When considering purchasing property utilizing a mortgage loan or refinancing a home with a mortgage loan, it is wise to shop. However, there are many confusing issues and industry terminology that can prevent the prospective borrower from finding that best rate at the least cost. The following is a basic primer for shopping for the best overall deal on a mortgage loan. Below is a small sample of what a loan officer looks at in order to work with the borrower on the loan.

RATE 10 DAY 25 DAY 40 DAY Loan Amount Cashout Refinance RATE 10 DAY 25 DAY 40 DAY
7.375 (3.500) (3.375) (3.125) -Loan Amt $110,000 and above add 0.000 -Cashout LTV 70.01% -
80% add 0.500 7.000 (3.125) (3.000) (2.750)
7.250 (3.125) (3.000) (2.750) -Loan Amt $75,000 to $109,999 add 0.125 -Cashout LTV 80.01% -
90% add 0.750 6.875 (3.000) (2.875) (2.625)
7.125 (2.750) (2.625) (2.375) -Loan Amt $50,000 to $74,999 add 0.250 Reduced MI Option 6.750
(2.625) (2.500) (2.250)
7.000 (2.375) (2.250) (2.000) -Loan Amt $40,000 to $49,999 add 1.000 -Reduced MI 12% add
0.375 6.625 (2.250) (2.125) (1.875)
6.875 (1.875) (1.750) (1.500) -Loan Amt under $40,000 add 2.000 -Reduced MI 18% LTV<= 95%
add 0.750 6.500 (1.875) (1.750) (1.500)
6.750 (1.500) (1.375) (1.125) Occupancy -Reduced MI 18% LTV>95-97% add 1.50 6.375 (1.500)
(1.375) (1.125)
6.625 (1.125) (1.000) (0.750) -Non-Owner LTV 80.01% - 90% add 2.500 Other 6.250 (1.000)
(0.875) (0.625)
6.500 (0.625) (0.500) (0.250) -Non-Owner LTV 75.01% - 80% add 2.000 -FICO < 620 add 1.000
6.125 (0.625) (0.500) (0.250)
6.375 (0.125) 0.000 0.250 -Non- Owner LTV 0-75% add 1.50/3-4 unit add 2.25 -Floor/Pool Escrow
add 0.250 6.000 (0.250) (0.125) 0.125
6.250 0.500 0.625 0.875

Notice on the second line from the bottom is 6.375 in the column titled RATE. Following to the right are three numbers in columns titled, 10 DAY, 25 DAY and 40 DAY. These numbers represent what to the loan officer’s broker receives as a pay back from the lender. This is commonly referred to as the yield spread percentage. So, notice that if the loan officer could close the loan in ten days the broker would receive .125 of 1 percent of the loan amount. Therefore, if the borrower gets a $200,000 loan the broker would receive from the lender $250.00. If the loan officer takes 25 days to close the loan the broker receives zero. A rate quoted that has a zero pay back to the broker is an at “par” rate.

Typically, it is very difficult to close a loan in less than 25 days from the time the prospective borrower first contacts a loan officer. So, if a prospective borrower asked a loan officer what the rate for an A paper, conforming loan with a 30-year fixed rate at par was on the day that the lender had provided the loan officer with a table of rates as shown above, the answer would be 6.375%. If the loan officer works to give the borrower a rate at par, then they must charge an origination fee in order to make money to pay for their service to the borrower. However, if the borrower wants a “no cost loan” (different from a “no out-of-pocket loan”), then the loan officer must use a higher rate so that he can give a broker credit to cover the costs for the borrower.

In the table, above the loan officer may use a rate of 7.375%, which means the broker will get 3.375% ($6675 on 200K) in yield spread premium from the lender. Then at closing, the loan officer will give a broker credit to the borrower to cover costs such as underwriting fees, title fees, appraisal fee, etc. that are third party costs required in a loan transaction by convention and law. The remaining amount is the broker gross profit. Generally, the lower rate will save much more in interest costs over time than the reduced costs of the loan at a higher rate, but that depends on the longevity of holding the property.

There are numerous type of loans besides A paper conforming such as government (FHA, VA), jumbo, A-, expanded, sub-prime, etc. All of them have associated rates and yield spreads. There are also junk fees that are fees generally charged to the borrower, that really When considering purchasing property utilizing a mortgage loan or refinancing a home with a mortgage loan, it is wise to shop. However, there are many confusing issues and industry terminology that can prevent the prospective borrower from finding that best rate at the least cost. The following is a basic primer for shopping for the best overall deal on a mortgage loan. Below is a small sample of what a loan officer looks at in order to work with the borrower on the loan.

