HOW TO WORK EFFECTIVELY WITH LENDERS AND MORTGAGE BROKERS
A LIVE TALK FOR REAL ESTATE AGENTS 
By

Carol Martino, Realty World Martino Associates and Mortgage Co. 


  Hello everyone, my name is Carol Martino. I'm the founder and President of Realty World Martino Associates and Mortgage Company in Alameda, so like most of you, I'm a  real estate agent. Unlike most of you, I'm also a mortgage broker. That's why they thought I could talk to you about working with lenders and mortgage brokers, to get your deals closed successfully.

  How many of you out there want to work for free? None of you? I'm not surprised. There's no reason why any of you should want to work for free. If you want to volunteer your time, there are all sorts of wonderful causes out there, just crying for help.

  For example, I  work with developmentally challenged children and I do that, because I enjoy it and consider it a worthwhile and needed community service. It's kind of a hobby for me, not something I do for money.

   Selling real estate, on the other hand, is also a valuable and needed community service. I'm proud of being a real estate broker. It's something I've wanted to do ever since high school. But, it's not a hobby, or a volunteer activity for me. It's what I do for a living, and I expect to get paid for it.

  I know that theoretically, we earn our commissions just by bringing together a willing Buyer and a willing Seller. But, I also  know that in reality, a willing lender has to be involved, too, or we won't really get paid. That's why it is so important for real estate agents to work successfully with lenders and mortgage brokers, so that everyone benefits.

  Like it or not, your job as a real estate agent or broker  does not end when you get a signed Purchase agreement. It just begins. Unless your buyers successfully get loans, they will not close escrow. There will be no sale. You will not collect a commission. This means that you volunteered your time for free. Think about that for a second.

  Many real estate agents have gone through this. They put in months of hard work finding the right property for clients, only to find out that those clients can't get a loan, or refuse to be satisfied with the loan terms offered to them. 

   The mortgage market is complex today. For most home buyers it's no longer as simple as going out and getting a 30 year fixed rate mortgage. If they want the loan with the best possible rate and terms for their particular situation, there are a lot of factors to consider.

  For Real estate agents and brokers, this means that it's no longer simple, to sell a house and collect your commission. Finding buyers the right house at the right price and terms and then introducing them to a lender's representative, is no longer enough. You have to be a full-service real estate advisor and this means getting involved in helping your buyers find the right financing to complete the deal.

  Now, you might say that helping your buyers find and qualify for the right loan, is the mortgage broker's or loan agent's responsibility. You're right. But, loan agents don't make the same  amount of commission that real estate agents do. Their commissions are much smaller, so the loan agents you deal with, will usually have anywhere from three to five loans in escrow, for each property you have in escrow. So, who do you think has more time to make sure that the loan goes through, and more to lose if it doesn't?

  Now that we have established why  you want to help your buyers find the right loan, the next question to ask yourself, is how do you help your clients look for a loan and find the right deal? How do you help them look good on paper, so they will get their loans and close escrow and you get paid?

  That's what we're here to talk about today.

  First of all, there is a lot you have to know about your buyers. How is their credit? How long have they been employed? Are they self-employed? Is this going to be their first home? How long do they think they plan to stay in the property? What are their plans for the future? Will they buy a bigger house within a few years? Move out of the area? Is their income likely to go up, or is it likely to remain steady or even go down?

  These are the questions you must have answers to before you can begin to help your clients and you don't want to get the wrong answers after you find their dream house and make a successful offer.

  If your buyers are going to have trouble qualifying for a loan for any reason, you want to know this in advance. Like a good Boy Scout or Girl Scout, you want to be prepared.

  Before you waste your time and the Seller's time, you want to get your buyers pre-qualified. You not only want to know that they will be able to qualify for a loan, you want to know the approximate amount that they can qualify for and whether there are any terms or conditions which have to be met before they qualify. 

  It's a lot easier to do this, if you have established good personal relations with at least one lender or mortgage broker. You need someone you can count on and someone who counts on getting your business once your buyers have found a property and are ready to get the loan. That way, they will work with you from the beginning to insure a smooth deal with a minimum of nasty surprises.

  One of the main reasons I decided to become a mortgage broker myself, as  well as selling real estate, is because I  wanted more control over my deals and more assurance that  I was doing everything possible to get them closed quickly and efficiently.

