There are many mortgage products available to loan originators. However, the most successful originators tend to know every detail about three or four products and most of their customers end up in one of those products.
To help you master your company’s most-used products, we’re going to run them all through a PEPPER analysis.
But what is a PEPPER Analysis? It’s an acronym to help you explain products to yourself and to your borrowers.
- Product name – What is the name of the product?
- Elements – What are the most important elements/specifications/guidelines of the product?
- Person – What type of person was this product designed to help?
- Pitfalls – What are some of the pitfalls or problems associated with this product or the process around this product?
- Environment – In what economic environment is this product best suited?
- Resources – Where are additional resources if you need more information?
Below is an explainer of most of the types of loans your company may deal with.
Fixed Rate and Adjustable Rate Mortgages
Fixed rate and adjustable rate are just as they sound. A fixed rate mortgage will have the same rate for the life of the loan while an adjustable rate mortgage (ARM) has a fixed rate for a period and then adjusts at a specified date based upon a specific index.
For MI purposes, ARMs that adjust after 5 years are considered fixed. ARMs typically have a lower rate than fixed rate mortgages and are most popular when rates are considered high.
Low Down Payment Mortgages
As a new loan officer, chances are you will be working with first-time home buyers. First-time home buyers make up ~33% of the purchase market and approximately 80% of first-time buyers do not put 20% down when purchasing a home. (First-Time Homebuyer Market Report, Enact Mortgage Insurance)
HomeReady® and Home Possible®
These programs, by Fannie Mae and Freddie Mac respectively, are popular with low down payment borrowers in that they allow a minimum of 3% down. While not exclusive to first-time buyers, these programs offer reduced mortgage insurance (MI) coverage for loans with LTV greater than 90%. The reduced coverage may help to lower the borrower’s payment.
Additionally, if a borrower has a certain credit score (680 or above at the writing of this), LLPAs will be waived further reducing the buyer’s monthly payment.
Private Mortgage Insurance – A Credit Enhancement
For customers with less than 20% down, private mortgage insurance (PMI or MI for short) is an excellent option. Fannie Mae and Freddie Mac who purchase closed loans require, per their respective charters, private mortgage insurance on loans of borrowers with less than 20% down to mitigate the risk.
Private mortgage insurance mitigates the risk by providing protection to the aggregator/servicer in the event of default by the homeowner/borrower.
The benefits of private mortgage insurance include:
- Multiple programs such as lender paid, borrower paid, monthly premium, single premium and split premium which allows for the borrower to select the best option to meet their needs
- Private MI is temporary compared to government-insured loans as borrower paid monthly mortgage insurance is cancelable. And upon cancelation, the borrower’s monthly payment will go down for monthly and annual MI plans.
- Private MI loans require less paperwork than FHA loans which means fewer steps and more efficient processing time allowing borrowers to move in faster
- Private MI companies work one-on-one with borrowers and their lenders to help structure loan workout programs for borrowers who experience a financial hardship.
Piggyback or Combo Loans
For those with less than 20% down, some lenders may offer two mortgages – one at 80% Loan to Value (LTV) and a second.
While sometimes the rate on the first mortgage is appealing, the interest rate on the second is typically higher.
Additionally, with this option, there are two closings, two sets of closing documents, two monthly payments and the borrower now has their second lien position filled.
FHA loans were originally designed for first-time home buyers with less than 20% down with lower or riskier credit. The borrower pays an upfront premium and a monthly premium. In most situations, the monthly premium is not cancelable. FHA loans are insured by Housing and Urban Development (HUD)
Down Payment Assistance (DPA)
There are multiple down payment assistance programs that may be available for a homebuyer.
Many states offer down payment assistance through their State Housing Finance Agency (HFA). As each state has their own unique program, an originator should inquire about each state’s program.
Other down payment assistance programs can be found at www.downpaymentresource.com.
Run a PEPPER Analysis
Now that you have a better grasp of what each product is, we can test your knowledge. In a moment, we’ll have you list out the top 3-4 loan products your company originates and complete the PEPPER acronym of each. The point here is to fill out the PEPPER sheet with what you think is important and in your own words to help you better understand and remember the intricacies of the products.