What determines mortgage rates and how to prepare for the approval underwriting process? 

Contributed By, Klaus Jensen   kjensen@mortgagemasterinc.com

Klaus Jensen joined Mortgage Master Inc. in 2002 as a Residential Loan Officer. He has over 12 years of marketing and management consulting experience. He was recognized in Mortgage Originator Magazine as a Top 50 Rookie Originator in 2003, coming in as the number 6 originator in the country with loan volume of $76 million.  In 2010 he was in the Top 50 nationally with loan volume well in excess of $100 million. In 2011, he was ranked 36th by Scottsman Guide on a national basis with loan volume topping $110 million. 

Klaus offers his clients a level of expertise and analysis that goes beyond simply having the best rates. He has established himself as a specialist in creating beneficial borrower alternatives through diversified product offerings and hi-end loan offerings. 

Klaus resides in Duxbury, MA with his wife, Pam, and three children, Helena, Bronwyn and Reese. He earned an MBA from the Amos Tuck School at Dartmouth College in 1995 and BS in Mechanical Engineering from Yale Engineering in 1988. In his free time Klaus enjoys family activities such as hiking and skiing as well as spending time in Maine at their lake cottage.  You can reach Klaus at 617-320-4287.

There are two common questions about mortgage rates that seem to arise again and again.  The first is “how are mortgage rates determined?”  followed by “how does the U.S. Federal Reserve affect mortgage rates?”

Mortgage rates fluctuate based on the daily trading of Mortgage Bonds or Mortgage Backed Securities (MBS). Many people often turn to the 10-year Treasury Bill performance as an indicator of where mortgage rates are trending. The 10 year T-Bill performance, however, is not always correct in foreshadowing mortgage rates.  It is not uncommon for mortgage rates to move in a completely different direction compared to the 10-year T-Bill. Using the 10 year T-Bill as a sole indicator of where mortgage rates are trending could lead you to make a poor financial decision. That being said, trying to time the market of when to lock is more luck than skill for most people.  A competent mortgage professional should be able to help you manage and gauge the market risk relative to locking in a rate.

The Fed lowered the rates, so why aren’t mortgage rates going down?  

When the Fed lowers the short-term discount rate, it is designed to stimulate consumer spending on short term-term credit (e.g. car loans, credit cards and lines of credit.) The short-term discount rate has little effect on mortgage rates.  Said differently, the Feds do not set mortgage rates (as explained in previous paragraph). Often when the market spots a short-term stimulus, investors bail out of the safe haven of bonds (or mortgage backed securities and move these dollars into stocks.  When this happens, the stock market rallies and the price of bonds falls – both of which cause long term interest rates (such as mortgages) to go up.

How to be prepared for today’s tighter mortgage approvals

The days of “low doc” or “no doc” loans are long gone.  Most lenders have adopted much tighter underwriting guidelines as a result of the recent mortgage crisis and economic recession.  As a result the documentation requirements can seem excessive and maybe even onerous to some. However, if you are well prepared and organized, it is really not any different than say 10-15 years ago, prior to the most recent housing boom. Here is a short list of what to be prepared for:

Income verification.  Be prepared to show at least two recent paystubs. Also, be ready to supply your two most recent year’s worth of complete tax returns. Complete means you will need to include all schedules, copies of W2 and 1099 forms and K-1 statements if applicable.  Most lenders will accept an electronic pdf version.

Asset verification.  You need to demonstrate that you have the assets for your down payment. Some lenders will also require that you show up to 6 months of reserves after you net out the down payment.  For the down payment, be prepared to document two consecutive months of account statements – the statements must be complete and include all pages – not just the summary pages.  Equally important is that you need to be prepared to show a tight paper trail for all deposits and transfers that are larger than $1,000. A sufficient paper trail is copies of checks deposited, expense accounts, other statements showing funds transferred out.  If you are receiving a gift from a relative towards the purchase down payment, the lender will ask for these funds to be verified.  Finally, most lenders will require you to demonstrate that the deposit checks you used for the offer and the Purchase and Sale agreement have indeed cleared your account.

Purchase and Sale Agreement.  It is a good idea to consult not only with an attorney relative to the review of the P&S but also a competent mortgage professional. Certain language and items (such as repairs) need to be treated carefully so as to not cause problems in underwriting.  For example, if you put in the P&S that “seller is to repair broken ceiling fan” the lender will require you to demonstrate that in fact the ceiling fan has been repaired. This can often cause costly delays and/or reinspections far exceeding the value of the repair.  You may be better off with a small price concession or closing credit from the seller and then fix minor repairs after you move in. Then you can have them fixed on your terms and your standards.

Condominiums.  If you are purchasing a condominium, please consult a mortgage professional before making the offer.  Many lenders have very tight lending parameters around condos such as owner occupancy rates, pre-sale requirements on new condos, affiliation with resort like amenities (ski condos can be problematic) and rental clauses.  Some lenders will not lend against certain condo complexes thus making financing more difficult and also more expensive.

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