Are Mortgage Brokers Evil?

In the 1990’s everyone was crying about how evil lawyers and contractors are. Lawyer jokes were common tales told around cocktail tables and functions. At the turn of the decade, mortgage brokers were added to the list and they too are under a lot of scrutiny and the pun of many jokes.

Are mortgage brokers evil? The answer is simple no. Are there shady mortgage brokers that will try to con you out of your hard earned money? Off course! Every profession has bad apples! Are these bad apples the majority? No, let’s discuss why.

1) Mortgage brokers want your business – Most mortgage brokers work on commission and rely heavily on word of mouth advertising to generate clients. Furthermore, 50% of a good mortgage brokers business is repeat customers; mortgage brokers have an incentive to service their customers properly and keep them in the long haul.

2) The competition keeps them honest – Given the influx of many new mortgage brokers in the last couple of years, the mortgage business is a very competitive field. There are a large number of brokers competing for a small base of customers. Brokers will almost always give you their best rate in order not to loose your business. Remember, brokers don’t get paid until they fund the loan. This is also a good reason to speak to at least four different brokers from different companies, let them compete for your loan and you will almost always shine at the end.

3) The law is there to protect you – God bless America! We have many laws in this country that govern mortgage brokers and let me tell you that the lending laws are not very forgiving in this country. Mortgage brokers will take a lot of heat when they do shady deals and all it takes is one simple complaint. Make sure you get everything in writing from your broker and you will be protected, simply as that.

The Bad about Mortgage Brokers

Mortgage brokers do not fund your loan themselves; they use wholesale lender and banks to find you the right loan and save you money. The problem arises in how they are compensated. Wholesale lenders do not set interest rates, nor do the brokers. The going interest is dictated by the secondary mortgage securities market. How rates are dictated is a discussion by itself, which is unimportant in our discussion.

Lets simple assume the going “par rate” for a 30 year fixed mortgage is 6%. If the mortgage broker funds your loan at 6% the mortgage broker makes zero in commissions. The higher the interest rate they close your loan with, the more commission they receive. Moreover, if they charge you an interest rate below 6%, they have to pay money out of their own pocket to fund the loan, or charge the client what is called a “discount point” to get the rate they want. Luckily the law has a cap on how much of a commission a broker can make on a particular loan. Nonetheless, your goal should be to lower the interest rate as much as possible.

What is the lesson to be learned here, when mortgage brokers quote you a rate, they have room to lower it; unless they gave you par pricing, which is not likely. Given our example above a broker might quote you 6.5%, where the broker makes $2,000.00. If you are a good negotiator you can get the broker to lower the interest rate, where the broker only makes a $1,000.00 on the deal, you will save big bucks!

Be Careful Of the Fees

By law, a mortgage broker is permitted to charge you a fee for finding you the right loan. When negotiating, don’t neglect these fees. Find out what they are and make sure you talk to them about it. Fees are negotiable; don’t let anyone tell you otherwise. The thing to ask yourself for when looking at fees is, what am I paying this fee for, is it for an appraisal, notary service, processing etc? Is the fee there because something must be done to fund the loan and is nessesary or is the broker just trying to make some money off of me? Remember, the broker makes his money on the interest rate spread between what he charged you and what the “par rate” is. Fees outside of that are considered “Junk Fees” and should be avoided if possible. If the broker, charged you a super low rate, give him a little, they need to make money somewhere.

Pounding Your Mortgage Broker

To successfully get the best rate on your loan with a broker, keep in mind that the broker needs to make a living. If you grind them too much, chances are they will not take you seriously and simply not want to do the loan. Be reasonable, let the broker make money off of your loan and they will work hard to get you the lowest rate. The broker can go back to the wholesale lender and grind them for a lower rate, but if there is no money in it for the broker, there is no incentive.

What I suggest is to speak to a couple of different brokers and let them compete. This has been a very daunting task up until recently; luckily there are many good mortgage lender website online that will analyze your needs and match you up with four of the best lenders according to your situation. What would take days to do flipping through the yellow pages now takes 60 seconds online.

A Quick Commercial Property Investment Guide

As the residential investment property market becomes fierce, many investors are starting to recognise commercial property as a viable investment option. So, don’t put all your eggs in one basket and consider diversifying your investment portfolio by investing in commercial property.

