THE SELF EMPLOYED BORROWER

                                                      www.texarkanagazette.com
 I hesitate to say it is more difficult to obtain financing for self employed individuals but unfortunately that can be the case.  Not every self employed borrower is difficult-but there are a host of different rules and criteria that have to be met for the self employed person to be successful in their quest of a mortgage.

   The first hurdle that has to be cleared is the self employed business owner must have filed tax returns on the business for two years.  (There is an exception with one of our lenders that allows for one year if the borrower has a previous employment history in the business he now owns-but solid net profit has to be demonstrated in that one year in order to qualify.)

  The second item on the list is the answer to this question: What was the average net profit over the past two years?  This is important as many accountants instruct their clients to take as many expenses against the business as possible.  That may make perfect sense tax wise, but that practice can make a mortgage loan  impossible. For mortgage purposes what has to be computed is the net profit-sales, less all
expenses plus depreciation added back in and averaged over a two year period.

  If for instance over the past two years a business has shown a loss-the owner will not be eligible for a mortgage based on his business income. Cash flow and sales are irrelevant-it's the bottom line that matters. So if you are thinking of getting a mortgage and you have shown losses for the past two years, you will need to get with your accountant and structure your tax returns to show enough profit to cover your consumer debt and a house payment for the next two years. Obviously, purchasing a home when one owns their own business requires planning.

  But let's say the borrower, though self employed has a spouse who is a W2 employee and makes a good living. That's great-but if both parties file taxes together, the W2'd spouse has to have enough income to deduct the losses of the self employed husband or wife and still have enough income to qualify for the mortgage.

  What if you decided to move from being a partnership to an LLC or S-Corportation? The new W2 income can be accepted, but if you are paying yourself bonuses or dividends again, they can't be counted without a two year history. In addition if the business returns show losses, then those loses have to be deducted from the W2 income.

  Let's assume that the owner has been in business for two years or more and is showing enough profit to contemplate purchasing a home.  Are the owner's bank accounts separated from his/her personal accounts? What about credit cards? Are the credit cards associated with the business paid out of a business bank account?  Vehicles as well? My advice is keep business bank accounts, credit cards, and vehicles separated from all personal accounts.  Otherwise you must put the business expense into personal expense which could run the debt ratio so high that mortgage financing is no longer possible.

  It is also important to keep in mind that while money from a business account can be used in mortgage transaction, often you will need the services of your accountant to verify that using the money will cause no harm to the business. In addition, after the first quarter of a year you will be required to prepare a profit and loss statement for your mortgage lender so the underwriter can get a feel for how the business is doing year to date, and some loans require audited profit and loss statements which can run into significant money to prepare.

                                                                    www.sweetpeachblog.com

  I have done many loans for self employed borrowers-but the rules are not the same. More preparation is involved and that is good to know before you have your heart set on buying a particular home.

TAKING CARE OF THE CLIENT

                                                           www.inc.com

  The cost of acquiring a new  client or customer is five times that of retaining a current customer.  There is no doubt that is the case.  But if so, why do so many companies chase after the one they don't have and disregard the ones they do?   More than coupons, discounts, and bonus points, what floats my boat is that when I have a problem, I can find someone to help me solve it. With companies going to more and more automation, (which means fewer worker bees)the simple act of calling customer service is almost guaranteed to become an exercise in frustration.  To that point, voice recognition software has become sensitive enough that a raised voice or cursing can get you to a human being who may or may not have the authority to help you. (This I know having experienced it myself.)

  One of the key components to a successful mortgage transaction is customer service.  Anyone can sell competitive terms and rates.  What is important is the follow through. Can Lender XYZ deliver on what they promise-or over promise as the case may be?  I find this especially common when the borrower is shopping on the internet.  As a rule I don't compete with internet lending. The old expression "what sounds too good to be true, is too good to be true" rules in this circumstance.  Often with internet lending the client and or their real estate agent can't speak with the same person twice, are not kept apprised of the progress of the loan and find little or no accountability when things go wrong. Of course there are exceptions but these types of problems are not limited to internet lending alone. I have heard many complaints from real estate agents and borrowers alike that the lender that is handling the mortgage loan disappears into a black hole while the transaction is in process. 

  Buying a home is an emotional process.  Not only are there are the logistics of orchestrating the move to deal with, but some moves are not predicated on happy experiences-perhaps a death or divorce is the motivating factor. In addition, there is a seller who needs to know the progression of things as well, so they can plan their exit from the home that is being purchased. Communication to all parties involved in the transaction is critical. This is a basic-it needs to be done.

  Post closing, our customers may not have the same issues as someone who buys a computer or toaster that doesn't work, but post closing concerns do occur.  It is important that our clients know there is someone they can call to assist them with any problems or questions that come up. While we don't service the loans we originate we can still get in touch with our network of lenders to find answers to question or at least a contact that can be called to solve a problem.

  Our company likes to use the motto "We want to be your lender for life."  We try to act on that by informing our past clients of financial opportunities such as interest rate reductions. shorter loan terms etc. as the years go by to improve their financial situation.  We also try to share information about other companies that we trust that might facilitate the financial betterment of our clients. such as tax preparation, insurance companies, or financial planners.  A large percentage of our business comes from past clients, be it refinance transactions, referrals or trade up situations.  I am always happy to see an old friend. To be referred a new borrower from a past borrower means that we have done something right.  I believe that is the highest form of compliment that I can be paid on my past work. 

  I also like to co-opt a slogan that was used by a department store retailer that I worked for many years ago and that motto was "Think Like A Customer."  It is very easy once one has been swallowed up into a business to forget that most people don't know the particulars of the business and don't have the basis of knowledge that I do about what I do. Everyday I try to keep my eye on the fact that I possess knowledge that I have learned over many years in the real estate industry.  This means I have to take the time to stop and explain what is going to happen. Even if I have bad news to impart-the truth is better than a soft shoe around it. Once the truth of the situation is acknowledged, then all concerned can move to deal with it. 

  It is important that whoever you choose to handle your mortgage business is someone that you trust to tell you the truth, follow up, return phone calls, and keep you in the loop of your transaction.  To get less than this on the most important financial transaction you will probably ever conduct is not acceptable.  

WHO NEEDS ASSETS WHEN BUYING A HOUSE?

  You do. 

 There seems to be confusion on either end of the spectrum of the role of assets in a mortgage loan transaction.  Many people I talk to think they need no money to buy a home because they are receiving 100% financing through USDA or VA-two programs that do not require a down payment.  And then there are the folks that still believe that one has to have 20% to put down in order to buy a home.  I have been working in the housing industry since 1991, and even in that long ago era, one didn't need 20% down in order to obtain mortgage financing.  In 1983 I purchased my first home and I put 5% down-so the 20% requirement is long gone, but apparently not forgotten.

  The fact is that you do have to have some money in order to purchase a home.  Minimally, if you are using a 100% financing program, you would need $800-$1000 to cover inspections, earnest money, and the appraisal once your loan was submitted.  However, while it is not my decision to make I highly encourage savings.  For one thing the underwriting goes much more easily if a borrower shows that they have the ability to save some money.  This money can be in retirement funds, CD's, a bank account, stocks, etc.  Even a couple thousand dollars in the bank shows a lender that the borrower is able to manage their finances.

  I have closed many loans for folks that only have a little money in their checking account.  That's okay-government loans don't require the borrower to maintain reserve funds.  However, if the simple aspect of purchasing the home requires all the money the buyer has, what happens three or four months down the road if the furnace quits running, the roof leaks, or there is an electrical problem?  Yes, there are whole house inspections and the inspectors do try to find anything that might go wrong in the near future so that it can be repaired prior to closing the transaction.  However, whole house inspections while useful, don't always find everything.  The whole house inspector may not be able to determine if the sewer is going to back up if it never has before. There are always unforeseen circumstances when it comes to owning a home. I put $1000 into treating two trees this summer because of the emerald ash borer threat. Stuff comes up. Not to mention the normal issues of life-medical emergencies, car issues, or school participation fees that can be a bit pricey.

