Back to Basics: Mortgage Lending 101
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Mortgage Basics provides information about mortgage products and programs that will help real estate agents realize success. Topics include: - when you need to ask for more time to close, - property types and characteristics that might be more difficult to sell (and how to sell them), - how to use various products/programs to help increase a buyer's purchasing power.
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Back to Basics: Mortgage Lending 101
- 1. Back to Basics: Mortgage Lending 101 June 16, 2015 Emily C Ingram New American Funding
- 2. Who is Emily C Ingram? • Local mortgage lender with New American Funding • 14+ years experience • Loan originator, processor, and underwriter • Bachelor’s degree in mathematics • Board member, Jefferson Co Home Builders Association • Board member, Real Estate Professionals for Affordable Housing • Occasionally skips work to go sailing.
- 3. Obligatory Disclosures • I’m pretty smart, but I don’t know everything. • Change is inevitable.
- 4. Objectives • Discuss types of mortgage lenders • Recognize categories of mortgage products • Identify (and sell) “problem” property types • Utilize mortgage programs and products to increase buyer’s purchasing power.
- 5. Types of Mortgage Lenders Origination Underwriting Funding Servicing Depository Institution X X X X Mortgage Bank/Lender X X X X Correspondent Lender X X X Mortgage Broker X
- 6. Categories of Mortgage Loans • Conventional Conforming FNMA / FHLMC • Government FHA / VA / USDA • Conventional Non-Conforming Funky Products / Funky People / Funky Properties
- 7. Conventional Conforming • Who is Fannie Mae & Freddie Mac? • Guidelines established by FNMA and FHLMC • Popular vanilla loan choice • Make sure your lender can choose! The GSEs asset holdings – either through mortgage securitizations or direct portfolio holdings – have increased from approximately 7% of total residential mortgage market originations in 1980 ($78 billion) to 46.7% in 2010 ($5.3 trillion). - Federal Housing Finance Agency
- 8. Features & Benefits “Standard” Conventional Conforming My Community Home Possible Minimum Down Payment 5% 3% Up Front Mortgage Ins private MI required with < 20% down lower private MI requirementsMonthly Mortgage Ins Income Limits none $72,680 Property Type SFR, 2-4 units, manuf, condo SFR, condo Occupancy primary, 2nd, non owner primary Interested Party Contribution 2% - 9% 3% Max Loan Amount $417,000 $417,000 Max DTI 45% 43-45% Credit Score 620 660 FTHB Restriction no yes and no Home Buyer Education not required required
- 9. Interested Party Contributions Occupancy Down Payment Max Contribution Primary/2nd < 10% 3% 24.99 – 10% 6% > 25% 9% Investment all 2%
- 10. Government - FHA • Who is FHA? • More lenient guidelines • Have a bad rap • Guidelines will change in September
- 11. Features & Benefits FHA Minimum Down Payment 3.5% Up Front Mortgage Insurance 1.75% Monthly Mortgage Insurance 0.85% / 12 Income Limits none Property Type SFR, 2-4 units, manuf, condo Occupancy primary Interested Party Contribution 6% Max Loan Amount $322,000 Max DTI 45%’ish Credit Score 580 FTHB Restriction no Home Buyer Education not required
- 12. Government - VA • Who is VA • Eligible veterans (COE) • Big draw = 0% down • Non-allowable fees • Tougher appraisals
- 13. Features & Benefits VA Minimum Down Payment 0% Funding Fee (MI) 0 – 3.30% Monthly Mortgage Insurance 0% Income Limits none Property Type SFR, 2-4 units, manuf, condo Occupancy primary Interested Party Contribution up to 4% for prepaids and funding fee Max Loan Amount none Max DTI 45%’ish Credit Score 580 FTHB Restriction no Home Buyer Education not required
- 14. Government - USDA • Who is USDA? • Rural properties / income limits • No down payment • Allow additional time for closing • No income producing properties
- 15. Features & Benefits USDA Minimum Down Payment 0% Guarantee Fee (MI) 2.0% Monthly Mortgage Insurance 0.5% / 12 Income Limits $75,650 Property Type SFR, condo Occupancy primary Interested Party Contribution 6% Max Loan Amount none Max DTI 29/41% (32/44%) Credit Score 620 FTHB Restriction no Home Buyer Education not required
- 16. Condominiums • Condo project must be eligible • No “spot” approvals • FNMA/FHLMC, FHA, and VA all have slightly different guidelines • If you list a condo, have it pre-approved by your lender!
