What to Do Before and After Setting up your Mortgage Business

Plenty of people are interested in setting up their own mortgage business. They believe that by being a mortgage broker, they can make loads of money. The truth is that successful mortgage brokers make six figures in a year. But all brokers aren't successful. This is a highly competitive field where only the fittest can survive.

Don't get disheartened. The first thing you need to establish yourself as a successful broker is the motivation to succeed. And to stay motivated, you need to do a few things. Remember that many brokers quit within months because they lacked either the right skills or the motivation.

Here we will show you what you need to do to become a successful mortgage broker.

Have sufficient savings

Mortgage brokers don't earn fixed monthly salaries. Their income is their commission. You will earn a commission only if you close a deal. This is something you need to remember all the time. You can't expect to receive a salary at the end of the month. Therefore, before you start out, you should have some money in your bank savings account. New mortgage brokers will have to find clients. This might take a while. If you don't have enough money in your bank account, you will find it difficult to make both ends meet until you start earning commission.

Many new mortgage brokers have no savings. Consequently, they lose their motivation if they fail to close any loans during the first month. By having enough cash reserves, you can keep your morale intact.

Promote yourself

You might be working for another person, but you still need to promote yourself. Every business needs marketing. Your mortgage business is no different. Don't sit at your desk all day waiting for the telephone to ring. Instead, reach out to clients. Use every available opportunity to promote yourself.  Set aside some money for advertising every month.  It doesn't have to be a huge amount. Many new brokers quit in less than one year because of their inability to promote themselves. Remember that you cannot become a successful broker without marketing your service.

Acquire new skills and knowledge

If you stop learning, you will stop earning. You need to be knowledgeable. You should have enough knowledge about your industry. You should know how the mortgage business works. Polish your skills. Attend seminars, buy books, training programs, and DVDs. Do whatever you can to give yourself an edge over your competitors.

Learn from top mortgage brokers in your neighborhood. Ask them what their trade secret is. When you learn from the experts, you too, will become an expert. Never stop learning. If you want to earn lots of money, you will need the right skill sets. Set higher income goals every month and learn whatever skills you need to achieve those goals.

Mortgage brokers can work flexible hours and successful mortgage brokers make insane amounts of money. That's the main reason many people enter this industry. However, they don't get the basics right and give up within months. While this is a highly competitive sector, with some patience and perseverance, everybody can succeed as a mortgage broker.

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Why Lenders Should Fund Green Homes

Green building practices are becoming the norm, but that is hardly surprising. Green buildings are healthier and more energy efficient. Since the quality of air present in these buildings is better, people living or working here fall ill less often. They also seem to possess a better attitude towards life and work.

In addition, green building techniques lead to reduced energy bills. Commercial establishments that have adopted green building standards witness an overall reduction in expenses. This leads to higher profits.

Adopting green building standards is relatively easy because most green building products do not cost much more than traditional products.

Companies are constantly looking for newer ways to manage their property more effectively. Consequently, they are adopting green building standards in a big way.

Health benefits of green building

Green building improves indoor air quality. Studies have also revealed that children living in green homes are less susceptible to allergy attacks and asthma. Better still, buildings that have adopted green technologies tend to command higher prices. Although benefits are quite clear, developers are still struggling to undertake green improvements. This is probably because many green products that we use today are relatively newer products and hence there is no reliable usage data. It is not exactly clear whether they possess the qualities they are said to have.

Getting financing is another big problem that developers face. Banks simply don't understand how green building creates more valuable homes. As a result, they fail to properly assess the value of these buildings. Since more and more builders will adopt green building standards in the coming years, builders need to educate themselves about the benefits of this new building standard. Appraisers also need to understand how green features increase the value of a property.

Many people believe that creating awareness is essential to change lending policies about green building.

Why lenders should embrace green homes

More and more builders will start adopting green building strategies in the immediate future. This will increase the need for funding. Lenders need to realize that besides the owner of the property and the environment, green building is profitable for them as well.

Green construction amounts to several billion dollars now. Currently over 100 million homes require energy improvement. As a result, there is huge demand for green remodeling.  Lenders who heed the call will reward themselves with a great business opportunity.

Lenders who go green can 'future-proof' their lending practices while at the same time contributing towards conserving our precious resources.