  My advice to soon to be home owner hopefuls is to save a little money.  If you have a tax return check coming-don't let the nearest car lot call your name and sweet talk you into using the money for a down payment on a car. Tuck it away-it may come in handy once you are a home owner.  If you don't have a retirement plan at work-create one.  If your company doesn't offer profit sharing or a 401K do it yourself.  Ask for a referral for a good financial planner and put a little away each month.

  I look at an awful lot of bank statements that are a testament to the fact that Americans eat out-a lot.  I often see that people spend $300-$500 a month on eating out. That's okay if you like to eat out-but put one meal a month away for a rainy day.  And if you find that eating at home isn't so bad-put more than one meal a month away.  It adds up in the long run.

  We all will not be blessed with winning the lottery, inheriting a large amount of money, or stumbling over a pot of gold at the end of the rainbow, but we can all do what we can do.  You will make your loan application that much stronger and create a little less stress for yourself in the process.

YES, WE ARE TALKING ABOUT CREDIT...AGAIN!

  Here's what happens.  Somebody drives by a home that they always admired-even thought they might like to live in one day.  There is a "For Sale" sign in the yard.  That wistful thought becomes an action plan-BUY THE HOUSE.  The first thing the potential buyer does is to call the Realtor listed on the sign.  The Realtor asks-"Are you pre-approved?" That's when my phone rings.  The facts are that this is the backward way of achieving the goal of home ownership-pre-approval comes first because -if you are a regular reader of my blog you already know-that a buyer not only has to be ready and willing, they have to be able to buy the home. Responsible real estate agents will not write an offer on a home until and unless the buyer has spoken to a financial institution about the prospects of borrowing money to buy the home.

 Once the phone call comes in I begin the process of pre-approving the borrower-the first step of which is to take a look at credit to see how the potential home owner manages his/her debts.  The statistic cited above by NCO-1 out of 4 people in the US have a credit score of 599 or below?   That is a very sobering number. 25% of the adult population of the United States has issues on their credit report that drop their scores below what most lenders require to obtain mortgage financing.  And I would attest to the fact that the 25% number is verified in the credit reports I see.  The reasons are many-medical hardship, job loss, mistakes on the credit report, or just plain old bad financial habits enter into a low credit score. (If I had my druthers a household finance class would be a required part of every high school curriculum in the United States-but no one is polling me on the subject.  In any event, many, many borrowers for one reason or another are not able to qualify for a mortgage. Here they are-the home they have always wanted is available and they don't have the credit to buy it- and what's more the lack of ability credit-wise is a surprise. Or maybe they knew all along and thought that given some time, the ship would right itself and all would be fine.

  With regard to credit there is no magic.  Bad credit doesn't disappear-it remains on a credit report for years and years.  If there are tax liens, collections, late payments, judgements, repossessions-all that bad stuff that most people would just like to go away-it's going to be with you for a very long time.  Unless, that is, you do something about it.

  I can't begin to enumerate the number of times I have sat down with a potential home buyer to go through their derogatory credit to have them say, "But I paid that one.  I disputed that.  That's a mistake."

  The Fair Credit Reporting Act is supposed to protect your rights with creditors.  In order to do that it has to be enforced.  At the current time it is not being enforced without expensive legal action. It is a fact that trying to take care of this yourself is in my opinion, fairly hopeless.  If there is one judgement let's say, that is showing unpaid, you can resolve that yourself relatively easily.  But dealing with collection companies? Forget about it. Even if you have paid that collection multiple times it may still show on your credit report as unpaid.

                                                                         firsttuesdayjournal.com

 Even the President of the United States can't unravel the secret to fixing credit. 

  I have an idea.  You knew I would, didn't you, and furthermore it works.  You can file an expensive law suit to correct your credit or you can work with a company that specializes in cleaning up your credit report. The Fair Credit Reporting Act requires that creditors go through a fairly extensive process in order to place a delinquent account on your credit report.  Because of the complexity of the process, many creditors bypass the required steps. The success of the company working on your behalf comes from challenging the creditors to produce the proof that allowed them to place the negative items on your credit report.  The end result of this is that items that have been placed in error or that have been paid or resolved are cleaned up and reported correctly, thereby improving your overall credit standing.  Challenging these companies yourself, working with the bureaus to clean it up yourself has become almost impossible for the individual.  The cards are stacked against you.  The link below is a 60 minutes piece that was shown earlier this year.  If you are thinking you might want to take on the task-please do yourself a huge favor and watch this:


http://www.cbsnews.com/videos/40-million-mistakes-is-your-credit-report-accurate/

 My final thought for the day is that you DO need to be careful of the company that is working on your credit. There are some outfits that are only too happy to take your money and not do much.  I am always willing to recommend the company that we use in our business as they have a track record of success with our clients.  So a referral from your lender or real estate agent is always appropriate. Credit clean up can take anywhere from 45 days to 9 or 12 months depending on the issues.  Do yourself a favor-plan your housing purchase in advance.  If you think you have credit issues, get ahead of them and go in for a pre-approval six months prior to when you think you wish to move forward purchase. If you need a credit intervention-do it prior to finding your dream home.

APPRAISAL? INSPECTION? THERE'S A DIFFERENCE?

                                                                   www.neiu.edu

 We are speaking of two different subjects today-Appraisals which are one thing and inspections which are another.  Many of my first time buyers are confused about the difference.  The appraisal is an inspection to be sure-but it is very different from other types of inspections.

  What the appraisal is all about is value. The reason for the appraisal is for a licensed appraiser to place a value on the home you are buying by evaluating the market in which the home is located.  In other words, to compare and contrast the home to others in the neighborhood that have sold recently to be sure that the sale price is within the scope of what is happening value wise with similar properties.  While an appraisal does in fact protect the buyer from paying too much for a house, the real beneficiary of the appraisal is the lender who does not want to be caught holding the bag on an overpriced property.

  Other types of inspections are done in order to obtain condition information about the property for the benefit of the buyer and in the case of some specific inspections on government loans, the lender. Various types of condition inspections are whole house-which covers the basics of structure and mechanicals, termite and wood devouring insect inspections, well, septic and radon tests to name a few.  Sometimes the whole house inspection may uncover an issue which requires further inspection by a specialist such as roof conditions or furnace and structural problems.  While many people are not crazy about shelling out the cost of a whole house inspection (in our area $300-$400) this cost is minimal when considering that a situation that even the seller doesn't know about may be uncovered-such as termites that have invaded the studs of a portion of the home or a floating foundation-which will cost thousands of dollars to repair.  Remember-once you own a home, you own any issues associated with it as well. There is no landlord to call. All repair costs will be coming out of your pocket.

  It is important to note that even though whole house inspections may identify problems, a whole house inspection is not a guarantee that every issue will be uncovered.  Whole house inspectors are generalists.  If there is an issue that concerns a buyer it is to that person's benefit to have someone who is a specialist in the concern further investigate the issue.

  Appraisers are required to note certain conditions of they see something that they feel needs to be looked at.  However, appraisers are not contractors and do not possess the knowledge to be able to identify situations that are not obvious.  They can look at a circuit breaker box for instance, and determine that the panel is wired for 100 amp service-but an appraiser would not have the knowledge to know if that box was wired correctly. So it is important for the buyer to know that they cannot depend on the appraiser to identify any significant condition issue. They might, but then again they might not.

  When asked I always recommend that a borrower obtain a whole house inspection-even if the property is new.  It is one more set of eyes to be sure that you are buying a property that will not need an infusion of money in the near future to keep it habitable. If for example the furnace is older but working  the seller has no responsibility to replace it on the reasonable premise that it might fail in the next year or two. All the seller can be responsible for is the condition of the property when they sell it. In order to hedge some bets if there is a concern about some of the appliances or mechanical features of the home there are home warranties available for sale.  Often the seller will pay for a one year warranty for the buyer as further protection as a part of the purchase agreement. Buyers are also able to purchase a warranty themselves if they feel it would be beneficial.

LET'S BE SMART ABOUT THIS...

