This economic cycle has played out many times throughout our history. Unfortunately, the economy often improves faster than the damage that it did to the average family. Maybe you are one of those who has fallen victim to unfortunate economic conditions in the past but now you have began the rebuilding process and with that comes a new job in a new community.

With a new job often comes relocation and with relocation comes a new problem: You need a mortgage but have damaged credit. The good news is that the bad news may not be as bad as you think.

What’s Your Credit Score?

These days, anything less than a 680 credit score is going to cause you trouble getting a home loan. While it’s more difficult to get a home loan, it’s not impossible. There are a few strategies that you can employ to get the home.

First, you are going to have to face reality. Before shopping for your home, understand that until your credit improves, you will probably have to settle for a smaller home than you would like. You’re going to have to shop for bargains.

Remember that if you have damaged credit but your new job has left you in a healthy financial situation, buy a home that needs some work and slowly improve it. You don’t need good credit to install new carpet or paint the fence.

Get Prequalified

While it is a good idea for everybody to get prequalified for a home loan, it is even more important that those with damaged credit to get prequalified. You need to know what your credit limit will be before you go shopping.

Remember that the more money you can put down, the more receptive the lender will be to you. If you sold your home and saved that money, it would be ideal if you could put 30% down on your new home. For many, that will not be possible but keep in mind that many lenders are asking for much larger down payments than in years past.

While it’s always a good idea to pay off your credit cards, if you know you are going to be moving in to a new home, save the proceeds from the sale of your home as a down payment for your new home. Don’t use it to pay off your credit card. This is one of the few exceptions to always paying off debt as soon as possible.

Other Options

In the event that you cannot qualify for a home loan, all is not lost. Ask your lender if you qualify with a cosigner. If you still do not qualify, maybe you have a family member or friend who invests in real estate who could take out the loan and you could either rent from them or negotiate a deal where you can pay in to the equity of the home.

Regardless of your home, you want to keep your focus on rebuilding your credit. That may require you to rent a home for a period of time. Be patient and don’t try to live beyond your current financial status. You’ll get back on your feet in no time.

I lived in California for several years and had no idea that people were growing it in their back yards in the Northern Part of the state, with little, if any resistance from law enforcement. Learn more about what they call the “Marijuana Triangle” tonight on CNBC. Check your local listing for showtimes.

From the CNBC website:

While it may not be traded on Wall Street any time soon, marijuana has become a booming cash crop. CNBC’s Trish Regan goes behind the scenes to explore the inner workings of this secretive industry, focusing on Northern California’s “Emerald Triangle,” now the marijuana capital of the U.S. In this scenic pocket of America, the pot business, much of it legal under state law, now makes up as much as two-thirds of the local economy.

Marijuana Inc [CNBC.com]

Ringleader Matt Cox made off with around $12 million and, in a telephone interview with CNBC, explains the details of his crime.

Check out CNBCs American Greed site here. Their site lists showtime at 9p | 1a ET, but I’m on the east coast and my guide has it listed at 10:00pm, so you may want to set your DVR so you don’t miss it, or check your guide.

Mat Cox - Mortgage Broker & Ringleader

Alison Arnold - The Ex-Girlfriend

Rebecca Hauck - Partner-in-crime

Madoff is the founder of Bernard L. Madoff Investment Securities LLC and separately managed money for high-net-worth individuals and hedge funds through an investment advisory business he oversaw. Madoff was charged with securities fraud on Thursday after federal investigators called his operation “a giant Ponzi scheme.”

According to The Wall Street Journal, Madoff was buying and selling options, which are orders that allow someone to buy or sell stock at a given price within a given time frame. The orders don’t have to be placed. The Wall Street Journal Weekend Business Podcast for 12/12/2008 states that, while buying and selling options is a viable investment strategy, it would be impossible to execute given the enormous amount of money Madoff was managing.

What is a Ponzi Scheme?

