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It’s been awhile since you bought your last home. 

You gear up to apply for a mortgage, you call your mortgage advisor, fill out an application, and WHAM, you get hit with an unexpected documentation-fest. 

You thought you had all of your ducks in a row. 

“It can’t be this complicated, can it?” you think.

“But I didn’t have to document this much stuff last time I got a mortgage.” you tell your advisor.  “Why now?  I have great credit, 20% down payment, a stable job, what’s the problem?”

Welcome to 2010.  The world of banking is completely different now than even 2 or 3 years ago. 

Every day I have someone tell me that they are frustrated because they have to document everything in so much detail.  Most express the fact that last time they got a mortgage, there wasn’t nearly so much involved.

Simply put, the reason for this is that banks are paranoid.  Banks are very cautious and conservative on extending credit because of the rash of foreclosures over the past couple years, partially due to shaky underwriting practices in the past.  Gone are the days where showing up in a mortgage office was enough to get a mortgage. 

Banks have tightened up underwriting requirements in an effort to curb the number of bad mortgages that they write and improve their portfolios.  Add an increase in government regulations and the result has been a significant increase in documentation requirements over the past couple years.

Here are some things to prepare for that you may not have had to deal with a few years ago:

Appraisals

The appraisal process has been complicated by the introduction of the Home Valuation Code of Conduct (HVCC) in 2009.  In an effort to curb appraisal fraud, HVCC put safeguards in place that prevent mortgage companies from talking directly to the appraiser.  In addition, there is now a rule in place that prevents an appraisal from being ordered until 4 business days after you have been sent loan disclosures by the lender.  The net result:  higher appraisal fees and longer turn around times.

Assets

Believe it or not, you now must document your assets to obtain a mortgage.  This includes money necessary to close for down payment and closing costs as well as “reserves” or excess money in the bank after closing.  Any unusual deposits over the past 60 days must be “sourced” which means showing where the money came from and that it was yours originally. 

In addition, some lenders have recently been requiring proof of the terms of withdrawal from any asset account even if you aren’t drawing on the account for closing.  This requirement seems ludicrous if you are not tapping into the funds for closing, but lenders want to be sure you will not be hit with a large penalty or high interest loan if you do have to draw on the account in the future for an emergency.

Employment

If you have been employed in the same line of work for less than two years, it will be extremely difficult to obtain a mortgage.  The exception is an FHA mortgage which allows for recent graduates or someone re-entering the work force after maternity for example, to get around the 2 year requirement. 

Self-employed individuals will also have a more difficult time as two years self-employed is mandatory for virtually every program.  You must prove two years self-employment through articles of incorporation, articles of organization, or business license.

Credit

Be ready to provide a “credit inquiry” letter which will explain every credit pull you have had over the past 90 days.  Lenders want to make sure there are no debts you have that are not appearing on your credit.  In addition, depending on the frequency and age of any derogatory items, you will potentially have to provide a “letter of explanation” explaining each derogatory item. 

Credit scores of 620 and above are mandatory to qualify for any program (there are a few lenders who claim they can help people with scores below 620, but in practice, it is virtually impossible to get a transaction approved with a score that low).  You will pay a higher rate with scores in the 600′s, and lenders will scrutinize your credit, especially if you are in the 620-639 range.

Income

Income has been the area that has been hit the hardest with stricter requirements over the past few years. 

“Stated” income financing has disappeared, and all borrowers must now document all income.  This means that the self-employed borrower who writes off all of their income can’t qualify.  Depreciation expense for self-employed filers can be added back to income for qualifying, but that usually isn’t enough to offset a zero or low adjusted gross income.  This is very frustrating for most self-employed people I talk to.  Even if they have become aware of these changes and started to write off less of their expenses in order to boost their income on paper, the lender will take a 2 year average of any self-employed income, and will use that for qualifying.

Another area that has changed with most lenders is the ability to use rental income to qualify.  For one, you must claim the rental income on Schedule E of your tax returns in order to use it.  If you haven’t, then you likely will not be able to use the income.  Lenders no longer will accept rental leases as proof of rent collected. 

