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Rising Tides of Mortgage loan Applications |
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After a few grueling years, investment banking and mortgage loan investments are making a comeback. The IPO pipeline is building again. And, of course, M&A is back with a vengeance, with a string of high-profile deals like P&G (NYSE: PG)-Gillette (NYSE: G), and Sprint (NYSE: FON)-Nextel
(Nasdaq: NXTL). While big firms like Goldman Sachs (NYSE: GS) and Morgan Stanley (NYSE: MWD) are benefiting from the boom of mortgage loan market, there are mid-tier players that are also doing very well. A case in point is Friedman, Billings, Ramsey Group (NYSE: FBR). However, FBR wants to sustain its growth over the long haul. Consequently, it has made substantial investments in hiring senior employees, technology upgrades and branding campaigns (such as the sponsorship of the FBR Open golf tournament). As the cash flow streams in, FBR is trying to target high-return markets. Thinking unconventionally, the company is making a big bet on the mortgage loan market. For example, FBR recently spent $88 million for First NLC Financial Services LLC, which is a subprime mortgage loan originator. This firm specializes in higher-risk mortgage loans. However, FBR believes that credit scoring techniques are much better and that the business can generate strong risk-adjusted returns. Also, FBR plans to protect itself with private mortgage loan insurance options and other innovative strategies. No doubt, there is skepticism about this strategy, as the mortgage loan business can be quite volatile. But, if FBR can achieve its goal of an 25% return on equity on the subprime mortgage loan portfolio, investors will certainly be happy. The mortgage loan application process requires considerable paperwork. First there is the application form, which asks for detailed information about you, your employment record, the house you want to purchase, etc. The lender will need documentation pertaining to your personal finances--your earnings, your monthly expenses, and your debts--to help gauge your willingness and ability to repay the mortgage loan. Lenders also will examine your file at the credit bureau to learn if you pay your bills on time. A lender may reject your application if the report shows that you have a poor credit history. Thus, you may want to make sure your credit file is accurate before you apply for your mortgage loan. You have a right to know what information is contained in your credit report and to have someone from the credit bureau help you understand what the report says. The names of credit bureaus can be found in the phone book. You can prepare for questions about your financial condition by using the worksheets in this brochure. The maximum mortgage loan amount will be determined by the value of the property and your personal financial condition. To estimate the value of the property, the lender will ask a real estate appraiser to give an opinion about its value. The appraiser's opinion can be an important factor in determining whether you qualify for the size of mortgage loan you want. Lenders usually will lend the borrower up to a certain percentage of the appraised value of the property, such as 80% or 90%, and will expect a down payment making up the difference. If the appraisal is below the asking price of the home, the down payment you planned to make and the amount the lender is willing to lend you may not be enough to cover the purchase price. In that case, the lender may suggest a larger down payment to make up the difference between the price of the house and its appraised value. When looking at your projected mortgage loan payment and existing debt, some lenders might use ratios such as 28 and 36 to determine whether you qualify for the mortgage loan. These are commonly used ratios. In the case of 28 and 36, the 28 refers to the percentage of your gross income (before taxes) that may be spent on housing expenses, including principal and interest on the mortgage loan, real estate taxes, and insurance. The 36 refers to the income that may be spent for payments on all your debts (including the mortgage loan): the monthly payments on your outstanding debts, when added to the monthly housing expenses, may not exceed 36% of your gross income. When you talk to a lender, find out what ratios will be used to evaluate your application. Then use Worksheet 2 to calculate whether you are within the lender's guidelines. Be prepared to provide certain documentation about your income (W2s for prior years and year-to-date pay stubs), current debts (account number, outstanding balance, and creditor's address for each), and the purchase contract for the home you want to buy. When you file your application, ask the lender how long the approval process will take. The time may vary depending on the complexity of your mortgage loan, current market conditions, and whether you have to provide additional information. It's common for a decision to be made within 30 days after the lender receives all the necessary information. Applications for FHA or VA mortgage loans may take longer. If your application is turned down, federal law requires the lender to tell you, in writing, the specific reasons for the denial. Make sure you understand the reasons given--you may be able to find answers or alternatives that will satisfy the institution's lending standards. Even if that doesn't happen, understanding fully why the mortgage loan was denied may improve your chances with the next lender you visit. |
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