give you a statement of the specific reasons why it denied your application or tell you how you can obtain such a statement. The notice will also tell you which federal agency to contact if you think the lender or mortgage broker has illegally discriminated against you.

Obtaining Your Credit Report. The Fair Credit Reporting Act ("FCRA") requires a lender or mortgage broker who denies your loan application to tell you whether he based his decision on information contained in your credit report. If that information was a reason for the denial, the notice will tell you where you can get a free copy of the credit report. You have the right to dispute the accuracy or completeness of any information in your credit report. If you dispute any information, the credit reporting agency that prepared the report must investigate free of charge and notify you of the results of the investigation.

Obtaining Your Appraisal. The lender needs to know if the value of your home is enough to secure the loan. To get this information, the lender typically hires an appraiser who gives a professional opinion about the value of your home. ECOA requires your lender or mortgage broker to tell you that you have a right to get a copy of the appraisal report. The notice will also tell you how and when you can ask for a copy.

Mortgage Borrowers' Rights

By: The Department of Housing and Urban Development (HUD)

ATTENTION BORROWER!

This may be the largest and most important loan you get during your lifetime. You should be aware of certain rights before you enter into any loan agreement.

You have the RIGHT to shop for the best loan for you and compare the charges of different mortgage brokers and lenders.

You have the RIGHT to be informed about the total cost of your loan including the interest rate, points and other fees.

You have the RIGHT to ask for a Good Faith Estimate of all loan and settlement charges before you agree to the loan and pay any fees.

You have the RIGHT to know what fees are not refundable if you decide to cancel the loan agreement.

You have the RIGHT to ask your mortgage broker to explain exactly what the mortgage broker will do for you.

You have the RIGHT to know how much the mortgage broker is getting paid by you and the lender for your loan.

You have the RIGHT to ask questions about charges and loan terms that you do not understand.

You have the RIGHT to a credit decision that is not based on your race, color, religion, national origin, sex, marital status, age, or whether any income is from public assistance.

You have the RIGHT to know the reason if your loan was turned down.

You have the RIGHT to ask for the HUD settlement costs booklet "Buying Your Home."

For "Buying Your Home" and other helpful information about RESPA visit the HUD website at: www.Hud.gov .

Loan Disclosures

Once a borrower begins the application process for a mortgage, there are disclosure forms the lender and or mortgage broker has to provide.

The lender will provide the borrower at least with the following three main disclosure forms BEFORE closing and funding of the loan.

Providing borrowers with the disclosures is required by certain state and federal laws and all borrowers have to read and sign them.

Loan applicants should make sure they know and understand the important information and dates given on these forms.

The Good Faith Estimate

The lender or mortgage broker is required by the Real Estate Settlement Procedures Act (RESPA) to provide the borrower, within 3 days of application, with the Good Faith Estimate. The Good Faith Estimate (GFE) is a summary of the parameters of the loan. It should summarize all loan and closing costs as well as third party fees such as broker fees, taxes, insurances, etc. The Good Faith Estimate is only an estimate of all involved fees and costs and only little dollar differences between the GFE and the actual HUD Settlement Statement should happen.

The lender or broker is required to issue the GFE to the best of his knowledge and cannot add previously undisclosed fees or points at closing without a valid reason and prior approval by the borrower.

The Truth in Lending

The legislature created the federal Truth in Lending Law and Regulations to make sure that the borrower learns, at loan application, about the terms and costs involved with his loan.

On the Truth in Lending (TIL), the lender has to disclose the annual percentage rate (APR) of the loan, which breaks down the cost of the mortgage as a yearly rate.

The APR includes other costs in addition to the note rate imposed by the lender in order to grant the loan.

Knowing the loan’s APR also helps the borrower to compare loan programs from different lenders.

The Truth in Lending also contains information about the amount of late fees, mortgage insurance premiums, if there is a prepayment penalty and also if the loan is assumable.

Transfer of Servicing

Many lenders are selling their loans to other investors such as banks, investment firms etc.

The fact that the loan was sold to another investor doesn’t change any of the loan conditions, such as the interest rate, term of the loan, prepayment penalties. etc.

The borrower will usually end with new lender information and has to send the mortgage payments to another lender or loan servicing company.

