Mortgages: November 2006 Archives

I've written a lot here about how to manage your mortgage so that you control it instead of it controlling you.



Let's consider what happens when that project fails.



If you don't pay your mortgage, on time, no big deal at first. The lenders don't like it, but there's a grace period built in. Fifteen days later, the first consequence is that you owe the lender a late payment penalty. It's a doozy, typically four to six percent, depending upon where you live. Here in California, it's four percent. Doesn't sound like so much, but four percent for fifteen days is the equivalent of ninety-six percent annualized interest, over three times the most horrible credit card I'm aware of. I don't like paying ninety-six percent interest, and neither should you. Don't get fifteen days late if you can help it. But once you've paid the penalty and brought yourself current, nobody knows and nobody cares.



Suppose you get to thirty days delinquent - one full month. At this point longer term consequences set in. First off, your lender marks your credit as being thirty days late on your mortgage. This is a big negative as far as everyone goes, and can easily make a difference of 100 points or more on your credit score. Additionally, if you are applying for a mortgage loan (or plan to), you just got a "1x30". For A paper, this means that if your credit is otherwise perfect, you barely slide through. For subprime, this makes a difference on your rate. It takes two years for this to work its way out of affecting your mortgage application, even if your credit score recovers.



Most people end up being thirty days late for several months in a row, each month hurting their credit score, before it goes to sixty days late. They missed one payment and struggle but manage to make several more before they miss another. Occasionally, they go straight to two months late. Either way, it's a Bad Thing. A single "1x60" might scrape through A paper if there's no cash out and your credit is otherwise perfect. Otherwise you are subprime for at least two years. In the subprime world, a "rolling 30" is generally not as bad as a 60 day late, but both are steps down from even a "1x30" and a "rolling 60" is worse. It gets worse yet if you pay your way current and then backslide again. And of course, you are paying penalties and interest is accruing on your loan and you're falling further behind every time you are late. This amounts to a notable chunk of change very quickly. So none of this is good.



On the other hand, depending upon the state you live in, until you get to ninety or 120 days late the situation doesn't become dire. Each state's foreclosure law is different, but once the lender has the option of marking you in default, the situation gets uglier. It is a common misconception that lenders like foreclosing. In actuality, only so-called "hard money" lenders will usually start foreclosure immediately upon eligibility, especially if you've been talking to them about your situation. If they have some real reason to believe yours will eventually become a performing loan again, regulated lenders will cut you significant slack, by and large. It costs lenders a lot of money to foreclose and there's always the risk they end up stuck with the property, so they'll usually give you as much leeway as they reasonably can. One thing I keep telling people who want a loan approved based upon the equity in the property alone is "The lender doesn't want your house. They want to make loans that are going to be repaid. The lender is not in the business of foreclosure. They don't make any money on it."



Nonetheless, even the most forgiving lender is going to eventually hit you with a Notice of Default. At this stage, things are starting to move towards a resolution that nobody likes, but you least of all. At this stage, you are now liable for a large amount in extra fees that was written into your contract to cover the lender's cost of going through the foreclosure process. At this point, the lender has the right to require you to pay the loan all the way current, with all fees, in order to get them to rescind the notice. Refinancing becomes almost impossible, except with a hard money lender, and unless something about your situation has changed from what caused it to get to this point, that is only delaying the inevitable and making it worse.



As soon as that Notice of Default is recorded, your situation becomes part of public record. You are going to get calls and letters and everything else coming out of the woodwork. One category is going to be lawyers, who will typically tell you they can keep you in the house a long time without payments by declaring bankruptcy. Well, this is true as far as it goes, but it's not going to make the situation any better. As a matter of fact, it will steadily get worse. Just because you go into bankruptcy doesn't mean that the penalties and fees and interest go away or stop accruing. They are still there, and they keep coming. I'm not a lawyer, and you should consult both a lawyer and an accountant if you are in this situation. Nonetheless, bankruptcy is not something I would even consider in this situation without something highly unusual going on.



The second group that will contact you are the "hard money" lenders, looking to lend you money at 15% with five points upfront and a hefty pre-payment penalty, to buy your way out of the situation. Once again, unless something about your situation has suddenly changed, not a long term solution, and it only makes it worse.



Another group that's going to call is investors looking for a distress sale. They want you to sell it to them for less than it would otherwise be worth. This is actually something I might consider. Yes, I lose some money, but that's better than going through denial with the lawyer for a year and a half while any equity I might have left gets frittered away in interest and fees and penalties, not to mention paying the lawyer.



The final category, and one with a significant overlap from the previous, is real estate agents looking to sell the property for you. Assuming you're not deep in denial, this is probably the best option as to least unfavorable resolution. The drawback is that it depends upon whether somebody will make an offer in a timely fashion, a factor which is not under your control. No matter how great the price, no matter how hard my agent works, there might not be an offer. It happens.



