My New Blog

I’ve seen many changes in the mortgage industry over the last thirteen years. The Internet has by far has had the greatest impact. It’s certainly made consumers better shoppers but I don’t think it’s really made them smarter consumers. It’s still assumed by many that if you have a good credit score then you’ll qualify for the best rate. What’s overlooked is that a good credit score is only one of three variables, the other two being capacity and collateral. Collectively known as the “3 C’s” these are the basis on which all mortgage loans are underwritten.

If you look at it from a lender’s perspective it makes perfect sense. Remember, for the lenders it’s a business transaction, an investment. Ask yourself, what would entice you to lend a total stranger $100,000, $250,000, or $1,000,000? You would probably weigh the risk and potential return. You’d want to see a track record of how the borrower has paid back other loans (credit), that they have the capacity to pay you back (income, job stability) and that the collateral is worth what the borrower says it’s worth (appraisal).

Since it’s their business, lenders have all the facts and statistics to accurately measure the risk and to decide what return is worth the risk. They use various models, the “benchmark” being an 80% loan-to-value, full income documentation, single family home and minimum 620 credit score (580 for FHA). This is a simplified scenario and there’s a little more that goes into the “approval” decision (first time home buyer, cash/liquid reserves, etc).

Will lenders make loans if you don’t fit this “perfect” scenario? Of course, it’s their business to make loans. They will however, make adjustments to the different variables to keep their risk/return calculations constant. Loan-to-value greater than 80%, no problem, they’ll require PMI. Want to take cash-out, sure, they’ll lower the maximum LTV and “bump” the rate.

The different variables interact with one another and the combinations seem endless. That’s why a mortgage professional will want to spend some time with you discussing your current situation. Most consumers usually simply ask, “What’s the rate?” They should be wary of anyone who too quickly blurts out an interest rate. It’s almost guaranteed that once full information is gathered that rate will be different. A better way to shop for a mortgage is actually to shop for a professional.

Your comments and input are appreciated.