 

                                         rossieronline.usc.edu


  Buried deep within my application paperwork is a form.  I refer to it as my "Don't Do Anything Silly" form.
The form reminds my clients not to make any changes in their financial picture that can affect their loan and their ability to be approved.

  That's just common sense you might say.  What many people don't realize is that until the mortgage loan closes, their finances and how they use them are being scrutinized.  I have had more than one borrower, once approved think that they are through the maze, so don't have to pay particular attention to how they manage their money.

  What am I talking about? During the loan process credit can be pulled at the beginning and at the end of mortgage loan submission.  Lenders are very careful about what is known as "debt ratio".  What the debt ratio is, is the percentage of income that is required to satisfy accrued consumer debt including the new house payment.

  Let me give you an example:  Once a long time ago I was working with a client who had a very high debt ratio. It was tight enough that adding to credit card balances or taking out new accounts would put the debt ratio over the limits allowed by lending.  The client was excited-he was building a new home and of course with a new home, there are items that need to be purchased that might not be needed in an older existing home such as window blinds, landscaping, a fence for the dog etc. My client was savvy enough to know he shouldn't charge up any more items on his credit card.  However, what he didn't realize was that prior to closing we are required by the lender to do a verification of his bank accounts. The reason is to ensure that the borrower still has the money to close in his account. Upon doing that verification we discovered that the client had taken out a bank loan to cover the items that he wanted in his home the day he moved in.  That loan put his debt ratio over the limits allowed by the lender. Two days before closing the loan was denied-Big Oops!  The situation was resolved by a cash infusion from mom and dad-but still not a comfortable conversation to have with a borrower that thinks he is moving into a new home.

  It is also advisable to keep your job.  In the past I have had clients who quit their jobs a day or two prior to closing thinking that the verifications have been made and the lender won't find out.  One of the last things that a lender does prior to releasing the mortgage money to the title company is a final employment verification. After the bad old days prior to 2008, lenders want their borrowers to be employed on the day of closing-and the day after closing. Some check the day after closing as well. 

 We have also had borrowers who were laid off their jobs.  While that is not under the borrower's control-the lender is still going to require that they be employed to close the loan.

  The other employment issue that occurs from time to time is a job offer for a better position in the middle of loan processing. I would never suggest that someone turn down a chance to better their financial situation but it is important to realize that a job change to a new company can impact the loan. What happens is that all probationary periods have to be fulfilled and thirty days of income must be received prior to closing. So while the borrower will still be able to close, the closing may be delayed. 

  Another concern that can occur with a job change is whether or not the borrower was approved for their loan using overtime, commission, or bonus income.  The rules are that overtime, commission, and bonus have to be earned over a two year period in order to count as income. So any change in company will throw the borrower back to the beginning of the two year window.  In fact, it has happened that we once had a borrower who left his job for two weeks, returned to the same job, and then bought a home. His qualification for the purchase price was based on his overtime. We didn't know that he had left for two weeks in the past year. But when we did the verification of employment the brief interruption was noted. He was not allowed to use overtime to qualify for the loan even though he was with the same long term employer. Fortunately, his spouse was able to be added to the loan and he was able to close with the addition of her income.

  Last but not least I would encourage folks who are in the mortgage process NOT to spend the down payment money on other items.  It is critical that you have the amount you need to close the loan in your account within a few days of closing. You can't spend it, have mom and dad replace it and then proceed without triggering a mountain of red tape and paper trailing. If mom and dad are going to buy you new appliances-let them put it on their credit card or write the check at the appliance store.

 In a similar fashion to trying to sell a home-the adage being that you don't live in a home you are trying to sell the same way you normally live in a home-you have to be keenly aware of how you use your money and credit during the period your mortgage loan is being processed.  I absolutely hate calling a borrower to tell them that I hope they really like the new SUV they just bought and I hope it has two bedrooms and a bathroom because they most likely will be living in it since the new car payment killed their mortgage loan.

EMPLOYMENT-HOW LONG IS LONG ENOUGH?

                                                       blog.lubans.org

  A statement that is frequently tossed out to me from prospective buyers is, "Well, we really want to buy a house but I haven't been on my job for two years yet."  Thinking back to my beginning days in the real estate industry in 1991 that may have been true-demonstrating job stability was and to a certain degree, still is an important factor in the list of items that underwriters look for in order to approve a loan.
  
  But 1991 was a long time ago.  And a lot has happened.  Immediately prior to the mortgage meltdown a borrower didn't even need to have a job if their credit score was good and they declared a certain amount of assets on their loan application (that weren't subject to documentation) But I think that most of us would agree that may have been taking it too far in the wrong direction. 

  In any event, the current rules, while not quite so loose as in the wild west-anything goes days of mortgage loans aren't so stringent as the two year rule from my early days in the business.  Let's face it-a lot of people lost their jobs in the 2008-2010 recession through no fault of their own. It seems a trifle unfair to make them show two full years of employment once they have once again found a job. 

  The good news is that government loans aren't quite as fussy as conventional loans on employment. Typically if a borrower has been on a job for 30 days, and has completed all probationary periods satisfactorily they are likely to be eligible for a mortgage loan.  There are a couple of caveats with this rule though.  There needs to be previous job history with a good explanation for the employment gap. But-if a borrower has moved from one job to another either in the same line of work or has significantly bettered themselves with the new move, there is continuity and the only issue is getting through the probationary period if there is one. 

  For young adults who have just graduated from college and are working at their first job-with government loans the same rules apply-the course of study in school substitutes for job time. For high school graduates however, most lenders will want a year job time to show consistency due to the fact that there is no specific course study geared to a particular profession.

  With conventional lending the rules are different.  If a borrower has a history of employment and then has a gap due to job loss or perhaps took time off to stay home with children-the amount of time back in the work force depends on the lender. Our company works with one lender that will allow the borrower to be back at work for one month as long as they are in the same line of work. Yet another lender will only allow a loan if the borrower has been back at work for six months. So the rules vary and if a borrower is turned down it is beneficial to check more than one source for the mortgage loan.  For new borrowers that have just graduated from college, once again if they are working in their field, a conventional mortgage should be a possibility and the time spent on the job would vary from lender to lender. 
  
 Job hopping is still open to question as underwriting wants to be relatively certain that the borrower will remain employed. 

 Part time employment income can be taken if the borrower has held the part time job for two years. (Even so there is an exception-we do use a lender that requires one year so if we need the part time income to qualify the borrower for the price range he/she wishes to purchase in we would take that person to that specific lender. But the majority of lenders are going to want 2 years on part time work.)

  If a borrower has a part time job that turns into a full time job the years spent working part time do count as consistent job time and once the worker goes full time his job qualifies him for a mortgage loan.

  My conclusion would be that a borrower should never assume that because he is turned down for a mortgage loan from his bank that he is not eligible for a loan.  It is worth the extra steps to check around to see if he does qualify for a program that is not offered by his bank or original lender. 

THE COST OF WAITING

 Frequently as I speak with potential buyers, I find that they are having a debate with themselves about whether to act now, or delay their acquisition of a home for a year or some point in the future when they feel the market conditions might be a little more favorable. A little more favorable for whom? Sellers? Buyers?

  Current interest rates for a 30 year fixed rate loan are sitting at about 4.5% with daily fluctuations.  The projection for 2014 is that by this time next year the rates will have increased to 5.5%. Those of you who already own homes may be thinking-yes, but I have read that home prices are also projected to rise about 4.5% as well.  So I would like my home to sell for a little more money.  I understand completely as long as you aren't interested in buying another home.  Why? Because if your home appreciates 4.5% all the other homes on the market will be appreciating 4.5% also.  Let's do a little math:

If you purchase a home for $150,000 and put 5% down at today's rate of 4.5% your principal and interest payment will be $722.03.  If you wait for next year to roll around and the interest rate is 5.5% and housing prices have increased, that same $150,000 home will be on the market for $156,750.  The house payment will be $845.51 a $123.48 difference. That's not so terrible you think.  Let's multiply that difference out over 30 years-the difference you will make in principal and interest payments will be $44,528. Ouch-now it's really adding up, isn't it?  But if you have a house to sell-let's say it is worth $100,000 right now-your house will appreciate to $104500 yet you will only net $2250 of that increase because you are paying more for your next house.

