WELL AND SEPTIC-A BIG DEAL FOR MORTGAGE LENDING

 

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Many folks dream of a home in the country-a few acres, a bit of land, space for a family to grow. Nothing wrong with that-I too once had a home in the country.  For the most part other than the mowing in the spring, fall and summer, the road to civilization being closed due to ice and snow in the winter, and the size and number of the mosquitoes, it was great. I had a huge vegetable garden, a bird feeder that attracted an amazing number of different types of birds, raccoons in my kid's wading pool, and other assorted wildlife that delighted us. Initially I was thrilled because there was no city water or sewage bill to pay. What could be better? The house was older-built in the 1940's. The sellers were the second family that had owned it, an elderly couple who didn't really have a recollection of where the septic tank was located other than it was "out back" the Mister said, waving his arm in the general location of the back forty.  It dawned on us after we owned the house for  awhile that perhaps "out back" wasn't an accurate enough description of where the septic might be.  If there even was a septic. Our worst fear was that perhaps our septic tank was a field tile that drained into the adjacent ravine.

  Wells and septic systems are the two items that create more litigation than any others with regard to real estate sales; and for good reason. Obviously human beings need clean water to drink unpolluted by ecoli bacteria, farm chemicals and lead. And we also must have clean, safe and efficient removal of sewage. It is when there is a malfunction or issue with either of these two vital systems that the trouble begins. Typically they are expensive systems to fix or replace.

  When a home is being purchased is the time to examine the well and septic.  I always highly recommend that the well be tested for contaminants. If the loan that a buyer is using is a government loan are specific requirements that the well water be sent to a laboratory for tests to be sure the water coming from the well is safe to drink.  VA only requires a bacteria test as long as that is what the county in which the property is located requires. USDA and FHA require a more extensive test that tests for nitrites, nitrates, and lead.  USDA will always require a well test.  FHA makes the test dependent on the appraiser's discretion.  Part of the issue is where the well is located with relation to the septic tank, septic field, house, and property line. HUD has set distance requirements to protect home owners from pollutants that could come from the septic or the house or nearby tilled fields that could potentially seep into the well water.  It is the appraiser's job to be the eyes of the lender and to determine if there are any issues with these distances. Which means that the appraiser has to be able to locate the septic system and its relationship to the well. Last I checked, most septic systems are buried, so unless the house is newer and/or the county requires permits sometimes it is hard to know where the septic is located other than "out back."

 

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If the appraiser can't locate these systems the lender will often order that the septic be found and the distances measured as a condition to close the loan.

  Since the appraisal happens about one third of the way into the lending process, it is highly recommended for the buyer to have a whole house inspection at the time of acceptance of the offer and ask the inspector to run the well tests and the dye test on the septic tank to determine if there are any issues.  If the inspector can't find the septic tank or field, more investigation needs to be done. 

  Personally I believe the time to find everything possible about your new acquisition is prior to closing on it whether the lender requires it or not. Once a property is closed, there are very few remedies other than litigation if it is discovered that there are issues with the well and septic system. If for instance the well is located too close to the septic system and the water has ecoli in it, (bacteria from human or animal waste) wouldn't you want to know prior to closing the loan? If you know early in the process it is possible to request that the seller put in a new well or the price of the home be adjusted so the buyer can put in a new well.  No lender will allow a closing to happen if the water is found to be polluted. 

  The week before closing is a bad time to find out you can't close a loan on your dream home in the country because of bad water or a non functioning septic system. Get these tests done early in the process-locate where these systems are. (I have had transactions in which several households are sharing one septic, or the well is located on the neighbor's land-it s good to know these things so that your well doesn't turn out to be nothing more than a wishing well.

 

EXPANDED CREDIT SCORING FOR MORTGAGE LOANS

  As most people who are shopping for a mortgage know-it's all about the credit score. There are other factors involved of course but the credit score is the singular indicator whether or not a borrower is deemed a good risk for repaying a mortgage or not.

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 The typically accepted scores across the board are 640+ for government loans, though there are banks and credit unions in our market that have raised the requirement even higher for their specific institutions.