The fact that green buildings are selling faster is pretty evident. They also command higher prices. As far as the lender is concerned, green homes are safer investments because of improved collateral. They also require less cost to operate. Green homes tend to sell for a 7.5 percent price premium.

Green homes consume less energy. They are also healthier because of the improved air quality. Although they cost more than traditional homes, many buyers don't mind paying a price premium when benefits are clearly evident.

Green homes are here to stay. It is high time the lenders changed their policies and embraced these eco-friendly building practices.

 

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A Quick Overview of the New Mortgage Rules

The new mortgage rules require lenders to tighten their underwriting norms. They are designed with the objective of reducing the risks of loan defaults and foreclosures. The new rules apparently promise 'no surprises, no debt traps and no runarounds'.

Lenders now have to comply with 2 new requirements: The Qualified Mortgages and Ability to Repay. Here is how these two new requirements will affect the borrower.

Ability to Repay

Lending institutions are required to verify that the borrower has the assets and income required to afford the monthly payments throughout the entire life of the mortgage. In order to determine this, the lender may assess the borrower's debt-to-income ratio.

To calculate the debt-to-income ratio, you just need to add up your monthly expenses and divide that figure by your monthly income.

Low-Doc loans

Earlier lenders used to offer low-doc or no-doc loans without verifying the financial credentials of the borrower. However, the new mortgage rules require the lender to verify and document the borrower's income, debt, assets and credit history. This will involve more paperwork. It may also prolong the processing times. However, the new rules will ultimately benefit both the borrower and the lender.

Underwriters are also required to approve mortgages on the basis of the maximum monthly payments the borrower will have to make. They are not supposed to approve loans based on the lower teaser interest rates which last only a couple of months or years.

Qualified Mortgages

This rule ensures that the borrower will not buy a bigger home than s/he can afford. The new mortgage rules insist that a borrower's debt-to-income ratio should be less than 43%. There are exceptions to this rule and banks can issue mortgages to people with higher debt-to-income ratio if they are convinced that the borrower has assets that justify the higher loan amount.

The term of a qualified mortgage cannot be longer than thirty years. They also cannot have risky features like interest-only payments and minimum payments that do not cover the whole of the interest cost. If your monthly payments fall short of your interest cost, your mortgage balance will grow. This is called negative amortization.

In addition, the upfront fees that banks charge cannot be more than 3 percentage of the loan balance. That includes origination fees, title insurance and any points paid to reduce mortgage interest rates.

There are also rules that discourage lenders from offering financial incentives to mortgage brokers and loan officers for pushing borrowers into higher-interest mortgages they can't afford. The new rules will offer borrower protection without limiting their access to credit.

Lenders also seem to be happy about the new mortgage rules. The only concern they have is that the new rules might slow loan processing.

Interestingly, the new mortgage rules do not specify a minimum credit score or down payment requirement.

The fact that there is no minimum down payment requirement will benefit most first time homebuyers who might find it difficult to raise that much money. The lack of credit score requirements might enable banks to loosen their underwriting practices sometime in the future. That said, loans still need to be supported by Freddie Mac and Fannie Mae. Since these organizations are unlikely to approve applicants with credit scores below 620, most borrowers need to have a credit score of at least 620 to qualify for a mortgage.

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How Does the New ECOA Valuations Rule Impact Lenders?

On January 18, 2014 ,the new ECOA Rules regarding appraisals went into effect. The new rules will apply to all loan applications which are seeking a first lien home loan. This will apply to all new purchases and first lien refinances from 1 to 4 units. In other words, it will include all single family homes, duplexes, triplexes and quads. It will not apply to the majority of commercial real estate deals. The rules also extend to townhomes, condominiums, and manufactured homes purchased by individuals.

There is no differentiation between owner occupied units and investments units, with regard to the new appraisal rules. Credit unions are also no longer exempt.

Basics of the New Valuation Rule

At the heart of the new ECOA Valuation Rule is with regard to providing the applicant with a copy of the valuation or appraisal of a property. When a buyer makes an offer, during the lending process the appraisal is completed, and until now, generally the buyer never saw a copy of the appraisal even though they were charged a fee for it. The buyer generally has no say in the selection of the appraiser, which lenders generally choose at random from a list of approved vendors. This measure is said to provide a more objective appraisal and reduces fraud.

