A home purchase can be a difficult process, and often negotiations on price or property inspection are difficult. However, the most difficult aspect of a home purchase inevitably seems to be securing your home loan. Lending guidelines have tightened considerably in the housing downturn, resulting in more documentation requirements, longer underwriting timelines and lengthier closing times. That is understandable. What is not understandable is when loan officers and lenders have a blatant disregard for contract deadlines and cause unforeseen delays. Real estate contracts are fairly strict and specific about terms, deadlines and the closing date. As real estate agents and home buyers, we have to adhere exactly to contract deadlines, otherwise we put our earnest money deposits or even the purchase of the home at risk. For some reason, we come across far too many lenders these days that take a lax attitude towards the closing date and feel that it is somehow OK to request extensions of the closing date at the last minute. While some mortgage delays are unavoidable, the behaviors we see from some lenders are simply unacceptable.

In today’s lending environment, there is always the possibility of delays in the process. The appraisal process is lengthy and difficult to control, and strict underwriting requirements may sometimes require more documentation and review time, particularly with more complex personal finances or credit situations. This is understandable and part of the game. No matter how simple your loan situation may seem, sometimes these hurdles come up, even with the best lenders. What separates out the best lenders from the worst is their ability to communicate what is happening to all parties in the transaction in a timely manner and prevent unanticipated delays.

One of the largest problems we see with lenders today is that many of them seem to operate in a perpetual state of “hurry up” on the transactions that are supposed to close soon, while ignoring the rest. Our agents have lost count of the number of times a lender is given a full 45 days to close a loan, then to have the rug pulled out from under them on the day before closing saying “the lender needs one more week.” Maybe I am wrong, but I can’t help but think that many lenders ignore the files closing later, and only pay attention to the urgent ones that are about to close. The consequences for real estate agents and home buyers for missing contract deadlines are significant. It is unfortunate that lenders cannot be held accountable in the same way, as their delays cause grief with buyer and sellers, often causing delays in moving, extensions of leases, or financial penalties.

Most buyers shop for a loan on financial terms only, picking the lenders with the best rate and fees, while ignoring the service aspect of the business. The difference between a smooth and relatively painless home loan process and a total nightmare relies on the service provided by loan officers and their support staff. Loan price is certainly important, but don’t ignore this important criteria when evaluating your loan options. Here are some tips when choosing a lender.

1. Look for recommendations – Seek recommendations from friends, colleagues or real estate agents that have had a successful transaction with a particular loan officer. Real estate agents can be a particularly good source of recommendations because they have experience with numerous lenders from numerous transactions. As a real estate broker myself, I have a list of lenders that I trust, but I also have a list of lenders that I would like to avoid. Ask your agent if they have worked with your chosen lender before and whether the experience was positive or negative.
2. Communication skills – This can be hard to evaluate, but you want a loan officer who communicates openly and instantly when your loan status changes.
3. Full time mortgage professionals – There are a fair amount of part-time mortgage professionals out there who originate home loans to supplement their income. We have yet to have a positive experience with a part-time loan officer. You want someone with experience who does nothing other than originate home loans for a living.
4. Pays attention to deadlines – A loan officer should be able to provide a timeline of how the loan process will proceed and should be able to provide updates as you progress through that timeline.
5. Being local helps – There are definite benefits to working with local lenders, even if they are employed by large national banks. Local loan officers are in your time zone, available to meet in person if needed, and aware of local market conditions. That cheap lender you found 2000 miles away on the internet won’t look so good when your loan process goes horribly wrong.
6. Honest and open about the numbers – The best loan officers we work with are upfront about all financial aspects of the transaction. They clearly outline the fees and rates and readily describe how they are compensated in the transaction.
7. Personality fit – This is the intangible part of your lender choice. Talk to a few lenders and find out who you feel most comfortable with. The loan process can be intimidating and stressful, and you want someone on your side that is easy and reliable to work with.

All is not bad in the world of home loans. There are great lenders and loan officers out there, but sometimes you need to spend the extra effort to find them. It will pay off with a smoother transaction.

Mortgage pricing is complex, particularly for the average home buyer who only deals with it once every 5-7 years. One of the most complex fees when obtaining a mortgage is something called Yield Spread Premium (YSP), which is easily missed or misunderstood by a home buyer. Put simply, YSP is the amount of money that a lender pays to a mortgage broker for loans that are made at an interest rate above the Par Rate. What is the Par Rate? The Par Rate is the interest rate being offered by a lender that offers zero YSP. Mortgage brokers can make money directly from fees charged to borrowers, but they can also be paid for their services via YSP directly from the lender. Often your mortgage broker is compensated in both ways. YSP also offers a mechanism for borrowers short on cash to finance some of their closing costs by paying a higher interest rate in the process.

