Thursday, September 30, 2010

Two Credit Reports for Conventional Loans

Two credit reports are now needed for conventional loans. A conventional loan is any loan that is NOT a government loan - if a loan is not an FHA loan, a VA loan, or a USDA loan, then it is a conventional loan.

If the loan is a conventional loan, lenders are required to refresh the credit reports of all borrowers shortly before the closing. A refreshed credit report updates account balances, minimum payments, and credit inquiries (every time someone pulls your credit, you have a credit inquiry).

If there are any major differences between the original credit report and the refreshed report, they must be explained. This can cause delays in closings, and in some cases, can cause the loan to be denied.

How do you combat this new problem? Very easily. If you have applied for a mortgage, do NOT apply for any new credit (credit cards, car loans, furniture loans, increases in credit card limits, etc.) and do NOT charge more on your existing accounts. Wait until after the closing to buy all those things you need for your new house.

Thursday, September 23, 2010

Changes for Conventional Loans

Fannie Mae (the ruler of conventional loans) is making some changes to their underwriting guidelines that will affect many real estate deals. Here are the two changes that will get the most press:
  • The minimum down payment for one-unit, primary residence loans is being lowered to 3%. This does not apply to cash-out refinances. It is incredibly important to note that mortgage insurance companies will not insure these loans at the moment, with the exception of loans for first-time homebuyers with very good credit, so do NOT assume that 3% down is the new standard. FHA loans (3.5% down) are still, at the moment, the lowest down payment option for most borrowers.
  • The down payment can now be paid by a relative of the borrower, as long as it is a gift. Again, private mortgage insurance companies are NOT insuring these loans at the moment. FHA loans allow gifts from relatives and FHA will insure the loans, the same as always.
  • These changes affect loan applications dated December 11, 2010 and later.

By the time these changes take effect, the mortgage insurance companies may insure the loans, but that is anyone's guess.

Sunday, September 19, 2010

What the Heck Does POC Mean?

We are often asked what POC means on a Final Settlement Statement.

Quick quiz - does POC stand for:
  1. Primary Occupancy Charge
  2. Pickled Onion Curry
  3. Ponies On Causeway
  4. Paid Outside of Closing
POC stands for Paid Outside of Closing, and refers to any fee that is not being disbursed at the closing. The two most common POC charges are the appraisal fee (if it has been paid by the borrower before the closing) and the yield spread premium (the rebate that the lender pays the mortgage broker).

When POC is listed on the Settlement Statement, the letters are often followed by the words Borrower, Seller, Broker, or Lender. This refers to who paid the fee. For example, if the borrower paid for the appraisal before the closing, the fee would be marked as "POC Borrower" on the Settlement Statement.

If a fee is marked as POC, it is not included in the bottom line on the settlement statement because someone has already paid it (in the case of a paid appraisal) or the borrower does not owe it (in the case of a yield spread premium).

POC fees are listed on the Settlement Statement because the Real Estate Settlement Procedures Act (RESPA) states that all fees associated with a federally regulated mortgage must be shown on the Settlement Statement, regardless of whether they have already been paid or not.

Wednesday, September 15, 2010

How Much Does a Mortgage Broker REALLY Get Paid?

Here's how mortgage brokers get paid.

We can make money in two ways. The first is by charging the borrower directly for fees. This is known as front-end compensation. The second way we get paid is by receiving a payment from the lender. This is known as back-end compensation.

Here are some examples of front-end compensation (direct charges to the borrower):
  • Origination fee
  • Discount fee
  • Underwriting fee
  • Processing fee
  • Admin fee
  • Marketing fee
  • Warehouse fee
  • Any other fee we decide to charge

On the Good Faith Estimate (GFE), all of these fees except the discount fee will be combined into Our Origination Charge (line 1 on the second page of the GFE). The discount fee will be on line 2. Always ask your mortgage broker for a breakdown of these fees. If he won't tell you, dump the bum and find someone who will be honest with you.

Does the broker get to keep all of these fees? No, they don't. However, there is absolutely no way for a borrower to know which fees the broker is paying to someone else and which fees he is keeping for himself.

Here is how back-end compensation works:

  • If the mortgage broker is acting as a true broker (meaning he is arranging for the financing, but does not actually fund the loan with his company's money), then he gets a check from the lender for increasng the interest rate. The more he increases the interest rate, the more money he gets. This is known as a Yield Spread Premium, or YSP. This is supposed to be reported on the Good Faith Estimate (GFE), but people still cheat in the mortgage industry, so it may or may not be on the GFE.

  • If the mortgage broker is acting as a mortgage banker (meaning he is not only arranging for the financing, but also funding the loan with his company's money), then he gets an additional check from the lender. This is known as a Servicing Released Premium, or SRP. This does not have to be reported on the GFE, so the borrower will never know if the broker is getting this check.

Every loan works this way, regardless of whether the person selling the loan works for a retail bank or sells loans for more than one bank.

Sunday, September 12, 2010

Mortgage Insurance Rates

Now that FHA mortgage insurance is going up from .55% a year to .90% a year, conventional loans will become more attractive to many borrowers. If a borrower has good credit, their monthly mortgage payment might be cheaper with a conventional loan than it would be with an FHA loan.

However, it is important to know that not all private mortgage insurance companies have the same rates. On a loan that we originated recently, the lender told us the mortgage insurance (MI) payment was going to be $195 a month for a $250,000 loan. We told the lender that we wanted to use a different MI company and got a cheaper payment of $139 a month, lowering the borrower's payment by $56 a month.

It was cheaper with the company we asked to use because they give discounts for good credit scores. The MI company that the lender wanted to use does not give discounts for good credit.

Not every state has approved the MI rates that are based on credit scores, but Colorado has approved the lower rates.

Make sure you are using a lender who knows about the rates that are based on credit scores. The cheap rates are not automatically given to people when they apply for a loan.

Wednesday, September 8, 2010

Quick Way to Raise Credit Scores

When we run someone's credit through the software that tells us exactly what to do to raise their credit scores, the most common recommendation is to lower the percentage of the person's credit limit that is being used.

Here are the percentages that affect credit scores:

-- If the balance is more than 70% of your credit limit, it lowers your score the most.
-- If the balance is 50% - 70% of your credit limit, it lowers your score a bit less.
-- If the balance is 30% - 50% of your credit limit, it lowers your score even less.
-- If the balance is below 30%, it will improve your score the most.

These percentages apply to individual credit accounts and also to the total credit limit of all credit accounts. So if you pay off a credit card account, do not close the account. That will lower your total available credit limit and therefore lower your credit scores.