  However HUD is moving in an opposite direction allowing FHA to approve mortgage loans with credit scores as low as 550.  Once again the choice of doing a loan with that credit score is left up to each individual lender. At Tippecanoe Mortgage we do have investors that will work with credit scores at that level, however, there are many specific conditions placed on the borrower with this type of credit score. Some of these qualifiers are:

Are twelve months cancelled checks available for rent payments to demonstrate on time rent?

If there are open collections (and for credit scores at this level there often are) have any new ones been opened in the previous 12 months?

If there are open collections, is there a payment plan that has been in effect showing 12 months payments on the open collections?  If not the borrower may be required to payoff some or all of the collections-particularly utility collections or credit card write offs. If there are open medical collections, what happened and has any attempt been made to pay them?

If there are open judgments or tax liens they will be required to be paid.

Are there compensating factors such as a pattern of savings, good job history and income, or low debt
ratios that show that the borrower has demonstrated positive factors to be considered in the loan approval decision?

Has the borrower made on time payments on their consumer credit items such as vehicles and credit cards for a twelve month period?

If they currently have a mortgage, has it been paid on time for the past 12 months?  How high are credit cards charged as compared to their limits?

Does the borrower have any insufficient funds checks over the past 12 months?

Is the down payment a gift or the borrowers own funds? Some lenders require a down payment to be the borrower's own money if the credit score is below 620. Some do not. Does this sound like

? ? ?

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 No doubt about it, it is a lot of work. But before we start waving a big unfair banner...

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Let us consider a couple of points-

1) Lending is all about risk.

2) If someone is going to loan someone else a large some of money, the loaner wants to be able to make a fair assumption that the loanee will be able to pay the money back.

3) If past is prologue-and in many situations it is-if a borrower has shown no habit of repaying debt in the past, chances are they won't repay debt in the future.

  The lender is the entity that is taking all the risk-and let's face it-lending money for mortgage loans is about reducing risk and making a profit if you are in the business of lending-so there have to be assurances that the borrower has the ability to repay and high odds that they will repay the loan.

  What FHA and HUD are saying with the reduction of acceptable credit score is that they recognize that times have been hard in recent years and some people through no fault of their own are in situations that have diminished their ability to become homeowners.  By lowering the credit score eligibility, HUD is allowing those people to get back on the housing horse so to speak.  But even if you are one of those folks, no doubt there is

  At Tippecanoe Mortgage we want to encourage everyone who wishes to own a home the opportunity to do so. However, we also have to be realistic.  Many times we make suggestions for the borrower to improve their situation prior to ever completing a mortgage application. Closing loans in which the credit score is below 640 is tough. It consumes an inordinate amount of time both in origination, processing and underwriting.  Therefore when we submit a loan with a lower credit score we want to be sure the borrower has a reasonable chance of becoming approved.  Not only are we burning clock and money when we work on these loans, the borrower is spending money as well for inspections, appraisals etc.  It is important to understand that loans with credit scores nationwide under 680 have an approval rate of 1 in 500. Typically our percentage of approval down to a 640 would be more than 95%, but the lower the score the harder it is.  If you are highly motivated to purchase a home we may be able to help you, just keep in mind that what we want for you is:

A FUNNY THING HAPPENED ON THE WAY TO CLOSING...

 

 

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  Here you are, your loan is ten days from closing.  You have made it through the approval process, inspections, and appraisal.  You have been packing your boxes, the apartment has been leased to a new tenant. The excitement is building for the day the dream home will be yours. What could go wrong now?

  Let me tell you, one of the toughest calls any of us at Tippecanoe Mortgage has to make is to an approved buyer who at the last minute is no longer approved.  How the heck does that happen, you ask?

 Or for that matter-that?

  Sometimes loans don't close at the last minute because of a notation the appraiser makes-such as the home is located on a private lane with no driveway maintenance agreement or the well is shared by the neighbors and there is no shared well agreement. But more often than not, the loan is sent hurtling off the rails by something the borrower does themselves.

  In our loan application packet we have a form that is formally called The Borrower's Acknowledgment Form. I call it the "Don't Do Anything Silly" form. The form is a list of things a borrower should not do prior to the closing of their home loan.  They include such things as:

1) Do not open any new credit cards

2) Do not increase balances on credit cards or loans

3) Continue to make all monthly payments on time

4) Do not take out any new bank loans, 30 days same as  cash loans  or co-sign for anyone on anything

5) Do not quit your job or change your job without speaking to your lender first

6) Do not take early occupancy of the property without speaking with your lender first

7) Do not spend your down payment money prior to closing

8) Do  not buy a new car unless it has two bedrooms and a bath because more than once, it has caused a loan to crash.

