Okay, so I might sound a little too Mary Poppins-ish there.  Blame my wife and her penchant for Julie Andrews musicals.  But the fact is, historical data shows that home sales traditionally began to heat up in early spring, and deals are still being made in June and July.   And this year, despite a relatively weak economy in many areas, looks to follow that trend, with applications for home purchases continuing to climb according to the Mortgage Bankers Association.

What is changing, however, is the type of loans that folks are choosing.  In fact, if you’re looking to buy a home, odds are that you’re considering a government-insured FHA and VA loan.  In fact, Bloomberg reports that more than one-third of prospective homebuyers are selecting government insured mortgages—the highest number since the early 1990’s.

Why would you, as a prospective homebuyer, choose a government-insured loan over a conventional one?  Well, there are a number of reasons.  First, these government programs usually have lower down payment requirements than their conventional counterpart.  If your home’s purchase price is $250,000, FHA guidelines require you to have a down payment of $8,750.00 (3.5%) while a conventional loan would require a down payment of $12,500.00 (5%).    Credit and debt-to-income standards are also generally more lenient with government insured loans than conventional loan programs.

Now, there are some downsides to government-insured loans, like you are required to carry private mortgage insurance (PMI) along with paying an upfront fee of 1.75% (this is normally financed into the loan amount), and currently the rates on FHA loans are running .125%  higher than conventional loans.  You’ll want to make sure that you talk to your loan officer about all of the pros and cons of several types of loan programs before making your decision.

Keep in mind as well that loan type will have an impact on how much your loan will cost you.  That’s why it’s extraordinarily important that you work with a loan officer you can trust—one committed to absolute transparency in mortgage lending.   Make sure that you know, from the first time you discuss your mortgage loan, exactly the type of fees that he or she will charge and how much those fees are going to be.  And ask—point-blank– for full disclosure of the yield spread premium on the loan you’re considering.  Transparency is crucial to getting the best deal for you, and should quickly be added to your list of favorite things.    Like raindrops on roses and whiskers on kittens.

Raindrops on—where on earth did that come from?  Oh wait.

Honey?!  How many times do I need to ask you not to put that DVD in when I’m working….?

I’m pretty sure you don’t know what Yield Spread Premium (YSP) is. It is  hidden in most mortgage transactions until the closing statement is presented and home buyers are ready to close escrow and complete the home buying process. Below is an actual scan of a closing statement is which you can see the YSP among all the other fees that are associated with a home purchase.

In this case the YSP was over $3,800, a hefty chunk of change.

I didn’t even see it, until I re-read the statement 3 years later. It was probably mentioned during the 30 day escrow but at that time your head is spinning with all the docs you have to sign and things to do. Worse thing is, I was really good friends with the mortgage broker, and now that I understand YSP better, I will never look at them the same way.

Why is the YSP not even in a debit column?

because, it is not a direct payment. It is carried into the life of the loan, so not only is it a large amount, but it will be compounded by interest over the next 30 years. That alone will triple the amount.

If you are unfamiliar with YSP, you can do some research on it at the YSP wiki

An inherent problem with the Yield spread premium is that it’s anti-capitalistic. Typically, the borrower has no idea or does not completely understand how the broker is potentially compensated on the back end and therefore can’t truly price out the service being provided to the borrower. The definition of capitalism is a willing buyer, knowing all the facts and circumstances surrounding a service the buyer is considering purchasing (including how much the service provider is being compensated) makes a choice to use the service provider. Since the borrower typically has no idea or does not understand that the broker could potentially get paid on the back end, they can’t compare terms between brokers.

Back to RateWindow.com. Now that I understood YSP better, mind you I’m still a developer, and still don’t understand all the mortgage talk, I was ready to fully jump on board. I’m very proud to be part of the transparent movement now and know that I was the first to develop a web application that turned that $3,800 FEE into a rebate to the consumer.I can only hope for the future an in 5, 10, 15 years I smile when I think of all the rebates people will get with the services I helped make. I think the savings will be in the millions!

Click to check out RateWindow, even if you’re not in the market for a loan, I think you’ll see that it is a much needed service, especially with the current economic conditions of the nation.

In the eyes of a typical homebuyer, what is the lending process like? I'll talk about this in my next blog post.

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