Do lenders get greater incentives for certain types of loans?

Question

I spoke with a Quicken Loan lender just to get a quick estimate of what kind of price range I was looking at for my first REI (also first home purchase). The lender stated that the best route for me was an FHA loan. When I inquired about the loan (because of the books I read), the theme of the conversation from him seemed to be "trust me I've looked for the best option for you.

I had a separate conversation with another private Realtor who owns his own company. I am in search of a duplex and he mentioned he had some deals going on. He directed me toward his lender, whom I will entertain. He mentioned that I should look into a conventional loan.

So my question is, is there an incentive for the lenders on what type of loan is offered? Would the QuickenLoans lender be hooking me up with an FHA loan because he is getting paid more? Would the local lender be suggesting a conventional loan because they are getting paid more?

Zack Karp · Answer

@Richard Roberts

Lenders can be compensated differently, but they are definitely not allowed to steer you into a certain product.  And not all lenders are created equally.  Be careful with the first one you went to.  While there are some quality LO's there, I have also found some of them were working at Pizza Hut or Jiffy Lube last year (nothing against those places, just making a point).  With the release of their recent rocket product, they have been filling seats with as many people as possible.  Again, not all of them are inexperienced, just do your homework.  You can look up any LO on the NMLS Consumer site.

That said, there also may be a good reason the LO is advising you to go FHA.  Besides the obvious of the lower down payment option, there are other reasons to go FHA instead of Conventional.  For one, if your credit score is 580-680, and you are putting less than 20% down, I have found the combination of rate and MI for FHA can actually be lower than Conventional.  I have helped borrowers with this strategy, we increase the rate to cover the upfront MIP with a lender credit, and FHA still comes out ahead.  Other reasons are that FHA usually allows a higher debt-to-income ratio than Conventional, allows a lower credit score, and can have some more flexible underwriting guidelines.

It's always best to find an experienced loan officer with a strong product arsenal to help you fit into the best product, and educate you so that YOU can make the right decision.  Hope that helps!

Sean Grapevine · Answer

Don't count your current rent payment. But you will have to count your proposed mortgage payment (including PMI, taxes, and HOI).

Gary Lamach II · Answer

Quicken LOVES FHA loans.  I am unsure why.  Conventional is your better option.  I remember from a previous post that you are looking for an investment property that would also be your primary residence.  If this is the case, you would not be required to put 20% down anyway.  There are also some "online" based banks that do non conforming loans for a little as 10% down.  Hope that helps.

Richard Roberts · Answer

I am a newbie to all of this and my situation is pretty black and white. I have a car payment and a salary, that is all. Per consumer finance:"To calculate your debt-to-income ratio, you add up all your monthly debt payments and divide them by your gross monthly income. Your gross monthly income is generally the amount of money you have earned before your taxes and other deductions are taken out."My only debt is a car payment of $560.00 of which I usually pay $800. Given this ratio, my calculation comes out to 9%. There is a possibility I'm not doing this correctly. I'm assuming my current rent is not included? If so, that calculation comes to 22.7%.

@Albert Bui , yes I am looking into a multi-family property. Specifically a duplex for now.@Kyle H. It seems I may have made a mistake in my calculation@Zack Karp See my input above on my DTI.

Zack Karp · Answer

Those of you saying 48% DTI is too high for Conventional and that the OP needs to get the DTI lowered, that may not be accurate.  Automated Underwriting (DU & LP) for Conventional loans can approve a higher DTI than the standard manual underwriting guideline.  AU takes into consideration the front end and back end ratios, credit score, reserve assets, and other factors.  I have had AU approve DTI's as high as 54.9% on Conventional financing.  And up to 50% DTI even with 95% financing.  And FHA can go to an even higher DTI even with 3.5% down.  Everyone's situation is different.

