The Bank or Mortgage Broker. Which Should I Choose?

 

In the world of mortgage banking there are two established ways of securing mortgage financing. We’ve all heard these names bandied about and sometimes used interchangeably. The virtues are extolled for one or the other, usually swayed toward the interests of the party at hand. It seems like there is not much of a difference. Superficially, that is correct, but there are differences under the skin.

 

The most prevalent misconception is “I’m going to the bank because they will not sell my loan.” This is a fallacy 99% of the time. The bank may retain the servicing rights to collect the payments but will sell the loan in almost every instance. We’ve all heard of Fannie Mae and Freddie Mac. They are the primary purchasers of conventional loans. Ginnie Mae is the buyer for FHA. Larger loans that meet the “jumbo” criteria will go to private investment pools. In honesty banks do retain some loans but these are almost always loans that have a 20% or greater equity cushion, and retained by smaller banks. Unless you are making a large down payment on a very large loan this “playing field” is fairly level.

 

Another misconception is that banks will have lower rates than a mortgage broker. This statement is entirely false. A mortgage broker can compete with a bank’s rates because the bank gives the broker discounted or wholesale rates. This rate is lower than what the bank offers to its retail customers. Why you may ask? It’s because a broker absorbs the overhead costs. Brokers pay their own rent, supplies, employees, and all other overhead costs. Banks save money by not having there outlays and their loan production costs are lowered.

In turn the broker will offer a retail rate depending on the profit deemed necessary to pay overhead expenses.

 

There is something critical that a bank can do but a broker cannot do on its own. It is approving your loan. A bank approves files internally. A broker must send your files to a bank for approval. This issue is a “double edged sword.” If a bank denies your loan then you must begin the process all over again if you wish to continue. If you are dealing with a mortgage broker they have the option of submitting your loan to a different lender for approval.

 

As far as education is concerned, all brokers and mortgage originators that work for brokers, must take and pass a national and state test to acquire a license. They must also undergo fingerprinting and a criminal background check. This is a Federal requirement as per the recently adopted Secure and Fair Enforcement for Mortgage Licensing (S.A.F.E.) Act. A mortgage originator who works for a federally chartered bank is exempt from the testing, fingerprinting, and background check requirements as Congress left these checks up to the bank to perform as per their individual corporate policy.

 

All mortgage originators and mortgage brokers must also be licensed through the National Mortgage Licensing System (N.M.L.S.), and must have a unique license number as an identifier.

 

You will find professional and competent mortgage originators at both a bank or mortgage broker. The actually skill level will vary between individuals as with every occupation. With a smaller mortgage broker you may have one person handling your file from start to finish if that person possesses the skill set to do so. This is uncommon at a bank because of the origination platform they use. Jobs are more clearly defined so your file will pass from one person to another depending on their duties in the loan process. Truthfully, this can be An asset or a detriment, defending on the individual borrowers tastes and the complexity of the loan.

 

Still can’t make up your mind? You can choose both! There are many mortgage banks that are a “banker / broker” hybrid. They have the ability to underwrite your loan, have mortgage originators who passed all national and state requirements, and the ability to broker your loan if it does not meet their internal guidelines.

 

I actually am both a banker and a broker!

 

I specialize in NJ conventional financing, conventional renovation loans, FHA and NJ FHA203K financing. I personally handle all files from start to finish.

Feel free to contact me with any questions you may have.

Mark Robinson

732-207-8434

mark@njfhapro.com

Daily Mortgage & Real Estate News

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Last Edited on 2016-05-17

First Time Homebuyer Financing

The latest Zillow data shows that a great migration of renters into homeownership will take place this year. Publications show the lack of affordable rental units will force increases due to simple supply and demand. Rents will increase significantly over the coming years.

According to data there is an overall lack of knowledge concerning the financing programs available to first time home buyers. A majority believe a large down payment is needed to purchase a home. This is simply not the case. There are many government sponsored low and no down payment programs available. This is true for every state and every income level.

