Jumpin Jimbo, The Rate Smasher!

In the U.S., the process by which a mortgage is secured by a borrower is called origination. This involves the borrower submitting an application and documentation related to his/her financial history and/or credit history to the underwriter. Many banks now offer "no-doc" or "low-doc" loans in which the borrower is required to submit only minimal financial information. These loans carry a slightly higher interest rate (perhaps 0.25% to 0.50% higher) and are available only to borrowers with excellent credit.

Sometimes, a third party is involved, such as a mortgage broker. This entity takes the borrower's information and reviews a number of lenders, selecting the ones that will best meet the needs of the consumer.

Loans are often sold on the open market to larger investors by the originating mortgage company. Many of the guidelines that they follow are suited to satisfy investors. Some companies, called correspondent lenders, sell all or most of their closed loans to these investors, accepting some risks for issuing them. They often offer niche loans at higher prices that the investor does not wish to originate.

If the underwriter is not satisfied with the documentation provided by the borrower, additional documentation and conditions may be imposed, called stipulations. The meeting of such conditions can be a daunting experience for the consumer, but it is crucial for the lending institution to ensure the information being submitted is accurate and meets specific guidelines. This is done to give the lender a reasonable guarantee that the borrower can and will repay the loan. If a third party is involved in the loan, it will help the borrower to clear such conditions.

The following documents are typically required for traditional underwriter review. Over the past several years, use of "automated underwriting" statistical models has reduced the amount of documentation required from many borrowers. Such automated underwriting engines include Freddie Mac's "Loan Prospector" and Fannie Mae's "Desktop Underwriter". For borrowers who have excellent credit and very acceptable debt positions, there may be virtually no documentation of income or assets required at all. Many of these documents are also not required for no-doc and low-doc loans.

Jimbo advises you to arm yourself with some knowledge before you go knocking on lenders’ doors. Here are a few mortgage tricks lenders use that you need to be wary of:

Overcharging. When you get a mortgage, you’ll unavoidably face a hurricane of fees. But not all of them are perfectly legitimate. Ask for itemization of fees and scrutinize them. (Know that if one lender quotes you a very low interest rate, it may make up the difference in steep fees.) If a mortgage broker is charging you an underwriting fee, question it, since the lender does the underwriting, not the broker. If you’re charged $100 for a credit check, question that, since these generally cost between $10 and $20.

Bait-and-switch. Be on the lookout for lenders offering deals that seem too good to be true, such as exceptionally low interest rates, closing costs, and other fees. These low rates may be available only to those with perfect credit scores, and once the lender has you in the door, he or she will reel you in. Keep your eyes open and know that you can keep shopping around. You don’t need to stick with a lender if you’re not being given what you were told you’d get.

Prepayment penalties. Avoid these at all costs, as they will either prevent you from paying down your mortgage aggressively, or will penalize you severely for trying to do so. They’re exceptionally common in loans made to those with poor credit scores, but according to mortgagetrap.org, "About 10% of all ARMs (adjustable-rate mortgages) that are ’conforming’ in nature have prepayment penalties per Fannie Mae." Read your mortgage paperwork closely, and have the lender verify that there’s no prepayment penalty.

Pressure from real estate agents. Don’t let your real estate agent push you into using a particular lender. While many recommendations are made honestly, in good faith, some others are made because the agent is related to the lender or perhaps even gets a kickback. Agents are not typically experts in mortgage finance. You can accept suggestions, but explore all options.