The Mortgage Company and Home Loans

Behind the Scenes of the Mortgage Company

Does the idea of shopping for a home loan at a mortgage company make you uncomfortable? You're not alone. It is a very good idea to have some understanding of the inner workings or a mortgage company before you shop for a mortgage loan so that you know what questions you may need to ask and why.

What are the Minimum Requirements of Mortgage Loans?

Remember that the lender or investor will set minimum requirements on the funds used for mortgage loans. The mortgage company by law must conform to these requirements.

Fannie Mae, Freddie Mac and Ginnie Mae are sources of mortgage money and are, therefore, lenders. If the mortgage company is using these sources, then their requirements apply to the company's loans. The FHA and the VA insure loans, but they also set requirements on loans they insure. A mortgage company must comply when they use these programs. Private mortgage insurance companies have requirements that must be met before they will insure a loan to the lender.

The mortgage loan company is a go-between and must meet requirements in all directions of loan sources. Federal and state laws have certain mortgage requirements as well. One such provision in the Truth in Lending Act of 1969 requires the lender to disclose to the borrower the annual percentage rate (APR), and this tends to be confusing.

The percentage rate is computed by adding certain charges that the borrower has to pay back as a yield to the investor and is shown in the form of an increased interest rate. Under regulation Z on refinancing and second mortgage loans, there is a three-day waiting period after the loan closing before the money can be disbursed. This is called the borrower's "right of recision." The borrower can change their mind and decide not to go through with the deal, but mortgage companies have no such right. Mortgage companies are obligated to comply with the loan agreement.

The intent of the act is to show all hidden charges and to bring to light the true annual percentage rate of the mortgage loan. In other words, the borrower is given a three day grace period. Unfortunately, there may be an occasion when the home buyer feels that things have been misrepresented to him. This waiting period gives the home buyer a period to clarify all representations.

What is Buying a Commitment?

A mortgage company stays in business by buying ìforward commitmentsî on money to use for mortgage loans. These commitments are bought for a particular length of time. There are a number of sources for this money. Depending upon the commitment, the mortgage company follows the prerequisites of the lending source with respect to rising and falling of interest rates. The mortgage company may be required to deliver the loans to fill the commitment at the stated yield, even if the current market rate is below that yield. Another option is a commitment that may adjust to the current market rate.

What is Originating the Loan?

Taking the mortgage loan application from the borrower, processing all papers and documents for the purpose of obtaining a loan, and closing the loan are activities called "originating the loan."

The mortgage loan company charges a fee for originating the loan, but this fee generally covers only the costs involved. The origination fee is not a big money making aspect of the mortgage loan business. The FHA and VA set the maximum amount that can be charged for the origination fee. If the mortgage loan money comes from a state or county bond, the maximum origination fee will probably be preset.