We interviewed Bill Rayman, a mortgage broker in Los Angeles California, to provide some expertise into the world of home financing. One thing Bill made clear is that there are exceptions to every “rule” in the finance industry as every lending institution has their own set of guidelines and loan criteria.
How can someone seeking a loan best prepare for a meeting with a loan officer? What are the items on a checklist of must have’s?
With some exceptions, every lender is looking at 4 criteria for doing a loan: 1) Collateral (the value of the home); 2) your credit – (somewhat simply the credit score, but mostly looking at overall credit history to see your level of responsibility, i.e. Do you pay your bills on time?); 3 Assets; and 4) Debt to income ratio.
Debit to income ratio is the banks’ way of determining that your cash flow is sufficient to pay them back. Ultimately, this is what the bank is concerned about because it is in essence the primary bank function: They lend you money and want you to pay them back on a regular basis. They aren’t looking to foreclosure; they don’t want more properties in their portfolio.
Demonstrating income is critical and is usually done with tax returns. If you’re owner or part owner of a company, they want to look at corporate tax returns. Wage earners are treated more leniently than a self-employed person. For the most part, I don’t know any lender who would let you be self-employed for less than 24 months.
What are some new loan programs that people should be aware of?
One of the best programs is the FHA, which is the only government program that really works. It’s designed for people who are either just starting out, don’t have a lot of job history, might not have a lot of money, or who might have tarnished credit. The FHA will work with that, and by providing insurance against a borrower defaulting, lenders readily make FHA loans. Essentially the FHA is an insurance company where you, the borrower, pay them an insurance premium fee to insure the loan against default.
As much as I like the FHA, I can get a better deal for many borrowers without going through FHA. I can accomplish the same thing with lenders either with less costly private mortgage insurance or by getting the lender to pay for the insurance. The costs are dramatically less.
How much less are we talking about?
The FHA charges 1% of the loan amount upfront and 1.15% of loan amount for 5 years. I can do comparable programs with no insurance, or insurance that is about 1/3 of the cost of the FHA.
Personally I don’t believe there are legitimate first time home buyer incentives offered by banks. My experience is that banks who offer it typically mark up the rate then discount it so that it’s a false savings. Logically, what bank would want to give a first time home buyer an incentive over someone with a history of home ownership?
How does someone choose the best loan officer to fit their needs?
First step is do research–look online, go to a bank, talk to a broker. Google “mortgage broker Los Angeles” and you get a list of brokers. Early on, do a little research and talk to a few different people.
The downside to working directly with a bank is that they are not there to help you. The bank employees don’t work for their customers-—they work for the bank. With a bank, if there is a problem and things go awry, it is going to do nothing to help you solve that problem. And in this restrictive lending environment, plenty goes wrong. A broker is only going to get paid if we make a transaction happen. Plus we have a license and a fiduciary responsibility to our clients.
People only think of “rate, rate rate”–it seems to be on everyone’s mind. The problem with rate shopping is that anyone can quote anything anytime. I guarantee I can find someone online who says they can beat any rate I can do, but it doesn’t mean anything. A quote at 1:30 on Wednesday is not a guarantee and could change anytime. Nothing is locked in until you have the applied and the loan registered.
The second reason that rate shopping is bad is that it focuses on the wrong issue. Getting a rate quote is one thing; closing a loan is everything! Because it is so difficult to get a loan you need to know it will close. You better be with someone who knows how to solve problems and get you to the finish line. These days, every loan has problems. If you’re just shopping rate, you risk being short-sighted, and to your detriment. My company is a bank, so intrinsically we have very competitive rates. And because of that price advantage I don’t have to focus on rates and I can spend more time helping people understand the process and loans so they can make informed decisions.
Another issue to be aware of online is that some of the companies to get quotes from are legitimate… some aren’t. The person shopping online has no idea who is and who isn’t. I have a list of anecdotes the length of my arm of people who went online to find a rate, but when they went to close, mistakes happened. The loan originator wants a higher rate or more points added. People making a purchase are completely over a barrel. They can’t pull out of a transaction because they’ll be at risk of either losing their deposit or losing the home. On a refinance, it might be worth the gamble but on a purchase I think it highly unwise.