  I figured that I was already putting in a lot of work to help get my buyers get their loans and this way, I get a second commission on most of my sales and I can pre-qualify all my buyers myself, before I start working with them.

  Now, don't get me wrong.  I'm not suggesting that all of you have to become mortgage brokers, in order to do your jobs as real estate agents and get paid for it. The majority of good real estate agents do nothing but sell real estate and don't handle their own loans. A lot of them make excellent money that way, too.

  It's a personal choice and actually, it's not one I would recommend to people starting out. I had many years of experience as a real estate agent and as a broker running my own company, before I started doing my own loans. So, I am definitely not here to talk about why you should all become mortgage brokers in addition to real estate agents.

  What I am here to talk to you about, is how and why to take charge of your loans and work with the lender and/or the mortgage broker to close escrow your escrows. Pre-qualifying your Buyers is one of the most important things you can do and as I said, to do it right, you have to develop a relationship with at least one loan agent or mortgage broker, someone you trust and can work with comfortably.

  How do you find someone like this? You ask for referrals from experienced people in the business. If necessary, if you can't get any good referrals, then you try several lenders or brokers, until you find someone you can work with. Ideally you want to have more than loan agent or broker you are comfortable with, but start with at least one.

  When you find the right person(s), together, you should work out a simple plan for each loan and decide what needs to be done to get it closed.  If your borrowers have problems, you should work out solutions together, writing a letter explaining bad credit or excessive debts or credit inquiries, arranging for necessary documentation, etc.

  But, first of all, you have to convince your Buyers to use your lender or mortgage broker. They can also choose their own lender or mortgage broker and if they do, it's their legal right. You just have to go along with that and take your chances. Maybe they will pick someone you can work well with and maybe they won't, but it's better for you, if you can get your buyers to trust your judgment.

  This allows you to remain in control of the situation and since you don't have any written contract with most buyers, trust and control are what it's all about. The more you do for your buyers and the more they depend on you, the more loyal they will be and the more likely you are to collect a commission.

  If you want your Buyers to follow your recommendation, then you should be able to talk to your buyers intelligently, not only about which lender or loan broker they should go to, but about which type of loan they should get.  This means you should have a basic familiarity with the various types of loans which are available nowadays. You should also understand what a mortgage broker does and what makes them different from direct lenders.

  Now, I don't want to bore anyone, or insult you, by telling you what you already know. But, since most of you are new to the real estate business, I'm going to quickly go through some very basic information about real estate loans and mortgage brokers versus direct lenders.

  Real estate loans break down into three basic types: Fixed Rate loans, in which the interest rate does not change over the life of the loan, Adjustable or Variable Rate loans, known as ARM's or VRM's, where the interest rate can go up or down and Hybrid loans, which start off fixed and then switch to an adjustable rate after a certain number of years.

  Many Buyers automatically assume that they want a Fixed Rate loan, but it's not always to their advantage to get one. Adjustable Rate and Hybrid loans usually start off with a lower interest rate, so in many cases, your buyers can save money and/or qualify more easily with an ARM or Hybrid loan.

  ARM's usually benefit three kinds of people: those  who are starting out, those who don't expect to stay in the property too long and those who feel that interest rates are currently high and don't want to be locked into a Fixed rate that will stay high forever.

  Hybrid loans are fixed for the first one to 10 years and then switch to an Adjustable interest rate for the remainder of the loan. This is for people who don't really want an Adjustable or Variable interest rate, but don't really need a 30 year Fixed rate either, because they don't expect to own the property that long. They can have the best of both worlds and get a lower Fixed Rate for One to 10 years.

  I realize this is a lot of technical information and some of you are probably wondering if and why you need to know it and the best answer I can give you, is that this how you maintain control of your Buyers. They have questions, you should have the answers. This is what builds trust between you and your clients.

  If you think this is a lot of information for you to absorb and deal with, imagine the way your buyers will feel. Sure, you can leave all this up to the lender or mortgage broker. After all, it is technically, their job and not yours. But, it's your commission and future referrals which are at stake, so it's to your advantage to stay on top of things..

  So what are the advantages and disadvantages of the  different types of loans? First of all, a Fixed Rate loan offers stability. The payments can never go up.  Many ARM's, on the other hand, offer a low initial starting rate for qualifying. This allows people who are starting out with a relatively low income, but expect their income to go up in the future, to qualify for larger loans.

