Many borrowers tell their loan officers that they prefer obtaining their mortgage through a smaller shop rather than a huge national bank. That is an interesting phenomenon – what is happening out there? After all, aren’t the rates and prices all the same?
It turns out, the answer is “no.” For smaller lenders, size is critical. They are more nimble. Midsized firms, for example, pride themselves on processing times, quick underwriting, and being able to close loans in a timely manner. Currently some of the large national banks take over a month, even two or three, to close a loan.
During the financial crisis in 2009, it stung larger home lenders, and the heightened regulation that followed hasn’t done them any favors. Still, the biggest banks, on average, originate roughly double the volume of all other banks each month.
Returns have something to do with that. While interest rates are low, mortgage returns have risen because such loans have become more attractive to secondary buyers, partly because of stricter underwriting standards following the housing meltdown.
Teams of experienced LO’s, processors, and other support staff allow us to find the best rate and price among several companies, and do it efficiently and usually less expensively than a large bank. Non-huge lenders pride themselves on customer service, great pricing, and knowledge of the local markets. It is very hard for a new loan officer in a bank branch to beat that. And borrowers, in turn, are agreeing.
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For a lender, down payments represent “skin in the game” since the more money a borrower can put toward a house the more the buyer will lose if they stop making payments. For many borrowers, attempting to put as little down toward the purchase of a house is standard, as they would rather have more money left over for furnishings, landscaping, and so on.
FHA (Federal Housing Administration) loans, which due to the government insurance, require very low down payments, and they rose to a very large share of the market during the worst years of the housing crash. Fannie Mae and Freddie Mac require at least 10% down, but borrowers must pay private mortgage insurance unless they put more than 20% down. In addition, private mortgage insurers these days aren't always willing to do business with low down payments.
But how much should borrowers put down? It depends on the program, but that certainly the days of “No money down!” are gone. Before the mortgage crisis unfolded, it was quite common for homeowners to come up with 20% of the sales price for down payment. So prospective homeowners took their time, saved up money in the bank, and when the time was right, made a bid on a property. We are back to those days, although some programs, such as FHA, VA, USDA Rural Housing, and Fannie Mae’s Homepath programs allow for lower down payments.
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When a borrower is trying to get a loan for a house, one of the things they'll need to do is fill out a lot of paperwork. In many cases that paperwork explains everything the lender and their underwriter needs to know. But in some cases that's not true, and a letter of explanation is needed. While that might seem daunting, or like there's a problem with the borrower's application, that's generally not true. Instead, these kinds of letters are becoming more common and are just used to clear up simple questions the underwriters may have about anything in the application they can't qualify or verify with the data they already have.
In other words, a letter of explanation is exactly what it sounds like. The lender and their underwriter are asking the borrower to explain something. That could be a change in jobs, a gap in employment, a large deposit into their bank account, a source of self-employed income, or just about anything else. These kinds of letters are also typically asked for if the borrower is purchasing a house a long distance from where they currently live. Are they moving? Did they change jobs? Will they telecommute? There are a number of questions the underwriter will seek to answer, but questions don't necessarily mean problems.
What the underwriter typically looks for is the borrower's ability to pay back the loan. As long as that can be verified to their satisfaction, the loan will likely be approved. They want the letter, or sometimes letters, of explanation in order to cover all of their bases and make sure that the information they are using to make an approval determination is as complete and thorough as possible. With that in mind, any borrower who's asked to provide a letter of explanation should do so quickly and efficiently, providing exactly the information the lender or the underwriter has requested from them.
If a borrower chooses not to provide a letter, refuses to do so, or otherwise doesn't give enough complete information to the lender when it is asked for, there is a possibility that the loan will be denied. In some cases the explanation itself will lead the lender or underwriter to deny the loan, but that's far less common. Most explanation letters are just used as a way to connect the dots, and when that's done the underwriter is satisfied with the information provided. Then they can move forward with underwriting and approving the loan, and the borrower can get the home they were hoping to buy.