What is Commercial Property?

The term commercial property (also referred to as commercial real estate, investment or income property) refers to building or land intended to generate a profit, either from capital gain or rental income.

What Type of Property is included in Commercial Real Estate?

Commercial real estate is classified as property assets that are primarily used for business purposes. Commercial real estate is commonly divided into the following categories:

1. Office buildings

2. Industrial property

3. Retail/Restaurant

4. Multifamily housing buildings and

5. Farm/Rural land.

In addition to the above, commercial real estate can include any other non-residential properties, such as:

>> Medical centres

>> Hotels

>> Warehouses

>> Malls and

>> Self-storage developments.

What are the differences between Commercial Property and Residential Property Investments?

When you invest in commercial real estate, you still expect to rent out your property and receive rental income from a tenant as you do when you purchase a residential property investment. However, the major difference between investing in commercial real estate compared to residential property is the Rental Agreement. With commercial real estate, the property is usually leased to a business under a detailed contract for a much longer period (e.g. three, five or ten years).

There are some other important differences such as:

>> The Tenant is usually called a Lessee;

>> Vacancies between tenancies can be longer;

>> Goods and Services Tax applies to commercial real estate (i.e. to the purchase price, rent received and any expenses in relation to the property); and

>> Maintenance costs are usually paid for by the Lessee, which means net rental income tends to be higher.

What is an Annual Return on Investment?

The “annual return on investment” is the amount earned on the investment property. The amount earned, is expressed as a percentage, and it is called the property’s “yield”.

So, if you are considering investing in commercial real estate. You should always ask yourself the following questions:

1. What return on investment will you get?

2. What is the property’s yield?

How is the Yield calculated?

Yield calculations are worked out by dividing the annual rental income on the property by how much the property costs to buy. For example:

Gross Yield = annual rental income (weekly rental income x 52) / property value x 100

This is best illustrated by using the following example:

>> Assuming you buy a property for $950,000; and

>> Rent the property out for $2,000 per week ($104,000 annually).

Your Gross Yield will be 10.9%. It will be calculated in the following way:

($104,000/ $950,000) x 100

If you want to invest in a commercial property, you need to keep in mind all the information mentioned here. You can seek help and guidance from a professionally qualified and expert finance broker, who specialises in obtaining the right funding for your investments.

Truly, having an independent and expert finance broker on your behalf can secure your eligibility for a commercial property loan, not to mention get you the best loan deal that suits your individual needs and objectives.

Why Using a Mortgage Broker Can Save You These 7 Loan Application Mistakes

1. There are too many credit enquiry notations on your credit file.

Mortgage Lenders do not like doing work for nothing, and I guess it is only natural that borrowers want to ensure they get the best deal. The problem hits the fan when you rack up too many hits on your credit file, and alarm bells start ringing at all lenders, as they all have access to the same credit files. The result can be you get your application declined from all lenders!

Loan Application Tip: Don’t sign [or give verbal approval] to any lender to access your credit file, till you have decided which lender you will be applying with. Get your Mortgage Broker to apply for the best loan you are eligible for after he or she has properly qualified your needs.

2. Your home loan submission is poorly written.

Any innocent or deliberate errors or omissions in answering questions about your credit history and your partners, can be viewed as suspicious or even fraudulent by the lender or mortgage Insurer. Most people don’t know that what you don’t say [omissions], can at law be taken as a misrepresentation of the facts.

Loan Application Tip: Have your Mortgage Broker get your credit report for all parties to the loan before you submit your loan application. Ensure that your Mortgage Broker writes a synopsis to cover your mortgage application, explaining why the loan should proceed and ironing out any wrinkles there may be.

This extra work on the part of your Mortgage Broker can get your loan application over the line, especially where your broker is a trusted party in the home loan process with a lenders back office team.

3. Your proposed home is appraised as less than the purchase price agreed.

When a property value is appraised by the lender’s valuers as less than the purchase price, you have a problem.

Because banks only lend on Loan to Value Ratios. For instance let us say that your $400,000 home is valued at $360,000. 10% deposit is 40,000 and costs are say $8,000. Yes, you have the $48,000 required. But the bank will only lend on 90% of $360,000 [the appraised value, or $330,000. With your $40,000 deposit that makes a total of $370,000 and you are $30,000 short.

