April 2011 Archives

The answer depends upon what they're doing for you.

If you contact them because they're the listing agent for a property, they shouldn't ask you to sign an agreement at all. They have a fiduciary duty to that seller to get the property sold. If the act of asking to sign the agreement causes you not to buy, or not to view the property - something that cannot be known in advance - they have violated fiduciary duty. They've just caused potential buyers to be discouraged. That's as hard a violation as it gets. It doesn't stop a lot of agents, as I've written before about Tina Teaser and Sherrie Shark, but it is a straightforward, no nonsense, no kidding violation of fiduciary duty. You don't want to do Dual Agency anyway, as I've written on many occasions. There are many reasons why you want a buyer's agent representing your interests, especially if it's a new development. There are all sorts of issues that will bite people without buyer's agents ten to a hundred times or more frequently. Issues that arise directly because of Buyer's who don't want buyer's agents are about nine of the top ten reasons why buyers get burned, including the top three or four.

If all an agent is doing is setting up an internet gateway, or search, that's no big deal either. MLS will allow me to have something like 120 client gateways at a time. I've never had half that at any one time. I can't serve that many people. I can only work with an absolute maximum of about six sets of full service buyers at a time - and that's if I don't have any listings. A smart agent will quite happily set up an internet gateway on the speculation of getting a transaction out of it. I'll call or email these folks periodically to see if they want to look at anything, or anything has caught their fancy. I'm not investing any significant time with them; they don't count against my (self-imposed) limit of six clients at a time. In fact, I make a lot more per hour with these clients than any others. Indeed, those of these folk who only want me for the paperwork will ask me for a contract that says I will rebate part of any buyer's agency commission at that point in time. If my liability is less and I'm not putting in anything like the time I need to for a full service client, I'm perfectly willing to work for a lot less money.

If you come to me to put an offer in, I don't need a contract there, either. The purchase contract specifies that I'm the buyer's agent - I don't need another one. Some agents use this moment as an opportunity to "lock up the business" by insisting people who want to make an offer through them sign an exclusive buyer's agency contract, but there is precisely zero need for any kind of agency contract at that point in time. The agency is created for this offer by the purchase contract itself, either explicitly (as in the California standard contract) or implicitly, by agency law. There's absolutely nothing wrong, ever, with an agent who asks you to sign a non-exclusive buyer's agency contract. You can walk away from a non-exclusive agency agreement at any time, but an exclusive agency contract requires that you stick with them even if this one falls apart. Suppose they do something to sabotage the transaction? It happens.

It's a rare client who requires something I have to pay for, but It does happen. Mostly, it's fresh foreclosure lists when it does happen. I haven't been subscribing consistently, as right now the well-aged ones are mostly better, but I know the ones that work for when I do have clients that want them. I can get them starting that day, and going back. I don't charge for this - but that's the only time I ask for an exclusive buyer's agency contract. Not only am I putting out a significant stream of money for their benefit, these people do count against the limit of six clients at a time I can work with - they count double! Working the fresh foreclosure lists is a lot more demanding than anything else I do, because it's all time critical. I can't put it off a day, and often not even an hour, even if there's something else going on with another client - it's got to be done NOW, and there are a lot of misses for every hit. It's kind of like been married to the ultimate high maintenance spouse. If that spouse is not willing to give just as much, nobody rational wants any part of that relationship. If you want an agent to put in that kind of work, you're going to have to commit to that agency relationship.

But the one common time a good agent will ask for a buyer's agency contract is when someone wants a real full service package. Property scouting is far too time intensive to do on speculation that you might want to do the transaction with me after I invest the time to find a real bargain. The agent has to invest usually weeks of time up front, culling out the bad prospects in favor of the better ones. This is, by the way, far and away the hardest work of the transaction, and the work that gets done has most of the liability of the process. A good agent - one who knows how good he or she is - will still only ask for a non-exclusive contract here. I'm perfectly willing to bet that I'm going to find you something you want to buy, and if I don't, then you owe me nothing. I'm eager to make that bet, as a matter of fact. I am not frightened of people who want to work with multiple agents. I know that the vast majority of them won't get out of their offices to go look. But if I do find something you want to buy - I take the time and do the work, and my experience and training spots a superior value - then I'm not going to countenance you then taking the transaction to some other agent. Kind of like a mechanic who gets the problem fixed - and then you decide to take the car to another mechanic. You're still going to have to pay the mechanic who actually solved your problem, and you're still going to have to pay the agent who finds the bargain. You don't think the agent did anything to deserve getting paid? Then don't buy that bargain property they found for you! But if you want to buy the property they found, then there is, by obvious fact, something particularly valuable, both about their property and about their work in finding it! If that were not the case, you wouldn't want to buy it.

So it's reasonable to be asked to sign a non-exclusive buyer's agency contract. As a matter of fact, agents that actually do this work have learned that if they don't get you to sign it, a very large percentage of people will then go to a discounter or rebate house, or even just buy the property without an agent, thinking they'll get a better bargain that way. Not only will you get a better bargain through the agent who understands the property and the market, that agent can then stay in business for the next time you, your friends, or your family wants to buy real estate. That's a win-win. But trying to cut out the agent who found the bargain is a lose-lose. You'll get a cookie cutter transaction from someone who doesn't understand the market and can't bargain as well - you'll end up paying more, and if there comes a point where you should walk away, they won't know it and won't tell you if they do.

