Mortgages: April 2006 Archives

The easy, general rule is that legitimate expenses all have easily understood explanations in plain english, they are all for specific services, and if they are performed by third parties, there are associated invoices or receipts that you can see.



Let's haul out the Mortgage Loan Disclosure Statement (California) or Good Faith Estimate (elsewhere), and go right down them line by line. Now, to be certain, it's the HUD 1 form that's really definitive, but if it's not on the earlier form it shouldn't be on the HUD 1.



Origination is not a junk fee. It can be excessive, but it is a real fee to pay a real service. Relating to this is Yield Spread on the HUD 1, which is what the lender will pay the broker for a loan on given terms. Origination plus yield spread plus line 808 (Mortgage Broker Commission) is what the loan provider makes if they are a broker. If they're a lender, they make a lot more, and they can hide it more easily. Yield Spread and Origination and Broker's Commission are disclosed on the HUD 1, while the price on the secondary market is not disclosed anywhere, and if you're talking to a direct lender, they don't have to disclose Origination or Yield Spread because there (usually) isn't any; they are paid directly off the premium the loan sells for in the secondary market. This is why I keep telling people to shop for loans based upon the terms to you. If you evaluate it on the basis of loan provider's compensation, a broker who has to disclose compensation of $4000 is going to look like a worse bargain that the direct lender who does not apparently make anything but turns around and sells your loan for a $25,000 premium. In this example, the broker's loan is likely to be about a point and a half to two points cheaper to you, but if you evaluate it on the basis of who has to tell you how much they make, you lose.



Loan Discount Fee is the fee you pay in order to get an interest rate lower than you would otherwise be offered. It is not junk, but you probably don't want to pay it, as most folks never recover the money they pay to get the lower rate via the lower payments and interest rate charges. I never pay discount points for anything except a 30 year fixed rate loan that I'm going to keep at least ten years.



Appraisal Fee is not junk. There is an appraiser who needs to get paid for doing the appraisal. Many times this gets marked PFC on the MLDS/GFE, to make it look like a given loan provider is cheaper than they are. Make no mistake, there's going to be a figure in the range of $400 associated with it eventually, but because it's performed by a third party, the loan provider can (and often does) pretend it doesn't exist as part of the charges until you have to pay it.



Credit Report is not junk. It's not free to run credit, you know.



Lender's Inspection Fee is usually (not always) junk. You're paying the appraiser. If you're smart, you're paying a building inspector before you buy, and the lender usually makes you do it even if you don't want to. Every once in a while, there's a home with a documented pest or structural problem that the owner wants to refinance, and that's where this comes in as non-junk.



Mortgage Broker Commission/Fee: Is all a part of how the broker gets paid. Around here it's origination and yield spread, but this could be part of what a broker gets paid. Origination plus Yield Spread plus this line is the total of what they get paid. If these are larger at closing than when you signed up, that's par for the course most places, unless they guaranteed their fees up front in writing. I do it. I know one other company that does it. Those who are members of Upfront Mortgage Brokers guarantee the total of the items that are their fees, but not the rest of the form. For anyone else, they can and most will change the numbers on these forms within very broad limits (and to illustrate with an example someone recently brought into my office, the difference between one quarter of a point and three points on a $450,000 loan is over $12,000).



Tax Service Fee is not junk, unfortunately.



Processing fee is not junk but it may be negotiable. When it's imposed by the lender, it's not. When it's imposed by the broker, it's to pay the loan processor, which may be negotiated sometimes. It is a real fee, however.



Underwriting fee is real. Lenders charge it to cover paying the underwriters.



Wire Transfer Fee is real, because it costs money to wire money. If you don't need it, don't get it.



Prepaid Interest (line 901) is definitely not junk. This is interest, exactly the same as you're going to pay every month of your loan.



Mortgage Insurance Premium is not junk but is avoidable.



Hazard Insurance premiums are not junk, either. This money is to put a policy of homeowner's insurance (or renew an existing policy) on the property.



County property taxes are not junk, either. Rats. If you buy during certain periods of the year (e.g. April through June in California), you'll need to reimburse your seller for property taxes they already paid.



VA Funding fee is charged by the VA on VA loans only. Not junk, but if it's not VA, it doesn't have this. As I remember, if you're 10% or more disabled this can get waived.



