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The Difference between Loan Officers at Banks and Private Lenders

Homebuyers on the hunt for a mortgage in 2017 have more options at their disposal than ever before. As always, name-brand banks continue to dominate the conversation regarding home loans. But increasingly, new homeowners are finding it easier and more cost effective to finance their home purchases with the help of a private mortgage lender.

While they each share the same goal, private mortgage lenders differ from their big bank counterparts in a few key ways. Homeowners should familiarize themselves with the best private mortgage lenders before signing onto a loan. After all, closing that loan could very well mark the beginning of a years-long relationship.

How private lenders differ

At any financial institution, the person who reviews and approves mortgage applications is called a loan officer. But despite similar titles, there are some significant differences between a loan officer working at a typical bank and one at a private lender.

What does a loan officer do, and how do those duties differ depending on their institution? One of the biggest differentiators between the two can be seen in legally mandated licensing and registration requirements:

  • A loan officer working at a depository institution, like a bank or credit union, must be registered under the National Mortgaging Licensing System. Once approved under this federal system, the loan officer is authorized to conduct business in all 50 states.
  • Private lenders, however, are held to a different, arguably higher standard. Since they are considered "non-depository institutions," loan officers at a private lending firm must not only be registered under the NMLS, but also must obtain a license in the state where they will operate.

This additional license requirement means private lenders must undergo at least 20 hours of state-mandated coursework, as well as at least eight hours of continuing education per year. The course requirements vary by state but usually include extensive coverage of federal and state lending laws, ethics courses and other technical training.

Paperwork

Despite Fed rate hike, US real estate in prime condition

The big news out of the business world this week largely concerned the Federal Reserve, which voted March 15 to raise its key interest rate for the third time since 2008. While the rate increase was a relatively minor one (only another quarter of one percent), and the Fed's actions generally go unnoticed by the average American, the move does offer the latest pulse​ check on the economy at large. This information is useful to anyone buying, selling or owning a home in 2017, and here's why:

Rates rise, but stay historically low

When the Fed decides to increase its key interest rate, it essentially raises the cost of doing business for banks in the U.S. and around the world. As a result, the interest rate on products like mortgages will usually tick up. However, this difference is often miniscule, and will still keep the cost of a home loan near its lowest point in history. As Marketwatch explained, if the interest rate on a standard 30-year mortgage rises by just 0.5 percent, that will translate into no more than an extra $80 per month paid by the borrower. While this certainly adds up over the life of the loan, it's a cost that can be reduced or recouped later on through refinancing, purchasing points at closing and several other methods.

Speaking of refinancing, financial professionals often advise against doing so when the Fed begins to raise rates. However, that's not to say a refinanced mortgage isn't an option for anyone right now. Marketwatch offered several suggestions for homeowners looking to retool their mortgages in light of this year's economic developments:

  • Cash-out refinancing is an option that can reduce the amount homeowners pay on non-mortgage debt, like debt from credit cards and other loans. In a cash-out refinance, homeowners convert some of the equity in their home into cash they can use for any purpose. Ideally, this money can be used to pay off higher-interest debt, leaving monthly mortgage payments unchanged but reducing other expenses.
  • Switching to a shorter-term loan might behoove borrowers who have 30-year fixed-rate mortgages right now. By converting to a 10- or 15-year loan, borrowers will need to make additional payments now, but can pay off the total balance faster and usually save money in the long run.
  • Opting out of mortgage insurance, or PMI, is a good move that can be achieved either before a loan is closed or with a refinance. PMI can be avoided by paying a larger down payment upfront, or with a refinance arrangement that focuses solely on eliminating the fee.

Why it's still a good time to buy

Current homeowners and mortgage borrowers have options when it comes to reducing their monthly payments. However, with this latest financial news, should prospective first-time buyers keep waiting on the sidelines, rather than purchasing a home in 2017?

For most, it's still a great time to buy. According to mortgage interest rate data from Freddie Mac, the current average 30-year loan rate of 4.17 percent is neck-and-neck with the average logged in 2014. In addition, since 2008, average mortgage rates have never gone above 5 percent. That means since Freddie Mac started tracking mortgage rate data in 1972, it's never been a better time to be a borrower than in the last decade.

With a wide variety of tools at their disposal, along with unbeatable interest rates, the real estate market appears primed to remain in everyone's favor for the foreseeable future.

Why a 15 Year Mortgage Makes Sense

Most homebuyers opt to pursue a 30-year mortgage, and while that's an appealing option, buyers should also consider a 15-year loan. 

Buyers should first contemplate a 15-year mortgage if they know they can afford the higher monthly payments. When taking out this type of mortgage, homeowners need to budget appropriately because they'll need to pay off the principal balance in half the time of a standard mortgage. By paying off the balance sooner, homeowners will be able to prioritize other financial matters, such as retirement planning or paying for a child's college tuition.

