CHFA FirstStep

Through the sale of non-taxable mortgage revenue bonds, CHFA is able to offer mortgage rates at or below market interest rates for first time buyers (anyone who has not owned a home for the past 3 years).

CHFA FirstStep Plus

Same program as the FirstStep with the addition of a second mortgage loan to assist with down payment, closing costs, prepaids and/or temporary buy downs.  The maximum amount of the second mortgage is 3% of the first mortgage amount.

Income Limits

Both of these programs do have income limits associated with them.  The entire household (everyone over 18 who will live in the home) must be below the total income as follows:

• 1 Person Household = $60,800
• 2 Person Household = $76,000
• 3+ Person Household = $87,400

Additional Restrictions

• CHFA is only available within the state of Colorado
• Borrowers must work with a CHFA Approved Lender
• Can not be combined with the Mortgage Credit Certificate
• Must be owner occupied and qualify for FHA, VA or USDA Mortgage Loans
• Additional restrictions may apply and details can be found at CHFA

Interest Rates

Rates can change at any moment but at the moment I type this the First Step Rates are:

• FirstStep = 5.000%
• FirstStep Plus = 5.25%
• Rates can be found on the CHFA website at http://www.chfainfo.com/lender/Single_family_lending_partners_and_realtors/Todays_rates.icm

Lending A Hand

Scott Wynn

The Wynn Team

Phot provided by escape_identity on xanga

The mortgage business can be a confusing industry to understand. There are different types of loans, different types of lenders and different paths for loans after closing. All of these can impact your ability to get approved for a mortgage loan, the terms of the loan or how smoothly the process goes. I bring this up because of a situation that happened just the other day….

We received a call from a mortgage loan officer at a different mortgage company who calls us when she is unable to get a loan approved with her company. As I mentioned in the opening paragraph, each mortgage company is different. In this situation, the lender who was unable to assist her customer works directly for a depository bank where their underwriting guidelines are tighter than a traditional mortgage banker. She realizes this and knows she can turn to us when she has a situation where her underwriting department can not approve a loan. In this case the reason she could not approve the loan was due to ratios.

Qualifying Ratios

In mortgage terms, ratios are the percentage of your income used for the house payment and debts.  There are two ratios that are looked at when you qualify for a mortgage:

Housing “Front End” Ratio:

This ratio is the percentage of gross income for all borrowers on the loan in comparison to the monthly payment you are looking to qualify for.  For example, if you were looking to qualify for a payment of $2,000/mo and had a total income of all borrowers of $10,000/mo the ratio would be 20%:

$10,000/mo gross income divided by $2,000/mo PITI mortgage payment

Debt “Back End” Ratio:

The debt, or “back end” ratio, is the percentage of gross income compared to all debts of the borrowers on the mortgage, including the new housing payment.  Continuing with the example above, if these borrowers had an additional $2,250 in monthly debts (cars, student loans, credit cards, etc) the total amount of debt would be $4,250 ($2,000/mo mortgage payment and $2,250/mo in other debts).  Calculating the percentage would result in 42.5%:

$10,000/mo gross income divided by $4,250 in debts

What lenders look for:

Based on the reason for this post there is no hard and fast rule associated with ratios, each lender is different.  For the lender that was unable to do the loan, her max “back end” ratio was 45%.  Ours is dependent on the overall risk of the loan.  When we receive a loan we complete a full loan application and run the loan through a computerized automated underwriting software program that determines whether the risk is acceptable to approve the mortgage loan.  The highest ratio we have seen approved in recent months has been about 59% (keep in mind this is with the best credit and a large amount of assets).  Typically, we like to see the ratio at about 50% or less.

Back to our scenario again, this customer had a ratio of 50.23%.  Because the other lender’s max ratio was 45%, she was unable to do the loan.  We ran the automated underwriting program to make sure I was able to offer financing and I received an approval.  The next step was determining how to set up the rates and fees.

Rates & Fees

When most people are looking to select a mortgage lender it seems obvious to look at a lenders rates and fees, right?  Well, yes but there is more to it than what it may seem.

