Approval/Qualification Process category archives

In today’s credit score driven world, it often seems as if there are rate add-ons for loans with anything under a 740 credit score. It has become increasingly important to monitor and maintain one’s credit rating to ensure qualifying at the best interest rates available. One of the most pesky things that can adversely affect one’s credit score are collection accounts. Here are some basic tips regarding collection accounts:

1. Review your credit report with a seasoned mortgage professional, and create a strategy for paying off collection accounts. For example, paying off collection accounts more than 2 years old may actually adversely affect your credit rating in some cases. You may be able to simply payoff a collection account at closing.
2. Document, Document, Document: If you do payoff an account, be sure to keep receipts from the creditor. Try to make sure the receipt corresponds with the account number reported on the credit bureaus.
3. Ask your lender what accounts will need to be paid off prior to closing. Some aged and/or smaller accounts may not be required to be paid off to complete your real estate transaction.
4. Contact your creditors. You can be your own advocate by taking the initiative to contact your creditors and make payment and/or payoff arrangements. You may also be able to document a filing made in error, and get documentation to remove an adverse credit item.

Best of luck!

If you have an FHA mortgage and are having trouble making the payments, you may now be able to get help from the government. FHA stands for the Federal Housing Administration, part of the Department of Housing and Urban Development (HUD). FHA provides mortgage insurance on loans made by FHA-approved lenders for home purchases with low down payments. As of August 15, 2009 HUD has made FHA mortgages eligible for their Making Home Affordable program.

It’s called the FHA-Home Affordable Modification Plan (or FHA-HAMP) and it’s designed to permanently reduce monthly payments. HUD Secretary Shaun Donovan announced, “We’re bringing another important tool to the table to help struggling families who are desperate to keep their homes. Tens of thousands of FHA borrowers will now be able to modify their mortgages in the same manner as so many others who are taking advantage of the administration’s Making Home Affordable program.”

So you think you want to buy a house that has multiple offers on it?

What I am about to suggest is called The Better To Be Lucky Than Good Plan and it’s success can largely depend on what your connection with karma is with the Gods in Charge of Decisions on Bank Owned Properties.

Step One

Once you have found a house and you realize that there is currently multiple offers in on it - maybe even at least one of them is for cash, it is time to get creative. In this case, creative is known as something called an escalation clause. The escalation clause can be worded in a number of different ways, but the essence of it is “buyer agrees to pay X% or X$ over the next highest offer.”

Step Two

Being creative can be fun, but unless you are also smart and creative, it could backfire on you. So now that you have been creative, you can protect yourself by being smart. Being smart in this case requires that in addition to your escalation clause, you also use a “subject to appraisal” clause such as this one The Phoenix Real Estate Guy stated in the comments from a post I wrote last week:

Appraisal Contingency: Buyer’s obligation to complete this sale is contingent upon an appraisal of the Premises by an appraiser acceptable to lender for at least the sales price. If the Premises fails to appraise for the sales price, Buyer has five (5) days after notice of the appraised value to cancel this Contract and receive a refund of the Earnest Money or the appraisal contingency shall be waived.

Once you have submitted your offer that is both creative and smart, it is time to sit back and let the fun begin. From what I can tell, the people who work for the Gods in Charge of Decisions on Bank Owned Properties are seldom able to turn one of these offers with an escalation clause in it down. I am sure it happens, but I just don’t see it happen very much.

Step Three

Once the offer has been accepted by the people who work for the Gods in Charge of Decisions on Bank Owned Properties, it is time to order the appraisal. Due to HVCC laws, appraisals today can be tricky and usually drive people nuts… but in this case, don’t let it drive you nuts - if the Better To Be Lucky Than Good Plan works out, you are about to save some money and be able to buy the home you want.

Step Four

If my math is correct so far, once you get the appraisal back, you will quickly realize that as a result of you being creative, you currently have an offer in that is possibly tens of thousands of dollars over the appraised value of the home.

Good thing you were also smart. Now is the time when you go back to the person who works for the Gods in Charge of Decisions on Bank Owned Properties and ask them which one of these three choices they want to pick:

1. Cancel the contract because the property did not appraise for the sales price
2. Get a different appraisal done with the seller paying for it
3. Negotiate with the seller to lower the sales price to the appraised value

How do you tell if you are one of those people who think it might be better to be lucky than good?

The person who works for the Gods in Charge of Decisions on Bank Owned Properties chooses door number three from the choices above and you end up with the house you wanted at the appraised value.

It might be easier than you think to be lucky… especially if the short sale department happens to be part of the “Retard Division“.

Other Recent Multiple Offer Thoughts:

Escalation Clauses: Bad or Good?

Multiple Offers and “Winning” The Bidding War

Multiple Offers is the Question of the Week

Can A Buyer Submit Offers on Multiple Properties?

