March 2012 Archives

"I am married but want to refinance my house only in my name. What do I have to do?"

Most lenders policies require the property to be titled in a compatible manner to the loan. Some few do allow the spouse to be on title and not a party to the loan, in which case they will be required to sign the Trust Deed, although not the Note. Most lenders, however, will require that if you are the only one on the loan, the property be titled in your name exclusively. So your spouse will be required to sign a quitclaim to "Jenny Jones, a married woman as her sole and separate property" (Or "John Jones, a married man as his sole and separate property). If you don't like the title being this way, that's fine and don't sweat it. You can quitclaim it back to "John and Jenny Jones, husband and wife as joint tenants with rights of survivorship" as soon as the loan records. What matters is that the people agreeing to the loan, as of the moment the Trust Deed comes into effect, is reflected in the official title of the property.

For those intelligent individuals whose property is in living trusts, this is also a common feature of getting a loan on the property. The lender will usually require it be quit-claimed from "John and Jenny Jones, trustees of the Jones Family Living Trust" to either the sole individual who qualified for the loan, as in the previous paragraph, or to "John and Jenny Jones, husband and wife as joint tenants with rights of survivorship."

All of that is the easy part. Now comes the hard part. If one spouse wants to be the only one on the loan, then they must qualify on their own. Only their income may be used. However, since most debts in a marriage are in the names of both partners, typically they are going to going to be charged for most debts on their qualification sheets. This really is no big deal if that particular spouse is earning all of the money anyway, but in most cases these days, both spouses are working, and they want to buy the biggest home they can, so it can be difficult to qualify them for that home based upon the income of only one spouse. Here's a typical scenario: He makes $5600 per month, she makes $5000. They have two $400 per month car payments and $120 per month in credit card minimum payments. But he has rotten credit, so they are hoping to secure a loan on better terms. By A paper full documentation guidelines, she only qualifies for a PITI payment of $1330 ($5000 times 45%, minus $920), which might get a one bedroom condo in a not so hot area of town. So then they have to go stated income in order to qualify for the loan on the home they really want - and stated income loans are dead, at least for now. As a couple they qualify for payments of $3850 ($10,600 times 45%, minus $920), which will get a decent single family residence in an okay area of town. You, the readers, can guess which of the two properties the average couple in this situation is going to shop for. Unfortunately, if they can't use his income, they don't qualify for the property they want. This is a real issue, especially if they went and got a prequalification from someone who figured both of their incomes in the equation, so here they are with a purchase agreement and they can't qualify like they thought they could. This is one reason I've learned never to trust someone else's prequalification of a buyer, because in this situation, the only way to make it happen is to put John, with his rotten credit, on the loan. Because he makes more money than Jenny, he will be the primary borrower, and so the loan will be based upon John's bad credit history, not Jenny's above average FICO. There used to be ways to potentially get around this, but the lenders have closed pretty much all those loopholes (and then some...) and so John and Jenny often don't qualify for the loan amount they need for the property they shopped for. Better to get John's credit score up where he will qualify for a good loan beforehand, of course, but usually these folks want a loan now so they can get this home they've already signed a purchase contract on. The ability to improve credit scores in a short period of time is limited, and it's even more limited if John and Jenny are short on cash, which is usually the case.

These can all be issues with the spouse who makes less money, also. Reverse the incomes, so that John, with his bad credit, makes $5000 per month and Jenny, with her good credit, makes $5600. So at least Jenny is primary on the loan now but that doesn't help a whole lot in the A paper loan market, where both borrowers have to meet the same standards.

Now, in point of fact many borrowers these days are ones that have settled upon a property before they even considered a loan, and are determined to get that property no matter what they have to do. Alternatively, they may have talked to someone about loans who gave them a budget which was in fact accurate, but they liked this property so much that they are utterly ignoring that budget. Such people are going to end up with bad loans or, more likely today, no property and a forfeited deposit. They want more house than they can really afford, and they want it now. When first I wrote this, I could get the loan for them, any competent loan officer could have gotten the loan for them, but there would be consequences down the road, because there are still those pesky payments they have to make (or negative amortization that builds up. Or both). A loan you cannot afford is a course for disaster, and the longer you're on it, the worse the disaster gets. And the lending standards now are much more paranoid on the lenders part. The Era of Make Believe Loans is over.