The Transfer of Servicing disclosure form shows the lender’s intent of servicing the loan after the closing, by telling the borrower the percentage of previously transferred loans.

Private Mortgages

Sometimes there are situations in which a private mortgage is used to finance real estate.

A private mortgage is basically the same as a mortgage from a lending institution. Instead of taking out a real estate secured loan with an institution, it’s borrowed from one or more private sources.

All conditions of the mortgage, such as the interest rate and term, etc., can be directly negotiated between lender and borrower.

Private mortgages in first, second or even third lien position are possible.

A private mortgage is often given from the seller of real estate as seller’s financing. Private financing can also be provided by a third in the transaction with a non-involved party such as investors, trusts, family members, etc.

Sellers Financing

Some sellers of real estate property are willing to finance the purchase price fully or as second financing behind the mortgage from another lender.

If the seller provides all of the financing, then the buyer gives the seller a down payment (often between 20-30% of the purchase price) and the seller holds a promissory note (secured by the property) for the rest of the purchase price until the mortgage is paid in full.

If the seller provides financing in addition to financing from another lender, then he holds a note for the difference between the down payment, the other financing and the purchase price.

The seller usually does not want to wait 20-30 years to receive the rest of the purchase price. That’s why many sellers financing transactions are done with a balloon mortgage.

With a balloon mortgage the monthly payments are based on a 25-30 year mortgage, but the loan matures (needs to be paid off) in a shorter time.

Sellers financing can be very helpful when only partial or no financing from another source can be secured or if the seller is willing to give better conditions than other lenders.

Every buyer should explore his opportunities with institutional lenders before agreeing to accept sellers financing. Short-term balloon mortgages are often used for sellers financing and the buyer ends up paying for a costly refinance for something he could have financed long term in the first place.

Mortgages from private third parties

Some people are able to get a secure financing from a private source other then the seller. That could be a loan from relatives, friends or private investors.

Similar to owners financing, the mortgage given can be the only mortgage, or it can be in addition to another private or institutional mortgage.

All mortgage conditions can be negotiated, but most private lenders also prefer to give a balloon mortgage rather then a 25-30 year mortgage.

Some private lenders are willing to give a second mortgage behind another mortgage, regardless of whether the first mortgage is from an institutional or from a private lender.

To the contrary, institutional lenders are not willing to grant a second mortgage behind a private first mortgage.

This fact can be of great importance when homeowners are financing with a private lender and, after a while, try to cash in some of their home equity by taking out a second mortgage. It’s almost certain that an institutional lender won’t grant a second mortgage or a home equity line of credit if the first mortgage is held by a private lender.

Other Considerations

A previously mentioned, a private mortgage can be a good move if no institutional financing can be obtained or if the private lender offers better conditions then other lenders.

But there are still other things to consider before financing with private money.

Questions such as the following may arise: Will the private source service the mortgage as professionally as an institutional lender? Will the borrower be able to get a professional payoff or loan balance letter once one is needed? Is the private lender able to report the mortgage payments to the credit agencies, so that the borrower is able to prove to other creditors that mortgage payments were made on time without problems? Would the private lender be able and willing to provide the borrower with a tax statement at the end of each year? Is the private lender educated enough to honor the borrower’s rights if the mortgage gets assigned or if other changing circumstances arise?

When dealing with important finance transactions such as mortgaging real estate, at least one involved party should be a financial or real estate professional who will fairly advise all involved parties.

Housing Bubble

Who hasn’t heard or read about the “Housing Bubble”, which is supposed to burst anytime soon?

People should take a closer look at what a housing bubble is and then evaluate their own investment situation.

A housing bubble is a period of unusually high appreciation in property values followed by a high loss (depreciation) in property values.

Housing prices are greatly influenced by the supply and demand rule. Therefore, if there is little housing supply but high demand (because of low interest, etc.), prices will go up rapidly.

If there is a high supply (such as after a construction boom), but housing demand is low (because of high interest rates, e.g. over 8%), prices could decline rapidly.

However, price adjustments through a housing bubble are not comparable to a crash on the stock market. Stocks can have a total or very dramatic loss of value, while residential real estate is more likely to maintain a fair level of value and will appreciate in the long run.

