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FREEandCLEAR Mortgage Expert Blog

Welcome to the FREEandCLEAR Mortgage Expert Blog! The FREEandCLEAR Mortgage Expert possesses over 40 years of mortgage industry experience and uses this blog to bring you insights on the latest mortgage market news and developments. We also use the FREEandCLEAR Mortgage Expert Blog to launch and highlight features, functionality and content offerings on FREEEandCLEAR.com so sign up below to receive blog updates via email or check back frequently.

 
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POSTED: Wednesday August 16, 2017

Big banks may be losing share of the mortgage market but they continue to hold mindshare when borrowers shop for mortgages.  While specialized mortgage banks have experienced significant growth over the past several years, most mortgage borrowers still turn to big banks when they compare lenders according to the FREEandCLEAR Mortgage Survey.   When asked “what… Read More

POSTED: Wednesday August 16, 2017

Big banks may be losing share of the mortgage market but they continue to hold mindshare when borrowers shop for mortgages.  While specialized mortgage banks have experienced significant growth over the past several years, most mortgage borrowers still turn to big banks when they compare lenders according to the FREEandCLEAR Mortgage Survey.

 

When asked “what type of lenders did you contact when you got your mortgage (select all that apply)?”, 50% of borrowers selected “Big Bank”, which ranked as the top survey response.  Given the tarnished reputation of big banks as well as recent scandals, we were somewhat surprised that borrowers selected big bank more than any other type of lender.  The high ranking for big banks is likely attributable to borrowers having existing checking or savings account relationships with the banks as well as borrowers wanting to get a mortgage quote from a known brand.

 

types of lenders for mortgage

Types of lenders borrowers contact for a mortgage

 

The surprising results extended beyond the top of the survey as smaller, local lenders placed relatively high.  “Local Bank” and “Mortgage Broker” tied for the second highest response, with each type of lender garnering 38% of borrower responses.  Industry regulations implemented since the mortgage crisis have made business more challenging for both smaller lenders and mortgage brokers but they continue to be an important resource for borrowers and more importantly, a viable lending option.  The results of the FREEandCLEAR Mortgage Survey suggest that borrowers like having multiple lender choices — both big and small — when they shop for a mortgage.

 

The bottom results of the survey are also highly informative with “Credit Union” and “Mortgage Bank” ranking fourth and fifth, respectively.  28% of borrowers said that they contacted a credit union when they got a mortgage, which is roughly consistent with credit unions’ share of the overall mortgage market.  As credit unions continue to grow their membership bases and expand their mortgage lending options you would expect them to increase their borrower mindshare in the future.

 

Perhaps the most surprising finding from the survey is that only 23% of borrowers said that they contacted a “Mortgage Bank” when they got a mortgage.  Mortgage banks that focus exclusively on mortgages without taking borrower deposits or offering other lending products have gained significant market share over the past half decade.  Despite their strong growth, mortgage bank attracted the lowest response rate among surveyed borrowers.  There are several possible explanations for why mortgage bank ranked so low.  First, because the definition of a mortgage bank is relatively technical, borrowers may not differentiate between a mortgage bank and other types of lenders when they shopped for their loan.  We hypothesize that a higher percentage of borrowers contacted mortgage banks without actually realizing the lender was a mortgage bank.

 

The second factor that contributed to the disconnect is that while fewer borrowers may shop mortgage banks, more borrowers may select them for their loan.  For example, a borrower may not contact multiple lenders before deciding to use a mortgage bank for their loan.  Larger mortgage banks tend to advertise heavily which may attract more customers directly.  While FREEandCLEAR advocates that borrowers always shop multiple lenders for a mortgage, some borrowers may be persuaded by a lender’s marketing messages.  Whatever the reason, we expect mortgage banks to attract a greater share of mortgage shoppers in the future.

 

While the mortgage lender landscape continues to shift, the results of the FREEandCLEAR Mortgage Survey reinforce how important options are for borrowers.  Whether borrowers contact old school big banks, local banks or mortgage banks, the ability to shop multiple types of lenders remains key to borrowers finding the mortgage that is right for them.

 

We will continue to provide a detailed analysis of each survey question on our blog in the coming weeks and you can review the full results from the FREEandCLEAR Mortgage Survey to better understand how borrowers think about and experience the mortgage process.

