I can’t decide which was more painful: shredding my ACL playing hoop, a chatty dentist drilling into my nerve or spending the last five months applying for a mortgage.
While it should be the former two that would bear the most pain, it was actually the latter that took the cake. Keep in mind: I have good credit, an attractive loan-to-value ratio and reliable income. For those with a different package, I can’t imagine the experience they’d have to go through. As a result, I asked my loan officer Dan Spitz at Wells Fargo to assist me with providing some helpful insight and tips that can improve one’s chances for success.
To begin with, understanding various options can certainly help.
- Government Loans
Government Federal Housing Administration (FHA) loans offer some of the most flexible loans on the market today. For owner-occupied borrowers, these programs require a minimal down payment of around three-and-a-half percent and lenders do consider approving borrowers with below-average credit.
Thankfully, this program is not just for the low-money-down or poor-credit crowd. Government loans also consider high-debt-to-income ratios. For borrowers outside the more stringent requirements of other programs below, FHAs loans can be a fantastic option.
As opposed to other programs, if various elements of a borrower’s package fall outside the guidelines but still seem to make sense, these loans could maintain a reasonable chance for success. For example, a borrower’s income might be low, but the person may have good credit with the ability to make a reasonable down payment. In the private sector, such a borrower might not get approved whereas here success can still be achieved.
Lending limits on these loans can go as high as $729,750 for a single unit. As for rates, percentages will vary according to the originator but should fall within a quarter-percent of a more conventional loan below.
The main drawback to FHAs is the agonizing paperwork involved as well as costly fees, specifically mortgage-insurance premiums that have up-front costs equal to 2.25 percent of the loan. For anyone getting a loan through these programs, you will also have ongoing Private Mortgage Insurance (PMI) payments as well.
- Conventional Conforming Loans
Traditional “conforming loans” (up to $417,000) typically offer the lowest rates. Lenders typically set rates according to the same benchmark, so if you see a big difference in the rate, it’s usually a sign of a higher fee built into the loan itself.
Rates in these programs vary according to the specific scenario. Condos and multi-units will generally have higher rates than those seeking loans on a single-family residence.
Credit scores in these programs bear significant impact. In these loans, your client may find a half-point higher closing cost with a mere two-point difference in their credit score.
Minimum down payment requirements for these loans are typically five percent, though this number will vary by state and county.
Income guidelines in these loans are quite strict. If your client has a high debt-to-income ratio, the application is likely going to be rejected even if it seems that the loan should otherwise be approved.
In these types of programs, many would think a lender’s biggest concern is whether or not the borrower will actually continue to pay. These days, however, lenders are equally concerned with something called “buybacks,” which is when a loan gets rejected by Fannie Mae or Freddie Mac, causing the originator to “buy back” the loan.
Buybacks can happen for any number of reasons and when it does, the lender is stuck carrying the loan. Certainly, they can try selling it to a third party but doing so will typically cost the originator somewhere around four percent to five percent of loan amount itself.
It’s for this reason that endless requests for documentation during the underwriting period can seem so utterly ridiculous thereby making a ripped ACL or drilled nerve by a chatty dentist a far more pleasurable experience.
- High-balance Conforming Loans
Back in the recent real estate train wreck, investors ran amuck from mortgage-backed securities (MBS) and the only market available for loans was typically through Fannie or Freddie.
Problem was that these entities were unable to purchase loans above $417,000. Faced with the possibility that the housing market would completely shut down, Congress created one of the many stimulus packages and increased this limit to $729,750.
The limit is actually based on prices in a particular county and guidelines for these loans are more restrictive versus the more conventional loans above. In addition, rates on these loans are slightly higher compared to their counterparts, typically to around an eighth of a percent.
- Jumbo Loans
A Few Quick Tips
“Jumbos” are sometimes called “portfolio loans” because these days, lenders are often forced to keep them in their portfolios. Because of the risks associated with the higher loan amounts, your clients may find the costs of these programs significantly higher than the alternatives above.
Lending guidelines on these loans have tightened the most. One of the major guidelines a lender will analyze closely is that of liquidity. Lenders want to see how much access to cash your client has after a down payment is made.
The good news on jumbos is that as a result of tighter underwriting, lenders are now generally originating quality loans. As a result, the investment world is starting to recognize the reduced risk and buyers coming back into this market have led to lower rates when compared to the recent past.
- Low advertised rates? May sound good, but rates are only part of the equation. Be sure to ask about origination and lender fees as well as the rate-lock period. Lowest rates typically have a 30-day lock and you may need more time to fund your loan.
- “No fees or closing costs?” Good luck. There are always fees associated with closing a transaction. If your client is being offered “no cost,” it means the lender is picking up the tab and giving you a slightly higher rate.
- Have your client check their credit 90 days before they apply for a loan. This gives your client enough time to pay down debt and/or take care of credit problems to improve their profile and thereby reduce their rate.
- To accelerate the underwriting process, be sure to prepare copies of your client’s last two tax returns, income and asset statements as well as bank, brokerage statements, W2s, K-1s and if your client is self-employed, make sure they don’t forget to include the last two years of business tax returns as well.
- Self-employed and taking many write offs? Your client will need to be prepared to likely get qualified for a lower loan amount.
Playing weekend hoop? Be sure to stretch out before making the run and as for friendly chatty dentists, I would very strongly suggest keeping the conversation to a minimum.
I hope this and the above will be of help to you and your clients.
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Alan Haft is an investment advisor representative with an insurance license, author of three books including the national bestseller, You Can Never Be Too Rich, and makes frequent appearances in national print, television and radio media such as The Wall Street Journal, Money Magazine, CNBC, BusinessWeek and many others. The amounts represented in this article should all be considered hypothetical and for example only.
* For full disclosure, Haft is a part of a firm that utilizes all industries which typically includes us receiving percentage based fees for brokerage servicesas well ascommissions when implementing insurance based plans. Haft does not work for any particular financial company or industry nor should this column be construed as an endorsement or condemnation for any particular product. Readers should note that all views and vendor recommendations as expressed in this article are solely the author’s and do not necessarily reflect the views of the AICPA CPA Insider™ or the AICPA.