Ponzi schemes operate on the promise of high rates of return with little risk; no different from most investment schemes in that regard. In a Ponzi Scheme, however, portions of new investors’ funds are siphoned off and paid as returns to older investors. Older investors think they’re getting great returns when the money is actually coming from the new investors. In the end little, if any, real investment actually takes place. The scheme is able to operate as long as there is a constant flow of new investors; as soon as new investment slows or stops, there is no longer money to pay the older investors. We may find that this is just how Madoff got caught…with the slowing economy, he no longer had a steady flow of new investments to pay the old investors. This is just speculation of course, nonetheless, this appears to be the largest investment scam in U.S. history, causing irreparable losses to thousands, including many large charities.

First Of All, What Are Points?

If you’ve read through the glossary, you may have come across the definition of Points. What you may have noticed is that the only real definition of a Point is a percentage of the total loan amount. The term points doesn’t necessarily mean closing costs, or rebate, or discount costs. Rather, quite literally, 1 point is equal to one percent of the loan amount. The problem with the idea of “paying points,” is that the phrase means, literally, “paying a percentage of the loan amount.”

What’s Really Wrong With The Promise of “No Points?”

The problem lies in the fact that “Points” is not the same as “Closing Costs,” something a lot of mortgage shoppers would be surprised to learn. So, promises of a refinance with no points makes great advertising and generates phone calls, but it does not mean there are no closing costs. It’s not what the promise of no points does say, but what that promise doesn’t say that makes this a form of bait and switch. The promise of no points says you won’t pay a percentage of the loan amount in closing…great, but it doesn’t say you won’t pay any up front closing costs, it also doesn’t say that your lender or broker can’t give you a higher interest rate and make you pay closing costs indirectly.

Understanding The Bigger Picture

When shopping for the best mortgage terms available, the focus should be on interest rate and total closing costs instead of terms like points, which may very well be so emphasized these days as nothing more than a marketing ploy. Mortgage companies understand that the average consumer doesn’t understand the details of a mortgage transaction well enough to recognize such ploys. An adequate understanding of the details of a mortgage transaction is essential if one expects to really find the best deal.

If you follow the mortgage or real estate markets at all you’ve probably heard about HR3915, the new proposition to, among other things, outlaw Yield Spread Premium (YSP) in mortgage transactions. If you haven’t heard about it, just do a Google search on HR3915 and you’ll find quite a bit about it. If you want to read the actual resolution itself, you can find it here…HR3915. So let’s break down yield spread premium and whether it’s a good or bad thing.

Yield Spread Premium, What Is It?

YSP, or Yield Spread Premium, is a term familiar to mortgage brokers and those home-owner’s who’ve done business with a mortgage broker. Essentially, YSP is a premium paid by the bank as a result of the broker/borrower accepting a higher interest rate than “par.” If you don’t know what I mean by “Par,” you can read a bit about the interaction between points and rate in this post, but I’ll give you a brief refresher here.

Interest Rate – Loan Cost Interaction Refresher

When I shop for a loan for a client, the bank gives me options as to how I want the loan priced. Aside from all the traditional factors affecting interest rates and loan costs, the bank gives me, and hence my client, two numbers that we can play with to change the interest rate and closing costs of the loan. Those two numbers are points and interest rate, and they vary inversely, in other words, when one goes up, the other comes down.

If I have a client who wants the absolute lowest interest rate offered by a given bank, also called the “floor,” the bank will accept money up front to essentially allow the borrower to buy the rate down; the money the bank accepts is referred to as points because the cost to buy down the interest rate is represented by a percentage of the total loan amount.

So, that’s what’s known as paying points, the opposite is known as a rebate; also called Yield Spread Premium, or YSP. Let’s say my client doesn’t want to pay any closing costs at all; without YSP, that’s impossible. There are costs associated with a mortgage transaction that no amount of wishing and hoping will make disappear; there are several people that work on any given mortgage transaction, and all those people get paid through the profits on the loan. However, YSP allows me to set up a situation for my client in which he or she won’t have to pay any closing costs, or so it appears, let me explain.