Albert Bui · Answer

- You had mentioned that your DTI is reportedly 48% based on whose calculation? if your income is salary and your obligations on your credit report are black and white then 48% may be true (questions about black and white or salary? let me know). The truth is income is a messy topic when you venture into the calculation of over time, commissions, self employment income, rental income, and other grey areas of how income is calculated. In the grey areas income can start becoming more "art," than "science." If you dont have any of the grey area types of income where the calculation is subject to loan officer skill and supporting documentation to tell a certain story then you'll be fine and your 48% DTI may be accurate.

- you have 5% or less down so hopefully you're qualifying for a 1 unit or single family residence (SFR)/ condo because conventional in "general," cannot lend to 2-4 unit properties as a primary residence with that low of a down payment. This is probably why the quicken LO urged you to go FHA. However, there are programs that allow conventional to in "theory," qualify as low as 5% such as "my community mortgage (MCM)," mortgage product but the problem is finding a MI company to insure it. Most MI (mortgage insurance) companies in the private sector only insure 1-2 unit primary residences (so its possible to get a duplex with 5% down just harder for 3-4 unit).

- Advantage of conventional is the lower MI costs and the ability to structure the loan with no monthly MI like Zak mentioned, however he did not state the break even where conventional is better than FHA. That credit score where the break even exists is roughly around 680 - 700 fico. At this point or above in credit scoring, conventional financing is more efficient in terms of cost in most cases. However, FHA has lower rates than conventional so depending on where your credit is the FHA rate + MI combination may still be effectively better priced.

Steve S. · Answer

@Richard Roberts No ... no greater incentive per say. Basically, the lender will push you to where they have an edge. I used to work for a sub-prime lender back in 2003-2008. We did not have an A-paper product. A-paper clients were not our clientele. We catered to a certain market and we only had certain products. Therefore we sold what we had. Just like a Toyota dealer is going to sell you a Toyota and not a Mercedes.

All in all ... FHA is great if your do not have a significant down payment. Yes there is PMI, but if you only have 3.5% to put down then the fact that you can buy something at 96.5% is crazy. Rates a re great.

If you can afford more then put a higher down payment and do it and go conventional. Either way they are A paper programs and you are protected from up on high by over-governmental control. I wouldn't sweat it.

Kyle H. · Answer

@Richard Roberts

I think your first step is going to be getting your DTI down.  It might require using some of your savings/downpayment money to accomplish this but you will find it extremely difficult to impossible to get a loan with that percentage.  I see you are in NC and if you have access(you can also join if a direct relative is a state employee) to the State Employee Credit Union I would recommend them for your first home purchase as they will do 100% financing for owner occupied and no PMI which is what I am assuming you are doing with this purchase as a house hack. Good luck!

Chris Mason · Answer

@Richard Roberts - You saw implied in the film The Big Short that mortgage originators got bonuses and the like for putting people in crappier (for the borrower) loans. Anyone that's been doing this since before the recession operated in that world, I have not and don't think I'd have been a good fit for that world.

I know a few realtors that gave up on lending and became realtors specifically because they could not be competitive in a world that rewards crummy behavior. I greatly admire those individuals for having the courage to give up their mortgage careers and start from scratch as realtors when the mortgage industry got stupid.

It is now illegal to do give out bonuses and whatnot for putting people in crummy loans.

Once in a while, someone still gets busted for it: http://www.consumerfinance.gov/newsroom/cfpb-order...

Possible moral hazards still present:

- FHA loans have lower credit/income/asset standards and are less work to push through to funding, and we can push them through a little faster. However if you are going to place a large premium on reliability and timeliness, and your credit/income/assets are not 100% on point across the board, then it follows that FHA may ("may," not "is") actually be a good fit.

- FHA loans almost always have a built-in automatic refi because the PMI lasts for the life of the loan regardless of your future equity position.

Wayne Brooks · Answer

A 48% DTI won't qualify for conventional, as far as I know.

Do lenders get greater incentives for certain types of loans?

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