Everyone loves a good mystery – especially around Halloween time -- but not necessarily when it comes to their mortgage. To many of us, the mortgage process is shrouded in mystery, with the mortgage wizards working behind the scenes to conjure up the money you need to buy a home. And while most of us would get through just fine without being privy to the mortgage hocus pocus, the savviest consumers want to understand the who, what, where, why and how of mortgage lending. Here are seven tricks of the lending trade:
1. How does your lender decide how much you can borrow?
Typically lenders look at your debt-to-income ratio, the amount of debt you would be carrying in relation to your gross income. As a rule of thumb, most lenders don’t want to see you taking on a monthly mortgage payment that’s greater than 28 percent of your monthly gross income.
2. Who is calculating your credit score?
Three credit bureaus – Experian®, Equifax® and TransUnion® – are constantly collecting information on you from your lenders and creditors to come up with your credit score. They then sell that information to businesses that want to view that information for a legally “permissible purpose” – usually to decide if they want to lend you money.
3. Where does the money that actually funds your mortgage come from?
Your lender doesn’t just go into its vault, take out six figures in cash and courier it over to your home seller. Typically, the lender arranges your financing by borrowing the money from another source – such as another lender, an investor or a bank credit line.
4. Why am I now making mortgage payments to company B, if I got my mortgage from company A?
Because company A, your loan originator, has sold your loan to company B. In today’s mortgage market, selling loans has become so commonplace that you could practically work your way through a whole alphabet of mortgage companies before paying off a 30-year mortgage.
5. Who are Fannie Mae and Freddie Mac?
Two government-created companies that provide consistent sources of mortgage funds to housing partners to assist home ownership. Fannie Mae and Freddie Mac purchase mortgages from lenders who originate mortgages. They hold on to some of these mortgages, or bundle them together and sell them as securities.
6. What makes $417,000 a magic number?
It’s the “conforming loan limit,” the largest loan that Fannie Mae or Freddie Mac can buy from an originating lender. The limit is set annually by the Office of Federal Housing Enterprise Oversight. But that doesn’t mean you can’t get a mortgage loan of greater than $417,000. They’re called jumbo loans, and they usually carry a higher interest rate than a “conforming loan.”
7. How are interest rates determined?
Mortgage rates can rise and fall like the stock market, based on 1-year, 5-year, and 10-year Treasury Note yields. These yields respond to the actions of investors. Depending on how the economy is moving, there could be high demand, which means yields fall. If the demand is weak, yields (and mortgage interest rates) rise.
Related Articles