If you do nothing, eventually a Notice of Trustee's Sale will follow the Notice of Default. In California, seventeen days after that happens, the property gets sold at auction (unless you've somehow brought it current). There are some protections in place here in California. The lender must perform an appraisal, and for the property to sell at auction, the minimum bid is ninety percent of this amount. Nonetheless, these are typically very conservative appraisals by design. At this point, the lender wants the property sold at auction, because if it doesn't sell, they own it, and they don't want to own the house. They are in the loan business, not the real estate business. So a house that may be actually worth $500,000 on the open market gets appraised at $400,000, and sold for $360,000. If the loan was for $250,000, that's $140,000 of equity you allowed to be taken from you because you were in denial, when you probably could have saved most of it. And if the loan with penalties and fees and interest was $450,000, that's worse, and not only because you forfeited $50,000 you could have gotten, and not only because they may be able to go after you in court for their loss in some states.



You see, because the lender took a $90,000 loss, they want to write it off on their taxes. And in order for them to do this, they have to hit you with a form that says you got away with $90,000 from them. This is taxable income!. So the IRS comes after you for the tax on the $90,000. IRS liens are one of the things that is not discharged by bankruptcy, and it stays with you forever. Ten years absolute minimum for any purpose. Sometimes your lawyer, CPA or Enrolled Agent will get you an "offer and compromise" that cuts your liability, but that's technically taxable income also and may be subject to another round of this crud. It it seems like to you the system is rigged so you can't win, you're right. The loan was an obligation you agreed to, and took the money for, and taxes are on obligation of anyone who is a citizen or resident.



The smart thing to do? As soon as you realize that you can't make your payment, take a long look at your situation and decide if this is something that's going to get enough better to make a difference, or not. Then figure out how much equity in the property you have.



If the situation is likely to improve, and you'll start making your payments in thirty days because hey, you just started your new job, that's one thing. Most of the time, however, most folks lie to themselves on this issue, for a variety of reasons. Remember: Denial Digs Deeper, and makes the situation worse.



Even if selling the property isn't going to net you anything, it's still worth doing as it gets you out from under the sitation. Your credit score stops dropping, you quit getting marked late by your lender, you quit getting socked with penalties and interest and fees you can't pay. The IRS obligations you are incurring stop.



Particularly if you have significant equity built up, the sooner you contact a real estate agent to sell, the better off you will usually be. You are going to lose the house if you don't sell. The sooner you sell, the lower the penalties and fees and extra interest you are charged by the lender will be. This translates into dollars in your pocket - dollars you are likely to need. If you can sell before the Notice of Default is filed, so much the better, as that's thousands of dollars right there. You don't have the luxury of taking your time about it, though. Taking the first reasonable offer is highly advised, and you have more time to get a reasonable offer if you start sooner. Once a Notice of Default is filed, it's a matter of public record and so your bargaining situation gets a lot worse because the buyer should know that you are over a barrel, metaphorically speaking, assuming their agent does their homework. Considering that it's two or three clicks of the mouse, it's easy homework to do and even the greenest new agent is going to catch it more often than not.



Trying the various delaying tactics with a lawyer is likely to end up costing you more than a quick sale. Even if you remain in bankruptcy for five years or more, within about a year and a half at most, the lender will almost certainly persuade the court to cut the home and loan out of the bankruptcy as a secured debt, and sell it. Since the loans and penalties and fees and interest kept accruing all this time, you end up with less money - or none, along with a little love note from the IRS that says "You owe us thousands of dollars! Pay up NOW!"



Every situation is different. At a minimum, consult a loan officer, lawyer, accountant, and real estate agent in your area. But when all is said and done, what I've talked about is the way most of these end up.



Caveat Emptor


UPDATED here

I've also got a "what happens next" kind of article called "Short Payoffs" up.

Joint Loans for Unmarried People

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We aren't married. How do we buy a house together?

Basically, the same way that married people do. The qualifications are exactly the same, provided that you both will be living in the property. If not all of the people who will be buying will also be living in the property, they have to show that they can afford both the place where they are living and their share of the expenses of the property. The only real difference in the paperwork is that unmarried parties cannot submit a single loan application - they must fill out separate applications. Most lenders will require that all of the disclosures also be signed and submitted individually. But that's just to keep the lumberjacks happy killing trees.

Now it is highly advisable that you consult an attorney as to how you want to hold title, and that there be some kind of partnership agreement that gives the other parties rights to recover any extra they paid to keep the partnership out of trouble, if one or more of the partners can not or do not make their share of the payments on time. But that's not a part of the purchase process, and you can certainly buy a property with basically anyone. It's one of the most basic of rights here in the United States. Convicted felons, jail inmates, illegal aliens, and people who have never set foot in the United States can all buy property here, as long as they have the money or can persuade someone to lend it to them.

The fact that people are not married means basically nothing to the loan qualification process, either. The guidelines are exactly the same either way. Yes, there are complex variables as to how you qualify, and what loan you qualify for. But people who are married but aren't going to be living together are treated the same as two random business partners, except that they can put all of their joint information on one application. You can have any number of people on title to a property, or responsible for a mortgage. The major thing to watch out for is that they must qualify as a group, and almost always under the same set of qualifications. If one person has to do stated income, they all might as well be stated income, because they're not going to get full documentation rates anyway.

