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 Frequently Asked Questions about Mortgages Got questions? We have answers. If you can't find what you need here, please call us at 212-555-4321 for personal service from a motgage professional.  What will an underwriter look for? Underwriters work for the lender and must decide to approve your loan - or not. They will evaluate your loan application and documentation to see if your criteria meet the minimum guidelines for the specific loan program you are requesting. In general, they will look at three general areas: Your Income and Employment Underwriters will naturally ask, "How will this borrower repay this loan? What is the source of income?" For those employed by someone else, the old way of doing this was to mail a "Verification of Employment" to your employer. When your employer had verified all the pertinent information, such as how long you have worked there, what you currently earn as a base income, how much you make typically in bonuses or commissions, and how likely it is that you will continue to be employed there. Today, we may still do that but we have alternatives too. We can provide your last two years' W2 statements and tax returns, and your most recent pay stubs covering a minimum of 30 days showing you are still employed. This is called "alternative documentation" and is much faster than waiting for snail mail and your employer who may or may not be cooperative. What they are looking for: Sufficient income to cover your proposed total debt load. Do you make enough money to actually pay for all this debt you're taking on after paying for taxes and living expenses, and going out for dinner and a movie once in a while? Your Assets In the case of a purchase, you obviously must have sufficient cash to actually close the deal. Cash means money in bank accounts, of course, but also any other liquid assets such as stocks, bonds, mutual funds, etc. In addition to enough for the proposed down payment and closing costs, you must also have some reserves. This will vary by lender, but as a conservative rule-of-thumb you should have at least three months gross income in reserves when the deal is closed. They will also want to document less liquid assets, such as life insurance policies, retirement plans, real estate, businesses owned, automobiles, and personal assets. You are not obligated to disclose or document everything, only those assets you want considered to induce the lender to make the loan. What they are looking for: Sufficient assets to cover contingencies. If you lost your job tomorrow, would you default on all your debt the next day, or can you carry yourself for a while? Your Credit History The lender wants to know about your current obligations and the payments you must make each month. They also run your credit report to see how well you have handled your debt in the past. Lenders are coming to realize that how well you have paid your obligations in the past is a better indicator of their safety than any other criterion they may consider. What they are looking for: Is the amount of proposed total debt reasonable for your income and lifestyle? Have you somehow found a way to pay all your obligations in the past no matter what? What is the best lock-in strategy? The best lock-in strategy depends on your particular needs and circumstances, as well as market timing. One point is very important here. All other things being equal, the longer the lock period, the more the loan will cost you. Why? You are obviously asking the lender to assume the risk of a market change. If the lender guarantees you a rate for 15 days, the market will not likely change much in that 15 days and to some degree it is predictable. But a 30-day lock means the lender is stretching his exposure out further, and into a time where rates are less predictable. One nationwide lender advertises a six-month rate lock. Do you pay for this? You bet you do! So the first rule of thumb is that, unless rates are fairly certain to rise before you can get your loan closed, it is best to wait until you are nearly ready to close escrow and then lock, as you will get the most favorable price. The market fluctuates daily, however, or even hourly at times. When you see a lender warn that "rates may change without notice," they really mean it. When your loan goes into process, your loan officer needs to be aware of what type of loan you have asked for, how market forces will affect rates in the very near future, and whether your particular program is sensitive to rate changes. (In general, fixed-rate programs fluctuate more than adjustables.) Typically, if rate increases appear imminent and you need to close escrow on a schedule you don't control (in the case of a purchase, for instance), you should lock-in early. If you have the luxury of waiting out market fluctuations or you feel certain that rates are stable or headed down, then wait. However, your loan officer should review your file every morning and review the market conditions. If things change, your strategy can change in mid stream. There may only be a period of a fraction of an hour to lock you in if the market goes haywire. Stay in touch, and make sure your loan officer does too. Can I lock-in a rate and then go shop for a home? Yes, but if you read the answer above you will see that it can be very expensive. It is generally only a good idea if you think rates are going up steeply in the near future. If you want to lock for more than 45 days, you may even have to pay a fee up-front prior to finding your home. We rarely recommend this strategy, but sometimes it's appropriate. Why should I use a mortgage broker instead of a mortgage banker or a bank? It is worth noting here the difference between brokers and mortgage bankers. Brokers have dozens, if not hundreds of lenders to whom they can broker your loan, and from which they can shop for the best rate. If you have any challenges in your file, your broker is your advocate who does not get paid until those challenges are addressed. If your loan is turned down by a lender, the broker can take the package back and shop your loan somewhere else, finding a new way to tell your story to the lender if that seems appropriate. Your broker doesn't get paid unless and until your loan closes. We have many different sources to try, and often find that one source says an emphatic no while another says "YES!" Your broker works for you. A mortgage banker has its own company's funds to lend, and has fast access to them. However, there is only one source of money. If you're turned down, you're turned down. The banker's agent is most likely on a salary plus commission, so is paid something whether you close or not. And after all, who is the banker's agent really working for? Doesn't it cost more to go to a broker? No. Whether you go to a mortgage banker or a mortgage broker, the same number of people work on your loan. Whether working for the mortgage banker or mortgage broker, a loan officer, a loan processor, an underwriter, and their respective managers all need to be paid. They all have desks, use phones and computers and take up office space, regardless of where they work. It costs the lender the same amount to make your loan either way. Why would mortgage bankers allow brokers to bring them loans? Mortgage bankers offer you the same products at the same price through brokers by offering the loan to the brokers at a wholesale price. Without any out-of-pocket costs lenders instantly have an unlimited staff of sales people, and no liability for them if they do not produce. Lenders who offer their loans through brokers as well as through their own staff typically do the vast majority of their business through brokers. Can't I get a better price by going directly to the lender? Since lenders want to encourage brokers to bring them loans, and since their costs of doing business through brokers are no more than doing business directly, they cannot afford to discourage their brokers by undercutting their prices. What is an index? Adjustable-rate mortgages allow the lender to offer you a better starting rate while protecting themselves by structuring the loan so that when general market rates move up or down your loan’s interest rate moves too. To do this, they need to attach your loan to some sort of market-driven benchmark. That benchmark is called an index. Typical Indexes A well known example of a market-driven index is the Dow-Jones Industrial Average, which measures overall levels of stock prices. The best known interest-rate index is called the Prime Rate, representing the rate that large banks would charge their best corporate clients for secured lines of credit. The most common indexes to which mortgage loans are typically tied are COFI (the Cost-of-Funds Index), one-year T-bills (U.S. Treasury notes) and, less frequently, LIBOR (the London Inter-Bank Offering Rate).
