Mortgages: July 2006 Archives

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

This is actually pretty easy, and there are at least two ways to potentially accomplish this, depending upon lender policy and the law in your area.

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. 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, many times her profession is not one where the lender will believes she makes twice what she really does without verification. 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 pre-qualification 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 are ways to potentially get around this, but sometimes they work and sometimes they don't, at least in the sense of getting John and Jenny a better rate on their loan, or of qualifying them to get a loan at all. 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 most people are not in professions where the lender will believe they make almost twice what they really do, so stated income A paper doesn't fly, and John and Jenny have to go sub-prime because if you put him on the loan, both spouses must qualify A paper and John doesn't. Sub-prime means higher rates and a pre-payment penalty, unless you buy off the prepayment penalty with an even higher rate.

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. They want more house than they can really afford, and they want it now. I can get the loan for them, any competent loan officer can get it for them, but there will 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.

But so long as a couple is qualifying for a loan where they really can make the payments, it's all okay. The one 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 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. 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 in the first place.

So 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.

UPDATED here

People are understandably hazy on the difference between pre-qualification and pre-approval. Pre-qualification is a non-rigorous process whereby somebody says that based upon the information as presented to them, it appears you'll qualify for the loan.



Pre-approval should be more rigorous. For A paper, it should mean that you've few the final loan information, including qualifying rate, income information, credit, etcetera through one of the automated underwriting programs, and it has come back with an "accept". All that is needed is the actual information on the property, and the actual underwriting.



Now due to the nature of the loan and real estate market, very few people actually get a pre-approval. Why? It costs money to do all of that, and takes a lot of time. Furthermore, it's based upon a qualifying rate. If rates go up, you have two choices: live with a higher rate or pay more money to buy the rate down, and sometimes no matter how much money you pay, the old qualifying rate isn't available. You can't lock the loan with any lender that I am aware of until you have a specific piece of real estate, so your rate will float between pre-approval and a fully negotiated agreement to purchase.



Furthermore, people have an unfortunate habit of stretching to the very limit to buy more house than they should. If you attempt to build in a little margin on the pre-approval, you're going to qualify them for less money than someone else.



Now with sub-prime lenders, they don't have Fannie and Freddie's programs to fall back upon, and if Fannie and Freddie will approve you, you shouldn't be getting a sub-prime loan. So in most cases, they have to go through essentially a full underwrite of the file, and agree to pay a cancellation fee if you don't fund within X number of months. Remember also what I told you about having an underwriter do part of their work now, part later. Every time they pick up that file is a real possibility that they will find something wrong that is a good reason not to fund the loan, or imposing a condition that the borrower cannot meet. Result: Dead loan, and in this case where you thought you had it covered, it really ticks off the client, understandably so. I'm a broker; I can always submit elsewhere, but direct lenders are stuck, and the client doesn't exactly like paying that cancellation fee, either.



Now many seller's agents are getting tired of getting left at the altar because a pre-qualification means so little, and are starting to demand a pre-approval with offers. Maybe a couple of years ago they would have gotten it; not in the buyer's market we have today. I submit an offer on behalf of a client, they are required to submit it in any case. In today's buyer's market, sellers are (or should be) eager to accept any qualified offer, but most seller's agents wouldn't know what a qualified buyer was if it bit them. Income documentation? Credit Score? Debt to income ratio? They are happily clueless, and they don't know how to negotiate for an appropriate deposit, with appropriate controls on who gets it and when. Furthermore, they don't want to drive off potential buyers, although this is exactly what requiring a pre-approval does. A good buyer's agent knows better in this current market, knows they aren't really necessary no matter what the listing says, but on the other hand they don't want to waste time with an unqualified buyer in the first place, and many of them have no more clue than listing agents what a qualified buyer looks like.



I've told you before that a large number of listing agents are lazy clods whose skills are mostly limited to getting the seller's signature on the listing agreement. They don't want to do the work they have more than once, and will drive off willing buyers who actually are decently strong, hoping for someone like King Midas to roll in so they only have to do the work once. Never mind that if they do it right, most of the time the clearances and such only have to be done once. But in the current market, driving off any willing buyer with a decent chance of qualification is a good way to have the property sit for months. Every so often, when I'm calling around to check about showing properties, an agent will tell me that they have two offers. Right. After it sits for six months, suddenly two separate groups decide it's worth buying when everything else on the market is languishing? If the two offers are real and not a figment of someone's imagination, neither one of them is good, or it would have accepted it and the property would be in escrow. If such offers are real, they're desperation checks from the sharks.



But even in a seller's market, requiring a pre-approval is counterproductive, and may mean that you are disallowing the person who would give you or your client the best offer, and may indeed be a well-qualified buyer. Yes, it may stop you from dealing with some of the "riff-raff", but the work it saves you could cost your client thousands of dollars, and you signed on to do that work. So if you're a potential seller, ask questions about this potential situation.



Caveat Emptor.



UPDATED here

Just like "we'll beat any deal!" in any other competitive sales endeavor, this is a game. Actually, it's even more of a game for loans than it is anywhere else, used cars included. What they are hoping is that you'll go there last, and tell them what the best thing you've been quoted, and then they can sell you on their loan and most people will go with them, because "we're here, not there."



The first issue is that anyone can give a low quote. It's like the old joke, "Your lips are moving." Unless they guarantee that quote, that's all they're doing: flapping their gums. All a quote is is an estimate, and I've more than adequately covered the games it is legal to play with a Good Faith Estimate (or MLDS in California). By itself, A low quote means nothing. Loan officers can, legally, quote you one loan and deliver a completely different loan at a completely different rate with a completely different (higher, or course) closing cost. Without some kind of Loan Quote Guarantee, a quote isn't worth the paper a verbal contract is printed on.



The second issue is that even if they are quoting a loan they intend to deliver, unless they are quoting to the exact same standard, the quote game favors the lender who pretends third party costs don't exist, who pretends that you're not going to get zonked for the add-ons that you are going to get zonked for at the end of the process, the lender who quotes based upon a loan that you do not qualify for. Are you going to pay these costs? Absolutely. Would you rather know about them at the beginning, so you can make an informed choice, or get blindsided at closing (assuming you even notice)?



The third issue is that they are looking for safe harbor, and they're hoping you give it to them. If someone brings them everyone else's quotes, they know what everyone else has talked up, how big the lies are that the prospect has been told, and they just have to tell one that's a little bit better. This is trivial when you've got all that information you've been freely given. This is called false competition. You've metaphorically given them a mark, and told them to "tell a more attractive story than this one." Easy enough in a storytelling context - tell the same story with a little more sex - and even easier with loans.



