As a consumer you might be asking yourself why loan officer compensation is important to me. The reason Loan Officer Compensation is important to you is simple and it boils down to your monthly payment. And for Loan Officers it is important to know how your compensation is derived as your manager may not give you a straight answer for one of 2 reasons; one he or she doesn’t understand how it works or; two they don’t want you to know how it works. This little blog may cause ripples in the industry but personally I have learned to educate people in the industry as well as consumers and not to hide anything is always the best practice. I write this with 34 years experience in the mortgage industry and have seen the good the bad and the ugly in this industry and we are going through another change and consumers should be aware of all of their options when it comes to financing and the right questions to ask. I think all would agree with the statement that consumers are best served with the lowest interest rates and fees as possible.
How does Loan Officer Compensation effect my monthly payment and why should I care? Great question, and the answer is a bit complicated, but it will be helpful to a consumer to know how to get the best deal possible when shopping for a loan. Loan Officers should know as they will be directly affected when clients go the lending source with the lowest interest rates. We need to start at looking at the current laws surrounding Loan Officer compensation and those laws have now been around since the Mortgage crisis of 8 years ago in 2010. These laws targeted Loan Officers but the laws were not equal in the way they were prescribed. For example, a Commercial Bank Loan Officer may or may not have an NMLS license and may be paid a salary and the Bank Loan Officer may also be in charge of several other types of loans other than home loans such as Auto Loans and credit cards. A Loan Officer that works for a Mortgage Banker or a Direct Lender, depending on the terminology, can can be compensated up to 3% of the Loan Amount by law. A Mortgage Broker can only charge 3% total to their company and the Loan Officer is paid from that. The difference is how much the respective companies can charge the consumer then how much the loan officer can add to the company profit margin for their compensation. The Commercial Bank Loan Officer has no control over how interest rates his or her Bank presents them to the consumer, however, it is safe to say that Banks having to maintain a nice consumer Branch and personnel have a high cost of doing business and generally have higher interest rates. The Mortgage Banker or Direct Lender has the same high branch operations that need to be covered in the profit margin before the Loan Officer adds his or her percentage to the interest rate and they can add up to 3% for themselves. The Mortgage Brokerage company has to be lean to stay in the game as the Mortgage Brokerage Company can only make 3% of the loan amount total to the company and the Loan officer has to be paid from that. Next, we will need to look at how and where interest rates come from.
This is where is gets complicated but if you are a consumer reading this know that you will generally always do the best if you work with a Mortgage Brokerage Company and here is why. As I said above a Mortgage Brokerage Company can only make 3% on a Loan transaction and the Loan officer must be paid from that. As a Loan officer you might be saying why would I ever want to work for less? Here is where the consumer will drive the answer to that question as a Loan Officer that makes more money per transaction at the Mortgage Banker you, the consumer, are paying for it in higher interest rates. As I stated earlier a Mortgage Banker or a Direct Lender, which ever terminology you wish to use, can make unlimited amounts of money to the company without regulation. Here is where you may have to read this a couple of times to fully understand what is going on. Having an understanding how interest rates are derived is important as all companies go to the same well to water their water, so to speak, to get their rates, and that is Wall Street. The basic interest market where Commercial Banks, Mortgage Bankers and Mortgage Brokerages get their interest rates come from the trading of large security pools of mortgages called Mortgage Backed Securities or MBS’s. These MBS’s are bought and sold every day all trading day long (from 9am est. to 4pm Est). These pools of mortgage have interest rates associated with each pool and are averaged to the nearest 1/8th of a percent. This is not a math lesson so I won’t go into the deep details of pricing, but this is where it begins. Banks and Mortgage Bankers who service mortgages (collect mortgage payments from borrowers) set the interest rates and the discounts and rebates associated with each interest rate in a 1/8th percent interval and they add their company profit margin on to those MBS rates and that is called a Wholesale Interest Rate. A Wholesale Interest Rate is the interest rate and fees that the company needs to make on each transaction as a minimum. A Mortgage Brokerage Company will go to these companies to find the best rates and deliver their loans to them and offer the Wholesale Interest Rates with their fee of a maximum of 3% (MAE Capital Real Estate and Loan only adds 2.5%) added on. A Mortgage Banker or Direct lender, on the other hand, is a company that will fund their own loans then either put them into a pool of MBS’s and sell them or keep them and service them. With those extra Origination expenses, a Mortgage Banker has, such as the cost of a Branch Manager, the branch rent, processing expenses and support staff will have to be added to the Wholesale Interest Rate before a Loan Officer is paid. The Loan Officer will then have to add his or her compensation costs above the branch costs this drives the costs up to the consumer thus higher end Interest Rate and fees. The Mortgage Brokerage Company will take on all the origination costs of the loan and will be able to use the Wholesale Interest Rate and simply add their fee to be profitable thus leaving the consumer with a lower interest rate and a lower monthly payment.
