The basic process of “doing” a loan is relatively simple: the borrower provides the lender documents proving that they are credit worthy, the lender reviews the documentation and the status of the property (underwriting) to verify that it is a sound risk, and then the money is lent. That being said, the process can take months, with the bulk of it being spent in underwriting the loan.
Underwriting criteria change with time, but one of the standard questions from borrowers is, “If Fannie Mae, Freddie Mac, FHA, or VA allow a certain loan-to-value (LTV), why doesn’t a lender?” Another way of asking this is, “What is a lender overlay?” It is important to understand that underwriting guidelines can vary widely from lender to lender even if the government specifies the criteria.
Basically, lenders have different appetites for risk, along with different specialties, so what one lender will gladly approve another will not. A “lender overlay” is essentially an expanded guideline (or set of guidelines) on top of what Fannie Mae, Freddie Mac, or the FHA/VA will allow. It is important for borrowers to remember that Fannie Mae, Freddie Mac, and the FHA/VA all set underwriting guidelines for residential mortgages but they don’t actually lend money directly to consumers. Individual banks and lenders provide home loans directly to consumers, and often they impose their own rules on top of those “agency guidelines,” and those additional rules or requirements are known as overlays.
Many of the overlays come from a lender’s experience with a type of loan. As an extreme example, if a lender finds out that every loan on white houses above 80% LTV goes into default, the lender will put an overlay on that requires every loan on a white house to be below 80% LTV, even if Fannie Mae and the other agencies will buy loans on houses that are white up to 95%.
Another example is that the FHA (Federal Housing Administration) will accept credit scores as low as 500 as long as you’re able to put 10% down. While this is true as far as the FHA goes, the particular lender you may be speaking with could require a minimum FICO score of 640, 680, or even higher. This is their comfort zone. Perhaps they’ve looked at default data and found that borrowers with scores below 640 happen to miss mortgage payments frequently.
These are just a few examples of lender overlays – there are literally hundreds of overlays required by individual banks and lenders throughout the country. They range from credit score (most common), to max loan-to-value, to max debt-to-income ratio, time after a short sale to borrow money to buy another house, and much more.
Mortgage rates continue to be low – hovering around 3% to 4% for a 30-yr fixed rate mortgage – and borrowers have a renewed interest in seeing if they can refinance. Borrowers across the nation are wondering if it is the right time to buy a home or refinance. Before you apply, be sure you do your homework to ensure it makes sense financially, and to see if you’re actually able to do it. In many areas home prices have fallen and mortgage underwriting has become a lot more stringent, making it especially difficult to get approved for a mortgage.
If your current rate is in the 4% range for a 30-yr fixed rate loan, it may make sense to obtain a 15-yr mortgage in the 3% or lower area. This is especially true if you plan to stay in your home for the long haul. The cost of refinancing has gone up, so spreading this expense over a number of years can make sense – but usually not for someone who is only going to keep their home for a short period. Ask your lender to run the numbers.
Assuming you do decide to refinance, check your credit scores long before you begin the process. If your credit scores aren’t in great shape, you may not be able to qualify. But if your scores are looking good, try your best not to apply for credit cards or any other type of loan, or making big charges on existing lines of credit, as events like that have a negative impact on your credit profile. You should also check your property value. Without equity (the house being worth more than the loans on it) it will be nearly impossible to refinance unless you’re able to take advantage of one of the government programs or bring cash in at closing (cash in refinance).
Other things to keep in mind prior to refinancing are, “Is your property listed for sale?” (It should not be.) Is there a prepayment penalty on your current mortgage? There are other considerations, but give your lender a call – they can help.
Often is the question asked, “What’s up with paying for a property in cash?”, albeit in slightly more technical language. For buyers, the market is tough right now, as there’s not a lot in the way of inventory, and sellers often receive multiple offers, especially in some parts of the nation. Many real estate agents suggest that buyers make a cash offer in order to make themselves seem more competitive and improve their chances of having their offer selected.