Caveat Emptor

Original article here

First off, let me say that your site has been very informative and helpful. I stumbled across your blog looking for information on ARM vs. 30 year fixed loans and ended up reading every article.

One issue I have never really seen addressed is joint loans. When a couple, married in this case, gets a loan, which FICO score do they use?

Right now, my wife is a nursing student, when she graduates in August we want to buy a new home that is significantly more expensive than our current home. Our combined salaries at that point should be somewhere around 120K. I have been told by a mortgage professional in our first phone conversation that being a student counts for "years in line of work", but we would have to wait until she receives her first paycheck from her new job before we could count her income. We just accepted an offer on our current home last week, and will have enough cash to put down 10% in the price range we are looking at (200-300 K). If we want to buy before she is employed, but has an offer so we know her salary, what are our options? It seems to me that we would be in a situation where we are doing a Stated Income type loan.

The answer to this is that whoever make more money is the primary borrower. This works with a couple as well as other arrangements. It's a very simple answer, but you'd be amazed how often I have to repeat it for trainee loan officers. Of course we all want to use whichever score is better, but it's the person who makes more money whom the lender will consider to be the primary borrower. It's their income that's providing the main source of income with which to pay back the loan.

Now as far as A paper goes, it's kind of academic. If you want to use both incomes for the loan, you both have to qualify. This can be an issue when one spouse forgets to pay bills and the other is as a-retentive as I am about it. Over time, spouses credit reports tend to track one another more and more closely, as they switch from single credit accounts to joint accounts. If it's a joint account, doesn't matter who forgot to pay the bill - you both take the hit. On the other hand, even long-married spouses don't tend to have exactly the same score, and in many cases they have intentionally segregated the credit accounts for precisely this reason, that one spouse is better about paying bills. So one spouse has a 760, and the other spouse has a 560. Ouch.

It is to be noted that the superior solution is to have the responsible spouse pay all of the bills, which results in two high credit scores. Why is this important? If one of you has a 760, they may qualify A paper. If the other has a 560, you have a choice: go sub-prime (if you can find it), or have the high scoring spouse be the only person on the loan. In other words, when you're talking about A paper, you both have to meet the credit score minimums, or you don't qualify as a couple.

This has implications. Suppose you have a 760 score spouse who makes $3000 per month, and a 560 score spouse who makes $5000 per month, you have a choice: Qualify based upon $3000 per month, go stated income (assuming it ever comes back), or drop to sub-prime (if you can find it).

$3000 per month doesn't qualify for a lot of house most places. So if you're thinking 3 bedroom house, you can be stuck with small one bedroom condo - if you want the best rates. Most people don't want to accept that.

The second alternative is going stated income. As of this update, stated income is essentially extinct. It's not quite illegal, but nobody actually does it because they can't sell the loan and the agencies that rate financial assets consider it a junk asset. This only works if the necessary income for the loan is believable for someone in that occupation. Even if it comes back someday, somebody who makes $3000 per month is not likely to be in a profession where $8000 per month is a believable income, and most people tend to overbuy a house rather than under-buy, regardless of the fact that under-buying is a lot more intelligent in most cases. Furthermore, you are committing fraud if the lender finds out and wants to prosecute.

The third solution is to go sub-prime, where you'll qualify, but get a higher rate and almost certainly a prepayment penalty. At this update, sub-prime lenders who will lend to someone with a lower credit score are difficult to find, and the down payment requirements are stiff. Furthermore, a single borrower with a 760 credit score gets a better loan, with proportionally less of a down payment, than the couple in this case - the primary borrower has a 560 score, remember - but they just won't qualify for as large of a loan because they can't afford the payments. Most people want to buy the more expensive property with a crummy loan rather than buy the property one spouse can afford, but it's just not on the list of options for most folks right now. The down payment, particularly for low credit scores, tends to be a major issue. Except for VA loans, 100% financing or anything close to it is very difficult to get.

Once upon a time, you might also have gone NINA, which is a "here I am - gotta love me!" approach where income is not verified, nor employment history. The loan you get is based totally upon your credit score and equity picture (how much of a down payment you make, in the case of a purchase). The rate was higher than stated income and the restrictions on equity were greater, but sometimes it was the best loan people could actually get. Unfortunately for those people, NINA went away even before stated income.

Now, as to what you were told, student does not, in general, count as time in line of work. Sometimes, exceptions are made for advanced professional degrees - medical doctor and lawyer and nurse - and have actually gotten easier than since I first wrote this. Even so, the lender is going to be careful because many folks get their degree and their license, then end up finding they can't stand the work. That's one of the main reasons for the two years line of work requirement. As a question to make why this more clear: How are you going to compute her average monthly income over the last two years? That is the way full documentation loans are justified. Some sub-prime lenders will accept it (not the better ones), or the person who told you this could just be planning to substitute a stated income loan based upon your income. The fact is, that unless you're talking ugly sub-prime, they're not going to accept your wife's income until there's some time actually working it. Many people graduate school and never work in the field. They don't pass licensing, or they decide soon after they start that it's not for them. When this happens, they generally end up not being able to afford the loan - and that's not something the lender wants.

As I keep telling folks, there are a lot of shysters out there in the mortgage profession. The easiest way to get people to sign up is to promise the moon, and until you get the final loan paperwork you have no way of knowing whether they intend to deliver what they said.

Caveat Emptor

Original here