When the customer and I talked for the first time we talked about how his loan was set up with the other lender and how the loan would be set up with me.  We were both offering FHA Financing, 30 year fixed mortgage with no pre-payment penalty.  The area where there were some differences was surrounding his rates and fees.  My fees were just slightly (within a couple hundred dollars) higher.  When I started to inquire with this customer on what his most important factor was related to rates and fees we discussed two things:

Amount Due at Closing:

Outside of your down payment, the closing costs on a mortgage are going to be the biggest factor in the amount of funds that are needed to close on your home.  Closing costs include:

• Lender Fees (how the lenders get paid)
• Mortgage Fees (interest and set up)
• Real Estate Fees (HOA, taxes)
• Title/Lawyer Fees (closing of your mortgage and real estate transactions, insurance)
• Government (recording, taxes)

Amount You Pay Over Time:

The amount of money you will pay over time on your mortgage is going to depend on how long you keep your mortgage, the rate and the balance.  Obviously, the lower any of these 3 factors are, the less you will end up paying.

Choosing Between Lower Due at Closing or Over Time:

Due to the size of the mortgage loan and the term of the mortgage loan most people decide that it would be best to have the lowest rate and balance possible instead of trying to minimize their out of pocket expense at closing.  Of course, we also don’t want to have to bring a ton of cash to closing, otherwise there would be no need for a mortgage, right?  In my previous post To Fee or Not to Fee, I explained why someone may want to increase their rate to cover some of their closing costs.  That is exactly what this customer decided to do.  We discussed many options but it came down to these 2 options:

1. 5.25% Rate, 1% Origination Fee, 0% Discount Points
2. 5.50% Rate, .25% Origination Fee, 0% Discount Points

The customer was mostly concerned about conserving his cash and could manage the slightly higher payment ($20/mo).  He opted for the higher rate and was very happy to not have to bring the extra cash to closing that would have been needed with option #1.

The biggest thing to understand about the mortgage business is that there are options.  There are options on who you use to obtain your mortgage, what mortgage company they work for, whether they are a banker or broker, how to structure your loan and whether to increase your rate to cover some of your costs.  Understand your options and select a good lender who can explain these options to you and look out for your best interest.

Lending A Hand

Scott Wynn

The Wynn Team

Effective January 1, 2010

The idea behind the new good faith estimate (GFE) is that it will more easily allow consumers to shop for mortgage loans.  To do this the new GFE combines certain fees into buckets.  One of those buckets, bucket #1, is “Origination Charge”.  Unlike the old GFE which broke out all the fees for the consumer to review the new GFE just lumps a bunch of fees into these buckets.  The new “Origination Charge” bucket includes everything that is charged by the lender for originating the loan.  On the old GFE these fees may have included, but were not limited to:

• Origination Fee
• Processing Fee
• Underwriting Fee
• Doc Prep Fee
• Funding Fee
• Tax Service Fee
• Admin Fee

Depending on the lender you selected, the state you live in and the structure of your fees/rates these “origination charges” could easily exceed 1% of the mortgage loan amount.  With the old GFE the maximum “Origination FEE” was 1%.  Until this new announcement was made the new “Origination CHARGE“, to include all of the fees listed above, was still at 1%.  FHA realized that their rules were no longer suitable given the changes to the way in which lenders are now required to disclose the fees to the consumers.

How Does this Impact You?

At first glance this may seem a bad thing for consumers with FHA eliminating their maximum 1% “origination fee”.  But upon further investigation and understanding of this change, knowing it is in direct response to the new GFE and HUD which are are meant to better protect and inform consumers when obtaining a mortgage loan.  In addition, HUD further stated in their recent statement about removing the 1% max, that “FHA expects that lenders will continue to charge fair and reasonable fees for all origination services and the agency will continue to monitor to ensure that FHA borrowers are not overcharged”.

The new HUD and GFE are meant to be simplified by lumping fees into these buckets so that you may easily obtain several GFE’s from competing lenders and just look at the overall cost of the buckets to see who comes out better.  If you are familiar with the creation of the Truth in Lending Act, its enactment was also meant to help consumers better understand the financing they are apply for and enable better comparison from one lender to another.  What it did create was one of the most misunderstood disclosures used on the mortgage financing package due to the APR shown on that disclosure.  For a better understanding of what APR is review my previous post on the topic.