Reserves deposited with lender are not junk, either. They will be used to pay your fees as they become due.



Title charges: Settlement or Closing Escrow Fee is a real charge to pay the escrow company. Like Appraisal fee, this is often marked PFC, but something like $500 plus $1 per thousand dollars is common.



Document Preparation Fee is mostly real, and actually the lenders do most of it these days. When the title or escrow company need to do it, they will charge fairly steep rates (I've seen $200 for a single sheet document), but you are kind of a captive audience unless you discuss it beforehand.



Notary Fee is to pay the Notary. It's real. It often falls into the PFC trap, previously discussed for Appraisals and Escrow, but you really do need this stuff notarized. Sometimes you can save some money by finding a less expensive notary, but this can bring up other issues, like getting everyone to the same place at the same time.



Title Insurance is real. If it's a purchase, there will actually be two policies of title insurance purchased, one for the new owner and one for the lender. This insures against unknown defects in the title of your property, and yes, title claims happen every day. Lenders won't lend without one. Title insurance is another one of those third party fees that gets marked PFC so that less scrupulous loan officers can appear to be less expensive than their competition.



I'm going to mention subescrow fees here, even though they aren't preset onto the form, and are not only junk but also avoidable if your agent did their job. The title company charges them because they are usually asked to do work that is, properly speaking, the realm of the escrow company. But if you choose a title company and escrow firm with common ownership, they will likely be waived.



Government Recording and Transfer Charges are not junk. They are charged by the county, and they are not avoidable, nor should you want to. Recording fees and tax stamps (if applicable) are just part of the cost of doing business. Beware of one provider pretending it doesn't exist while another honestly discloses it.



Additional Settlement Charges. Pest Inspection is the only one on the form, and it is not junk. You want a pest inspection.



Now, you'll notice that of the permanently etched items on the form, there's not a lot of junk, but everybody keeps talking about high junk fees. What are these, and where are they?



Well, some of the things that people talk about as junk fees aren't junk fees. These are fees like Appraisal fee, escrow, credit report, notary, etcetera. These are, incidentally, half or more of the closing costs for most loans. They may have been hidden from you on the initial form, but they're not junk. They are essential parts of the process, and if you don't see explicit dollar values associated with them, somebody is trying to lie about their fees by not telling you about all of them.



Nonetheless things that really are junk fees are a real problem, but the reason they're not among those listed on the form is that the items listed on the form are mostly real. It's the extra stuff that gets written into the extra lines that you've got to watch out for. It is fine and legitimate for a loan officer to write "Total of lenders fees $995" or whatever it is. On the HUD 1, these should be broken out into separate charges, but this way the loan officer only has to remember one number. As long as they add up correctly, no harm and no foul, and it doesn't make any difference to you whether it's underwriting or spa visits for the CEO, it's part of doing business with that lender. What is probably not legitimate is to start writing all kinds of other fees. Miscellaneous fees. Packaging fees. Marketing fees. Legitimate Messenger fees should be something you know about because you need them at the time they happen. But the majority of messenger fees are the title/escrow company trying to get you to pay for daily courier runs that happen anyway. If you choose the right title/escrow combination, you should be able to avoid them in most cases.



It is also a common misconception that all junk fees are lenders junk fees. I don't impose junk fees on my clients, but even coming into situations other loan officers have left behind, title companies and escrow companies, in general, appear to impose about an equal amount in junk fees with most loan providers.



Caveat Emptor.

UPDATED here

Just got a search on "state of california fsbo questions to work directly with loan officers without a agent"



This isn't a problem. Whereas it is the same license, it is two entirely separate job functions. The fact that you are or are not working with an agent has absolutely nothing to do with whether you can get a loan.



This is not to say that some folks who do both might not attempt to trick or pressure you into signing an agency agreement. The way to deal with that is to contact these folks (the link is for California, but the principle applies elsewhere).



This is not to say you should be looking for real estate agent responsibilities from someone acting solely as your loan officer. This happens quite a bit; If they're not getting an agent's commission, you should not ask them to do an agent's work or assume an agent's responsibility. Asking you to sign a form that says they are acting purely as a loan officer and are not responsible for anything except the loan is reasonable. Loan officer legal responsibility is minimal to non-existent anyway; it's one of the reasons the loan business is so messed up and out of control. But asking a loan officer to do both jobs for the pay of the lesser is unacceptable. You don't do extra work for free, you don't assume extra responsibility for free. Why should you expect someone else to do so?