Another thing that bites a fair number of people is divorce, where one ex-spouse figures that because he (or she) qualified all by themselves so they should be able to make the payments all by themselves. But the loan officer back when they originally bought used stated income without telling them, and once that other income is gone, it turns out that they can't make the payments. Not only can they not make the payments, they cannot qualify to refinance now, even as a couple. Typically, most people live in denial about this for way too long, ruining their credit to where they can no longer qualify for the loan on the lesser property they would have been able to get if they had done the smart thing and sold as soon as they figured it out in the first place.

One spouse qualifying for a loan on their own has some real issues to be aware of, and that will turn and bite you if you're not careful enough.

Caveat Emptor

Original here

It's very simple really, and this is something I have never covered in the perhaps mistaken belief that it was too simple and everybody knew this.

The Note is the loan contract that sets the terms of the loan, repayment, etcetera. This contract is the document that controls, in conjunction with state law, your loan. Term of loan, interest rate, prepayment penalty, penalties for late payments, it's all there.

The Trust Deed is the security instrument. Without the Deed of Trust, the Note still creates the indebtedness, it's just not secured by anything specific. You still owe the money, but without the Deed of Trust the lender cannot force the sale of the residence (or take possession themselves) in satisfaction of that Note. Actually, I should say that they can't do so without recourse to the courts, and they would have to stand in line with all of the other unsecured creditors. The Deed of Trust creates that security interest, and makes the debt secured by a specific asset - the land given in the Deed of Trust. The Deed of Trust, unlike the Note, is recorded with the County Recorder with an official document number, and indexed in public records to as being associated with a particular piece of land, hence the ability to find it pretty easily.

You hear talk about a Note secured by a Deed of Trust. They're talking about a Note, and telling you that it is a note secured by Deed of Trust on a particular asset. Both real estate and automobile loans are routinely secured by a Deed of Trust against that particular property or vehicle, which is how the various holders of those loans have the ability to take back the secured property administratively, without recourse to the courts, provided certain conditions are met. If these loans were not secured by the pledge of a specific asset, these creditors would have to go through the courts, and stand in line along with credit card companies, etcetera. If they did not have a greater security interest, there would be no incentive to give real estate and automobile loans better rates than credit card holders get. So think about that before you advocate making it harder for lenders to foreclose. Every little bit you restrict a lender from its valid security interest means higher rates for everybody else as well. This is basic economics.

There's a great brouhaha right now about "produce the Note." People who are in over their heads are telling lenders to "produce the Note" in order to proceed with a foreclosure. They're hoping for a jackpot, and a few years ago, in the case of perhaps one to two percent of all borrowers, usually with a loan that had been sold multiple times, the lender was unable to produce the note and the person ended up with a free house instead of losing it. I shouldn't have to tell you who ends up paying for those houses and the loans associated with them, should I? Here's a hint: It's not the lender or their stockholders. If you're completely clueless, It's customers of that bank and future borrowers who end up paying. If it gets bad enough, its the US taxpayers and depositors with over the insured amount in that institution. These days, however, "produce the Note" is a delaying tactic - figure the lender is going to find it in all but a very small number of cases - on the order of winning the lottery odds. It may take them a while, but it's a safe enough bet that they will find it. It may buy you a month or two delay, that's all - perhaps only a day or less. If you can solve the problem presented by the default in that period of time, all well and good. If you can't, all you've done is delay the inevitable and perhaps make it worse (The Trust Deed is part of the public record, and trivial to find and produce - the title companies can all do it within thirty seconds).

The two legal documents (or instruments) can be combined, but generally aren't, and I don't know why. However, this can be a problem for lenders who buy the loans from other lenders. It doesn't happen much any more, but it does still happen that lenders cannot produce the Note, and it usually is something that takes a while. Without the Note, there is evidence of debt and therefore no loan to satisfy, and so you can have your lawyer insist that the Trust Deed be reconveyed. to clear the cloud it creates upon your title. Essentially, free money. Without the Reconveyance, however, it's difficult to sell the property and this can give the lender leverage to require repayment if you're trying to sell the property right now. Any unreconveyed Deed of Trust creates a cloud on title, and you need to clear that title in order to be able to sell, quitclaim, or even conceivably, will the property to an heir or even have it pass by action of law. If court action is required to clear a title, it's called a quiet title proceeding.

I'm not a lawyer in any state, so if a lawyer tells you something different than this, take their word for it, not mine. Even if I'm right in every other state, the lawyer is going to know that yours is the exception. This is simply the understanding of a layman who has had things explained to him by lawyers, and is attempting to pass on general knowledge of the differences and relationship between two loan related legal documents.