A good loan officer has no need to know what quote you've been given to tell you what the best loan they can deliver is. Tell them to quote you the best loan they can without this information. Ask them if they'll guarantee that quote, because a quote that isn't guaranteed - as in they pay any difference, not you - is worthless. That's how you can choose the best rate that can really be delivered, not by allowing someone the advantage of knowing how much they have to lie to get the business.



Caveat Emptor.

UPDATED here

Got a question asking if zero cost loans really exist. They do. I've done several dozen myself, for clients who listened to me about the nature of the market.



Let me define what a zero cost loan is. It is a loan with a higher rate deliberately chosen so as to get a high enough rebate, or Yield Spread, to cover not only the loan provider's margin, but all closing costs you would normally have had to pay as well. So that except for any cash you get, your loan balance should not increase by a single penny.



Even on a zero cost loan, you're likely going to write a check or even more than one, but they are for things like Prepaid interest. Prepaid interest is not a cost; it's paying money that you would have owed anyway in a slightly different manner, a little sooner than you otherwise would have, and you will get it back by not having a payment the next first of the month. Matter of fact, prepaid interest is the reason there is no payment due on the first of the next month. You're not skipping a payment. You never skip a payment, and any contention to the contrary is reason enough not to do business with that particular loan provider. You generally have the option of rolling prepaid interest (along with other prepaids) into your mortgage, but then you're paying interest on it and it's stuck in your balance forever. Ditto an impound account. That is your money, not a cost of the loan. We are talking zero cost here, which is an entirely different thing from the lender absorbing money that you would have had to pay anyway. But in a true zero cost refinance, no money gets added to your loan balance. $X before the refinance, and $X after, not $X+6000. You will likely need to pay for the appraisal (if required) out of pocket when the appraiser comes out, but you get that cost refunded upon funding for a net zero out of pocket. True zero cost. This does entail accepting a higher rate, and therefore higher payments than you might otherwise have gotten, but if you only intend to keep the loan a relatively short period of time, you start ahead by doing this and there is not enough time for the lower payments to break even. For instance, a while back I had a par rate of 6.25% on a thirty year fixed loan, but providing your balance was at least a couple hundred thousand, I could do 6.625% for literally zero cost. If you were planning to sell in two years but your current rate was eight percent, as many people have nowadays, but their credit has improved now to where they qualify A paper, this saves them a lot of money for literally zero cost, so there are no "sunk costs" to "recover"; it's pure profit from day one. I happen to think that with rates as volatile as they have been the last few years, it makes a lot of sense to choose a zero cost loan. If rates go down half a percent six months or a year from now, you can go get a rate that much lower for zero cost when they do. If you paid two points to get the rate, it's going to cost you the same two points again to benefit by as much.



Now this is not to say that you shouldn't be on your guard when someone talks about a zero cost refinance. What most lenders mean when they say "zero cost" is "No money out of your pocket." But thousands of dollars (including multiple points) can still get added to your loan balance, where you not only pay them, you pay interest on them. Many lenders will talk about putting money in your pocket, when what they are doing is adding not only that money but all the costs and all the points to your loan balance, and people who have been doing this every two years wonder why their loan balance is ten times their original purchase price. I call these Stealth Cash Out Loans. There is no such thing as a free lunch. You paid for the cash out; you're going to be paying for the cash out for many years, just the same as you paid for your closing costs in the previous paragraph with a higher rate than you would otherwise have gotten. The difference is that money added to your balance tends to stick around for as long as you own property, whereas a higher rate is over as soon as you sell or refinance that particular property. If you choose a zero cost loan, your balance should transfer straight across; you are continuing to pay it down as soon as you write the first check on the new loan. Whereas if you chose a loan that adds thousands of dollars in closing costs etcetera to your balance, it's going to be years of payments before you're back where you started. Here is a list of Questions to Ask Prospective Loan Providers in order to pin down what they are really offering.



A true zero cost loan not only has no net "out of pocket" expenses, it has literally zero added to your mortgage balance. They do exist, mostly for well-qualified A paper borrowers, despite what certain skeptics might say, and for most people who qualify for them, they are something you should strongly consider, whether you're planning a purchase or a refinance.



Caveat Emptor

UPDATED here

Somebody asked, "What are my legal options when there's a change on a good faith estimate."



Short answer: Sign the documents or don't. Same thing with a Mortgage Loan Disclosure Statement here in California. Neither one means anything binding; that's why they call the one an estimate. Nonetheless, because there is a perception that they mean something, that people think the lenders are trying to disclose everything fully. The fact is that some are while others aren't, and there is no correlation with size of the lender, how well known they are, or even what the loan officer at the next desk over is doing.



The fact is that if the loan officer cannot persuade you to sign up, there is a guarantee that neither they nor their company will make anything. This creates an incentive to tell you whatever it takes to get you to sign up. Once signed up, most folks consider themselves committed or bound to that lender, and stop looking around.



But the only documents that mean anything, legally, all come at the end of the loan process. Note, Trust Deed, HUD-1. So you can see the motivation exists to pull a bait and switch, or more often just not to tell the whole truth. Nor will they point out the differences at closing from what you signed up for. That would get you upset to no good purpose, from their point of view. The fact is that a majority doesn't take the time to spot the difference, and of those who do, some just don't understand how to spot the difference. Of those who do take the time, and do spot the difference, most will cave in and sign just to be done with the process, and of course there are those who are trying to purchase who won't get it and will lose the deposit if they don't sign.



The fact is that these forms are estimates. They may or may not be accurate estimates. In some cases, the loan provider tells you about every single dollar you're going to need up front, in others they might as well be telling you the loan is going to be done for free at a rate two percent below any real loan out there. If they can't get you to sign up, they don't make anything, so the incentives are for them to over-promise and under-deliver. In other words, tell you about something better than what you'll end up with. Now the loan officers know what it's going to take to get the loan done - or they should know, anyway. But they often tell you a fairy tale that might as well begin "Once upon a time..." to make it seem like their loan is better than the competition, because if they can't get you to sign up, they don't make anything.



Now, the fact is that the vast majority of people out there go out shopping for loans in the wrong fashion. They find someone they think they can trust, because they are family, because they are the scoutmaster, or because they go to church with them. Exactly what type of loan will they deliver, and at what rate? With what costs? It is always a trade-off between rate and cost on any given loan type.



