The Anatomy of a Mortgage Loan

Posted: Jul 26, 2007 12:38 PM

I am constantly being quizzed as to why I do not post mortgage rates on our web-site. That is a question with a very easy answer: why, the rates won't be good for the majority of those who would view them.

The mortgage industry is not like some apparel manufacturers where one size fits all. It is almost the antithesis where one loan probably won't work for the 99.9% who would apply for the same program.

The easiest way for me to prove my point is with the chart that follows: There are approximately 30 choices to make in nine different categories. The chances that two borrowers will have the same results are very, very small.

Some terms that you might need to know are as follows:

1. Conforming loans: Conform to the rules of Fannie Mae and Freddie Mac which currently have a $417,000 limit for single family residences; $533,850 limit for duplexes; $645,300 for triplexes and $801,950 for 4-plexes. In Hawaii, Alaska, Guam and The Virgin Islands limits are 50% higher.

2. Jumbo loans: One dollar more than the limit on the conforming loans.

3. Super Jumbo: Varies from lender to lender but can start as low as $650,000 or as high as $1.5 million.

4. Loan to Value: The amount of the loan divided by the value of the house determined by an appraisal.

5. No Documentation: The borrower only fills out the employment section of the application and the lender ascertains that the borrower is employed at that business.

6. No Ratio: There is no employment or income on the application, only the applicant's information.

Now that you have seen and studied the table what type a loan should I show on the web-site? I think you will now agree that not much would be gained and a lot of frustration would ensue by posting rates and programs that would work for just a minority of borrowers. If you are into math you can figure out how many different quotes I would need for a simple 30 year fixed to more or less "cover the water front".

I believe you can almost begin to sense my frustration with the advertising that most mortgage companies use to lure the borrowers to them. And I am sure you can see how a borrower could be frustrated with the inability to get the rate he heard but couldn't qualify for because his home is cash out second home duplex with a loan size of $500,000 and the loan that was advertised was a conforming owner occupied purchase.

By studying and understanding the anatomy of a mortgage loan you can be a more intelligent borrower who can understand the nuances of programs and rates. You will not be embarrassed to ask how the loan officer arrived at the pricing and you will not be susceptible to double talk and nonsense. Knowledgeable borrowers are easier to deal with and make the entire process a pleasure for both the borrower and the lender.

Before I close I must tell you that AUS (Automated Underwriting Systems) have changed a lot of the standard rules. There are a myriad of these systems, first designed by Fannie Mae and Freddie Mac, and they were originally designed for conforming loans. On a full doc loan with a low loan to value and a high credit score the AUS system can be as little as one bank statement or perhaps a verbal verification of employment.

A number of major banks have designed their own automated systems that will work on their products. Still other banks will give special simplified rules to those who have high credit scores, generally over 700. It all boils down to the fact that lenders want to make loans, borrower want to accept them and everyone is working to make the process easier and fairer for all concerned.