WRITE OUT FIGURES ON OVERHEAD PROJECTOR

  For example, if 30 year Fixed rate loans are currently at 8.5%, the payments on a $200,000 loan would be $1538 a month and your buyers would need an income of approximately $5,000 a month to qualify.

  An ARM on the other hand, might start off with an initial rate of 7%. This would make the initial payments on a $200,000 loan only $1,330 a month, a savings of $200 per month and your buyers could qualify with an income of only about $4,300 a month.

  The payments on the ARM will not stay this low for long. Within six months to a year, the interest rate will adjust. If interest rates go up in the future, then the rate may even adjust to more than 8.5%, but  if your buyers  expect their incomes to go up in the future, then even if their payments go up, they may figure they will be able to handle the extra expense. This is good for you, because some of your buyers who can't qualify for a Fixed Rate loan, may be able to qualify for  ARM's.

  Many lenders also offer a really low initial starting rate, called a Teaser Rate, on ARM's, which is even lower than the initial qualifying rate. For example, if the interest rate on 30 year Fixed rate loans is 8.5% and the initial qualifying rate for an ARM is 7%, then the Teaser Rate, for the first three months, to one year of the loan, could be as low as 4% or 4.5%.

  In other words, your buyers would still have to have sufficient income to qualify for the loan at 7% interest with payments of $1,330 a month, but for the first three months to a year, their actual payments would only be $955 a month (4% interest) or $1,013 a month (4.5% interest) for the Teaser period.

  At the end of the Teaser period, the interest rate will go up as much as 1% every six months, or 2% every year, STARTING WITH THE INITIAL QUALIFYING RATE OF 7%, RATHER THAN THE TEASER RATE of 4% or  4.5%. Therefore, the interest rate could be at nine percent (9%) within a year, while the Fixed Rate will remain at 8.5% interest.

  This benefits people who don't plan to keep the property very long. They figure that even if the interest rate does go up higher than the Fixed Rate in the future, they will still save money. If you have Buyers who plan to move within a couple of years, you will want to point this out to them.

  The interest rate on ARM's can also go down, so if interest rates are high right now, why lock in a fixed rate that can never change? By taking an ARM loan, your buyers may be able to lower their payments in the future. If you have prospective buyers who are scared because interest rates are high right now, then point this out to them.

 


  If you think your buyers fit into one of these categories, then an ARM may be for them. But, there are several different types of ARM's, so there are several questions to ask the lender or mortgage broker, to make sure that you help your Buyers make the right decision.

  Either you should ask these questions, or pass them along to the buyers and let them ask, but if real estate is your business, you should understand how the financing works and be able to explain it to your clients.

1) What is the Qualifying Rate? Is it the same as the Teaser Rate? If not, is it still lower than the qualifying rate for a Fixed Rate loan? How much more money can they borrow this way? How much easier will it be for them to qualify?

2) Assuming that interest rates for Fixed rate loans stay the same, what will the interest rate on the  ARM be in six months? A year? Two years from now? What can cause it to go up, or down?

3) What Index will the ARM loan be based on and how stable is it? Ask to see figures for the last five years. The Index is the basis for deciding the interest rate on Adjustable Rate mortgages. Many borrowers assume that an Adjustable Rate Mortgage means that every time interest rates on new Fixed Rate loans changes, the interest rate on their loan will change, but this is not the way it works.

  There are three indexes commonly used in the Bay Area for ARM's. They are the One Year Treasury Bill rate, the Six Month Libor rate and the Eleventh District Cost of Funds.

  The One Year Treasury Bill rate is the amount of interest the government currently  pays on One Year Treasury bills. The interest rate on the loan can change once a year, depending on the latest government auction of Treasury Bills, just like the interest rate on the Treasury bills changes depending what is bid at the auction. This generally a reasonably stable index. 

  The Libor is the London Inter bank Offering Rate, the interest rate which international banks charge for short term loans. The interest rate on this loan can change every six months. This is generally the most volatile index, the one most subject to fluctuations.

  The Eleventh District Cost of Funds is based on the average cost of funds incurred by banks in the Eleventh Federal Reserve Bank District. It is  the average interest rate they have to pay on passbooks, CD's, and interest bearing checking accounts. The interest rate can normally change every three or six months, depending on the loan agreement, but this is generally considered to be the most stable and least volatile index.

