Same Game, Different Rules

At a recent Aggie basketball game I noticed that the three point line is a little bit farther back from where it used to be. The next day, after doing a little bit of research, I found out that it had in fact been moved back one foot to 20 feet 9 inches. Apparently, the NCAA basketball rules committee made the decision based on the rationale that it would "open up the game", force teams to play more defense away from the basket, and assist in the "problem of rough low-post play". I also imagine it will help college players prepare for the next step to professional basketball overseas or even the NBA, where the 3 point line measures 23 feet 9 inches. Whatever the benefits or consequences might be, one thing that is certain is that coaches will have to adjust their strategies to the new rule. They might have to change the way they play zone defense or make a decision on which players are still allowed to shoot the 3-point shot. The teams that will be most successful are the ones that can use the new rule to their advantage.

Just like college basketball, the mortgage industry has had some rule changes as well. The credit score requirements have been moved up a little bit, The down payment requirements have been moved up a bit, up to 3% minimum(except on Rural Housing, VA, and the Utah Housing loan), and the referees of the mortgage business, or underwriters, have become more vigilant of the overall strength of a loan file. It is still the same game but we just have to adapt our strategies a little bit. One strategy is to take advantage of the numerous government sponsored loans, such as the various FHA loans, the Rural Housing loan, the Utah Housing loan, and the VA loan for veterans. Oftentimes, especially with FHA, these loans can help borrowers with shaky credit still qualify for a home loan with a low interest rate, just as long as there is sufficient evidence for their ability to repay the loan. If a home loan applicant has a 720+ credit score and 10% down, than the conventional loan is still an excellent strategy as well. With these government sponsored loans, most home loan applicants that were able to qualify over a year ago would still be able to qualify today.

In 1987 college basketball introduced the 3-point line for the first time ever. It was a huge change that forced teams to adapt or fail. In that same year, Rick Pitino took an undersized and nonathletic group of players from Providence University to the final four by utilizing the 3 point line to their advantage. They made the most 3-pointers of any team that year at over 8 per game (See The 3 Has Changed Strategy, Player Evolution). In that same year, interest rates on a 30 year mortgage averaged over 10%. Just like in 1987, those that can adapt are those that will experience the most success.

Broker vs. Banker

I've taught about half a dozen "First-Time Homebuyer" classes over the last year and a common question I've been asked is, "Is there a difference between getting a home loan through my bank or through a mortgage broker?" Short answer: "Yes" with a "but". Long answer: "No" with a "maybe". Just kidding. There are a couple fundamental differences between the two.

1. Brokerage: Also known as wholesale lending because they can offer rates below retail prices (and higher than retail prices), the mortgage broker works as an independent contractor for various banks and lenders. Most mortgage brokers will have a greater variety of home loan products to choose from than a bank. A home loan originated by a mortgage broker will always be sold to another lender.
2. Bank: The loan officer that works for a bank will only offer home loan products from that bank. Generally speaking a bank will service the majority of the loans that it originates.

I really don't think that these differences should determine whether someone uses a loan officer or not. It should not matter if they work for a bank or a broker. The fact is that there are good and bad loan officers that work at both banks and brokerages. The trick is finding a good loan officer regardless of where they work. Jack Guttentag, the "Mortgage Professor", describes some characteristics of good mortgage brokers that everyone should look for when shopping for a home loan. See What Makes a Good Mortgage Broker, part 1

Term of the day: APR

APR, or annual percentage rate, is a term that is used in the mortgage industry to describe the true cost of credit. Essentially, the APR is the interest rate (e.g 6.0%) plus the closing costs, expressed as an interest rate. The closer the APR to the interest rate the better deal you are getting. For example one loan officer might quote you an interest rate of 6% with an APR of 6.26%. Another loan officer quotes you an interest rate of 6.125% with an APR of 6.18%. The second loan officer is offering you a better deal even though the 1st loan officer has a lower interest rate. The moral of the story is to always compare APR's and not interest rates when you are shopping for a home loan.

Borrow like it's 1975

Things are definitely changing in the mortgage industry and in the credit industry as a whole. Lenders are requiring bigger down payments, better credit scores, and a more stable work history. 100% financing and stated-income loans have, for the most part, "gone the way of the buffalo", as my college basketball coach use to say. With all of the changes that are happening, it's crucial that homebuyers be aware of them and prepare themselves accordingly. Liz Weston, a personal finance columnist for msn.com explores the changes that are happening in the credit industry today and how analyzing the credit industry of 1975 could help us adapt to today. See... Borrow Like it's 1975

Note: USDA Rural Housing, VA, and the Utah Housing loan are all government sponsored programs that allow for 100% home financing.

Once upon a time

I got into the mortgage business about 3 years ago with a company called World Savings. World Savings was the father of the Option ARM loan (practically a swear word today), and was doing quite well before they got bought out by Wachovia at the height of the housing boom. It's no wonder that Wachovia is no longer in business today. They bought World Savings at the absolute worst time when home prices were peaking. About a month ago they were rescued by Wells Fargo, one of the few remaining banks with a strong balance sheet still. World Savings had its issues and there's no question that they did some loans for people that had no business buying a home, but I will always hold a special place in my heart for World Savings because of the people that I worked with and because they gave me my start in the mortgage industry.

Here it goes!

These days it seems like everybody who is anybody has a blog. So I figured because I want to be somebody I should start a blog and what better topic than mortgages. Well, actually I can think of a few better topics, like Utah State basketball or gardening tips, but I can still think of a few very valid reasons for starting a blog about mortgages. I don't think I will list them right now but my hope is that this blog will become a medium through which people can learn more about the mortgage industry, real estate, finances, and yours truly.