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What will an underwriter look for? 
Underwriters work for the lender and make the decision whether or not to approve your loan. They will evaluate your loan application and documentation to see if your criteria meet the minimum guidelines for the specific loan program you are requesting.

In general, they will look at three areas:
 
Your Income and Employment
Underwriters will naturally ask, "How will this borrower repay this loan? What is the source of income?" For those employed by someone else, the old way of doing this was to mail a "Verification of Employment" to your employer. When your employer had verified all the pertinent information, such as how long you have worked there, what you currently earn as a base income, how much you make typically in bonuses or commissions, and how likely it is that you will continue to be employed there. Today, we may still do that but we have alternatives too. We can provide your last two years' W2 statements and tax returns, and your most recent pay stubs covering a minimum of 30 days showing you are still employed. This is called "alternative documentation" and is much faster than waiting for snail mail and your employer who may or may not be cooperative.

What they are looking for: Sufficient income to cover your proposed total debt load. Do you make enough money to actually pay for all this debt you're taking on after paying for taxes and living expenses, and going out for dinner and a movie once in a while?
 
Your Assets
In the case of a purchase, you obviously must have sufficient cash to actually close the deal. Cash means money in bank accounts, of course, but also any other liquid assets such as stocks, bonds, mutual funds, etc. In addition to enough for the proposed down payment and closing costs, you must also have some reserves. This will vary by lender, but as a conservative rule-of-thumb you should have at least three months gross income in reserves when the deal is closed. They will also want to document less liquid assets, such as life insurance policies, retirement plans, real estate, businesses owned, automobiles, and personal assets. You are not obligated to disclose or document everything, only those assets you want considered to induce the lender to make the loan.

What they are looking for: Sufficient assets to cover contingencies. If you lost your job tomorrow, would you default on all your debt the next day, or can you carry yourself for a while?
 
Your Credit History
The lender wants to know about your current obligations and the payments you must make each month. They also run your credit report to see how well you have handled your debt in the past. Lenders are coming to realize that how well you have paid your obligations in the past is a better indicator of their safety, than any other criteria they may consider.

 
What is the best lock-in strategy?  back to top
The best lock-in strategy depends on your particular needs and circumstances, as well as market timing.

One point is very important here. All other things being equal, the longer the lock period, the more the loan will cost you. Why? You are obviously asking the lender to assume the risk of a market change. If the lender guarantees you a rate for 15 days, the market will not likely change much in that 15 days and to some degree it is predictable. But a 30-day lock means the lender is stretching his exposure out further, and into a time where rates are less predictable. One nationwide lender advertises a six-month rate lock. Do you pay for this? You bet you do!

So the first rule of thumb is that, unless rates are fairly certain to rise before you can get your loan closed, it is best to wait until you are nearly ready to close and then lock, as you will get the most favorable price.

The market fluctuates daily. When you see a lender warn that "rates may change without notice," they really mean it. When your loan goes into process, your loan officer needs to be aware of what type of loan you have asked for, how market forces will affect rates in the very near future, and whether your particular program is sensitive to rate changes.

Typically, if rate increases appear imminent and you need to close escrow on a schedule you don't control (in the case of a purchase, for instance), you should lock-in early. If you have the luxury of waiting out market fluctuations or you feel certain that rates are stable or headed down, then wait. However, your loan officer should review your file every morning and review the market conditions. If things change, your strategy can change in mid stream.

Can I lock-in a rate and then go shop for a home?  back to top
Yes, but if you read the answer above you will see that it can be very expensive. It is generally only a good idea if you think rates are going up steeply in the near future. If you want to lock for more than 45 days, you may even have to pay a fee up-front prior to finding your home. We rarely recommend this strategy, but sometimes it's appropriate. 
 
Why should I use a mortgage broker instead of a mortgage banker or a bank?  back to top
It is worth noting here the difference between brokers and mortgage bankers. Brokers have dozens, if not hundreds of lenders to whom they can broker your loan, and from which they can shop for the best rate. If you have any challenges in your file, your broker is your advocate who does not get paid until those challenges are addressed. If your loan is turned down by a lender, the broker can take the package back and shop your loan somewhere else, finding a new way to tell your story to the lender if that seems appropriate. Your broker doesn't get paid until your loan closes. We have many different sources to try. A mortgage broker works for you! A mortgage banker has the bank's own company funds to lend, and has fast access to them. However, there is only one source of money. If you're turned down, you're turned down. The banker's agent is most likely on a salary/commission, and gets paid something, whether you close or not. 
 
Doesn't it cost more to go to a broker?  back to top
No. Whether you go to a mortgage banker or a mortgage broker, the same number of people work on your loan. Whether working for the mortgage banker or mortgage broker, a loan officer, a loan processor, an underwriter, and their respective managers all need to be paid. They all have desks, use phones and computers and take up office space, regardless of where they work. It costs the lender the same amount to make your loan either way. 
 
Why would mortgage bankers allow brokers to bring them loans? 
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Mortgage bankers offer you the same products at the same price through brokers by offering the loan to the brokers at a wholesale price. Without any out-of-pocket costs lenders instantly have an unlimited staff of sales people, and no liability for them, if they do not produce. Lenders, who offer their loans through brokers, as well as through their own staff, typically do the vast majority of their business through brokers. 
 