Even less likely to get a good rate at a decent cost are the people who do shop around, but won't give loan officers a chance to figure out what's really the best loan for them. The first group of people might stumble onto someone trustworthy who gives them a good loan at a reasonable rate for a reasonable cost; these people are going to fall for the biggest lie, because a loan officer can always tell you about a better loan than really exists and they are motivated to get you to sign up. They call around asking about the lowest rate or the lowest payment, and don't want to hear anything else out of the loan officer.



The fact is that it's going to take a good, in depth conversation about your situation for a loan officer to figure out the best loan for you, and you want to have that conversation with at least three or four loan officers. Why? Because the first one could have told you exactly what they thought you wanted to hear. Ditto the second. Keep going until you hear a couple of different suggestions. Furthermore, once they've given you their suggestions, ask about the other suggestions you heard in the past. Don't shop by lowest payment; that's a good way to get stuck with an abomination like the so-called Option ARM or another loan type that you don't want. Don't shop by interest rate alone, because you'll get stuck with a loan that has six points and you'll never save enough money on the payments to recover those sunk costs. Shop by the trade-off between rate and cost, because there always is one.



Now at the end of the process, the lender has all the power. You need or want this loan, and they're the ones with it ready to go. In the case of a purchase, you've got a deposit you're going to lose and a home you wanted that you won't get if you don't sign the loan documents. If you sign the documents, you are stuck with the loan, that probably isn't on the terms you were originally told about. I pointedly did not say "promised" because the earlier forms are not promises unless somehow guaranteed, and very few loan providers guarantee their quotes. Chances are, if they won't guarantee their quotes, they are not telling the entire truth about the loan they are telling you about.



The most important question on this page of Questions You Should Ask Prospective Loan Providers is "If I say I want this right now, will you personally guarantee this rate with those closing costs, and will you cover the difference (if any) between the quote and the actual final cost?" You won't get a flat "Yes." If you do get a flat "yes", they're making a promise on something that is not under their control, and I wouldn't trust it as far as I can throw an aircraft carrier. What you're hoping for is something like "Subject to full underwriting approval, yes we will guarantee this quote as to rate, type of loan, and total cost." This is a simple sentence that makes a specific guarantee subject to a reasonable condition, as loan officers never know if a prospective borrower is intentionally hiding or shading something at loan sign up. If you get a response full of nonsense about how long they have been in business, how they honor their commitments, or any such equivalent claptrap, then they are trying to buffalo you. None of the stuff when you initially inquire about the loan is a loan commitment in any way, shape or form. I'd rather have a higher quote that was guaranteed than a lower one that wasn't, and I strongly suggest you adopt that attitude as well. For an illustration as to why: If the quote is guaranteed, there's no incentive to stick you with a rate an eighth of a percent higher so they can make a little more money - they're going to have to make it good. There's no incentive to pad the closing costs with junk, because they've got to turn right around and give it back to you. If I offered you a choice between two envelopes, one transparent where you can see the $100 bill (guaranteed), and the other one opaque where I told you there might be anywere up to $110 in it (not guaranteed), which envelope would you choose? The same thing applies to whether the loan is at 6.5 percent with no points and no more than $3400 of closing costs guaranteed, or 6.375% with no points and no more than $3000 of closing cost, but not guaranteed. From my experience, the first quote intends to deliver a better loan than the second quote.



So (if you can't find someone who guarantees their quotes) how do you force the loan provider to deliver the loan they told you about in the first place? You can't. But you can give them a better reason to do so, if you have more than one loan ready to go. This gives you a third option. Your options are not limited to signing the first set of loan documents they put in front of you. You can sign the others. More to the point, because there is another loan ready to go, you can use that fact to negotiate a better deal - one that more closely adheres to what you were told about in the first place. If provider A won't do it, provider B will. If one of the two providers won't move, then the other one is likely to get your business. If the other provider gets your business, the first provider makes nothing. If they will give you the better loan, that's what you want, right? Keep in mind that if either provider actually provides the loan they talked about in the first place, you are miles ahead of the game. But this puts the power to control the transaction where it belongs, with you.



Now the loan provider is going to make money, or they won't do your loan. Judge loans by the benefits and costs to you, not by how much they loan provider is making, or whether they even have to disclose it (brokers do, direct lenders do not). The important thing to you is that you were delivered a thirty year fixed rate loan at 6.5 percent without paying any points, as opposed to 6.625% with one point and higher costs, not that loan provider A had to tell you they made $4000 by doing it while loan provider B doesn't have to tell you anything. Sounds obvious, but I have seen people who chose the higher rate at more cost for the same loan, even stuck themselves with a prepayment penalty where my loan had none, because they thought I was making too much. In point of fact, I would have made a fraction of what the other guy did make, and therefore, by the only universal measure, I performed work considerably more valuable to my client. So don't shoot yourself in the foot like that.



Now expect to spend a little bit extra (about a $100 retyping fee, if you're the one who orders the appraisal and therefore controls it) on the second loan. That $100, together with the extra time you spend getting the other loan through, is the best, cheapest, most cost-effective insurance policy you can buy anywhere for any financial purpose. It will not indemnify you for your losses, but the odds are overwhelming that it will certainly keep you from losing several times as much, by giving the loan providers a concrete incentive to deliver the best loan they really can deliver. From my experience, and that of my clients who have brought me more horror stories than most folks believe, I would judge it unlikely that either loan quote will be as good as the loan the loan provider originally talked about, unless one company or the other guaranteed their quote, but with another loan ready to go, chances are you'll get something a lot closer to what they talked about in the first place. Even if you can find a loan provider who will guarantee their quote, a backup loan is a really good idea, because going to court to force them to deliver is costly and time consuming, and you need that loan now. The existence of the other loan is an excellent reason to actually produce that loan they talked about way back on day one, with the initial Good Faith Estimate or Mortgage Loan Disclosure Statement. Because no matter how little they make with the loan they told you about, if they don't produce it they will make nothing.



Caveat Emptor.

UPDATED here

Every so often I get questions about loan cosigners. The main borrowers do not qualify on their own, so they get someone - most often mom and dad - to cosign. Now this is a different thing, or so I understand, in the other major credit areas - automobiles, rent, etcetera. But this is about Real Estate.



The only time this usually makes a difference is in credit history. The main borrowers qualify on the basis of income, but don't have enough of a credit history to qualify. Sometimes they just don't have enough open credit to have a credit score. This is rare, but I did have one executive couple who made a habit of paying cash for everything (a good habit, I might add). They had precisely one open line of credit, a credit card they paid off every month, and the major bureaus require two lines in order to report a credit score. No credit score, no loan. It's that simple. Even there, the solution was to walk in to their credit union and apply for another, not to get a cosigner.