All of these changes, although made with good intentions, will, in my opinion, just complicate the process by providing less transparency from the lender to the consumer.  Instead of allowing consumers to see a break-down of all the fees they are now only going to see the buckets these fees fall in.  I believe that consumers are smart enough to be able to see the fees and do the comparison on their own, but HUD doesn’t seem to think so.  When everything surrounding this issue has settled down, I believe there will be very minimal impact to the mortgage industry and to consumers.  Ultimately, it comes down to trust.  Do you trust the lender you are working with to provide you with a great mortgage loan, protect your interests and provide great service while doing so?  If not, I would suggest finding another lender.  If so, then an extra $250 in fees probably isn’t going to make that big of a difference, considering you will have a lot less stress and actually close that loan when you are ready to close on your home purchase.

Lending A Hand

Scott Wynn

The Wynn Team

Mortgage Brokers

Mortgage brokers are individuals who originate mortgage loans with funds from mortgage banks.  Basically, mortgage brokers do not use their own money to fund your mortgage transaction but instead rely on a variety of banks to do that for them (and ultimate you).  Mortgage brokers typically have the ability to shop for the best mortgage on your behalf from the variety of mortgage banks.  Seems logical that you would hire a mortgage broker who is educated, experienced and does it every day to shop around for the best mortgage for you instead you taking the time to cal a bunch of mortgage banks and getting rate and fee quotes, right?  Well, maybe.

While mortgage brokers do have the ability to shop around for the best mortgage loan they also have relationships with certain mortgage banks that provide perks.  Some perks may include shorter underwriting time, higher income, or lower fees.  While some of these could benefit you, the buyer, they could also benefit the broker enough that they would pass up an opportunity that would benefit you to ultimately benefit themselves.  That is not always the case, but brokers are performing a balancing act to get you a good deal while still taking care of themselves (human nature, if you ask me).

The disadvantage of mortgage brokers is that they do not underwrite the mortgage approval.  The underwriting is left up to the mortgage banks to complete and notify the mortgage broker of the decision.  Similarly, the closing/funding of the mortgage is done by the mortgage bank instead of the broker.  This limits the control the broker has over the transaction.

Mortgage Bankers

Mortgage bankers, unlike mortgage brokers, fund the loans they originate with their own funding source.  Typically mortgage bankers have what is called a warehouse line.  Warehouse lines are like bridge loans, or temporary financing, that allows the mortgage banker to get a loan to fund your mortgage and then find another mortgage lender to buy that loan from them, thus paying off the warehouse lender.  This can get quite complicated and confusing, but the main idea to be aware of is that mortgage bankers fund with either their own funds or through the funds of a warehouse line.  So why is this important?

The reason that having a funding source is that the mortgage banker can maintain control over the underwriting and closing/funding of the mortgage while the mortgage brokers do not.  Mortgage bankers may have priority over the brokers who send their files to be underwritten at these banks.  Many mortgage banks have two entirely separate departments working to underwrite, close and fund broker’s mortgages and their own mortgages to eliminate this type of situation.  Mortgage bankers can, however, have more direct access to those that are working to underwrite and close their file while a broker typically has to work through a wholesale representative (sales person to get brokers to use their bank).

The disadvantage of some mortgage bankers is the potential for problems with their funding source.  Many of you probably heard about the tales of American Home Mortgage.  From my understanding, many of their customers faced situations at the closing table, ready to close on their mortgage and home purchase were left moneyless because American Home Mortgage’s warehouse line would not lend them the money necessary to fund the loan.  This situation caused many mortgage bankers to work towards obtaining two warehouse lenders, instead of just one, to avoid similar situations in the future.  

Hybrid Banker/Brokers – Correspondent Lenders

Correspondent lenders are those that are somewhere in between or, possible, both a banker and a broker.  Correspondent lenders have a funding source, typically through a warehouse line (or two, or three) but also have the ability to broker to other mortgage banks, if they so choose.  Correspondent lenders typically have agreements with larger mortgage banks to enable them to underwrite and close on behalf of that larger bank.  Here is an example:

• Buyer goes to ABC Mortgage (a correspondent lender)
• ABC Mortgage originates a Wells Fargo (for purposes of explanation and example only) mortgage
• ABC Mortgage underwrites and closes (with Wells Fargo’s authorization) the mortgage
• ABC Mortgage used XYZ Warehouse Lender to fund the mortgage
• Wells Fargo Purchases buyer’s mortgage after closing from ABC Mortgage
• ABC Mortgage pays back XYZ Warehouse Lender with funds from Wells Fargo

In this situation the mortgage company funded with the own money while maintaining control over underwriting and closing knowing, the entire time, that a larger bank would purchase the loan after closing.