Credit requirements are another area of great misunderstanding. Credit scores as low as 550 are acceptable for some lenders. There is also low or no cost help available to those who need credit repair assistance.

Find out more about these programs now.

Historically low mortgage rates as well as reduced home prices have presented many with an opportunity to own a home. This anomaly is due to a market collapse and may not happen again for decades. The last time it happened was during the Great Depression. Home prices and payments are often not much more than the cost of rent.

See a recent homeowner video testimonial.

One important trend that is separating the new homeowner from renters who wishes to purchase a home is the knowledge of the available financing options.  Successful first time homeowners are seeking information and professional guidance earlier in the home shopping stage. There are many opportunities to take advantage of free information and many home financing professionals will assist with education and qualification at no cost.

Find out more about home ownership programs now.

Does Getting the Best Interest Rate Matter?

Yes it does, and to some degree, no it doesn’t. The interest rate depends on your income, equity, and personal qualifications. The rate also depends on the type of financing you choose. The most important aspect of a loan is its benefit to you.  The best rate is not always the best deal. The total picture, in its entirety, must be carefully considered.

Here is an example:

You are refinancing to pay off just your current mortgage and you’ll save $300 a month but another program at a slightly higher rate will pay off all your credit cards, shorten your loan term by 10 years and save you $900 a month. Which loan is better for you? It would depend on your situation. Your age (years left until retirement), the amount owed on in credit card debt, if you pay them off on your own, and what plans you have for the savings.

Here’s another example:

You are buying a home and “Bank A” has a rate that is .125% less than “Bank B.” Does “Bank A” require a higher down payment? How is the service at “Bank A.”? Will it take longer to close? Will you be working with an experienced professional who you can call if you have questions or need assistance?  How much is your time worth? These are just a few of the factors that need to be included in your decision.

When all information is carefully weighed then you will be able to clearly see what the best deal is for you!

My area of expertise is NJ FHA and conventional financing. Feel free to contact me if you have questions about the right option for you.

Mark Robinson

732-207-8434

mark@njfhapro.com

What is Mortgage Insurance (MI)? How Does it Benefit Me?

House Puzzle

Mortgage insurance has been around since the late 1800’s. It was provided as a guarantee to mortgage investors that, in the case of default, they would be able to recover their money. Without mortgage insurance investing in mortgages was not very attractive.

As years went by data on defaulted loans (loans foreclosed) showed lenders that distressed sales or foreclosed homes seldom sold for full market price. Lenders are not in the real estate business. The value of a property is gauged by the amount of lost money that can be recovered in a reasonable amount of time. Caring for a “bank owned” property increases expenses. The taxes must be paid, insurance maintained, and basic maintenance must be done to keep a vacant property in good condition.

In order to protect against losses lenders generally require mortgage insurance if a borrower puts less than 20% down. This policy is paid for by the borrower but it protects the lender. There is no borrower protection but mortgage insurance does allow a prospective homeowner to purchase a home with a lower down payment. That is a benefit for many potential home-buyers with limited savings.

The mortgage insurance payment will generally go away once a home-buyer establishes 22% equity. This means that for every $100,000 of value the balanced owed of $78,000. Equity is gained in two ways, by paying down a mortgage over time or the value increasing. If someone wishes to use a value increase to eliminate mortgage insurance it will require a new appraisal and often a refinance of the current loan to a new loan using the higher appraised value.

Mortgage insurance has benefited many current homeowners, and will benefit many future homeowners, by allowing purchases (or refinances) with lower down payment or required equity thresholds.

FHA Mortgage Insurance

FHA Update

 

As of January 27th, 2017, FHA’s monthly mortgage insurance is .85% for loans with 5% or less down, and .80% with more than 5% down.

If a 15 year mortgage if chosen the mortgage insurance is .70% with 10% or less down and .45% with more than 10% down.

What does this mean for you?

