Realty World – Friend & Associates

Alright, we are continuing here with data on mortgages and the ins and outs of how they really work.  I would encourage you to read Parts 1 and 2 so you can track with this easily.
Lenders will also have pricing adjustments as part of their wholesale price sheets. These are called “hits” or “add-ons” in the industry. Sometimes there are ‘hits’ for a lower credit score, or if it is non-owner occupied etc.  These are ‘add-on’ (increases) to the price of the loan.
Likewise, the lender may give certain ‘credits’ on the pricing for positive aspects of the loan. For example if you have a credit score above 740 than the lender may offer an additional yield spread premium of .125 to .25 points.  This can help lower your overall fees.  If you choose not to have impounds then the lender will usually add .25 points to the cost etc. (Impounds are where the lender pro-rates your annual property taxes and your homeowner’s insurance and collects a portion of them for you each month and then pays them for you when the premiums are due.)
Hopefully you now have a basic understanding of how loan pricing works.  So how do you use that to your advantage?
Now it is time to shop.
1-A good start is your bank.  Have them give you a quote. This will be in the form of a fee worksheet called an “Estimated Fees Worksheet”. This is a basic quote and is not based on them reviewing any of your financial information.  You don’t need a credit report or anything yet.  It is just a line item breakdown of costs and rate.
2-You should also get one of these from any broker you speak to as well. Again, have them give you a quote. As a reminder, a broker can shop many, many different wholesale lenders for you.  In my experience it is NOT easier, or cheaper or a better deal or faster to go to a regular bank.  Mortgage brokers deal directly with the wholesale lenders and shop for programs very specific to your needs, whereas a bank may or may not have a program best suited to your particular situation.  Again, you should shop and compare.  Be sure to get your questions answered so that you really understand the loan you may be looking at.
NOTE:  Make sure you are getting quotes on the same type of loan from banks and brokers, so you can compare apples to apples (30 year fixed no point no fee for example). Again, your loan scenario is unique to you (credit score, assets, income, what you are trying to accomplish etc.) and may or may not be the same rate as you have heard advertised.  (For example, the rate for a 10% down purchase loan and the rate for a 20% down purchase loan may be different and require different percentages of assets, income etc. to be in place to get that particular loan rate.)
Now,an Estimated Fees Worksheet is NOT the same as a “Good Faith Estimate” or “GFE”.  A GFE is only required to be issued by a lender after they have received your financial information such as, name, address, income and credit.  Then they are required by law issue one within 3 days of receiving such information.  There is also another document called a “Truth in Lending Disclosure”.  This is a document that gives you the amount financed and what the cost of credit is on your loan.  This is generally issued with the GFE.
You don’t need those yet.  You get those after you choose a lender to work with.  The Estimated Worksheet has all the numbers you need. These numbers are entered into the lender’s loan application software and at the correct time these same numbers are used to auto populate the GFE and Truth in Lending disclosures.
So when you approach a lender the first thing you ask for is an Estimated Fees Worksheet along with a rate quote. You don’t need to give them your financial information or pull credit at this stage.  This is just a “what if” type of document.  Get a sheet for a “par” loan and get a sheet for a “no point no fee“  loan.  A “par” loan is when the broker’s wholesale cost is zero.  So you would pay all points and fees.  (Look at the table in part 2 of this blog at the 3.625 rate on a 30 day lock.)
They may ask you if your credit is good and may ask how much you plan on putting down on a purchase or if you are refinancing, how much equity you think you have. This is to help them adjust for any “hits” on their wholesale price sheets.
So for shopping purposes only tell them your score is above 740.  If you know your recent score go ahead and tell them what that number is. Again, be sure you tell each lender or broker the same information so that when you compare you are looking at apples to apples. Different data can make a huge difference in your rates and does not give you the data you need.
Once you get 2 or 3 Estimated Fee Sheets you are now ready to get down to business and compare.  See part 4 for how to get a good comparison.

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OK, so hopefully you have at least a basic understanding of how mortgage loans are created.  If I confused you don’t worry.  The really important stuff is coming up.
Mortgage banks have two ways to work with a borrower.  There is “retail” and there is “broker wholesale”.
Retail is when you walk into your bank and sit at someone’s desk and ask for a loan.  The bank may call them “loan consultants” or “mortgage professionals”… whatever. This is what you are doing if you go to Wells Fargo or B of A or Chase etc. You get only the programs that particular bank has to offer.
If you use a mortgage broker then the broker takes your loan application and shops around for the best “wholesale”pricing.  The mortgage broker has access with many different lenders with many different programs to choose from.
OK so what’s the difference? Well…I’m obviously biased towards brokers but I’ll try to be fair in my explanation.
RETAIL PRICING WITH A BANK When you walk into say…Chase or Wells Fargo and you meet a “loan consultant”.  He or she will show you their line of products.  To keep it simple let’s just stick with 30 year fixed loans for now.
So you get a rate quote and you usually have 2 choices.  You can get a no point loan which means you are not paying any points but will pay a higher interest rate, or you can pay points and get a lower rate.
Remember… the lower the rate the higher the upfront cost.  The bank has to sell that loan and they will not get as high a price from an investor for a lower interest rate.  So they basically have to charge you the difference.
WHOLESALE PRICING WITH A BROKER If you go to a broker he or she will check their wholesale pricing.  Wholesale pricing on loans is like any other commodity.  It’s cheaper than retail pricing.  So a broker picks an interest rate at their wholesale pricing from one of the lenders they deal with.  If you want to pay points then he/she can choose a lower interest rate.  If you don’t want to pay points then he/she will choose a slightly higher rate.
OK…so how does this work?
The table below will show a typical wholesale price sheet and will you how ALL loans are priced on the wholesale end.
Lock period
Rate 12 day 30 day 45 day
3.500                     0.250                     0.500                   0.625
3.625                     -0.125                    0.000                   -0.250
3.875                     -0.750                    -0.500                    -0.375
4.000                     -1.375                    -1.000                    -0.875
4.125                     -1.875                    -1.625                    -1.500
4.250                     -2.250                    -1.875                    -1.750
Take a look at the 3.50% rate at a lock period of 30 days.  The table tells us that the broker’s wholesale cost is one half (.500) of a point for that rate.
If you move down to 4.125% rate and the same lock period of 30 days you will see that the broker is now getting a “yield spread premium” of 1.625 points. That little minus sign means the lender is paying the broker for that rate.
That means the lender is going to pay the broker 1.625% of the loan amount for that rate.
You will also see that the higher the interest rate, the higher the yield spread premium.
A broker is going to usually try to make at least 1 point on a loan.  Sometimes more and sometimes less depending on the size of the loan and the complexity of the loan.
If we have a $400,000 loan and use the chart above for a 3.5% rate then you would have to pay .500 points to the lender and 1.0 points to the broker (if the broker was charging 1 point). (.500 + 1.0=1.50 points)  That’s $6,000 just in points for that 3.5% rate.  But if you didn’t want to pay any points and the broker needs to make a point then he would just slide down to 4.0% on a 30 day lock. You see there that the lender is paying the yield spread premium of 1.0 points.
So you should see that the higher the interest rate the lower the closing costs and the lower the rate the higher the cost.(See Part 1 of this Series.) Make sense?  ALL loans are priced this way.
At a retail bank such as Wells Fargo you will never see this matrix.  But it will be there in the background.
Some brokers will show this and some will not.  The lenders consider this confidential information so it depends on the broker. These sheets change daily and sometimes several times per day.  Depending on what is happening in the financial markets.
WATCH FOR PART 3  TO LEARN ABOUT CLOSING COSTS
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