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» Secondary Market Mortgages & Guidelines» Important Mortgage Terms
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The difference between Mortgage Broker and Mortgage Banker
The financing of a mortgage is facilitated by one of two kinds of lenders: The Mortgage Broker and The Mortgage Banker. Understanding the basic differences in these two kinds of lenders can help you in knowing what “you” and your “Buyer-Referral” can and cannot expect in terms of processing, control, and servicing of the loan.
A. The Mortgage Banker
1. Orginates and oversees the loan process
2. Processes the loan
3. Underwrites and approves the loan
4. Funds the loan
5. Services the mortgage
B. The Mortgage Broker
1. Orginates the loan
2. Process the loan
3. Underwrites and approves the loan
4. Usually cannot fund the loan
5. Mortgage Brokers do not service the funded loan
At 1st National Financial Corporation we process, clear all conditions of the file, prepare the closing package, underwrite, and fund the loan at the closing table. At 1st National Financial Corporation we can do anything that a Mortgage Banker can do, and more.
Doing business with a Mortgage Broker can offer the Buyer and the Realtor one primary contact who is knowledgeable and in control of the entire process from loan application to the post-closing of the mortgage. Post-closing continuity generates referrals.
TEAM POSITIONS YOU SHOULD KNOW AND THE STEPS OF PLAY
A. Loan Officer
1. The Sales Rep. – accountable to you, the listing agent and the
2. Takes the “face-to-face” Loan Application and maps the loan strategy
3. Prepares Borrower “To Do List” at application
4. Outlines loan process for borrower…takes apprehension out
5. Prepares the Application for setup
6. Oversees the loan from application to funding
7. Reviews the file weekly and consults with processor
B. Setup Specialist
1. Receives the application packages
2. Orders all verifications
3. Re-works ratios from loan application to catch any mistakes and notifies originator immediately of any undetected problems.
1. The originator’s teammate and “Right Hand”.
2. Receives all verifications
3. Enters all documentation into the computer.
a. VOE (Verification of Employment)
These numbers are often different from application. The processor makes changes and recalculates ratios.
b. VOD (Verification of Deposit)
Again, these numbers may be different from loan application. The processor makes changes to the computerized application and recalculates funds for closing.
c. VOR (Verification of Rent)
This verification must be spotless and not reflect lease timing problems. The processor catches any problem to the contrary, and immediately consults the loan officer.
The processor checks value, FHA problems, deferred maintenance problems, and consults loan officer.
Once the appraisal is received, the processor re-checks the file for missing documents or problems, consults originator as needed, and prepares the file for underwriting.
f. Conditions of Approval
The processor works with buyer to clear all conditions and forwards closing instructions to closing department.
4. Coordinates closing with the title company and realtors
D. Closing Department
This department funds the loan with the following steps:
1. Receives loan package from underwriting
2. Reviews, title, survey, termite, gas and roof certifications, etc.
3. Reviews at closing conditions of underwriting
4. Prepares closing instructions for title company
5. Prepares all closing documents except final HUD1 Settlement Statement
6. Prepares mortgage numbers for HUD1
7. Ships or emails closing package with funding check to title company
E. Post Closing
Receives closed mortgage package from title company.
1. Reviews closing package to assure that all closing conditions are met
2. Balances money expended
3. Sends package to servicing department
4. Submits necessary paperwork to FHA/VA/Private Mortgage Insurance company for completion
F. Servicing Department
1. Sets up loan
2. Sets up Escrow Accounts
3. Sends out coupon books
4. Receives monthly mortgage payments
5. Pays Taxes, Insurance and Mortgage Insurance when due
6. Sends out tax information to borrower
7. Sends Escrow Accounting to the Borrower
Even though Mortgages are funded and serviced by Mortgage Bankers, no one company has enough money to make loan after loan forever without replenishing their bank. So, it may be of little surprise to you, that the largest majority of loans (all loans not held for portfolio) are sold in the Secondary Market to investors.
This is the Mortgage Bond Market. Traded as Mortgage Backed Securities, these investments trade on the New York Stock Exchange! In order for a mortgage to be sold in the secondary market, it must first pass through certain guidelines. The purpose of these, is to make it unnecessary for an investor to personally underwrite a loan before investing in the Bond. Knowing that the mortgage has met these predetermined guidelines, the investor can feel certain of his or her level of risk without any personal evaluation of the investment itself.
