Why Can’t I Get the Best Mortgage Rate?

Why Can’t I Get the Best Mortgage Rate?

So you heard your neighbor brag about his new 4% thirty-year rate? Or maybe you just read an article describing how rates have dropped to historic lows, or you heard a local mortgage company advertise 4% rates.

But when you call to apply you’re offered a rate of 4.125%. You’re shocked. After all, you have excellent credit. You have a solid job history. And you owe less than seventy-percent of your home’s value.

So why can’t you get the lowest mortgage rate advertised?

Best Case Scenario vs. Risk-Based Pricing

First, the lowest mortgage rates are typically reserved for best case scenario loans. These are loans that carry the smallest risk of default. A best case scenario loan typically has:

  • Loan-to-value (LTV) under 60%
  • Credit score over 740
  • Loan amount under $417,000
  • Debt ratios under 41%

Mortgage companies and banks usually advertise rates based on this best-case scenario or one similar. Once a lender takes your application they will access price hits for anything outside these parameters. This is called risk-based pricing. These hits can negatively affect your rate.

Different Rates for Different Programs

Your loan program can also affect your final rate. Conventional programs (Fannie Mae, Freddie Mac) have different risk-based price adjustments than government programs (FHA and VA).

For example, a credit score of 680 combined with an 80% LTV on a conventional loan will result in a higher rate than a FHA loan with the same criteria. While 680 is considered “A” credit, it is a third-tier score on the conventional score-card. And while having an LTV of 80% might allow you to avoid mortgage insurance, it is the highest LTV allowed on cash-out conventional loans. Therefore, risk-based price hits are accessed.

FHA programs simply don’t have the same price hits as conventional programs. They require mortgage insurance which helps to offset a lot of risk. So in the example above, an FHA loan will most likely have a lower rate.

Many banks and lenders offer their own portfolio programs too. These programs are usually created to help fill a niche in the market place. They typically expand beyond the conventional and government guidelines. Consequently, the rates can be a little higher than conventional and government loans.

Different Rates from Different Lenders

Finally, rates can differ from lender to lender. Lenders and banks all have money built into their rates. They all start at basically the same point, but then increase their rates in order to collect a service release premium (SRP) when they sell the loans on the secondary market. This is why bank rates can differ from one institution to another.

Brokers have the distinct advantage of being able to offer rates from multiple banks and lenders. This allows them to compare lender rates daily and offer their clients the best possible rates available.

A Word of Advice

In this post- meltdown environment, risk-based pricing is more strict than ever. With a back-log of foreclosures still on their books, lenders and banks want to ensure that new loans perform well (payments are made on time). This is one reason why it’s tough, even for “A” credit borrowers, to obtain credit at the lowest rates.

It’s important not to split hairs here, though. Often the difference in a 4% rate and a 4.125% rate is negligible. While you might lose out on bragging rights with your neighbor, you can still obtain a lower rate today than at any time in history. In fact, rates are so low that you may never need to refinance again.

Our advice is to apply with a couple lenders, compare rates and programs, and make a decision. Shopping or holding out until you get that one rate you heard advertised on the radio just doesn’t make sense. There is such a thing as paralysis by analysis. Don’t let these rates pass you by. Act now.

Self-Employed and Can’t Qualify for a Mortgage?

Self-Employed and Can’t Qualify for a Mortgage?

The mortgage crisis has had a disproportionately negative impact on self-employed borrowers. In retrospect, it’s easy to see how this happened. And it’s important to understand who’s to blame, how the blame has shifted, and what can be done to adapt to the new lending standards in today’s market.

What Happened?

Some of the first program casualties of the mortgage meltdown were the stated income, stated asset (SISA), and no income, no asset loan (NINA) programs. These programs were initially created to assist self-employed borrowers with great credit and good equity.

Since the majority of self-employed borrowers legally write-off a good portion of their income, they are not allowed to use all of it to qualify. Instead, underwriters use their adjusted gross income (AGI) to qualify.

The SISA and NINA programs allowed self-employed borrowers to state their actual income without having to prove it with tax returns.

