Mortgage Shopping
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Definitions:
Correspondent Lender: An entity that funds its own
loans with a line of credit and
then sells these loans to the secondary market in a bulk package.
Broker: An entity that seeks out the best possible
bank for a borrower and processes the mortgage application for a fee.
Bank: An entity that through a wholesale division funds
loans for a broker or
correspondent lender to avoid the expense of a retail operation. Retail
operations are very expensive.
Secondary market: Where a bank or correspondent lender
takes closed loans and sells
them to recover the principal that was lent out to the borrower. Secondary
markets are
Fannie Mae, Freddie Mac or Wall Street investment banks.
Borrower Credit: The percentage of the loan that is
offered to the borrower at each
individual rate. The higher the rate the more credit is available. The
lower the rate the less credit that is available. (See rate sheet example)
Service Release Premium (SRP): The Percentage of the
loan that is paid to a correspondent lender or bank for delivering the
loan to the secondary market. The higher
the rate the more SRP paid. The lower the rate the less SRP paid.
Third Party Fees: Appraisal, Origination Fee to the
bank, Title Services Fees,
Recording Fees, Transfer Taxes, Escrow Deposits, and Daily Interest Charges.
Loan Level Price Adjustment (LLPA): The percentage
of the loan that is reduced
from the borrower credit or SRP for various reasons. (See fee adjustment
table)
Loan to Value (LTV): The loan amount divided by the
value of the appraisal or
purchase price which ever is lower.
Changed Circumstance: Any change in the loan which
changes the terms of the GFE.
Since LLPA’s are based on the LTV, a higher or lower appraisal could
change loan terms.
Cost to Cure: A dollar amount the originator is responsible
for if the borrower’s closing
costs exceed the disclosed amount.
Regulatory rules to protect the borrower:
A broker must give the borrower the lowest rate possible. If the borrower
credit exceeds
the third party fees, the broker must give the borrower
the lower rate.
A bank must do compliance on a broker’s
GFE before allowing the loan to proceed. A
bank is responsible for delivering a changed circumstance to the borrower
with 3 days.
A broker must disclose third party fees to within 10% of the actual
amount. If at closing
the third party fees exceed the disclosed amount by more than 10%, broker
must provide a cost to cure.
Origination fees and transfer taxes may not change
once disclosed to a borrower. A cost
to cure must be given for the full amount that
exceeds the disclosed amount on the GFE.
How interest rates work:
Below is an example of a rate sheet we are looking at when we quote
your loan.
Rate
Sheet |
Rate |
30
day lock |
45
day lock |
4.250% |
COST
OF 0.5% |
COST
OF 0.625% |
4.375% |
CREDIT OF 0.5% |
CREDIT OF 0.375% |
4.500% |
CREDIT OF 1.125% |
CREDIT OF 1% |
4.625% |
CREDIT OF 1.625% |
CREDIT OF 1.5% |
4.750% |
CREDIT OF 2.5% |
CREDIT OF 2.375% |
4.875% |
CREDIT OF 3.25% |
CREDIT OF 3.125% |
The percentages shown above change on a daily basis based on the secondary
market.
Using the rate sheet, let’s assume a purchase with a 740 credit
score and 25% down:
Example 1
250000 @ 4.5% for 30 days would be a credit of $2812.50 (250000 X 1.125%)
250000 @ 4.625% for 30 days would be a credit of $4062.50 (150000 X 1.625%)
These credits appear in Box 2 of your GFE.
CORESPONDENT LENDERS AND BANKS ARE NOT REQUIRED TO SHOW
ANY
CREDITS IN BOX 2. While they receive a percentage of the loan
(SRP) from the
secondary market, since they package their loans in bulk they are not
required to disclose
on an individual loan transaction. The SRP belongs to the bank or correspondent
lender.
Loan Level Price Adjustments (LLPA):
There are about 80 different LLPAs. They are assessed by the secondary
market and
subtracted from the borrower credit or SRP. Your mortgage broker will
help you identify
if your transaction is subject to any LLPAs. Below are the basic ones
based on credit
score and LTV:
| |
<=60% |
60.01% - 65% |
65.01% - 70% |
70.01% - 75% |
75.01% - 80% |
80.01% - 85% |
85.01% - 90% |
90.01% - 95% |
>95% |
FICO >=740 |
+0.250 |
- |
- |
- |
-.0250 |
-0.250 |
-0.250 |
-0.250 |
NA |
FICO 720-739 |
+0.250 |
- |
- |
-0.250 |
-0.500 |
-0.500 |
-0.500 |
-0.500 |
NA |
FICO 700-719 |
+0.250 |
-0.500 |
-0.5000 |
-0.750 |
-1.000 |
-1.000 |
-1.000 |
-1.000 |
NA |
FICO 680-699 |
- |
-0.500 |
-0.500 |
-1.250 |
-1.750 |
-1.500 |
-1.250 |
-1.250 |
NA |
FICO 660-679 |
- |
-1.000 |
-1.000 |
-2.000 |
-2.500 |
-2.750 |
-2.250 |
-2.250 |
NA |
FICO 640-659 |
-0.500 |
-1.250 |
-1.250 |
-2.500 |
NA |
NA |
NA |
NA |
NA |
FICO 620-639 |
-0.500 |
-1.500 |
-1.500 |
-3.000 |
NA |
NA |
NA |
NA |
NA |
Using the same rate sheet above let’s factor in a LLPA. Let’s
assume a purchase with a
701 credit score and 25% down:
Example 2
250000 @ 4.5% for 30 days would be a credit of $937.50 (250000 X .375%)
250000 @ 4.625% for 30 days would be a credit of $2187.50 (250000 X .875%)
Comparing Ex 1 and Ex 2 the original credit of was reduced by .75% because
of the
credit score and down payment.
Compensation Correspondent Lenders and Banks
vs. Brokers:
Banks and Correspondent lenders receive SRP as their compensation after
the loan
closes. The amount is unknown to the borrower since it is not disclosed
on the GFE.
Brokers charge a flat origination fee upfront. The origination fee is
charged in Box 1.
Top 5 Reasons to use AFI Financial:
1. Transparency- you know exactly what your paying to originate your loan
2. Track Record- Since 2003 we have provided the lowest rates and fees
3. Experience- thousands of transactions closed
4. Service- your loan is handle in one office, not moved from department
to
department
5. Price- Box A of the GFE will always be lower
than the competitors
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