What does APR mean? Sometimes a lot, sometimes not much. Really? Read on . . . The government-mandated Annual Percentage Rate is an attempt to give the borrower a consistent way of comparing loan offerings, and to some extent it does that, but you should not assume that the APR quoted is what you will actually pay. In most cases it will be higher than what you pay. Costs and APR Loans are offered at various interest rates with differing costs (points and loan costs). Comparing such loan products can be difficult. APR makes comparison easier by lumping the costs into the interest rate -- actually, subtracting the costs from the effective amount being lent to you. If you choose a no-point, no-fee loan, the APR will be the same as the note rate. With costs involved, the APR will always be slightly higher than the note rate -- the higher the costs, the greater the difference. Let us use a $100,000, 30-year fixed-rate mortgage as an example. A loan at a 7% note rate, 2 points, and $1,500 in other costs has the same APR as a 7.357% no-point, no-fee loan; that is, 7.357%. All other things being equal, these two loans would cost you the same. But all other things are not equal. APR and the Life of the Loan In theory, the life of the loan is whatever it says on the note, typically 30 years. In practice, it usually isn't. Most people will either sell or refinance their home well before the 30 years are up; in which case, the APR we quote you would actually have been too high. Still APR is a useful comparison tool. APR and PMI On most loans with a loan-to-value ratio of greater than 80%, you are required to carry Private Mortgage Insurance (PMI), which pays off your mortgage if you can't (or perhaps run off to Paraguay). In such cases, the amount of the insurance payment is added to your loan payment when APR is calculated. In other words, required PMI becomes part of APR. This accurately states your APR only as long as you retain your PMI. In most cases, people drop their PMI when they have paid the loan down to less than an 80% LTV, reducing the effective APR. (Don't you just love acronyms?) APR On Adjustable-Rate Mortgages (ARMs) On a fixed-rate mortgage, the factors above are the critical ones. On an adjustable-rate mortgage, there are six more variables to consider: (1) the type of index the loan will be tied to, (2) the margin over the index (2.5% over COFI, for example), (3) the length of the initial period in which the loan is fixed (a three-year ARM, for example), (4) the frequency with which the loan is adjusted after the first adjustment (perhaps once per year), (5) the cap on the adjustment each period, and (6) the lifetime cap on the interest rate. Monthly-adjustable mortgages start at an artificially low "teaser rate" for some fixed term, say 3 months. At the end of that term, the loan will move up to the fully indexed rate. For APR purposes, it is industry practice to assume that it will stay there throughout the rest of the life of the loan. In other words, the index (the value of COFI, for example) will never change. This is certain to be incorrect, but at least it strikes a happy medium and is useful for comparison to other types of loans. Other ARMs (1-year and intermediate) completely ignore the fully indexed rate in APR calculations. Industry APR practice assumes that on your first adjustment date your loan will adjust upward by the full adjustment cap. Sometimes that happens; most of the time it doesn't. In fact, it's even possible that the rate can go down! It all depends on how close the start rate was to the fully indexed rate and what happens to the index. We seem to have lost our happy medium. It is virtually meaningless, then, to use this APR to compare to the APR for other types of loans. What is the level rate? To reestablish the APR as a useful comparison tool, we have devised the Level Rate. In all loans other than 1-year and intermediate ARMs the level rate is exactly the same as the legally mandated, industry-standard APR. With 1-year and intermediate ARMs the level rate assumes that the rate moves to the current fully indexed rate, as it is assumed in monthly ARMs, and overall rates remain stable. A guess? Yes, but more realistic than assuming the worst as APR does. In quoting loan costs and interest rates for 1-year and intermediate ARM programs we state both the level rate and the APR. We feel that the level rate offers a better comparison. Costs and Your Actual APR The up-front costs anyone discloses to you are based on estimates and most likely will change (hopefully, only slightly) depending on the final lender, the loan program chosen, and the rates available at the time you lock in your loan. In other words, even if all our assumptions were accurate, the APR would change if costs change, and they probably will. Conclusions About APR Our advice is to not take APR very seriously even though programming it into the site was a monumental task (the algorithms are monstrous). Instead, once you know what loan program is right for you and what features you want (i.e., prepay or not, negative-amortization or not), consider the APR and level rates but ask your loan consultant to provide you with three things: (1) your total up-front costs in detail, (2) your monthly payments for principal, interest, and mortgage insurance (if applicable) until the date you expect to either sell the property or refinance the loan, and (3) the remaining loan balance on that date. This information should give you a good feel for the trade-offs you are facing and which direction is best for you. |
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