Conclusion

Although recent guideline changes have made qualifying for a mortgage more difficult, and the paperwork required more challenging, it is possible to obtain a mortgage.  In fact, we have seen quite a few loan approvals come through with very minor or no loan conditions (items required by the lender in addition to the items submitted with the original loan package).  The key is documenting everything properly up front.

August 3, 2010

Despite the expiration of the Home Buyer Tax Credit, waiting to buy a home could cost you tens of thousands of dollars.  “Why?” you ask.

Home Values
Perhaps you are on the fence because you think home values are going to drop further.  You may be right, but there is mounting evidence that most markets are stabilizing, and some markets are starting to show appreciation vs. this time last year.  Below is a chart showing the average US Home Values since 1975.

As you will see, home values are stabilizing and there are some major US markets that have seen appreciation compared to this time last year.

What does this mean for you?  If you are waiting for home values to fall further, you may be waiting forever.

At least one expert thinks home values are going to go up.  John Paulson, who made billions by correctly predicting the housing crash, had this to say on Reuters.  Paulson Eyes Housing Rebound

Mortgage Rates

We have enjoyed mortgage rates for over a year that are the lowest since World War II.  That’s the war that took place in the 1940′s, before TV was widely available for most households.

The prospect of rates dropping significantly more is unlikely.  Although we might see a slight decline, it would not be enough to warrant waiting to just to lock in that “perfect” rate.  30 year fixed rates are currently below 5% which is an incredible bargain.

The chart to the right shows bond prices over the past 2 years.

This is an illustration of the price of the Fannie Mae 4.5% 30 year coupon, which is one of the key indicators of mortgage rates.  Tracking this bond on a daily basis can give great insight as to what mortgage rates are doing and what kind of trends we can expect.

The pink line shows the 200 day moving average, an important trend line.  Higher bond prices result in lower mortgage rates.  The price of a bond is in basic terms tied to supply and demand.  More demand = higher prices and vice-versa.

Note that on November 25, 2008, the Federal Reserve announced a plan to purchase $1.25 trillion in Mortgage-Backed Securities (MBS), and the bond markets  immediately rallied.  Bond prices have not come out of that general trading range ever since, hence the resulting low rates we have experienced.

The Fed exited their MBS program on March 31, 2010, and there was widespread speculation that rates would then go up.  This hasn’t happened- yet.  Rates have stayed low due to uncertainty in the economy and low inflation.  Recent news of trouble in Europe has led to even better rates in recent weeks.  Any time there is uncertainty in the market, investors tend to buy safer investments with guaranteed rates of return (MBS fall into this category).  We have seen this ”flight to safety” especially in the past couple weeks with the global fears of a European collapse.  This added demand has driven bond prices up and mortgage rates down.

However, if you are waiting for lower rates before you buy, don’t.  Most experts still believe that rates will go up, and likely this year.  One of the key drivers of mortgage rates is inflation, and with the Fed financing record stimulus packages by essentially printing money, inflation will come, it’s just a matter of time.  More money in circulation = lower currency values = more dollars to buy the same item.

Inflation is the arch-enemy of long term investments because it erodes returns, which means yields must rise (and mortgage rates with it).  Morgan Stanley predicted higher rates in 2010 and they are not alone in this opinion.

As soon as inflation arrives and/or the world economy appears to be stabalizing, bond prices will return to the levels we had  prior to November 25, 2008, which means rates back in the 6%’s at least.

What does all of this mean?

If  home values trend up, and mortgage rates do the same, you will certainly lose tens if not hundreds of thousands by waiting to  buy a home.  Even if home values drop more,  but rates go up, you will lose a significant amount of money by waiting.

The chart to the left shows the net savings of buying a home now vs. buying later, assuming a 1% increase in mortgage rates.  Column 2 assumes  that  home values continue to fall, and column 3 assumes  home values remain the same.

Note that your total after-tax mortgage payment will be higher at a 6% rate, even if home prices fall by 10% more.  If home values stay the same and rates go up by 1%, your after-tax mortgage payment will be $134/mo higher if you wait to buy and rates go up by 1%.