  Question Four is, What is the Margin, the premium that your Buyers will pay, over and above the Index? (This will generally vary by anywhere from One to Three percent; the higher the Margin, the lower the initial interest rate should be and vice versa.)

  In other words, a lender might offer an ARM with an initial interest rate of 6.5% with a margin of 2.25 points over and above the index, or an initial starting rate of 7% with a margin of 2% over and above the index.

  This means that the first loan would start of one half point lower during the teaser period, with payments of only $1,264 a month, instead of $1,330 a month. But in the future, if the index is at 6.5%, the first loan would carry an interest rate of 8.75%, with payments of $1573 a month while the second loan would carry an interest rate of 8.5% and payments of $1,538.

  If your Buyers want really low payments now, they may have to pay more in the future, but this may well be worth it to them. Find out how it affects their chances of qualifying. 

  Question Five: How much can the interest rate go up over the life of the loan? What is the maximum interest rate? What is the likelihood of ever reaching the maximum? Ask to see figures for the last five years.

  Question Six Is the loan fee (the "Points") the same, or less than it would be for a Fixed Rate loan?

  Question Seven only applies if it's a hybrid loan. Does it automatically switch to an Adjustable, or Variable Rate loan at the end of the Fixed Rate period? Or, does the Buyer have to apply, and/or qualify, in order to extend the loan period beyond the Fixed Rate period?

  Your buyers need all the facts before they can really decide. You need the facts before you can advise them. When you have answers to these questions, you can then begin to make an educated comparison between the different types of loans.

   That's when you can help your Buyers decide whether a Fixed Rate, an Adjustable Rate, or a hybrid loan would really be best for them.

  If the lender or broker can't, or won't, help you answer these questions, then you are dealing with the wrong person. Find someone who can and will answer all your questions truthfully and knowledgeably. That way, you'll get the information you need to help choose the right loans for your Buyers. It's as simple as that.

  Either way, whether your Buyers use your lender or mortgage broker, or their own, you want to be sure that all the necessary forms - Verification of Employment, Verification of Deposit, Tax Returns, etc. - are signed and delivered  Then you can really feel as though you've earned your commission.

  If you want your buyers to trust you and trust your judgment, then another basic question you should be able to answer, is "Do I need a mortgage broker? Or should I just go right to the lender? What does a mortgage broker really do?"

   The best answer  you can give to the first part of that question, is  "There is no easy answer which works for every one in every situation. It just depends on who has the best loan for you at any given time. Sometimes it will be a mortgage broker and at other times, it might be a direct lender. "

  That's very profound, I know, so let's talk about the parts of that question that we can actually answer. How do mortgage brokers work?

  Mortgage brokers take loan applications from borrowers and instead of funding them in-house, they shop those applications around, to various lenders that they work with and decide where to place them.

  Not all lenders work with mortgage brokers. Many direct lenders don't, but some lenders, called Mortgage Bankers, deal almost exclusively through mortgage brokers. In many cases, mortgage bankers are subsidiaries of traditional banks and savings and loan associations, but they exist only to make mortgage loans. They don't have branches which are open to the public and they don't take deposits, so they count on mortgage brokers to generate loans for them.

  All  lenders who do work with mortgage brokers, both mortgage bankers and traditional direct lenders, have a  two-tiered rate system. They have Wholesale rates for the mortgage brokers they work with and then they have Retail rates, which they offer to Borrowers who come to them directly.

  The difference between the  Wholesale rate and the Retail rate is the points or loan fees,  which is usually anywhere from one quarter percent, to two percent of the loan amount.  This is the mortgage broker's commission.

USE OVERHEAD AGAIN

  For example, let's say the local bank or savings or loan is offering you a 30 year fixed rate loan at  7.5% interest, with a loan fee of two points  (two percent of the loan amount) If you go to a loan broker who deals with this same lender, the lender offers the mortgage broker that loan at 7.5% interest with no loan fee, or the lender might even pay the broker a fee up to one percent or more.

  The broker then offers your buyers the loan  for the same two points they would pay if they went direct to the lender. In other words,  the Lender pays the Broker's commission and your buyers wind up paying the same rate whether they use the mortgage broker or not. In fact, if the broker is really anxious for their business, he or she might even offer the loan to them for less than two points, particularly if the broker is also collecting a fee from the lender.