When you bring other folks into the loan, you're bringing their credit history, their potentially high payments, and every other negative they have into the loan. Most of the time, the folks who are willing to cosign do not materially aid the qualification process.



Pitfall number one: If the cosigners make more money than the "real" borrowers, they now become the primary borrower, and it becomes a loan on investment property as far as the lenders are concerned, adding restrictions, raising the trade-off between rate and costs of the loan, and perhaps making the loan require a larger down payment. This does assume they won't live there, but usually if they were going to live there, they would have been on the loan in the first place.



Pitfall number two: The cosigners are overextended also. Sure, they make $10,000 per month, but they have payments of $5000 per month already. There's nothing left over where the bank sees them as having enough money left over to help you out. They may, in fact, have money to spare, particularly if they make a lot of money, but according to the standard ratios, they do not. You can't have the cosigners be stated income or NINA if the main borrowers are full documentation. If you have to downgrade to stated income in order to qualify, that is going to cost a lot of money through higher rate/cost trade-off. Obviously, better that you qualify for a lesser loan than that you don't qualify at all, but you don't want to downgrade if you don't have to.



Pitfall number three: This one hits the cosigners. They are agreeing to be responsible for your payments in the event you don't make them. Suppose they want to borrow money for something else. Especially if it's a large amount of money, as real estate payments tend to be. It really cramps their ability to qualify for other things. This works the other way, also. People come to me for real estate loans who have agreed to be cosigners for a car loan are responsible for the $400 per month for that loan. Many times, this means they don't qualify for the real estate loan. So we have to prove to their prospective lenders that the "true" borrowers are making the payments. This is usually not difficult, but if the cosigners wrote the check for the payment anytime in the last six months to a year, it can be problematic.



Pitfall number four: This also hits the cosigners rather than the main borrowers. Suppose a payment gets made late. It impacts the credit of the cosigners as well as the "real" borrowers. It doesn't matter if you're the "real" borrower or the cosigner, it hurts your credit just as much and for just as long. If you cosign, you want some kind of proof that payment is being made on time, every month. You shouldn't cosign if you don't have the resources to make that payment pretty much indefinitely. Furthermore, should the cosigners decide to cut their losses, it can take months before the monthly hits to the credit stop. If the "real" borrowers don't want to liquidate, the cosigners may have to go to court to get out of it, and the only people who are happy there are the lawyers.



Now suppose the loan being applied for has a Debt to Income Ratio maximum of forty five percent, and the cosigners make $10,000 per month, but they have expenses of $4300. This will mean that they only have $200 per month to contribute towards qualifying for the new loan. If the "real" borrowers weren't fairly close to qualifying without them, they aren't going to qualify with them. If they have expenses of $4600 per month, they have nothing to contribute to the loan qualification. In such cases, the work of asking them to apply is wasted.



Caveat Emptor

UPDATED here

Got a search for "mortgage closing documents do not sign changes."



Unfortunately for this person, the documents you get at closing are what legal folks call a contract of adhesion. This means you can either accept it, sign, and adhere to all the terms as presented, or you can walk away. Basically your choice is to take it or leave it, in exactly the form presented.



Now on those rare occasions someone actually has the intelligence and good sense to walk away from a situation where the terms have been changed, the prospective loan provider does have the option of offering you a better deal as incentive to do business with them. Like, say, the loan they originally talked about to get you to sign up with them. Mind you, they don't have to, and the costs of that other loan may mean that they would rather do no loan than that loan.



Now I'm not a lawyer, but the way contracts of adhesion were explained to me is that if there is any legal ambiguity, it will be interpreted in your favor. This doesn't mean you can claim you thought it meant something different than the average person would understand; this means that if there is a legally ambiguous wording that could legitimately be interpreted two different ways, and you and your lender disagree as to the meaning, the courts will generally rule in your favor. Once again, the law is different from place to place and the courts have the final say; check with your lawyer.



Now in the loan world, it is much more common than not to be offered a loan contract at final signing which differs in some material form from the loan terms that were described to you in the beginning. The loan provider will generally offer you a loan of the same type, and usually at the same rate, but most often the costs to get that rate will be significantly higher than were listed on the Good Faith Estimate or Mortgage Loan Disclosure Statement. Neither one of these forms is in any way, shape or form a legal commitment, nor are any of the other forms you get at the beginning of the loan process, such as the Truth In Lending Advisory.



The only thing that means anything is the loan contract, or Note, that you are offered at the end of the process, together with the HUD-1 form, which is the only accounting of the loan required to be correct and complete.



Now the difference between the initial teaser loan they talked about and loan contract they actually got approved is one of the reasons why the less than ethical providers out there often want a cash deposit for the loan, particularly if their rates are not particularly competitive and they know it. If they're nervous someone will come along behind them and offer you a better deal, they want a cash deposit so that they still get something if you pull out, and many folks obsess about the cash deposit to the point where I could offer them a deal that saves them several times the cash deposit, and they still wouldn't switch. This isn't to say not to pay the twenty dollars or whatever it costs them for the credit report, this is to say don't deposit the appraisal fee (several hundred dollars, which should be paid at point of service) or even part of a point "to be refunded if the loan funds" within a certain amount of time. Chances are the loan isn't that great, particularly not the real loan they are really going to offer, and that's why they want to lock you in by having something to hold over you if you don't sign on the dotted line at the end of the process.



Caveat Emptor

UPDATED here

I keep getting hits for this, so people must want it explained. Loan Amortization is nothing more than the process of paying the loan off by regular payments over time. Leave it to the experts to come up with a fancy word for an everyday process, eh?



A loan which is fully amortized (or fully amortizing) is one which the required payments will pay it off in full by the end of the term of the loan. Fixed rate loans are the classic example of this. A thirty year fixed rate loan has 360 payments of equal amount, at the end of which the loan will be paid off, assuming you have made all the payments on time. The last payment may be somewhat smaller due to the fact that they may round the payment up to the next penny, and over thirty years it makes a difference.



However, most hybrid ARMs are also fully amortizing loans. The difference between these and the fixed rate loan is that the rate, and therefore the payment, is fixed only for the first few years, and after that the rate varies based upon an underlying index. Nonetheless, the loans are still calculated to pay off the entire balance by the end of the loan. You are welcome to keep them after the fixed period if you want to, but few people do.



Balloon loans are partially amortized. Their payments are calculated as if they were a longer loan than they are. Because they amortize based upon a longer loan period, the regular payments do not pay the loan off in its entirety by the end of the loan. Unlike the hybrid ARM, these loans are over in a shorter period of time, and you do not have the option of keeping them. You must either pay the loan off, whether by paying it or by refinancing, or sell the property.