For every $100,000 borrowed, an additional $50.00 will be added to your monthly payment with a down payment less than or equal to 5% (100,000 x .85% /12 = $70.83).

Under the new mortgage insurance rules (06/03/2013), the monthly mortgage insurance will last the life of the loan if the down payment is less than 10%. The mortgage insurance will cancel in 11 years if the down payment is greater than 10%.

There is also a 1.75% up front mortgage insurance (UFMIP) which is allowed to be financed in the loan. What this means to you is an additional $1,750 will be added to your loan for every $100,000 borrowed.

FHA loans are still one of your best financing alternatives. The minimum down payment is low (3.5%) and the rates are excellent!

* This is an example of a 30 years fixed rate loan with a loan to value > 95%.

VA Guaranteed Home Loans

New Jersey VA Loans


What is a VA – Guaranteed Home Loan?

They are Loans made by private lenders (banks, savings and loans, and mortgage companies). There loans are made to eligible veterans for the purchase of a home for themselves and their families. The home you purchase must be a 1-4 family house that you will occupy. Investment property purchases are not allowed. Again, the home must be for your own personal use.

VA does not actually make any loans. The Veterans Administration only guarantees the loan. They guarantee the lender who makes the loan will not lose money if the payments are not made. This encourages lenders to make loans to veterans with more favorable terms, such as 100% financing, low rates, low fees, and reduced closing costs. The guarantee is not automatic. You must still qualify for the loan based upon the lending guarantee guidelines set by the VA. This insures they are only backing qualified borrowers and lessens there risk of loss.

What can this Loan be used for?

A VA Loan can be used to buy a home, condominium, townhouse, or co-op. It may also be used to build a home, repair or improve an existing home, add energy efficient improvements (solar heating/cooling systems, water heaters, insulation, storm doors and windows, etc.), or to refinance a home to reduce the interest rate.

Who is Eligible for a VA Loan?

  • A Veteran (served 181 days during peacetime or 90 days during war)
  • Reservist or National Guard (served 6 years)
  • A Veteran Married to a Non Veteran
  • Two Married Veterans
  • Unmarried Surviving Spouse of a Veteran
    (Veteran must have died due to service or service related causes)
  • Spouse of any member of the Armed Forces serving active duty who is listed as M.I.A or a P.O.W. and listed for more than 90 days

What are some of the advantages of a VA Loan?

  • Zero Down Payment
  • Limited Closing Costs
  • No Monthly Mortgage Insurance
  • VA Funding Fee can be Financed
  • Mortgages are Assumable
  • Easy Refinancing to Lower Rates

How Do I Prove that I am Eligible?

The good news is now most information can be accessed online in a few minutes! A lender will need your Certificate of Eligibility.

Click Here or the Logo Below for full instructions on how to register and access your Certificate of Eligibility (COE) from the United States Department of Veteran Affairs website.

Thank You for Your Service to Our Country.

Foreclosure Bidding Tips: HUD Foreclosures

There are three categories of properties that are sold by HUD as foreclosures.

They are:

1) Insurable Listings (IN):

An Insurable Listing (IN) generally does not need any repairs.

2) Insurable Escrow Listings (IE):

An Insurable Escrow Listing (IE) needs minor work (under $5,500). These funds will be financed in set aside in an escrow account for you to complete the repairs after your purchase.

3) Uninsurable Listings (UI):

An Uninsurable Listing (UI) will need repairs greater than $5,500. These homes are only eligible for FHA 203K (Rehab) financing. The cost of the repairs will be included in your mortgage.

When bidding on a HUD home always remember this.  If your bid is more than the asking price you will be asked to pay the difference in cash.

Example:

If HUD is asking for $100,000 and you bid $105,000, you will be required to invest at least the minimum 3.5% as a down payment PLUS the additional $5,000.

The above is not a requirement when you choose an FHA 203K loan as your financing option. Every HUD listing is eligible for this type of financing no matter what category they are in. If the home does not need repairs the money can be used for upgrades, energy improvement, and appliances.

