Exposing the Unbelievable Mortgage Ads

Despite all the honestly sincere mortgage brokers in the world today, there are so many others that are doing anything it takes to make money. Open up your local Homes Magazine. The one that's free at your supermarket. The ads are nothing short of ridiculous and they're about to be exposed.

Mortgage companies have been analyzing their sales statistics and realize this: The more applications they take, the more loans they can fund. So, they do anything they can just to get more applications. How they get these applications is what defines them. The "bad ones" resort to ads like these:

Rates as low as 1% for 30 year mortgage!!!

Any normal person born with logic would see this ad and assume appropriately that this mortgage would be 1% for 30 years. There's one important word that's missing from the heading, "fixed".

The 1% is an introductory rate that changes swiftly. These are the types of loans that investors use to buy a property and keep their payments extremely low while they look to unload this extremely short-term investment. If you stay in this mortgage for much longer, you are doomed.

The payment is negatively amortized. The payment you are required to pay is actually less than the monthly interest that is charged. Just like a credit card, your balance will continue to go up until you can afford to make double payments. A homebuyer should never want this type of loan. Leave this one to the investors.

Why do these companies advertise these awful programs to the homebuying public? Well, you called, didn't you? It's the oldest one in the book, the old bait-and-switch. After (and ONLY after) you take an application and allow them to pull your credit they say you don't qualify. They work up a much less attractive loan that you do qualify for and start the process. Ugh! Here's another one:

No Money Down Mortgage!!

When they say you don't need any money down, it does not mean you won't need money. What they are saying is that you don't need to put a down payment on the house. The mortgage company (upon approval) can finance 100% of the Purchase Price of your new home.

The Purchase Price is the agreed-upon dollar amount that the seller will sell this house for. Let's say for example the Purchase Price is $100,000. If this house is worth $130,000 it doesn't make a lick of difference. The mortgage company is ONLY going to lend you $100,000. You can't take extra money for repairs.

There are a few programs that create an exception to this rule. If you are buying a home from a direct family member or have lived in the home you will buy for more than 1 year, you may be able to borrow more than 100% of the Purchase Price. There are also some loans that go up to 125% of the Purchase Price if you qualify, but again, these are exceptions.

Let's say the seller wants $100,000 for his house and the bank lends $100,000. Well, you haven't paid the mortgage broker, title insurance company, or lender yet. You would need to pay for these closing costs out of your pocket. All these fees are detailed on the Good Faith Estimate for you.

As much as these ads confuse us, there is no such thing as a free lunch when it comes to your mortgage. You can't come to a closing table with nothing but a pen and a smile. That will not get it done 98% of the time. It is extremely common for the person in the above loan scenario to need a couple thousand dollars to close the loan.

Cast of Characters - Part III

The Processor

Loan Processors are the workhorses of the mortgage broker team. They look at a loan file objectively and dig deep into the details. After the Loan Officer originates the loan and determines what bank or banks to send the loan to, that is when the Processor gets involved.

She will stack the file so that all the information and documentation that you gave to your loan officer can be easily read and organized. It will then be sent to the Underwriter at the selected lender for review. Then, we wait.

When Underwriting is complete and they have created the list of stipulations it is the processor's job to collect the necessary documents to close the loan. Sometimes the processor will call you directly and ask for these papers from you. Often, the processor will tell the loan officer what they need and the loan officer will contact you directly. Each mortgage brokerage is set up differently.

Because of the nature of the Processor's job, the Loan Officer and Processor work very closely throughout the process. In my office, my Processor sits about 15 feet away from where I sit. We meet twice a week to talk about each of our files. A great relationship between your Loan Officer and Processor is critical.

So, how can you use this information to help in the speed of your loan process? The Processor is one of the people in the process that you may or may not ever meet. I suggest that when you stop in at the office (which I suggest strongly that you do), ask to meet the person that will be processing your loan.

The people coordinating your loan and moving it towards closing are constantly staring at documents with your name on them. It's a great idea to give them a face and personality to match with the name. Your loan team is human and they will be apt to work on something more often and more diligently when they have a personal attachment to it. Just be careful not to take too much of your loan team's time. Their time is extremely valuable and they are usually trying to coordinate many loans simultaneously. When a problem arises close to a closing the mortgage office can look more like an Emergency Room after a major accident. It can get pretty intense. Let your Loan Officer know that they can tell you when they just can't be disturbed and you'll gladly stop by or call back at a later time.

