To better understand the process of negotiating with your lender, you need some tips to know how the mortgage market actually works. The mortgage market has two main parts: the primary market and the secondary market.
The Primary Market
The primary mortgage market is made up of lending institutions and banks that extend loans directly to consumers and prospective home buyers like you. Basically, if a financial institution keeps the loan that it makes to you, then it’s a portfolio lender or a primary lender.
Examples of “portfolio” or primary lenders include credit unions, savings and loan companies, and banks. Portfolio lenders can be a little more flexible in their loan offerings and often more creative than lenders who sell their loans to the secondary market.
The Secondary Market
The secondary mortgage market is made up of institutions like Fannie Mae, Freddie Mac and others that purchase loans from primary lenders or mortgage bankers. In turn, they package these loans into mortgage-backed securities (which are like bonds) and then sell them on the world capital markets.
Before a loan can be sold, it has to be a “conforming loan.” That means both the collateral and the borrower have to meet a certain quality and credit standard. Any loans that fail to meet these standards are considered “non-conforming” and are kept in the issuer’s portfolio until there’s enough buyer equity built up to sell the loan or it can be classified as “seasoned.” This happens when the borrower has made on-time monthly payments for a set period of time.
Because over 60 percent of all loans are sold on the secondary market, some lenders have very particular lending standards that the borrower has to meet to make the loan conform. They also have very specific guidelines that must be met when negotiating with homeowners in foreclosure. This is why your servicer often cannot make a decision on their own…they have to get approval from the conglomerate that actually runs the group of loans your loan is part of.
How the Mortgage Loan Process Works
Mortgages are complicated and often time-consuming. Predatory lenders can take advantage of misinformed borrowers, so it’s important to equip yourself with a mortgage education. Become familiar with the mortgage process, learn what’s available in your market and always try to find a credible mortgage adviser to help you through the process.
Having a healthy down payment helps tremendously in today’s risk averse market. This money can be savings, a gift from a relative or sometimes a secondary mortgage. Next, the lender will want to review your credit. If your down payment and credit scores are healthy and it’s determined you pose a small risk of foreclosure, you should qualify for a mortgage with a low interest rate and favorable repayment terms.
When negotiating with your servicer, you need to find out if they can make the decision or if they have to take your decisions to someone else. You also need to check with your private mortgage insurance (PMI) company if you have a policy…they may have guidelines that can heavily impact your workout as well.
Talking about PMI, The Mortgage Reports Blog reported the below last Friday:
Bad news for real estate investors: Private mortgage insurance companies will no longer insure new investor mortgages over 80 percent loan-to-value. This includes both lender-paid MI and borrower-paid MI features. Given Fannie Mae’s high fees, though, investors may want to put down 25 percent or more anyway.
Lots of other great mortgage-related info on that site too…check it out. For instance, this video on Why mortgage guideline matter to you, the consumer.
Even if you’re not an investor, this PMI change (along with the others mentioned on the site) are bad news…it used to be that the only time you absolutely had to get PMI was if you put less than 20% down…now you won’t get it unless you put more than 20% down. My how times change! I guess the only way to get insurance with less than 20% down now is through FHA or VA for those that are eligible.
Tags: loan process, mortgage backed securities, mortgage education, predatory lenders
November 1st, 2008 at 7:01 pm
Lenders are going to take a long, hard look at your personal information. This includes your work history as well as your credit history. This is great news for some consumers and a great cause of stress for others. No matter what, this information has to be included in the hardship application process.
Todd Reply:
November 11th, 2008 at 3:37 pm
Great point. Lenders don’t normally run a credit check until you’ve turned in your hardship package and they’ve reviewed everything to make sure your information is complete and accurate. Then they will pull a credit report to make sure you told the truth in your hardship package.
It’s not unusual for homeowners to leave credit card account, car loans, or other monthly obligations off their hardship package to try to skew the numbers. Make sure you don’t do this because it will undermine your entire effort.