Professionals, Professionalism and the Mortgage Broker

We have all heard the phrase, "You get what you pay for." That is true to the extent that you know what you should be paying! If you are working with a true professional mortgage broker, it will be evident. Here are some things to look for when choosing a mortgage broker so that you get the value you expect for your money:

1. Ask the broker if their company participates in continuing education.
2. Are you treated with respect and are concepts and options explained until you are comfortable with them?
3. Does your mortgage broker seem knowledgable about products and the market conditions?
4. Are you allowed more input than just the facts on an application?
5. Ask to see testimonials from satisfied clients.
6. Above all, work with someone you feel comfortable with.

Professionalism is a way of doing business by providing the client with what they want and how they want it by using the best possible product for them. A true professional will help you make critical choices, not make them for you.

As always your comments are welcome!

Brought to you by Professional Mortgage Group, Inc.

Mortgage Products

Conventional Loans

Conventional loans may be conforming and non-conforming. Conforming loans have terms and conditions that follow the guidelines set forth by Fannie Mae and Freddie Mac. These two stockholder-owned corporations purchase mortgage loans complying with the guidelines from mortgage lending institutions, packages the mortgages into securities and sell the securities to investors. By doing so, Fannie Mae and Freddie Mac, like Ginnie Mae, provide a continuous flow of affordable funds for home financing that result in the availability of mortgage credit for Customers. Fannie Mae and Freddie Mac guidelines establish the maximum loan amount, borrower credit and income requirements, down payment, and suitable properties. Fannie Mae and Freddie Mac announce new loan limits every year.

Jumbo Loans

Loans above the maximum loan amount established by Fannie Mae and Freddie Mac are known as Jumbo loans. Because jumbo loans are bought and sold on a much smaller scale, they often have a little higher interest rate than conforming, but the spread between the two varies with the economy.

B/C Loans

Loans that do not meet the borrower credit requirements of Fannie Mae and Freddie Mac are called 'B', 'C' and 'D' paper loans vs. 'A' paper conforming loans. B/C loans are offered to borrowers that may have recently filed for bankruptcy, foreclosure, or have had late payments on their credit reports. Their purpose is to offer temporary financing to these applicants until they can qualify for conforming "A" financing. The interest rates and programs vary, based upon many factors of the borrower's financial situation and credit history.

Fixed Rate Mortgages

With fixed rate mortgage (FRM) loans, the interest rate and your mortgage monthly payments remain fixed for the period of the loan. Fixed-rate mortgages are available for 40, 30, 25, 20, 15 years and 10 years. Generally, the shorter the term of a loan, the lower the interest rate you could get. The most popular mortgage terms are 30 and 15 years. With the traditional 30-year fixed rate mortgage your monthly payments are lower than they would be on a shorter term loan. But if you can afford higher monthly payments a 15-year fixed-rate mortgage allows you to repay your loan twice as faster and save more than half the total interest costs of a 30-year loan. The payments on fixed rate fully amortizing loans are calculated so that at the end of the term the mortgage loan is paid in full. During the early amortization period, a large percentage of the monthly payment is used for paying the interest. As the loan is paid down, more of the monthly payment is applied to principal.

Balloon Loans

Balloon loans are short-term fixed rate loans that have fixed monthly payments based usually upon a 30-year fully amortizing schedule and a lump sum payment at the end of its term. Usually they have terms of 3, 5, and 7 years. The advantage of this type of loan is that the interest rate on balloon loans is generally lower than 30- and 15- year mortgages resulting in lower monthly payments. The disadvantage is that at the end of the term you will have to come up with a lump sum to pay off your lender, either through a refinance or from your own savings. Balloon loans with refinancing option allow borrowers to convert the mortgage at the end of the balloon period to a fixed rate loan -- based upon the outstanding principal balance -- if certain conditions are met. If you refinance the loan at maturity you need not be requalified, nor the property reapproved. The interest rate on the new loan is a current rate at the time of conversion. There might be a minimal processing fee to obtain the new loan. The most popular terms are 5/25 Balloon, and 7/23 Balloon.

