Although it’s common knowledge that the major banks have been criticized for denying millions of loans, there is a false assumption that one’s own credentials are necessarily stronger than those who’ve been declined. While many borrowers are rejected for low income, poor credit scores, lack of equity, etc, strongly credentialed candidates are also routinely denied mortgage financing. Many reasons explain why solid loan files get rejected, including shoddy underwriting, today’s compromised appraisal process, or minor anomalies within a borrower’s loan package. Some lenders may reject certain properties while others not. Keep in mind that the loan process is inherently chaotic –even in a good housing market –as its goal is to commodify the unique characteristics of both borrower and property. In a tough market there is a virtually endless list of factors that can cause a loan to fail.
First, to set the record straight, many of the loans that banks are faulted for declining were rejected because they did not meet investor (Fannie Mae, Freddie Mac) guidelines. Should a loan later be disqualified by the investor, the lender who approved and funded the loan could be on the hook for hundreds of thousands of dollars. Because investor guidelines are highly exacting and constantly changing the process of getting a loan has become largely adversarial as underwriters increasingly take the most conservative view of a borrower’s qualifications and of a subject property’s attributes. Working a loan through process often involves correcting the lender’s interpretations of a loan package to conform to their program guidelines. Fortunately, some lenders are able to get around certain investor guidelines or “overlays” and carve out niches within the marketplace. Because every lender differs with respect to their rates and ability to underwrite a given file, the process of choosing a lender must be carefully weighed and, here, a mortgage broker can offer strong advantages.
Full disclosure: although it serves my interest to promote using a mortgage broker, the manner in which borrowers are corralled by today’s underwriting and appraisal processes supports the reasoning that a good broker is a borrower’s best friend. Essentially, a broker offers choice and flexibility in a market that rewards the nimble. Those electing to use one specific bank are finding all their eggs relegated to one lender’s basket of rates and products, appraisal process, and quality (or lack) of underwriting. As millions of borrowers have discovered, should the chosen lender fail in any of these areas, it is back to square one.
As a borrower’s advocate, a mortgage broker is your industry insider who first locates the best loan and then ensures that it actually closes. The mortgage broker has a vested interest in your loan’s success as their compensation occurs only if and when the loan funds. Since broker originated loans are professionally managed from start to finish, they have a significantly higher success rate than bank direct loans. And, because brokered loans relieve the eventual bank of salary and benefit expenses, they reduce loan costs by as much as 50%. These savings are passed along to compensate the mortgage broker so that their work comes a little or no extra cost to the borrower. Given the weeks of work a mortgage broker can dedicate to a purchase or refinance, their input is a bargain.
Once a mortgage broker has qualified and processed a borrower’s loan application, they are able to send the loan package to as many lenders as necessary to close your loan. Selection of the target lender, however, is not haphazard, but done with consideration to pairing the borrower’s credentials with the lender’s underwriting, loan programs, and competitiveness of interest rates. The quality of the lender’s appraisal management company must also be looked into as contracted appraisers now receive only a fraction of fees collected and are often unqualified for the job. Even worse, appraisals are no longer portable so borrowers must pay for a new appraisal for each lender. Properly positioning the loan is crucial and a broker will devote many hours of work identifying which lender to use and then processing the loan file to mesh with their requirements and underwriting system in order to secure as clean an approval as possible. Once a loan is approved, the broker continues to manage the process so that all remains on track to close within the lock period.
Beyond finding the best loans for qualified borrowers, a mortgage broker finds lenders for borrowers (or target properties) that would otherwise be blocked by investor guidelines –and there are numerous, seemingly innocuous circumstances that could cancel a loan. A very short list of deal killers with most lenders includes: unpermitted additions, multiple 2nd homes, using business funds for down payment and loan reserves, limited tradelines on credit report, debt-to-income ratios in excess of 45%, paying off debt to qualify, 6-month gap in employment, using unemployment income for seasonal employees, credit for both recurring and non-recurring closing costs.
Although there is no guarantee for success in the loan world, a dedicated mortgage broker increases the likelihood of a favorable outcome and greatly facilitates the ability to shop for the best loan. (Internet businesses suggesting they have lenders lined up to compete for your business are actually referral services selling your information to the highest bidders –not to qualified lenders.) The only way to really shop for a mortgage is by building a strong loan file and doing the actual grunt work of shopping. Mortgage brokers are constantly in contact with scores of lending institutions from major banks to mortgage banks seeking their qualified files.
Nicholas Ballard is both a mortgage broker and banker specialized in the residential Marin market. For assistance, please call or e-mail:
Nicholas Ballard: 415-526-1941; firstname.lastname@example.org
Real Estate Financing
CA Dept. of Real Estate #01356374
California Mortgage Advisors, Inc.
CA Dept. of Real Estate #01170868
Redwood Highway, San Rafael