Homeowners can save money

One major benefit of a 15-year loan is the opportunity to save money due to lower interest rates. According to The Mortgage Reports, a shorter mortgage can make sense if homebuyers don't have a large amount of debt to their name and housing represents their largest monthly expense - they'll likely be able to comfortably pay off the mortgage in a shorter amount of time. Even so, homebuyers should still make sure their income is steady, recommended The Motley Fool. Tackling a bigger mortgage payment can be difficult to overcome if buyers don't have a stable career and income they know will pay the bills.

And after 15 years, homeowners don't have a mortgage to worry about anymore.

Finally, a 15-year mortgage helps homeowners build equity faster because they pay less in interest, Money Crashers explained. With a 30-year loan, interest is higher and more time is needed to pay off the principal, so equity doesn't build as quickly. Homeowners can then use that equity to help buy a new home or fund repairs.

If homeowners have a steady income source and can handle the larger payments, they should consider a 15-year mortgage. By opting for the shorter loan, homeowners can pay off their house faster while saving more money.

3 Mortgage Myths that are Wrong

As the spring and summer buying seasons quickly approach, prospective homebuyers have to remain careful about falling for mortgage myths.

Let's dispel the following three mortgage myths:

No. 1: Buyers must have a high credit score

Having a high credit score won't hurt, but subpar scores won't bar buyers from purchasing a house. Buyers can still take out a mortgage if they have scores below 700, sometimes even in the 620-630 range, according to SmartAsset. The catch, however, is that buyers with lower scores typically pay more in interest.

Buyers shouldn't let low credit scores stop them. They should work to increase that number and look into taking out a Federal Housing Authority-backed mortgage.

No. 2: Pre-qualification and pre-approval are the same

Achieving pre-qualification isn't the same as being pre-approved for a mortgage, Realtor.com explained. Pre-qualification only gives buyers an idea of a mortgage amount they qualify for. Realistically, pre-qualification is not a concrete document and won't help in the buying process.

Instead, buyers should seek pre-approval because it indicates a lender has already collected the necessary documents and pre-approved a buyer for a certain mortgage amount. Sellers know pre-approved buyers are serious about making an offer, so it's best to go to through the pre-approval process.

No. 3: 30-year fixed rate mortgages are the best

While 30-year mortgages are the most common, they aren't necessarily the best option.

Buyers who can afford higher monthly payments may want to opt for a 15-year mortgage so they can pay off a house in half the time.

In other instances, buyers may want to consider an adjustable-rate mortgage if they want lower interest rates and monthly payments early in the loan's life and can handle future variable rates, Bankrate stated.

Taking out a mortgage is a life-changing decision, which is why it's important buyers bust common mortgage myths.

When Should You Buy and When Should You Rent?

In 2015, only 32 percent of homebuyers were first-time purchasers, according to NPR. 

After the housing crisis in 2008, many people became skeptical of buying homes, but now that the mortgage industry appears to be making a comeback, prospective owners are beginning to wonder whether purchasing a home is an option again. But before consumers make a decision they need to know whether they're better off renting or if they would benefit more from purchasing real estate.

Here are some things to consider before taking out a loan or signing a lease on a new residence:

Mortgage Delinquency Down 26 Consecutive Quarters/What to do When Delinquent

For homeowners who are behind on mortgage payments, foreclosure is not the only option.

Overall, the outlook for the delinquent mortgage rate in the U.S. is quite promising. The percentage of people behind on their real estate loan payments was 2.69 percent in the third quarter of 2016, which is the 26th-consecutive quarter where that number has declined, according to the Federal Reserve. That number is nearly 1 percentage point lower than the third quarter of 2015, according to the data.

The definition of what is considered a delinquent mortgage will vary from lender to lender, but the most common definition is that any mortgage payment more than 30 days overdue is considered delinquent, and homes are not eligible for foreclosure until a mortgage is 120 days delinquent, in accordance with Consumer Financial Protection Bureau guidelines.

Several pundits are optimistic about the mortgage industry going into the new year.

"The mortgage market has seen steady improvements over the last several years, and we believe lower unemployment rates, growth in median household income, and rising home values will be the primary drivers for continued strong performance in this sector," Joe Mellman, vice president and mortgage business leader for TransUnion, told DS News.

Some experts attribute the low delinquency rates to a decline in the number of people who have subprime mortgages, which are some of the riskier mortgages lenders can approve. According to the TransUnion 2017 Consumer Credit Market Forecast, of the 66.9 million borrowers with a mortgage balance, only 8.5 percent of them were subprime loan holders. This indicates a two-tenths of a percent drop from 2015, the report noted.

For those falling behind on their mortgage, there is hope of refinancing. Although there are several options and individual cases will vary, the most important thing is for borrowers to talk to their lenders about why they are having trouble with their payments. From there, homeowners and lenders can work together to design a plan that will get individuals back on track with their payments.

Why the Super Wealthy Choose to Get Mortgages

Mortgages aren't normally associated with wealthy people. When the mega-rich - such as Brad Pitt or Mark Zuckerberg - buy a home, people assume they buy their homes outright because they definitely have enough money in the bank to do it. But there are some surprising benefits for wealthy individuals to take out a mortgage.

