Today I will be speaking with Jason Sharon. He is the owner and broker at Home Loans Inc. And we are going to be talking about the different ways you can get a mortgage, whether it’s through a broker or a banker. And it’s a very important, informative kind of mortgage 101.
So the thought for the day is if you’re thinking of getting a mortgage or even if you’ve got a mortgage before and you’re looking to refinance, take a listen because you want to know where to go and what the differences really are,
The action for the day is if you think that you need to refinance, or you are wanting to get a mortgage, make sure that you go to the right place so you get the best rate and take advantage of what’s out there.
Jason Sharon’s Credibility
I really think what you’re going to share today for a lot of people, including myself, is new news and kind of parses out the mortgage landscape well. But just to give your credibility some cred…so people are like, why would I listen to them? Tell us about yourself and your company and what you do exactly?
I am the broker and owner of Home Loans Inc. We’re a small little boutique mortgage broker here in Charleston, South Carolina. I’ve owned my own company for three and a half years and I’ve been in the mortgage industry for six and a half, almost seven years. Before that, I was in the Navy for 20 years. As far as credibility, big news this week, I was featured and published on Forbes, which was pretty exciting. I’ve written three books on mortgages published my fourth, and Forbes picked up one of my books and wanted to discuss it, which was about VA loans.
About a month or two ago, I was featured on Yahoo Finance. And last year I was on the Money.com best lender list. So I don’t know that I’m great, but a couple of people out there think I am.
Getting a Loan: The Basics
I wanted to get you in here to really talk about one of the things, from the basic standpoint, on the different ways that people can go about getting loans. I think a lot of times we don’t even know what all the options are. So can we just start with the basics and give me the landscape of, “I’m going to get a mortgage.” What happens? I know I need to put some money down. What are my options?
If you get nothing else out of this discussion, you go with somebody that you know, like, and trust. And if you don’t know, like, and trust anybody, you go with somebody that’s referred to you from somebody you know, like, and trust.
Big picture. There are four broad strokes of where you could get a mortgage.
1. The first that most people think of is a Bank Depository institution, someplace you go and open the savings account and put money into it. This could be like, Wells, Bank of America, or Navy Fed, or someplace like that. Those loan officers tend to be low compensation. And I joke around and say, do you want fries with that mortgage? They’re taking the walk-in business.
They don’t have to be licensed with the National Mortgage Licensing System.They only have to be registered, which means they don’t have to do the pre-licensing education. They don’t have to do continued education. They don’t need to do background checks. They just need to be there working at a bank.
2. The second place that you get a mortgage is from one of the online places. Obviously, the elephant in the room is Rocket mortgage. They’re the biggest out there. Their fees are tremendously high and rates. They’re not a smart place for consumers, but they’re an amazing marketing machine. They’re a marketing company that sells mortgages.
There’s Loan Depot, Guaranteed Rate, those types of places. And those loan officers are online lead chases, right? They’re just powering the phone 8 hours a day. I just hired a guy from Rocket 90 days ago, and whenever he came over, I was interviewing him, and he said he had 90 seconds from the time he got the phone connected to where he had a Social Security number. If he didn’t have a Social Security number in 90 seconds, he needed to end the call and move on to the next lead, or he got dinged in his reviews.
3. So the third place that you can get a mortgage from is a non-depository institution, like a Guild or a movement mortgage or one of those places you see driving up and down whatever main road in your city. And those loan officers tend to be very talented individuals. They usually work off of referrals, so they’re good personalities. They’re usually smarter than the online places and the depository places. But those types of places are high rates and high fees. So you’re going to get good service. But you’re going to pay for it for the next 30 years on your mortgage.
4. The fourth main place that you get from is from a mortgage broker like myself. So as a mortgage broker, I work for the client. I don’t work for the bank. I don’t work for the lender. I don’t work for anybody except for the client. I’m licensed by the regulatory authority here in South Carolina for the Department of Consumer Affairs. I’m not licensed by the banking financial institution. I’m licensed to work for the clients, just like the real estate agent. I have a fiduciary responsibility to the clients.
You can call me and I could broker you to Rocket Mortgage, but I would never do that unless I really don’t like you. But I could do that and that same day that you call me to get a rate from Rocket, you could call Rocket yourself and get a rate from them, and it will be cheaper through me as a broker. And the reason for that is the cost of a mortgage.
Cost of a Mortgage
Every mortgage is a product. You could call it a commodity. You can’t put your hands on it. But it is a thing that has value. A mortgage is going to get sold as value. So the cost of creating a mortgage, the biggest cost is compliance. Just like we were talking earlier about compliance in your industry. I have to prove, and the lender has to prove and save it in the file, Even if it never gets looked at for the next 30 years, but have to prove that we comply with all the different federal state laws. So as a mortgage broker, I own the compliance for the origination, the starting the sales of the loan, and the processing or the handling of the loan.