I don't see it in a federally approved list of loan terms, but I have heard interest only loans called delayed amortization. These loans, whether fixed rate or hybrid ARM, have interest only payments for a given time, and then amortize over the remainder of the loan. For instance, a five year interest only loan is then paid off (amortized) over the remaining twenty five years of the loan. Note that when they start to amortize, they will then have payments that are higher than the equivalent fully amortized loan, because the balance is paid off over a shorter period. They will also typically carry a higher interest rate (most subprime lenders charge 1/4 percent higher interest rate for an interest only loan, and there are additional limitations on availability).



If there were such a thing as an interest only loan that stays interest only until you refinance, it would be an unamortized loan. Years ago, I was invited by a company to take a seminar because they offered these to financial planners clients. Fortunately, when I checked NASD regulations, I found out that what they were trying to sell was prohibited. The interest rates they were talking about were very high as well. The reason I said "fortunately" about finding out NASD regulations prohibited what they were doing is that I later found out that they were a scam and shut down by the regulators. I might have found out had I done all my due diligence, or it's possible I might not have. Either way, I'm glad I didn't have any clients with them.



Finally, there is the negative amortization loan, where if you make the minimum payment your loan balance actually increases, effectively digging yourself deeper into whatever hole it was that motivated you to do it. There are circumstances where they are the best thing to do given the situation, but in my opinion, (at least for owner occupied property) it should be a temporary solution of last resort.



Caveat Emptor.

UPDATED here

"Trust Deed Incorrect Legal Description"



There are all kinds of legal descriptions. Lot, Block and Map, or just Lot and Map, are probably the most common. Sectional portions (Portion A of Section B of Township C, Range D) are probably next most common, followed by "metes and bounds", and often the two are mixed. Finally, in some areas of the country (like Southern California) there are remnants of prior systems here and there, like the Ranchos here, parishes in Louisiana, etcetera. What they all have in common is descriptions of the boundaries of the parcel concerned. Condominiums are based upon cubes of airspace exclusively with an undivided common interest in the communal property.



There are technically incorrect legal descriptions, and there are significantly incorrect descriptions. There are three main categories.



1) Descriptions that describe the land with some technical difference. Missing an easement, missing part of a defined lot, something like that. This is by far the most numerous of these errors and basically means nothing. They land the trust deed describes was pledged as security. Practically speaking, these might as well not have the imperfection, and if you fight in court, you're probably wasting your money. If the legal description is missing part of the land, but the whole thing is only one legally zoned lot, they're going to get the whole thing, by and large. If it's out in the country somewhere and not covered by things such as lot regulations, they might split the part that was covered by the description off from what wasn't covered. Obviously, only part of the property was pledged as security, right? But most of the time, the lot cannot legally be subdivided anyway, and the lender is likely to get the whole thing.



2) Descriptions that partially describe the property. There are three main subcategories: a) they describe part of the property, but not the whole thing b) they describe part of the property and part of some more, and c) they describe the entire property and some extra besides. Subcategory a, that describes part of the property but not the whole thing, usually count as the "technical difference" category. In other words, no big deal. Subcategory b, where they describe something extra as well, is only of special note if you owned the other piece of property, also, at the time the Trust Deed was signed. Otherwise, you deeded property you didn't own. Your neighbor may end up defending his title in court and coming after you for his expenses, but you can't deed away what you don't own. It's the part that you own that's important. Subcategory c, like b, is only interesting if you own the extra property as well. Then the lender might get a little extra! Otherwise, you can't deed away what you don't own.



3) Descriptions that describe another property. You can't deed what you don't own, so unless you owned the other piece of property as well, the lender is basically out of luck. It is to be noted that they're still going to do their best to come after you, and your neighbor may come after you for his expenses in defending his title, and the cops may be interested in you if they think you intended fraud.



Of course, the law varies and you should check with your lawyer and it's the court's decisions that are final. Your mileage may vary; these are just some rules of thumb.



Caveat Emptor

UPDATED here

what happens when house doesn't appraise?

I presume this question meant "for the necessary value according to the lender's guidelines".

Lenders base their evaluation of a property upon the standard accountant's "Lower of Cost or Market." This is intentionally a conservative system, because the lender is betting (usually) hundreds of thousands of dollars upon a particular evaluation, and if something goes wrong, they want to know that they'll be able to get their money back.

When you're buying, purchase price is cost. When you're refinancing, there is no cost basis, we're working off of purely market concerns, except that for the first year after purchase, most lenders will not allow for a price over ten percent increase on an annualized basis. Six months, no more than five percent. Three months, about two and a half. Mind you, if you turn around and sell for a twenty percent profit three months later, the new lender is going to be just fine with the purchase price, as long as the appraisal comes in high enough.

But as far as a lender is concerned, you can see that no matter what the appraisal, the property is never worth more than purchase price on a purchase money loan. There is a transaction between willing buyer and willing seller on the books and getting ready to happen. It doesn't matter if the appraisal says $500,000 and you're buying it for $400,000. The lender will base the loan parameters upon a value of $400,000.

But what happens if the appraisal comes in lower than the agreed purchase price? For example, $380,000 instead of $400,000? Then the lender considers the value of the property to be $380,000, no matter that you're willing to go $20,000 higher. You want to put $20,000 of your own money (or $20,000 more) to make up the difference, that's no skin off the lender's nose. Matter of fact, they are happy, because it means they still have a loan, where they would not otherwise.

Keeping the situation intact, if you planned to put $20,000 down (5%) on the original $400,000 purchase price, the loan is probably still doable, albeit as a 100% loan to value transaction instead of a 95% one, which means it will be priced as riskier and the payments on the loan(s) will doubtless be higher than originally thought. The same applies if you were going to put $40,000 (10% of the original purchase contract) down, except that the final loan will be priced as a 95% loan ($360,000 divided by $380,000 is 94.74 percent, and loans always go to the next higher category).

Suppose you don't have the money, or won't qualify for the loan under the new terms? That's why the standard purchase contract in California has a seventeen day period where it's contingent upon the loan (many sellers agents will attempt to override this clause by specific negotiation). If you get the appraisal done quickly, you have a choice. You can attempt to renegotiate the price downwards. How successful you will be depends upon several factors. But if you're still within the seventeen days, the seller should, at worst, allow the deposit to go back to you, and you go your merry way with no harm and no foul, except you're out the appraisal fee. This is not to say that the seller or the escrow company has to give the deposit back; they don't. You may have to go to court to try and get it back, depending upon the contract. The escrow company is not responsible for dispute resolution. If the two sides cannot agree, they will do nothing without orders from a court. If the seller wants to be a problem personality, you can't really stop them without going through whatever mediation, arbitration, and judicial remedies are appropriate.