Now in California, we changed the law a couple of years ago so that in certain circumstances where the firm is licensed with the Department of Corporations, the loan officers do not have to be individually licensed. I've seen a lot of abuses out of such situations; the loan officer who isn't individually licensed isn't risking their individual ability to work in the profession, no matter how egregious the violation. Indeed, many firms licensed with the Department of Corporations instead of the Department of Real Estate have made a point of recruiting people new to the profession who don't know any better, and no one will tell them until they go work for a company with better practices, which most of them never do. These folks also don't know how much the company makes per loan, so they don't have to pay them as much. Best of all possible worlds from the company's view!



But so long as you only ask a loan officer to do the loan officer's job, there should be no problem with doing a loan on a For Sale By Owner property. After all, you don't need a real estate agent to refinance, do you?



Caveat Emptor.

UPDATED here

what is a underwriter final "sign off" on the conditions

First off, it needs to be mentioned that a good loan officer gathers information and puts a full package, with all of the information an underwriter should need, before submitting the package to the underwriter. That's how you get loans through quick and clean. Give the underwriters all of the information you know they're going to need right up front.

Some clients don't understand this. They want to hang back and see if the basic loan will be approved before they do "all of this work." This is a good way to have to work much harder on the loan. Give it all to them in one shot, and they only look at your file once. You get a nice clean approval. The issue is that every time that underwriter looks at your file, there is a chance they will find something else that they want documented, some little piece of the picture they are uncomfortable with. The underwriter can always add more conditions. The cleaner the package, however, the less likely it is that they will.

There are some matters it's okay and routine to bring in later. Appraisal is probably the most universal of these. Title commitment (aka Preliminary Report) is probably second most common. These are completely independent of borrower qualification, and when they come in later, will generally not cause the underwriter to re-examine the whole file. But you want to submit the borrower's package as complete as possible, right up front. If the borrowers pay stubs show up later, the underwriter will look at the file, and if the income they document is even one penny less than the initial survey of the file, they will underwrite the whole thing again. A good loan officer submits complete packages, so the file only gets looked at once.

But every loan officer gets asked for additional conditions from time to time. With the best will in the world, sometimes they are going to miss something that the underwriter is going to want to see in this particular instance.

Loan conditions fall into two kinds: "Prior to documents" and "prior to funding". "Prior to docs" conditions are related to "Do you qualify for the loan" type stuff. Income documentation, property taxes, existing insurance for refinances, verification of mortgage, rents, employment, deposits, all of that good sort of stuff. Also appraisal, title commitment, etcetera. If there's something missing in the loan package, it should be a "prior to docs" condition. These conditions should be taken care of between the loan officer and the underwriter. The underwriter tells the loan officer what needs to be produced in order to approve the loan, and the loan officer goes and gets it. If the loan officer can't produce it, there is no loan.

This is not to say that a good loan officer can't necessarily think of another way to get the loan approved. Indeed, that's a significant part of being a good loan officer, almost as big as knowing what loans won't be approved, and not submitting a loan that won't be approved. This is a big game with many loan providers, by the way. They get you to sign up with quotes they know you won't qualify for, but when the loan is turned down (or, more commonly, the conditional commitment asks for something that the situation can't qualify for), they then tell you about the loan they should have told you about in the first place. Pretty sneaky, huh?

Getting back to the underwriter's conditions, a good loan officer knows how to work with alternatives. But at the bottom line, the loan officer has to come up with something that the underwriter will approve. It is the underwriter who has final authority. They write the loan commitment, which is the only thing that commits the money. In fact, most loan commitments are conditional upon additional requirements. The only universal to getting these conditions signed off is that the underwriter has to agree they have been met. As the underwriter agrees that the conditions have been met, one by one, the loan gets closer to final approval.

When the last prior to docs condition is satisfied, the loan officer orders loan documents. This is also when many of the less ethical of them actually lock the loan quote in with the lender. An ironclad rule is that if it isn't locked with the lender, it's not real, but that doesn't stop many loan officers from letting the rate float in hopes of the rates going down so they make more money for the same loan. Of course, if the rates go up, guess who gets stuck with the increase? It's not likely to be the loan provider.