The lender owns the compliance part for the underwriting and for the closing funding. So using a broker, the lender’s cost just got cut in half for that mortgage. So, therefore, the rates and the pricing, and the fees are significantly lower for the same lender going through a wholesale broker than going directly to their retail arm.
So really, when you’re looking at these four different pieces, but you really have your banks that I think people go there because it’s like a one-stop-shop. I got my cash there, I might matriculate up to having some investments there…oh, I need a mortgage. I get my mortgage there. It’s just easy. You just kind of fall into it. And to your point, it made me think that’s how those robo loans happened in 2007-08 that caused so much of the meltdown because they’re just turning mortgages.
And then you look at the online ones. It’s similar because it’s just a lead farm from an online thing. I understand that, too. The movement one is interesting because it tends to my mind starts to think that’s where your realtor is connecting you to these people because a lot of times they’re connected very closely with real estate companies.
Real Estate Involvement
So what you have there is what’s called a marketing service agreement, or MSA, where that lender agrees to pay money towards advertising with that real estate firm in order to be their first go-to lender.
What I’m trying to parse out is that when you get all the way to the bottom, you have true independence. And you can go anywhere you want.
The next level of detail is understanding the client’s particular scenario and what that lender likes. So I have the ability to broker about 54 different lenders at any one day. I probably have loans between six to eight different lenders on any particular day. You call me and say, hey, who are you sending to? It depends on the client’s situation. Like, let’s say someone calls me and says, hey, I’m buying another investment property, and I have three other investment properties. And you know what? I own XYZ store down the street. That’s how I make my money, right. So you’re self-employed and you’ve got three investment properties already.
I’m not sending you to Freedom Mortgage. Freedom Mortgage might be the best rate that day, but Freedom Mortgage is going to screw up that mortgage and ask you for a billion extra documents that you don’t need. And it’s going to be such a painful thing. And you’re going to get delayed two weeks to close.
So I would probably send you, in that type of scenario with a good credit score, I would probably send you down the wholesale mortgage. If your credit score is not great, I’d probably send you to Caliber Homeowners. So it just depends on that client’s situation where I’m going to send that loan. And it’s also, how complex is that scenario? What lender has an appetite for that type of loan, right?
Weighing the Risks
Since you’re using these different companies, is there ever a liability to me to use a company that I don’t know? I think some people, feel like they have to go with names they know. They understand there are other companies out there. Let’s say I’ve never heard of Freedom. Is there a risk to me to use a mortgage company that just isn’t marketed well or you may not necessarily know?
So the risk is the performance during the closing. Are the conditions going to get cleared and closed on your timeline to get that loan closed? After it closes, nobody really cares. Some people do. And some people drink that Kool-Aid. But almost all mortgages are sold, there’s only a handful of places that have “unlimited funds” that don’t sell the servicing. But servicing a mortgage is a completely different industry than the origination and closing of the mortgage.
So some people do hang on that. Hey, I want to close, and I don’t want my mortgage to be sold. Well, if that’s the case, you got to go with Wells, you got to go with Rocket or you got to go with somebody like Freedom on a government loan. You have to be some huge company. A wholesale mortgage doesn’t sell but most companies sell the servicing.
All the money comes from some investor, right? There’s some investor that wants to make more money, a better rate of return on their money than the t bill. So the type of person that invests in mortgages is generally a very conservative person that wants to make a slow, steady rate of return with minimal risk. And the T bill is obviously the safest thing out there.
But the next safest thing, with a little bit more return, is a mortgage-backed security. The particular type of investor that wants that type of return, the money to comes from them. But then eventually it gets bundled into a mortgage-backed security and sold on Wall Street under Fannie Mae or Freddie Mac, or maybe a Jenny Mae, a bond with some particular rating based on the credit score and the loan value and all that stuff. It’s all coming from an investor. It’s going to eventually be on Wall Street. So where it’s really coming from doesn’t really matter to the consumer. They just want to know, hey, am I getting a good rate? Are my fees minimal or none? And am I going to close on time? That’s really matters? The person that’s actually servicing the loan, meaning who you’re paying for the duration of that 15 or 30 years, is not necessarily the person that put the whole loan together.
Let’s just start with what the range of fees looks like. What are the ranges of fees and what do points mean? And how does that all break down from high to low?
So, closing cost is the most appropriate term to start with on the basic level. And that’s the sum of all the third-party fees that will be incurred through the mortgage. So that’s going to be the attorney if you’re an attorney state, which South Carolina is an attorney state. There’s going to be a title company associated with it. Usually, the attorney owns the title company, but you have title insurance and title binder, and title search.
The title is just making sure that house when you own it, there’s nothing out there that someone else can come in and say, I own that house. That’s half of it. Are there any hidden liens? Is there anything against that real property as recorded in the county records?