Generally, on any given mortgage transaction, a homeowner can expect to pay $3500 or so in total closing costs; the money will be paid, and it will come out of the homeowner’s pocket, there’s just no way around it. There are certain situations, however, in which a homeowner would benefit from not paying any up front costs for a mortgage. Yield Spread Premium allows us to accomplish that; in exchange for a slightly higher interest rate, the bank will pay a rebate on the mortgage transaction; the amount of the rebate depends on the amount of the rate increase. If my client wants no out-of-pocket closing costs, we increase the rate slightly, receive a rebate, and the rebate pays for the borrower’s closing costs as well as compensation to those who worked on the loan.

I mentioned “par” earlier; the par rate is the rate at which the borrower qualifies without paying any points and without receiving any rebate. If we want to pay points, we can get a rate below the par rate, and if we want to receive a rebate, or YSP, we get a rate above par. It’s important to keep in mind that the par rate is not going to give the borrower a no-closing costs loan, the borrower still has third party fees and broker fees to pay.

How Yield Spread Premium Affects Homeowners

Now that we’ve had our interest rate/loan cost interaction refresher, we can understand how YSP affects you, the homeowner. Let’s start with the good side of YSP – when it’s used responsibly by the broker.

When YSP Is Used Responsibly

Let’s say I have a client named Joe who plans to move in a year, but his mortgage rate is about to adjust and he doesn’t want to get smacked with ever-increasing payments. I’d usually recommend to Joe that he not pay any points, and, in fact, no out of pocket costs at all, and, instead, accept a slightly higher interest rate, and here’s why.

Let’s say Joe’s third party closing costs (Title, Escrow, Recording, etc fees) are $3,500. Let’s also assume that Joe has great credit and qualifies for a 6% interest rate at par (no points, no rebate). To close that mortgage transaction, Joe is going to have to pony up the $3,500 either out of pocket, or it will be rolled into the loan amount, in addition to my compensation. Now, let’s also assume that if Joe was willing to accept a 6.5% interest rate, the bank would pay a rebate of 0.875% of the loan amount (this rebate is YSP). If Joe’s loan amount is $600,000, that 0.875% rebate would amount to $5,250, which, in Joe’s case, may be enough to cover all of his $3,500 in third-party fees as well as my fee. So, Joe gets a no closing cost loan, but was it worth it to take a higher interest rate? Since Joe plans to move in a year, it probably was; let’s take a look.

Was Joe Better Off With No Closing Costs And A Higher Interest Rate?

That extra 0.5% on the rate will end up costing Joe $250 a month, which, over the course of the next year will add up to $3,000. But remember, the bank paid us a rebate of $5,250 (again, this is rebate is called YSP, or Yield Spread Premium), which Joe used to cover all of the costs associated with his refinance. So, if Joe sells in one year, he effectively traded $3,000 of his own money for $5,250 of the banks money; sounds like a pretty sweet deal to me, and Joe ends up with an extra $2,250 in his pocket ($5,250 – $3,000).

If, however, Joe decides to stay in the home for two years instead of the originally-planned one year, he’ll actually be worse off by accepting the higher interest rate. Over two years, that extra $250/month on the payment will add up to $6,000, so if Joe told me he’d be staying in the home for two years instead of one, I wouldn’t have recommended taking the higher interest rate.

What If YSP Is Not Used Responsibly?

By law, a broker has to disclose YSP on your final loan documents; so you can find out exactly what rebate was paid by the bank, if any. The problem is, if you’re like most homeowners, this is the first time you’ve ever heard of YSP and how it’s used; this opens up a world of possibilities for unscrupulous brokers to use YSP for their own gain.

For example, let’s say instead of me, Joe decided to do business with a shady mortgage broker, let’s also say that Joe was completely dead-set against paying up-front costs, even though he’s now decided to remain in his home until he retires, another 25 years. If Joe’s so against paying points, that shady mortgage broker will have Joe pegged within 15 seconds and know exactly what to say to get Joe to bite. Joe will probably tell the broker about all the other companies he got quotes from that offered low closing costs, but Joe didn’t want to hear any of it, he had his heart set on no closing costs. So, the shady broker sympathizes with Joe, he says thinks like, “Wow, I can’t believe no-one was willing to offer you a free loan. I’m sure all those guys were just trying to take advantage of you and get you to pay points that you didn’t need to pay in the first place.”