Soon, in keeping with the now infamous greedy big bank mentality, these program guidelines were expanded to include W-2 wage earners, sub-par credit worthy borrowers, borrowers with little equity, and un-proven first-time home buyers.

Borrowers were qualifying for loan amounts that they could never afford. Needless to say, the more the qualifying criteria loosened, the worse these loans performed. Soon, defaults began to pile up and the rest, as they say, is history.

Who’s to Blame?

The federal government’s (Fannie, Freddie) misguided policies and the greed of Wall Street and big banks were initially to blame for allowing such lax underwriting guidelines. Opening up the SISA and NINA programs to less qualified borrowers eventually spoiled things for credit-worthy self-employed borrowers.

Smaller lenders and mortgage brokers also contributed by writing loans that they knew were unaffordable. Without question there were some shady individuals and companies that took advantage of these programs. They were negligent in their duties to both limit the amount of income borrowers were stating, and to warn borrowers of the consequences of buying homes they could not afford.

However, the majority of small lenders and brokers were simply following the guidelines that were encouraged by the federal government and written by the big banks. While this is not wholly excusable, it does offer perspective on the rampant “blame-the-broker” theme that the politicians, banks, and the press ran with in the months following the meltdown.

Borrowers who knew they couldn’t afford these homes cannot escape their share of the blame either. Exaggerating or lying about income to buy a new home is at best irresponsible, and at worse criminal.

Still, this doesn’t explain why credit-worthy self-employed borrowers are still being left out in the cold. After all, the majority of SISA and NINA programs performed well when they were limited to the original qualifying criteria.

We still hear the complaints from self-employed applicants today:

  • I’ve always paid my bills on time
  • I’ve got perfect credit
  • I’m being punished for being self-employed
  • It’s not fair

All of these complaints were probably valid three or four years ago when borrowers were caught off guard and struggling to understand the new lending reality that was blanketing the country.

But today’s hard truth is that these borrowers now share in the blame by failing to adapt to the new lending standards. If a borrower needs to show a specific amount of income to qualify for a home, they have to pay taxes on that amount.

CPA’s aren’t doing their self-employed clients any favors by soley focusing on how much they can write off or how they can get away with paying the least amount of taxes.

CPA’s should be focusing on their client’s over-all finances. They have a fiduciary duty to inform them about how their taxes will affect their borrowing ability. Too often they fail to do so.

Moving On

Meridian Home Mortgage understands that there is a real need for stated income programs in today’s market. After all, tax write-offs are legal. And these programs actually worked before the guidelines were expanded.

While stated-income programs might begin to pop up at some point to fill the void, they will undoubtedly be very restrictive. Therefore, the only real full-proof solution lies with the borrowers themselves.

Ultimately, it’s the borrower’s responsibility to initiate a dialogue with their CPA. Discussing write-offs and future mortgage related plans has never been more important. Writing everything off or showing a loss just won’t work anymore – even if those write-offs are legitimate.

Adjusting tax deductions to improve their AGI is really all that’s needed. In other words, borrower’s have to stop writing-off so much and pay more taxes on the income they earn.

5 Ways to Simplify the Mortgage Application Process

5 Ways to Simplify the Mortgage Application Process

If you are in the process of a mortgage application and are looking to close as soon as you can, there are steps you can take to help ensure there are no delays.

Here are five tips that can help you:

1. Continue to pay all of your bills on time

Your credit history is one of the most vital elements of your mortgage application. Sometimes it’s necessary for lenders to re-pull credit before the loan process is complete.

For example, if you are applying for a conventional loan your credit will likely be pulled again before your loan funds so that the lender can verify that you have kept your credit clean throughout the course of your application.

A drop in your credit score could increase your rate, or even make you ineligible for a loan.

2. Try to avoid opening any new liabilities after you begin your application

New credit cards, auto loans or other lines of credit will need to be disclosed to your lender just like old accounts. Any new liabilities will need to be verified and added into your debt-to-income (DTI) ratio, which could affect your qualification.

3. Call the appraiser back and make an appointment ASAP

The appraisal process can take up to a week or more to complete. An appraiser has to make an appointment to see your home, perform research on your home from the appraiser’s office, and then prepare the appraisal report.