In short, if you plan to bid more than HUD’s asking price an FHA 203K loan may be your best option!

I’ve helped thousands achieve their dream of home ownership in my 20 year career. Call or email me anytime!

Mark Robinson

732-207-8434

mark@njfhapro.com


Adjustable Rate Mortgages – A Detailed Anatomy

There are reasons to choose an adjustable rate mortgage (A.R.M.). A large amount of borrowers do not have a complete understanding of this type of loan. This may be based upon inexperience, lack of a detailed explanation, bad press, or other factors relied upon in the decision making process.

There are times when an adjustable rate mortgage may be your best home financing choice.This will depend on your situation.

Some of these reasons are listed below:

  • You expect to sell your home within a few years.
  • Your income is increasing and you need a lower initial payment to qualify. An FHA adjustable rate mortgage uses the start rate for qualification purposes.
  • You are planning to pay more toward the mortgage principal to pay off your loan faster.
  • You have additional household income but it can not be used to qualify.


An adjustable rate mortgage tends to have a lower overall rate than a fixed rate mortgage because it is much easier to project profit margins.

When a bank gives you a fixed rate mortgage they are assuming that the loan will be profitable over a period of time. This mortgage may cease to be profitable if market conditions change, especially the inflation index. The rate is higher on a fixed rate mortgage to hedge against this occurrence.

Let’s use a loaf of bread as an example of this logic:

You loan a friend a dollar when bread costs 90 cents a loaf. Your friend promises to pay you back $1.10.  When he pays you back the bread costs $1.20 a loaf. The dollar you loaned out is more valuable than the money returned to you. You actually took a loss although you received more money. This is the effect of inflation. You would need to charge a higher rate of return to reduce you chances of taking a loss because you are guessing the value of the returned dollar.


Now let’s use the same example in relation to an adjustable rate:

You loan a friend a dollar. He promised to pay you back 10 cent profit, but the profit will be adjusted for inflation.  Since bread went up 30 cents, you will receive $1.40 back. In this example you could charge less because the guesswork for inflation is gone. An adjustable rate mortgage limits the guesswork for a projected profit so the rate of return initially charged can be less. If the price of bread stayed the same or went down, you would actually pay back less!


An ARM has five major components. They are a floor, ceiling, caps, margin, and index.


The floor is the lowest rate and the ceiling is the highest rate that can be charged on your mortgage when it adjusts. The caps are limits on the adjustment for any period of time. Caps are set to avoid payment shock or large payment increases.

The margin is simply the profit margin that will be set. This is a fixed amount and it will never change. This number is added to the index to derive your rate adjustment.

The index is the component that will actually adjust. The index must be readily available and easily found to be fair. If everyone agreed upon how many apples are in a barrel then this could be an index.


Banks use standard indexes that are published daily. They most widely used are the LIBOR, Treasury, COFI, and Prime.

  • The LIBOR stands for London Interbank Offered Rate. This is a daily reference rate based on the rates at which banks borrow unsecured funds from other banks in the London wholesale money market.
  • The Constant Maturing Treasury (CMT or Treasury) is a United States Treasury security or government debt issued by the United States Department of the Treasury.
  • The COFI or Cost of Funds Index is a regional average of interest expenses incurred by financial institutions. This is mostly based on the 11th district Federal Home Loan Bank (San Francisco CA).
  • Prime indicates the rate of interest at which banks lend to favored customers with high credibility. These are usually large corporations.


Always remember that the margin plus the index equals your new adjusted rate, but it can not adjust below the floor or above the ceiling. It also can not adjust beyond what the caps allow for any given period of time. It’s that simple.


Your choice of the security of a fixed rate or the flexibility of an A.R.M. will depend on your individual circumstances.


Contact me at 732-207-8434 or email mark@njfhapro.com

for the lowest rates and fast, reliable service!

Knowing all details will help you make a fully informed decision.