Caveat Emptor

Original article here

As a good buyer's agent, I love a challenge. When someone comes to me trying to make a budget stretch just a little bit further than it would usually go, that's the kind of client I love to have. My goal is always to make at least a ten percent difference to the price the client pays, the value of the property they get, or some combination of the two. Nonetheless, the ones who can almost but not quite afford what they want without me (or someone equally good) as an agent are the ones I really get off on working with. The single mom of two who I can help get into the three bedroom condo or PUD instead of two, so everybody gets their own room. The huge family (or multiple family) where everybody pitches in together for the house they're all going to live in together. The young newlyweds who are just getting started and may only intend to hold onto the property for a few years, but they're going to start their family there. One hopes you get the idea, and of course, preventing the "mistake" properties that are just going to suck a budget dry and be an ugly problem to sell.

There is nonetheless a thin but sharp divide between someone like that and someone who will only buy the Taj Mahal at a cut rate price. Someone calls me and asks for something that doesn't exist and isn't going to at a price they are willing to pay, I'm going to be completely upfront about telling them that what they're asking for is not realistic, and any agent worth a damn is going to do exactly the same thing. Anyone who can swing it is eager to buy the Taj Mahal at a cut rate price.

I did use the phrase "cut rate Taj Mahal" deliberately. If it's beautiful, people will want it. That's the way people are wired; women especially so, and women are the ones that make the "buy" decision. The only thing that prevents it from selling is if they can get more for their money out of some other property. An attractive property that is not significantly over-priced will sell in any market. Of course, it will sell for significantly more in a hot market than a buyer's market, but that's an entirely different subject. The property is on the market when it is on the market, and whether a seller could have made more by waiting is a subject for a different article. The point is that beautiful properties will sell, there is always demand for them, and if they are priced even close to the right level, you will get people lining up to buy them, competing to buy them. The probability of a cut rate offer being the one that is accepted is about the same as winning the lottery with a single ticket. An ethical listing agent won't let it go for less than it's worth. Heck, a crummy listing agent won't let it go for less either - they are paid on commission!

I just checked the statistics on MLS. When I originally wrote this, the San Diego area was down to 12099 active listings, while 946 had gone Pending in the last seven days, giving us about a 13 week theoretical supply (89 days) in inventory. That's a balanced market, no longer the buyer's market. But a sample of actives in a couple of diverse zip codes yielded that about 20% of the theoretical actives are short sales with an accepted contract that were allowed to remain on the active list. Looking at 80% of the actives number, and assuming that a short sale takes about ten weeks on average, that means the real numbers were about a 57 day supply of inventory - just over 8 weeks. This means we're edging down to a full fledged seller's market, and it wasn't yet Easter.

So what does this mean to buyers? The first thing to consider is that the above numbers are the statistical mean. You're lumping the beautiful property in a great neighborhood with fantastic schools with the cluttered, trashed, falling apart piece of garbage in an area where the schools mostly teach "Hanging out with an ankle bracelet", and then taking the non-existent middle course between the two. Assuming you don't really want the cluttered trashed falling apart ghetto property, this means you're competing for the property at the other end of the spectrum - by which I mean the highly desirable properties that are going quickly and for good prices. The morning I wrote this, I called the listing agents on two such properties that have been on the market less than a week, and got believable responses that both properties have already gotten multiple offers. Those properties are not going to go for a cut rate price, and buyers putting in low-ball offers to see if they work are wasting paper and wasting time. In such an environment, the days when I or anyone else could "steal" an attractive property like that for thirty-five percent under the appraised value are gone, as I must have predicted here in writing on at least three or four occasions - not that there was any great predictive ability involved.

If you're wealthier than Midas and don't mind spending your wealth on housing, this article just isn't relevant. For those looking to buy significantly below the limits of their means (and I do seem to get a fair number of clients in this category, for which I am profoundly thankful, and I can make an even larger difference than usual), large parts can be ignored because they have the alternative of increasing the budget if they don't like their choices at the current dollar limit. For those who want to stretch their budget and make every dollar count, it is critical, and failing to follow something very close to this model is a recipe for disaster. The idea is to make rational, informed choices that you will be happy with later.

The first thing to consider is your budget. In order to buy within a budget, you have to know what that budget is. There are no more "Make Believe" loans - and this is a Good Thing, as I'm certain the vast majority of the millions of people facing defaulted Make Believe loans right now would agree. They could have afforded something good enough with a sustainable loan, and instead they chose a Make Believe loan in order to get the Taj Mahal, but now they're losing the Taj Mahal, and can no longer qualify to buy the eminently suitable property they could have had if they had chosen rationally in the first place.