Probably the easiest way to understand what Yield Spread Premium is all about is to look at a fictitious sample of a lender’s wholesale rate sheet. In this example, the Par Rate is 5.0%. If your mortgage broker originates a loan at 5.0%, no YSP is paid. If you pay a slightly higher interest rate, say 5.25%, there is a YSP credit of 0.733% of the loan amount available that can be used to compensate the broker or to pay your closing costs. For a $400,000 loan, this translates into a credit of $2932. The inverse is also true. If you pay an additional 1.35% of the loan amount, you can “buy down” your rate to a below-par rate of 4.75%. All mortgage are priced this way, though most times these rate sheets are not seen by consumers.

How can Yield Spread Premium be used by home buyers?

There are three ways that YSP can be used in a transaction.

1. Buyer pays a higher interest rate so that their mortgage broker receives YSP as compensation on the “back end” of the transaction.
2. Buyer pays a higher interest rate so that YSP can be used to pay for closing costs.
3. Buyer “pays points” at closing to reduce the interest rate on their loan.

How do I know if I am paying YSP as part of my loan?

Mortgage brokers are required to disclose the payment of YSP on both your Good Faith Estimate and and your HUD-1 closing statement. Banks and other direct lenders do not have to disclose YSP at all. There is considerable controversy over this discrepancy, and many in the industry want the disclosure laws to be the same across both types of lenders. (We agree and believe that both should have to disclose YSP.) However, for now, only mortgage brokers are required to make this disclosure. There is a major flaw in the current disclosure laws that allow the YSP to be disclosed as a range on your Good Faith Estimate. I have seen Good Faith Estimates say that “YSP may be paid to your mortgage broker between 0%-4% of your loan amount.” Clearly that is a huge range and varies from a reasonable deal to a total rip-off. In this case, you won’t see the final YSP until closing, which can lead to abuse of this practice by unethical mortgage brokers.

Should I even be paying YSP at all? Why can’t I just get my loan at the Par Rate?

This is an excellent question. YSP can serve a legitimate purpose in loan transactions by helping borrowers to reduce their cash out of pocket for loan fees or mortgage broker compensation. However, it is a practice that is too frequently abused from the experiences I have had with some lenders. On more than one occasion with our buyers and on personal transactions, I have had mortgage brokers sneak in a big YSP payment to themselves on the closing statement. Sometimes this equates to thousands of dollars and a borrower who is paying a higher interest rate than they needed to. It is easy to hide from unsuspecting buyers since it is not part of the direct fees being charged to them on the closing statement. Don’t be fooled if a mortgage broker tells you that “You are not paying that amount. I get it directly from the lender.” You ARE paying that amount to your mortgage broker via a higher interest rate.

How do I ensure that I am not being taken advantage of through YSP payments to my mortgage broker?

The best way to ensure that you are not taken advantage of is to be diligent and ask questions. An ethical mortgage broker should be able to answer these questions directly when asked.

1. How am I paying for your mortgage services and what is the total amount that you charge for helping me with my loan? Do you charge an upfront origination fee or other processing fees? Are you also being paid on the back-end by the lender? If so, what YSP amount will you be making?
2. Am I able to get the Par Rate on my loan? If so, what fees will you charge me.
3. If your broker shows a “range” of YSP payments on the Good Faith Estimate, ask them to clarify and give you an exact amount. There is no reason they cannot be more specific with this number, though it can change up until you lock your rate. 
4. At the point you locked my interest rate, what was the Par Rate? Ask to see that day’s rate sheet if needed.

A good mortgage broker does a lot of work when helping you get a loan and they deserve to be compensated. However, borrowers should work with brokers who are upfront and ethical about how they charge for their services, both in direct fees and indirect YSP payments. If a mortgage broker claims that they charge only 1% for their services, they should not be tacking on another 2% via YSP payments. The correct answer in this case is that “I charge 3% of the loan amount for my services. 1% is paid by you at closing and the other 2% is paid to me by the lender as a Yield Spread Premium.”

If you can’t get a straight answer on the fees that you are paying, it is wise to seek an alternative mortgage broker. A trusted real estate agent can help you review your Good Faith Estimate and closing statement to watch for potential mortgage issues.

Related articles:

We get a lot of mortgage-related questions from our home buyers, and often those questions are best answered by a mortgage expert. Today’s post is a guest post from Rhonda Porter, a Mortgage Originator who has helped a number of findwell clients with their home loan needs. She also writes one of our favorite local mortgage blogs, The Mortgage Porter. Thanks for the informative post Rhonda!

