Mortgage banking 101

By Allison Brophy Champion

Published: September 27, 2008

Carol Coleman has never seen anything like it in her 30-some years in the mortgage business.

“This week has been a rollercoaster with rates,” said the branch manager at Mason Dixon Funding, a correspondent lender in Culpeper.

“On Tuesday, I could give someone 5.5 percent fixed with zero points and by 4 p.m. it was 6 percent with no points. Then the next day, this could change in the other direction.”

With interest rates on 30-year mortgages falling one day and surging the next, it’s uncertain what the future holds.

But even amid all the financial uncertainty, one thing remains constant: education is paramount when refinancing a mortgage or applying to buy a home for the first time.

What’s the point?
Two weeks ago, Coleman and Dustyn Deal, senior loan officer at Mason Dixon, sat down in their Main Street office for an hour-long interview intended to educate the public about buying or refinancing a home.

First, they said, question, question, question when banks attempt to add on “points” or extra fees to the bottom line of an application — sometimes resulting in thousands of dollars more in costs.

“Typically, you will have an underwriting fee, (closing fees), a processing fee, a credit report (fee) and an appraisal,” said Deal, a six-year industry employee who recently moved back to Culpeper after running a brokerage firm with a relative in Connecticut. “Other than that, you shouldn’t really have much more.”

Sometimes banks will offer borrowers “no points” on their loan, he said, but then “an origination fee,” basically the same thing, gets tacked on last minute. Borrowers could also opt to pay points to “buy down” or lower the interest rate. Coleman said.

“I’ve heard horror stories where a guy gets to closing and it’s four or five thousand dollars more,” Deal said. “Make sure every line is spelled out.”

Coleman suggested always getting two quotes for a refinance. “Be cautious of the rate you’re being quoted and the points you’re being quoted.”

Extra points means less money for a borrower to, for example, pay down credit card bills, she said. And it’s something she has a problem with.

“I think people need to look at what they’re paying to get the rate they are refinancing to,” Coleman added of scenarios in which a bank will lower an interest rate but add on points. “They need to look at their good faith estimate and say, ‘Hey listen why do I have to pay these points?’ Get a reason why.”

On a standard “Good Faith Estimate” form, these points are usually listed on lines 801 and 802 as a “loan origination fee” or “loan discount.”

In an example provided by Coleman, the two points included on these lines translated to $2,100 in extra fees.

Credit 101
With home prices drastically reduced from a few years ago and lots of inventory out there, now is not a bad time to peruse the housing market.

And if you’re planning on staying where you are for a while, now is a good time to buy, Deal and Coleman said.

“Rates are still at almost record lows and sellers are going out of their way to work with buyers,” Deal said.

“Houses are on sale!” Coleman added Friday.

But get pre-qualified for financing first, she said, that way a potential buyer is aware of their price range beforehand.

“I think now is a good time to start looking into purchasing and refinancing, especially if you are in an ARM (adjustable rate mortgage) that’s going to be adjusting,” she said.

Looking to get a more traditional, fixed rate mortgage?

There are some things you should and shouldn’t do.

First, said Deal, it’s always worth it to repair your credit.

That could mean paying off bills first and improving your credit score before applying for a home loan, he said. Sometimes it’s worth it to wait.

In other cases, Deal said, it could be worth it to spend about $30 per line on your credit report, for a “rapid rescore.”

This option, available through mortgage lenders, cleans up a credit report faster, resulting in a higher credit score and theoretically, a lower interest rate.

In addition, when refinancing a home loan or applying anew, don’t get a new credit card, close an old account or max out existing credit cards — all adversely effect your credit score, resulting in extra points at closing.

Don’t allow multiple banks to make inquiries on your credit report because, yes, inquiries can hurt your score, Coleman said.

Do stay current on paying credit card bills during a refinance: one 30-day late payment can cost anywhere from 30 to 75 points on your credit score.

And do continue to use your credit as you normally would. Even a slight diversion from normal spending habits, again, raises red flags.

A person’s credit score is based on payment history (35 percent impact), outstanding credit balances (30 percent), credit history (15 percent), type of credit (10 percent) and inquiries (10 percent).

Credit scores can range between a low of 300 and a high score of 850. Only one out of every 1,300 people in the U.S. have a credit score greater than 800, according to information Deal provided.

So what happened?
Unfortunately for many homeowners, a refinance is not an option if they owe more than what their house is now worth.

“In that instance, people are stuck,” Coleman said. “They cannot refinance because they don’t have the equity to do it.

“They paid the market rate at the time, but since everything has fallen with the foreclosures, people’s rates adjusted and they were unable to make payments.”

Deal compared it to the technology crash of 2000.

“From 1999-2004, equity in homes was building 15, 20 percent a year,” he said.

Statistically though, real estate increases in value about 6 percent per year, Deal said.

“So people were buying into this as, you know, I’m going to make a million dollars in five years,” he said. “It was riding the equity wave and it just crashed.”

Most times, it’s too late for people to refinance if they’re months behind on mortgage payments and on the brink of foreclosure.

Many folks like the “everyday person,” said Deal, who put no money down and made only interest payments to start had no idea what they were getting into.

On the other side, the investors, banks and hedge funds that bought these mortgage securities were trying to make “a quick buck,” he said, and ended up getting in over their heads.

“They made tons of money on these products and they put these things out there to try and boost the economy,” Deal added. “But they weren’t savvy investors, the guidelines were so wide open. The federal government, the lenders made these programs so readily available that it totally hosed over a lot of people.”

That was then
The standards for getting a mortgage have drastically tightened since the boom of a couple years back.

“Things have gotten back to where they were 15, 10 years ago. You’ve got to have a job, you’ve got to have a little bit of money and you’ve got to verify your income,” said Coleman, saying Mason Dixon, like most other lenders, offered products like ‘no doc’ loans, meaning no financial documentation was required to get a mortgage or to refinance. “There are no more ‘no doc’ loans anymore.”

The foreclosure crisis has been rough, she said, adding, “I don’t think we’ve seen the worst of it. I hate to say it.”

Deal was not very optimistic two weeks ago at the news of the federal government buyout of mortgage giants Fannie Mae and Freddie Mac.

“It’s mixed emotions,” he said. “Some people think it’s good, but then if you look at our government, they can’t even manage their own funds too well — we’re $9 trillion in debt with the world.”

But by last week, Deal was trying to be a bit more optimistic about the ongoing government bailouts of private business, saying the takeover of AIG was “a great thing.”

“I don’t believe that this going to be a quick fix, but a steady and sure type of fix to get our country back on track,” he wrote in an e-mail Wednesday.