These guidelines, are determined by agencies of the Federal Government…namely:
1. Federal National Mortgage Association
2. Federal Home Loan Mortgage Company
3. Government National Mortgage Association
Fannie and Freddie create underwriting guidelines for Conventional Loans. (That is mortgages which are not insured by any government program.)
Ginnie Mae creates a market for loans which have successfully passed through the various underwriting guidelines of FHA or VA programs. These loans are backed by Mortgage Insurance, or guarantees of the Federal Government, for a portion of the loan amount should the loan default.
We will not delve deeply into these issues. However it is important for you to understand the following:
1. Underwriters are charged with the responsibility of making certain loans will be accepted, post closing, by Fannie, Freddie or Ginnie.
2. Conforming to the guidelines of these agencies is essential, absolutely essential to loan approval.
1. LTV – Loan To Value … The lesser of Appraised Value/Sales Price
95% LTV = 90.01 – 95%
90% LTV = 80.00 – 90%
80% LTV = 80%
The Loan to Value affects certain underwriting guidelines discussed later
The total house payment (PITI) compared to income. Various loan programs allow varying degrees of acceptability. This ratio is often referred to as the “Front End”.
The total debt projected after closing, including the house payment and all other debt, compared income. Again, depending upon the loan product, LTV’s, credit issues, and ratios all vary. This issue will be covered many times in this series. Debt Ratio is sometimes referred to as “Back End”.
The Rate refers to only the simple Note Rate.
4. Discount Points
The dollars charges once, at closing only, when a borrower wishes to acquire a rate which is discounted from the true value of money.
8% = No Points
7-1/2 % = Discounted Rate
Discounted points charged.
Each point is 1% of the loan amount.
$100,000 Purchase Price
80,000 Loan Amount
1 PT = $800
1/2PT = $400
1/4PT = $200
1/8PT = $100
Note: POINTS ARE NOT CLOSING COSTS.
5. Closing Costs
Closing Costs are all the fees a Buyer and Seller must pay in order to transfer the property. For purposes of this series, we will concern ourselves only with the Buyers Closing Costs. They fall into 2 main categories:
a. Loan Costs
b. Title Costs
See Good Faith Estimate Enclosed
6. Application Fee
The money collected at Loan Application. This money is used to purchase Credit Report and Appraisal. Normal application fees today are $300. An additional $50 will be charged if 2 unmarried parties are on the loan. This is necessary to cover the additional Credit Report required. There is never a profit to the lender from an application fee.
7. Lock In
This is the term used to indicate that the borrowers interest rate is guaranteed for a predetermined time frame.
The Valuation Report for Conventional or FHA Loan
9. Certificate of Reasonable Value
The Appraisal on a VA Loan
10. Valuation Condition Sheet
The list from FHA of the needed repairs in order for the appraised value to be substantiated.
11. Conditional Commitment
The Underwriters acceptance of the FHA Appraisal
d. Supply and Demand
Often you will see rates generally decline. You’ll be puzzled then if Mortgage Rates either stay the same or even go up. Now you know why this may be the case.
THE ADVANCEMENT OF TECHNOLOGY
THE CONSUMER LED MARKETPLACE
1. Cost Motivations
Several factors, currently working together are creating change throughout the Mortgage Business. Over the next five years, it is safe to assume that you will not even recognize the Mortgage Process.
Processing a loan is becoming faster, easier, and more cost efficient. The system we have used for years has made it both unprofitable for us, and unpleasant for the buyer and the seller. The enormous cost of the process has driven many mortgage brokers and bankers right out of business. The pressure to process loans at lower and lower interest rates is ever mounting.
2. Technology Motivations
Meanwhile, technology has arrived! It has become both possible and desirable to use new technology to reduce time to close and overhead costs at the point of Origination.
It is important to understand however, moving too fast in this new direction can be costly:
Equipment and Training (Fannie Mae is testing and rapidly changing requirements and guidelines. Each change is costly to the end users.
To The Borrower who cannot fit the stricter mold of automation. This will result in more rejections.