Caveat Emptor

UPDATED here

One of the consumer attitudes I encounter constantly is the feeling that if you cannot afford the loan, the lender will not loan you the money. This safety zone common sense sort of reliance upon lender policy as a backstop is not only false, but one of the best ways to get in trouble with real estate there is.



Once upon a time it may have been true. Back in the dim times fifty years ago, lenders required down payments, and retained their loans for the full duration. This provided at least two levels of protection for the lender. First, if people did default upon their loan, that down payment was a cushion for the lender in that the property was genuinely worth more than the lender had at risk. All real estate loans were done "full documentation", where the borrower proved they made enough money to make the payments and repay the loan. Underwriting rules were designed to filter out those whose employment was not stable enough, those who couldn't afford the loans, and those whose creditworthiness was marginal.



At the same time, however, real estate was far more affordable. The inability to get a loan on good terms meant that you were a little further away from the middle class house of your dreams, that you were going to have to save a little more, work a little harder, and perhaps settle for something less than you really wanted, but you could still have a good property. 800 square feet on a fifth of an acre, instead of 1200 square feet on half an acre. These really were typical property choices available then. You saved until you had forty or fifty percent down, instead of twenty, and then you maybe had to look a little bit harder, but it could be done, and people paid cash for their properties all the time. A three or five thousand dollar property was something that people could save the money to pay cash for, even at seventy five cents per hour.



That's not the case now. Even though people may make $40,000 per year, and the family has two incomes, they are not content with the lifestyle of fifty years ago that enabled people to save a down payment within a couple of years. Nor is employment as stable. People don't work forty years for The Company any longer.



The changes on the lender end have been even more profound. Lenders discovered making stock valuations rise as a primary method of becoming wealthy. Where once the most important thing to the stockholders was to have every single loan repaid in full, now it becomes more important to have portfolio growth, which makes potential investors willing to pay more for existing stock. Then it became unnecessary to actually hold loans until they ran their course, as investors were willing to pay more than the face value of the loan for the rights to receive payment! This nice dependable mortgage bonds were good as gold! Matter of fact, the money the lenders received by selling the loans was higher than they made by holding the loans. True, they might only make three to four percent from selling the obligation, as opposed to seven percent for the obligation itself, but they could do it in two to three months, as opposed to the entire year. In fact, they could go through the process four, five, or even six times per year: Receive a loan application, provide the funds on a short term basis, and then sell to investors for a three to four percent markup. Instead of earning seven to eight percent on their money per year, they were now earning twenty or twenty five. They could even retain servicing rights, as the investors had no idea how to run the loans, and make even more money. Stock prices would show the effects of growth, as investors expected them to be able to keep in up, and current stockholders could cash out for huge gains by selling part or all of their holdings.



However, you now have a new group of stockholders, who bought - or held existing investments - in the belief that this growth curve could be maintained. They want that growth to keep going - however are they going to sell for a big profit if it doesn't? If the growth doesn't continue, how are performance awards to management going to be paid?



And so it goes. Growth begets a need for more growth. Now there's nothing wrong with growth - quite the contrary - but when the expectations shift over time from a two or three percent annualized growth curve, to eight or ten or even thirteen percent, it creates an expectation that no one wants to fall short on. Furthermore, other people with money, seeing the rewards, join in the lending business. Joe made fifty percent in two years with Bank of Nowhere in Particular! Let's all invest in that bank! They'll double our money in three years!



The fact of the matter is that there is only so much revenue growth that can be had in any given set of economic conditions. When you try to overshoot that amount, it can come from very few places. First, it can come at the expense of the competition. Unfortunately for that hope, the lending market grows more competitive, not less. Second, it can come from places that weren't a part of the market previously - in other words, people who were not good credit risks or who would not have applied in previous markets. The reason most of those would not have applied is that they are less credit worthy, and they know it as well as the lenders do. Third, growth can come through individual loans being larger, being willing to loan more money per property. This has also happened, but you cannot loan more per property without subsequently having more at risk, although the lenders have learned how to solve this. Remember that we discussed them selling the loans? Well, that's how the lenders limit their risks - by selling to someone else for cash. Let them assume the risks!



So we have increased competition for borrowers, including those who may not have been as solidly credit worthy as a previous day's client. There are more lenders competing for limited pools of borrowers, and pressure to qualify the borrowers for increased loan amounts, because, after all, that's how the bank makes money.



Furthermore, shifts in consumer habits played into this. People don't live in the same house for as long, and they don't keep loans nearly so long as they once did. Where they once lived in the same house from the time they bought it until they died, now the first house they buy in their twenties is a "starter," and then they sell that and buy a trade-up when the family expands a little, then another when they move up the corporate ladder, and this leaves out the effects of transfers and changing employers. Furthermore, they refinance and take cash out when they want a bigger SUV or a European vacation, and then they take more money out when the rates go down because they can afford a larger loan on the same payments.



