Mortgage financing


The essay What's your best rate, tomorrow? deals with the interplay between interest rates and loan fees. This page deals with, for want of a better term, the component parts of the mortgage process.



In 1946 Frank Capra gave us It's A Wonderful Life in which Jimmy Stewart was the banker we all trusted. As some of us deposited funds, others in the community drew upon those funds for business and real estate. Little did Frank Capra know that twenty years later the Jimmy Stewarts' of rural America would be replaced by a friendly behemoth: FNMA,the Federal National Mortgage Association.

Henceforth there would be no need for Jimmy Stewarts or for deposits as a source of mortgage financing since FNMA would buy the loans from mortgage lenders - provided, however, that all the "t"s are crossed and all the "i"s are dotted. There would be standardized guidelines and standardized forms. Apparently this has worked so well that most of the standardized forms are used for jumbo loans as well as conforming loans.

The Uniform Residential Loan Application [FNMA 1003] is a five page form. You may download this form and present it to any mortgage broker or lender, although it is likely that each lender will transpose the data onto its own 1003.

The Housing and Economic Recovery Act of 2008 changed Fannie Mae's charter to expand the definition of a "conforming" loan. Two sets of limits are provided for first mortgages -- general conforming loan limits, and high-cost area conforming loan limits. San Francisco and Southern Marin real estate is so expensive that I do not recall any client ever applying for a conforming loan. The current year single family Loan Limits are posted on the FNMA site.

Conforming loans command the best rate/fee pricing because lenders can sell the loan back to FNMA immediately - sometimes the day after escrow closes. So, for example, if you're about to borrow a sum just over the FNMA maximum, you might consider adding cash so that you qualify for a conforming loan amount. But, as with all mortgage decisions, do the math over the period of time that you reasonably expect to be in your home. What is ideal for one, is not necessarily ideal for another.

You can browse today's "ballpark" interest rates for conforming, jumbo and adjustable loan products, by State, using sites like Bank Rate Monitor. The latter publishes daily averages based on its survey of 4,000 banks in 50 states. But such averages may or may not perfectly mirror actual local rates. Unless otherwise indicated, rates are quoted "at par", meaning "without points".

The APR [annual percentage rate] is a more accurate way to compare lenders since that calculation (required by Regulation Z) takes into mathematical account the loan fees associated with the loan. The "problem" with APR is that the formula assumes that you will keep the loan to maturity (e.g.., 15, 30 years). If , due to refinance or sale, you pay the loan off before the end of its stated term then you will have incurred a much higher APR. For example, assuming that you incur $3,000 in financing-related charges on a 30 year fixed loan, the APR formula will spread those charges out over 30 years, at $100 per year. What if you refinance in 3 years? Then you will have effectively paid $1,000 per year.



There are two major mortgage loan programs in which the borrower deals with a participating lender but the federal government guarantees that if the borrower defaults, the government will make good on the loan.

First is the FHA [Federal Housing Administration] loan. No credit scoring. Previous bankruptcy is acceptable. Minimum 3% down payment - which may be by gift. Single family rates and multi-family rates are based on the area's cost of living. Mortgage insurance is part of the equation.

There is a private site that does a better job in making sense of FHA programs than the HUD site. It is: Don't submit anything at this site unless you understand to whom you are talking.

Second is the VA loan, available only to qualified veterans. The current Loan Limits are posted on the VA site.



HELOC: A Home Equity Line Of Credit differs from a home equity loan or mortgage in that you owe no interest unless/until you draw down on the line of credit. Even though it is secured by the equity in your home, it looks/feels more like a credit card than a mortgage. The interest rate is usually based on Prime plus or minus basis points.

Because of our volatile housing market it might be risky to sell a home and THEN attempt to locate a replacement home. An alternative approach would be to place a HELOC on the current home and borrow the down payment only if/when a replacement home was found; and/or use the line of credit to make substantial repairs to the current home prior to placing it on the market. Unless - as they say - cash is not an issue.

To make life easier, these lines can often be established on a stated/stated basis: this means that the lender takes your word for the income and assets; the information is undocumented. It is my understanding that for most HELOCs the lenders pay for all costs of the line, including the appraisal, escrow fees, title insurance premium, and even the mortgage broker. You pay approximately $500. Translation: the industry really wants this business.

It is my further understanding that using a HELOC as a substitute for the most expensive bridge loan may be frowned upon by the mortgage industry because lenders want to profit from the long term use of the line of credit. And as explained above, the lender has gone to some expense to establish the HELOC. So if the line is closed too quickly some lenders impose an "early termination fee" that may run a few hundred dollars.

There are important collateral issues. For example, does the process outlined above constitute "borrowing the down payment"?

Unlike in law and in medicine, in real estate folks often turn to friends and "really nice persons" for advise. This is one area where I would recommend using a seasoned professional who understands HELOCs. And ask a lot of questions.



There are three national repositories of credit data:

Experian (formerly TRW)
Equifax (formerly CBI)

Do not purchase a report until you read the following.

By recent amendment to the Fair Credit Reporting Act (FCRA), beginning December 1, 2004, in the western states, everyone is entitled to a free credit report from each of the three named repositories, every year. To ensure that your request is secure do NOT respond to email or pop-up ads. Rather, go to the Federal Trade Commission site and follow its link to the free credit report website. That site has been constructed jointly by the three major repositories for purposes of providing these free annual reports. The reports do NOT include the corresponding FICO Score (see, below).



In the '60s it was gospel that anyone over thirty was not to be taken seriously. So one can imagine how poorly B.F. Skinner was received. Not only was he over thirty, he argued that all behavior originated outside of man. Therefore, to understand human behavior all we need is the knowledge of the external causes of an action and the action's consequences. Man is simply a responder, a product of his environment and genetic inheritance.

This was unacceptable to those of us who treasured the dawning of the Age of Aquarius.

But, perhaps Skinner was right. Folks in my home County of Marin doing business as Fair Isaac Company have apparently taken Skinner to heart. They have developed a proprietary model which assigns a score to our credit patterns. It is such an accurate scale that the mortgage industry has adopted it as the most important indicator of credit worthiness.

FICO scores are apparently weighted as follows: 35% of your score is based on payment history on your accounts; 30% is based on outstanding debt, and unpaid balances; 15% is based on length of time you have been a debtor; 10% is based on how much new debt you have recently incurred; and the final 10% is based on the types and "mix" of your credit accounts.

The FICO model is imposed on a data base and returns with a score. We each have three credit databases - the three credit repositories discussed above. So, we will have three FICO scores! It is the current practice, when running a merged credit report, for mortgage lenders to pick the "middle" score as your FICO score.

You can purchase all three credit reports, together with the FICO score that applies to each one, directly from



My overview is at Return to GO.



For those that "love" on-line real estate calculators I recommend what may be the Mother Of All Calculator Sites. It includes an amortization graph that moves as your cursor toys with interest rate and time period tabs.

Or try the real estate calculators offered by the folks at Nolo Press.

The amortization calculator offered by BankRate is especially useful because it permits you to calculate the effect of adding to one or more installment payments, in excess of the minimum payment, and to visualize its effect on the bottom line.


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