Joe likes the sound of this, “this is my type of guy,” Joe thinks to himself. So, the shady broker goes to work shopping for the loan that’s going to give him the biggest payday. The broker comes back with an interest rate a bit higher than the other companies came back with, but the broker knows that Joe is so dead set against paying up-front costs, that he’d rather accept a higher interest rate than pay any up-front costs. Also, the shady broker mentions that those other “evil” companies ran Joe’s credit so many times that his score dropped and, because of that, the rate is slightly higher, but “No fear!” the shady broker exclaims, “The higher rate is hardly going to cost anything extra each month and I got what’s really important for you, Joe, no up-front costs.”

Now Joe’s happy, he’s got what appears to be a no-closing cost loan, he signs the documents, and the deal is done. It’s likely that Joe won’t ever realize what happened, because he doesn’t fully understand how the mortgage industry works, and that’s what his shady broker was counting on.

So what’s actually happened here? Let’s say the broker decided to jack the rate up to 7%, take a 1.5% rebate from the bank, and pay Joe’s closing costs from the rebate. The YSP paid to the broker, at 1.5% of the loan amount, would be $9,000; after closing costs, the broker walks away with $5,500 in commission; none of which Joe will actually ever realize he paid. Instead, Joe will assume he got a “free loan,” and since all those other companies ran his credit, the score dropped, so he got stuck with a higher rate, but what’s most important to Joe is that he got his “free loan.” Now, remember that I would have recommended, if Joe were going to stay in the home for more than a year, to pay some closing costs in exchange for a lower interest rate? Let’s see just how much this “free loan” actually costs Joe.

At 7% on a $600,000 loan, Joe ends up paying an extra $500/month than he would have if he took the par rate of 6% based on my recommendation (since he’s now decided to stay in the home until retirement, another 25 years). Over the next 25 years, the extra interest at 7%, as opposed to 6%, will cost Joe $150,000! So, Joe just gave the bank $150,000 in exchange for the bank saving him around $5,000 in total closing costs…I’m sure if Joe were aware of this he would have paid the up-front costs.

Should We Outlaw YSP?

That depends on who you ask. YSP can be used to take advantage of unsuspecting borrowers, but then again, so can any other aspect of the loan process borrowers don’t understand. If we’re all so worried about being taken advantage of, why don’t we just lock everyone up in a padded room and have guys in white outfits feed trays of food through slots in the door. The fact is, when you walk out the door in the morning, you run the risk of being taken advantage of, but most of us protect ourselves, and you know how we do that? We educate ourselves (or someone does it for us).

You don’t hand over a $100 bill to a stranger on the street just because he tells you he’ll turn it into $1,000 do you? No. And why don’t you? Because you’ve learned, either through your own mistake or someone else’s, that it’s a bad idea; this seems such a basic concept to us that we don’t even think about it, but at one point, we learned not to do this.

The solution is not to outlaw YSP, which, in Joe’s case above could have saved him quite a bit of money in the event he moved out of his home in a year’s time; the solution is to educate borrowers on YSP, require full disclosure of YSP, and enforce some of the lending laws that already exist. Listen, adding more laws and more restrictions when we don’t even enforce the ones we already have is a little more than nuts, especially when the thing you’re trying to outlaw is a pretty important money-saving tool when used correctly.

What To Do Now

At this point, I recommend you do two things. The first is to sign this online petition against HR3915. The second is to call your local congressman/woman and voice your opposition to this bill (if you’re only going to do one thing, do this, it will be way more effective than just signing the petition).

If you’d like to read the bill itself, you can find it here. Read the original HR3915.

You see, a lot of larger mortgage companies do have their own marketing departments that are charged with generating potential clients for the sales teams to speak with, but there is an entire army of mortgage brokers and small mortgage companies out there that simply don’t have the means to fund or the expertise to operate a dedicated marketing department.

Very similar to how Real Estate Agents operate, many mortgage professionals are either independent, or they work for very small companies on the order of 10-15 employees. As is the case with many smaller companies, in order to operate efficiently, they need to outsource a good portion of their business, and marketing is usually the biggest portion they outsource.