Let’s say that a correspondent lender decides that either there is a better opportunity for him or the customer by brokering the loan elsewhere.  A correspondent lender typically has the ability to do that, while a true mortgage banker normally does not.  The best of both worlds, right?  Again, similar to brokers, correspondent lenders create relationships, or comfort levels, with certain mortgage products and generally use those same mortgage products over and over, even if the loan officer or customer could benefit from a loan to be brokered.

For the purpose of full disclosure, I am a correspondent lender.

A State of Confusion

So now that you understand the difference from an industry point of view, I will confuse you by sharing what the State of Colorado has designated as a mortgage banker versus a mortgage broker:

Mortgage bankers are loan officers who work for a bank that has banking functions within the state such as bank branches with bankers, ATMs, etc.

Mortgage brokers are all other loan officers in the state.  Mortgage brokers, even is they have their own funding source (correspondent lenders), are required to be licensed in the State of Colorado and must abide by certain rules set forth by the state.

I hope this helps to clear up your questions about what the differences between the types of lenders are.  Here are a couple of links I found when writing this article will help to fill in certain areas I did not discuss:

• Pros & Cons of Mortgage Bankers and Mortgage Brokers
• Banker or Broker? It Doesn’t Matter

Scott Wynn

Lending A Hand

Here are the questions you should ask when deciding on the right mortgage loan officer for you:

#1 – Why Should I Select You as My Mortgage Loan Officer?

Seems like a simple and obvious question, but I can tell you I rarely get this question asked of me.  Let’s take this out of context for a second, and suggest you were going into brain surgery and there were two outcomes – death or success.  Would you want to know the credentials of the brain surgeon working on you?  Would you want to know why they are better than the other brain surgeons in the area, or even the country?  Personally, I would want the best doctor I could get my hands on, despite how much it may cost me.  By asking why you should select that person as your mortgage loan officer, it allows them the opportunity to brag professionally about themselves and put them in the best light possible.  If they don’t have a good answer, your answer should be, “next” – move on to another loan officer who is confident in their ability to provide you with a great mortgage loan.

#2 – How Many Mortgage Loans Have You Closed in the Past Year?

Understanding the volume of their business helps you to understand their level of experience.  If someone has done just three loans over the past year, I would want to understand how they believe they will be able to help me better than someone who does, say, three loans every month or every week.  This may also be a situation where you determine that the loan officer is too busy to take care of your particular needs.  Just because they do three loans every week does not necessarily mean they are not able to meet your needs, but it should be considered and further questions should be asked to make sure they will be there for you when you need them.  Just because someone does three loans per year does not necessarily mean they are not experienced.  In fact, this could be someone who enjoyed a successful career and now does this part time as a sort of retirement.  I wouldn’t mind that sort of situation considering they have a great amount of experience and now have a lot of time to meet your needs, especially if you have a lot for questions or need a lot of time with your loan officer.

#3 – How Long Have You Been in the Mortgage Business?

I remember when I first started doing mortgage loans.  I had a customer who came to me as a referral.  I was very confident they would end up working with me, but I needed to find the best mortgage option I could.  I provided the option to this customer as a 95% jumbo loan with mortgage insurance (the type of loan is not all that relevant, but what I do want you to understand is that this loan was expensive with a higher than average rate and a mortgage insurance premium that did the customer no good).  It was the only loan program that I thought I could offer.  My customer compared me with a friend of his, who was also in the mortgage business, and was told he should get an 80/15/5 to avoid a jumbo loan amount and mortgage insurance.  Why didn’t I think of that?  Lack of experience.  The primary role of a mortgage loan officer, outside of attracting business, is to problem-solve and provide great solutions to customers.  Without the knowledge and experience, a newer loan officer may not be able to provide great solutions for you.