To help expedite your loan process your best effort should be made to cooperate with your loan team. I've seen bad communication and unwillingness to cooperate destroy peoples' dreams to become a homeowner. You should make sure your Loan Officer has multiple ways of contacting you and let him know that you are comfortable talking to the Processor as well. Creating a positive impression on these two characters and displaying a willingness to help will cause your loan to glide right through the process to closing.

The Cast of Characters - Part II

The Underwriter

If you think it sounds a little too close to "The Undertaker" you're absolutely right! This is the person that could make or break your real estate transaction. The funny (but awful) thing about this is that the underwriter absolutely has the most power over the decision of your loan, yet you will never meet or even speak to this person.

After your buddy, the Loan Officer, has put together the loan file in a neat and easy-to-understand package, the underwriter will begin to tear it apart limb from limb. She will disect the loan into each of its 4 factors: income, assets, credit, and property type (we'll dive into more detail about these on a later post. Knowing these four loan factors can give you the control in the decision of your loan!)

The underwriter is someone paid by the lender to minimize thier risk in a transaction and uncover any potential fraud. This is how they do it:

Let's say you said that you make $100,000 per year at your job. The loan officer asked this question and wrote that number on the application. Now the underwriter has to prove that. She'll do that by looking at last year's income to make sure you made what you said. She'll also look at this year's income to make sure you're on track to make about that same amount. That's why she asks for last year's W2 form (or sometimes complete tax returns) and your most recent paystubs (to see your year-to-date income). A good loan officer would have already collected this information knowing that the underwriter will need it eventually.

This process is repeated for each of the 4 factors we discussed earlier. She'll need bank statements to prove the assets you said you have. The bank will need to verify at least the amount you need to bring to the closing table for settlement. Some banks will need to verify "reserves". This is a safety net. If the worst thing happened and you lost income, would you still be able to make your payment? The bank wants to be sure of this in some cases so they'll require you to put anywhere from two to six months of monthly payments (reserves) away in a checking or savings account.

She'll pour over your credit report and ask you or the loan officer to explain any strange items. She'll do the same thing with the appraisal report to make sure that the appraiser is accurately stating value.

Most lenders tell loan officers that they do "common sense" underwriting. They say to ask ourselves the question "Would I lend money to this person and expect to get it back?" The truth is that if the bank decides during the process that the loan isn't as attractive as it started out or there are too many twists and turns, they will simply give us stipulations that we couldn't humanly get.

An example of this: I was helping an investor get a loan for a 4-unit property. Everything was going well. We sent the appraisal to the bank and they reviewed it. They couldn't find anything wrong with the appraisal but the house was in a not-so-desirable section of town. But it was a nice house, nothing wrong with it! We were scheduling the closing and coming very close to the deadline when the bank faxed us new conditions at the last minute. They wanted the appraiser to get pictures of every room of the house. There were 18 rooms. We were panicked because the appraiser was backed up and the seller was pushing us to close ASAP. We got it done but that was the lender's idea of saying "We don't trust that this house is in good shape." They couldn't believe that a nice house like that was available in that area.

The moral here is that surprises can and do happen. Imagine if that appraiser didn't know me as well as he did and didn't do me the favor of going out and taking those pictures. I would have had to go to my borrower and say "For reasons I can't control, I can't help you buy this house. You are going to lose it to the next bidder." As a consumer, I ask that you be patient with your loan officer and get the full story. Sometimes, things are out of their control.

This in no way should scare you out of dealing with a loan officer. On the contrary, it should give you an incentive to work with one. If you had been dealing directly with a bank and they pop a suprise on you, you don't have someone on your side pulling strings to get this done.

My coworker had a similar situation where the underwriter suprised her with impossible stipulations. She asked the seller to extend the deadline and was able to switch the loan to another lender to get it done. If you are working directly with a bank you have their loan products to choose from and that's it. Loan officers have the benefits of working with plenty of lenders at the same time.

The Cast of Characters - Part I

There are many people involved in the mortgage loan process. Some you will meet or speak to, some you will never know existed but each has a very important role in the processing of your loan. If you know the people, you can better understand the process. I'll start at the start.

The Mortgage Loan Officer
The term "originator" is also often used and its more relevant to his role. This is the person that seeked you out and created the loan application. He may have found you through a referral, he might have found you on the internet, or he may just know you. One way or another he got your attention and sold you on the fact that you would be best off if he helped you get a loan. This person will earn a commision upon the loan closing and is in charge of the overall process of your loan. You should meet this person face-to-face since they have the most control over your application.