Disclaimer: I am not a Realtor but I get to watch them work every day and most days it is more fun than not. Be sure to consult with a licensed Realtor before trying any of this at home.

True for the Boy Scouts, and true for anyone and everyone looking for home financing today.

Much has changed in the mortgage world in the last few years, and our last year has seen the most changes yet. Underwriting guidelines have gotten much more stringent, and processing times have lengthened. A good loan officer these days will look for ways to trim down the time between application and closing, but the loan officer can only do so much. Borrowers, the easiest thing for you all to do is to GET PREPARED. If you are looking for a home, or refinancing a current one, gather your documentation before you even start shopping. Why? Having everything ‘at the ready’ will enable you to move fast when documents are requested. It will make you feel LESS stressed about the process by knowing what will be required, and what is expected from you. 

Remember taking tests in school? The nerves were always worse, and the test always more frustrating if you were NOT prepared. So do yourself and your loan officer a favor, and gather up all the documents listed below. Note: your lender may request some or all of the documentation listed below. It’s always better to be on the safe side.

One month of pay stubs (all borrowers)

2 years w2’s or 1099’s

2 years Federal Tax returns (with signatures!) If self-employed or if you have income from investment properties. Include all schedules.

2 months bank statements (ALL PAGES) from ANY account that will be used for the transaction. Also, it’s a good idea to show SOME assets on a refinance, but there is no need for your IRA and stocks and bonds and all of that. That would be overkill, just use what’s necessary to qualify, and maybe a little more.

Copy of divorce decree or separation agreement, if you are divorced, receive or pay alimony or child support etc. VERY IMPORTANT to have this on hand.

Copy of canceled checks for deposits on a property OR gift funds. Document every step of the way if you are using a gift- that could even mean a bank statement from the person who is giving the gift! Paper trail, paper trail, paper trail. Remember those two words.

A copy of your HUD Closing Statement from the purchase of your home, if you are refinancing a second mortgage that was used in the purchase. 

As you can see, the amount of paperwork does look rather daunting. But it’s not that bad- most of this stuff you may not even need. Discuss your file with your loan officer to find out what to expect, and which documents will likely be requested. If he/she doesn’t know, and wants to wait for it to come out of underwriting, well… I hope you like waiting.

Be proactive, be prepared, and you will close with ease. 

This morning we got a question over on the “Ask Zillow” side that reminded me again that the jargon in the lender world is imperfectly understood by the general borrowing public.

No, strike that.  My English teacher would be appalled (right, Mrs. Russell?).  Here’s what I meant to say: It reminded me that most people haven’t a clue what loan people are talking about most of the time.

The question was, “When is my rate locked?” One of the answers was “is this a rhetorical question?  It’s locked when it’s locked.”  I am not making this up.  Obviously, that answer is true, yet monumentally unhelpful.  When we reach a point where the lenders and the borrowers don’t even understand what the other party doesn’t understand, then we’re in trouble.  So in an attempt to bridge the gap, I offer the following.

A rate lock is a commitment by a lender to the party taking out the loan.  This can be on the part of the servicing lender to the funding lender (secondary-to-primary) or on the part of the broker to the borrower, or a number of other possible combinations.  Confused yet?  Sorry.  It’s actually simpler than it sounds.

Here’s an analogy: I have a big vat of lemonade.  You want to buy some lemonade from me so you can set up a lemonade stand.  You come to me and say that you want 10 gallons of lemonade, and ask me how much it will cost.  I tell you it will cost $1 a gallon.  You want that lemonade, but you don’t want to pay for it right now, so you order the lemonade for delivery in 30 days.  I agree to this.  You have now locked the price of this lemonade, and I have set aside for you the 10 gallons you want.  This represents the secondary mortgage market, when your broker locks a loan with his investors.

Now you go and build your stand.  You engage salesmen to hawk your lemonade to the thirsty.  You hire ten guys and send them out.  They sell the lemonade for you.  They come back and say, “I can sell a gallon of lemonade for delivery 30 days from now.  How much will that cost me?”  You consult your accountant, and decide that you can sell that lemonade for $1.50 a gallon.  The salesman takes that information, and makes the sale to the public.  When he gets an order, he goes back to you and tells you to reserve a gallon of lemonade for delivery in 30 days.  This is a rate lock between the borrower and the broker.

What is immediately obvious is that there are two different locks here.  One is out in front, what most people call “locking their rate”, which is the second example.  When a borrower locks his rate, he believes that he is going to get the loan at the rate he locked.  What he rarely understands is that the rate has a time limit on it, and is subject to the honor of the loan officer he locked with.  A million things can make the closing take longer than the lock period.  Go over that time limit, and the rate changes.  A million things can prevent the loan officer from getting a borrower’s lock transmitted to the guy that owns the vat of money.  Fail to get that lock down with the investor, and the rate could get very expensive for the loan officer.