Can't I get a better price by going directly to the lender? 
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Since lenders want to encourage brokers to bring them loans, and since their costs of doing business through brokers are no more than doing business directly, they cannot afford to discourage their brokers by undercutting their prices.
 
What is an index?  back to top
Adjustable-rate mortgages allow the lender to offer you a better starting rate, while protecting themselves by structuring the loan, so that when general market rates move up or down, your loan’s interest rate moves too. To do this, they need to attach your loan to some sort of market-driven benchmark. That benchmark is called an index.
  Typical Indexes
A well known example of a market-driven index is the Dow-Jones Industrial Average, which measures overall levels of stock prices. The best known interest-rate index is called the Prime Rate, representing the rate that large banks would charge their best corporate clients for secured lines of credit.

The most common indexes to which mortgage loans are typically tied, are COFI (the Cost-of-Funds Index), one-year T-bills (U.S. Treasury notes) and, less frequently, LIBOR (the London Inter-Bank Offering Rate).

• COFI - COFI is a blended rate which is derived from several other measured rate performance benchmarks, and represents the approximate cost of the money that U.S. banks borrow from each other or from the Federal Reserve to cover short-term needs. This index tends to move within a fairly narrow range, and is somewhat slow to respond to changes in the market.
  

• One-year T-bills - are the actual instrument the federal government uses to borrow money from the general public for one year. The U.S. Treasury issues promissory notes which are sold at auction. Investors bid on the notes at a price that gives them an interest-rate return that is acceptable to them. These instruments are subsequently traded, in billions of dollars, each day by investors through securities dealers (stock brokers). Because these notes are traded every day, this index is more sensitive to changes in market conditions, and it can move within a broader range. Relative to one-year T-bills, therefore, COFI is typically more steady and moves less. Relative to COFI, one-year T-bills move more quickly and can go higher and lower than COFI typically would. In the last few years, COFI has been lower than one-year T-bills most of the time.
   

• LIBOR and Prime - Another less common index is called LIBOR, an acronym for London Inter-Bank Offering Rate. This index is more volatile than the other two and can go quite high. Prime is typically used only on equity-line second mortgages. It tends to be very stable for a long time, but moves more in response to government monetary policy than market conditions.  
  

What does APR mean?  back to top
Sometimes a lot, sometimes not much.

Really! Read on . . .
The government-mandated Annual Percentage Rate is an attempt to give the borrower a consistent way of comparing loan offerings, and to some extent it does that, but you should not assume that the APR quoted is what you will actually pay. In most cases it will be higher than what you pay.
 
Costs and APR
Loans are offered at various interest rates with differing costs (points and loan costs). Comparing such loan products can be difficult. APR makes comparison easier by lumping the costs into the interest rate -- actually, subtracting the costs from the effective amount being lent to you. If you choose a no-point, no-fee loan, the APR will be the same as the note rate. With costs involved, the APR will always be slightly higher than the note rate -- the higher the costs, the greater the difference.

Let us use a $100,000, 30-year fixed-rate mortgage as an example. A loan at a 7% note rate, 2 points, and $1,500 in other costs has the same APR as a 7.357% no-point, no-fee loan; that is, 7.357%. All other things being equal, these two loans would cost you the same. But all other things are not equal.
 
APR and the Life of the Loan
In theory, the life of the loan is whatever it says on the note, typically 30 years. In practice, it usually isn't. Most people will either sell or refinance their home well before the 30 years are up; in which case, the APR we quote you would actually have been too high. Still APR is a useful comparison tool.
 
APR and PMI
Monthly-adjustable mortgages start at an artificially low "teaser rate" for some fixed term, say 3 months. At the end of that term, the loan will move up to the fully indexed rate. For APR purposes, it is industry practice to assume that it will stay there throughout the rest of the life of the loan. In other words, the index (the value of COFI, for example) will never change. This is certain to be incorrect, but at least it strikes a happy medium and is useful for comparison to other types of loans.

Other ARMs (1-year and intermediate) completely ignore the fully indexed rate in APR calculations. Industry APR practice assumes that on your first adjustment date your loan will adjust upward by the full adjustment cap. Sometimes that happens; most of the time it doesn't. In fact, it's even possible that the rate can go down! It all depends on how close the start rate was to the fully indexed rate and what happens to the index. We seem to have lost our happy medium. It is virtually meaningless, then, to use this APR to compare to the APR for other types of loans. 

What is the level rate? back to top
To reestablish the APR as a useful comparison tool, we have devised the Level Rate. In all loans other than 1-year and intermediate ARMs the level rate is exactly the same as the legally mandated, industry-standard APR. With 1-year and intermediate ARMs the level rate assumes that the rate moves to the current fully indexed rate, as it is assumed in monthly ARMs, and overall rates remain stable. A guess? Yes, but more realistic than assuming the worst as APR does.

In quoting loan costs and interest rates for 1-year and intermediate ARM programs we state both the level rate and the APR. We feel that the level rate offers a better comparison.
 
Costs and Your Actual APR
The up-front costs anyone discloses to you are based on estimates and most likely will change (hopefully, only slightly) depending on the final lender, the loan program chosen, and the rates available at the time you lock in your loan. In other words, even if all our assumptions were accurate, the APR would change if costs change, and they probably will.
 
Conclusions About APR
 

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