Mortgage Banking

What is a mortgage?

A mortgage is a way to finance a purchase of a home. Homeownership is one of the best ways to build wealth in America. Buying a home is probably one of the biggest financial decisions a person can make in their lifetime.

Mortgages made in the United States are generally offered as a 30 year fixed rate loan. Meaning that the total amount of money a person borrows to pay for their home is paid over a 30 year period and the interest rate this mortgage loan carries is a fixed annual percentage rate. For example, you could borrow $500,000 from your bank or mortgage companies at a 3.5% interest rate over a 30 year period. Your monthly payment would be $2,245. This doesn’t include insurance, real estate taxes, repairs etc. 

Even though homeownership is expensive, it is a great way to build wealth. Generally speaking the equity value of your home goes up if properly maintained and the area you live in doesn’t undergo frequent natural disasters or economic downturn.

Therefore, if you’ve purchased your home for $500,000 as the above example, over time, your own might be worth over a million dollars. Homeownership is a great way to save and build equity.

Who offers mortgage products?

Most of the conventional mortgages are originated by banks and mortgage companies. These banks and mortgage companies are all publicly traded or privately held.

The United States government doesn’t directly make mortgages, it always uses banks and mortgage companies to originate mortgages and service these mortgage loans. However the US government guarantees defaults or losses from certain mortgages made by these private companies. Federal Housing Administration, Veterans Affairs and United States Department of Agriculture are some of the government agencies the back the losses of mortgages issued under their specific guidelines. 

But the majority of the mortgages are what are called “conventional mortgages”. Almost 80% of the mortgages are conventional mortgages purchased by government sponsored enterprises like Fannie Mae and Freddie Mac.

Fannie Mae buys mortgages from larger banks and institutions and Freddie Mac buys mortgages from smaller banks and credit unions.

In essence, all mortgages suitable for middle class families are associated with the government in some shape or form. With the government’s banking of these mortgages, the banks and mortgage companies are more confident on originating mortgages with world’s largest credit facilities.

Who qualifies for mortgages?

There are two biggest factors of qualifying for a mortgage, your creditworthiness and your income. 

Banks and mortgage companies almost always look into your credit history and your ability to pay. Banks and mortgage companies often adhere to certain criteria and guidelines prescribed by government agencies directly or government sponsored entities.

Rising from the last mortgage meltdown in 2008, the US government has since tightened the underwriting criteria for mortgage underwriting. Especially around validating and verification of income. 

However, the US government also created first time homeowner programs to encourage those that may not have saved much to get into home ownership. The down payment requirements are lower.

For those consumers with less than stellar credit, the government has other forms of programs to help these consumers into homes. Again, with certain guidelines these soon to be homeowners must follow.

Generally speaking, if someone is gainfully employed with a decent history of financial responsibility, they can get themselves into homeownership with some aid from the government programs.

Mortgage technology stack:

The mortgage industry’s technology stack runs deep and it is probably one of the more matured industries in lending and banking.

Today we will focus more on the mortgage origination side of the technology stack. Let’s start with the marketing side of the mortgage industry.

To get consumers interested in looking into mortgages, you must look into real estate. When people are actively looking for potential homes and areas to live is when they might also be considering financing options to help them to make the purchase.

Websites such as Zillow are a goldmine for real estate agents and mortgage companies to mine for their prospects. There are a number of other websites catering to people shopping for home and real estate agency ads and mortgage banking ads are plastered all over those websites.

When someone is genuinely interested in shopping for mortgages, they will engage one of these ads and fill in their contact information and potentially the property they would like to purchase.

These mortgage leads generation companies such as LendingTree collect millions of leads in real time and mortgage banks bid for these leads in real time and routing these leads to their call center and a junior mortgage banker might conduct an outbound call to size up the potential buyer’s intent.

This process has gone on for a few decades ever since the internet became a popular destination for people to shop for homes and seeking financing options to help them purchase these homes.

Alternatively, the real estate agent might recommend a financing team to their prospective clients while they are touring the home or working with the potential buyer to find a home in a neighborhood that they like.

These financing groups might be a group of private licensed mortgage brokers that will work with the potential buyers and shop for a lender that can help them. Whereas LendingTree matches the potential buyer to the highest bidder, the mortgage broker might lay out several options to the potential buyer. Of course, the mortgage broker will also present options which pay them the highest commission.

Private mortgage brokers will use a platform supplied by their mortgage broker company to punch in the buyers information and the platform will fan out that information to the affiliated lenders and return the best product back to the mortgage broker.

The mortgage broker then refines that response and connects with their client, the buyer, on all suitable financing options.

Just like in the automotive industry, these systems have been used for decades to quickly return available offers to the potential buyer and get their home purchasing experience on its way.

If home buyers are interested in buying new homes, the home builders, just like the automotive manufacturers, might have their own captive financing company to incentivize home buyers with promotions to buy one of their products. Sometimes the home builder’s own financing company can offer discounts and promotions with bigger incentives than going through another private mortgage broker or sometimes even the banks themselves.

Whatever the case might be, a pre-qualification application process as well as a decision engine is what private mortgage companies, new home builder financing staff as well as high volume online mortgage lenders are using the quickly process the buyer’s information and produce a variety of different offers to their clients either via email or in person or over the phone.

The credit decision engine must be able to do the following:

• Process the buyer’s personal information

• Digest the potential home the buyer’s interested to size up the purchase amount

• Produce an AVM or Automated Valuation Model of the home in question to pull in the equity value of the home.

• Be able to pull credit reports from several credit bureaus and use the best one to understand the creditworthiness of the buyer.

• If possible, verify the home buyers income through bank statements or having the buyer log into Truv.com to verify their income.

• The decision engine must have the ability to run multi-stage credit underwriting rules and models to calculate a probability of default for the lenders to use to generate a loan amount.

• The decision engine must also produce different scenarios for a variety of different down payment and monies to buy down points or interest rates.

LendAPI’s LOS (Loan Origination System) Platform:

LendAPI’s product builder tool allows any mortgage broker team to create their own application form and quickly launch it to start collecting information from their potential clients. 

From collection application data from the buyer or both spouse to pulling credit report and run complex decision rules, we are ready to get your applicants pre-approved within minutes.

Come and check us out at www.lendapi.com and sign up for 30 days free (start building today) at app.lendapi.com/signup