Adjustable Rate Mortgages

Variable or adjustable loan is loan whose interest rate, and accordingly monthly payments, fluctuates over the period of the loan. With this type of mortgage, periodic adjustments based on changes in a defined index are made to the interest rate. The index for your particular loan is established at the time of application.

Well known ARM Indexes include:

Constant Maturity Treasury (CMT)
Treasury Bill (T-Bill)
12-Month Treasury Average (MTA or MAT)
Certificate of Deposit Index (CODI)
11th District Cost of Funds Index (COFI)
Cost of Savings Index (COSI)
London Inter Bank Offering Rates (LIBOR)
Certificates of Deposit (CD) Indexes
Bank Prime Loan (Prime Rate)
Fannie Mae's Required Net Yield (RNY)
National Average Contract Mortgage Rate

Negatively amortizing loans

Some types of ARMs (for example, option ARM loans) offer payment caps rather than interest rate caps, which limit the amount the monthly payment can increase. If a loan has payment cap but has no periodic interest rate cap, then the loan may become negatively amortized: if the interest rates rise to the point that the monthly mortgage payment does not cover the interest due, any unpaid interest will get added to the loan balance, so the loan balance increases. However, you always have the option to pay the minimum monthly payment, or the fully amortized amount due.

Option ARM Loans

One of the most creative products that don’t require a set payment each month is the option ARM. After the first payment, you get four payment options to choose from each month: your lender sends you a monthly statement offering a minimum payment (1), interest-only payment (2), 30-year amortized payment (3) or 15-year amortized payment (4).
Combined (Hybrid) Loans.

Hybrid loans, a combination of fixed and ARM loans come in different varieties:

Fixed-period ARMs

With fixed-period ARMs homeowners can enjoy from three to ten years of fixed payments before the initial interest rate change. At the end of the fixed period, the interest rate will adjust annually. Fixed-period ARMs -- 30/3/1, 30/5/1, 30/7/1 and 30/10/1 -- are generally tied to the one-year Treasury securities index. ARMs with an initial fixed period beside of lifetime and adjustment caps usually have also first adjustment cap. It limits the interest rate you will pay the first time your rate is adjusted. First adjustment caps vary with type of loan program. The advantage of these loans is that the interest rate is lower than for a 30-year fixed (the lender is not locked in for as long so their risk is lower and they can charge less) but you still get the advantage of a fixed rate for a period of time.

Two-Step Mortgage

Two-Step mortgages have a fixed rate for a certain time, most often 5 or 7 years, and then interest rate changes to a current market rate. After that adjustment the mortgage maintains new fixed rate for the remaining 23 or 25 years.

Convertible ARMs

Some ARMs come with option to convert them to a fixed-rate mortgage at designated times (usually during the first five years on the adjustment date), if you see interest rates starting to rise. The new rate is established at the current market rate for fixed-rate mortgages. The conversion is typically done for a nominal fee and requires almost no paperwork. The disadvantage is that the conversion interest rate is typically a little higher than the market rate at that time. The other kind of convertible mortgage is a fixed rate loan with rate reduction option. If rates had dropped since the time of closing it allows you, under some prescribed conditions, for a small conversion fee to adjust your mortgage to going market rate. Generally the interest rate or discount points may be a little higher for a convertible loan.

Graduated Payment Mortgages (GPMs)

Graduated payment mortgages have payments that start low and gradually increase at predetermined times. Lower initial payments allow you to qualify for a larger loan amount. The monthly payments will eventually be higher in order to catch up from the lower payments. In fact, your loan will be negatively amortizing during the early years of the loan, then pay off the principal at an accelerated pace through the later years. Lenders offer different GPM payment plans, which vary in the rate of payment increases and the number of years over which the payments will increase. The greater the rate of increase or the longer the period of increase, the lower the mortgage payments in the early years.