The increased prevalence and availability of the stated income loan has played right into this. Certainly, some people in your profession make that much, but what if you're not one of them? Simply say that you are! After all, you're in that profession, right? Furthermore, there is no payoff for telling people that they don't qualify. They've made up their mind that they want that three thousand square foot six bedroom house, and if you tell them they don't make enough, they're not going to give up their dream house! They'll just find another way to do it, so someone else will get that loan! That nice, wonderfully wonderfully large loan that means a huge commission check to the loan officer and a forty thousand dollar premium on the secondary market for the lender!



Traditionally, the check upon this was the fact that the borrower had to actually make the payments on the loan once they had it, which limits their ability and willingness to sign for more loan than they can handle. However, competition between lenders once again found a way: First, the interest only loan, and then the negative amortization loan solved that problem, particularly as sub-prime lenders make their qualification for the loan based solely upon the initial minimum payment. Whereas when A paper lenders underwrite a hybrid ARM that's interest only for a given amount of time, they will base their computations upon a fully amortized loan payment, and even assume the rate will rise slightly, that is not the case in the sub-prime world. Sure they've bought the property on a 2/28 interest only loan with a three year prepayment penalty, and they bought in a flat or declining market, and they are not going to pay the principal down any in two years, and the property isn't going to be worth any more, so it's unlikely they will be able to refinance, and they certainly won't be able to afford the payments when they adjust, so they're going to lose the house, but hey! You got a commission check and your lender sold the loan (at a fat markup due to the prepayment penalty), and your employer won't have any money at risk when they do default! What's not to like?



So how is a consumer going to protect themselves in this sort of environment? Obviously, you've got to start by figuring out a budget and sticking to it. This is hard. This is very unpopular, as far as real estate professionals go. When I sit down with people's finances and tell them what they can afford with a sustainable loan, the first words out of their mouths are usually, "I can't afford anything I want with that!" A certain percentage of them just walk out right there, sure that they can find someone else who will tell them they can afford more.



As I've just covered, they certainly can find someone who will tell them that they can afford more. However, the reason I sit down and go through the numbers, including today's rates, what they make, how much they spend, is to show them precisely what they can afford. When somebody shows you real numbers and you deny those numbers, and are certain you can afford more, you are essentially performing magical thinking. "I want it and I deserve it, and this other guy tells me I can just pull myself up by my bootstraps and fly!"



However, loans aren't magical. In fact, there is nothing magical about loans. You may get a negative amortization payment that you can afford for a while, but the money that you are not paying does not just vanish into thin air. It may be held in abeyance for a while, but it is there, and it will turn around and bite you. You wanted a $600,000 home for a $2000 monthly payment, and you got it for a little while. However, you now owe $680,000 and the property (which you put $50,000 down on) is now only worth $540,000. It doesn't take a genius to see what happens next. Even if the property increased in value by $100,000, it costs you $55,000 to sell the property and you have to pay $15,000 of their closing costs so that they can qualify for the loan, and that fifty thousand dollars you put down has turned into nothing.



A rapidly increasing market, such as we had for several years ending about the end of 2004, covers a multitude of sins and mistakes. If the property doubled in price over three years, you came away with $400,000 and you were very happy! Unfortunately, this is not the type of market we are in now, nor are we likely to have that sort of market any time again in the forseeable future. It's always a bad idea to bet on it, because you never know it's going to happen ahead of time.



So what are you going to have to do? As I said earlier, figure out what your real budget is and stick to it. If you can't afford anything you want, then want less. Insist upon sustainable loans, and qualifying for them full documentation. Full documentation loans have better interest rates anyway. Fully amortized loans, where you are paying principal and interest, have lower interest rates, as well, and if you stick with A paper guidelines (and 100 percent loans on A paper are possible for people with decent - not spectacular - credit), you get better interest rates and can usually avoid pre-payment penalties.



"I just won't buy anything if I can't afford what I want!" some of you are saying. Right now, with prices retreating somewhat, it may even make a limited kind of sense for those with strong credit and stable prospects. However, the market here locally is not going to retreat that much more. Indeed, where prices are is currently being masked by a stubborn type of seller and a not very competent stripe of real estate agent. It doesn't matter that three fourths of the sellers want $X for property of given characteristics, if the sales that are taking place are $100,000 lower. If this seller won't sell, someone else will, and it is the sale that actually happens that tells where the market is, not the hundred comparable properties where the asking price is $100,000 higher.



However, real estate, even in markets that are rising just slightly, is such a fantastic investment due the the effects of leverage, that I do not anticipate the local market going much lower. Indeed, very smart investors are swarming, intending to hold the property five years or so instead of flipping it. Yes, we've lost between twenty and thirty percent the last two years, but the statistics have been manipulated to make the decline seem much shallower. I'm starting to see evidence of a reversal in the not too distant future, and people who decide to sit on the sidelines because they can't afford anything that they want are likely to discover themselves being able to afford still less when they do decide to jump into the market - or nothing at all. If you've got a family of three and don't want a two bedroom condo, what are you going to do when you can't afford that?