And the other part of title searches is the person selling to you, do they really own it? I’ve had deals fall apart where some person passed away and their kids have been selling the house. But it had made it through probate, and they did a review on the house so they couldn’t have even signed a contract. I’ve had it to where someone passed away, and it did go through probate, but it didn’t go to probate correctly.
So there was an ex-spouse that had an interest in the property that just had not been properly notified. So there’s a lot of things that could happen in a deed that could cause you issues down the line. Let’s say you buy the house and the title search wasn’t performed properly. And then ten years from now, you’re ten years in the mortgage. Now you’ve got $100,000-$200,000 in equity and someone knocks on your door, hey, this is my house, and it truly is. And that happens.
I’m not saying it happens often, but that’s a huge risk. Use the attorney and proper title search.
So attorney titles are some of the big parts. The other part of the closing cost will be homeowners insurance.
Typically, you pay one-year homeowners insurance upfront, which will be $1000-$3,000, depending on policy pitch. You’re also going to establish your Escrow account. Escrow is where your taxes and insurance are paid as part of your mortgage every year. And your appraisal, if your appraisal is wrapped into your closing costs. So that’s the bare minimum of closing costs. Notice, I didn’t say anything about origination fees, lender fees, any underwriting fees, processing fees or anything like that.
When I set up my company, I set up to be a non-fee company. I collect no fees and I don’t tolerate any fees for my lenders. So no origination fees, which could be one point or 1%. So let’s say in a $4,000 house that could be $4,000 worth of fees. Then you have an underwriting fee and processing fee that could be $500-$1,000, which is what I typically see from competitors. And the form to look at for this a loan estimate. Whenever you’re getting a mortgage, you should be provided, within 72 hours per federal law, a loan estimate that will itemize what the fees are.
There’ll be a bunch of sections on there, and most of the sections are just estimates of third-party fees. But section A or Alpha, the very top left section is the cost of the loan or the origination charges. So points, fees and running fees that kind of stuff. And that’s what matters.
All the loan origination fees and costs are going to be the things that are negotiable. I’ve seen as low as $500. I’ve got a refi right now for a gentleman that started with Rocket mortgage. And whenever I got his loan to us that his rate was a quarter percent higher than mine, and he had $8,000 worth of fees in Section A just for a refinance. So they were banking on him, not thinking about that, only hearing what his payment was. So they were getting him a good payment. But it was costing him $8,000. It was eating up $8,000 with equity out of refinancing, which was horrible.
When You Should Use a Broker
Is there ever a time that it’s more favorable not to use a broker?
Depository institutions look at jumbo loans as a leading indicator or leader to get other business. So, if someone calls me and says, hey, Jason, I got referred to you from Joe, the real estate agent, and I’ve got this house I’m buying on Sullivan’s Island, and it’s a $2.5 million purchase and I want to put down half a million dollars so I want $2 million. I’ll say, hey, you should probably give my guy Justin a call. He works over at bank XYZ because they look at those types of loans as a foothold to get into credit cards and boat loans and car loans. So a big depository institution will do a jumble loan at a significantly lower rate.
Also, if someone calls me for land loans, usually, I tell people I’m not competitive on land loans. I could do them, but I say if you call an AG south type credit union or former merchant bank type credit union in that specific county, you’ll probably get better terms because they understand the county. They understand that type of loan product. So it’s not a one-size-fits-all. But it’s one size fits 99% of the loans out there.
And there’s a couple of weird outliers. Construction loans generally aren’t competitive for brokers. But once you’re done with construction, you’ve got to refinance it to a permanent 30 year or 15-year term, then you come back to the broker and they’re going to smoke whoever else you’re talking to.
For example, yesterday a gentleman reached out to me and said, hey, I’m getting quoted. What rate could you give me? And I was actually a quarter-point higher than what he was being quoted. Okay, well, that sounds like a good rate. What’s the cost of that rate? Pull up your loan estimate. Tell me what’s in section A, and he had, I think, $1,700 in section A, and that $1,700 was buying him down to the quarter-point. Without it, he would have been an 8th point higher than me, but it was buying a quarter-point lower, and I was saving him $17 a month.
So it’s going to take him 100 months of saving $17 a month to recoup that $1,700. Are you going to have this house for 100 months? Is there someplace better you would put that $1,700 that’s going to make you more than $17 a month? And he’s like, I haven’t thought about that yet. This makes perfect sense.
Five years ago, the average mortgage length was eight to ten years. The average mortgage now is like four to five years because people are refinancing. And I think it’s going to get even shorter-term because of the amount of equity growth that we’ve got in the country right now. Last year to this year, your $400,000 house last year is worth $450,000-$480,000 now. I mean, that’s a lot of capital that you could be doing something with. You could do a cash-out refinance, go leverage that money, invest with you, pay off debt, pay for college, whatever it is, do something better than what you used about mortgage for.