Buydown Mortgage

A temporary buydown is the type of loan with an initially discounted interest rate which gradually increases to an agreed-upon fixed rate usually within one to three years. An initially discounted rate allows you to qualify for more houses with the same income and gives you the advantage of lower initial monthly payments for the first years of the loan when extra money may be needed for furnishings or home improvements. To reduce your monthly payments during the first few years of a mortgage you make an initial lump sum payment to the lender. If you do not have the cash to pay for the buydown, the lender can pay this fee if you agree on a little higher interest rate. A very popular buydown is the 2-1 buydown. 3-2-1 and 1-0 buydowns are also available, though less common. Compressed Buydown works the same way, but with the interest rate changing every six months instead of on a yearly basis. The lower rate may apply for the full duration of the loan or for just the first few years. A buydown may be used to qualify a borrower who would otherwise not qualify. This is because a buydown results in lower payments which are easier to qualify for.

With a variety of different loan programs available, it is important to choose the type of loan that will best suit your needs. The right type of mortgage chiefly depends on how long you plan on staying in the house and the amount of monthly payment you can comfortably afford. If you don't plan to stay in your house for at least 5 to 7 years, it will be reasonable to consider an Adjustable Rate Mortgage, Balloon Mortgage or Two-Step Mortgage. ARMs traditionally offer lower interest rates during the early years of the loan than fixed-rate loans. A Two-Step Mortgage will give you a lower interest rate than a 30-year mortgage for the first five or seven years. A Balloon Mortgage offers lower interest rates for shorter term financing, usually five or seven years. Because of a lower interest rate it is easy to qualify for these types of mortgages. However don't accept the ARM unless you can afford the maximum possible monthly payment.

Good Faith Estimate

I receive many questions about the documentation needed when you apply for a mortgage loan. Everyone wants to know what interest rate they are being charged. They also want to know what fees are there. The Good Faith Estimate or (GFE) is a very critical document for the borrower. Be sure to look at it in detail and don't be shy to ask questions. The Good Faith Estimate will list the following:

• The Interest rate you are being charged
• The loan amount
• The Term of loan
• Items Payable in connection with loan
• Reserves deposited with lender
• Title charges
• Government recording and transfer charges
• Additional Charges
• Summary of the transaction
• Summary of your payment breakdown

Most people seem to forget that the Good Faith Estimate is exactly that, only an ESTIMATE!We do our absolute best in predicting your fees, however these estimates are rarely exact. Title charges vary by title company and some county's require the costs be distributed differently. For a purchase, we don't know what you insurance will be and in some cases we must estimate your taxes. If you have a lien that we are unaware of that shows up on title, this will obviously affect the loan. As we all know interest rates change daily and the rate initially quoted to you may not be available come closing. This is rare, but as your file gets worked circumstances can come up. When this happens the underwriter has the power to adjust the deal slightly and it affects your pricing. As these details come available to us, we can adjust the loan. A good Mortgage Broker will keep you up to speed when any changes occur and how this will impact your closing costs and payment! Lastly, once the deal goes to closing we require our brokers to call and go over the final fees and loan terms with our client before closing. You should always require your broker to do this. We at Professional Mortgage Group, Inc. do not want any surprises for our clients!

Your comments are welcomed. If you have any questions on any other mortgage disclosures, please ask.

Brought to you by

Professional Mortgage Group, Inc. of Columbia, MO.

Your Columbia Mortgage Broker!

Mortgage Brokers

I've heard a lot of discussion lately of what exactly I or my staff do as a mortgage broker. Luckily I have an outlet, this "blog", to shed some light on what goes on "behind closed doors" with regards to our clients files. Hopefully, to your surprise, you will find this very educational and enlightening as to what we do as mortgage professionals.

First, let's assume we already have worked with the buyers and real estate agent to get a "buyer friendly" contract that will be acceptable to the lender. Also, let's assume we have met with the client and have signed the preliminary "disclosures" and explained the entire transaction in detail regarding: rate, term, product, closing costs, first payment, out-of-pocket expense, etc. Let us also assume that we have collected the necessary documents from the client in order to submit the file to the "right" lender (i.e. one that is respected, timely, customer service oriented, and possesses the best possible product for our client). This could entail all or some of the following: pay stubs, W2's, bank statement, savings statements, 401k, divorce decree, bankruptcy papers, lease agreements, etc.