  Whether they deal directly with the lender or go through a mortgage broker, the loan fee usually works the same way the margin does on an ARM. The higher the loan fee, the lower the interest rate and vice versa.

  In other words, if the lender or mortgage broker is offering a loan at 8.5% interest with a loan fee of two points, your buyers usually have a choice. They can get that same loan at 8.25% or 8% interest with a loan fee of two and half or three points, if they are willing to pay more up front, in order to have lower payments.

  Or, they may be able to get the loan at 9% interest with no loan fee, if they are strapped for cash, and/or don't expect to keep the property for that long and don't mind making higher payments each month.

  Why do Lenders offer mortgage brokers a better rate than they offer to Consumers? Because mortgage brokers do a lot of the Lenders' work for them. First of all, they bring the Borrowers and save the Lender money for marketing.

  Secondly, the broker qualifies borrowers and theoretically passes on applications only from those who are likely to meet the lender's guidelines. This saves the Lender time and money on paper work, so they're willing to pay the mortgage broker's fee and let you and your buyers get the mortgage broker's services for free.

  And what are those free services? Some people would say that the most important reason to use a mortgage broker, is to have your broker as an independent advocate, someone to speak and act on your buyers' behalf and give you honest, impartial advice, about which lender and which loan to choose.

  When you go directly to the lender, you are assigned to a loan officer, or agent, who works full-time for that lender.  He or she can only offer you the programs offered by that one lender. They can not tell you that some other lender might have a program which would better suit your needs.

  If you don't meet the lender's guidelines and are turned down, the in-house loan officers might not be able to do anything for you. They can't threaten to take their future business elsewhere and they can't take your application to other lenders. All they can do is turn you down and say they are sorry and possibly recommend another lender to go to on your own.

  Independent mortgage brokers work with several lenders. They know the peculiarities of each lender - what types of loans they offer, what types of loans they prefer and what types of borrowers they are likely to turn down. Therefore, they can steer your loans to the lenders who are most likely to approve them.

  If your clients are turned down, mortgage brokers can often get them qualified by writing Letters of Explanation  for poor credit, insufficient income, too many bills, or other minor problems. Independent mortgage brokers can also take your buyers' applications - and if necessary, their other business as well -- to other lenders if they feel your buyers have not been treated fairly.

  Mortgage brokers will not drop your buyers simply because one lender turns down their application. They find workable alternatives, instead. They get paid by the lenders, but they work for you and your clients.

  Mortgage brokers also work with independent appraisers, as opposed to in-house appraisers who work for direct lenders. These appraisers count on mortgage brokers for business and so they will bend over backwards to make their appraisals come in high enough to qualify for the loan. They won't lie, but they will work harder to find the comparables they need to make the loan work. In-house appraisers don't have the same incentive

 

  These are the standard arguments in favor of mortgage brokers, but first of all, I am prejudiced, since I am a mortgage broker and secondly, these arguments are all over-simplified. 

  Whether they work in-house, for a direct lender, or, for a mortgage broker who works with many different lenders, loan agents should always be your advocate and your buyers' advocate. If not, then they're not doing their job and you're working with the wrong person.
 
  If your loan agent works for a direct lender, this can  even be to your advantage, for several reasons. First of all, not all lenders share all their programs with brokers. Some programs are reserved for in-house loan agents only, to give them an edge over independent mortgage brokers.

  An in-house loan agent working for a direct lender may have a program which can benefit you, which no one else - no other direct lender and no mortgage broker - has access to. This is designed to help them win loyal customers.

  Secondly, an in-house loan agent knows the lender's guidelines, standards and peculiarities, in a way that no independent mortgage broker can. Since he or she has only one lender to deal with, it is a lot easier to become an expert in dealing with that one lender and what they want.  If your loan application does not meet the lender's criterion for any reason, the in-house loan agent should be able to spot this right away, instead of wasting time.

  If possible, the in-house loan agent will tell you what you have to do to make your buyers qualify. If letters have to be written explaining credit, down payment, or income  problems, then the in-house loan agent should know exactly how to word those letters and who to address them to, for maximum impact. In-house loan agents are part of a lender's team, working together to get your buyers' loans approved, so that you and your buyers will become satisfied and loyal customers.