POSTED: Wednesday August 09, 2017

Recently, Fannie Mae, the government-sponsored enterprise that helps to determine mortgage guidelines, increased the debt-to-income ratio that lenders use to determine what size mortgage borrowers qualify for.  You may not have heard of Fannie Mae because it is not an actual lender but it plays a very important role in the mortgage process.  Fannie Mae… Read More

POSTED: Wednesday August 09, 2017

Recently, Fannie Mae, the government-sponsored enterprise that helps to determine mortgage guidelines, increased the debt-to-income ratio that lenders use to determine what size mortgage borrowers qualify for.  You may not have heard of Fannie Mae because it is not an actual lender but it plays a very important role in the mortgage process.  Fannie Mae buys mortgages from lenders which in turn enables them to issue more mortgages to borrowers.  Fannie Mae is the largest purchaser of mortgages in the country so when it changes a rule or regulation the impact on the mortgage market — including both lenders and borrowers — is significant.

 

Fannie Mae’s decision to increase the borrower debt-to-income ratio is one of the most important mortgage guideline changes in years because it directly affects how much mortgage borrowers can afford. A debt-to-income ratio represents what percentage of your monthly gross income you spend on debt expenses including your mortgage payment, property tax, homeowners insurance and homeowners association fees (if applicable) as well as other debt payments such as for credit card, auto and student loans plus alimony, spousal or child support payments, if applicable.  In short, if you add up all your monthly housing and non-housing related debt payments and divide that figure by your monthly gross income, the result is your debt-to-income ratio.

 

The previous Fannie Mae guideline permitted a debt-to-income ratio of 43%, which meant that borrowers could spend a maximum of 43% of their monthly gross income on total monthly debt payments, including total monthly housing expense.  The new Fannie Mae guideline increases the debt-to-income ratio to 50%, which means borrowers are permitted to spend 50% of their monthly gross income on total monthly debt payments.  The increase is important because the higher the debt-to-income ratio, the higher the mortgage amount you can qualify for.

 

The change in debt-to-income ratio from 43% to 50% significantly increases the mortgage amount borrowers can afford according to Fannie Mae rules.  The example below compares what size mortgage a borrower can afford under the new 50% debt-to-income ratio as compared to the old 43% debt-to-income ratio.  In this example, the borrower makes $5,000 in monthly gross income and has $500 in monthly non-housing related debt payments (such as credit card and auto loan payments).  As illustrated by the example, under the new guideline, the borrower can afford a mortgage of approximately $342,900, as compare to a mortgage of $282,900 under the old guideline, an increase of $60,000, or 21%.  Please note that this example makes an assumption for property tax and insurance which vary by county and other factors, but the outcome generally remains the same across all borrower scenarios.          

 

   Old Ratio

(43%)

   New Ratio

(50%)

Monthly Gross Income

$5,000

$5,000

Monthly Debt

$500

$500

Estimated Monthly Housing Expense Plus Total Monthly Debt

$2,150

$2,500

Estimated Monthly Housing Expense

$1,650

$2,000

Estimated Monthly Mortgage Payment (P&I)

$1,310

$1,590

Estimated Mortgage Amount for Which You Qualify

$282,900

$342,900

 

While this example represents only one case, it demonstrates how the new debt-to-income ratio enables borrowers to qualify for a significantly higher mortgage amount, which enables them to buy more home. Borrowers can use our Mortgage Qualification Calculator to determine what size mortgage they can afford based on the new debt-to-income ratio guideline and their specific financial profile

 

In this case, the borrower could potentially afford to spend $60,000 more on a home.  In other cases, borrowers who thought they could not afford to buy a home in a particular neighborhood may have new options.  And other buyers who thought they were priced out of buying a home altogether may now be able to afford a home.  In summary, the new debt-to-income ratio increases purchasing power and expands the pool of people who can afford to buy a home.

 

There are a couple of important points to keep in mind about the new debt-to-income ratio.  First, while Fannie Mae rules are guidelines, some lenders may impose stricter internal rules, called lender overlays, which means some lenders may not apply the higher debt-to-income ratio.  FREEandCLEAR surveyed multiple lenders, however, and they all indicated that they are using the higher ratio.