The new ruling requires lenders and creditors to provide the buyer (or refinancer) with a copy of the appraisal “promptly upon completion,” or within 3 days prior to consummation or account opening. If the lender chooses to email the appraisal to the buyer, they must comply with existing eSign requirements.

Banks or lenders may charge a fee for the actual appraisal, as most already do. However, they cannot charge an additional fee for the copy or mailing of the appraisal to the applicant. If the application is withdrawn, cancelled, denied or incomplete, the lender still must provide a copy of the appraisal to the borrower. They have no more than 30 days in the event of a decline to provide the borrower a copy.

The only condition that would allow the lender to not provide a copy of the appraisal is if the borrower waives their right to the copy. This may be done orally or in writing.

Impact on Lenders

Part of the concern for lenders in providing an appraisal to borrowers is that they will take it to another lender to complete the transaction. Processing a loan has certain costs associated with the loan. By the time the appraisal is ordered, many hours have been put into approving a loan. This puts the lender at a disadvantage.

In the event that a buyer chooses to switch lenders at the last minute this will impact and delay the closing. If this becomes a frequent scenario then it will impact both lenders and realtors. Overall it may be seen that the concerns are not justified. The lending process is an arduous one and it is hard to imagine a borrower volunteering to go through the process again over a slight change in interest rates, once the process is nearly complete.

Overall this should be a good regulation change as borrowers could become more educated about the appraisal process, providing more cooperation and understanding when it comes to appraisal values.

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How Do Lenders Determine the Loan Eligibility of a Real Estate Company?

When a lender receives a business loan application from a real estate company, they will consider several factors before sanctioning the loan. What are these factors?

It is true that lenders do not use a single criterion for approving a loan. In fact, they use several criteria to determine the eligibility of the borrower. For example, as a lender, you may review your business relationship with the firm requesting the loan. You will also get the financial statements of the company scrutinized by a credit analyst. In addition, you may gather reports from third party credit agencies. You do all this to ensure that the borrower has the financial capacity to repay the loan.

After analyzing the financial statements of the company, if you feel that the loan applicant meets your credit standards, you will approve the loan request.

Credit Rating

Before approving the loan application, you need to try and obtain a credit report on the real estate company from a credit rating agency. These credit reports include information about public filings, credit scores and payment histories. Any negative information (e.g. past-due payments or outstanding tax liens) that appears on these reports should act as a red flag. In that case, you may contact the company and ask for an explanation. If the loan applicant fails to provide a satisfactory answer, it’s best to reject the loan application.

It is true that these credit reports are not always up to date; however, they provide useful information about the credit history of the company seeking the loan.

Financial standing

You need to ask the real estate company to show its annual statement for the last two years. You may also request an interim financial statement for the month before. By analyzing these statements, you can get a better idea about the company's financial standing. In particular, what you want to know is the financial status of the company – whether they can repay the loan or not. You may insist that the company should get its annual statements prepared by a reputed public accounting firm.

Collateral

Most lenders require collateral for the bank loan. If the loan is secured with collateral, you can seize the collateral and sell it if the borrower fails to repay the loan. If a real estate company is requesting a loan for buying land, it can pledge the title to the land as the collateral. Some assets do not make good collateral. For example, you might not want to accept the assets that are not readily salable to a third party.

Personal guarantees

You may also require each owner of the firm to offer personal guarantees. Each owner will have to submit personal financial statements. These personal guarantees provide additional security. You can verify these personal financial statements and after approving the loan, ask the owners to execute a guarantee.

Relationship between the lender and the loan applicant

While processing a business customer's loan application, you will have to verify its past and current relationship with the customer. The loan committee is more likely to approve a loan application if the applicant has been a valuable depositor for years before requesting a loan. Community bank officers are more likely to approve loan applications submitted by companies that are actively involved in civic affairs.

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Changes to the Dodd Frank Act are Impacting Buyers

The Dodd Frank Act was signed into law back in 2010, but many of the changes that were implemented in January of 2014. This act has the potential to change a lot about the lending process. The idea behind the act was to prevent predatory lending and to hold lenders accountable for their loans, making them liable and subject to lawsuits, if they were not offering qualified mortgages. While this sounds like great legislation, the result is stricter lending practices that will keep many buyers out of the home buying market.