With the First Time Home Buyer Tax Credit, I'm seeing more buyers wanting to get preapproved to take advantage of the $8000 credit. The credit expires on November 30, 2009 which means in all reality that home buyers who qualify and who are wanting to take advantage of this benefit need to be in contract by early October. FHA is a popular program for first time home buyers and many have wondered what the difference is between FHA and conventional financing.

Here are some quick stats on FHA financing:

• FHA mortgages allow people to purchase a home with as little as 3.5% down payment. Down payment may be a gift from family members.
• Sellers can contribute up to 6% of the sales price towards actual closing costs and prepaid expenses once the buyer meets the 3.5% minimum down requirement.
• FHA has both upfront and monthly mortgage insurance regardless of down payment. (FHA monthly mortgage insurance remains with the property for a minimum of 60 payments, unless the mortgage is paid off.) 
• Unlike conventional financing, FHA insured loans currently do not have "risk-based" pricing for credit scores over 620.
• FHA loans are assumable. With today's low rates, this could be attractive should mortgage rates be higher in the future.

Let's compare a transaction based on a sales price of $400,000 with 5% down payment based on mortgage rates from September 14, 2009 at 12:00 pm. Let's assume these are first time home buyers with mid-credit scores of 700.

FHA 30 Year Fixed  

The base loan amount (95%) is $380,000. FHA has upfront mortgage insurance of 1.75% which is typically financed into the mortgage. The adjusted loan amount would be $6,650 (1.75%) + $380,000 = $386,650.

Current rate at 95% LTV (loan to value) is 5.000% (APR 6.008%). The payment would look something like this:

• Principal and interest:  $2,075.62
• Est. property taxes:  $416.75
• Est. home owners insurance:  $50.00
• Monthly mortgage insurance:  $158.33
• TOTAL EST PAYMENT:  $2,700.62

5% down provides a slightly lower monthly mortgage insurance rate (0.50% vs. 0.55%) than 3.5% down payment. However, if a buyer wanted to, the could purchase a $400,000 home with $14,000 (3.5%) as long as the seller pays their closing costs and prepaid expenses. Remember, that down payment can be a gift from a family member as well.

Note:  The rate/payment above would apply whether your credit score is 620 or 800 when using FHA financing.

Conventional 30 Year Fixed

5.000% down payment and private mortgage insurance at 5.000% (APR 5.157).

• Principal and interest: $2,039.92
• Est. property taxes:  $416.75
• Est. home owners insurance: $50.00
• Monthly private mortgage insurance: $297.67
• TOTAL ESTIMATED PAYMENT:  2,804.26

Private mortgage insurance with conventional financing can be quite enjoyable if you're into being completely nit-picked. FHA guidelines tend to be more practical. Conventional financing also has price hits based on loan to values and credit scores. The credit score that you are judged by is the middle credit score. If you are financing your home with someone else, it's the lowest middle score of all buyers that your rate and underwriting decisions are based on.

I admit, I'm probably biased towards FHA financing for most first time home buyers who are shy on savings. And, if someone has roughly 5% down payment, I think they should consider using just 3.5% down to save the remaining 1.5% down ($6,000 based on our example of $400,000) for their bank accounts. Owning a home does have expenses and most lenders will want to see home buyers with a minimum of two months reserves (two mortgage payments or roughly $5500 based on our example) in the bank AFTER closing regardless of what the underwriting guidelines state.

To learn which program is right for you, I recommend meeting with a local mortgage professional who is experienced with both programs. Even if you're planning on using conventional financing, do ask your loan originator if they are approved to do FHA loans as well (and how long they've been originating FHA loans) and if their office has in-house FHA underwriting.

About Rhonda Porter

Rhonda Porter is a Mortgage Originator at Mortgage Master Service Corporation, a family-owned correspondent lender that has been helping Washington residents with residential mortgages for over 30 years.  Rhonda joined the Mortgage Master team in April of 2000 and appreciates the advantages of being able to select from many lenders and banks to work with while the processing, underwriting and funding all take place at her office.  She feels this is the best of both worlds for the consumer.  Mortgage Master is a direct endorsed HUD approved lender and offers FHA, VA, Conventional and USDA programs.  Prior to assisting people with their mortgages, Rhonda was in the title and escrow industry for 14 years.   She strongly feels that consumers should learn as much as possible about mortgages and the real estate process so they can make informed decisions.  She writes a nationally recognized blog, The Mortgage Porter and was recently named 2009's Best Tweeting Mortgage Broker by the Seattle Weekly.

Our typical recommendation when buying a home is to allow ~30 days from contract acceptance to closing, but new regulations in the mortgage industry may lengthen the time needed to obtain a mortgage, according to some of our lenders. In today’s online world, 30 or more days sounds like a long time to complete a home purchase, but there are a number of processes that happen during that time, some of which are time-consuming. As a buyer, your inspection period and subsequent inspection negotiations usually take 7-16 days, so you must allow time for this to take place. However, inspections generally do not delay closings. It is the mortgage approval process that takes so much time, and two new government regulations are definitely slowing things down.