  If you are a renter and paying $650 in rent, you will be paying an additional $7800 to your landlord which could be going into a mortgage.  Keep in mind, that overall home ownership is 35% cheaper than renting.

  I don't know about you, but I don't see an upside to waiting if you have the ability to buy now.

POSITIVE IMPACTS OF HOME OWNERSHIP

  Even after going through the burst of the housing bubble Americans are ready to climb back on the horse and attain home ownership.  A recent Harvard Study entitled Special Benefits Of Home Ownership After The Housing Crisis, outlines why 85% of Americans still feel that owning their own home is a big piece of the American Dream.
  Why do Americans favor home ownership? Here are a few reasons:

1) Want a good place to raise their children
2)Want their family to be in a safe environment
3) Want or need more space
4) Want the ability to renovate, i.e. make the space their own
5)Believe that home ownership is a better investment than renting

  The Federal Reserve would bear out number 5 since their numbers show an average of a home owner's net worth being 30 times that of a renter's net worth. The national average of net worth for a home owner is $175,000.  For a renter-$5000.  For the United States, 61% of the net worth of our citizens is in home equity.  The other interesting number that the Fed gives us is that home ownership is 35% cheaper than renting a home. So the old adage that you can pay your own mortgage or you can pay your landlord's appears to be true.

  In addition the Harvard study collected some theories regarding the positive impact created by home ownership:

1) Wealth creation
2)Greater residential security
3)Better quality home environment for children
4)Better quality neighborhood-which includes better schools, better educational outcomes, less crime
5)Heightened sense of accomplishment

The negative factors cited by the study were these:

1)Mobility restrictions-moving from place to place is not as easy
2)Mortgage payment stress and fear of foreclosure
3)The impacts of home maintenance and the expense of repair

  Overall the findings of the study were that home ownership is still highly desirable-even after going through the past few years. It is still viewed as a net positive.

WHERE I GET MY LOAN...DOES IT MAKE A DIFFERENCE?

There are three different types of entities that offer mortgage money to the consumer.  The bank-which is familiar to most people, a mortgage bank, and mortgage brokers.  Most people don't spend a lot of time pondering the differences.  But there are differences and they are significant.

  The place most borrowers begin their mortgage search is normally the bank where they keep their accounts. It seems logical, they need money. Where do you find money? At the bank, of course. Depending on the bank, there may or may not be multiple programs that cover a large variety of people and their needs. For instance, Wells Fargo or Bank of America will probably have access to most available loan programs-your neighborhood Main Street bank may not. Smaller banks have fewer resources, so don't are often limited in the loan choices. The benefit of a small bank is that they may know their depositors personally, so have the ability to keep the loan "in the vault" for a period of time rather than sell it on the secondary market if they know the client and feel it is a safe bet, even if the characteristics of  the loan or credit profile is outside comfortable parameters.  And, banks that don't have all programs available may try to cram borrowers into programs that aren't as good for them as a program they don't have-VA mortgage loans come immediately to mind. Not every bank will lend on a VA loan and may try to put the veteran into another product that doesn't possess all the advantages as the VA loan.

  Banks being somewhat conservative organizations, may add what is known as overlays to a loan program. I.E. adding rules over and above what the program requires for approval-such as requiring a higher credit score than what is required by the program, or more assets for down payment etc.

Mortgage banks are entities that do not have depository accounts.  Their sole purpose is to originate and fund mortgages. Quicken Home Loans is a well known example of a mortgage bank. Mortgage banks, like a regular depository bank may only have one source of money.  That being the case the attributes of the loan must conform to the rules that the investors in the mortgage bank choose to extend. These overlays can be stricter than the actual rules of the programs they carry.

Mortgage Brokers don't have assets that they lend. Mortgage brokers function just as a stock broker or real estate broker functions.  They are the intermediary between you-the consumer, and any number of lending sources.  Some of those lending sources are the same depository banks or mortgage bankers that have retail shops. The money that is available to mortgage brokers is known as whole sale money. And it means just what is says.  Any business that has a retail outlet has to purchase their wares from a wholesaler.  In the case of mortgage brokers what is being purchased is money which may be at a different price than what is being offered at the retail bank down the block. In fact, it is somewhat interesting to note that I have had clients come into my office with a quote from a bank from whom we obtain wholesale money.  Many times our rate from the same entity is lower than the retail operation.

   Why do I need a middle man, you ask.  One, for the reason I mentioned above. Many times a broker can meet or beat the best offer you can receive at a bank.  Second, since brokers have more than one source of money, if the characteristics of a particular buyer don't fit one lender's profile, they may fit the profile of another. Brokers often have more flexibility.  So to put it succinctly-more choices, more chances for approval.

  Typically a mortgage broker isn't going to be able to call around to every lending institution for quotes on your loan. Brokers have relationships with specific lenders-not access to all of them.  In case of our company we choose lenders that fulfill different needs in the market. We have one that has a little more latitude with unusual employment situations, while another will allow a lower credit score in some instances or different variations in credit requirements. Not all borrowers present the same credentials when applying for a loan. It is important to be able to assist as many as possible with their individual needs.

 Whether the entity is a bank, a mortgage bank or a broker-all can easily approve and close the top tier of borrowers.  However there are many borrowers in the market who while not possessing extraordinary credit or assets, are qualified buyers.  It is important that they have access to mortgage money also.

 Granted, I have a biased point of view but I have closed many loans with no trouble that were previously turned down by a bank or mortgage bank.  So the take away is this: More choices, more chances-stop at your mortgage broker first. You may be very pleasantly surprised.

PRE-QUALIFICATION, PRE-APPROVAL, CREDIT APPROVAL -WHAT?

  When a buyer begins their search for a home, it is recommended that they stop by their lender and obtain a pre-approval. Even if this isn't his or her first rodeo, many rules have changed and options are different than they once were. Once this is accomplished and they find the home they wish to purchase, the seller will expect a pre-approval letter to be presented with the offer.

  The reasoning behind this speaks to the definition of a buyer. A buyer is someone who is ready, willing, and able to purchase a home. The ready and willing part is normally not a problem. It is the able part where the hair splitting begins. Many people believe that they are able, based on what they pay in rent, how much they have to put down, etc.-but when they run their financials by a lender, they find out they aren't.  A seller doesn't want to take his or her home off the market and lose market time unless the buyer has a pretty good idea that they really can complete the transaction.

  There are three stages of review when a lender is working with a buyer. The first is pre-qualification.  What pre-qualification entails is the borrower telling the lender about his financial readiness to buy. So for instance they may say they make $40,000 per year, have $5000 in the bank and have worked for company XYZ for three years, and their consumer debt payments are $250 per month. They may inform the lender that they have gone onto freecreditscore.com and retrieved their credit and it was 687.  On the surface of it, this looks like someone who can buy a house.  But what do we really know? All we know is what this individual has told us-there is no verification of any type to be sure this is true. The details we don't know such as are there student loans that aren't in repayment, or is his income commission based, or what the other two credit scores are can sink this buyer. So a pre-qualification isn't what is needed to secure an offer.

 The second and most common document attesting to a borrower's ability to obtain financing is the pre-approval.  In this case the lender obtains all the info the buyer has to give, plus pulls a credit report to verify that the credit is substantial enough for the loan.  Normally when I issue a pre-approval I like to see a pay stub with year to date income on it as well-sometimes buyers don't calculate income the same way a lender does. If I can get them, I like to obtain bank statements and get some background on employment, and rental history as well. If I have that information I can upload it to Fannie Mae and get an automated approval. By that time in most cases, I have enough information to assess the situation and figure out where the stumbling blocks, if any, may pop up.  Most of the time, this is good enough-but it is not fool proof.