The other is the back-end lock, between the secondary market investor and the broker.  That contract is fairly inviolate, but has zero flexibility.  If your broker locks with an investor, the lock will be honored.  But there’s no way to extend it for nothing - the investor will demand to be paid for any extension.

So what does all this mean?  If you’re a borrower, keep these things in mind:

• Your loan is not locked until you are explicitly told it is.  Do not assume that your rate is locked just because you got a Good Faith Estimate.
• Your rate lock is not guaranteed.  Your broker may or may not honor the commitment he gave you.  Likely he will, but if he does not, you’re not going to have recourse.
• Once you lock, the clock is ticking.  You cannot afford to dawdle.  You need to take it upon yourself to provide everything you’re asked for as fast as you can.
• Your broker has certain flexibility.  If it’s definitely his fault the loan took too long, he can often be induced to pay for the extension.  Also, if rates drop while your loan is locked, he may be able to slide your rate down.  Mortgage shoppers should remember, however, that that rate lock has provided them protection against rate increases, and that rate protection has cost their broker something.  You might consider being loyal to a person that has stuck his neck out for you, even if someone else comes along that seems to have a better deal.

If you’re a broker or a loan officer, here are some things to remember:

• If a client tells you he wants to lock, do not make a commitment to him until you have one yourself.  It sounds easy to take one phone call and make another one right away, but you and I both know that what sounds easy often isn’t.  Never promise what you cannot be sure you can deliver.
• Do not roll the dice.  It is tempting to take a lock from a borrower, then roll the dice, holding off locking with your investor and betting that pricing will get better and you’ll make more money.  Don’t do this.  The stress of watching the market isn’t worth the few bucks you’ll occasionally make.  And if you blow it - you know what I mean here - you’re going to get killed in reputation and in dollars.  It’s not worth it.
• Stand by what you say.  If you tell a client his loan is locked, honor that lock, whatever it costs you.

Hope this sheds some light on one of the obscure-but-critical terms we use in the mortgage industry.  Next time, we’ll tackle the term “securitized mortgage derivatives”.  Wait.  On second thought…

Another government agency? No way!

Before you groan about more regulation, please read this recent article in the New Yorker titled “Caveat Mortgagor.” It was an excellent piece that explained the proposed Consumer Financial Protection Agency, an Obama Administration plan designed to regulate consumer financial products, which would hopefully prevent another Wall Street meltdown that also caused a Main Street meltdown.

The article made some compelling arguments and offered examples of other federal regulations that were put in place to save consumers from danger and death (e.g., “Food, Drug, and Cosmetic Act,” and “Meat Inspection and the Pure Food and Drugs Acts“).

Death from mortgages?

C’mon! How can a consumer die from a bad mortgage? Unfortunately, it has happened — perhaps indirectly as a result of a mortgage the borrower couldn’t handle, but it did happen. There was the Pasadena woman who took her life when faced with foreclosure and then the unforgettable national story of 91-year-old Addie Polk who tried to take her life when she learned she would lose her home to foreclosure. Two sad stories of which there are probably many more.

Mortgages just plain confusing

What was most striking about the Caveat Mortgagor article was how many people are just plain befuddled when it comes to mortgages and finances.  Federal Reserve economists Brian Bucks and Karen Pence issued a paper “Do Homeowners Know Their House Values and Mortgage Terms?” and wrote:

In particular, borrowers appear to underestimate the amount by which their interest rates can change. … borrower confusion also appears to be a factor, as a sizable number of adjustable-rate borrowers report that they do not know the terms of their contracts.

The FTC turned out an executive summary “Improving Consumer Mortgage Disclosures” in 2007 that concluded:

If consumers do not understand the costs and terms of their mortgages, they may pay more for their mortgages than necessary, obtain inappropriate loan terms, fall prey to deceptive
lending practices, and experience unpleasant surprises and financial difficulties during the course of their loans.

And lastly, back in 2003, economist Susan Woodward wrote a paper “Consumer Confusion in the Mortgage Market.” Even though it was written six years ago, all of the same issues are still apparent now: Buying a home and getting a mortgage is complex, the language is difficult, and shopping for a mortgage is not easy.

Do you know the True Cost of your loan?

While we can’t change the actual language used in the mortgages world (an ARM is an ARM is an ARM), we can try to make it easier to shop for a mortgage. That’s why a few weeks ago, Zillow Mortgage Marketplace rolled out True Cost Calculation, which is an apples-to-apples comparison of mortgage quotes. True Cost is the sum total borrowers will pay in interest and fees during the expected time they plan to keep the loan.  So, if you think you will stay in a home for five years before moving, you can see how much you will pay for that entire time.