RATE 10 DAY 25 DAY 40 DAY Loan Amount Cashout Refinance RATE 10 DAY 25 DAY 40 DAY
7.375 (3.500) (3.375) (3.125) -Loan Amt $110,000 and above add 0.000 -Cashout LTV 70.01% -
80% add 0.500 7.000 (3.125) (3.000) (2.750)
7.250 (3.125) (3.000) (2.750) -Loan Amt $75,000 to $109,999 add 0.125 -Cashout LTV 80.01% -
90% add 0.750 6.875 (3.000) (2.875) (2.625)
7.125 (2.750) (2.625) (2.375) -Loan Amt $50,000 to $74,999 add 0.250 Reduced MI Option 6.750
(2.625) (2.500) (2.250)
7.000 (2.375) (2.250) (2.000) -Loan Amt $40,000 to $49,999 add 1.000 -Reduced MI 12% add
0.375 6.625 (2.250) (2.125) (1.875)
6.875 (1.875) (1.750) (1.500) -Loan Amt under $40,000 add 2.000 -Reduced MI 18% LTV<= 95%
add 0.750 6.500 (1.875) (1.750) (1.500)
6.750 (1.500) (1.375) (1.125) Occupancy -Reduced MI 18% LTV>95-97% add 1.50 6.375 (1.500)
(1.375) (1.125)
6.625 (1.125) (1.000) (0.750) -Non-Owner LTV 80.01% - 90% add 2.500 Other 6.250 (1.000)
(0.875) (0.625)
6.500 (0.625) (0.500) (0.250) -Non-Owner LTV 75.01% - 80% add 2.000 -FICO < 620 add 1.000
6.125 (0.625) (0.500) (0.250)
6.375 (0.125) 0.000 0.250 -Non- Owner LTV 0-75% add 1.50/3-4 unit add 2.25 -Floor/Pool Escrow
add 0.250 6.000 (0.250) (0.125) 0.125
6.250 0.500 0.625 0.875

represent nothing more than additional broker profit under different names. Reputable brokers avoid the use of junk fees. Regulations require that loan officers provide the prospective borrower with a “Good Faith Estimate” that outlines all costs of the loan and a “Truth In Lending” document that uses all the costs of the loan plus the quoted rate to determine a true annual percentage rate on the loan. Large brokers have a hundred different lenders and lenders will get more aggressive from time to time, dependent upon their own desire to collect loans. Thus, a loan officer who is really working for the borrower will shop those lenders for best rate and terms.

Armed with a “Good Faith Estimate” and a “Truth In Lending”, the borrower should be able to compare offers between loan officers. However, the controlling document, which is the “Good Faith Estimate”, is only an estimate and changes to it at the time of closing can be substantial (a few thousand dollars, yet still within guidelines of change in costs as a percentage of the loan). This is legal and necessary as conditions and underlying issues are such that the loan officer may not know all the facts at the time of the loan application. Lender’s underwriters sometimes introduce issues that cause a different rate to get approval. However, changes are often used as a ruse to build in more profit at the last minute when the borrower is committed to the purchase of property on a timetable that cannot be changed without suffering other losses. The way to avoid the problem is for the borrower to be very honest and specific with the loan officer and the loan officer to be so with the borrower, taking the time necessary to understand all of the issues.

Banks and their loan officers are under different regulations than the broker, but the theory of the transaction is the same. Unlike the broker, loan officers only have their bank’s product to offer. The underlying issues are the rate and the costs, therefore study and understand the “Good Faith Estimate” and the “Truth in Lending” documents. The borrower can then shop. Loan officers will lower their fees, but the borrower needs to provide the each loan officer contacted with the same complete information, to get a clear picture. Then the borrower still should go with the loan officer they feel will hold to the “Good Faith Estimate”, lock the rate and not come with surprises at the last minute - even if the loan offer is not at the lowest cost and rate. In the purchase of real estate, the buyer can negotiate much more in savings on the price of the house than they can typically save on the cost of the loan. Realtors will reduce fees to close a deal and there is typically more money to work with on in that transaction than there is on the loan.