If any borrower doesn't fully understand the questions being asked, they should get clarification before providing the letter. That way they can give the lender and the underwriter the information they need and want, so the loan can keep moving through the process. Failing to give them the information they want can actually result in the loan being delayed, and in some cases that could cost them the house they're trying to buy. It's always better to get that letter to the lender right away, so the loan can continue to be worked on by the underwriter and approval can be that much closer.
Overall, borrowers who are asked for letters of explanation shouldn't get worried about that type of request. They should simply make sure they understand the question, provide a direct and succinct answer, and then wait to see if the underwriter asks for anything else. There is no reason to assume that being asked for a letter of explanation means that the loan won't be approved. Many borrowers get nervous about these letters or see them as almost accusatory, but it's important to step back and treat these letters as what they really are. A lender's underwriter is asking a question, the borrower answers it, and the process of getting approved for the loan moves on.
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When embarking upon the mortgage loan journey, the typical borrower’s number one concern is how they can get the lowest interest rate possible. It’s inevitable that the rate question is asked early on, as it’s an essential part of judging if taking out a mortgage is a sound financial decision. Borrowers, whether they shop around or not, want to rest assured that they’re not being swindled, particularly at a time when “rock-bottom rates” are making headlines.
Consumers should be aware, however, that it’s very possible that the rates they see published won’t apply to their particular situations. Property type, down payment amount, amortization term, credit score, and rate-lock duration are all variables that factor into the equation, as do points paid or rebates credited against closing costs. As such, loan originators aren’t able to quote a rate (an accurate one, anyway) on command, as it takes a bit of time to obtain and analyze that information.
Given that they’re dictated by the whims of the market, rates are also subject to massive fluctuations over the course of a day, which makes pinning down the absolute lowest possible rate unlikely. Some lenders do offer the option to lock a loan a second time if rates fall, but “floating down” comes at a cost that is passed onto the borrower. Floating can also backfire if rates rise instead of fall.
Concisely stated, mortgage loan transactions are too complex for lenders to quote rates on a lark or simple supply and demand. Some borrowers contact multiple lenders and shop around for the best rate, which the federal government endorses—lenders are required to present borrowers with documentation that encourages consumers to make comparisons—but it’s tough, if not impossible, to outsmart the market. In the spirit of capitalism, compare Lender A with Lender B; however, it’s unlikely that one will quote a rate that’s life-changingly lower than the other.
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There are a lot of companies, and people, involved in the home loan process. A borrower might work with a real estate agent, a loan broker, a lender, a title or escrow company, a loan servicer, investor, and so on – it can be somewhat confusing. But most borrowers know what those are – except for the “servicer.” What is a loan servicer, and is it needed?
When it comes to buying a home, the role of the mortgage servicer is an important one that bridges the gap between the borrower and the investor who owns the loan. The role of the mortgage servicer is to provide certain customer service tasks such as, collecting payments from the borrower on behalf of the investor, handling customer service after the loan closes, paying real estate taxes and insurance on escrowed loans, negotiate loan modifications on behalf of the investor, and work with the funds when a loan is paid off.
An issue that consumer groups have had with the mortgage servicing industry is that borrowers have not been able to pick their mortgage servicer (like they did with their lender). This, coupled with the servicer's insufficient resources, left them ill-equipped to handle the mortgage crises. This resulted in inefficiencies such as lack of employee continuity, "runaround" from their servicers, and inconsistency with paperwork. The Consumer Financial Protection Bureau ("CFPB") has now mandated that for any borrower who is two or more month's delinquent, policies need to be put into place by the servicer to provide these borrowers with easy, ongoing access to a servicer's employees.
The servicer's personnel will be responsible for making sure that the documents get sent to the proper person for handling of the issue. The person responsible for loss mitigation must have timely access to the borrower's records and provide the borrower with accurate information about the foreclosure process and loss mitigation options, procedures a borrower must follow to be eligible for loss mitigation, and the status of any loss mitigation application that the borrower has filed.
Dodd-Frank has demanded that mortgage servicers be more responsive and accountable to their customers. Effective January 10, 2014, a new set of servicing rules will go into effect providing borrowers with better tools and options for dealing with their mortgage servicers. If borrowers have questions before that time on these issues, they should contact their lender or servicer.
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