Suppose the appraisal comes in low on a refinance? Well, that's a little more forgiving in most cases around here, at least with rate/term refinances where you're just doing it to get a better loan. If you have a $300,000 loan and you thought the property was worth $600,000 but it's only worth $500,000, that just doesn't make a difference to most loans. Your loan to value ratio is still only sixty percent, and it probably won't make a difference to residential loan pricing (commercial is a different story, and if you have a low credit score it might also make a real difference). On a cash out loan, it can mean you have to choose between less favorable terms and less cash out, however, especially above seventy to eighty percent. There are ways to prevent wasting money on an appraisal, but once it comes in, it is what it is. If the underwriter sees one appraisal that's too low, they're going to go off that value, and if you bring another appraiser in, the underwriter will usually average the two values, so even if the second appraiser says $400,000, the underwriter who has seen a $380,000 property will value it at $390,000 (not to mention you pay for two appraisals). And a low appraisal can mean that the reason you were refinancing becomes impossible, so you're better off walking away.

Caveat Emptor.

UPDATED here

Because most loan providers will not guarantee their Federal Good Faith Estimates or California MLDS forms, I've been telling folks that the best suggestion (other than doing their loans myself, of course!) that I can give them is apply for a back up loan. But some mortgage loan providers will guarantee their quotes, and this article is about those guarantees, their limitations, and what to watch out for.



Loan officers are not the only ones who play games in the mortgage world. Borrowers do it. A lot of borrowers do it. Some are actually intending fraud, some just want a better loan and don't see anything wrong with painting their financial picture a little rosier than it is. Furthermore, there are reasons that lenders will decline loans that are not obvious. It has happened to me that I couldn't do a loan at all because of fairly obscure points that the borrowers weren't trying to conceal, they just didn't know they were important, and I didn't think to ask.



Keeping this in mind, loan providers are leery of offering guarantees, and indeed, since only an underwriter you will never meet or talk to can authorize the loan, for a loan provider to make a guarantee that there will be a loan is nonsense. The most they can say is, "Based upon my experience, I see no reason why this would not be approved," or, better, "Subject to underwriter approval, your terms will be this." That's a key phrase. Keep in mind that loan provider guarantees are few and far between, and as a result, there is no standard terminology to use. I, as a loan officer, cannot promise the loan. I can promise, however, that if the loan is approved as submitted, it will be on a given set of terms.



Now it happens that loan officers can manipulate you by submitting a loan that they know will not be approved. This is a lot of work and often "poisons the well" at that particular lender, but then they can tell you sorry, you do not qualify for that loan, but there's another one over here that you do qualify for, and now that you've already selected them, they are no longer competing on price, and they build a much higher margin into the newly proposed loan, secure in the knowledge that you're unlikely to be shopping other lenders at this point.



You can counter that by asking what the guidelines are for the loan they are submitting. What is the maximum debt to income ratio? How much income do you need to qualify? Ask them to compute it out for you, and watch what numbers they use. What loan to value ratio is the rate predicated upon? What does the property need to appraise for in order to make that happen? (This can also help you spot hidden fees, albeit rarely. Comparatively few loan officers can tell you how much it's really going to take to get the loan done.) How much time in the same line of work are required? Here's a whole list of questions you should ask prospective loan providers.



Now, as to the form the guarantee should take: It should include the type of loan, to include an industry standard name for that loan type, so other loan officers you shop with know right away what they are talking about. It should also include the cost to get that loan. How many points of origination, if any, and how many discount points, if any? How much in total closing costs? How long of a lock is included?



You should beware the term, "thirty year loan," unless the words "fixed rate" are in there. A thirty year fixed rate loan is the standard loan that most folks aspire to, but it's usually the highest rate out there. The words "Thirty year loan" describe an Adjustable Rate Mortgage (ARM), or a hybrid ARM. A few loan officers will even describe hybrid ARMs as "thirty year fixed rate mortgages," because they are fixed for an initial period. So ask them "how long is that fixed rate fixed for?" here is an example of one way to disclose it right. So you always want to ask, "How long is it fixed for?" if they do not volunteer the information.



If it's a balloon loan, that means you have to refinance or pay it off before the end of the loan. Mandatory, required, there is no more loan after that point. If it's an ARM or hybrid ARM, you also want the margin once it does start adjusting and the name of the underlying index to become part of the guarantee. You don't have to refinance hybrid ARMs, and you're welcome to keep them as long as you like what they adjust to, but most people refinance before the end of the fixed period or very shortly thereafter.



Finally, you most especially want whether or not there is a pre-payment penalty to be part of your guarantee, and if yes, the nature of that penalty. A loan with a prepayment penalty should be a much cheaper loan than one without, as you are looking at agreeing to pay about $12,000 around here if you refinance or sell while it's in effect. The phrase, "What would that be without the prepayment penalty?: is one of my favorites. But you have a right to know, and a loan with a prepayment penalty is likely not as good a loan as one a quarter to a half percent higher for the same cost, without a prepayment penalty. If you already know you're going to need to sell before it expires, it needs to be more than that. So make sure you find out, is there a prepayment penalty, yes or no? If Yes, how long is it for? Is it a hard penalty or a soft one, and does it strike from the first extra dollar or only after you pay down more than twenty percent in a year? These all make a difference, and you should be aware of their nature, and it should be honestly disclosed to you when you are shopping for a loan.



Caveat Emptor.

UPDATED here

Right now X is offering me a loan that looks something like this:

80/20 No down payment
On the /80: 6.5% FIXED interest for 30 years, interest-only payment option for 15 years
On the /20: 8.75% FIXED interest for 25 years (amortized to 30) 6-month lock for 1-point ($3800) refundable fee with float-down option

My response:

Devil is in the details.

Is there a pre-payment penalty?

They want 1 point to lock for 6 months? Cash, I presume? Quite frankly, the usual cost for locking in six months out is about three points. Nor is X usually that cheap on the lock (they have some excellent rates, but what they're quoting you is a market current quote for a 30 day lock. Long term rates are expected to rise, and long lock periods aren't free. There's something they are not telling you.)

What are the discount/origination on the underlying loan? How much are they going to charge in closing costs to get it done?

