Profit First Negotiating Page 2

Once we understand the lenders operating cost we can begin to negotiate their profit, which is really the only aspect of the loan that they control. The profit margin is usually determined by the loan officer (LO) working for the lender. Some LO's prefer to work with higher profit loans and do fewer of them each month, and some like to make lower profit loans and do more each month.

The difference in these two types of loans is the difficulty of approval. The harder the loan is to get approved the higher the profit margin is. So let's begin by determining the degree of difficulty your loan will fall into.

The first thing an experienced LO is going to do is to determine the risk that your loan represents to his or her investors. The risk factor will ultimately determine your interest rate and fees. The variables we have listed below are the major building blocks to a good mortgage.

For the purpose of this tutorial we will not go into the details of each of these variables listed below, but you should know the answers to these questions to properly access the risk factor of your mortgage.

• Property Type
• Occupancy Type
• Loan to Value (LTV)
• Debt to Income Ratio (DTI)
• Documentation Type
• Credit Score and History

Most people will not get a perfect score on all of the variables listed above. If you can get a passing grade on all of the variables listed above; your loan represents the easiest deal for the lender and you can expect to pay the least amount of profit for your mortgage. If you are like most people you can pass 4 or 5 of the variables above but not all of them you may still get an excellent deal. Depending on which variable you score low in and to what degree you rate poorly in it will be the determining factor. When you begin to score poorly in more than two of the categories your rates and fees will begin to suffer as a direct effect of this.

The amount of profit a lender should earn is entirely between you and the lender. It will be dictated by the risk, documentation LTV, DTI, credit, occupancy and property type. As mentioned above, 2 out of 6 of these variables is not too bad, assuming that you do not fail miserably in one of these variables that causes a lender to deny the loan.

All things being average, and 4 out of six of the variables being positive, below is the suggested point structure I seek as a loan officer. Keep in mind, easier loans will pay less, harder loans will pay more. These points can be charged in the rate or the fees or a combination of both. Again this is just a guide and ranges from the low end to the high end.

Remember, these are profit margins, these do not include regular third party closing cost, however they may include the lender "junk fees" which we will discuss later. Keep in mind that most lenders will not do a loan if they cannot clear $2000.

Also, remember some or all of the profit may be concealed in the interest rate, this is why it is so important to find out the par rate before negotiating. In our next sections we will evaluate closing cost and Interest rates to help you understand these better.