3. The Process of Change
The first challenge for Mortgage Lenders now is to combine the fast moving changes available through technology with the requirements of Fannie Mae and Ginnie Mae, without making a complete sacrifice of the borrowers who require special handling.
The problem is, that the technology developing is so expensive, that if purchased, it would only make sense to use “the new system” for all loans. Without a doubt, this would mean that any borrower coming to the process without spotless credit seasoned job history, and a totally conforming property would be quickly rejected. IN THIS CASE, THEMARKET WOULD SOON COME TO AGREE, FASTER IS NOT ALWAYS BETTER!
4. Change in moderation … Policy at 1st National Financial
While we are adding technology to our system all the time, still we are dedicated to the personal service that we believe is not coming to be an expectation of the past by any means. Therefore, through the use of technology where appropriate, and through the hand processing of files where there is still a need, we are mixing and matching the traditions of old and the updates of today to generate business as economically as possible without compromising the service our clients deserve. These objectives are being achieved through the use of the following:
LIMITED DOCUMENTATION PROCESSING
HUMAN VS COMPUTER UNDERWRITING
ONE HOUR LOAN APPROVALS … WHEN PROPER
15 DAY OR LESS CLOSINGS THE RULE
The following issues are weighed together rather than separately. Here are the issues: Stability, Intent, Collateral.
A. Down PaymentsVary – But they say a great deal.
1. The lower the down payment, the greater risk to the lender
2. Where the down payment came from might also say a lot.
a. Savings over time – shows a diligent rebuilding
b. Inheritance – says less
c. Gift – says less as well
3. Gifts – How much can there be?
a. Standard Loan
Ax Gift = All BUT 5% of purchase
20% Down – Every dime gift
(If the gift is 100% of the 20% down, it will be allowed. Otherwise, Borrower must have 5% of purchase of his/her own money, not gifted.)
B. The Credit Issues – The Borrower
1. A weak Borrower in a weak property is sure to b e a hard loan, and probably not viable. Be Careful when you make an offer!
C. The Contract Issues
1. What can the Seller pay? (Concession)
a. Seller Waive Prorations
2. What can’t the Seller pay?
a. That part of the buyer’s down payment which must be the buyer’s own money cannot be loaned.
3. How can the Lender Contribute?
4. Example to solve a cash problem:
Possible Solution: Raise the price of the house to allow the seller to cover the Closing Costs
Allow lender to raise the rate, use lender’s profit, to pay Closing Costs.
The interlocking of issues is complex. The Lender is trained and knows how to evaluate. For this reason, it is always hoped that as the Realtor/Builder, you will introduce your buyer to the lender up front. The lender can be working on a :pre-approval” while you shop. Knowing up front what kind of Mortgage this will be, and how the contract must be structured, is bound to result in a smoother process.
We’ll be glad to talk with your borrower by phone or set an appointment face to face. We’ll identify price, product, credit issues and loan type! All you’ll have to do is find the house and order the Title. Use us! We love it! We believe both you and your Buyer will be better served.
PMI (Private Mortgage Insurance) Why, How, How Much
-Not so long ago, a buyer could not purchase with less than 20% down.
PMI (Private Mortgage Insurance) changed all that. PMI insures to the lender the difference between what the buyer puts down, and the 20% the lender requires to protect against losses in the event of an unexpected default.
-When the file is ready for underwriting, PMI underwriting takes place as well.
Most lenders send their loan package to the PMI Company for approval. At 1st National Financial Corporation, we are a PMI Underwriter as well. It all happens at the same time! A step saved is a dollar earned!!
Standard FNMA (Fannie Mae) Loans
1. Down payment Minimum 10%
2. Debt Ratios generally same as owner occupied
3. 75% of income from investment can be used for Debt Ratio calculation.
4. Annual Lease must be in place in order to count the rental income.
5. Many loan products available
6. Rates generally carry a premium of 1.5 PTS for investor
Portfolio Products Can Increase Your Market Due To Lower Minimum Down Payments
1. Down payment as low as 0%
2. Debt Ratios to 60% back end, no Housing Ratio.
The Easy To Qualify Investor:
1. Duplex or 2-4 family units, are considered Owner occupied if one unit is to be owner occupied by your Buyer.
2. In this case, Down payments, Ratios and Rates are based upon owner occupied guidelines.
3. This is a marvelous tool for a first time home buyer with tight debt ratios.
It’s also a wonderful tool for repeat business. In 1-2 years, your buyer will be ready to buy again!