Loan Application Tip: A Mortgage Broker will give you the options you need to try to resolve this, including re-negotiating the price down with the sellers agent, getting the lenders to have the valuers re-appraise, or asking the lender to appoint a new valuer [at your cost].

Another solution may be to get a new lender who has a valuer that may be more appreciative of the value of your proposed home. Finally, you may have to find another home that values better.

4. Your Lender says you have insufficient savings, deposit or income.

Down payments and income requirements and payment capacity can vary between lenders.Also, the deposit is not all the money you need to complete a home settlement. You will have conveyance lawyer costs, property tax and other costs that might include mortgage insurance, property and mortgage stamp duty.

Loan Application Tip: Ensure that you have the funds for your costs, in addition to your down payment. Your mortgage Broker can help you with all of this.

AND/OR, find a mortgage lender who has less home loan deposit requirements, or who pays your mortgage insurance for you, OR find a lender that requires no mortgage insurance as they carry that themselves.

5. You have changed jobs, or employment status recently.

Many residential mortgage lenders, [or their mortgage insurers] view changing jobs in high unemployment times as a sign of instability that may lead to you defaulting on the loan.

The other problem is that if you are on probation for 3 to 6 months, your income cannot be assessed as proof of income till the probation period has lapsed.

Loan Application Tip: Your Mortgage Broker may find a lender who calculates your repayment ability in a more favourable way, or a lender that will take a letter from your employer that your job is secure beyond probation, and then get that letter from your employer.

If that is not possible your Mortgage Broker will find a sub-prime or low doc lender to approve your loan for you.

6. You have no savings history or irregular savings patterns.

Banks like to see stable incomes and regular savings for at least 6 months prior to the loan application. This shows you can plan for buying a home. They want to see predictable inputs and outputs, as this has proven to be valuable in having less repayment pain down the line.

That can be good for the borrower and the lender.

Many banks do not like ‘unsaved deposits’ or irregular savings from windfalls and the like. If you are self employed or have seasonal ups and downs, that can be a problem.

Loan Application Tip: Your Mortgage Broker will source your loan from lenders that allow unsaved deposits, gift deposits and parent help with collateral, and parent joint ownership options, including shared equity mortgage options.

Or your broker may use lenders that specialise in small business owners and the self employed if that is your situation.

6 a. You or your partner have a bad credit rating or history.

Bad credit is often result of breaks in income streams, because of the reasons listed in point 6 above. After all the bills don’t stop just because your income does. It might be a good idea to run a credit check to find out your credit rating and credit score before you apply for a home loan, not be told by the lender that your loan application has been declined due to a poor credit score. Many Mortgage Brokers are set up to give this service, or you can apply for a credit report from the major credit reporting agencies

Loan Application Tip: If you or your partner have a poor credit history your Mortgage Broker will have already performed a credit check, and may use a nonconforming lender, that lends to borrowers with past credit issues, usually at a higher interest rate, at least for the first one to three years. Some non conforming loans are good deals!

7. The home of your dreams is undesirable in the eyes of the Mortgage Lender.

We have talked about a poor appraisal coming back, and the home being under valuation. But lenders may also have policies on the type of property they require to be pledged as mortgage security. Problems can occur with unacceptable postcodes, residential property deemed rural, rural property over 5 acres, 10 acres or 25 acres.

Loan Application Tip: Residential mortgage loans cannot be used for working farms for instance. The smaller acreages would not be viable as a working farm, and therefore may be considered as “residential rural”.

Also ‘dual key apartments’, and “ultra low area” housing units may also be unacceptable to your lender. The central policy theme in rejecting these types of security is that the property resale may take longer than the specified time to resale [usually 3 months], should the lender need to exercise a mortgagee in possession sale.

In these cases your Mortgage Broker will assist you to find niche lenders that are comfortable with these types of security, or you may need to find a property that is more in demand that the type you have selected.

Summary

Mortgage Brokerage is normally a fee free service to the borrower. So using a Mortgage Broker to help you get your home loan approved quicker and easier makes sense. Mortgage Brokers can also save you from making these eight common loan application mistakes when applying for a mortgage loan. Whilst having your loan application declined may be overcome, and you can get a great home loan without using a Mortgage Broker, why deal with the stress and bother when a Mortgage Professional can take care of everything for you and do things right in the first instance?