I compute what every single buyer client can afford, whether or not they're planning to do the loan with me. I sit down and discuss the questions that need to be answered: "How much cash do you have for the down payment and closing costs?" and "how much income can you document for (the relevant period)?" and "What is your credit score?" I sit down and go over what those numbers mean in terms of purchase price in the current market, and then both the prospective buyers and I have got to agree upon a maximum purchase price we will consider. If the property cannot be obtained within that purchase price, it is a non-starter. There may be a certain amount of gray area as asking price is not the same as sales price, but the bottom line is that if I cannot persuade someone to sell for a price within the budget my client and I have agreed upon, we're going to put that property out of our minds. Most of the trouble I do get arises because there is a lot less slack in the asking price for beautiful properties new on the market than there is for less physically attractive properties that have been sitting a while. I have a choice as to where to put the dividing line as to what the clients see, and my default is always to allow them to see all the properties within a set mark-up of the agreed upon budgetary maximum, even though that may have attractive properties new to the market where the price is not that negotiable, or not that negotiable yet. Transparency, always transparency - even when it causes me problems.

The next thing to consider is "what does the property absolutely have to have?" The hard part here is cutting this list to the bone, if not all the way down to the marrow. You have got to focus on no more than one or two things at this level. It can be a good school district, it can be a certain number of bedrooms or certain size of lot, it can be a certain section of town, it can be a lot of other things but the critical thing is to get that focus laser-sharp. One thing, or at the very most, two. To paraphrase the immortal Monty Python, three is right out, and for reasons similar to those given in the Book of Armaments. You have got to be clear, and you've got to mean it. If it doesn't have this one thing, it's off the list of possibilities, no matter how beautiful it is. That's pretty easy for most folks. The logical corollary of that, however, is much more difficult: that if it does have that one attribute, the property is a serious possibility no matter how ugly, no matter how trashed, no matter any number of other undesirable factors. If you're not serious about this one point, you're not serious about stretching your budget. I'm not going to say that there's nothing a good buyer's agent can do for you, because it wouldn't be true, but if you cannot abide this corollary you have become your own worst enemy. This is at the heart of why there is money in fixer properties. If someone else has already made it beautiful, people are going to line up to buy it at a very competitive price. If you want a budget stretching price, you've got to be willing to some degree to be the one who makes it beautiful.

This applies no matter what else you want. The ultimate expression is that if I run a search and there is one property that meets your budget and your "must have" list. This has never happened to me yet, but there's nothing that says it won't happen tomorrow. At that point, you have Hobson's Choice: that property or none at all. Mind you, "none at all" (i.e. continue renting) is likely to be the superior of those two alternatives in this situation, but it would certainly cut down on my time requirements. Also, there is always the option of "wait and see". Just because nothing on the market today fits the bill doesn't mean that there never will be. It's not for nothing that "patience" is the number one item on my list of Top Twelve Things That Help You Buy a Bargain Property.

Things usually aren't that cut and dried, however. Usually, there are several dozen possibilities, sometimes hundreds. This is because I will either keep badgering people to expand their criteria until there are enough possibilities to give a real selection, or I will tell them point blank that the list of possibles is short and once we have seen what's available, they're going to need to make a choice. It doesn't take very many properties on the alternatives list before there will be at least one worth buying whether they like it or not, and if they choose not to buy anything available within their budget, I have to reconsider whether I'm able to help them. I what you want isn't available at a price you can actually pay, nobody can help you.

Keeping in mind that thin line between my favorite clients in the "challenging but possible" camp and those in the "want a bargain on the Taj Mahal" camp, there are only two choices for an ethical agent who believes he's got someone in the latter category: Have a frank talk with the client in which these folks convince me that they have seen the light of what is realistic, or I must stop working with them. If I continue working with them when they have unrealistic expectations, I'm wasting my time, their time, and the time of every listing agent and seller whose property I want to show, because it's not going to happen, and it's my fault if I don't put a stop to the wishful thinking. I'm wasting money and gas and nice afternoons that we both could be spending doing something else and keeping myself from helping other people where I might make a real difference. My point is this: People looking for something unrealistic are not going to turn into happy owners. I can tell them they're not realistic, or I can put them into a property they are going to be miserable in. In the latter case, they're not going to be happy with me. If I tell them the truth in the first place, they might be able to respect my professionalism and refer someone else I can make into a happy owner. If I put them into a property where they are not a happy owner, then I might get one paycheck, but I'm going to be paying for it forever when those people tell all of their circle of influence how miserable they are and whose fault it is.