  These sound like pretty common sense items, right? This list was derived, sadly, from real people doing exactly the above mentioned things who then were denied right before closing.

  If new credit is opened debt ratios can become affected- and possibly create a situation where the monthly consumer debt is too high for the rules of the mortgage.

  Most lenders do a last minute credit pull prior to closing-so if you have bought new appliances and put them on a credit card or taken out an additional bank loan to cover them-it will be discovered.  Likewise lenders also check employment immediately prior to closing. We have had borrowers who quit their jobs thinking that the lender wouldn't find out. They always do.

  One situation  that we have encountered more recently is moving into a home prior to closing. With most loans it is okay, however it is a distinct no-no if your loan is an FHA loan. FHA does not allow pre-occupancy. So be sure to ask if your loan allows pre-occupancy prior to moving your furniture in before closing.

 Paying your rent and current mortgage is also important. Just one late rent or mortgage payment while in the loan process will earn you a denial. Credit is updated throughout the process so be informed that non payment will no doubt be caught.

  So keep the credit cards in your wallet, drive what you have been driving all this time, and pick out the new appliances and furniture but don't pay for it until you are safely closed. Once you own the home you can go back to a more normal way of living. It's only 30-45 days. A new house is definitely worth it.

This is what we want to see on closing day  

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Not

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RENNOVATION ANYONE?

  You have just found the perfect home-spacious, on a beautiful lot with mature trees, great schools, walking distance to amenities.  It is everything you need in a house except...

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Yeah-the kitchen is something out of a bad dream about the 1970's.  And of course the rest of the house is covered in that nasty shag carpeting that was awful even in 1976. You hate to pass this one by-everything else is right about it.  As it happens we may have the solution (but you knew we would didn't you?)

  Even in this day of extreme regulation on mortgage money, there is still money available for renovation and repairs.  May we present the FHA 203K streamline mortgage loan.

 A great question to ask.  The FHA 203K Streamline loan is a method of purchasing a home and obtaining extra mortgage money to do upgrades and repairs.  Many of our clients use this loan in conjunction with the purchase of a bank owned property-bank owned properties being notoriously in need of repairs due to being vacant and not maintained for years at a time. Here are the facts about the 203K streamline:

1) 15 or 30 year fixed rate FHA loan-having all the attributes of a normal FHA loan including 3.5% down payment, fixed rate, upfront mortgage insurance premium and monthly mortgage insurance.

2) Up to $35,000 available which can be added into the loan to make non structural repairs and upgrades to an existing property.

3) The key phrases are cosmetic and non structural repairs.  If a roof truss is shot or floor joists are eaten away with termites, this loan won't work.

4) This loan however will repair or replace windows, damaged siding, roof shingles, carpet, paint, trim, kitchen cabinets and bathroom fixtures, appliances, leaky plumbing, furnaces and air conditioning-essentially-anything of a non structural nature in the home.

5) The buyer must have a legitimate contractor who can serve as a general contractor to organize the work. All work is estimated upfront prior to submitting the loan. The contractor must be licensed or registered as an entity by the state. This means that Uncle Bob who does odd jobs on the side is not considered a legitimate contractor.

6) All work is inspected and signed off on by a HUD appraiser.  I will mention-this is a highly regulated process that has to be completed within a specific time frame. Essentially if you want the money you have to play by HUD's rules.

7) This loan is for owner occupants only, but can be used to refinance a home and make repairs and upgrades.  Many homeowners take out a home equity line of credit or a cash out refinance to pay for upgrades.  In the current world of mortgages the maximum loan you can obtain is 85% of the appraised value. So the mortgage, closing costs plus money for upgrades has to be encompassed within the 85%.  If one uses the 203K streamline the borrower may be allowed up to 110% of the improved value as determined by the appraiser.

