For this issue’s Ask a Lender Column, Randy Thomas, sales manager for Guaranteed Rate’s Oak Brook office, answers a number of questions posed by Chicagoland Realtors in a variety of locations.
Q: Why is it that when I refer two clients that can put 20 percent down on a property with above average credit, they sometimes receive different interest rates even if they apply with the same company?
A: With the rapid tightening in the credit markets over the last few quarters we have seen a lot of changes in the mortgage industry. The effects of foreclosures and mortgage write downs have taken its toll on the global economy as well as our own backyards. Because of the huge losses, lenders have been forced to take a closer look at their lending practices and re-evaluate pricing based on models of different risk. This trickles down to every borrower so that the interest rates (or prices) quoted are based on transactional specifics now more than ever. For example, someone who is borrowing the same amount of money with the same credit score as someone else may receive a different rate if their property type or occupancy is different. Certain tiers of credit scores receive different rates, as well as other factors such as loan to value (LTV), escrowing of taxes, loan amount, debt-to-income ratios, lock in periods and cashing out more money on a refinance as opposed to re-mortgaging just what they owe.
Q: With all the changes in the mortgage industry over the last year, we are seeing more and more clients obtain FHA financing. Why is this and how does it differ from conventional financing?
A: FHA loans have had a variety of perceptions and connotations attached to them over the years. Most people in the industry, as well as consumers, have always felt that FHA loans were just for first-time homebuyers, or for those with challenged credit, and were issued by the government. While that statement is partly true in that both groups can benefit from FHA, and the loans are guaranteed by the government, it’s not exclusive to that group. In fact, it’s the opposite. Many people who have what’s considered excellent credit or are purchasing their next home can benefit greatly from an FHA loan. FHA is also a great alternative to a conforming loan because it allows for a 3.5 percent down payment with cheap mortgage insurance payments and easier requirements to qualify, in most cases. With the advent of recent legislation, FHA has also increased its loan limits up to $365,750 in Illinois.
Another misperception of FHA is that it will take “forever” to close; not true. The main difference on the transaction is the appraisal. FHA requires a closer look at the property to make sure certain specifics are in line with what FHA has set for a standard. This always helps the borrower’s interest to know that the property, not just the value, was looked at and was approved for FHA financing. A couple extra steps in processing and underwriting and it can virtually be the same timeframe to close as a conventional loan. For borrowers placing less than 20 percent down — with great credit, with challenged credit or for those who have a little higher debt-to-income ratio than what is required to go conventional — FHA is a cheaper and more resourceful alternative to a conventional loan.
Randy Thomas is the sales manager for Guaranteed Rate’s Oak Brook office. He has over 10 years of experience in the mortgage industry and works with many of the top agents in the city. Thomas can be reached at 630.440.6420 and by e-mail at firstname.lastname@example.org