Will they guarantee their quoted costs (as in they eat the
difference if there is one, not you)? You might want to ask them all of the questions here

A developer's condo sell out is not the most difficult loan, but it's a long way from the easiest, as well. There are a lot of lenders that will not do them. Furthermore, what's being presented to you looks much cheaper than is likely to be true. If you insist on going with it, call me thirty days before the place will be done, and I'll do a back up loan, because I don't think what they're offering you is real.

he did get back to me as to what lender X's response was:

Is there any pre-payment penalty on this loan? NO.....

What is the total refundable cost for the 6-month lock? YOU PAY 1% UP FRONT AND IT IS REFUNDABLE IF YOU CLOSE WITHIN 6 MONTHS (emphasis mine)

How much will the closing costs be to get this loan done? I DON'T KNOW WHAT YOUR ESCROW AND TITLE COSTS WILL BE. YOUR LENDERS COSTS WILL BE APPROXIMATELY $1,200. (emphasis mine)

Is the rate being quoted based upon full documentation, stated income, NINA or EZ Doc? 100% FINANCING IS FULL DOC....

Do I have to pay any discount points, points of origination, or any other points to get the quoted rates? NO POINTS NOR ORIGINATION FEE (ONLY THE 1% LOCK IN FEE OF WHICH WE SPOKE) (I prefer no points)

Regarding third party costs, can you tell me, or will the papers you send me make clear, the following third party costs:
- Appraisal fee: THIS SHOULD BE AROUND $400 BUT IS PART OF THE $1,200 I QUOTED.

- Total title charges: ??????????

- Escrow fee: ???????????

The builder has already assigned an escrow and title company for the property — may I use this company with the (lender X) loan? YES!

How much, total, will I be expected to pay X upfront, out of my pocket, to get this loan? THE $400 FOR THE APPRAISAL AND THE 1% TO LOCK IN....

How much, total, if any, will be added to my mortgage balance on top of what is quoted? ????????????????? NOTHING IS ADDED TO YOUR MORTGAGE.

If I agree to this loan after reviewing the papers, are the rate and closing costs guaranteed, and will X cover the difference (if any) between the quote and the actual final cost? WE'VE BEEN IN BUSINESS SINCE X. WE CONTINUE TO STAND BY OUR COMMITMENTS. (emphasis mine)

Now for the emphasis points, last first
-This question of is the rate guaranteed requires a simple yes/no response. This evasive reply tells you the answer is no, but that they don't want to admit it. If this answer is not yes, none of the other stuff is written in anything more permanent than beach sand somewhere below the high tide line. It's funny they mention commitments. Neither a Good Faith Estimate nor a Mortgage Loan Disclosure Statement (the California equivalent) is a loan commitment, or any kind of commitment at all. Regulations leave so much room for the unethical to maneuver without running afoul of the law that either one of those forms is nothing more than the loan officer or company wants it to be. A few are right on, and those companies will typically guarantee their quote. More are somewhere in the ballpark, amazingly enough usually noticeably on the low side. And quite a large fraction are nothing more than an exercise in creative writing. He didn't guarantee his quote. Tell me this: Two companies are bidding on doing building work for you. Both are large firms. The first company asks you all sorts of questions about specifications, and guarantees they'll get it done for $5000, and if there's a problem on their end, they will fix it for no additional money. The second says they think they can do it for $4500. Which would you feel more comfortable with? If you know anything about building contractors, the latter is a joke compared to the former. Lenders and estimates on the initial paperwork to get you to sign up are, if anything, worse.

-I do business with this lender. Their costs are $1295 not including the appraisal to brokers, who perform some of the services they charge their clients for performing. By the time you've added escrow and title, you're roughly at the $3400 mark.

-It's easy to talk a good game to most folks who aren't experienced with how the game is played. The point of this particular game is trying to lock you in with that 1 percent cash upfront payment, so that when clients discover that he's not going to be able to deliver what he's talking about, they'll be thinking about recovering/losing that money, rather than focusing your attention on getting the best loan. This is called creating a distraction, and is in accordance with the tell you anything to get you to sign up school of thought.

When it comes time to close, he'd be licking his chops due to the fact that the client paid $3500 (or whatever one point comes to) cash upfront, and when he delivered something different, the client believes they have no choice but to agree in order to save their money. I've offered people in that situation a loan that was more than 1 point better, and they still went with the guy who had rooked them out of the 1% upfront, because they're worried about that cash when they should be worried about the rate/cost tradeoff.

He also went to the builder's lender

If I'm interested in getting my monthly payments down lower and I consider getting a 5/1 ARM loan to do so, is that a completely horrible idea, or could I refinance into another 5/1 ARM after the first five years to continue getting a pretty good rate, if for example the 30-year fixed rates
have gone up a bunch in 5 years?

That's precisely what I've been doing for the past fifteen years. On the other hand, with the difference in rate/cost tradeoff being so narrow right now between a thirty fixed and a 5/1 (roughly a quarter of a percent interest rate wise), there's a strong argument to be made for the loan you never have to wonder about. Where I thought I would never have a thirty year fixed rate mortgage, I'd consider it if I were going to buy or refi right now. Don't know if I'd do it, but I'd think about it.

80/20 No-down 5/1 ARM
No pre-payment penalty
Total loan amount: $379,900

80%, $303,000: 5.25% fixed & interest-only for 5 years, payment: $1329.65
20%, $78,000: 9.5% fixed for 5 years, interest-only for 15 years, payment: $601.50

Total monthly payment: $1931.15

Aside from the fact that the putative loans total $381,000, which is likely picking nits, I don't believe that loan exists, as 5/1 ARMS are running up around 6.25% at "par" right now. I couldn't find a lender that is even offering 5.25, no matter how many points you paid, and that's wholesale. He attached some GFEs which show $4180 in points charges (plus $875 in pure junk fees and about $150 in well padded costs on the first loan and shorted the likely interest, in addition to all the real stuff), adds $5000 that he's evidently already paid to the closing costs, requires another $3200 plus at closing, and still comes up with final first loan of $303,920.

On the second, the loan required another $1140 in fees but a loan amount of only $75980, thereby balancing the 80/20 requirement correctly, at least, thereby negating the nitpick in the previous paragraph.

(I'd also shoot his agent for not negotiating any givebacks, given the current market, except I'm prepared to bet he didn't have one. I've covered some of these issues, precisely as they relate to this particular situation, at the end of this article), of which which I'll reproduce the relevant section here

Unfortunately, you've already (probably) put a deposit down and you said in subsequent email that the home has appreciated while it was being built, so the developer has incentive to throw roadblocks in your path. Your transaction falls through and not only do they get to keep your deposit but they can turn around and sell the home for more. Preventing this kind of nonsense is what buyer's agents are for (it also gives you someone easy to sue if something goes wrong!). Unfortunately, most developers will not cooperate by paying a commission to buyer's agents for precisely this reason, which means that the average buyer will decline to pay an agent out of their own pocket and try to do the transaction on their own, which leads to situations like this.