 

Second, the new guideline does not apply to all mortgage programs.  Government-backed mortgage programs such as the FHA, VA and USDA programs apply their own guidelines and typically use a lower debt-to-income ratio.  Additionally, some lenders may offer proprietary mortgage programs that use a lower or higher debt-to-income ratio.  Borrowers should understand up-front what debt-to-income ratio their lender uses as well as the income and debt inputs used to calculate the ratio.

 

Finally, while the new debt-to-income ratio enables borrowers to qualify for a higher loan amount, that does not always mean that is the right mortgage for you. The most important factor in deciding what size mortgage you can afford is that your are financially comfortable with your monthly mortgage payment and total monthly housing expense over the long term.  The worst outcome when you get a mortgage is that you end up with a monthly payment that you cannot afford.  Regardless of your debt-to-income ratio or what a lender tells you, it is ultimately up to you to choose a loan amount that you can afford.

POSTED: Monday July 24, 2017

It seems like the Internet is replacing traditional methods of shopping in almost every area of commerce.  Whether its groceries, clothes, electronics, travel, cars, real estate and just about any product you can imagine, people are turning to the Internet to search for, research, compare and buy products and services.   At FREEandCLEAR we want to understand… Read More

POSTED: Monday July 24, 2017

It seems like the Internet is replacing traditional methods of shopping in almost every area of commerce.  Whether its groceries, clothes, electronics, travel, cars, real estate and just about any product you can imagine, people are turning to the Internet to search for, research, compare and buy products and services.

 

At FREEandCLEAR we want to understand how this tidal wave of online shopping is impacting how borrowers search for and select their mortgage lender.  Is the mortgage market similar to other industries where we would not think of making a purchase without first researching our options online?  I mean, who would buy an airline ticket without checking out an online travel website to compare flight prices.  Where we used to turn to a travel agent to book our flights (remember when), we now turn to the Internet.  Online shopping has fundamentally changed the way we shop for travel and so many other products and services, but what about mortgages? Has technology replaced people and relationships when it comes to finding a mortgage lender?

 

According to the surprising results of the FREEandCLEAR Mortgage Survey, the answer is a resounding no.  Based on our findings, the mortgage industry is one of the last remaining market segments where relationships, not technology, drive the selection process.   When asked how did you find the lender you selected for your mortgage, 30% of borrowers selected an existing bank relationship, 29% of borrowers selected a real estate agent referral and 18% selected a friend or colleague.  So in total, 77% of survey respondents indicated they relied on a personal relationship to find their mortgage lender — an astoundingly high figure when compared to other product and service categories that seemed to have been overtaken by the Internet.

 

How  borrowers find mortgage lenders

Borrowers rely on personal relationships to find mortgage lenders

 

Perhaps what is most shocking about the FREEandCLEAR Mortgage Survey is how low the Internet ranked in the results as only 9% of borrowers selected Internet search when asked how they found their lender.  Based upon these findings, relationships outweigh technology when borrowers select a mortgage lender by an almost almost 9-to-1 margin.  Compared to other product and service categories where technology is replacing people, it seems that borrowers still prefer “old school” methods when selecting a lender.  Whether it is with your bank, real estate agent, friend or business colleague, relationships still matter when it comes to mortgages.

 

The survey results are fascinating and raise the important question of why the Internet and online shopping has not transformed the mortgage market as it has so many other areas of our lives?  What is it about mortgages that leads people to rely on relationships instead of the Internet when they make a purchase decision?

 

Our hypothesis is that the complicated and sometimes overwhelming nature of the mortgage process leads borrowers to seek more personal approaches to finding a lender.  Mortgages are far more complex than commodity products like airline tickets so maybe it should not come as a surprise that borrowers rely on relationships when they “shop” for lenders.  While you may be comfortable using the Internet to shop for a new television, getting a mortgage can be confusing and it is not something most people do on a regular basis.  Plus, a mortgage is a lot more money than the price of an airline ticket or television.

 

While websites like FREEandCLEAR and others are making it increasingly easy to compare mortgage lenders, people will always play an important role in the lender selection process.  As more millennials buy homes we expect that more borrowers use the Internet to shop for mortgage lenders but use technology to complement, not replace, our trusted relationships.

 

We will continue to provide a detailed analysis of each survey question on our blog in the coming weeks and you can review the full results from the FREEandCLEAR Mortgage Survey to better understand how borrowers think about and experience the mortgage process.

 
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