- 17. Manufactured Homes • Fewer options • Doublewide • Built after June, 1976 • Moved only once • Permanent foundation • Foundation inspection • L&I inspections
- 18. Down Payment Assistance • Available through WSHFC • Second mortgage used for down payment • Some have deferred payments/no interest • Follow standard underwriting guidelines • No FTHB requirement • Must work with an “approved” lender • Income limits • Home buyer education required • Higher interest rates
- 19. Mortgage Credit Certificate • Tax credit equal to 20% of annual interest • Afford a slightly larger home • Program can be combined with any mortgage • Must work with an “approved” lender • First time home buyer • Income limit $70,000 (1-2 people) • Acquisition limit $310,000 • Home buyer education required
- 20. Conventional Non-Conforming • Funky products, people, or property • Lenders determine guidelines • Lenders determine interest rates • Fewer options
- 21. Funky Products Jumbo Loans • Loan amounts > $417,000 • Intense competition • 20-25% down payment • Credit scores 680+ • Lower debt to income ratios • Reserves required Other funky products: interest only, construction loans, lines of credit
- 22. Funky People • Recent major derogatory credit • Asset dissipation • High debt to income ratio • Stated income • Foreign national
- 23. Funky Properties • Non-warrantable condos • Hobby farms • Log homes • Handled case-by-case
- 24. Refer to New American Funding! (aka Shameless Self Promotion) • More product options • Better customer service • Who ya’ gonna call? • Local appraisers • Go the extra mile • 40 years combined experience in Port Townsend
- 25. Referral Best Practices “The first lender I would have you talk to would be: Emily Ingram of New American Funding, her phone number is 360-531-1934 and I have seen her follow through and admire her work style and dedication. I, by office policy, must recommend two other lenders for you to contact. Acme Bank has a good reputation (www.acme.com). And also USA Mortgage Co, specifically, Jane Doe at 360-555-1212.” • Call with the buyer sitting in the office • Give the referral partner the buyer’s name/number • The “multiple business cards” scenario
Editor's Notes
- Introductions Lunch will be delivered around noon / pause for 10/15 minutes and keep going I’ll stop every once in awhile and ask questions Sticky notes around the room Restrooms are behind me. Please silence your phones. If you’re not big on taking notes, I’ll show you where to get this presentation online.
- My name is Emily Ingram. I’ve worked in the mortgage industry for almost 15 years. During that time, I’ve worked for large megabanks and small brokers. I’ve played a number of different roles I’ve really learned to think like an underwriter (which is kinda scary) If you stop by the office on a beautiful sunny day like today and I’m not there, there is always a slight chance I’m out sailing.
- That being said… I’ve done my best to present accurate information. I wrote all this material This presentation is not authorized or endorsed Don’t tell my boss Also, guidelines change every day. There is an exception to every rule.
- We’re gonna talk about what you need to know about mortgage products and programs to help you successful. when you need to ask for more time to close, property types and characteristics that might be more difficult to sell (and how to sell them), how to use various products/programs to help your buyers purchase the most home they can afford.
- - Both depository institutions & mortgage banks function similarly. - Mortgage brokers don’t lend money at all... Correspondent lending. Hybrid between the two. So how do you know which type of lender you’re working with? You don’t unless you ask. To complicate matters further, lenders can play more than one role. Small banks/credit unions… At New American Funding, 95% of what I do is this… What are advantages/disadvantages? Large depository institutions (major banks) often have centralized underwriting. The larger the institution, the less nimble they are to respond to changes in demand. Large banks also tend to be more conservative with their underwriting guidelines. Explain credit overlays. You don’t see as many mortgage brokers as you used to. In years past… Brokers don’t have any control over the process
- A conforming loan is any loan that conforms to guidelines set forth by FNMA and FHLMC. A conventional loan is any loan that is NOT insured by the US government. A non-conforming loan does NOT conform to guidelines set forth by FNMA and FHLMC. ANY QUESTIONS SO FAR?