LowerMyBills and LendingTree

Unless you’ve been in a cave for the past 5 years, you’ve probably heard of LowerMyBills.com or LendingTree.com. LendingTree unleashed a whale of a marketing campaign several years ago touting the benefits of having banks compete over you, instead of the other way around. What you probably didn’t know is that these two companies don’t do anything new or revolutionary, they just happen to have a knack for marketing. Over the past several years, these two companies have become major players in the mortgage industry.

So How Does This Lead Brokerage Thing Work?

LowerMyBills and LendingTree primarily generate leads from their websites, but that’s not the only way to do it. Have you ever received telemarketing calls from mortgage companies? Well, I’m going to let you in on a little secret…some of those telemarketing calls were probably not from mortgage companies, but lead brokers. Just about any way you can think of to gather a potential borrower’s information has been attempted by lead brokers with varying degrees of success.

I’ll use the internet brokers to explain in more detail how this works. Let’s say I’m a mortgage broker who doesn’t know much about marketing or doesn’t have the resources or desire to create an internal marketing department. I may go sign a contract with LowerMyBills to receive, say, 20 leads per day. Depending on what lead broker I’m dealing with I can make stipulations as to what types of leads I wish to receive. For instance, I can usually specify that I only want leads from borrowers with credit scores over 700, or loan amounts over $200,000, or Loan-to-value below 80%, and so on.

So, when Mr. Homeowner submits an application at LowerMyBills, and the information on that application meets my qualification requirements, Mr. Homeowner’s information is automatically sent to me and 4-5 other mortgage companies (or at least that’s what they claim – in reality Mr. Homeowner will probably receive several dozen calls from different mortgage companies as a result of submitting that one application online – where all those calls come from I can only speculate on).

Now, as a mortgage broker, every time LowerMyBills sends me one of these leads they charge my account somewhere in the realm of $50-80, depending on the information submitted with the application. Let me repeat that so there’s no confusion; a lead broker like LowerMyBills will generally sell your information to 4-5 other companies (at least) at $50-$80 a pop! So, every company that calls you paid that amount just to be able to make an attempt at getting in touch with you and earning your business; but since each lead is generally sold to 4 or 5 companies, a single LowerMyBills application may generate $200-$400 in revenue for LowerMyBills. So, there’s obviously big money in the lead brokering business, but expenses for such companies are surprisingly high, so many lead brokers are also mortgage companies themselves. I’m not sure about LowerMyBills, but LendingTree is an example of such a lead broker/lender hybrid.

Are Lead Brokers Good or Bad?

Lead brokering is, I’m sure, a tough business, but to be quite honest with you I’ve never done business with a single one, not one, that I would do business with again. I’ve also yet to meet another mortgage professional who feels differently than I do, but to be fair, I’m sure someone is having a good experience with his or her lead company (seriously, there has to be someone).

As a mortgage professional I haven’t found a lead broker that’s worth doing business with, and knowing what I know about lead brokers, I wouldn’t do business with a lead broker as a homeowner either.

The problem with lead brokers from a home-owner’s standpoint is three fold. First of all, as a home-owner you don’t have any idea who is actually going to call you. You may submit a loan application through LowerMyBills.com, but you won’t know anything about the companies that call to earn your business.

Second of all, there is little, if any, screening process involved when a mortgage company signs up to purchase leads from a lead broker; even if there were a screening process, it would be nearly impossible to implement effectively. There is simply no reliable way to screen out unethical mortgage companies. Even if the lead broker wanted to do this, how would he find out who’s ethical and who’s unethical? There’s no objective source of that kind of information. So, even though you submit an application through a website you may believe to be a good resource or a site you’ve heard great things about, you could still end up speaking to a scam artist on the other end of the phone, and there is next to nothing done to prevent this from happening.

