The majority of real estate transactions involve some sort of financing. Residential lending has become a fairly standardized business, with loan rates and approvals based on sophisticated risk models which analyze the borrower and the property securing the loan. Single family residential loans to owner occupants for less than $300,700 are the bread and butter of the mortgage industry. These are loans which meet the guidelines of Fannie Mae, the largest purchaser of mortgage loans in the secondary market.

Since Fannie Mae only buys on the secondary market, others businesses are needed to originate and fund loans. The retail  side of lending is dominated by mortgage brokers, who originate loans to sell to investors who underwrite and fund the loans. The loans may then be sold in the secondary market to Fannie Mae or other secondary buyers. Mortgage brokers generally take the loan application, then turn the file over to a processor who handles the processing of the information needed to submit the loan to underwriting.

Underwriters compare the profile of the loan application with guidelines to determine whether or not to approve the loan. Fannie Mae has a brochure which explains factors that their automated underwriting system, Desktop Underwriter, uses to analyze loans. Credit scoring, assigning a numerical value to your credit worthiness based on risk models, has become a very important component of underwriting decisions. It pays to check your credit before you apply for a loan to clean up any errors, which can take several months. Fair Isaac is the most prominent credit scoring company, and you can purchase your credit score from them at myFICO. Experian, Equifax, and TransUnion all have sites you can visit to learn more about your credit. For a different view of credit scoring, you may wish to visit Greg Fisher's site creditscoring.com.

Loans with down payments of less than 20% of the purchase price will generally require private mortgage insurance (PMI). The lower the down payment, the riskier the loan is to the lender. They cover this risk by insuring a portion of the loan with a mortgage insurance company, which will pay in case of a loss by the lender. These premiums are charged to borrowers, and included in their monthly payment. As mortgage insurance does not pay down the loan, nor is it tax deductible, it is best avoided if possible. Sometimes low down payment deals can be structured with a second mortgage which keeps the level of the first mortgage low enough to avoid mortgage insurance.

Single family conforming loans generally carry the best interest rates. Many other types of loans are available, some of which Fannie Mae will also buy. The more you move away from the norm, though, the more you are likely to pay for your loan. It also is wise to check out all your options. If you are a member of a credit union, your credit union may have programs that are better for you. If you have a good relationship with your bank, you may do well with an in house loan with them. One of my objectives in working with buyers is to help them sort through the mortgage maze to figure out what type of financing is appropriate for each individual circumstance.