Caveat Emptor

UPDATED here


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

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

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


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

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

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

This has implications. Suppose you have a 760 score spouse who makes $3000 per month, and a 560 score spouse who makes $5000 per month, you have a choice: Qualify based upon $3000 per month, go stated income, or drop to sub-prime.

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

The second alternative is going stated income. This only works if the necessary income for the loan is believable for someone in that occupation. Somebody who makes $3000 per month is not likely to be in a profession where $8000 per month is a believable income, and most people tend to overbuy a house rather than under-buy, regardless of the fact that under-buying is a lot more intelligent in most cases.

The third solution is to go sub-prime, where you'll qualify, but get a higher rate. A single borrower with a 760 credit score gets a better loan, with less of a down payment, than the couple in this case - the primary borrower has a 560 score, remember - but they just won't qualify for as large of a loan because they can't afford the payments.

You might also go NINA, which is a "here I am - gotta love me!" approach where income is not verified, nor employment history. The loan you get is based totally upon your credit score and equity picture (how much of a down payment you make, in the case of a purchase). The rate is higher than stated income and the restrictions on equity is greater, but you'll get a better loan at a better interest rate in most cases for a NINA A paper loan than even a full documentation loan for a 560 score.

Now, as to what you were told, student does not, in general, count as time in line of work. As a question to make why this is obvious: How are you going to compute her average income over the last two years? That is the way full documentation loans are justified. Some sub-prime lenders will accept it (not the better ones), or the person who told you this could just be planning to substitute a stated income loan based upon your income. The fact is, that unless you're talking ugly sub-prime, they're not going to accept your wife's income until there's some time actually working it. Many people graduate school and never work in the field. They don't pass licensing, or they decide soon after they start that it's not for them.

In this case, you are talking stated income unless you go sub-prime. It's just the way things are computed. Sorry.

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

Caveat Emptor

UPDATED here

I have repeatedly advised my readers to sign up for a back-up loan if they can find somebody willing. So every once in a while, I get email like this:





Hi! Would you be willing to do my backup loan? I'm already signed up with my brother-in-law but you tell people to get a backup loan so I'm asking you.





No loan officer with any sanity is going to agree to that request. You've already made up your mind who is doing your loan. You are not honestly shopping your loan, and you're kidding yourself if you think you are. You're not likely to evaluate your brother-in-law's loan critically when it comes to final signing, you're just going to sign on the dotted line. So the back-up loan officer is going to spend hundreds of dollars and a lot of time pushing your loan through for zero prospect of getting paid. Suppose your asked you to work through the weekend, and maybe a couple extra nights, spend about a week's worth of your own pay, but that you wouldn't be paid, you wouldn't get a bonus, and it wouldn't be considered at your next review. That's essentially what you're asking them to agree to with the above scenario. There is no carrot whatsoever in the case of loan officers, because (unlike employers) you're not paying them at any other time, either. Quite frankly, I'd rather spend the time trying to find another client, or with my family, or doing anything else. I'm not interested in wasting my time on backup loans like that, and neither is any other loan officer.



The first thing you have to do if you're hoping for someone to agree to be a backup loan provider is give them an honest chance at being the primary loan. You have to shop them before you have signed up with anyone. You have to have the whole loan officer conversation with several loan officers: what you've got, where you want to get to, your situation, etcetera. Don't forget to ask the Questions You Should Ask Prospective Loan Providers. They go out and price the loan, and get back to you with what they can do. If you are actually signed up with someone else prior to this point, you have not honestly shopped your loan, and no loan officer in the world is going to agree to provide a backup, not to mention that you have placed yourself completely at the mercy of the loan officer you signed up with. There never was any real chance that other loan officers could actually earn your business. It's like going to an auto dealer and asking them to special order a car for you, despite the fact that you've already paid another dealer, are not going to put down a deposit, and indeed, really want to do business with the other dealer, but hey, you want them to do this for you on the chance that other dealer cannot deliver. If you have any doubts, why did you order with the other dealer, or more precisely, why did you sign up with your brother in law for the loan? Especially prior to checking with anyone else?