Now that you understand how Loan Officers and Companies are paid you can make a logical choice in companies you wish to get your financing through. However, since this is an industry secret you may be confused when you talk with companies and Loan Officers when shopping for a Mortgage. First, MAE Capital Real Estate and Loan is a Mortgage Brokerage and our regulator is the California Department of Real Estate and we do offer wholesale rate to our clients so you don't have to look farther than this article. As a Mortgage Brokerage we are required to hold 2 licenses to be able to offer Loans to our clients and Real Estate Services, those are a Real Estate Broker license and a NMLS License (National Mortgage Licensing System). A Direct Lender or Mortgage Banker, on the other hand, only has to hold the NMLS license. Another advantage of using a Mortgage Brokerage Company is that we have to maintain both licenses and with the additional knowledge we can help negotiate and explain the Real Estate process to consumers and even bundle our services to save them even more money. So, if you are reading this then you have found the key to finding the best interest rates as Mortgage Brokerage Companies in California have the ability to offer the lower interest rates. But don’t be fooled if you are calling around and get a Direct Lender’s Loan Officer and they call himself or herself a Mortgage Broker, you will have to ask them who their Business' regulator is and if it is not the California Department of Real Estate and it is the Department of Business Oversight then you are actually talking with a Direct Lender's Loan Officer trying to get your business. Call us today even if you are in the middle of a Loan Transaction we can analyze your transaction for free and let you know if you are not getting the best deal possible. Again, our phone number is 916-672-6130 and our website is www.maecapital.com we look forward to saving you money.
The Income Solving home loan has been designed to fill the gap for those folks that can’t qualify when they have to provide their Federal Income Tax Returns. Current rules for obtaining a Conventional or FHA loan require the applicant to provide tax returns to prove they make enough income to qualify for a home loan. This traditional style of qualifying for a home loan can leave an entire segment of the population out for qualifying for Conventional, or FHA and even VA home loans. So, the market place has come up with a type of loan that will comply with the current laws and allow for those that are self-employed or on commission to be able to qualify for a home loan without having to provide Federal Tax Returns. You may have even heard them advertised as Income Solving Mortgages.
The current law states that a borrower must be able to show “the ability to repay” the mortgage when applying for an owner-occupied home loan. This does not hold true for properties that are being purchased as a rental or for business purposes. So how have lenders come up with ways to avoid providing Federal Tax Returns? First, you may want to ask why not show the tax returns? The answer is simple as people that are self-employed or on commission don’t get the luxury of company expense accounts, paid health care, and other expenses. So those folks may make more than enough money to actually make the payments they just have to write off so many other expenses that a normal salaried person may not need to. This, in turn, lowers the income shown on their tax returns and, in some cases, may take them out of being able to qualify for a traditional home loan with their tax return.