  Like an onion, people's financial and credit history can unpeel in endless layers of information.  Once in while there is something at some level that could not have been sussed out prior to issuing the pre-approval. One such instance was a pre-approval that was done for a client who had 7 years at the same job. The pre-approval was based on income on hourly pay plus overtime which was received on a routine basis.  What we didn't know, and had no reason to ask, was if there had been any interruptions in the client's job time.  As it happens there was-he had quit the company for a two week period ten months prior.  The rules of lending are that overtime can't be counted in income unless it has been received continuously for two years. That brief break in employment set the clock back on this client and we were not allowed to count his overtime. Had his employer not noted the interruption, or had they bridged the dates there would have been no issue-as it was, his income was not adequate for the home he purchased since the overtime could not be used.

  The only sure thing in the evaluation of a borrower in our arsenal is to actually credit underwrite the buyer. Not every lender offers this service, as it is not a sure thing that the buyer will end up buying or that if they do, that they will use the lender that credit approved them. Time being money, many lenders don't want to burn the underwriting time and payroll to evaluate loans at this undetermined stage. However, if the lender will do the credit approval, this is the next best thing to a cash offer. The process is identical to a loan application only there is no property attached.  When I do a "to be determined" loan, I normally use the highest loan amount that the buyer qualifies for based upon either their payment comfort zone or their debt ratio. Typically this is a feature that is good if there are any questions about the buyer's qualifications or if there may be an impediment to financing. It is always preferable to problem solve prior to the purchase agreement rather than on the fly after. The results are normally much better.

 In conclusion, I only use pre-qualifications on a generic basis for hypothetical situations with a buyer who isn't ready to make a firm decision about whether or not they wish to buy a home. I won't issue a pre-approval letter until I have a credit report, and a comfort level with income. If I have any questions, I try to actually submit a file prior to purchase, at which point I can issue a credit approval letter. This gives all parties to the transaction the benefit of the best chances of a successful closing.

COULD WINTER BE THE BEST TIME TO BUY?

  Historically, the housing and mortgage markets cool off in the winter as consumers turn their attention to other priorities such as the holiday season. And, let's face it, there is not a lot of fun to be had sloshing through snow, slush and ice to look at properties.  But for those who are willing to pull on the galoshes and wrap the muffler a little tighter around their necks, winter could be an excellent time to buy. Here are some reasons why not waiting for spring may be just the ticket:

1) Interest Rates-We saw what happened last summer when the Federal Reserve even mentioned tapering off buying mortgage bonds-rates shot up 3/4 of a percent in a ten day period.  The Fed had to do a lot of backtracking to assure everyone that the possibility of tapering was next spring-not now.  If even the mention of tapering off the bond buying program is enough to make rates increase, you have to figure that when the Fed actually does begin to buy fewer bonds-rates are going to go up and go up quickly.  Right now conventional wisdom is that this will happen in the spring of 2014. So buying now while rates are lower is a good plan.

2) Home Prices-Typically homes that have been on the market for awhile have taken or will be taking  price reductions. Added to that is the fact that sellers aren't excited about keeping their homes on the market through the holiday season and winter and may be more negotiable and willing to pay closing costs.  During the spring market, optimism reigns and listing prices out of the gate are normally higher.  You may be able to find a good deal by shopping in the winter.

3) New Construction-If you are considering building, while construction may be hampered by winter weather, winter is an excellent time to lock in pricing for a home that is to be completed in the spring.  Building suppliers typically take price increases in late January. So best to get your building contract signed and pricing secured for a late spring or early summer close.

4) Time and Attention-During the winter since activity is down, real estate professionals have more time to focus. on.you.  Whether it is your real estate agent, mortgage lender, whole house inspector, title agency or availability of appraisers-with less traffic all of these people who make real estate transactions happen have more time to devote to the details of getting the job done.  It is much easier to address the needs of five clients adequately, so take advantage of that.

5) Changes in Federal Finance Reform-We are not done with theDodd-Frank Financial Reform and Consumer Protection Act yet.  We are still dealing with the consequences of the mortgage meltdown in 2008.  This January brings new changes to mortgage qualifying-tighter debt ratios, and a larger burden of proof on consumers with regard to assets and employment.

  So while the idea of shopping for a home in the winter may not sound appealing, smart buyers are out looking for good properties at great prices.

 

10 THINGS WE BET YOU DIDN'T KNOW ABOUT THE VA LOAN

 With Veteran's Appreciation Week getting set to kick off I think we ought to highlight little known facts about the VA loan. So here we go...did you know:

1) The un-remarried spouse of a deceased veteran is eligible for the VA loan

2) A veteran  that qualifies can actually own two VA loans at the same time-the second one must be on a purchase for over $144,000

3) The VA loan is 100% financing with no monthly mortgage insurance

4) If a veteran is disabled they are exempt from the upfront funding fee that rolls into a VA loan

5) The veteran, under no circumstances is allowed to pay the termite inspection fee on a purchase-this must be paid by the seller.

6) The VA loan can be used to purchase  a mulitple family property up to 4 units as long as the veteran is occupying one unit

7) Those who have served in the National Guard or Reserves who have never been on active duty are eligible if they have served 6 years in the NG or Reserves.

8) While VA does not have a minimum credit score for the most part lenders will not accept a score below 620

9) A current VA loan can be refinanced using an IRRL-or interest rate reduction loan which has reduced documentation  in order to achieve a lower interest rate.

10) VA will allow up to $6,000 to be added to a 30 year purchase loan or an owner occupied existing property for energy efficient upgrades.

  With features like these, it would be a disservice to veterans to try to persuade them to use a different type of loan. But we see it happen.  If you are a veteran, be sure to check out VA and what it can offer you before deciding on a different type of loan product.

DIVORCES AND MORTGAGES

 Now there's a topic that no one wants to think about. Unfortunately, it's an event that happens all to frequently.  And...it is one of the last things people consider during the emotionally charged period surrounding a divorce.  People think about it when they decide to refinance the house, sell the house and buy another, or attempt to do something that involves a mortgage and find out that the divorce decree and property settlement didn't adequately address the issue.

  How could that happen?  My attorney is supposed to take care of all that, right? I paid that guy good money, and a lot of it, to get it all squared away. Well, here's the thing-you may have the greatest divorce attorney on the planet- a real pit bull-but your attorney's expertise is in family law-not mortgages and the requirements of mortgage lending or maybe even the Federal Financial Reform Act and how it affects borrowers and what is possible or not with regard to mortgages.

  Here is what we normally see with situations of divorce:  One party or another decides to keep the house. The judge rules that the party that doesn't want the house must sign a quit claim deed relinquishing all interest in the property-which is the purpose of a quit claim deed.  What the party not keeping the house doesn't relinquish with the execution of a quit claim deed is ownership of the mortgage.  They are now in a tricky situation-they don't have any claim to the property that secures the mortgage but they still are liable by the terms of the mortgage.  Typically the judge will also write into the divorce decree language that one or the other party will assume all responsibility towards the house and the house payments. Which is fine if the party to whom the house is awarded does exactly that-pays the mortgage, taxes, insurance etc. on time.
  If that happens there are no issues and the party not responsible for the house can move ahead with their life-all is fine and dandy.

  But guess what? Many times for one reason or another that doesn't happen.  The person responsible for the house quits paying the mortgage.  The first time the party that no longer owns the house will hear of it is when the mortgage company comes knocking on their door for payment.  "Well, good grief," you say.  "I have this divorce decree that says I am no longer responsible for this mortgage." That may be enough to get the mortgage company off your back, but the bad debt will still be reported on your credit report. Since you were never removed from the mortgage, anyone who is still attached to the mortgage will get the dubious benefit of that. Now your credit is all messed up. And, if the mortgage company hasn't informed you that your ex is in arrears on the house payment, you may hear about it when you are declined for a new mortgage, at the time you have decided to purchase a new home.

  Let's not forget that there may be child support-that is added to the monthly debt ratio.  So whichever party is paying child support is going to find that they have less- or maybe no buying power left. Which is not to say that I am for not paying adequate child support-what it means is-wouldn't it be nice to know how all this is going to affect you up front-rather than as a SURPRISE!!!!