Even scarier- What if rates go up to 7.5%?  This is where Morgan Stanley predicted rates will be at the end of this year.

The net result?  You would lose over $140,000 over the life of your mortgage and your payment would be a staggering $353/ mo higher, and that is assuming home prices don’t go up.

Tax Advantages

All of this is not even taking into consideration the lost tax advantages you would lose over the months you are waiting to buy a home.  All of the mortgage interest over the next 6-12 months while you are waiting will not be available to you as a tax deduction  if you wait.

Why wait?

Home affordability is at an all time high, and with mortgage rates at extremely low levels and home values  deflated, it makes sense to buy a home now, even though the home buyer tax credit has expired.

It is impossible to time the market exactly at the bottom, and if we are not there, we are close.

May 19, 2010

In today’s world, it is more difficult than ever for consumers to qualify for a mortgage. Bank underwriting standards tighten every day, and documentation requirements are extensive and thorough.

If you are in the market to buy a home, getting pre-approved for a mortgage is one of the first steps to buying a home. However, a pre-approval doesn’t guarantee that you will ultimately get the financing if you have any change in your circumstances between the pre-approval application date and your loan closing.

It is surprising what some people will do after they get their loan approval that can potentially derail their financing and ultimately cause a mortgage denial. I remind my clients early on about these potential home buying blunders to avoid, and I hope you also take note of these things. Don’t make these mistakes!

Blunder #1: Making credit purchases after loan application, prior to closing on the home.

This one seems to be a no-brainer, but it happens. Whatever you do, do not apply for any new credit between your loan application date and your closing. This is not the time to buy new furniture on a 0% financing plan! The new credit line could affect your credit score or debt-to-income ratio, or both, and could potentially lead to a mortgage denial. If you must make a purchase, talk to your mortgage advisor first.

Blunder #2: Paying off collections

This blunder is also related to your credit score. It doesn’t sound logical, but paying off a collection account that is older than 12 months will likely cause your credit score to go down. That’s because although the account is paid off, it is still a negative item, and any accounts with more recent activity, positive or negative, will affect your credit score more than an account that has activity further in the past.

The only exception to paying off a collection is if the creditor agrees, in writing, to completely delete the account from your report if you pay it off. Even still, it’s best not to pay off the account if you already have a mortgage pre-approval, it’s best to leave everything regarding your credit alone because lenders may re-pull your credit once you are under contract, especially if there is a lag of more than a couple months between the initial application and when you go under contract on a home.

Blunder #3: Larger than $500 non-payroll deposits into your bank account

This is the most common home buying blunder that I see. Any non-payroll deposits into your bank account within 60 days of closing must be “sourced.” In other words, you need to show where it came from and that it was your money. This is most commonly a problem with people have “mattress money” or cash that they intend to use toward their home purchase. Cash can’t be used unless you deposit it into your account greater than 60 days prior to closing. If you have any funds to deposit, do it before your pre-approval application and if after, inform your lender.

Blunder #4: Changing jobs

Sometimes of course, changing jobs is necessary. However, if you intend to change jobs, or worse yet, you lose your job after your pre-approval application, inform your lender immediately. If you want to make a job change, the best policy is to wait until after your closing. However, a change within the same field is usually acceptable with an increase in pay and an explanation as to why the change was made. If you get a job offer that is too good to pass up, by all means take it, but discuss with your lender first. If you lose your job, and are able to find work in the same line of work within 30 days, you should still be approved for your financing.

Blunder #5: Making an offer on the first home you see

My wife and I made this mistake on our first home. We looked at two homes and made an offer on the second home we saw. Although the house was great, we wondered for years if we made the right decision and should have looked at more, or could have gotten a better deal. The best policy is to view at least 10-12 homes, even if you fall in love with the first one you see. Get a good sense of the market, and then come back to the first and make sure. You may be surprised at what else is out there and find something you like even more.

Good luck with your home search. Hopefully this article will help you avoid these home buying blunders!

May 4, 2010