I'm not a wealthy broker running a transaction mill. Yes, I'm busy, partly because I'm good and partly because I earn my pay. I spend a lot of time and effort doing the best I can for each and every client, and I don't accept clients if I haven't got the time to do a good job with them right now. You really want an agent who follows this business model, by the way. "Firing a client" has real consequences to me and my family, and I don't do it lightly or often. Nonetheless, I will do it if I need to because the consequences of not doing so are worse.

Starting from a point where there are several dozen properties that potentially fit the bill of being within budget and possessing the absolute "must have" quality. This means the client has a range of options, and usually more properties coming onto the list by the time we've looked at all of them. We don't have to look at all of them, and in fact I don't think I have ever shown every single property on their list to anyone, but we could. In the meantime, if something catches their eye as being something they think they'll be happy with, especially once we've discussed downsides and potential downsides, it's a good idea to make an offer on it right away. In my experience, hoping for something perfect is more likely to net you frustration than a good property you'll be happy with at a good price. Beyond a certain point, the more you try for perfection, the less happy you're likely to end up.

The real point is that there will be a set of trade offs the client can choose between. This one will have more square footage, while that one will be beautiful, but have a homeowner's association that comes with it. This one will have some significant extras but need lots of cosmetic work, while that one doesn't have a lot of the lesser qualities they want but be move in ready. It's the client's money, therefore it's the client's choice. My principle jobs as a buyer's agent are to 1) Differentiate the obviously unacceptable and those with problems that laypeople may not spot from those that are real contenders, 2) Make certain that the client understands the ramifications of their choice before signing away hundreds of thousands of dollars in cash and borrowed money, 3) Negotiate as effectively as I can for a better deal, 4) Be aware of everything about that transaction and 5) be willing to take action, up to and including counseling my clients to walk away if something is wrong enough.

The more you require in a property, the more it will cost. There is a measurement for how desirable a property is, and the unit of measurement is the dollar. If you've only got a certain budget and you're looking to buy in the best neighborhood in town, it's going to cost you more than the same property in the ghetto. The difference is that value of the neighborhood. The same property in the district with the very best school system (or best school) is going to be more valuable than the otherwise identical property down where schools are just a taxpayer subsidized babysitting service where the kids learn undesirable behaviors. People seem to soak this up easily, but they aren't usually as fast on the uptake of "holding the neighborhood constant, you can have a beautiful turnkey property or you can have an extra bathroom, two bedrooms, and four thousand square feet on the lot by being willing to beautify a solid property or you can have a huge lot with a better zoning where the existing building needs to come down completely." All of these, and many others, are potentially valid choices and I can see where making any of these choices could be the most rational choice if your needs and resources match the right profile. It's my job to help you with that, too, but the final choice has to be yours. Nonetheless, there will be tradeoffs involved - you can't have it all. If I were some corporate or NAR flack, I'd be telling you otherwise, but the fact is that you're going to have to choose what's most important to you, and either create the rest yourself or do without. The more you have to spend, the broader your choices and the more you can expect to receive for that money, but even the richest man on the planet has alternative uses for the money that he's giving up to buy this property. Nobody has an unlimited budget.

Putting up with things that others are not willing to is worth some money - often enough for a major shift in the question of whether they're being realistic. I had some clients who were relocating from the primary flight path of a major jet airport. They laughed every time I talked to them about traffic noise as a negative factor, and that was fine. They had told me they didn't care, but they had also told me that this wasn't a forever property for them, which means that when they go to sell it, it's going to be a factor for them. They wanted to consider a property on what was essentially a frontage road to an interstate. I convinced them otherwise for a number of reasons that include that street might as well be a drag strip because mild mannered housewives with their hair up in curlers turn into testosterone fueled racing junkies there - all within feet of where children are playing in their yards. But if the traffic noise had been all there was to the issue, they could have used it to snare a bargain property because they would be willing to put up with something nobody else would. They were also shopping well beneath the limits of their means, so I was also able to put them into something in a better location with a lot more upside for the same money.

The bottom line is that more money buys a better property. Like any other good buyer's agent, I can stretch your available dollars, but there is a limit to how far I can stretch them. I'm aware of that limit, and so are my buyer clients because I will make certain that they are aware. There comes a point where a given set of search criteria flips from "challenging but possible" to "not likely to happen on Planet Earth." If that happens to you, you are wasting your time and everyone else's. Most buyers have to accept compromises in order to get what they need within their budget, and it's only going to get worse as we finish working our way through the problems that caused the meltdown. If you understand this in the first place, you're in a much stronger position when you start looking.

Caveat Emptor

Original article here