Third, you really have no idea what’s happening with the information you submit. Some lead brokers will keep the best leads for themselves and sell the rest. Well, if you submitted your application under the impression that you’d be having banks compete over you, you may be sorely disappointed when, and/or if, you ever realize those were false pretenses. Also, you will receive more phone calls than you anticipated, even if you read all the fine print when you submitted your application. I wrote an article about why you may receive more mortgage and refinance phone calls than anticipated; however, what I didn’t mention in that article is that there is quite a bit of fraud going on. Your information will find its way to quite a few more mortgage companies than the 4 or 5 originally promised by the lead broker. There’s no way to know exactly who is committing the fraud, be it the lead broker higher-ups, or just some disgruntled employee, but I’ve purchased leads from various lead brokers in the past, and I could count on one hand the number of people who had not been contacted by double or triple the number of companies they were supposed to have been contacted by.

Conclusion

Unfortunately, the mortgage business is full of shady people; hopefully that will start to change with the changing market conditions, but even major companies will conceal the truth a bit, so working with name-brand lenders won’t necessarily protect you. If you’re looking for a company to do business with, follow this link for some mortgage shopping articles I’ve written. If after you read those, you’re still not sure what to do, follow this link to get in touch with me and I’d be happy to offer some advice or take a look at your current offer to see if it’s a good one.

To make things simple, I’ll use the mortgage rates and loan amount from the post about paying points to refinance. In that particular situation, paying $9,600 in points upfront on a $600,000 loan would save the borrower $300 a month on his or her monthly payment. As a result, the buy-down cost of $9,600 would pay for itself in a little less than 6 years; so, the cost would be worth it if the homeowner expected to remain in the home for more than 6 years. That’s just one side of the story, there’s another side that most people don’t think about.

Put the Savings Toward the Loan

Ok, so if you don’t pay the points, you’re payment is $300/month more than it will be if you do pay the points, so, if it’s up in the air and you can afford to make the higher payment, you should factor in one more thing. Since you were considering the higher payment anyway, what if you were to pay the points and put the $300 savings toward an extra principal payment each month? Well, at the end of the 6 years, the roughly $20k cost will be returned, but what if you then decide to stay in the home until the loan is paid off? At the end of 30 years, you’ll have saved $135,911 in interest payments and you’ll pay off your home 8 months faster!

In Layman’s Terms

So basically, it boils down to this: In this particular situation, if you’re going to stay in the home for at least 6 years, it will benefit you to buy down the rate, but every month you stay in the home past 6 years, you’re going to see extra savings that you wouldn’t have seen had you not paid points for the lower rate.

The Investment Approach

The other option is to pay the points, buy down the rate, save $300 a month and, instead of putting that money back into the loan, you invest the savings. At a measly 4% return, $300 a month will turn into $24,746 after 6 years, $44,619 after 10 years, and a whopping $209,188 after 30 years. You shouldn’t have any problem finding an investment that will pay a 4%.

Now, more realistic returns on, say, the stock market would be around 8-12% – let’s call it 10% for the sake of the demonstration. Investing $300 a month for 6 years at 10% would give you $29,965, after 10 years you’re looking at $62,232, and after 30 years that little ‘ole $300 a month turns into $683,381!

Obviously the investment approach yields the greater benefit and, in fact, the roughly $20k cost of the loan we covered earlier would pay for itself a bit sooner than 6 years using this approach.

It’s All in the Numbers

In California, a $600,000 loan is quite common; ultimately, how the numbers work out will completely depend on your situation and these calculations need to be made by you, your financial advisor, or your mortgage advisor. Whoever does the math, it needs to be done, we’re talking about a lot of money here. So quit sitting on your butt and get to it!

Ok, if you’ve ever refinanced, you’ve probably wondered at some point just what the hell goes on between the time you complete an application and the time your loan funds. I mean, if you’ve had a half-way decent loan officer, he or she has probably given you a little insight, but nowhere near what I’m going to tell you. Now, keep in mind, this is the process your file goes through if you’re dealing with a mortgage broker; maybe someday when I feel like writing about something boring I’ll key you in on what goes on at a bank, but to be quite honest, I don’t really know because I’ve never worked at one thank God. I’ll keep this concise, but if there are any questions, by all means, fire away in the comments section. On with the show…

After The Application:

So you’ve spent a boring hour while your Loan Officer takes down a complete 1003 (pronounced Ten-oh-three), also known as a Uniform Residential Loan Application. If you’re lucky that Loan Officer at least made an attempt at keeping you from tearing up with boredom and took the opportunity to get to know you a bit during the process. Once the application is complete, you hang up the phone and the LO goes to work.

