Laura Houle Real Estate Services

Should you deal directly with the bank? Should you deal with a mortgage broker? We all know what banks are and what they do, but few of us know precisely what a mortgage broker does and what the differences might be.

The disadvantage of dealing with a bank is that you are dealing with one source only. If, for some reason, you do not qualify or the bank does not have a loan that suits your particular situation, you must start all over with another lender. The loan officer at a bank does not have to be licensed by the Department of Real Estate, as does a mortgage broker, because the bank is using its own money. For this reason banks do not broker loans, except from a wholesale division, dealing with mortgage brokers. The loan officer of a bank is also an employee of the bank and therefore represents the bank.

A mortgage broker has contacts with wholesale lenders and is licensed by the Department of Real Estate. The broker, in effect, buys the money from the wholesaler at discount prices and lends it to you. The broker must meet the rigid standards of the lender, both financially and in their work methods, in order to be approved by them. The mortgage broker is ultimately responsible for the loan should fraud be proven.

The mortgage broker actually represents the borrower by packaging the loan to highlight the borrower’s strengths and minimize the weaknesses. A wide array of programs is offered, with competitive rates, fixed and adjustable. The broker shops for the best rates and can move a “problem” loan from one lender to another. Mortgage brokers, or the loan

You often see loans offered with no points, or no costs and no points. This means that the interest rate is lightly higher than the best available rate, and the broker is being paid a substantial amount by the lender. The broker can then pay some or all of your costs, depending on the amount the lender is paying for that particular rate.When you refinance, you are able to add the costs to the loan. With a purchase, you do not have this option. Today, however, there are loans available with no down and it is allowable to have someone else pay your non-recurring closing costs: A seller, parents in a gift form, etc. Non-recurring costs are just that — they are generated one time only. These fees would include processing, points, etc. Interest is an example of a recurring cost and it would be paid by the borrower.

Pricing is received daily by the mortgage broker, sometimes twice a day. This pricing is affected by what is happening in the nation and even the world. Employment numbers, the stock and bond market, retail sales, the Consumer Price Index, existing home sales, etc., all have an influence on interest rate pricing. You have a choice of locking in a rate or jumping in at a certain time, when it is felt that the pricing is particularly favorable. The length of time of the lock can also be reflected in the pricing.

How a loan is repackaged can determine whether or not the loan is approved. It is important to choose an experienced mortgage broker who comes highly recommended, is someone with whom you feel confident and who has a good track record. Good mortgage brokers want to build an ongoing relationship so that you will use their services again and recommend them to your friends.

It is difficult to understand why individuals think lenders will give them credit or a decent interest rate even though they have a history of late payments, collections, charge offs (debts written off by the debtor) and even bankruptcy.

Many lenders these days rely on a credit score (FICO) when evaluating applications. Scores may be based only on information in your file at the credit bureaus or on a combination of credit bureau data and information you supply on a credit application. The way you have handled credit in the past gives a strong indication as to how you will manage credit in the future. While credit scores cannot predict with certainty how a person will act, they do provide a quick, accurate and objective estimate as to how likely you are to repay according to the terms of a loan.

Scoring programs are: Beacon at Equifax, Empirica at Trans Union and the TRW/Fair, Isaac Model at TRW. The Fair, Isaac Bureau scores range from approximately 450 to 850 points, and one needs at least 660 to qualify for a loan covering 97 to 100 percent of value.

Scoring has been around since the 1950s and credit bureau scores based solely on credit bureau data became available in the 1980s. Not all loans require FICO scoring.

Elements of a scoring model:

• Recent payment history
• The amount of credit you have access to and are using
• How long a credit history you have
• Whether you have been shopping for credit and
• Notification of collection and public record items such as liens and bankruptcies

If you have been turned down for credit, you are entitled to a free copy of your credit report. Even if you have not been turned down, it is a good idea to know your credit status and to correct any erroneous information. Your request for a copy of the report will not affect your score in any way and if there is an error, the credit bureau will investigate and respond to you within 30 days. Telephone numbers are:

• Equifax: 800-685-1111
• Trans Union: 610-690-4909
• Experian (formerly TRW): 800-682-7654

Credit items are updated frequently, so new items can pop up since a previous report. Unfortunately, repeated requests for credit reports may cause the score to drop.

Over time you may improve the information on your credit report by paying all your bills on time and using credit wisely. As derogatory data in a credit report gets older, the score will be affected less. A missed payment four years ago will not affect the score the same as a missed payment six months ago.

It is important to remember that the scoring is not done to calculate a debt ratio but is simply an indication of the consumer’s historical credit use habits.

Scores by themselves do not identify individuals as “acceptable ” or “unacceptable” customers. They are just one of the factors lenders use when deciding to make the loan. The final decision depends on the individual lender.