Try to call your appraiser back and make an appointment for the appraisal as soon as you can to help collapse this time frame.

4. Submit whatever the lender asks for in a timely fashion

If the underwriter asks for documentation, it is pretty certain your loan will not close until they sign off on it. The faster you are able to submit that documentation, the quicker the mortgage process will be.

5. If you switch jobs, inform your lender ASAP

Your lender will verify your employment before funds are issued on your loan. If you switch jobs, the underwriter will need to see at least one pay stub and verify that your new employment will continue.

Be sure to tell your mortgage representative before accepting a new offer so they can let you know how it might affect the process.

As your mortgage broker, Meridian Home Mortgage is committed to keeping the mortgage process smooth and simple. We encourage you to follow these tips to help ensure that your loan closes on time. We are here to help you every step of the way.

Mortgage Bankers vs. Banks and Direct Lenders

Comparing Mortgage Bankers to Banks and Direct Lenders

Understanding how mortgage bankers compare to banks and direct lenders is crucial when shopping for a mortgage. However, finding unbiased information is difficult. False myths and stereotypes dominate the mortgage landscape. It’s important to separate fact from fiction.

Below is a breakdown of a few factors that can influence a borrower’s decision of where to obtain their mortgage. A sober comparison of the facts reveals both distinct differences and surprising similarities between mortgage bankers, banks and direct lenders.

Loan Servicing

Almost all mortgages are sold on the secondary market. Gone are the days of big banks and lenders servicing home loans for entire terms. The only variable now is when the loan is sold.

  • Banks and direct lenders often service loans for the first year in order to collect interest payments. Then, they sell the loans
  • Bankers never service loans. They are typically sold by the lender immediately after closing

Rates and Fees

Mortgage transactions are never free. Borrowers pay for their mortgage through the rate, fees or a combination of the two. It’s critical to recognize that rates and fees are interrelated. One directly impacts the other. Here are the facts:

Banks and Direct Lenders

  • They are limited to offering only their mortgage rates
  • Historically, they have been able to charge fewer fees than mortgage bankers because the bulk of their profit is tied to the rate:
    • They collect interest payments when they service loans
    • They collect a Service Release Premium (SRP) when they sell loans. The SRP is largely affected by the interest rate. Therefore, they have a financial incentive when setting the rate. Most banks bump their rates to increase profitability
    • It’s not uncommon for banks and direct lenders to charge fees in addition to what they earn on the rate
    • They are not required to disclose the SRP to borrowers

Mortgage Bankers

  • Historically, they have been able to offer lower mortgage rates because they can shop among multiple wholesale lenders. They also have access to wholesale rates with no profit built in
  • They never collect interest payments or profit by selling loans on the secondary market. Instead, they are paid a fee for the service they provide. Mortgage Bankers can earn their fee in one of two ways:
    • Borrower Paid: The borrower pays an origination fee to the mortgage banker and obtains the lowest wholesale mortgage rate available
    • Lender Paid: The borrower pays zero origination fees in return for a slightly higher mortgage rate. The wholesale lender then pays the mortgage banker a yield spread premium (YSP)
    • They cannot charge an origination fee and collect YSP. It’s strictly one or the other
    • They are required to disclose the YSP to borrowers

Home Loan Options

Today, borrowers have fewer home loan options than in years past. Mortgage bankers, banks, and direct lenders generally have access to the same basic home loan programs. The most popular are Conventional, FHA, and VA.

  • The difference is that banks and direct lenders don’t always offer all programs. And they are often inflexible with qualifying guidelines
  • Mortgage bankers have access to a variety of different wholesale lenders. Each offers different programs, niches and guideline enhancements. Mortgage bankers can also access specialized portfolio programs through wholesale lenders. They can provide several home loan options for their customers and approve certain loans that banks deny

Together, mortgage bankers, banks and direct lenders provide borrowers with a clearly defined choice. Understanding the differences allows borrowers to make educated decisions about where to obtain a mortgage. Borrowers should base their decision on what’s best for their individual situation.