Location, location, location

Real estate depreciation and, of course, appreciation is more a localized event.

So, if a housing bubble would occur, it’s very likely that some areas will be harder hit than others. There might even be some areas that would see no depreciation at all. It’s similar to the hot real estate market of the last few years; there were some areas in the US that had dropped in property value instead of going up in value as most other areas did.

Before buying a property, it’s very important to research and evaluate the local situation.

Before signing a purchase contract, buyers should educate themselves about the current and planned future infrastructure of the neighborhood, as well as the economical outlook for the whole city, county and state.

Questions like the following should be asked or researched:

Are there many other properties for sale in the same or surrounding areas?

Do previous sales support the purchase price for the property of my choice?

Is there a chance that the property was over improved?

Does the economy of this area depend a great deal on only one or a few related industries?

Personal circumstances

Even if a real estate bubble would hit the area in which people own real estate, chances are very likely that, within a few years, prices will be on the way back to climbing higher.

Homeowners are actually affected by declining property values only if they have to sell very soon, need to refinance, or cash out some of the home equity.

Well planned financing should be a big part of the purchase process. A fixed rate mortgage (or, at least, fixed for a few years) might be a good idea, if it appears that the interest rates will go up and the plan is to keep the property for a longer period of time.

Buyers should not only evaluate the property and its surroundings, but also their own personal circumstances. If, for example, there is a risk of unemployment, it might be a good idea to pay a little less money down and keep the rest in a savings account as emergency reserve.

It’s also very advisable that every buyer has an idea about his long-term plans, before buying any real estate.

Is the purchase in anticipation of holding property only for a short period of time or rather for many years?

Holding a property for only a short period of time always contains the risk of not recouping the invested money, which would be the purchase price plus sales and purchase closing costs.

Investing in real estate for the short term is always risky, especially right now with the chance of the overall market slowing down or for real estate in local areas depreciating in value.

Homeowners don’t have worry too much about a market slowdown or housing bubble if they are planning to stay in their homes for the long term. Everyone should remember that homes are not only an investment but, more importantly, the places in which they live. So what difference does it make if one can get a little bit more or less money for his home, if he is not planning on selling it anytime soon?

Conventional Loans and the Secondary Market

Conventional loans are mortgages which are not guaranteed or insured by the government (such as VA and FHA loans).

At the beginning of mortgage lending, the lender gave money to people for a fixed period of time and for a fixed interest rate. The loan was held in the portfolio of the lender until paid off in full or foreclosed on.

Holding a loan in a portfolio wasn’t always in the lender’s best interest. When rates changed upwards, the lender received below-market interest on the loan and wasn’t able to recycle the money to lend to other borrowers for a higher rate.

With the creation of the secondary market in the late 1930’s, lenders were able to sell their loans and generate fresh funds to originate new loans.

Secondary Market

Basically, all mortgage transactions that occur after the loan closes, such as the sale of a mortgage to a new investor, are secondary market transactions.

Secondary market transactions are the link between the mortgage market and the capital market.

Today, most lenders sell their loans to the secondary market, and only a minority of lenders keeps loans in their own portfolios.

The major secondary market agencies, such as Fannie Mae, Freddie Mac and Ginnie Mae, have standardized mortgage loan documents and underwriting procedures.

Conforming/Non-Conforming loans

Loans which are closed in accordance with the guidelines of Fannie Mae or Freddie Mac are called “conforming loans”.

Loans which don’t meet Fannie Mae and Freddie Mac guidelines are known as “non-conforming” loans.

After the credit abuse of the 1980’s, a secondary market for non-conforming loans had developed and standardized documentation and underwriting was set.

Non-conforming loans are often known as sub-prime loans, which address the lending needs of people with some kind of credit impairment, lack of documentation or other unusual situations.

Sub-prime loans are higher in risk for the lender, but so are the interest rates charged on such mortgages.

So, it is a known fact to investors in the secondary sub-prime market, that securities for this kind of investment bring much higher yields, but also contain higher levels of risk.

Regardless whether a loan is conforming or non-conforming, it’s always a conventional loan, if not guaranteed or insured by the government.

________________________

>> Click here to learn more about financing >>