As the Consumer Financial Protection Bureau strives towards creating more transparency within the mortgage industry, these truths remain. Here are four things you won’t hear from your bank at loan application…
‘You Can Get a Better Deal Elsewhere’
Fannie Mae and Freddie Mac publish mortgagee guidelines banks use to originate loans, in order to ultimately offload these loans in the secondary mortgage market. In addition, individual banks may place additional layers of credit requirements on these guidelines minimizing buy-back risk. A buy-back is situation for where the lender must re-purchase the loan they made and sold to due to an oversight or non-performance (meaning borrower didn’t make the payment). These additional risk layers are called an Investor Overlays. For example Fannie Mae has a maximum debt to income ratio allowance at 45%, but the bank that you are applying with has a max debt ratio at 43% earmarking the CFPB’s definition of a ‘qualified mortgage’. You will never hear your bank tell you can get a better deal elsewhere (even though you probably can). When you work with a bank, you are limited to their programs and their products. Direct lenders, and brokers and some smaller banks have access to more credit, which ultimately dictates whether or not your loan will moving forward.
Mortgage Tip: a better offer elsewhere on a loan that will never close because you are unable to meet the loan guideline is not a better offer, even if the rate is better.
‘Time Is Not Your Friend’
If you have locked in your interest rate, the clock has begun. The saying “Time is Money” rings true. For example let’s say you’re nearing the end of your 30 day interest rate lock, and you need additional 15 days, your lender might charge you as much as .25% of the loan amount, that’s $750 more in fees because you took an additional week in getting your financial documentation back to the lender. Lock fees vary as does rate lock policies amongst banks. Be informed. Ask upfront. After you have chosen to lock your rate, get your financial documentation back to the lender in 24-48 hours as needed in the process. While this is recognizably an inconvenience, it will ensure your loan closes in the time frame in which the interest rate is locked.
Mortgage tip: the reason why interest rate lock extensions cost is because of interest rates go up, and you’re locked in at lower rate your loan is less desirable to the end investor as a higher interest rate loan is ultimately more profitable because of the additional interest generated.
‘You Better Have a Ton of Equity’
This one is a crucial factor when applying for a mortgage. If you intend to get the absolute lowest possible bottom line interest rate the market will bear you’re going to need a minimum of 30% equity in your home, ideally, more. Mortgage pricing adjusters (factors that drive mortgage costs) like occupancy, credit score, and loan to value, begin after a loan to value of 65%, 35% equity. Put another way, if you have 35% equity financing an owner occupied loan the pricing is going to be quite a bit better all other things equal, than if your pricing is at 75% loan to value for example. Loan officers will normally tell the borrower the minimum amount they need to get a mortgage however, not the minimum amount they need to get a mortgage, and the minimum amount they need to get the best possible combination of rate and fees.
‘Appraisers Hold All the Cards’
You will find mortgage professionals who work in a non-banking capacity will candidly tell you, appraisers do hold all the cards. Loan professionals who work for a bank have more rules and requirements for originating than non-bank loan officers. Additionally, many bigger banks own the appraisal companies, subsequently getting a piece of the appraisal revenue. The Home Valuation Code of Conduct that arose in the aftermath of the financial collapse took away the ability for loan officers to have any direct access to appraisers including the ordering and scheduling of the appraisal. Currently, the entire appraisal process is automated, to meet federal compliance regulations. You may qualify on paper with your credit score, income, credit and debt, but the appraiser’s opinion of your home value may mean you not getting a loan, even though a different appraiser’s opinion of value may give you a green light. Even a five thousand dollar disparity in value is enough to throw a loan off course. Should your appraised value not meet expectations, you do have recourse. Ask a real estate agent friend to pull comps identifying other houses in close proximity to your home not included in the appraisal report. Next, ask your bank to have a re-consideration of value performed with the new information. In most cases, it’s a 50-50 shot, as the loan industry has been forced to give appraisers absolute power.
The more clarity and understanding consumers have about the loan process, pricing and general guidelines, they more information they will have to make an educated choice. Always best to continually ask questions, and then some throughout the transaction.
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