You are a U.S. citizen or a permanent resident alien.

b. The house is or will be your permanent residence.

c. If a refinancing, you will not take cash out of the transaction, though settlement costs may be financed.

d. There will not be a second mortgage on the property at closing.

e. You can fully document your income and assets.

f. You will escrow taxes and insurance.

g. Any co-borrowers will occupy the property with you.

h. You have enough cash of your own to meet the down payment you have specified plus the settlement costs.

Make a list of your “niche adjustments” – all the deviations between your deal and the assumptions stated above. Whenever you are soliciting price quotes, you offer the list.

There are several other generic assumptions that are more difficult to deal with.

i. You have “good” credit. Unfortunately, there is no standard definition of “good credit,” and you may not know how good yours is in any case. The best approach, therefore, is to put your credit score on your list of niche adjustments. It is available for $14.95 at www.myfico.com.

. You have sufficient income to meet the maximum ratios of housing expense and total expense to income on the loan you select. Calculator 5a on my Web site will allow you to determine whether you meet the most common maximum ratios of 28 percent and 36 percent.

The calculator will require that you anticipate the rate and points you will have to pay, and it will suggest figures for taxes and insurance because you may not know yours. Hence, your ratios won’t be exact. Nonetheless, if they exceed 28 percent or 36 percent, add them to your niche adjustments. It may or may not matter, because the maximums vary from one loan program to another, and also may depend on your credit score, down payment and other factors.

k. You don’t want a prepayment penalty. In the mainstream market, prepayment penalties are an exception to the rule that, in the absence of information to the contrary, the lenders quoting prices will assume the feature having the lowest price. The generic assumption is that there is no prepayment penalty. If you are willing to accept a penalty, you can lower your rate by 1/8 percent to 1/4 percent. In the sub-prime market, on the other hand, price quotes generally assume prepayment penalties, which may be non-negotiable.

Borrowers who know the mortgage features they want and have their niche adjustments ready are prepared to meet with loan officers. Most loan officers begin sizing up potential clients as soon as they open their mouths. If it is obvious that a potential client doesn’t know what he is doing, many loan officers say to themselves, “I smell an overage (an extra high commission), but I hope the deal doesn’t take too much time.”

In contrast, the potential client who places his desired mortgage features and niche adjustments on the table, immediately commands respect. The loan officer’s reaction is likely to be “This guy has probably been to other loan providers or plans to, so I better not try for an overage. However, he probably won’t be a large drain on my time.” That’s the response you want.

The writer is Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.

Copyright 2003 Jack Guttentag
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