After he has originated the loan by seeking you out his next step is to "place" the loan. A mortgage broker works with 5-50 different lenders at any given time. They all try to get his loans by offering special incentives and promising great service and a quick closing. First the Loan Officer will determine which lenders will accept this particular loan. He'll then pick 2-3 lenders he feels comfortable with and sends them an overview of your file. The lender will normally fax him the interest rate and terms they can get based on the summary he showed them within 24 hours. He then picks the best lender to use. The "best" lender sometimes has less to do with rate than: the loan officer's comfort level with that lender and the people that work there, the incentives (in the form of monetary rebates at closing or rate cuts) that the loan officer receives for doing business with them, and the reputation of that lender's underwriting department.

He will then quote the rate with the lender he chose to you and let you know what your monthly payments will be. If you're local, the next step would be to set up an appointment where the two of you can sit and go over the details of your loan. He'll go over your payments, costs, and your credit report. He'll ask you to bring documentation to support your application. At this point you will be asked to sign your application and disclosures. We will get into the application and required documentation in a later post.

If your loan is a refinance, the loan process begins immediately. If you're buying a home he will issue you a PreQualification Letter. This is a letter of good faith to show the seller or their Realtor that you do have the ability to secure a mortgage. Often, this letter is required to view a property or start working with a Realtor. Having one gives you a distinct advantage in that the seller knows that once you sign a Sales Agreement your loan process begins immediately.

After you've signed the Sales Agreement (or right away if you are refinancing) the Loan Officer will order an appraisal and title search. He will also send your signed application and supporting documentation to the lender's underwriting office for review. This process usually takes 24-48 hours. It is then his job to collect all the information and documents that the underwriter requires before the loan can be "Clear to Close". After all is collected, the loan is "Clear" and the closing is scheduled. If you've chosen a local Loan Officer, he will be by your side as you sign your closing documents at the attorney's office.

We'll describe some other characters and their roles in the next post. The Loan Officer is the one person that's in it from start to finish so I needed to devote a whole page to him.

Explain To Me!

Hello and welcome to my first attempt at a blog. You as consumers deserve more control in your mortgage process. This is my attempt to give you that control in the form of information and knowledge.

I have been involved in mortgage financing for 5 years with 3 years specifically as a Mortgage Loan Officer. I've taken plenty of applications and have spoken to just as many people. I plan to share with you the patterns I've seen emerge and ways to improve your standing in the mortgage process and to improve your credit. I'd like to give you a leg-up on anyone else applying for a loan because you will know what's really going on.

Let me also tell you what I am not. I am not a writer. I cannot apologize for this shortcoming since my goal is not to impress you with prose. I want to tell it how it is. I'd like you to be exposed to the brain of a loan officer and I'd like to open the door to show you what goes on inside the bank during the decision process of your loan.

I don't pretend to be the best and most knowledgable loan officer out there. I'm sure there are plenty that make more money than me. The difference is that they make money based on what you don't know. I sleep better making sure everyone I talk to is completely educated about the mortgage process even if that does affect my earnings.

I'm not selling anything to you. Let me repeat: I'm not selling anything to you. Yes I'm a commisioned loan officer but I only work with clients I can meet face to face. The only way I'll work with someone directly is if you happen to be buying property in Pennsylvania. I know plenty of mortgage brokers that make money by helping people buy homes all across the country. They thrive by keeping their customer in the dark. Most of their customers don't realize that there is someone just down the street that can do the same thing as this person across the globe.

There are distinct benefits to staying local when choosing a mortgage broker. It saves time when you know you can drop off necessary documents at the office. Your loan officer can copy them and hand them right to you. Not so with a national broker. You also have the best advantage in the world when you can shake your loan officer's hand and smile. It is in those first 30 seconds of meeting a person that you can make the best decision whether you truly trust that person or not.

I know I didn't spill much information on my first blog here but this could perhaps be the most important point. Only work with people you can trust. The second your subconscious says that you can't trust this person you should cut and run. Speaking of... never ever ever do an application with a mortgage broker if they ask for any fee. You should not have to pay $1 out of your pocket to your loan officer until at least after you've found a house, signed a sales agreement and are having your future home appriased. Many lenders will even pay for that and charge you back in the closing costs. You should always be free to walk away from your mortgage broker. He should accept this because if you did walk, it was something he did or didn't do that made you leave.

In the same token, don't expect to come to the closing table with no money at all. It is VERY rare that this happens. You will need to make at least a small investment in this huge home purchase, usually a couple thousand dollars to secure your new home. It is unrealistic to think otherwise. There are ways to reduce the amount you would need to bring but we'll get into that a little later.

Since this is my intro to blogging, I'd appreciate any helpful advice or constructive criticism regarding future topics or just on improving the web page here.