At this point your Loan Officer is in a position to accurately research the loan program that suits you best. By the way, for all you weirdos out there that call brokers and ask what their rates are, if you haven’t gotten at least to the application stage, any rate-quoting is merely a tactic to keep you interested. Realistically, rate and program qualifications cannot be determined without a complete application, especially in the current market, so don’t ask and expect a real answer. Anyway, back to business. Now your LO either contacts as many Lenders as possible through some sort of automated system or he contacts just a few of the lenders he thinks, based on his experience, offer the best rates for the loan program that suits you best.

The Broker – Account Executive Relationship:

When Mortgage Brokers, or Loan Officers working for a Mortgage Broker, contact a lender, they don’t just call customer service and get the rates of the day…that would be too easy. The banks/lenders your LO deals with are the Wholesale Divisions of that bank, which is completely different from the side of the bank that the average consumer deals with. Your LO has one assigned contact at each lender he does business with, that contact is called an Account Executive, or AE. AEs relay pricing information to the LO and are the “experts” on a given lenders programs; I put the word “experts” in quotes because, all too often, AEs have no idea what they’re doing. Essentially, AEs act as liaisons between the lender and the LO; the Loan Officer is the AE’s client, just like you are the loan officer’s client.

After The Loan Has Been Researched:

I’ll go into what’s involved in researching a loan in another post, because it can be complicated, for now we’ll just move on to the “after-research stage.” At this point, the LO analyzes the programs he’s researched and figures out the best way to present these options to the client, whether that be via email, telephone, mail, or whatever the hell he comes up with. In an ideal world, the client choses the program he or she likes best after short deliberation, hangs up the phone, and the LO puts together a set of disclosures to send to and have signed by the client.

Submitting The Loan:

After you’ve signed and returned the disclosures to your LO, he moves onto the submission stage of the loan process. If you’ve ever heard an LO talk about his processor, this is where she comes into the picture. The LO decides to lock or float the interest rate at this point and then hands the file off to his processor to be submitted to the lender. A good LO will have all the potential problems with your file worked out before he hands it off to his processor, and a good processor will review the file before submission as a last line of defense; once the file is submitted, it can be too late to correct any issues that may cause your file to be declined by the lender. A good processor takes over the file almost completely at this point and updates your LO with the progress; the better a processor is, the less the loan officer has to be involved in the post-submission process.

The Processor’s Job:

Now the waiting begins, at least on the part of you and your LO; the processor’s job, on the other hand is just beginning. The processor handles things like opening title and escrow, ordering verifications of employment, and supplying the lender with any requested conditions.

The Four Steps In The Approval Process:

A loan processor has four major steps to complete before your loan closes; all presenting varying degrees of difficulty and frustration depending on the specifics of your file. The four steps are Submission, Approval, Docs, and Funding, and we’ve already went over the submission process, so let’s tackle the three others.

Approval:

Once your file is submitted, the processor waits, and depending on the lender, waits some more, for news back from the lender that your loan has been approved. The lender will usually issue one of two types of approvals, either a conditional approval or just an approval. When the lender issues a conditional approval, it means that the loan is approved on the condition that certain things happen. Usually those things involve submitting more documents to the lender. If you’ve ever wondered why your LO calls you late in the loan process asking for you to send in more documents, it’s probably because the lender issued a conditional approval and those documents are required to meet the lender’s conditions. In addition to a conditional or full approval, the lender may issue Prior to Doc and Prior to Funding Conditions; these are conditions that don’t need to be met for an approval but must be met before the lender will send out your loan documents or fund your loan.

Docs:

After your loan is approved, the processor fills the Prior to Doc Conditions, if any, and orders your loan documents from the lender, she also lines up a notary for your signing at this point. The lender sends your loan docs to the escrow company and sends a HUD-1 to the processor; the HUD-1 is a final breakdown of the terms of the loan. Your LO should call you at this point to go over the HUD-1 and ensure everything appears as expected. The notary picks up your loan docs from the escrow company and heads to the signing location, at which point you sign the loan docs. Meanwhile, the processor is working on filling the prior to funding conditions, if any, issued by the lender.