  Overall this is not a particularly difficult loan to obtain or administrate. Many buyers are frightened off because there is some homework required prior to submitting the loan application. Homework  revolves around determining exactly what the property needs to meet FHA guidelines (an electrical upgrade perhaps?) as well as what the homeowner would like in amenities. In our opinion it is a very legitimate method of bringing a dated home up to current standards.


  At Tippecanoe Mortgage we have experience with working with this loan. It is a good way to create equity in a home, plus reuse, repair, and recycle is a positive mindset.  There are many great homes that only require a bit of a facelift to be functional again.

  So if you want to turn this

 

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 Into this

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Don't be afraid to investigate this great renovation loan.  

Lava lamp anyone?

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HOW DO I DECIDE IT IS TIME TO BUY?

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 If you are a first time home buyer or a former home owner who has been out of the market for awhile you have probably been hearing that NOW IS THE TIME TO BUY-all caps, shouted from the rooftop by every source of information you can think of.

  We would agree with the general statement that now is an excellent time to buy, however we would amend that to say, but is it an excellent time for YOU to buy?  There is overwhelming enthusiasm about the issue.  Everyone you meet says, "DO IT!"

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  Let's think about that for a moment.  In order to assist you making the decision-and it is a big decision - I'd like to go over a couple of points that you might want to ponder.

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  No, sorry, wrong point.  The following is what you should be thinking about if you are deciding to buy a house:

1) Job Stability- We interview many young people who are just out of school or have scored their first job.  They are eager to purchase a new home and begin this new adult life.  But one of the first items that a loan underwriter is going to review is, how likely is the applicant to remain at the current job, and does that job support a house payment? Many people believe that because they are paying rent, they will be approved for a mortgage at the same amount, or that the fact alone means that they have the income they need to purchase a home. A mortgage lender is in the business of giving mortgage loans to people that they are relatively sure will pay the money back. So when they look at employment, they are looking to see if the potential borrower has a stable job, has completed all probationary periods, receives enough income to cover the mortgage plus other consumer debt and does the job relate to what that person studied in school?  This is where the person who is just out of high school and has not progressed to post high school education may be at a disadvantage depending on the type of employment. Lending allows "experience" to those who have obtained positions in their field of study in post high school education. So even if a borrower has a well paying job, if he or she has just graduated from high school the lender may require six months or a year on that job, whereas a person who just graduated in a two year degree program for a technical skill may be able to obtain mortgage financing after they have completed all probationary periods because their work is in their line of study.

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2) Credit Depth- I have spoken at length of this before.  One of the biggest hurdles that young people must overcome in their quest for a mortgage is developing a credit profile.  Some people had forward looking parents who assisted them by co-signing loans or credit card applications when they were in school so there would be a credit footprint when they graduated. (My children can thank me-when I next see them.) However, not every child has that advantage or every parent thinks of this.  Credit rules have changed significantly in a very short time. It used to be considered a good thing to be debt free, right?  If a borrower wants to borrow money for a mortgage-they will need some credit history- a year is sufficient. It can be made up of a credit card, a car payment, and a student loan. Or two credit cards and an auto loan.  Revolving credit, such as a VISA or Master Card carry the most weight.  If you have no credit or have just opened accounts, you probably aren't quite ready.

3) Savings- can you show a pattern of savings?  It can be a 401K from work, or a savings account.  Lenders like to see that mortgage applicants have the ability to save money.  While there are several loans available that do not require the borrower to have reserves, I always wonder what happens when the furnace quits.  A loan won't necessarily be declined due to not having savings, but I think it is an important point to consider.  Once a homeowner, the repairs fall on you. There will be no landlord. So if you have trouble saving money for any reason, think about how you will make repairs to the home you buy.

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4) The cost of renting VS the cost of owning- Many people wish to buy because of the recent increase in rental costs.  In a lot of cases they can find a nice home for a lower payment than what they are paying in rent. In addition when you pound a nail into the wall, it is your wall.   In an earlier blog I cited that using this year's appreciation and projected interest rates a renter will break even on home ownership in three years. Not paying rent is a powerful incentive to buy if you are going to be in the same community for the foreseeable future.

5) Tax Benefits- Pure and simple you will save money on your income taxes by owning a home. A portion of the interest you pay on your mortgage will be deducted.  In addition property taxes are normally deductible as well, plus any improvements you make to the energy efficiency of your home.
So you may be in a tax bracket in which owning a home would be an advantage on your taxes.