Once all of this preliminary leg work is done we completely comb through the file to make sure that the underwriters understand the product and transaction type. For instance, I recently heard a story of a purchase closing going astray because the lender had the name spelled wrong on the closing documents. This could have all been avoided had the broker proofed the application and the loan commitment from the lender to ensure the proper name spelling. After we have a "complete" file we make copies and overnight the file to the lender for underwriting. In the mean time we are ordering title work, a closing protection letter, wire instructions, appraisal, home owner's insurance, verification of employment, verification of deposit, getting a copy of the canceled earnest money check and many other items.

When we have the commitment from the lender hopefully there are very few "conditions". This is really where brokers must do their homework. We must make sure the conditions are reasonable, make sense and are realistic. What do I mean? Well, if the client is a W-2 employee and the underwriter is wanting last year's Form 1099, something that does not exist for a W-2 employee, it is an item we cannot provide. We must then call or e-mail the underwriter, processor and account executive to make sure the issue is resolved. Some of you may be asking; what are "conditions"? Well conditions are stipulations to the loan approval the broker must provide in order for the loan to close. Examples of some conditions are as follows: updated pay stub, last year's W-2, lien release letter, 2 months bank statements, letter of explanation etc.

Keep in mind this entire time we are watching rate trends and market trends to advise the client when the best possible time to lock their loan might be. We want to make sure the client gets the best possible rate and the only way to do that is to have a substantial knowledge of the market and what does and does not affect interest rates. The market, especially in today's environment, is changing drastically and we must be on top of our game!

After the loan is cleared and ready to close we must make sure the proper fees are charged, along with the correct rate, term, loan amount and vesting. The last thing you want is a bill for some unpaid appraisal or inspection invoice that you must then contact the clients and explain to them why they have more expenses. Our job as a broker is to make sure all the I's are dotted and the T's crossed. This makes for a happy client, realtor, seller, buyer and title agent.

Hopefully you have a new view of the mortgage broker and what he/she does "behind closed doors". There is much more to discuss but this portrays the "nuts and bolts" and perhaps another blog will bring time to dig a little further into more details.

Your Comments are Welcomed!

Brought to you by the "Industry Professionals" at Professional Mortgage Group, Inc. Columbia, Missouri.

Good News From The Fed!...(maybe)

Yesterday the Federal Reserve kept rates steady and indicated that they felt overall the economy is cooling enough to keep inflation in check. They still are concerned about a few areas, but overall seem to be in a wait-and-see mode rather than a tightening one. This is potentially good news not only for the stock market but also for borrowers.

The rates on mortgages do not necessarily move in lock step with the Fed funds rate. Most mortgages have their rates based on the U.S. Treasury or some other bond market index. The Federal Reserve can only affect the Fed funds rate (the rate charged to banks for borrowing overnight funds to meet reserve requirements) and the actual reserve requirements of the nation's banks. So, mortgage rates are not based directly on the rates set by the Federal Reserve.

The Fed funds rate does however affect the loan rates in an indirect way. Rates that a bank charges for its loans in the long term should be more than what it could make passing money through the Federal Reserve. Loaning money to people is "risky" where loaning it to the Government is not. As the Fed funds rate increases, so must bank loan rates...eventually.

What does all this mean for the consumer? It means that there will not be any pressure from the Federal Reserve on rates for now. However, since the Fed funds rate is only a part of what determines a mortgage rate, keep your eyes on the bond markets to see where rates are headed.

Of course, working with a professional mortgage lender allows you to use expertise on markets and rates to your advantage.

RESPA Disclosures

What are RESPA Disclosures? They are disclosures that break down the costs associated with the settlement, describe servicing and escrow account practices, and gives the customer information about the settlement service providers. RESPA stands for Real Estate Settlement Procedures Act.

RESPA requires the lenders or brokers give the customer a Good Faith Estimate of settlement service charges, of a loan application. Customers are suppose to receive this GFE within 3 business days from application date. Remember that these costs are estimates and are not guaranteed costs.

RESPA also requires the lenders or brokers to explain in writing if the loan will be service retained or service released. This is called the Servicing Disclosure Statement.

RESPA requires a referring party to give customers an Affiliated Business Arrangement Disclosure, if that business or company is owned or controlled by a common corporate parent that offer settlement services. So when lenders, brokers, or other participants in a settlement refers customers to an affiliate for a settlement service, the referring party must give customers an Affiliated Business Arrangement Disclosure.