1. Home Valuation Code of Conduct (HVCC) – This went into effect on May 1, 2009 and is intended to shield appraisers from the influence of lenders and loan officers. Essentially it prevents loan officers from selecting or having direct contact with appraisers. In addition, it requires that borrowers receive a copy of the appraisal three days in advance of closing. Both of these requirements have increased the time needed to receive an appraisal, which definitely slows down the loan approval process. There have been reports of appraisals taking more than two weeks to complete and lengthy appraisal times jeopardizing buyer’s ability to lock their interest rates.
2. Mortgage Disclosure Improvement Act (MDIA) – This was passed as part of the Housing and Economic Recovery Act (HERA) and regulations went into effect on July 30, 2009. For mortgage applications, it changes the disclosures required for borrowers and the timing of their delivery. Specifically, if there are changes to your interest rate of more than 0.125%, the lender must issue a new Truth in Lending statement and allow a minimum of 3 business days before closing. In the past, a new disclosure could be provided at closing. If you are floating your rates, this could definitely delay the transaction at the end of the process.

While the intent of these new regulations is to protect consumers, it is clear that in their initial implementation, both of these are going to bog down the loan approval process. There are many issues that remain to be resolved here, as many loan officers are complaining about the quality of appraisers being used in this new process. Apparently some appraisers being selected have little or no experience with the properties and geographic areas that they are being asked to appraise, resulting in poor or faulty appraisals and lengthy review times.

While it remains to be seen how the Mortgage Disclosure Improvement Act will impact loan closing timelines, we are going to go with our lender’s recommendations for now. To be conservative, you need to allow at least 45 days to close your home purchase. 30 days is now a “bare minimum” in order to complete a transaction and represents a significant risk of delays and extensions at the end of the process. We are hopeful that the kinks in these regulations are worked out, since 45 days is simply too long in an already inefficient process.

I received a peculiar piece of junk mail today. At first glance it appeared to be legitimate. It appeared to come from the Loss Mitigation Department at National City Bank. At one point, I had a mortgage with National City Bank, so I was intrigued enough to open it.

When I opened it, it instructed me to contact the loss mitigation department in regards to my existing mortgage. It claimed that they were “willing to negotiate the terms of your existing mortgage to a more reasonable monthly payment and rate of interest.” It then went on to claim that I had thirty days to contact them, otherwise I might “no longer be eligible for a loan modification.” Sounds like an attractive offer, doesn’t it? Problem is that my mortgage with National City was paid off close to three years ago! Pretty hard to modify a mortgage that no longer exists!

Now read the bottom line. “We are not an affiliate or nor endorsed by, nor associated with National City Bank”!! Clearly this is an offer to dupe unsuspecting home owners out of fees to try and negotiate a loan modification on your behalf. Clearly this company has not authority to “negotiate the terms of your existing mortgage.” Home owners need to be aware and protect themselves from schemes like this.

Ron Lieber of the New York Times recently published an article comparing the services of a mortgage broker and a bank when securing a new mortgage for your home. His conclusion? Banks are super-busy, and you may have delays and heartache when trying to reach your loan processor during your application process. Mortgage brokers may give better service but end up costing $300-$425 more than working with a direct lender.

Chelsea Mitchell from Redfin advises:

“So, that said, I’d beg to differ over how much of a “better deal” you really are getting. I’d be willing to pay the mortgage broker a little extra to be reachable, explain processes and get my loan processed on time, just for peace of mind.”

So if you are buying a home, which should you choose? While banks are swamped and sometimes bureaucratic, we continue to have good luck with our recommended loan officers at MetLife and Countrywide. When lenders are busy, a good loan officer can make all of the difference. We also continue to refer clients to our trusted mortgage brokers as well. Even in a market where the number of mortgage brokers is contracting quickly, the good ones are still able to pull together great loans for their clients.

Our conclusion is that both mortgage brokers and direct lenders have their place in today’s volatile mortgage market. If you are searching for a recommendation, ask your real estate agent. We work with lenders every day and don’t take our recommendations lightly. We have no financial incentive when you choose a lender and make our recommendations based on past experience with other clients. Your agent should give you a handful of lender recommendations. Take those recommendations and interview each one. You’ll likely find a lender who you feel most comfortable with.

Curious about what caused the current subprime mortgage crisis? It is a fairly complex and global chain of participants that brought us to where we are today. A friend of mine turned me on to this radio broadcast from Chicago Public Radio that tries to unwind and tell the story in an easy to understand way. If you are at all curious about today's mortgage situation, I found it to be a very informative and educational piece worth listening to.