  In some cases obtaining cancelled checks showing who made the past 12 mortgage payments works to clear up any issues-but many people can't get those from an ex. In some cases the non owner spouse is stuck and can't do anything.

  I bet you have a suggestion, Casey-you say.  I do.  It is never a bad idea if you are in the midst of a divorce to have a mortgage lender take a look at what you anticipate the property settlement is going to look like.  That way you can assess the debts, potentially reduced income, and make a good decision about the current home and its disposition as well as what your mortgage potential is going forward.

  My opinion is, that if the marital property is not going to be sold, there needs to be a refinance done in the name of the party that is going to keep the home as soon as possible after the final settlement.(That party needs to be sure they are qualified on their own income and credit to take out a new mortgage prior to the property settlement.) Then you have a clean break without the potential of a time bomb over which you have no control  going off at some random time in the future. The party not keeping the home can move forward knowing their credit won't be hampered by the past.

LEGAL FOR ANOTHER YEAR

  Whew! Another bout with continuing education is over for another year.  You see, every year mortgage brokers have to pass a continuing education class and an exam that satisfies state and national requirements to qualify to originate mortgage loans for the next 12 months. What do we study you ask?

  The law mostly- Federal Law such as the ins and outs of the Truth in Lending Act, and the Real Estate Settlement Procedures Act which require all lenders to make certain disclosures pertaining to fees available to loan applicants within a specific time frame after application.  Once those fees have been disclosed in conjunction with a particular property and loan type they are written in cement for the most part. The point being that your fees will be the same at the beginning as they are at the end of your loan process and that available interest rates and options are disclosed.

  The other biggie that emphasis was put on this year was diligence with regard to fraud-loan fraud and real estate fraud-I had not realized after everything that has happened in the past few years that there are still people out there scamming the public and attempting to scam lenders.  A lot of people don't know what constitutes loan fraud.  I don't want to write a "how to book" on the subject but here are a couple of instances that many consumers don't think about:

-Declaring on loan documents that you are going to live in a property that you are intending to rent out. There are different requirements for investment properties than primary properties so to say you are going to live in one that you have no intention of living in is a federal crime.

-Falsifying income or employment information in order to obtain a larger mortgage than a borrower can qualify for-while this one is hard to pull off anymore due to the stringent documentation and verification requirements on loans, people still try.

  Next up before the end of the year is a criminal background check complete with fingerprints. If you have a felony on your record, federal law doesn't want you obtaining sensitive information from people such as social security numbers, bank account numbers, etc.  Makes sense doesn't it?

  We are also tracked along with our fellow originators who are employed by banks (though they do not have to go through the background checks) in a national mortgage originator registration system, the NMLS.  We all have a number which you will see posted on loan documents.  What this means is that when you call your neighborhood mortgage broker you will receive the services of an educated professional who you can trust to receive some of your most sensitive financial information.  I wouldn't have it any other way.

INTERNET LENDING

 The internet has made many things easier for the consumer.  Just think about it-if you want to find a particular item at your favorite department store you can browse online to see if they have it and then order it and have it sent to your doorstep. Pretty convenient.  The internet has made shopping for a home easier as well. You can look at pictures on line, get neighborhood crime statistics, find evaluations of school systems etc.all the data at your fingertips.  This enables you to be a much more prepared shopper when you do make the phone call to your Realtor to actually get inside the homes that you think you would like.

  But what about mortgage lending?  Most lenders have websites that you can access to give pertinent data in order to obtain a pre-approval. When you look at different website offerings for lending do you really know what the offer is? How much do you know about various loan programs, the differences between them, and what makes one lender more desirable than another?

  Gen X'ers and Millenials have grown up with internet access and are very comfortable navigating through cyberspace to find what they want.  But in order to find what you want you have to not only know what you want, but what you are actually able to obtain.  Mortgage loan products aren't quite the same as finding the best price on a pair of Nike running shoes.

  Generally speaking I won't compete with internet interest rates.  The fine print can hurt you.  If you don't know what you are comparing then you don't know what you are buying. Interest rates may differ  depending on location but overall there isn't a lot of variation-maybe an eighth to a quarter of a point on any given day on identical products. If you run across a rate that is significantly different than what I or other local lenders is quoting something's up.  The old adage "if it sounds to good to be true, it is" definitely applies to comparing interest rates. 
 
  The last time I had someone call to ask me to match an online rate I went to the website myself to see what he was asking me to match. The buyer wanted a 30 year fixed rate conventional mortgage.  What he was looking at was a fifteen year fixed rate with a discount point attached to the pricing to bring the interest rate lower. Not what he wanted, nor what he was qualified to pay for.
 
Individual issues that affects interest rates are:

1) credit score
2) Down payment amount
3)Loan type
4) Loan amount
  In addition if the loan is for a refinance, whether or not a borrower takes cash out of the transaction to pay off bills will make a difference to the rate as well.

  There is an another issue with internet mortgages and that is knowing who it is you are dealing with. There are large companies such as Bank of America, Wells Fargo and JP Morgan Chase that are certainly reputable, but it is difficult to find accountability.  Do you want to speak with the same person twice? What about if you run into an appraisal problem-how does that get resolved?  When you use online lending sources you may be losing your ability to have any control over the tracking your own loan. Not knowing where you are in the process or the ability to find out who does, can kill a real estate deal.  You could lose the house you love. The stakes are high.

  Wouldn't you rather be able to sit down face to face if there is a problem or concern about your loan? Wouldn't you rather have someone that you can ask about what the fees mean or the lending terms if you are unfamiliar with them? What about the process?  Even if you are a veteran of buying homes, if you haven't obtained a new mortgage in the past few years you will find that things have radically changed. Personally I think accountability is worth something. I hope you do too.

LET'S TALK CREDIT

  Specifically problem credit.  I would love to be able to say that everyone I speak with has terrific credit unmarred by any mistakes or erroneous information.  But that wouldn't be true.  Unfortunately, in a large measure due to the issues stemming from 2008 and the ensuing recession, many, many people who previously had good to great credit have issues on their reports that can slow or stop them from achieving their dream of home ownership.

  Some folks, due to job loss or medical issues that occurred while they were without a job and health insurance had lost the homes they had or have incurred medical debt that only a bankruptcy would resolve. Others got behind in payments and their credit scores are still suffering the effects. And...there is the simple fact that most people have incorrect information reporting on credit-plain and simple.

  I often speak with people who are discouraged because they have been "working" on their credit for a year or two years and it doesn't seem to be improving.  Many times what they are "working"on is paying off collections or disputing accounts that they feel are reporting inaccurately.  What they don't realize is that paying off a collection doesn't guarantee that the collection company is going to report that the collection has been paid to the the credit bureaus. They might, but then again, they might not.  Similarly, judgments don't always get reported upon release.  These items remain on the credit report for years-so it is in the borrower's best interest to get them to report correctly. Many people try to "dispute" accounts which is to say, contacting the credit bureaus and asking them to investigate whether or not the creditor is reporting credit correctly.  The usual result of this request is that the tag "information in dispute" is added to the credit line which resolves nothing. All that means is that the consumer has a question about about how the creditor is reporting. To correct a credit report, documentation providing proof of the error must be presented to all three bureaus-asking for resolution from one bureau isn't enough-all three must be addressed individually.

  With collections this may be a daunting task.  Let's say you had a medical issue that resulted in an expensive surgery.  Medical billing companies are impatient entities.  If your insurance doesn't pony up within 30 days it is possible that thousands of dollars of unpaid medical bills could end up as a collections on your credit report. Those bills could be paid within days of the time they hit the collection company, but too late. The original creditor (the hospital) may not go back and tell the collection company-"sorry, our bad, we just got paid." Or they might, but the collection company may not get around to correcting your credit report even though they mark the bills as satisfied.  To make matters worse-collection companies sell their accounts to other collection companies so your collections could be sold, thereby tangling the web even further.  Or maybe someone transposes a number of your social security number incorrectly and items that have nothing to do with you begin to appear on your report. How do you prove that whoever isn't paying these bills isn't you? This is what people encounter when they try to muddle through and "fix" credit themselves.