Before a settlement, customers have the right to inspect the HUD-1 Settlement Statement. This is an itemized statement of services provided and fees charged to the customer. The HUD-1 Settlement Statement is completed by the settlement agent who conducts the settlement.

Finally, the lender may require the customer to establish an escrow or impound account to make sure real estate taxes and homeowner insurance premiums are paid currently. In this case, the customer usually has to pay an initial amount at the settlement to start the account plus an additional amount with each month's regular payment. Some escrow account require a cushion to ensure the lender has enough money to make the payments when due. RESPA limits the amount of cushion to a maximum of 2 months of escrow payments.

Prepayment Penalties

So what is the big deal with prepayment penalties? Are they a rip-off? Should I take a loan with one? These are very common questions. The following is a very quick summary of the pros and cons of a prepayment penalty.

What is a prepayment penalty? A prepayment penalty is a provision of your contract with the lender that states that in the event you pay off the loan entirely, you will pay a penalty. Penalties are usually expressed as a percent of the outstanding balance at time of prepayment, or a specified number of months of interest.
Usually, prepayment penalties decline or disappear with the passage of time. Seldom do they apply after the fifth year. Partial prepayments of up to 20% of the balance usually are allowed in any one year without a penalty. A penalty that applies to a home sale as well as a refinancing, is a "hard" penalty; if it applies only to a refinancing, it is a "soft" penalty.

First, you as a borrower are classified as a prime or sub-prime borrower. If you are prime, you have good credit and qualify for a conforming loan. If this is the case, a prepayment penalty is something that you should avoid. The only scenario that is different is if a penalty works in your favor for your unique situation. For example, You just moved to Columbia and know you will be working at the University of MO for 4-5 years and then you will move on to another University. When you purchased your home you took a loan that offered a lower interest rate if you elected to have a 2 or 3 year prepayment penalty. As you can see in this situation, you can get the lower rate and payment and the penalty will not affect you. The only drawback is if some emergency situation came up and your plans changed. This is doubtful, but possible. Assuming no emergency comes up, you can sell and move on and you enjoyed the savings of the lower rate!
As a Prime borrower, keep in mind you also have more bargaining power when discussing prepayment penalties. With certain lenders you have options like its duration and a penalty only for refinancing, not selling. Just ask what is available.

If you are a sub-prime borrower, your options change! You do not have many options and the lenders offering these loans don't give you much choice. They simply don't make enough money on sub-prime loans without prepays and wont offer them. Now as I say your options are limited, always ask what is available. You may be able to negotiate between a couple options. If you are able to choose a loan without a pre-pay, the rate will be higher. Since sub-prime loans already have higher rates, this is not a very appealing option!

Now that you know the difference in pre-pay options for prime and sub-prime loans, lets look at a couple other points.

Before you raise a big stink about a pre-pay and pass on a refinance that will greatly help your current situation, consider the worst case scenario penalty. If your mortgage is small and your penalty is 2% of the unpaid balance, the amount may not be that large. Say you own a home worth $150,000 and you owe $80,000. You need to refinance to payoff some credit cards that are hounding you. If your penalty is 2%, your penalty would be $1,600. This may be worth it since you have the equity and the new loan will make your life much easier!
Now if you owe $400,000 and your penalty is $8,000, things may change a bit.

Occasionally, you may receive a letter in the mail from your lender asking you to add a prepayment penalty. Some people can be duped into this. There is absolutely not reason to agree to this. Unless they offer you a lower rate in return, just decline this attempt. The reason they want this is because your loan is worth more if sold on the market with the prepayment penalty.

In summary try to avoid a prepayment penalty if possible. However, just stay calm and analyze the entire situation if your loan officer is telling you that it is not an option unless you want to pay a higher rate . Some situations may make it impossible for you to accept a penalty and others will allow for it. Remember, the loan officer doesn't enjoy offering these penalties. They are doing so because they have no choice or are trying to give you options that will offer a lower interest rate.

Questions and Comments are welcomed?

Professional Mortgage Group, Inc.
Columbia, MO

100% Financing!