- Who are FNMA and FHLMC? What do they do? - FNMA and FHLMC are GSEs – Government Sponsored Entities Their purpose is to expand the secondary mortgage market by securitizing mortgages in the form of MBSs, allowing lenders to reinvest their assets into more lending. So FNMA and FHLMC set forth guidelines for mortgages they will securitize. Lenders know if they make loans that meet those guidelines, they can sell those loans on the secondary market. And investors who are buying those securities have assurances as to the quality of the loans. Who Gets? Lots of people. Nearly 47% of all mortgages. For me, it’s probably closer to 75%. What do you Need to Know? Work with a lender who can choose between FNMA and FHLMC. They can have different guidelines.
- Down payment – only 5% required – Down payment is a little higher for 2nd homes / NOO Mortgage insurance. - Most loans with < 80% “LTV” require MI. CC & govt loans work a little differently. - PMI options: pay up front, pay monthly, split, LPMI Can be paid by the buyer, by the seller, or financed The amount of the MI that you pay is a percentage of the loan amt. The percentage is based on LTV and FICO and other factors. Let’s say you’re buying a $250K house – 5% down w/ a 640 credit score - $230/mo – The same person who puts 15% down - $78/mo Most PMI can be canceled. $417K for 1-unit
- IP = Realtor, seller, builder This is a percentage of the sales price. QUESTIONS ABOUT CONVENTIONAL CONFORMING LOANS?
- The Federal Housing Administration was created during the Great Depression to increase home construction, reduce unemployment, and operate various loan insurance programs. FHA doesn’t loan money. FHA doesn’t underwrite or approve the borrower. FHA insures the lending institution in case of loss. They’re basically playing the role of a private MI company. Lender wins b/c they’re protected / Borrower wins b/c they’ve received a mortgage loan the lender may not have otherwise made. Who gets an FHA loan? - Low down payment – can’t qualify for My Community - Typically, it’s someone who – for credit reasons – can’t qualify for a conventional loan. What do you need to know? Guidelines will change. Installment debt w/ < 10 mos remaining can only be excluded from DTI if the remaining cumulative payments are < 5% of the borrower’s gross monthly income. Borrower can’t pay down the debt to qualify. All deferred student loan payments must be included in DTI regardless of when payments will commence
- FHA MI is a little different. This is where FHA gets a bad rap. FHA MI is expensive. It’s gotten a little cheaper in the last year. But it’s still very expensive. On our $250K home… That’s $4222 UFMI + $174/mo W/ PMI everybody pays a different percentage, or a different amt based on certain characteristics of the transaction. FHA: Everybody pays the same. UFMIP can be paid by buyer, seller or financed Monthly MI is paid for the life of the loan. Derogatory credit example. Our guy w/ the 640 credit score was paying $230/mo PMI but only $174/mo MIP Credit scores Just b/c a person has a 580 credit score, doesn’t mean we can give them an FHA loan. QUESTIONS ABOUT FHA?
- Who is VA? Operate very similar to FHA. VA insures the lender against loss. Except in a very few circumstances, VA doesn’t underwrite the file or approve the borrower. Who gets a VA Loan? Obviously, eligible veterans. Request a COE Lots of people. I do a lot of VA loans. Not just for FTHB. Big draw = 0% down What do you need to know? Ineligible fees. I won’t bore you w/ details, but VA specifies certain fees that cannot be charged to the veteran. The NWMLS contract and the practice of the escrow companies in this area is to have the seller pay the entire escrow fee. If you have a seller who is balking at this, let me know. There are ways to structure the loan so the veteran can pay that fee. Tougher appraisals. Let’s stop and talk about appraisals for a sec. LET’S TAKE A SECOND TO TALK ABOUT APPRAISALS
- - VA calls their “mortgage insurance’ a “guarantee fee.” Guarantee fee depends on type of military service, # of uses of VA eligibility, and down payment. Usually financed - VA doesn’t set a cap on how much a veteran can borrow. Their max loan amount – w/ 0% down – is the same as the conforming loan limit ($417K). But a veteran can usually borrow more if they have a down payment. If you have a customer who is looking for a jumbo loan – above $417K – and they happen to be a Veteran, they might want to look at a VA loan. It can be a great alternative to a jumbo loan for some borrowers. QUESTIONS ABOUT VA LOANS?
- The USDA loan is intended to help low- to moderate-income borrowers own homes in rural areas. People who may not otherwise be able to own a home. And the standard they use is… People who can’t qualify for a conventional conforming loan with 20% down.
