LENDER SECTION

 

Preliminary Information
Resources
Explanation (technically speaking)
Meaning what?
Advice
Subjects to Discuss
Summary

 

PRELIMINARY INFORMATION

There are not many people who can afford to pay cash for a new home purchase.  The obvious question then becomes – where do I get the money to purchase my home?  This is the role of the lender. 

 

RESOURCES

So who are the lenders?  Usually you think of the local banks you drive by every day.  However, your choice of lenders is much broader and the best choice may not be a bank at all.  First of all, not all banks offer money to purchase a home but most of the large commercial banks do. 

In addition to getting your financing at commercial banks there are also mortgage bankers who may be wholly owned subsidiaries of commercial banks.  They also may be independent stand alone corporate entities whose only business is making mortgage loans.  Mortgage bankers are licensed by whatever state they lend in.  The commercial banks usually will have a federal charter which means they can lend in any state.

 

EXPLANATION (Technically speaking)

Whether your choice is a commercial bank or mortgage banker, you’ll be surprised to find that the money for your loan usually will not be the lender’s money at all.  Most lenders use borrowed funds to initially fund a mortgage loan.  They borrow the money from prearranged “warehouse lines of credit” provided by other banks or their own personal money.  Warehouse lines are short term loans that are paid back when the lender obtains the permanent financing of the mortgage. They can either keep it in their own portfolio (their own money) or sell it to an investor.  This is commonly referred to as “the secondary market”.  When they sell it to an investor, the money is paid back to the warehouse line, and then becomes available again to initially fund another loan. 

The two largest purchasers of loans in the secondary market are the Federal National Mortgage Association (Fannie Mae or Fannie) and the Federal Home Loan and Mortgage Corporation (Freddie Mac or Freddie).  These corporations have a special charter created by the US congress to help provide liquidity in the mortgage market. 

The investment banks on Wall Street also purchase loans in the secondary market.  Whether it is Fannie, Freddie, or the wall street investment banks they all bundle the loans into investment grade securities such as MBS (mortgage back securities) that are sold as investment certificates (or, bonds) to third party investors like insurance companies, pension funds, corporations and individual investors.  Because of this, you may not make your mortgage payments to the same bank throughout the loan.

 

MEANING WHAT?

What all this means to you, the borrower, is that it really doesn’t matter if you go to a commercial bank (large or small) or a mortgage banker (large or small).  They both have access to, and end up getting the money from the same place – the secondary market.  What’s more important to you becomes the quality of service you receive through the entire loan process and the competitiveness of the rates, terms and fees.  

Be careful not to focus exclusively on the published interest rate.  Your particular situation will determine the many factors that make up the rate you receive.  The rate you receive will take into consideration your income, credit, mortgage/rental history and the value of the home, as well as your ability to buy down the interest rate.

 

ADVICE

So, how do you know which lender to choose for your loan and what is the best way to have access to them?  To find out who the lenders are in your area, click on the “Find a Lender/Loan Officer” button above to see if they are committed to our code of ethics.  You can also search the yellow pages, newspaper ads, real estate magazines, or use an on-line search engine like Google.

Licensed mortgage brokers are an excellent source to access a wide variety of lenders and programs.  You definitely want to contact the Mortgage Brokers listed on this web site that have agreed to a code of ethics and are willing to have the service they provide (good or bad) reported back to this site for all to read.

Keep in mind a mortgage loan (or any type of loan for that matter) is a product that not everyone can get.  If you were shopping for a new car or a new pair of shoes, as long as you are paying in cash or using a credit card, anyone will sell it to you.  In other words, you do not need to qualify for it.  So, unless you can pay cash for your new home, you will need to get a mortgage. 

Lenders are realistic people.  When they lend the money they expect to be paid back.  They know from experience that not everyone will pay the money back or just as important pay it back on time according to the terms of the loan agreement.  This is why lenders have certain guidelines or rules under which they are willing to lend the money.  In other words the “golden rule” is at play here.  The people who have the gold (money) make the rules (guidelines). 

The lender will want to know whether or not you qualify for the loan according to a set of guidelines that they have established.  They ask questions like:

“Do you have steady employment with enough income to pay the new mortgage loan and the other expenses connected with owning a home as well as your other obligations?”  This will be measured by the Debt Ratio.

“Do you have a reputation for paying your obligations on time according to the agreed terms?”  This is measured by the information available to the lender through credit bureau reports, the credit score and other references that the lender may require.

“Is the collateral (new home) worth the money you are paying for it and suitable for the lender to lend against?”  This is measured by the appraisal performed by a licensed state certified appraiser.

So, be prepared to provide the lender through their loan officer (or your Mortgage Broker) with the information necessary to determine if you will qualify for the loan.

 

SUBJECTS TO DISCUSS

When you meet with the Lender or Mortgage Broker, here are some of the questions you should ask:

• Will you pre-qualify me for the loan?  I want to be reasonably assured I can get the loan before I commit to purchasing my home.

• With some lenders leaving the industry, how do I know the lender will still be here to fund my loan?

• How long will the processing of my loan take once I provide you with all the required up front documentation you are requesting?  This is more commonly referred to as “turn time” in mortgage industry.

• What is the interest rate?  Is it fixed or adjustable (ARM)?  If it’s an ARM, what index is it based on and what is the margin over the index?  How often does it adjust?  How high or low can it go?  In other words, what are the caps?  Does it have the potential for negative amortization?  If yes, please provide me with an example.

• Are there any prepayment penalties?  If yes, please explain and give me an example of how it is calculated so that I understand it.

• Is there an up front application fee that I have to pay?  If yes, is it refundable or credited back to me on the closing statement in some way?

• What are the fees associated with the loan?  Note: The law requires the Mortgage Broker or Lender to provide you with a Good Faith Estimate (GFE) of all the charges and fees associated with your loan.  Go through it with them to be sure you understand what each fee is for and whether it seems reasonable for the type of loan for which you are applying.

 

SUMMARY

Buying a home usually is the single largest investment the average person makes in their lifetime.  There are no stupid questions – just stupid people who don’t ask questions.  If you are not sure of something, ask.  If still you aren’t sure, ask for clarification or an example to help you understand.  A professional Mortgage Broker or Lender will gladly take the time to help you understand everything and guide you through the process.

Enjoy your new home!