So after honestly shopping your loan, you obviously need to make a choice. Now the reason I advise people to get a back-up loan is because everything you are told when you make that choice could very well be a lie. With the majority of loan companies, either the federal Good Faith Estimate or the California MLDS are subject to all kinds of misrepresentation, intentional misquoting, etcetera. If this were not the case, there would be no need to sign up for a back up loan. The purpose of signing up for a back up loan is to give yourself another option if, when you go to sign final documents, the loan they actually offer you a contract for is different from the loan they dangled to get you to sign up, that they have been talking about all this time but at the moment of truth they don't really have it. Whether it's a different rate, has closing costs thousands of dollars higher, thousands of dollars added to your loan amount that they conveniently "forgot" to tell you about, has a pre-payment penalty when they told you it didn't, is a completely different kind of loan than they told you about in the first place, or even all of the above, the loan isn't what got you to sign up. In some cases, they don't have a loan at all, and are stringing you along in hopes that they will have a loan Real Soon Now. If you only have one loan ready to go, your options are limited to "sign on the dotted line or don't." If you've made a substantial deposit on a property you are buying and all of a sudden you don't have a loan, guess what? You will probably lose that deposit. So people will sign on the dotted line, even for refinances, when it's not the same loan they were led to believe they were getting in the first place. Hence, my advice to sign up for a back-up loan. That gives you the option of signing the other loan officer's loan contract, and the mere fact that someone else also has a loan ready to go is much better leverage than anything else you can do to get them to produce the loan they said they had in the first place. You can use the first loan officer's loan as a club for your back-up, too, if need be.



But if you're not going to evaluate your primary loan officer's loan critically, if you're not going to go through the paperwork and make sure that rate, terms, and costs is indeed, as described, that back-up loan officer has just wasted all of their work, and all of their money. Excuse them if they are less than enthusiastic about doing that when there is no prospect of getting paid. It's not like they are being paid an hourly wage. If that loan doesn't close, they get nothing for all that time and effort. People work to earn money, even if they really do like their job.



So what you've got to do, preferably before you make a final choice for your primary, is ask your number two prospect about your number one prospect's loan. Does loan officer number two think offer number one is deliverable? I assure you that good loan officers know what is and isn't really deliverable. Whether the answer is "Yes" or "No", you've got some useful information. If the answer is "Yes," you know that what the low bid is talking about is possible. Whether they will actually deliver it or not is a different question. The way to bet is that they will not, unless they are willing to offer you a written Loan Quote Guarantees. If you ask for a Loan Quote Guarantee, most lenders and loan officers will not give you one. Instead, they will try to distract you with BS about how they are thus and such reputable company, and they honor their commitments. This is nonsense. Neither the Good Faith Estimate, Mortgage Loan Disclosure Statement, Truth In Lending form, or any of the other standard forms that you get at loan sign up, is in any way a commitment or a guarantee. They are only estimates, and they may be accurate estimates or they may be the biggest lie since the invention of the one night stand. Furthermore, loan officers don't write loan commitments. That is the exclusive province of underwriters, whom you will never communicate with directly. The most that loan officers can promise is that if the underwriter approves it, the loan will be on a given set of terms, and that is the sort of Loan Quote Guarantee you should look for.



Now, if the second lowest loan provider says "no," that the lowest's rate is not deliverable, that is your opening. "Well, tell you what, Mr. Loan Officer," you say, "If you're certain that loan quote is not deliverable, and that yours is, how about you agree to be my back-up loan provider. If they don't deliver on those terms, as you say they won't, and you do deliver on yours, I'll take your loan. What do you say?"



What they are most likely going to do, of course, is try and talk you into being the primary, and to forget this nonsense about back-up loans. After all, he (or she) is a sales person. If you do what they want, this puts them in the cat-bird seat thirty days down the line instead of your number one choice. And you know, if they are willing to give a Loan Quote Guarantee and the number one choice isn't, I'd probably make them my primary. Ask anyone who's dealt with construction contractors if they'd rather take a bid of $X that is just an estimate, or $X plus 5% that has good solid guarantees behind it? Same principle here. The one that's willing to guarantee their work gets the business, or at least first crack at it.



Now suppose number two won't agree to provide a back-up? Then ask number three. Suppose number one is going to try to hinder your back up loan? You need to explain that you fully intend to go with them, and that if they provide the loan on the terms they told you about, they are going to get the business, but you're providing yourself with an insurance policy, just in case they won't, and their attempts to sabotage that insurance policy are likely to force you to cancel your loan with them. Tell them that if they are really going to deliver what they said they would, their loan will be better than the competition's, so there will be no reason to choose the other loan, so their attempts to obstruct or sabotage the other loan have you thinking that maybe you should cancel their loan, because their actions are indicative of being nervous about their own loan. Be blunt, be truthful, and carry through on your threat to cancel if they keep being an obstacle to the back up. If they need to obstruct a worse loan, it's because they have no intention of delivering the better one. Carry through on your promise to cancel - and then go find yourself a new insurance policy.



Signing up for a back up loan is the cheapest, smartest thing you can do to protect yourself in one of the largest dollar value transactions of your life. But if there isn't a real possibility of getting the business, no loan officer in the world is going to agree to be your back up. You need to demonstrate to them that there is a real possibility of their loan being the one you actually sign the loan contract for at the end of the process, or they are not going to be interested. The type of email that is referenced at the top of the article isn't to protect yourself. It's to mollify your conscience, because you know you didn't really shop your loan around, and you know you're going to pay more than you need to, unless you get struck by pure dumb luck. The point of reading the consumer education here is that you don't want to rely on pure dumb luck.