The solution to being able to show “the ability to repay the loan” comes in the form of showing the actual income made by the individual. Showing the income can be best done by showing the deposits made to a business or personal bank account. For example; a borrower may show $300,000 in deposits for a year and yet their tax returns after expenses only show an income of $25,000. If we are allowed to look at the deposit record and apply the actual expenses of running their business their income would be far greater and probably enough to qualify for what they wish to purchase. So, to prove deposits we would require a borrower to bring in one or two years of bank statements to support their “ability to repay the loan”. We may also ask for a year-to-date profit and loss with the true income and expenses minus any paper write offs like depreciation.
Self-Directing your investments either from your IRA or your savings in Notes and Deeds of Trusts is a little known activity that can dramatically increase your returns on your investments. Most folks just listen to their Stock Broker when it comes to their IRA or retirement funds as to the investment they should be in according to their age. This has traditionally been a good practice, but have you really studied your investment statements to see how much of your money is being spent on this service? That’s right your retirement funds are being skimmed off for brokerage fees and management fees and those fees add up. Those fees come directly out of your funds and you have no control over it. Did you know that you, by law, have the ability to self-direct your IRA? The fact is that you can choose the investments like Real Estate and Notes and Deeds to hold in your IRA account. You may have heard about this and asked your Stock Broker about this and they discouraged you from doing this as you would need a custodian to take care of the accounting and most stock brokers do not undertake this as they don’t get paid to do so. A Stock Broker makes money every time you invest in a stock either buying or selling, they also can charge a management fee. A Stock Broker will not be able to collect those fees if you are self-directing your funds into Real Estate or Notes so they will tend to discourage you from taking control of your funds as they will lose out on money.
*Self-Directing your IRA or Retirement funds has to be done with the use of custodian that can do the accounting for you. If you look at the costs you will find them significantly less than brokerage fees. If you have followed Real Estate and the laws that have changed over the last several years you will see that the laws have opened up and area within the Real Estate Lending industry for private investors. With tightening of credit in the primary lending markets such as owner occupied loans and Conventional, FHA, VA, and Jumbo loans you will see that there is a need for loans to investors to flip homes, commercial loans, land loans, and construction loans. These loans come with a higher perceived risk, thus they have higher interest rates which equates to higher returns to those who lend in this arena (generally 8-12%). With the perceived risk being higher to the borrower the actual risk to the investor is really quite low done properly. This is done by restricting the lending to a lower loan–to-value (LTV). What a low LTV does is twofold; one it makes a borrower put down a large down payment or have significant equity in a property and that will generally insure that they will not want to default and lose the property and do everything in their power pay monthly; and two the investor who is invested in the Note holds the property as security for the loan so if the borrower defaults the investor gets to sell the property and they get their money back and sometimes can finish the project and make a large return on the equity in the property. If you are using your IRA funds all returns are non-taxable until you use them at retirement time which means you can grow your money even faster by using un- taxed dollars to churn you investments. By acting as a lender with your own funds you will act like a bank and you will be privy to the high returns, but how do you get started in investing in Notes and Deeds or Real Estate?
Here at MAE Capital Real Estate and Loan we can help you with picking the right custodian to use as we have used them for our own funds. As a Broker we can help you with your interments either into Notes and Deeds or Real Estate directly. We work directly with the custodian so your funds are directed property and will keep you legal. The law states you can lend your money to others for Real Estate up to 8 times a year without the services of a Licensed Broker. However most would choose to use the services of a Broker as they will be more protected by using a Broker, as the Broker must adhere to a strict set of rules when handling other people’s money. The system is easy with no costs to the lender to use a broker and the yields are far greater than that of a Bank.
What you need to know when deciding to invest in Notes and Deeds? First is the terminology, there are many new words that you should get comfortable with. The first of which is what is a Note and a Deed of Trust. The Note, or Promissory Note, is the written paper or contract between the Lender and a Borrower stating the terms of the loan and how it will be paid back. The Deed of Trust, in California, assigns a trustee, or a Third party to be in charge of foreclosure proceedings and as is the document that is recorded at the county that secures the Note legally. Sounds like a mouthful, but to keep it simple the Deed of Trust secures the Note and are the legal instruments that bind the Borrower and lender together until the loan is paid in full. A Real Estate Broker like MAE Capital Mortgage can prepare these documents and make sure they are legal binding instruments and that they are handled correctly.