Consider the flip side now…a very experienced loan officer who has been in the business for a while may be a bit cynical about the business and tired of working with customers.  I am not suggesting that all mortgage loan officers who have been in the business for a long time are cynical, but just like any industry, those people do exist.  A newer loan officer may also be hungry enough for business they will look out for you and your interests more than someone who has been doing this for a while.  The newer loan officer is looking to gain your trust for the income your loan will provide but they also realize there is a potential for referrals if they do a great job for you.

#4 – Are You a Mortgage Banker or a Mortgage Broker?

Understanding the difference between a banker and broker and the impact it has on you is important.  Each have their advantages and disadvantages which I will explain now:

• Mortgage Banker
  • Advantages
    • Direct access (or In-House) to underwriting
    • Niche products available only to the bank they work for
    • Potential the loan officer is on a salary as opposed to commission
    • Possibility for lower interest rates
    • Mortgage funded by the bank they work for at closing
  • Disadvantages
    • Sometimes limited to use that bank’s mortgage options only
    • Potential the loan officer is on a salary as opposed to commission
    • If that bank is unable to fund on your loan, you will not be able to close

I mentioned the salary loan officer in an advantage and disadvantage because it depends on how you look at this.  Some people like working with salary sales people because there is less pressure or “sales”.  Others, like me, do like working with commissioned salespeople because they have something invested in my time and mortgage, which makes me believe they would do more for me than someone on a salary.  This is exactly why you should ask questions and understand how the loan officer will work for you.

• Mortgage Broker
  • Advantages
    • They can shop around to various companies to find you the best deal
    • Wide range of options outside of one mortgage company
    • Possibility for lower interest rates
    • Ability to place your loan elsewhere if a mortgage company closes
  • Disadvantages
    • Does not have direct access (or in-house) to underwriter (although some brokers have strong relationships with certain mortgage companies to offer special perks)
    • Possibility of no training

Possibility of lower interest rates was shown as an advantage on both sides.  This is because some banks offer lower rates to their in-house loan officers compared to brokers.  Brokers have the ability to lower their commissions or shop for the best rates through various lenders, so there may be occasions where they can offer better rates than a banker.

I want to also elaborate on training because there is always a possibility that the loan officer you work with, despite whether they are a banker or broker.  I believe it is more likely for a broker to open their doors with little to no training as compared to a mortgage banker who likely have a training program for newly hired loan officers on their staff.

Ultimately, understand how your mortgage loan officer works and what options they have to best help you.

#5 – Can You Originate Government Loans?

You may or may not be interested in a government mortgage, but if you work with a mortgage loan officer who does not have access to government mortgage options, you may miss out on an opportunity.  I often talk with customers who have been told that they should not do a VA loan; later to find out they were told this because the loan officer could not do VA loans.  Be aware of whether the loan officer you select can do government mortgages and whether or not you qualify for a government mortgage that may be better suited for you.

#6 – Can You Recommend a Real Estate Agent?

Most loan officers would love to get this question.  Often, a lot of the business that mortgage loan officers get is through referrals from real estate agents.  When they have the opportunity to return the favor, they will jump at the opportunity.  A good mortgage loan officer will be well connected and can provide referrals to real estate agents, CPA’s, home inspectors or many other professions related to the home buying process.

#7 – What is Today’s Interest Rate?

You want to know what the rate is for a mortgage, right?  A good mortgage loan officer will not just provide a quick answer to that question but rather respond in, “It depends.”  The reason the answer depends is because there are so many different factors that go into determining your rate.  The first step to determining the rate is to determine the best loan program, which will take some time and will occur through a conversation between you and a mortgage loan officer.  If a mortgage lender responds with a rate to this question, I would suggest you look for another person.

#8 – Do You Have Access to any Special Programs?

This may not be a need of yours, but here is a list of people that should be concerned with the answer to this question:

• First time home buyers – see my post on Money for Buying a Home
• Buyers with limited to no down payment
• Teachers, Firefighters, Paramedics
• Buyers purchasing a home that requires repairs or rehab
• Buyers with disabilities or family members with disabilities

Other special situations may exist, so if you think you may fall into a special circumstance, make sure you ask your lender if they know of any special programs that may be available.

I hope this post has been helpful to you in selecting a loan officer to work with.  If you have any questions, please feel free to email me.

Lending a Hand

Scott Wynn