Caveat Emptor

UPDATED here

Title Searches Missing a Lien

| | Comments (1)

I refinanced my house and an existing lien was not discovered


Now the important question: Is it a valid lien, or has it really been paid, and just not released of record? If it has been paid, you don't owe money simply because the lien on your property was not properly paid off. If you can prove it was paid off, either by yourself or a previous owner, you're out of the woods.

Since you are asking the question, however, I'm going to assume that it is a valid lien. Most are. You owe the money. It doesn't magically go away simply because the title company (or lawyer doing the title search) missed it.

Now, assuming you live in a title insurance state, it should make no difference to the state of your mortgage. You bought a lender's policy of title insurance as part of your transaction, and the title policy insures the lender from loss due to the extra lien.

You still owe the money, of course. Like any other bill, just because you neglected to pay it off or neglected to pay it on time does not mean you somehow don't owe the money. If it was in effect from before you bought the property, though, your owners policy of title insurance should kick in and pay it off. That's the way title insurance works - they tell you about known issues with your title, and then they insure (almost) everything else. They'll then go after the previous owner, of course. That's what subrogation is all about. They stepped in and paid to keep you from getting damaged, but they now assume the right to receive the money from the person who damaged you. If you live in an attorney title search state, my understanding is that you are going to have to sue the attorney involved, but suing attorneys is a tough proposition, and you can't recover the base lien, only increased damages resulting from that attorney's negligence. If the previous owner was really responsible for it, the title insurer is going to have to run them down and file a lawsuit, and quite often the previous owner has no assets that they can get at.

If the lien was your doing, as most are, you're going to have to start making an effort to pay that lien. How much of an effort depends upon whether you have a lender's policy of title insurance. If you do, it's really no huge deal, because the lender has access to the checkbook of a national megacorporation. If you don't, the lender can potentially force you to pay it in cash right now. They can also force you to refinance by calling your loan, or to take out a second mortgage to pay the lien off in many cases. It's possible they might just pay it and tack it on to your balance, usually boosting your payment in the process. Talk to a real estate lawyer in your state for details, but the lender is not generally going to leave an uncovered lien in place, when the pricing they gave you for that loan was predicated upon there not being such a lien. Since the lien predates their loan, it's almost certainly senior to it, by which I mean that if something happens and you have to sell the property to pay off the liens, it gets paid before your mortgage. The lender is not usually going to tolerate that.

Now suppose that you got a thirty year fixed rate loan at 5% back in 2003, and suppose rates have gone up to seven and a half percent by the time you rediscover the lien. The lender can do better with that money from your loan, and so they are going to want to seize upon any excuse to make you pay it off. This, all by itself, is a really good reason to be careful with your liens.

If you intentionally hid the lien, the lender may even sue for fraud in many jurisdictions. If you intentionally hid it, for instance, it's quite likely that your policy of title insurance won't cover you, and the lender is going to be very unhappy about that.

Most people, however, don't intentionally hide a lien, they just forgot it was there, and when the title search comes up empty any worries in the back of their mind went away. If they even think about it, they mentally write it off. "Oh, I must have forgotten that I paid it." You still owe the money, and now that it's discovered, you're going to have to start paying on it, but if they've got lender's title insurance the lender shouldn't freak.

Now, missing liens is actually fairly rare, but once title insurers miss them, they usually will not be caught on subsequent title searches, because the title company will use the previous title search as a starting point (around here, they actually call them "starters", but I don't know how widespread the practice is) for their new title search. Sometimes they do catch them, and ask the previous title company for an indemnity (which basically says that the previous title company is still liable for having missed it).

Caveat Emptor

UPDATED here

That question brought someone to the site. The answer is "Yes, they can". As a matter of fact, just because they have you sign those documents does not in any way obligate that lender to actually fund your loan.



There are two sections of conditions on every loan commitment. The loan commitment is what the underwriter writes up when the loan is approved. The first section is called "Prior to Docs", meaning before the final loan documents the customer signs at closing are generated. These should be all the stuff that's substantive in nature, that governs whether or not you qualify. Unfortunately, that is not the case. The second section is called "prior to funding," or "funding conditions." This should be limited to simple procedural stuff like a final updated payoff demand, final verification of employment (they call and make sure you still work there), etcetera. However, more and more, conditions that more properly belong in "prior to docs" section are being moved to "prior to funding."



Why do they do this? Well, once you sign those documents you are more heavily committed to them. Once you sign, and the Right of Rescission (if any) expires, you are stuck with that lender. You no longer have the right to call it off. If you go elsewhere, to another lender, because they are taking too long, they can fund your loan and force you to live by the terms of the documents you signed. Bad business all around, and you're going to be dealing with two sets of high powered lawyers that the contracts you signed basically obligate you to pay for - but they work for the two different lenders!



One fact that many people don't understand is that it's a rare loan application which is rejected completely. I don't remember when I've ever had a loan application outright rejected. Of course, being a good loan officer, I'm going to be as careful as possible that the people will qualify before I submit their loan package, but this is far from universal. Many loan officers routinely tell people about loans and programs that they have no prayer of qualifying for, but there sure are some great rates attached, for all the good they will do you. Then the loan gets rejected but they sit on the rejection while they work the loan they had in mind for you all along, and come back and say, "This is the best I could do" at closing time, and an extremely high percentage of people will sign on the dotted line because they think they have no choice.