Funding:

Most loans come with a 3-day Right of Rescission, meaning even after you’ve signed your loan docs, you usually have 3 full days to change your mind, or rescind. As an example, if you sign docs on Thursday morning, the 3-Day Right of Rescission begins the next day, so it’s in effect on Friday, Saturday, skips Sunday, and Monday. In this example your loan funds on Tuesday. After the 3 full days have elapsed, and the processor has submitted the Prior to Funding Conditions, if any, your loan funds the next day. One day after that your loan is recorded in public records. Public records? That’s right. Have you ever received phone calls from brokers/lenders soliciting your business and they seem to have a bunch of information about your loan that you never gave them? They usually get that information from public record; you’d be surprised how much of your information is accessible this way. The recording date is also the day your Broker/Loan Officer’s paycheck is sent out for delivery (or wire transfered if your Broker is smart ).

Wow, did you get all that? If not I’m happy to answer questions posted in the comments section. Just don’t ask me what kind of rate I can get you .

1. Because both lenders and brokers will lie to you.
   • That’s right, even the big lenders will lie to retain clients or get new ones and they get away with it everyday.I see it happen almost every day, and I’m just one broker in one city in the entire Untied States. Not sure if your mortgage professional is being truthful? Post a comment and I’ll let you know what I think.
2. Because Interest Rates Change Every Day, Sometimes Several Times A Day
   • I can tell you from experience that Lender A’s rates can be lower than Lender B’s on Monday and the opposite may be true on Tuesday. So you get a quote from Lender A on Monday of 6% and a quote from Lender B on Tuesday of 6.25%. Who do you go with? Well, most people would go with Lender A, right? The problem is Lender A may not actually have the best deal, you just happened to catch them on a day when rates were down. Lender B may very well have lower rates in general, but you’d never know that. This is where a good mortgage broker comes in. A good mortgage broker tracks interest rates from different lenders every day for his or her entire career. He knows which banks tend to have the best programs available at any given time. In my case, if I’m not sure who has the best programs available considering market conditions on a particular loan program, I can send an inquiry to all of my lenders and get several hundred quotes in about 20 minutes (of course, then I have to sort through all those quotes, which can take a couple days). The point is, a broker can compare apples to apples whereas consumers can only compare apples to oranges…not effective
3. Because You Really Don’t Know Who You’re Talking To
   • How well do you know that person on the other end of the phone who’s quoting you rates? Don’t make the mistake of thinking Mortgage Broker’s have an easy job. To be truly effective, a Broker has to be on top of market conditions at all times, he has to have a thorough understanding of all the programs offered by his lenders, and most importantly, he has to be able to foresee problems with a file before they rear their ugly heads (because almost every file has a problem), and they have to be able to merge all this information into a clearly defined “mortgage plan” for their clients. I can tell you from experience, good mortgage brokers are few and far between. Have you ever been told what index your new Adjustable Rate Mortgage will be attached to? It’s information that may be important, and I’d be willing to be that in 80% of refinance transactions, the homeowner has no idea what index his or her loan is attached to; for no other reason than the broker didn’t know either.
   • Put it this way, if you were unlawfully charged with a serious crime, are you going to hire a $20 lawyer who makes his money on volume, who isn’t going to give your case the attention it needs, who’s going to clean his hands and walk away as soon as he files the paperwork and shows his face in court? Or are you going to pay extra for a lawyer to carefully consider all the details of your case and help you work to find the best way into a better position; a lawyer who knows your situation like the back of his hand and can let you know, if the laws relevant to your case change, that you should to take a different approach than originally planned; a lawyer who, after your case is over, isn’t going to walk away with his check and never speak to you again, he’s going to help you with appeals or fines, or any other issues you may have when the case closes, as well as offer advice in the future? Obviously, that’s your choice, but when you chose a broker based solely on the lowest cost, you’re representing yourself in the legal system known as the mortgage market on a case that involves what is likely your biggest investment (your home); and when is the last time you thought it would be a good idea to represent yourself in court?