Every lender wants your loan referrals to be happy with the loan process. We believe it will be helpful therefore, for you, the Realtor/Builder to have a peek behind the scenes. This little peek is not intended to make Lenders out of Realtors. Rather, it is our objective to help “Money Club” members to be aware of what’s involved in normal processing.
1. “What is Customary Documentation And Why”
2. “If the borrower is a professional, why does the Lender need to get so personal?” He/She is a great Risk!!
3. “This buyer could pay cash for this house…who cares where he got the $3,000, 30 days ago?”
4. “The borrower was divorced years ago! Why bring all that up now.”
5. “The Bankruptcy was 9 years ago! Who could be expected to still have those papers!”
6. “Mr. Jones became disabled in the Korean War!! The Lender wants his original award letter! Get Serious!!”
7. “Ok! Ok! Mr. Jones has $20,000 in stock, but he doesn’t want to sell! Grandma’s going to advance him a gift. She’s 90 years old and she’s not going to have her bank validate her funds! That’s her business!! She’s most insulted!”
A. Income Documentation
1. Hourly wage or salary employees
a. 2 weeks pay stubs
b. 1 Yrs. W-2’s
If pay stubs are not possible, on a Conventional Loan we can substitute VOE but it takes longer. On FHA, copies of checks are necessary if no pay stubs exist
. 2. Self Employed
a. Corporation or Sub Chapter S Corporation
1. 2 Yrs. Tax Returns – Personal
2. Yrs. Tax Returns – Corporate
3. Year to Date P&L
1. 2 Yrs. Personal Tax Returns
2. 2 Yrs. K-1 for Partnership
3. Year to Date P&L
c. Sole Proprietor
1. 2 Yrs. Personal Tax Returns
2. Year to Date P&L
3. Commissioned Sales Rep, Truck Driver, Court Reporter, Any job with expenses or variable income.
a. 2 Yrs. Tax Returns
b. Year to Date P&L
4. Retirement, Social Security, Disability, A.D.C. (Must Continue 3 Yrs. Conventional of FHA)
a. Original Award Letter
b. Current Benefit Statement
c. Xerox of Most Recent check
d. 2 Yrs. 1099’s or W-2’s
5. Rental Income
a. Annual Lease
b. 2 Yrs. Tax Returns
c. Year to Date P&L
6. Child Support – Must Have History of Receipt
a. 12 Month’s Canceled Checks (front and back)
b. Court Report Covering 12 Month History
c. Child Support Agreement
B. Funds In All Accounts
1. Checking Statements 2 Months
2. Savings Statements 2 Months
3. Stock Accounts 3 Months
4. If Stocks or Bonds are Held, Copies of Each
5. Cash Value of Life Insurance, 401 K, Retirement Accounts, Mutual Funds:
Name, Address, Account Number, Current Statement.
6. Gifts – See Gift Letter Instruction Sheet
a. FNMAE Gift Letter (attached)
Top – Donor
Bottom – Donors Bank
b. Xerox of Cashiers Check from donor
c. Xerox of Deposit Receipt
With printed Balance before and after the deposit, signed by bank teller
7. The Sale of An Asset:
a. Proof of ownership with date acquired
b. Proof of Value
c. Bill of Sale
d. Cope of Cashier’s Check from proceeds
e. Copy of Deposit Receipt as above with 6c.
All increases in funds over the past 2 months must be traced to their source. A “Paper Trail” is essential even if funds are not used to close.
Mattress Money is NOT Allowed In Most Loans!
1. Divorce Papers including Separation Maintenance Agreement
(List of Debts, Who pays what, Assets, Children)
2. Child Support
a. Child Support Agreement
b. Friend of Court/or Court Report
1. 3 Month’s Bank Statements
2. 2 Yrs. W-2’s or Tax Returns
3. 1 Month’s Pay Stubs
4. List on paper Debts, Monthly Payments, Approximate Balances on all
Installment and Rev. Credit
5. Bankruptcy Papers
6. Divorce, Separation Maintenance, Child Support Agreement.