I did not realize that about shopping for interest rates at a bank…
Go talk to a Wells Fargo manager–he’s got one thing on his mind. How does he or she get promoted? The answer is: by making money for the bank. It’s a zero sum game. If the bank makes money, it’s coming out of your pocket. At the end of the day, he works for the bank.
What are the new Fannie Mae, FHA, or Freddie Mac guidelines that people should know about?
Understand what Fannie and Freddie are. Most banks do not keep their loans–they sell their loans to the secondary market to recoup cash that they can lend again. Fannie Mae and Freddie Mac represent 80% of the secondary market.
You go to Chase for a loan, they likely will turn around and sell to Fannie and Freddie who set the guidelines for loans. Each bank adds their own overlay on top of those guidelines. For instance, the FHA says they’ll do a loan on a credit score of 620, but good luck getting a loan at Wells Fargo, Chase, or Bank of America with that credit score. Banks are private companies and can choose to say, “No.”
These guidelines are complicated and there are many of them. That is a big reason to work with a professional, whether a banker or mortgage broker. These guidelines with Fannie and Freddie change and keeping up with them is half the challenge.
What do you project will happen with interest rates in the coming year?
The consensus is that through 2012 interest rates will remain relatively flat. They always flutter–they go up and down the way the market goes up and down, but the general consensus says they will remain flat within the year.
If you’re looking to buy a house, frankly I don’t think the interest rate should be something you should make your primary concern. Buying a house is about your lifestyle. Is this where you want to live, where you come home every day? If you tell me you’re not going to buy the home because it’s a quarter point higher on the rate, it seems that maybe having a home isn’t really what you want or are ready for – both of which are fine answers!
I do the math for people and point out that on a $300k loan, the difference on 1/8th point is about $20/month. Maybe your neighbor got 4 1/8 and you were quoted 4 1/4… Sure, in dollar terms it’s measurable, but it’s not the reason to buy or not buy a house. You should be aware of your priorities and react accordingly.
Besides a home being about lifestyle, it is a huge investment. Today’s interest rates are so riotously low – they haven’t been this low in 50 years! – whether you get 4.00% or 4.25% doesn’t detract from the idea that now is a phenomenal time to take advantage of these rates. Sure, I fight to make sure my clients save every penny they can, but in the long term of 5, 10 or 30 years, passing on a home because you might have missed on a fraction of a point in today’s market may be a mis-priority.
What tips can you provide someone looking to refinance?
Get your credit pulled at the beginning by a mortgage professional. For something so important, it’s astounding how few people actually understand how the bureaus work. Not all credit reports are the same; they vary by industry and by type.
Banks use a Financial credit score, derived from information from the 3 bureaus. Get someone to pull your credit score early and review it. For people who are worried that pulling their credit will lower their score, I tell them, “There’s a kernel of truth in it, and a lot of corn.” It reflects my comment that few know how this vital service works. Pulling credit does not automatically lower your score. The bureaus see who’s pulling it, how often it’s pulled, and what the purpose. Banks and brokers pulling it 10 times in a week will not lower your credit score. The bureaus see that you are shopping for a loan–not asking each company for money.
Knowing what’s on a report is vital to do early. Problems have to be identified and mistakes fixed – a process that can take 2-4 months . Mistakes easily derail a purchase or refinance. I only work with people who let me pull their credit up front.
What is your outlook for the real estate market in 2012?
I deal with property around the nation, but the bulk of my activity is Los Angeles and California. Although the better properties and / or better areas have maintained themselves, home prices in most areas are still declining. This makes it a buyers’ market. It’s a great time to buy. When prices stop declining, people sitting waiting for prices to be the lowest are the ones who lose out. Once prices start to go back up, sellers are no longer eager to sell and it becomes sellers’ market.
Now is an extraordinary time for people to buy. Do I think the market will turn around in the next year? No, but I expect the Los Angeles market to rebound in 2 years. What I tell people is: I’m not a real estate expert. I know real estate finance. I know how to makes things happen. I know how to get people the financing they need. Part of my value is that I have a group of experienced, knowledgeable real estate brokers—each knows their geographic slice of the market. Ask me about real estate, and I’ll happily refer you to an expert.
Thank you Bill! You can reach Bill Rayman at (310) 295-6213 or by e-mailing email@example.com. Also check out his website www.mortgagehelplosangeles.com for more valuable information about real estate finance.
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