When the loan documents arrive, the borrowers sign them with a notary and that's when the rescission clock begins. There is no federal right of rescission on investment property, and none on purchases, but on owner occupied refinancing, there is (Some states may expand on the federal minimums).

Now there will be "prior to funding" conditions to deal with. "Prior to funding" should be reserved almost exclusively for procedural matters, and should be taken care of primarily between the escrow officer and loan funder. There are always going to be procedural conditions here, but many lenders are now moving more and more conditions to "prior to funding" as opposed to "prior to docs". Why? Because once you sign documents, you're more heavily committed. Psychologically, once most people sign loan documents they think they're all done. This is not, in fact, the case. Legally, once the right of rescission, if any, expires, you are locked in with that lender unless/until they decide your loan cannot be funded. Once rescission expires, you no longer have the ability to call the whole thing off. You are stuck.

This is not to say that an occasional condition can't be moved to "prior to funding." Especially on subordinations. I've saved my clients a lot of money by getting subordination conditions moved to prior to funding so the rescission clock will expire in a timely fashion to fund the loan within the lock period.

This is all well and good if the lender told you about everything and actually deliver the loan they said they would, without snags. On the other hand, I have stories. One guy I used to work with had the capper, and the reason he got into the business was he was certain he could do better. He signed documents on a purchase, and a week later they called and told him he had to come up with $10,000 additional money within twenty-four hours, or lose the loan, the property, and the deposit, and be liable for all of the fees. His father had to overnight him cash, which he then took into the bank for a cashier's check.

He is only the most extreme example. The loan is not done until the documents are recorded with the county. Until that happens, the money does not have to come, and even if it does, the lender can pull it back. One procedural thing that happens with literally every loan is a last minute credit check and last minute call to the employer to be certain you still work there. If the borrower has been fired, quit, or has retired, no loan. If the borrower's credit score dropped below underwriting standards, no loan. If the borrower has taken out more credit, the lender will then send the file back to the underwriter to see if they still qualify for the loan with the increased payments. So like I tell folks, until those documents are recorded, don't change anything about your life.

The many less than ethical loan officers don't help matters any. I was selling a property a while back, and the buyer signed documents on Tuesday. If I had been doing the loan, the loan would have funded and the documents recorded the next day. Unfortunately, I wasn't doing the loan. This guy's loan officer had quoted him a loan he couldn't qualify for, and ten days after he signed documents, I got a call saying he could only qualify if I knocked $20,000 off the purchase price. I kept the deposit and went looking for another buyer. This guy learned an expensive lesson. When you sign loan documents, require your loan officer to produce a copy of all outstanding loan conditions. Don't sign until and unless you get it. This guy had signed, and was now locked in with a lender who couldn't fund the loan on conditions he could meet. I had even warned his agent (I accepted the offer because I was willing to sell at that price, so I wanted the transaction to go through), but hadn't been believed. So both of us ended up unhappy.

If they give you a copy of all outstanding loan conditions, you should know if you can meet them. If you can't meet them or aren't certain, don't sign. Don't hesitate to ask for explanations. Some of this stuff gets pretty technical, but a good explanation should be easily understandable in plain english. It may be complicated, but there just isn't anything that can't be explained in plain english. If the explanation you get is gobbledegook, you've probably been lied to all along, and I hope you have a good back up loan ready.

Caveat Emptor.

UPDATED here

"How do I remove PMI?"



First off, a definition. Private Mortgage Insurance, often abbreviated PMI, is an insurance policy that the bank may make you buy in order to get the loan. It is a monthly surcharge based upon a percentage of your entire principal balance. You pay for it, but the bank is the beneficiary. It doesn't make your mortgage payments if you can't, it doesn't keep your credit from being screwed up, and it doesn't even keep you from getting a 1099 for income from loan forgiveness. Net benefit to you: it gets you the loan, and nothing more, ever again.



You can trivially avoid PMI by splitting your loan into two pieces, a first loan for 80% of the value and a second for any remainder. Yes, the rate on the second will be higher, but it will likely save you money starting immediately, not to mention that it's likely to be deductible, whereas PMI is not, in general, deductible. I do not believe that with all the loans I've ever done, I've ever seen one where PMI was preferable to splitting the loan in two, from the client's point of view.