  So okay, Ms Casey Smartypants, what is someone supposed to do?
  
  If you have only one item that is reporting incorrectly, say a judgment that is showing unreleased and you have a copy of the release-this isn't hard to undo.  Send copies of the release, a copy of your driver's license and a copy of a bill with your current address (and it needs to match your driver's license) for identification purposes, with a letter to each of the credit bureaus and ask them to show the judgment as released or paid. You have the proof. Normally within in 45 days the bureaus will inform you that this item has been corrected. One or two items of this nature are not too difficult for the average consumer to deal with. However, if you have multiple items and some of them are old-that is where it gets difficult- maybe you think they are paid, but you don't have receipts. You can call the creditor and try to get them to research the account and hope they do the right thing. 90% of the time you will be spitting into the wind. The job of collection companies is to get the money and they will take it more than once. I have had consumers that had to pay them a second time because they were still being reported as in arrears and they had no proof of payment. What do you do? Here is my suggestion. (You knew I had one, didn't you?)

  You need professional help. The Fair Credit Reporting Act which was passed to protect consumers from incorrect reporting of credit and give them access to their credit, requires creditors to go through a series of extensive steps in order to report someone delinquent on credit.  Unfortunately, most creditors don't go through the steps. What you need to do is require those creditors to report any deficiencies in credit correctly and legally.  Which means you have to get them to correctly investigate each negative item on credit. So-the collection company would have to go back to the hospital and research whether or not that bill was ultimately paid by the insurance company and correct the credit if it was. But remember-the job of the collection company is to chase you down like a dog to get you to pay the bill-not figure out if it was paid. Few individuals have the time, expertise or sheer grit to handle the details of the follow up to do this. One caveat to the above advice-this is not for people who habitually default on their credit obligation or who are not in the habit of paying their bills on time. For those folks, enrolling in a program such as this is a bit like the mother who is running the sweeper with her three year old following behind trailing cracker crumbs on the carpet. It won't work. This type of program is for people who have genuine errors or concerns about how their credit is reporting.

  There is an entire industry that revolves around credit clean up.  In the course of originating loans I have worked with several companies that do an excellent job of repairing credit, correcting issues and getting credit scores back to where they need to be.  It does cost money. Once again you are paying someone for their experience and expertise. It is your choice- you can continue to hammer away and try to do it yourself, but I will add this to the discussion. When I sit down with someone who has a credit report that is a non starter for a mortgage loan, and they tell me that they don't want to pay for the service, that they will fix it themselves; 98% of the time, a year later when we up meet again there is no improvement on credit. And I can tell you that of the people that I have referred to a credit repair company that have stayed with the program and done what they are told to do, 100% of those folks have come back to me ready, willing, and most importantly ABLE to buy a home. I have seen it repeatedly, and it works. I would caution anyone who is considering enrolling a third party company to assist, get referrals. There are those who will take your money and don't do much. So be sure you are referred to a reputable source.

  I am always excited when I have a client I have referred to credit clean up call me and say, "My credit score is 680-I want to buy a house!" It is a perfect ending to a job well done.

 

VA LOANS

 Could there be a better loan for those who have served our country so well in the armed services? Not in my opinion. Which is why I am often shocked when I hear someone say that they were told at their bank or credit union that the VA loan isn't a good loan; that borrowers and the properties they select have to meet all kinds of difficult criteria to qualify. I am dismayed when I hear that veterans are being given bad information about a loan that is geared to give the veteran a great interest rate and great terms, and the ability to refinance the loan if interest rates go down with an easy low document refinance.

Why is VA so much better for the veteran?

-100% financing
-no monthly mortgage insurance (the only loan left that has no mortgage insurance with less than 20% down payment)
-low fixed interest rate
  This loan is literally the least expensive loan available to the veteran.

 So how difficult is it to qualify for a VA loan?  Here are the basics:

-The borrower must be currently in the military or a veteran of military service and have been honorably discharged or have served in the National Guard or Reserves

-The borrower's credit score must be 620 or above

-The borrower must be employed and or be able to qualify on disability payments

  As for the property-typical HUD guidelines apply-good roof, mechanicals, no plumbing leaks, 100 amp service-all the criteria I have discussed in previous posts.
 There are the normal underwriting criteria that is looked at-debt ratio, credit history etc. but it is no more difficult for the veteran to qualify for this loan than any other loan product.

  So do a vet a favor-if any lender tells him or her that the VA loan isn't a good loan, tell that person to run don't walk to the nearest lender who offers VA-like Tippecanoe Mortgage!

GOOD NEWS

 Safely past the government shut down for awhile, anyway, I am pleased to report that interest rates have gone down since just prior to the shutdown.  This is good news for buyers or folks who are still dragging their heels about refinancing their homes. There is  time this year to get into a home before the holidays if you have been shopping.

  An unscientific survey that I have done among real estate agents indicates to me that folks are still putting their homes on the market in order to trade up or trade down and take advantage of the buying power that lower rates give us while we still have them available. This decrease in interest rates could mean that we have a good fourth quarter market in home sales-which in turn means more work for contractors, suppliers of home goods etc.  The importance of the housing market can't be over stated.  It becomes a snowball for affiliated businesses when homes are selling.

  What many people don't realize is that late fall and winter are great times to purchase a home.  While the inventory is a little lower, the fact is that many sellers don't want to keep their homes on the market over the winter so may be a bit more negotiable in price.  New home construction can be contracted before spring price increases occur which means that building a brand new home may be less expensive if contracts are signed during the winter months.

  There is no time like the present-so if you know that you need more space, or less space, a lower payment  or lower term in your mortgage, don't let the coming colder months scare you off.

Property Condition for Government Loans

  Many times when people are qualified to use one of the government loans-FHA, VA or USDA they are concerned about property condition issues and whether or not those issues will disqualify a property they may be considering.

  Fifteen or twenty years ago there was a long laundry list of condition issues that the appraiser had to check off as being satisfied in order for the loan to proceed.  Today's government loan is not nearly as restrictive.  The reason for property condition requirements is that both VA and USDA are 0 down programs and FHA has a small down payment.  First and foremost if Uncle Sam is backing a loan, HUD wants to ensure that the homes funded by these programs are in habitable condition in case they wind up in foreclosure.  Secondarily, by ensuring certain property condition standards are met, it decreases the likelihood that the borrower will have an expensive repair during the first year or two they reside in the property-the assumption being that borrowers who use these loan products may not have a large amount of assets to pay for repairs.

  What exactly needs to be in good repair so the property qualifies for the loan?  The following is a list of items that we see appraisers cite most often.  There are other issues of course that are not on this list, but these are the biggies:

1) Five years life in the roof
2) No peeling paint on properties that were built prior to 1978
3)100 amp circuit breaker box
4) Ground Fault Interrupter outlets within six feet of water
5) If there is a negative grade that allows water to drain towards the foundation, gutters will be required to be installed
6)No broken windows, holes in drywall. 
7) No exposed concrete or subflooring
8) No plumbing leaks
9) Heating and Cooling must work
10) Basement and crawl space must be dry
11) If the water and sewage system is provided by private well and septic, that minimum distances between the two are satisfied.

 Chances are if the property that has been selected meets these requirements there will not be an issue with property condition.  Even if the appraiser cites one or more of these items; if the buyer or the seller can make repairs the loan will move forward.  The problem comes into play when neither party can afford to repair the necessary items prior to closing or the property is bank owned and the bank will not repair the items or allow anyone else to repair them. In that case, the borrower needs to buy the property using cash or use one of the rehabilitation loans such as the FHA 203K streamline loan.  While conventional mortgages aren't underwritten specifically using the above conditions, an underwriter can still call to have repairs made as a condition of closing the loan.