- Guarantee Fee can be financed into the loan, paid by the seller, or paid by the buyer. Monthly MI is paid forever (like FHA it decreases each year) Income limits for Jefferson County, up to 4-people. Includes the income for every person over 18 who will reside in the home IPCs: USDA is a little different in that closing costs can be financed. Lend up to 102% of the appraised value of the home. Lowest DTI. Show DTI calculations. QUESTIONS ABOUT USDA? BEFORE WE MOVE ONTO CONVENTIONAL NON-CONFORMING, I WANT TO PAUSE AND TALK ABOUT CONDOS, MAN HOMES, AND DOWN PAYMENT ASSISTANCE PROGRAMS.
- Bastards of the lending industry A single entity (person, investor) can’t own more than a certain percentage of the total units (10% for projects w/ 21 or more units) Commercial space can’t exceed 25% % of occupancy HOA has to have a certain amount of insurance. Only a certain percentage of owners can be delinquent in their HOA dues. Many (if not most) condos in Jefferson County are not eligible. FNMA/FHLMC has their own approval process FHA has their own process VA has their own process Just b/c a condo will work for FNMA/FHLMC, doesn’t mean it will work for FHA. There are no VA approved condos in Jefferson Co. And there wouldn’t be. USDA uses FHA’s list.
- Many lenders do not lend on manufactured homes. Period. Remember when we talked about credit overlays? That’s a really popular overlay. FNMA allows manuf. FHA/VA allow manuf. Many lenders do not.
- If you want to learn more about WSHFC and the programs they offer, talk to LMW. Training / classes… ANY QUESTIONS ABOUT CONDOS, MAN HOMES, WSHFC?
- We have our own jumbo programs Correspondent relationships And brokered relationships
- These – at least at NAF – are going to be brokered. Funky people are people who don’t fit into the FNMA/FHLMC/Government Mortgage “mold” These are people in the past that we called Alt-A or Subprime borrowers. But they’ve changed a lot. I think days of giving someone a mortgage who has no down payment, a 500 FICO, and 1-day out of BK are over. Who are these people? Recent major derogatory credit: Bankruptcy, foreclosure, short sale. Chapter 7 BK: 4y CC / 2y FHA/VA Foreclosure: 7y CC / 2y VA / 3y FHA We have a lender that will allow only 1y from BK/FC. Requires 20-25% down, great credit score, cash reserves
- Example: Property on Disco Bay that had a composting toilet. No geodesic domes OR houses made out of shipping containers QUESTIONS ABOUT CONVENTIONAL NON-CONFORMING?
- - Options: Just the tip of the iceberg. I was cutting slides like crazy yesterday b/c we only have 2 hours together. Reverse mortgages, renovation loans, and loans that allow you finance energy efficient improvements to a property. Customer service: We have a vested interested in pleasing your customer and you! First National Bank of California doesn’t have that motivation. That loan officer is probably never going to work with you again. Who are you going to call? I got a call not long ago from a guy who was using an Internet lender – very reputable Internet lender – but not someone who has a physical office here in town. Or anywhere else that I know of. All they had was an 800#. They couldn’t get anyone to return their phone calls. They can’t go down to anyone’s office and knock on the door. There’s nobody physically present in town that you can go yell at. Well my office is always open. Heck some of you know where I live. And barring that, most of you know you can find me at the Port Townsend Brewery after work. Local appraisers. We talked a little bit about the appraisal process. We really go the extra mile. Getting a mortgage is a pain. We make it as easy on customers as possible. I was talking to LMW about a transaction yesterday. We needed some information about the homeowner’s insurance on another property the borrower owned. So I suggested to LMW, don’t ask the customer for the “insurance declaration page.” He doesn’t know what that is or how to get it. Ask him for the name of his insurance agent. Then you call and get the document. That way you know for sure that you have what you need. And you don’t have to bug the customer. Bank statements. With nearly 40 years of combined experience b/w the two of us, we are well equipped to serve your buyers and to help you sell more homes.
- - Referrals work both ways. We often meet with customers who are not working with an agent. How do we make sure they call that agent? It’s inevitable… I give out three business cards. I tell the customer all the fabulous qualities of each of the three Realtors. How they’d love any one of them (or all of them). And what do they do? They end up using their cousin’s brother’s best friend who is a Realtor in Sequim. So what do I do? How do I know they’re actually going to call you?