The next thing you need to know is how the system works. The system is generally pretty easy. Once you have decided to invest some of your money, you need to know who to give your money to and how it will be handled. The very first thing I would suggest is that you do not give your money directly to a Broker and ask them to invest it. This is very important, as you should be advised of the investment you are making before giving any money. At MAE Capital Real Estate and Loan we furnish you with the RE 35 (Investor Booklet) and RE 870 (Investor Questionnaire), to determine your financial situation as an investor. Then when MAE Capital presents you with an investment opportunity we provide you the RE 851 (Individual loan information form) that spells out the qualifications of the Borrower and the terms of the transaction. At MAE Capital Real estate and Loan we provide you with the loan application, appraisal, and preliminary title report, and credit report and the purpose of the loan. The risks of the transaction are outlined and detailed so you can make the decision to invest or not, such as the Loan-to-value, credit, ability to repay, and exit strategy. Generally, the higher the risk to the Lender the higher rate of return the Lender will have. Conversely, the lower the risk the lower the return, and as an investor your risk assessment will become obvious. So once you have determined that this is an investment for you, and the terms of the transaction are acceptable for your return objectives, we will draw up the legal documents for you and the borrower to sign. At MAE Capital Real Estate and Loan we will insist on using an Escrow company that will issue title insurance, to protect you, as well as act as a disinterested third party that will bring Buyer, Seller, and Lender together in a neutral setting at different times. Once the buyer has signed all the legal documents you, as the Lender, will be instructed by us, the Broker, to wire funds directly to the Escrow Company, as your Broker we do not have direct contact with your money. Before we allow you to fund the transaction we have made sure the Title Insurance is correct, and that there is a hazard insurance policy in place in case of a catastrophe. Before the loan has funded we have set up the servicing of the loan for you. Servicing the loan means the collection of payments and the dealing with the borrower throughout the term of the loan. There will generally be a nominal fee to do so in addition to a “servicing spread” that is built in the loan paid by the borrower. For example; a servicing spread is the difference between the interest rate collected from the borrower and the rate of interest paid to the Investor/Lender. If the Note was written at 11% and the Lender (you) was promised to receive 10% the 1% difference is the servicing spread paid to broker every month.
The Self-Direct IRA can also be used to buy and hold Real Estate as well. So if you are into investing into rental property and receiving rent every month as return on investment you can do this as well. The returns would be deposited to your custodial account every month tax free. You could also buy and sell real estate in your IRA. So if you already have a rental in your IRA you can sell it and invest into another piece or pieces of property all tax free. At MAE Capital Real Estate Loan we can show you how this is done for you and help you set up your custodial account to manage it.
I sincerely hope this has helped you with information to make decision on. We at MAE Capital Real Estate and Loan are here to help with your Self-Directing funding needs. If you would like more information or to talk with a Broker to go over your needs please click here and complete the quick information or give us a call at 916-672-6130.
We have all heard of the Stated Income Loan, unless you entirely missed the mortgage meltdown from 2006-2011. Assuming you did not miss the meltdown, you know that this type of lending was one of the causes, stated by the Government, for the Mortgage Meltdown. But we, as consumers, and those of us in the industry, keep hearing rumblings of this loan re-emerging as a viable product. So let me dispel the myth of this loan coming back for those of you who wish to purchase a home that you intend to use as your primary residence. The Dodd-Frank Act of 2010 made this type of loan basically illegal for lenders to offer on owner occupied loans. The fact that you have to income qualify for a loan on a primary residence, makes it that much harder for those Americans that are self-employed or derive their income from other than salaried jobs.
