Because you’re not likely to pay cash for your home, you undoubtedly want to
determine how much borrowing power you can safely muster. Fortunately, no simple
answer exists.
Why “fortunately?” Because if only one simple standard applied, people turned
down by one lender would also be tossed out by every other lender. As it is,
more than 10,000 mortgage lenders call the good ole United States of America
home, and every one of these lenders sets its own lending standards – within, of
course, applicable laws and regulations. This fact gives you the Baskin-Robbins
range of choices and creative alternatives. With a good knowledge of lenders and
lending standards, you can stretch and bend your finances to borrow far more
than you might think; or you can take the safe road and borrow much less than
many lenders recommend. Either way, the choice is yours because choice is the
American way.
10,000 lenders set their own standards
Conventional wisdom holds that the all-powerful national mortgage companies.
Fannie Mae and Freddie Mac, set underwriting standards for the mortgage lending
industry. In fact, though, Fannie and Freddie buy only about one-half the
mortgages issued throughout the country. A big number, yes, but nowhere near
universal. In addition, the underwriting standards applied by Fannie and Freddie
do not mirror each other. Loan requests rejected by Freddie may get approved by
Fannie, and vie versa. Both Fannie and Freddie publish underwriting guidelines,
not absolute requirements, so lenders who sell their loans to Fannie and Freddie
remain free to use some discretion and flexibility.
Portfolio Lenders
Lenders who don’t sell their mortgages to Fannie, Freddie, or other players
in the secondary mortgage market are called portfolio lenders. Portfolio lenders
include many banks, savings institutions, credit unions, pension funds, and life
insurance companies. Although Fannie/Freddie affiliated lenders may exercise
flexibility if they choose to, portfolio lenders can tailor any type of loan
that can find a market.
These portfolio lenders frequently look to Fannie/Freddie lending practices
and then develop differentiated loan products that will permit them to compete
effectively for some types of borrowers – for example, credit impaired,
no-documentation, low-documentation, jumbo amounts over $325,000 no mortgage
insurance, balloon notes, high qualifying ratios, income properties, farm land,
rehab and renovation loans. Sometimes, portfolio lenders will even structure a
financing arrangement to meet the special needs of a specific borrower.
Government-Backed Loans
Government-backed loans include a broad variety of programs that often permit
some homebuyers (and sometimes investors) to obtain loans that they could not
get from either Fannie/Freddie or most portfolio lenders. Some of the more
popular government loans include:
1. Federal Housing Administration (FHA). The FHA specializes in
low-down-payment, easier qualifying loans.
2. Department of Veterans Affairs (VA). The VA offers easier qualifying,
no-down-payment mortgages to eligible veterans.
3. Rural Development Administration (USDA). As part of the United States
Department of Agriculture, this agency helps low to moderate income families
buy homes with low down payments and low interests rates.
4. State mortgage bond programs. It’s typically easier to qualify for
these programs because they offer low-down-payment, lower-interest rate
loans, and are aimed at firs-time buyers, which is defined as anyone who
hasn’t owned a home within the past three years.
5. Community development loans. Many states and cities encourage
homebuyers (and sometimes investors) to buy and fix up properties in
designated neighborhoods. To achieve this goal, community redevelopment
agencies frequently offer purchase and fix-up loans on quite favorable
terms.
What All of This Means for You
With this quick trip through some common types of lenders and loan programs,
I want to again drill into your consciousness that lenders differ, loan programs
differ, and qualifying standards differ. No loan rep can ever tell you how much
home (property) you can by, or how much money you can borrow. When you speak
with specific loan reps, each will tell you how much (if any) money their
funding sources will loan you. Never again think of mortgage loans as peas in a
pod. They’re more like large baskets of mixed fruit with at least a few poisoned
apples.
Just as important (and sometimes more so), you could get different answers
from different loan reps who work for the same lender and are working with the
same loan program. How well the loan rep packages your personal information, and
how effectively the rep responds to underwriter (or computer) queries can make
the difference between a yes and a no.
Keep these potential quality differences in mind. The knowledge gained here
will not just help you figure out the types of financing strategies that could
work best for you. It also will give you the solid footing necessary to stand
your ground and perceptively question (or challenge) what loan reps tell you.
Mortgage-land abounds with hunters looking for lame prey. Appear vulnerable, and
you could get skinned.