"With all this against mortgage insurance, why does it still happen?" you ask. This is the critical question. Lenders usually pay yield spread to brokers or commission to their own loan officers based upon the amount of the first loan. Pay for a second is typically (not always) a small flat amount or zero. Your loan provider makes more money by doing it all as one loan. The loan provider wants to make more money and sticks you with the bill. Doesn't that make your heart glow with gratitude? Didn't think so.



There are two ways PMI is collected. One is as a separate charge, supplemental to your loan. The second is as an addition to the rate.



The separate charge is never deductible, but is easier to remove. Most states, including California, have laws requiring the bank to remove it when a Price Opinion or appraisal say that the Loan to Value Ratio goes below 78 percent (or something similar). Depending upon your state, you may or may not be required to pay for an appraisal, a cost of approximately $400, in order to have it removed. Some states require only a price opinion, others, like California, permit the bank to require an appraisal.



Just because the law says that that the bank can require an appraisal doesn't mean that the bank will require an appraisal. If the loan to value is obviously there, they might just have someone drive by to make certain the house is still basically sound. On the other hand, if loan to value ratio is close to the line, the bank has a responsibility to its owners not to increase their exposure to loss unreasonably. So if you just wake up one morning with doubled property values, the bank will likely waive the appraisal. If your market is gradually increasing in value and you're watching it like a hawk and make your request the instant you think the value is there, be prepared to pay for the appraisal. Around here, with PMI on a 90 percent loan being a surcharge of about one and a quarter percent per year on a $500,000 loan, you pay for your appraisal by not having PMI in one month - if you're right. If you're wrong and the appraisal comes in lower, you're just out the money.



Suppose, instead that instead of choosing the surcharge option, you choose to have PMI built into the rate. So instead of a 6.25 percent loan rate, you have a 7.00 percent loan rate. Advantage: it's usually deductible, because it's actual interest on a home loan. Disadvantage: You have to refinance (or sell!) to get out of PMI, because the pricing is built into the loan itself as part of the contract you signed. It is to be noted that by itself, this method is usually cheaper than the monthly surcharge for precisely this reason, because in order to get rid of it you have to pay to refinance, and if there's a prepayment penalty in effect you're likely going to pay that also, and so on and so forth.



So if your loan is more than eighty percent of the value of your property, you can expect to pay PMI, although it is easily avoidable by splitting the loan into an 80 percent first and a second for the remainder, and you're likely much better off for doing so. If you're already stuck with it, contact your lender for steps to remove it providing you think the value has increased enough. If you suspect the lender is not abiding by the law, contact your state's Department of Real Estate, although lenders not abiding by the law in this case is both stupid and, in my experience, rare. It's usually the consumer that doesn't understand the law.



Caveat Emptor.



UPDATED here

There are a fair number of specific helpful suggestions to make in helping you purchase a home. All of them revolve around the loan. Let's face it, the loan is far and away the most hypothetical and uncertain part about most real estate transactions. If there is a non-loan related problem, chances are that you really didn't want to buy that particular property anyway. Most of the time, these problems mean that you would be buying into trouble, and nothing but. Unless you have specialized knowledge in sorting out that particular problem, it's likely to be more expensive than any money you saved through reduced purchase price.



A poor loan officer can always botch a loan, of course, and even the best may not be able to push it through if you are a marginal enough case. So how do you improve your case standing?



The first thing is to get a credit score above 720. If you're there already, keep doing what you're doing. Even if you're not there yet, it's easier to improve than most people think, although it takes time. Make all of your credit payments on time, especially any mortgages and rental payments. These are the most important things to mortgage lenders. Note that you make a payment a few days later than it is due, and you may even pay a penalty, but the lender will not report it as late until 30 days later, and that's when it counts as late to everyone else. In order to qualify for the A paper loan, at the top of the market, the general rule is no more than two 30 day late payments on revolving debts within two years, or one 30 day late on mortgages or rent.



Most lenders want you to have three lines of credit, and a twenty-four month credit history. Not all of them need to be still open, but if you don't have at least two open lines of credit, a given reporting bureau may not report a score, and if you don't have two different scores from the three big bureaus, only a few sub-prime lenders will give you a loan. The longer your particular lines of credit are open, the higher your score will be. So if you keep opening new lines of credit, expect your score to be low.