The big rave the past few years was; 100% financing and how easy it was to obtain. Wow, what a difference 2 weeks makes! Lenders have really cracked down on high ltv (loan-to-value) loans (ie 100% financing) and what it takes to qualify for them.

Most Fannie Mae loans are requiring the borrower to invest at least $500.00 of their own funds in the transaction which honestly, to purchase a home is not that much money. Second, lenders are more likely to require the borrowers to have a least 3 months payments in reserves. This means if your total payment is $1000.00, they want to see a minimum of $3,000.00 in a savings, IRA, checking or some other form of liquid asset. One other thing they are cautiously watching is late payments and the recentcy of them. If you have a couple of minor 30 day lates, lenders are wanting a valid explanation as to why they were late.

Don't get me wrong 100% financing is still alive and well and still very much a part of the growing housing community but lenders are stiffening the guidelines it takes to achieve them. Make sure you deal with a lender that will explain every detail of the loan process to you and make you aware of program changes as they come available. The market is changing fast and you will need a professional who is on top of his/her game!

Your comments are welcomed!
Brought to you by the Professional Mortgage Group, Inc. "The Industry Professionals"

What a Crazy Sub-Prime Market!

It sure has been a crazy couple of weeks for the sub-prime lending market! You can say it has been March Madness for the lending world. It hasn't been as fun as the College Basketball March Madness that we all are accustomed to either! If you haven't heard, the news wires have been filled with news of faltering lenders. One of the largest Sub-prime players (New Century) is really hurting and bankruptcy is looming. FMF Capital shut down last week and earlier this year a few others packed up and closed their doors! What does this all mean for PMG and our customers? This means we as brokers must be selective as to whom we do business with. Major players such as Countrywide Home Loans, Chase, and Wells Fargo are going to continue to thrive and will be used. More and more brokers and customers will flock to them because of their stability. Now this doesn't mean other lenders are bad or will not be used, they are just going to be checked out thoroughly before we form a business relationship with them. We will not sacrifice our customers financial future! If it doesn't make sense to use a particular lender, then we won't. We are very good at knowing which lenders must be used in certain situations and we know who can get the deal done for our clients. Once this storm is over, the good lenders will remain and it will be back to business as usual. Any lender could have been successful with the mortgage boom that has gone on for the past several years, it is times like now that the cream rises to the top!

Professional Mortgage Group wants to continue making a name for itself in the Columbia, MO market. PMG's goal is to be known as THE mortgage broker for Mid-Missouri and we want to be thought of first when it comes to a mortgage!

Professional Mortgage Group, Inc.
Columbia, MO

Trade Shows

I recently attended two events here in Columbia. One, the Home Show, was a disappointment. The other, the Columbia Chamber of Commerce Business Expo, met my expectations.

So, what were my expectations and why did one disappoint where the other did not? When I go to these types of trade shows, I have one goal in mind. I want to network. I want to get face to face with as many professionals that I would like to work with or who might want to work with me as possible.

This leads me to why the Home Show disappointed and the Business Expo did not. I have worked as a vendor at the Home Show in the past and I remember vividly how packed the Hearnes Center would be both in vendors and the general public. This year there had to be less than 90 booths and very little of the general public walking around.

I will be generous and grant that I purposely went during a low volume time as far as the public attendance goes as I was there primarily to talk to the professionals showing there. But the lack of vendors was astonishing! This used to be Mid-Missouri's premier event for those involved in the home building and real estate industries.

Having been disappointed overall, I would like to say that I did have a few good conversations with several people. But, I will have to do some serious evaluation on whether it will be worth my time to attend next year.

The Business Expo was a great event this year, as we said yesterday on this blog. The turnout was good, and the opportunities for networking with professionals were many. I will be definitely be going back next year.

What do you think? Am I thinking the right things about these two events or am I wrong? Please let me know!

Business Expo

After visiting the 2007 Columbia Business Expo, there was a lot of business opportunity of networking. It was the best turn out I have ever witnessed. As a mortgage broker, I had the opportunity to meet new business partners and visit with current partners. The experience is worth the $5 to attend. I am already looking forward to next years turnout.

Columbia is a great community to have these type of functions. It gives business owners and potential clients a chance to interact face to face.