  If there is no way to get your buyers' loan approved, the in-house loan agent should realize this more quickly than an outside broker would. He or she can usually steer your buyers to another lender who might have more lenient guidelines.

  As for in-house appraisers, their jobs are secure and salaried and they are not directly dependent on mortgage brokers for work, but they still get paid to make loans work, not to kill them with low appraisals. Most of the time, the appraisal should not be a problem unless your buyers are overpaying for the property.

  So, what it really comes down to is personal relationships. There are arguments in favor of mortgage brokers and other arguments in favor of direct lenders. The important thing is the loan agent.

  Finding someone you feel comfortable working with, can be more important than who they work for. 

  Now, let's get down to a worst case scenario. It's the end of the world. You've been to all the lenders you know - all the mortgage brokers you know have shopped your buyers' loan application to all the lenders they know - and your buyers have been turned down for a loan. Maybe their credit is bad, or their income is not high enough to qualify. Either way, the lenders have all said "No!"

  What do you do now? Do you tell your buyers to forget it, to curl up and die, from shame and disappointment? No, you sit  down and try to figure out why they were turned down.

  Is it a problem which can be remedied by a letter explaining their situation? Was there a valid reason (illness or loss of a job due to no fault of their own) why they were late making their payments? Or was it their fault, but they have learned their lesson and will be mor3e responsible in the future?

If this is the case, then you write a letter and explain exactly what happened. Convince potential lenders that it was a one-time occurrence and it is not likely to happen again.  Your loan agent should help you with this and tell you exactly what to say.

  Even if this does not  work, it is still not time to give up. You just go looking for a sub prime lender. This is a lender who specializes in making loans to people who have been turned down by the "A" paper, or "Prime" lenders. Some of them will only loan to people with slight credit or income problems. Others will loan to almost anyone who is not currently involved in a bankruptcy.

  The worse your buyers' problems are, the more they will have to pay. It's a pretty simple formula.  The exact numbers will vary, but the general principal does not change. If an "A" paper borrower, with good income and perfect credit pays 8.5% interest with two points, then someone with a few credit problems can expect to pay at least 9.5% interest and someone with serious problems can pay as much as 14% or 15% interest and five to ten points, or more.

  The same thing applies, if your buyers are lacking down payment money. Nowadays, many lenders will make 90%, 95% and even 100% loans, with no down payment at all, but buyers must have good credit and be prepared to pay a higher interest rate and/or higher loan fees.

  This is just one more reason to pre-qualify buyers before you work with them.

  You want to be sure that your buyers understand what they will realistically have to pay and agree to it. You don't want them to go house hunting and base their budget on payments at 8.5% interest, if they are really going to have to pay 10% or more. On a $200,000 loan, that's a difference of more than $200 a month, plus any difference in the "points" or loan fee.

   So now, you know enough to advise your buyers on the loan process and help steer them through it, but your job is not quite done yet. The final thing you have to do, is to allow a reasonable period of time to get the loan and close escrow.

  Too often, real estate agents who are representing buyers, agree to unrealistically short escrow periods to please the seller and the seller's agent and then try to harass the mortgage broker and/or the lender when the loan won't close in time. This does no one any good and just makes for bad relations all around.

  You want to work with loan agents who are efficient and will do all they can to get your loans closed, but even if your buyers have been pre-qualified, you still have to get the property appraised and get final approval of the loan. Particularly if it's a Seller's market, with a lot of properties changing hands, this may take longer than you would like, so allow time for it.

  Ask your loan agent how much time they will realistically need to close the loan. Remember that you, your buyers and the mortgage broker or lender are all on the same side. You should be working together, not against each other. You should all be cooperating in any way you can, so you can all make money together.

  That's what it's all about. Real estate is a cooperative business and it's very hard to do it all by yourself. You will rarely wind up selling your own listings - that's why the Multiple Listings Service exists - and even if you do become a mortgage broker, you will rarely if ever, be able to get your loans closed without help.

 
  The better you understand, not only your own role in the process, but everyone else's too - from the lender or mortgage broker to the appraiser and title officer - the easier the business gets and the more money you can make.

  Good luck to all of you and thanks  for your time …… I'm now open for any questions ……………


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