"Financing your home allows an individual to take a big tax deduction."

Although some people might be wealthy right now, they could be in a profession where their income drops drastically or goes away altogether at any time. This is particularly true for professional athletes. Aaron Rodgers, quarterback for the Green Bay Packers, took out a $1 million mortgage on his $2 million home, despite having a $110 million contract, according to MarketWatch. Professional athletes can suffer career-ending injuries in any game during the season, so financing a big investment such as a house will allow them to keep more cash on hand, the source reported. 

But that's not the only reason to opt for a mortgage. Financing your home allows an individual to take a big tax deduction while he or she is paying off the loan, according to Go Banking Rates. Homeowners are able to use their mortgage interest and property taxes to get a deduction when they do their taxes. Mortgage interest deductions saved taxpayers $75 billion in the 2015 fiscal year, according to Go Banking Rates.

Even Zuckerberg - whose net worth is valued at more than $56 billion - took out a mortgage for a home he bought in 2012. At that time, he opted for an adjustable-rate mortgage that started out below the rate of inflation, essentially allowing the Facebook founder to borrow money for free, according to The Christian Science Monitor. If his interest rate was to rise substantially, wealthy people such as Zuckerberg are capable of buying their homes outright, saving them money and giving them peace of mind.

Women are Buying More, Defaulting Less Than Men

When it comes to investment property mortgages, men and women have their differences. 

That's according to a new study from the Urban Institute, which details several surprising findings around how men and women handle their mortgage payments.

A major finding of the report is that women - particularly single women - are becoming a force to be reckoned with in the mortgage industry. Although single women have a greater likelihood of having poorer credit scores, living in lower-income neighborhoods and paying higher-priced mortgages, they are also more likely to put down a larger down payment and have a smaller loan-to-value ratio than single men, according to the study.

Additionally, single female borrowers are less likely to default on their mortgage payments than their male counterparts, the report found. This conclusion is surprising because lower credit scores might indicate that these borrowers would be more likely to miss payments, but the opposite turns out to be true, the study's researchers explain. This trend held true across all racial backgrounds and even during the recession, the report found. The motive behind this is most likely a higher rate of risk-aversion behavior among women than men, according to the study.

Bloomberg also came out with a recent study which found that in a wide range of markets, including Boston, Charlotte, Columbus, Los Angeles, Louisville, and San Francisco, the share of women making more than $100,000 has increased from 2012-2014. These numbers correspond with a National Association of Realtors report which find single women have consistently been buying homes at a higher rate than single men throughout the 21st century.

Balancing Your Expenses: What a Debt-to-Income Ratio Means for a Mortgage

One important consideration that a lender takes into account when deciding whether to approve a borrower for a mortgage or a mortgage refinance is their debt-to-income ratio. This small ratio, buried among all the other percentages and numbers in an application, is often a key deciding factor - even more so than credit scores and savings. Yet more than half of consumers say they do not understand what DTI is and how it effects their chances at being approved for home financing.

"DTI is a calculation that weighs personal debt against your monthly income."

What is DTI?
DTI is a calculation that weighs the payments you make toward your personal debt against your monthly income. Lenders considering a loan applicant will add up the expected expenses that a borrower has to pay on a monthly basis and then compare it to this estimated income. 

This calculation is broken down into two distinct parts. Front-end DTI involves adding together living expenses and housing costs related to the mortgage. Back-end DTI consists of expenses related to credit cards, auto loans and other bills like cable and telephone.

The 4 Most Important Mortgage Documents

Regulatory changes to the mortgage process have made it so many new buyers are now working off new and unfamiliar documents. Here is a guide to the most important documents you will encounter and sign on the way to closing on your new home.

The Loan Estimate. A new form that was put into place by the Truth In Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA), this document is issued within three days of applying with a lender, and it replaces the Good Faith Estimate and Truth In Lending disclosures. It will show loan terms, your projected payments over the span of a mortgage, and line item closing costs. It is designed to make it simpler to compare different loan programs and lenders so you can be sure you are getting the best deal.

The Closing Disclosure. Virtually identical to the Loan Estimate, though this form is issued at least three business days before closing on your mortgage and includes a breakdown of costs paid by buyer versus seller versus third parties. This way, the buyer can see if the initial quote and final terms have changed and easily compare the two documents.

The Promissory Note. Also known as "the note," this document is the loan contract, containing the terms of your loan (specifying if it is a fixed rate loan or adjustable rate loan), the interest rate, payment intervals and payment changes or penalties. It also specifies that your home is security for the loan in case of default.

The Security Instrument. Also known as "the deed of trust," this form functions as another form of documentation pledging your home as security. It also specifies if your home is going to be owner-occupied, a second home or non-owner-occupied.

There are, of course, many documents and moving parts that go into obtaining a loan or refinancing, but knowledge of the most important parts, along with a knowledgeable loan officer, can make the process far less stressful than many believe.