Now the market is falling, but it looks like to me the guy paid full asking price (since he's local to me, I can look), and the market is incredibly squishy on prices.

Now getting back to the loans, this is how lenders Play The Game of getting you to sign up. They are looking for you to build what salesfolk call commitment to a loan before they tell you the whole truth - usually by springing it on you at closing. They make it look better than it is for a while. They can do this because the only form that has to have correct accounting is the HUD 1, which comes at the very end of the process (It's usually prepared by the escrow officer. You should get a provisional when you sign loan documents and a final within 30 days of the end of the transaction). In the case of a purchase, this is usually at the last possible instant, which means that if you haven't prepared a back-up loan there is no time to get one before the deal goes south, which means your choices are limited to sign or lose the property, the deposit, and all that time and aggravation. This is providing that you even notice. Industry statistics say that somewhere around half the folks won't, and even on refinancing, where people can almost always just keep the loan they have without bad consequences, eighty-five percent or so of those who do notice will cave in and sign.

Caveat Emptor.

UPDATED here

Most days I get loan wholesalers coming into my office. I'm always happy to talk with them, providing they want to talk about what I want to talk about. They usually want to talk about this gimmick and that gimmick and the other gimmick. They feed me lines about service and fast turn around and quick approvals and loan commitments. Ladies and gentlemen, these are all things that every lender should be capable of, and if someone hoses one of my clients, I'm no longer interested in doing business with them. Now, everybody makes mistakes, it's how they deal with mistakes that I am interested in. I'm very forgiving if they make their mistake good, completely unforgiving if they do not.



What I want to talk about is two things. The first is loan programs nobody else has, or that nobody else has in that category. Suppose a lender has a program to deal with people in default just like everyone else with only a small penalty. I'm all ears, and I make certain that goes into my database. I expect the rates for the underlying program to be higher, but that's cool. I'll price loans with them anyway, and if they're the best I can do for the client, I'll use them. Next time I have somebody in default, though, they get my first call, because they've got something nobody else does, or very few do.



The second thing I want to talk about is price. A loan with given terms is the same loan no matter who is carrying it. So long as they are both legal, my client sees no difference between National Well-Known Megabank and Unknown Lender from Nowhere. The loan is the same. If the rate is the same, what's important to my client is how much they have to pay in order to get it. This comes back to The Trade-off Between Rate and Cost. If one lender's par pricing is a little bit lower, I can either get the client the same rate cheaper, or I can get the client a lower rate for the same price. There is otherwise no difference between standard loan terms for the standard loan types. I can get the client a lower rate if they'll accept a prepayment penalty. If they want a true zero cost loan, the rate will be higher. How much higher or lower? That varies with time and the lender involved. But except for the rate printed on the contract and the cost to get that rate, these loans are the same.



Now wholesalers don't want to talk about price, and they don't want to compete on price. If they're competing on price, they're making less money in the secondary market. Less money for the same work. I can't blame them. Suppose I walked into your office and proposed cutting your pay by somewhere between twenty and fifty percent? Somehow, I don't think most of you would appreciate it. But now turn that around, because you're in my office now, shopping for a loan, and you want the loan with the terms you want at the best price possible. If I get a lower price from the lender, I can pass it on to you. I can maybe even make a little more money while still saving you some money. Aren't you entitled to a bonus when you make money for your company or their clients? Ask yourself this: If I saved you $1000 and $20 per month over the next best quote, would it break your heart if I made an extra couple hundred? When I'm out shopping, it doesn't bother me at all. By delivering the item on better terms to me, that company has earned whatever money they make.



This doesn't mean I necessarily look for the lowest price. Many times I'll buy something that is close to the top of the line? Why? Because it has something worth more than extra money to me. What is worth extra money in real estate? Getting you a better bargain. You spend three percent instead of one, but your $500,000 home sells for $25,000 more, or it sells when it perhaps would not sell under a less aggressive marketing plan. $25,000 minus 2% ($10,000) is $15,000 in your pocket because your agent can afford to market and negotiate more aggressively on your behalf, never mind the difference between selling and not selling. Can a full service agent guarantee a better result? No. But I can tell you through personal experience that I find it much easier to get a better bargain for my clients who are buyers from someone who listed with a discount brokerage or flat fee place, and my clients are probably going to think I'm superman before the deal is done. But note that the difference in price does have to be justified. A loan is a loan is a loan, as long as it's on the same terms.



A couple days ago, I got an email calling my attention to someone calling me an "alarmist", and furthering that with an accusation that I was trying to paint everyone else as a crook. Nope. There are a large number of basically honest practitioners out there, and a significant number of scrupulously honest ones. But there are also a fair number of people out there who, like my loan wholesalers, don't want to compete on price. Do I blame them? In most cases, no. As I said the day I launched, this is the way they were trained and they don't know a better way is possible. Plus they want a larger amount of money for the same work rather than a smaller. Many of them resist changes for the better for the consumer because it means they will make less money for the same work. Seems like every day there's a seminar advertising that they'll teach agents and loan officers how to attract clients without competing on price.



Well, suppose someone makes enough money per transaction to be happy, even though they are competing on price? Then what they want to do is attract more business, which is a part of what I'm trying to do here. More importantly, I'm trying to give you, my readers, the tools necessary to get yourself the best possible bargain. Nor am I trying to tell you that I'm purer than the driven snow, and I don't think I ever have. That is for you to judge with the tools I put out, and there's no way to know for sure unless and until I do a transaction for you.



How far you want to go with these tools is up to you. Real Estate transactions are the biggest transactions most folks undertake in their lives, and as a consequence, small percentages tend to be a lot of money by the standards of lesser transactions. If you only want to do a few easy things, they should save you some money. If you want to do the work for the whole nine yards, they should save you a lot more. But when you have the tools, you are better armed consumers, more likely to get bargains that are better for you, given your situation. Like all tools, they are to be evaluated on the basis of how well they do the job. If they are used properly and nonetheless fail you, you are right to fault them. If there are tools that do a better job, you are right to use those instead. But to say, essentially, "Pay no attention to that man behind the curtain!" is not the optimal response to the issue. Through issues clients and potential clients have brought me, I have encountered every single issue I raise here. There not only is a man behind the curtain, you need to keep your eyes on him and you need to learn how best to deal with him. That is what this site is about.



Caveat Emptor.

UPDATED here