Buyers have a few options when it comes to making an offer. They can pony up cash by writing a check and backing it up with statements that disclose the balance of their accounts. They can get pre-approved, which involves having their down payment verified with asset statements; employment verified with W-2 forms, pay stubs, and tax returns; credit reviewed; and loan reviewed for underwriting. They can also be “pre-qualified,” meaning that all of that same documentation has been reviewed but not underwritten.
Trained loan officers tell borrowers that the last option, despite its somewhat reassuring moniker, poses certain risks to a borrower’s deposit. If the buyer puts down 20%, for instance, and the appraisal comes back lower than the price upon which both parties agreed, the buyer is faced with a situation where they have to come up with more money, pay private mortgage insurance, or convince the seller the lower the price.
Such a scenario can become even more complicated if the seller refuses to deviate from that agreed upon price and the buyer doesn’t have that extra money and can’t qualify if they have to pay private mortgage insurance. In this particular case, the buyer could potentially lose the deposit.
Cash payments do indeed make for an attractive buyer, but the wise would-be homeowner understands the difference between a cash offer, being pre-approved, and being pre-qualified along with the risks carried by their various options. Be sure to ask your loan officer their thoughts!
Our borrowers will often ask their agent, “Are mortgage points good or bad?” For starters, let’s define “points,” as they are often misunderstood. A mortgage point is defined as a percentage of the loan amount, so if you take out a $150,000 mortgage, one (1) mortgage point would be $1,500. That is pretty simple, but there are different definitions of a mortgage point, as both mortgage discount points and loan origination fees are often thrown under the same umbrella and they are not the same nor treated equally.
A mortgage “discount point” is pre-paid interest included in closing costs that lowers your mortgage rate. This occurs when you buy down your interest rate. A loan origination fee is a fee that covers certain closing costs and the loan officer’s commission.
With that in mind, the fewer points you pay the better, right? Not necessarily - if you pay less at closing and more over the life of the loan thanks to a higher mortgage rate, you’re not paying less. Our agents will tell our clients that for those who plan to stay in their home for the long-haul and pay off the mortgage, paying mortgage discount points could be considered a good move. Conversely, if our borrowers plan to stay in their home for just a short period, or think they’ll refinance again in the near future, paying mortgage points is probably bad news.
When it comes to loan origination points, paying less is usually better. This is essentially just more commission for the originating bank or mortgage lender, so be sure to discuss fees with your agent. But often a particular loan is more complicated than another, and requires more processing and/or underwriting time. The lender needs to be compensated for their work, but be sure you know how much they’re getting and why.
Most borrowers are very well aware of the stock and bond markets. In fact, most people have a relatively fixed number of investment opportunities available to them. These include keeping their money in cash, buying property, buying bonds, or buying stocks. Currently anyone keeping their money in cash (in the bank, for example, in a savings account) knows that the interest that they are earning is very little – probably near 0%. But it is safe, up to the insured FDIC limits. Of course, no one knows what the stock markets are going to do over the next year, or the next ten years. But currently, if a person was to purchase the 30 stocks that make up the Dow Jones index, the dividend yield on the Dow is approximately 3%. If one were to buy a 10-yr Treasury Note, it pays an interest rate of about 3.00%. Therefore the dividend yield is about the same as the current yield on the benchmark U.S. Treasury note. Of course, both go up and down on a daily basis.
But let’s say that one could earn more money in dividends than on the 10-yr Treasury note. What this means is that if the Dow’s stocks, and their dividends, go absolutely nowhere over the next 10 years, and no dividends are cut, they will still outperform Treasury notes. Which doesn’t necessarily make either asset class a good investment: it’s entirely possible that both stocks and bonds are going to go down rather than up over the next decade. So with questions in the stock and bond markets, and cash earning very little, many are returning to examining real estate as a very viable investment. Given what their cash in the bank is owning, borrowers are placing an increased number of calls to lenders and are taking a new look at primary residences, 2nd homes, or investment properties. Given how low mortgage rates are, it is certainly an option worth discussing with any of our highly trained staff.
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