  No one can make the decision for you. The decision is personal.  A buyer has to be ready, able and willing to buy. The above points cover those three criteria. Many people are ready and willing but not able. Conversely some may be very able but not quite ready.  Buying a home is a commitment. We never want to talk someone out of buying a home. Personally I think it is a terrific step to take. However, it is not for everyone at all times.  Consider carefully and then decide if this is the right step for you.

PICKY...PICKY...PICKY

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 When we consider the phrase Picky...Picky...Picky, this is what we think of- a choosey eater, someone who refuses to try something new or is suspicious of anything they haven't experienced before.

 But you all know I write about the mortgage business, not a food blog.  What I am referencing is the fact that we mortgage brokers find ourselves at the beginning of the Picky-Picky season.  The volume of loan application is up.  Lenders have become quite busy underwriting a greater number of new mortgages.  And with more volume comes more rejection.  Loans that were not a problem to get approved over the winter months are now being tossed overboard.  Why? Because the investors can-they are busy, because pipelines are full and there is no incentive to work on more difficult transactions.

  I understand the dilemma.  There are borrowers whose circumstances are head twisters.  These are the loans that as a mortgage loan originator I believe in, but to get them to the closing table for any number of reasons can be Herculean feat.

  During a recent conference call with one of our investors I learned a jaw dropping statistic-only one in 500 loans with a credit score of 660 or below is approved.  1 in 500! At Tippecanoe Mortgage many of our clients are in the 620-660 range and we close many loans with those scores. But during the busy time of the year it is definitely more difficult. 

  While I think it is a true statement that almost any loan no matter the credit score, job time, or assets will get looked at more critically in the post financial reform era, the lower the score drops below 740 the bigger the magnifying glass.

  Last year 70% of borrowers with credit scores over 740 were approved. For those with credit under 680 the percentage changes to 30%.

  In most cases a mortgage loan that the borrower has credit scores of 640 or above is going to be approved eventually-but any issue such as over drafting the debit account, total debt ratio being at or just above the standard percentage, income variances over the past couple of years, or a late payment or two on a credit card may be enough to require maximum hoop jumping to get the job done.

  If your credit score is below 640 it gets even tougher.  Most underwriters won't stamp the dreaded

on a file without giving the borrower a chance to obtain documentation to refute or explain the situation.  It is highly likely that rent checks or mortgage history for the previous 12 months will have to be produced. There might be some collections that will have to be paid off, and certainly any tax liens or judgments will have to be released. Perhaps some credit card debt will have to be eliminated. These are typical requirements.

 A careless phrase from an appraiser that wouldn't have mattered during the winter months, repair issues on a property, or a job gap, work on the loan may come to a screeching halt until a resolution is found.

  For instance- one recent loan's approval status revolved around income calculation. The credit score was in the mid 600's. The borrower, over a period of several years had shown an income history that was consistent. However, the guaranteed hourly pay was lower than the regular income. The underwriter chose to only use the guaranteed hourly pay rather than the historical income level that was earned over the past three years. Seems that when times get busy common sense can get tossed out the window.

  A borrower with several jobs over the past two years, or less than a year on a job that was different than what they had been doing prior to the current job might raise an eyebrow.  Income that is less than the past year will definitely be scrutinized.

  The purpose of these musings is not to discourage people from making mortgage applications, rather it is to encourage borrowers to do whatever possible to co-operate with their lender so that documentation can be provided, good explanations given, etc. to solve whatever the problem is and move to closing. The borrower who thinks that the process will never end is not alone-many people are running this gamut.
 
 The good news is that as a mortgage broker, Tippecanoe Mortgage can provide you with several lender choices.  Many times if one lender can't or won't work with a specific scenario, another will.

 Closed loans equals happy borrowers-we do everything we can to get our clients there.

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FORECLOSURES- YOU'VE HAD ONE...NOW WHAT?

  www.forsaleinspain.com


I guarantee that not one person who bought a primary residence prior to the mortgage meltdown years of  late 2008-2011 ever believed upon receiving the keys at closing that they would one day lose their home due to an inability to make the payments. Sure-there were borrowers who had no business being approved for a mortgage. Even so, even the most challenged buyer intended to make the payments.

