LET'S BE SMART ABOUT THIS...

 

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  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?

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  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.