However, knowing what the law states and how it is interpreted makes a great deal of difference in the way lenders derive loan programs. The laws states that a lender must verify that the borrower has the ability re-pay the loan, it further goes on to say that a borrower’s total debt, including their primary housing payments, must not exceed 43% of their total gross income. Ok, that was a lot of lender babble, so let’s break it down. We have to explore what income is, and how a lender has to determine if you have the ability to re-pay the loan.
Let’s start by defining income, and to some (in high places in Government) it is cut and dry, you get a salary and that is your income. Say you are self-employed, or are paid a commission, or you have rental properties, or other investments. Determining income becomes quite difficult. The Government has tried to stick everyone in a uniform box that really only fits a select few. We are starting to see some logic come from lenders now in the way they are viewing income, but not from your big 4 loan types (Conventional, FHA, VA, and Jumbo loans) which are typically sold to government owned agencies like FNMA, FHLMC and GNMA. There becomes opportunity to do things differently when loans are not being sold to those Agencies. Private lenders have to work under the rules of the Dodd-Frank Act and the Real Estate Settlement and Procedures Act (RESPA) when doing a primary residence loan, but they have a little more risk tolerance than the “Big 4”. What this means is that they can view income calculations a little different than the Big 4 are mandated to by their Governmental Big Brother. We are not going to see stated income loans or any derivative ever coming from loans that are being sold to the Big 4, for no other reason than they are not mandated to do so. We can see more creative ways of viewing one’s income starting to emerge from private funding sources. A great example would be looking at the deposits being made every month into a borrower’s bank account. More specifically deriving a qualifying income through an average of the monthly deposits into a borrower’s personal bank account. This is very creative and can help borrowers obtain financing where they have been locked out of until now. These types of loans are being called “Bank Statement Loans” and are perfectly legal under current laws. One would have to agree that if the deposits are consistent in nature every month that this can be viewed as a valid income source or, as law states, proof of the “ability to re-pay” the loan.
Although, the income is not verified in the traditional way with pay-stub, W2’s and Tax Returns, we know the borrower has the ability to re-pay the loan by the deposits he or she makes. The interest rates for this type of loan is higher than the Big 4 rates, but it allows for folks that would not otherwise qualify, qualify. By having the bank statements over 6 month to a year period also allows a lender to establish payment patterns which can also reduce risk to the lender. Using this method of deriving income can help those who are self-employed or otherwise do not show a high income on their tax returns but actually have the income. Here at MAE Capital Mortgage Inc. we are doing these loans right now helping folks who have been lost by the system.
Now the flip side to all of this are those loans that do not fall under Dodd-Frank or RESPA. Those are loans on properties used for investment purposes or that are non-owner occupied. We are not legally obligated to verify an income source, or that the borrower has the “ability to re-pay” on investment property, or property that is used for business purposes. This is true, it has now become a lot easier to get a loan on an investment property that your own home. Although, loans that were done on investment properties during the Mortgage Meltdown were the first ones to default, the Government did not include these properties in their new laws. So the door is wide open for investment property loans and we have several products for investment properties that do not require us verify any income source. These loans are done based on the equity position in a property. In other words, the more equity or down payment you have in an investment property the easier it is to get the loan. This holds true for all types of investment property from raw land, to giant commercial properties and everything in between. The theory is simple; people that have large amounts of their own money into a property the less likely they will default on a loan.
So we now know that it is not legal to do a stated income loan for property that is intended to be a primary residence, but we can do them for investment property. In fact, in today’s lending environment it is far easier to get a loan on an investment property than it is on your primary residence. This change is remarkable in that the American Dream is to own your own home but it has become a whole lot harder to reach that dream. I would not get the idea to tell a lender you are not going to live in a home when you actually are just to get a no income verified loan, this is fraud and you can be prosecuted for loan fraud if you do something like this; and you are not the first to think of it. At MAE Capital Real Estate and Loan we walk you through all your possibilities and we look forward to working with you. For more information on the investment property loans that do not require an income check click here. As usual any comments you might have please leave them and start a discussion.