  The upshot of 2008-2013 is this-the market is improving. Homes are appreciating again and people are back to work. The economy is getting better. The massive inventory of foreclosed homes is greatly reduced and diminishing. Give it another year or two and the foreclosure crisis will be nothing but a bad dream.  But what about the people who lost their homes?

  Here is one thing I can tell you-Americans are an exceptionally resistant lot. During the worst of the downturn we would have people call our company and say: "I'd like to apply for a mortgage."
 "Great," we would reply-"Have you selected a house?"
  "Yup-123 Main Street, USA. That's my house!"
  "Oh, so when we close your loan that will be your house."
  "No-I mean that's my house. The bank took it back last month."

  Even people who had gone through the trauma of eviction, the foreclosure process and bankruptcy were ready to jump right back in the saddle and buy.  Unfortunately what many of them found out was that they were able to obtain financing to buy a new home because of the previous foreclosure. The story of financial hardship created by the economy wasn't a sell that mortgage companies were buying or were able to buy-all the rules regarding mortgage loans having changed in the aftermath of the worst financial disaster since the Great Depression.

  Foreclosure along with its sisters, Short Sale and Deed in Lieu of Foreclosure, have all been treated the same by lending. You lose the house or sell it for less than what you owe, or give it back to the bank and you lose the ability to be loaned money for another.  Many people who lost their homes were told or heard through the grapevine that this meant that it would be as long as ten years before they would be able to purchase another home.

  Sadly enough, many real estate professionals including lenders gave home owners the wrong information about Short Sales and a Deed in Lieu of Foreclosure. Home owners were counseled in many cases that a short sale or Deed in Lieu of Foreclosure wouldn't impact them as badly as a foreclosure would.

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  This advice was dead

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  Not only did short sales and deeds in lieu of foreclosure severely impact people's credit scores-the same rules apply that apply to a foreclosure in terms of future lending.

  So what are those rules? The rules are:

 Three years have to elapse between the sale of the house at the sheriff's sale before the home owner is eligible to apply for a mortgage loan. The loans available to the home owner would be government loans-FHA, VA and USDA.  Conventional lending requires 7 years unless the borrower can put down more than 10%-then it is 4 years.

  So hat happens at the sheriff's sale? Why is that the date that starts the clock?  This is the date the deed transfers out of the homeowner's name into the new owner's name-normally the bank.  So if you had a foreclosure you will need to go to the county in which the home was located and obtain a copy of the sheriff's deed-easy enough to do-just give them the address and ten bucks or whatever they charge and there is the proof of when the deed transferred.  Many folks don't know when the sheriff's sale occurred as they left the home long before that happened.  The same is true of short sales and deed in lieu ofs.  Three years from the transfer of the deed.  If you had a short sale you will have a settlement statement proving title change and if you had deed in lieu of there will be a paper trail from the bank. These documents are normally required to prove the three year seasoning period. Of course credit has to have recovered and any bankruptcies will have to have been seasoned two years from date of discharge-date of discharge-NOT date of filing. Normally the bankruptcy is discharged before the sheriff's sale as foreclosures take a while to go through the legal process.

  There are some exceptions- often differing from lender to lender. Conventional lending will allow two years from a short sale on a conventional mortgage if the borrower puts 20% down. This eliminates the need for mortgage insurance so the rules are a little less strict.  Someone who has had a short sale may be allowed a new loan after 2 years if there were no delinquent mortgage payments the twelve months preceding the short sale-an event that we don't normally see-but it could happen.  One of our lenders allows less than three years seasoning on a short sale if the borrower qualifies for a USDA loan and there is no outstanding FHA, VA or USDA mortgage debt.

  However, for most people the rule of thumb is that if you have had a foreclosure, short sale or deed in lieu of foreclosure, you will be eligible three years from the date of the sheriff's, shorts sale settlement or transfer of deed in a lieu of foreclosure situation for an FHA, VA or USDA mortgage. You will need the settlement statement showing the sale for short sales and the deed showing the transfer out of your name for the other two.  You will also have to have rebuilt credit.

 So there is good news  that there is home ownership after foreclosure-it just takes a little time.