Revolving credit balances should be kept low, less than half of their limit. There is a significant hit if your credit line is more than half its limit, and the higher you go, the worse it is. If you have two $5000 limit credit cards, it is much better to have $1500 on each than $3000 on one and nothing on the other. It make even more difference if you have $2000 balance on each as opposed to $4000 on one. And if you're one of those people who keeps doing the "transfer your balance to a new card and get zero interest for six months" thing, it will really impact your credit in a negative way, because if your credit balances sum to $8000, that's usually what the limit on the new card will be, and so you've got a brand new credit card that's maxed out, which is a major hit on your credit.



One of the best ways to improve your credit score relatively quickly is to use your credit regularly but pay it off every time you get a bill. Once per month, charge something small that you know you will be able to pay off when the bill arrives. This may still take some months to improve your score, but better months than years.



The next way to improve your ability to afford a house is not to have any large monthly payments. The best rates are for full documentation loans, where you prove to the lender that you make enough money to be able to afford all of your payments. "A paper" lenders will allow you to have total monthly payments of 38 to 45 percent of your gross monthly income. Some sub-prime lenders will go to 55 percent. If your family makes $6000 per month, this means that total payments can be up to $2700 for certain A paper loans, up to $3300 for sub-prime and still qualify full documentation. This also means that the more income you can document, the more house you can afford.



This number includes not only the amount of the mortgage, but also the property taxes, homeowners insurance, association dues (if applicable), and anything else you may need to pay in order to keep the home, as well as car payments, credit card payments, and any other debts you may have. This means that somebody with other payments of $80 per month can afford a lot more house than somebody with other payments of $900 per month. This should be intuitive, but you'd be surprised how often people don't realize it.



The final thing that is helpful is a down payment. The larger your down payment, the less you have to borrow. Lending money is a risk-based business. Up to a point, the lower the ratio of loan balance to value of the property will help you get a lower interest rate and more favorable terms, because the bank will be more certain of getting all of their money back. A 5% down payment is better than none. 10% is better than 5%. The first 5% makes the most difference, but every bit helps. Of course the larger your down payment, the less you have left over for other purposes. It seems to be a phenomenon today that people don't want to risk any more of their own money than they have to, and 100% loans can be done right now, although how much longer that will be the case is anyone's guess. Still, people who make a habit of saving money are always in a stronger position that those who do not.



Caveat Emptor

real estate mortgage credit consumer education

UPDATED here

On of the biggest time and money wasters in real estate is people that apply for the wrong loans - loans that they can never qualify for because they can't meet the guidelines, or can't prove they meet the guidelines, which amounts to the same thing. Often, loan officers are the worst offenders, judging by the people who come into my office with messes for me to clean up. They don't know how to submit a loan, or they know full well it won't be approved, but they get you to sign up by dangling this carrot, and then snatching it away, but now they've got you working with them and they end up with your business because they told you a fairy tale that sounded better than what the other guy talked about because he restricted himself to talking about loans he could actually deliver.



How do you know what mortgage market is best for you?



There isn't a cut and dried answer unless you're one of those folks who can qualify "A paper" full documentation. If you can do it, and a lot more folks can qualify this way than think they can, A paper full doc is the way to go. Because it's the least risky loan, the banks give you the best pricing. What if you can't make it, however?



The reasons why people fall away from A paper full doc is long. The two largest ones, however, are people who cannot prove they make enough money and people whose credit score isn't high enough. At a distance from that, the third reason why folks don't qualify, is late payments. A paper permits one thirty day late on the mortgage, or two on other credit. If you fall off the pace due to late payments, you have to go subprime.



A paper accepts only two ways of proving your income: Income tax forms and, for some employees not in construction or on commission, w-2s and year to date pay stubs. If, with the income taken from these forms does not qualify you according to A paper debt to income ratio considering your known debts (typically 45% back end ratio, but I've seen high seventies get accepted in some circumstances), you do not qualify full documentation. Think of full doc as being where you prove you're got enough income to make your payments. If you can't do full documentation, you have to go to stated income.



