The state of today’s mortgage lending is characterized by three major factors: market volatility, accountability, and challenges in selecting the right mortgage lending source.
Market volatility refers to both mortgage rates and home prices. Mortgage rates, which depend on publicly traded bond markets for mortgage backed securities (MBS), fluctuate daily, if not several times a day, due to global and domestic economic events. Threats of inflation, government borrowing, economic trends, foreign debt and trade, political unrest affecting commodity prices, stock market activity—all of these cause reactions in the bond market that affect mortgage rates. Although rates are at all time lows, it is now virtually impossible to time the market, so a rate quoted at 9am could be drastically different only a few hours later. A trained professional should be able to show you how the bond market is performing, analyze trends, and be a “personal shopper” for their clients in the volatile rate environment.
Home prices are scrutinized like never before. The appraisal, and, indirectly, who performs the appraisal, becomes one of the most important factors in loan approval. Many large bank lenders use third party appraisal management companies to assign appraisers, and this creates a risk that the appraiser is not knowledgeable about the trends in the local market. Home prices in a given neighborhood could also vary widely depending on the existence of distress sales (foreclosures and short sales), and sifting through the relevant comparable sales can be a challenge. Some areas are actually appreciating in value, despite what you might have heard in the news, but you need a local, experienced appraiser who really understands the market to provide the most accurate evaluation.
Accountability applies both to borrowers and their loan originators. Borrowers must now provide more documentation than ever before—tax returns and bank statements are required for all loans—as well as be expected to sign more disclosures and forms than any other time in mortgage origination history. Cash flow is much more important than assets, and newly self-employed or retired people need to plan carefully if they intend to purchase a home with income sources that they have not drawn upon for appropriate lengths of time.
There are still many low down payment options for home buyers as well, including USDA, FHA, VA, and, yes, loans with private mortgage insurance. Such loans are appropriate not only for first time homebuyers but also people relocating to new areas who have had to sell their previous homes for lower prices, and hence, have limited funds for down payments.
Borrowers should no longer expect to get a rate quoted without providing important information and allowing their credit history to be checked. Borrowers with lower credit scores may either pay higher rates or find themselves ineligible for any loan until they take steps to raise their scores.
People who pay their bills on time, have steady incomes, and have good credit scores (720+) can get loans at unprecedented low interest rates. Self employed and commissioned people have to show track records of success in their work and not deduct so many expenses that their cash flow becomes too low to qualify. People who can’t prove their income can’t get loans.
A loan originator must now be an expert in coaching his or her clients in gathering and presenting a loan application package that is comprehensive and addresses any issues up front. That originator also needs to work for a lender who can offer quick turn times for loan decisions and make all decisions in-house. Many large bank lenders can no longer close loans quickly, and have very little accountability to the borrower in keeping track of their files. Loan originators should have in place a disciplined regular communication program for every loan that keeps every party (borrowers, realtors, attorneys) proactively informed.
Thus choosing the right lender becomes critical. While rates are important, most lenders tend to have rates in a similar range as their loans all ultimately end up in the same secondary bond market. Minor pricing variations could result from quotes at different times, different lock periods, or levels of service. Many low-priced lending sources such as internet lenders will not offer the personal attention, service, and accountability that a local loan originator will provide, not to mention the on-the-ground local problem solving necessary to get things done properly. Finding the right lender is as simple as asking 7 questions; for more information on this, watch the video at http://vimeo.com/25821745.
In summary, to properly navigate today’s lending environment requires working with trained, experienced local professionals to help prospective borrowers understand the market, use local appraisers, compile a solid loan application, and remain accountable to the borrower throughout the process.