A few key pieces of the legislation that went into effect in January 2014 include the following:

The FHA loan maximum was decreased to $625,500. This is significant because borrowers who qualify for an FHA loan are only required to put down 3.5%. If borrowers do not qualify for an FHA loan they will be required to get a jumbo loan which requires at least 20% down. While some markets may not be greatly impacted by this decrease, markets with high property values like Washington DC and California, will be significantly impacted for a large number of buyers.

Rules for a Qualified Mortgage will need to meet new “Ability to Pay” rules. This includes stricter requirements around verifying income, credit, employment, and assets. The maximum for the debt to income ratio is set at 43%. This will hurt self-employed borrowers, who do not have a w-2 to prove income. It will hurt borrowers with less than perfect credit and with assets that are hard to verify and establish a value for. All these factors will impact lending.

Higher fees will arise. The new regulation has placed a cap on origination fees, where there was no cap prior to 2014. The 3% limit has generally not been met because of the competitive lending market. The other fees that may have a greater impact on mortgage costs is the increase in guarantee fees charged by Fannie Mae and Freddie Mac. These servicing fees will almost definitely be passed onto the customer. Add higher fees, with the anticipated increase in interest rates, and the costs could price millions of borrowers out of the market, or into lower priced homes.

The foreclosure process cannot be started until after 120 days from the last payment made by the borrower. This is very important to note. This will make it more difficult for the banks to foreclose on borrowers, but could be very expensive for the lender or loan servicing company.

These changes are bringing about a new lending environment. Banks have spent the last few years preparing for these changes, but most borrowers are unaware of the changes. There will certainly be a period of consumer education that will be required. The concern is that the stricter lending policies will turn more buyers away. This legislation has the potential to slow down the housing recovery.

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How B2B Lending Can Facilitate Economic Recovery

SMEs play a significant role in ensuring economic growth. In fact, roughly 95% of all enterprises belong to this category.

Most small and medium sized businesses depend on banks for financing. But bank financing can be very reliable. Many enterprises learned this the hard way during the recent financial crisis.

Since many banks now lend less than they used to, SMEs are finding it difficult to get affordable debt finance. And when capital adequacy requirements increase, banks will be forced to lend even less. As a result, the need for more viable sources of funding is increasing.

On the other end of the spectrum, there are institutional investors who need long term investment opportunities. Since many of them have already burnt their fingers in capital markets, they are looking for more viable investment opportunities. Unfortunately, there aren't many investment options that generate yield and security.

It is an interesting situation. SMEs need investors and investors need opportunities for investing. There is one problem, though. Big investors do not find SMEs all that attractive and consequently, the gap between investees and investors is widening. What we need right now is a financial solution to close it.

Theoretically, there are two options to bridge this gap between small investees and larger investors.

The first method is to pool enterprises that require investment in bond structures. Since this method will be based on capital markets, it is risky in many aspects. There are several other challenges as well.  For example, the risk profiles of investees may be incompatible. The structuring cost will be high and there will be intermediary fees.  Another problem is the slow execution and the inability to change credit terms over times. What's more, this method involves the same financial institutions that were instrumental in bringing about the collapse of the economy.

The second option is to encourage large investors to make small direct investments in SMEs.

Mainstream institutional investors are yet to warm up to this concept because these direct investments are usually small. In addition, finding a suitable company or project for investing in can be difficult.

However, by deploying crowdfunding through digital investment platforms, these problems can be overcome to a certain extent.

Some large scale institutional investors have already understood the potential of this platform. An advantage of using the digital platform is that eliminates the need for intermediaries. Consequently, the yields are higher than traditional investments. Furthermore, it provides better protection against risks as small investments are spread over many companies.

Since capital market movements have only a negligible impact on the performance of these investments, they are less risky. As far as investees are concerned, it helps them attract long term investments from several sources. This also reduces the cost of capital. When investees get direct investment from investors, they do not have to depend on banks.

Digital investment platforms have the potential to revive the global economy. Any investment in SMEs should be encouraged because they help bring world economies back on their track. What's more, B2B lending is not facilitated by banks and as such, it is more resilient.