A paper also requires an absolute minimum credit score of 620. 619 is an automatic rejection from any A paper program out there. Some A paper may require higher credit scores (640 jumbo, 660 stated income, 680 for both), and if you haven't got it, you don't have the loan, either. If you don't have the relevant credit score, you're going to subprime.



A paper stated income is where you've got a good credit score and can prove that you've got a job (or a source of income) and you've had it for two years. You just can't prove you make enough money to justify the loan. You could be making it, though, and the lender agrees not to verify, although they will look at it to see if the income you claim is consistent with your profession. You're paying your bills on time, though, so lenders are willing to believe that you're living within your means, and therefore qualify for the loan. They are not agreeing to close their eyes if something indicates you cannot afford it or what your real income is; they're just not going to go out of their way to verify your income. They are going to have you sign an IRS form 4506, releasing your taxes to them. Don't worry too much about it. The IRS takes a minimum of 60 days to respond, and the loan will be done in thirty, if your provider is competent, and it's not fraud to overstate your income on a stated income loan. Dumb, maybe; fraud, no. The major reasons why "A paper" stated income falls out are low credit score, insufficient time with your source of income, and incompetent loan officers who allow the underwriters to find out that the client doesn't make that much. Low credit score goes to subprime, insufficient time in line of work goes to NINA, and loans with incompetent loan officers start over with another lender.



A paper NINA is a loan driven by the credit score and the situation you find yourself in. There is no debt to income ratio, and the personal qualification consists of a good credit report. Of course, you still have to have the appraisal and the rest of the documentation relating to the property. Furthermore, the rates are higher than stated income (which is in turn higher than full documentation), and the maximum Loan to Value Ratio is lower. Common fallouts are credit score too low (go to subprime), loan to value ratio too high (go to subprime) and something wrong with the property (go to hard money)



Subprime is an entirely different world than A paper. The standards are different, the qualifications are different, everything is different. Just because you can't go full documentation A paper doesn't mean you can't do it subprime. For one thing, typical subprime goes up to fifty percent debt to income ratio, and a few lenders will go higher - some as high as sixty percent! So even though the rates are higher, it may be easier to qualify.



Subprime also has another form of accepted income documentation: bank statements for the last six, twelve, or twenty-four months. When I started, this was always discounted, but of late personal bank statements have been accepted on the strength of 100 percent of the income they show. This rate will be higher than a borrower who can prove their income via one of the A paper methids, but is lower than stated income. Number one reason for falling out of subprime full documentation: Not enough income. Number two: sub-500 credit score. Number three: the underwriter believes that you manipulated your income on your bank statements. Not enough income goes to stated income subprime (with another lender, as if it was submitted full doc it cannot go stated income with that lender). Sub 500 credit score goes to hard money, which is where you might as well start when you find out, because regulated lenders can't touch you if you don't have at least one of your three credit scores above 500. If the underwriter thinks you manipulated your income, you or your loan officer have either got to convince them you didn't, which usually requires w2s at least, or you are going to another lender.



Subprime stated income is fairly wide open, with the proviso that a given credit score will have a higher rate and a lower maximum permitted loan to value ratio. Number one reason for falling you here is that you don't meet loan to value guidelines. Number two is you didn't state enough income in the first place, and you don't qualify by debt to income ratio guidelines. Number three is you stated too much income, and the underwriter doesn't believe you make that much money. They can always require income documentation - they don't have to let you state it without verification. At best, anyone suffering from any of these three problems can expect to have to go to another lender, because this lender will not now approve their loan. Maybe lose a little time if you're working with a broker who then submits the package elsewhere. Back to square one if you were working with a direct lender.



Subprime NINA is even more wide open. A loan officer has got to be a serious bozo to blow this one, but I clean up behind ones that went bad on a distressingly frequent basis.



Hard money is the last hope of the unfortunate. These folks don't care about your income, your credit score, or anything else. What they care about is that they can sell the house for enough to cover the loan if you default, and unlike regulated lenders, they will record that Notice of Default on the day you become eligible. Sometimes they are the only choice, but if you find yourself dealing with them you should really ask yourself if this loan is something you absolutely have to have, or if you just want it. If the answer is the latter, my advice is to reconsider getting the loan.