Read more about how True Cost Calculation works. Better yet, look at the graph below to see it displayed.

Yesterday I had a client in my office (I’ll call her Marie) to work on a purchase loan.  She was referred by her Realtor to a fellow across town that she had started working with.  She liked him.  He was friendly and efficient, gave her information, seemed to be on the ball.  Then, partway through the process, he assigned her file to one of his in-office agents, and that’s when the trouble began.

This new agent was unresponsive, didn’t return phone calls, always seemed distracted and forgot Marie’s relevant information several times.  She took phone calls during their meetings, was frequently interrupted, and generally gave the impression she didn’t care about the client.  This was really frustrating to Marie.  She went back to her office after one such session and mentioned her terrible experience to one of her co-workers.  He had a radical suggestion:

Go see someone else.

Marie had never thought of that.  “But they already pre-approved me,” she said.  “So?” her friend replied, “did you sign anything? Any sort of commitment with them?”  Marie had not. “Then go find someone you like,” he said, and she called me.  She likes me.  I like her.  Her deal is complicated, but not impossible.  I think we can get it done.

There are two lessons here, one for professionals and one for borrowers. For professionals it is, never assume that once you’re working with someone you can start treating them like crap and they’ll stick with you.  If you’re going to fob your loans off to one of your people, you might want to make sure they have the same client-service standards you do.  For the borrowers it is: right up to the close, it is NEVER too late to switch lenders.  Rates and fees are important, and you should research those thoroughly, but just as important is the relationship you have with the lender.  If you don’t like him, get a new one.  There’s no shortage of options out there.  You can shop.  You should shop.  Keep going until you find a guy you like that gives you what you need to feel comfortable about the transaction, and don’t do the deal until you find someone like that.

The government’s $8,000 first-time home buyer tax credit has been a source of some confusion by those who might be eligible, but aren’t quite sure if they fully meet the criteria.

Now you can take a simple, 5-question quiz to find out if you qualify:

Do You Qualify for the $8,000 First-Time Home Buyer Tax Credit?

The great thing about this new quiz is that it was developed as a widget that you can put on your own blog or Web site.  Just copy and paste the code, and anyone who visits your site can then take the quiz and get instant results.

When you’re done taking the quiz, make sure to check out all of the other real estate and mortgage widgets Zillow offers.  Here are some of the latest widgets that are among my favorites:

• Mortgage I.Q.
• Market Bottom Poll
• Most Expensive Homes

Yeah, thought that might get your attention.  Let me clarify the headline.

Of course it matters how much you pay for something, but it doesn’t matter by itself.  It only matters in the context of the entire deal.  Let me use an example to show you what I mean.

Suppose you were offered a piece of real estate, on which the cost was $5 million.  Sound like a lot?  Yeah, and if the property was 4 swampy acres in Mississippi, you’d be correct that that was a hefty price tag.  On the other hand, if the offered property was, say, 20 acres of lower Manhattan - did you know that the World Trade Center footprint was exactly one acre? - you might reconsider.  That would be a pretty good deal.  The price tag, in other words, has no meaning by itself, outside the context of what the price is attached to.

I had a client recently tell me that there was no way he was going to pay more than $4000 for closing costs on his loan of $390,000.  I asked him what the significance of that number was.  He said that $4k was just a huge price to pay for a refinance, and he didn’t want to pay any more.  So I asked him a question: if he were saving $1000/mo on his payment, would he be willing to pay more than $4000 for the deal?

Turned out, he was.  Fascinating.

We had a lengthy conversation then about the tradeoff between costs and benefits, and he finally understood that what mattered was not how much the loan cost, but how fast the refinance paid for itself.  If it paid for itself in 6 months, that was a screaming deal.  If it took 6 years, that was not.  For each borrower that calculus is different, which is why good loan officers make refinance deals in terms of repayment times, not just interest rates and costs.

When you go to refinance, don’t just ask for the Good Faith Estimate.  Ask for a cost-benefit analysis.  You’re going to be investing your equity (or your cash) in the deal, and as with any investment, it’s a good idea to know what the returns are going to be.  Refinances are great investments, most of the time.  You can see annual returns of 40-60%, or even more sometimes, guaranteed, tax-free.  Try that with a mutual fund.  But you should absolutely know what that return is before you make the investment.

So ask.

Cj

Now is a great time time to purchase a home!  Here are some great reasons why!

• If you can pay rent, you can own a home
• Lock in housing cost at today’s rate vs. rent increases over time
• Tax advantages of home ownership
• Equity building through appreciation and paying down loan balance
• May be eligible for the $8000 tax credit as a first time homebuyer

Only 138 days left to take advantage of the $8000 first time homebuyer tax credit.