DOCUMENTATION FOR YOUR MORTGAGE LOAN

 I sometimes joke with clients that by the time I am done with them I will know everything about them including their underwear size.  It seems that lessons have been learned since the crash of the housing market-or at least the Federal Government is requiring lenders  learn them as documentation requirements for mortgage loans have increased substantially. (I guess an increase of nothing to one or two documents would be substantial, wouldn't it?)

  In any event, it is now required that buyers can prove they have jobs, bank accounts, and that all funds used in the transaction are from legitimate sources. Here is a typical list of items that are required by lenders to process a mortgage loan:

W2's for the past two years

In the case of self employed borrowers, tax returns for the past two years

60 days of bank statements

Large deposits showing on the bank statements must have sources provided

30 days of pay stubs

Current identification 

Rent checks for the past 12 months in some cases

  That is the starter list.  For many borrowers that will be enough to get the loan approved. It is highly likely that updated pay stubs and bank statements will be required immediately prior to closing to verify that the funds to close are still available and that the borrower is still employed.

  If there has been a divorce, death, release of judgment, prior foreclosure or bankruptcy or any legal situation that impacts income such as child support paid in or out, there may be a requirement for the legal documents that support those issues.

  In addition, if the buyer is using a government loan such as USDA, FHA or VA there will be inspections that may be required such as termite or well and septic depending on the situation and the lender. The inspection results all become part of the loan file.  Typically the whole house inspection is between the buyer and the inspector and not required by the lender.

  Our company sends out surveys to all of our clients once their transaction has closed.  These surveys evaluate customer service throughout the transaction.  One comment that I see every now and then is that documentation requirements seem excessive.  I can see how a buyer would think that to be the case.  Let me assure you of a couple of points:

1) We never ask for anything unless we are 75% certain we will need it. We make these assessments based upon our experience with the loans that we have closed in the past.  Most of the time the documentation requests originate in underwriting. There is no choice in the matter-the house won't close without the request being satisfied. Sometimes if a document is difficult to obtain there are alternate means of supporting the request.

2) Many of the items required are now mandated by the Federal Government, so once again no one has a choice in the matter.
 
 Once in while we lose time processing a loan because our borrower for one reason or another doesn't give us what we ask for.  For instance a W2 is not the same as a tax return in mortgage lending and you can't substitute one for the other.  So it is important to get us the specific item we request and the sooner the better.  Underwriters don't look at loan files on a piecemeal basis. Each file has its place in line.  After the initial approval, it goes back into queue waiting on the additional items the underwriter has requested to complete the file. We sent all the items at one time so the underwriter can sign off in one session.

  As a general rules the items we request are going to be items that will be requested by any lender.  The documentation for mortgage loans is standardized and we try to choose partner lenders that stick to the basics as much as possible. But they are and we are accountable to the Federal Government.  If a loan file is audited and found to be lacking in required documentation, the buyer will be contacted to provide the missing materials.

SHOULD I BUY A FORECLOSURE?

   There are many foreclosed homes on the market so this is a relevant question for any home buyer.  Odds are that a foreclosure can be purchased at a price below market value.  Instant equity is a great thing, particularly if your plan is to resell the home in a few years.
 
  There are two types of foreclosures on the market-those that are owned by the banks that held the loans of the folks that originally owned the houses and HUD foreclosures-or homes owned by the Department of Housing and Urban Development which are primarily FHA foreclosures.   VA also has it's share of foreclosures.
  Negotiating with these entities can be a long and frustrating process-a good real estate agent is a requirement in order to work on these types of purchases. I have had a lot of buyers ask me, "Don't these banks want to sell these properties?" Yes, they do, but on their terms, not yours.

  What are you getting into when you buy a foreclosed home?  There are examples of outstanding homes available on the foreclosure market-homes that are ready to move into and at a good price.  However, there are also many that have significant condition issues that affect your ability to obtain mortgage financing.

  It used to be that conventional (non government) financing cured a host of ills when it came to condition when purchasing a home.  Conventional lending turned a blind eye to roofs that needed repair, structural issues, missing floor covering, drywall holes or broken windows.  Since the crash of 2008 that is no longer true.  Appraisers have been charged with the responsibility of noting serious condition issues in their appraisal reports and lenders require repairs to be made prior to closing -regardless of the type of loan the buyer is using to purchase the property.  So here's the rub.  If a property is bank owned it is up to bank whether or not they will repair the property to meet the requirements of the buyer's loan. Some will, but in many cases they won't-the home is being sold "as is".  And, to further complicate the problem-the bank that owns the property will not allow the buyer, even if able and willing, to make the repairs prior to closing.  Therefore it is important to know before spending money on inspections and appraisals-what repairs are appraiser going to cite as a requirement to close?  Here are a few  I can think of off the top of my head:

mold, termites or termite damage,missing or non functional heating and cooling systems, missing floor coverings (hardwood is fine but subfloor or concrete is not) missing kitchen cabinets, broken windows, absent plumbing, leaking plumbing, shingles that need to be replaced, peeling paint on properties built before 1978
 
  If the house you want to buy has any or more of these conditions present what do you do if the bank owner won't make repairs?  You can pay cash for the home-which is what many investors are doing, or take advantage of a rehabilitation loan such as the FHA 203K loan.  It is important to note that if you use a rehabilitation loan to purchase your home, your lender is going to require the repairs be made by a bonded contractor that has a business presence.  Uncle Bob who is good with woodworking  or your own sweat equity will not be allowed.   Why?  Because during the bad old days, the banks that allowed money for repairs that the home owner was doing themselves got stung, the money being used for purposes other than repairs to the home. The money for the rehabilitation loan is provided after closing but in a structured manner to the contractor under the watchful eye of the title company and the appraiser.

 If you are buying a HUD home, HUD has already appraised the property.  If it hasn't been on the property longer than 120 days you may be able to use the HUD appraisal with your loan. But in order to use it, your loan will have to be an FHA loan-which may not be the best financing available to you.  HUD may also allow you to borrow some money for repairs to the home and add it to your FHA loan. But those repairs have been pre-determined by the appraiser.


  Another important note to make with regard to repossessed homes is that on the lowest end of the market are homes that are selling for $20,000 to $35,000 or $40,000.  It is important to realize that mortgage lending in many cases can't loan money on purchase prices this low.  This would vary state by state depending on the predatory lending laws that are specific to each state.  In Indiana a lender can't charge more than 5% of the loan amount in fees and compensation. If it is a $30,000 property that we are considering, the lender can't charge more than $1500. If title fees are $650, the appraisal $425, credit report $45, that leaves the lender $380 to cover compensation, underwriting fees, administrative fees and processing.  So in the end, the lender is working in the red. And I think most people can understand that a company can't work at a loss.  When buyers ask me I typically tell them that I can't accept loans for less than $45K-50K depending on the type of loan and obtain a paycheck for myself and my company.  It is not a case of not wanting to process smaller loans, it is a case of the limitations place on lending by state law.

  So if your dream is to buy a $30,000 home and fix it up into it's true value of $100,000, and have a great low payment, you will have to have cash.  However, for homes a bit higher priced we may be able to help with the rehab loan.

  The last thing to consider when purchasing a repossessed home is real estate taxes.  In Indiana we are allowed exemptions or reductions in our assessed tax value. Two of the most common exemptions are the mortgage exemption of a $3000 reduction and the homestead exemption (given to owner occupied residences) of $48,000.  These reductions can make a huge difference in property taxes.  In Indiana we pay property taxes a year in arrears. What this means is that in 2013 we are paying 2012 taxes.  If the homeowner was foreclosed upon in 2012, the home will have lost the above two exemptions as no mortgage or owner/occupant live there. That means that the taxes on these homes will be significantly higher until the new owner/occupant files their own exemptions and the tax year catches up to the exemptions. So if you buy a repossessed home, you can anticipate that the taxes will be double or even triple what they will be 12 or 18 months down the road.

  The answer to should I buy a foreclosure depends on what you are willing to deal with as a buyer.  Many of these transactions take a long time to close because you are dealing with a bank and its attorneys as the seller, condition issues, and limitations on the type of mortgages available. However, if you can tough it out, you may be able to get yourself a whale of a deal on a home.