There you have it, something like a flowchart of what kind of loan you should apply for. These are far from the only reasons loans fall apart, of course, but they are the most common. A good loan officer knows enough of the tricks and traps to tell you the truth straight off, and apply to the appropriate loan first, without wasting your time and money. Bad ones don't.



Caveat Emptor.



UPDATED here

Appraisers Petition Against "Make The Deal"



I've spoken about these issues before in this post.



I've certainly heard of plenty of abuse on both sides of this equation, and there is plenty of motivation for lenders to abuse the situation by requiring a higher than "real" appraisal value. Still, I think that by reading only the comments from various appraisers one would get a skewed vision of what is going on.



It is the appraiser's job to do their best to get a value that is useful. Theirs is a service occupation, just as mine is. I don't expect to be paid if I can't help the people with their situation. Sometimes I put in hundreds of dollars and dozens of hours of work and it all falls apart because of something beyond my control. Situations like this are part of being in business for yourself. I don't expect to get paid when I can't help the people. Why does the appraiser?



These houses are selling for these prices. If the last three similar houses in the neighborhood sold for $600,000, then this one is likely worth $600,000 also. When the appraiser tries to tell me a house that I've seen and is immaculate and further upgraded than than any of the last three is worth $150,000 less than those sold for, something is wrong, and it isn't with the house.



Basically, what's wrong is they don't want to work. They want to be able to drive over and pop the customer for the bill and let the chips fall where they may. And if the house is really only worth $450,000, the house is only really only worth $450,000. But most of the time, if they worked a little bit, and maybe chose a different sale to compare to, they could justify the higher appraisal, but they don't want to be bothered.



Let me ask you: Somebody bills you $400 or so for work that doesn't help you and in fact makes all of the work you put in worthless, it makes you feel all happy, right? They knew before they went over and asked for the check that they weren't going to be able to get the necessary value. You know something? I'd be more forgiving of him charging me $400 in those circumstances than charging my client $400. If the appraiser called first, and told me he couldn't get value, that gives me a chance to re-work the loan and save everyody's investment in this by talking to the client before the client has written a check for $400. If I can't get the client to accept the new loan, at least they're not telling people I screwed them out of $400 on the appraisal. That's right, it's the loan provider that gets the blame for this in the customer's mind. If I tell them about a change before they spent $400, they're not going to be as angry, and even if this loan falls apart they're likely to tell people I was honest and saved them from being out $400 rather than that I took their $400 and didn't deliver. As I think you might have gathered by now, I didn't get that $400 - the appraiser who screwed the loan up did. If I can't turn it into a new different loan, the appraiser is out a little bit of work. I've put ten times as much into making this happen. It's much easier to tell the client their house is only worth $450,000 before they've written that check for $400. The check gets written, and the whole thing is gone up in smoke.



The appraiser, understandably, wants to get paid for their work. So do I. All I ever ask is that they don't intentionally waste my client's money. If they can't get value, give me a chance to re-work the loan or find someone who can get value. In some situations on a sale, this allows me a chance to re-negotiate the price down so my client gets a better price on the house they want. If they just make the call that gives me a chance to fix it first, I will use them again. That's the kind of appraiser I want to work with. But do a "hop pop and drop" ("hop on over, pop the customer for the bill, and drop a useless appraisal on the bank") so that they get paid once while I'm stuck with a pissed off customer who is now going to tell all their friends and family what an awful person I am, and I think they've earned a spot on my personal blacklist of appraisers I will never do business with again. I'll forgive it once, maybe even twice, if this appraiser has a history of calling me first and this time it just happened that they couldn't get value when they thought they could. Treating your customers right is part of the requirements of being in business for yourself, and sometimes this means you did some work and didn't get paid. You want a job with a steady income where you don't take any risks, go find something with a w-2 involved, and the only risk you take is being fired. You won't make as much money, but you will get paid for all the work that you do. For as long as they put up with you.



UPDATE: Home values here locally have deflated siginificantly. Right now, the value the appraiser comes back with is not usually an issue unless there have been a lot of distress sales in the neighborhood. The appraisal is rarely a major issue when prices are deflating, because it works by historical sales. Yes, there could be five identical homes sitting on the market and not selling for $10,000 less; but the last one that actually did sell sold for $20,000 more, and the appraiser works off of actual sales.

Caveat Emptor

UPDATED here