What happens much more frequently is that the loan gets approved, and the underwriter writes a loan commitment, but with conditions that cannot be met in this particular instance. The borrowers need to prove more income than they make is probably the classic example, but these "killer conditions" occur in every area of loan underwriting. More often than not, the loan officer is not really surprised by these, and most often, they won't ever tell you about them if they can avoid it. Why? Because that gives you a "heads up" that you're not going to get the loan you thought you were, and at a time when it's still very possible for you do go loan shopping elsewhere.



Now a good loan officer - both competent and ethical - will not tell you about a loan they don't think you're going to qualify for. My ambition is always to have the list of conditions, both "prior to docs" and "prior to funding", to be as short and unsurprising as I can possibly make it. This saves work and it saves time. Remember, every time that underwriter touches the file they can add more conditions, and they can also discover something that causes them to essentially reject the loan, by adding conditions the consumers in question cannot meet. If I can submit a file and the underwriter writes a commitment with only a few routine prior to funding conditions, I am much happier because now I can request documents, have them signed, and get this loan done. You get this kind of commitment by sending all of the documentation they need in every loan all at once, in the beginning, but only that documentation. It's not necessarily a sign of incompetence if the underwriter puts some other conditions on it - probably somewhere close to half of my commitments have some condition the underwriter took it into their heads to require in this instance. Like any good loan officer, I avoid arguments with an underwriter if I can, so when they give me a condition I didn't anticipate, I figure out what I need to satisfy it and whether I can get it. But you learn when extra documentation will be required.



Many loans, particularly sub-prime, are done completely in the reverse fashion. The loan officer submits a bare application, without supporting documentation, and waits for the conditions, and boy do they get a blortload of conditions. Not too long ago I helped an experienced real estate agent in my office with his first loan. He wanted to do it "the easy way," by which he thought he meant, "The lazy way," but he really meant, "The hard, stupid way." He submitted a bare application to the lender and got seven pages of conditions, which were added to as time went by and he submitted documentation piecemeal. Took him two months and four times the work of just taking another day and submitting a complete loan package in the first place. If he had done that, the loan probably would have been finished in two and a half weeks. Some of the conditions were for stuff I had never encountered before. What was going on, of course, was that the underwriter had gotten it into his head that this was probably a dangerous loan to approve, and he wanted to be extra careful on the approval.



So what can the average person do to safeguard themselves against this happening. Well, you can't - not completely. The underwriter can always add conditions, and so can the funder. Even if the loan gets funded, they can pull the money back right up until the moment that trust deed gets recorded with the county. That's just the way it is. What you can do is ask for copies of the loan commitment, and of the outstanding conditions, those that have yet to be met. Refusal on the part of a loan officer to provide this is always a bad sign. Ditto the inability. I definitely wouldn't sign the loan papers without a copy of the outstanding conditions in my possession, and it may be smart to ask for copies of the conditions at several points in your loan. Yes, they can be faked, pretty easily, but then they are ammunition in your lawsuit if something goes wrong. Before you even apply, you can ask questions about necessary income, what the program guidelines for debt to income and loan to value ratio are, etcetera. Much of the stuff in my article Questions You Should Ask Prospective Loan Providers is aimed at defusing that kind of situation. Furthermore, you can and should apply for a back up loan if you can find someone willing. Remember, at sign up you have all the power, but at closing, the lender has all the power. They have the loan, and nobody else does. Many times, the loan they deliver at closing will have nothing in common with the loan that got you to sign up. If you don't want to find yourself completely at their mercy, the only way to reliably do so is apply for at least two loans. In the worst case scenario, it means that you get the least bad of these two loans, and in most circumstances, you can use the fact that there's another choice you can make to motivate them to deliver something that more closely resembles what they told you in order to get you to sign up. At the very least, get a written Loan Quote Guarantee.



Loan officers have people sign loan documents every day that there is no hope of actually funding a loan on. It doesn't make sense to me, but they do it, mostly because they are afraid if they break down and tell you they can't fund this loan, you will go elsewhere and they won't get paid. Signing loan documents more strongly commits borrowers to this loan, and as long as they keep trying, there's always the possibility that they will get paid. I have talked with people that were strung along for three months before they finally gave up and realized that this loan was not going to happen.



Caveat Emptor

UPDATED here


I'm clueless about how home loans work. Is there any way to figure out how much I can afford to spend per month on a home. If I were to get a home for $(figure) how much would that be per month? How do I know how much the interest will be? Any sites that explain it all in laymans terms? Thanks



It's actually pretty easy. You are allowed a certain percentage of your gross monthly salary for debt service and housing. According to Fannie Mae and Freddie Mac, who control A paper, it's essentially 45%. Some sub-prime lenders will go to 60 percent, but let's stay A paper until we know you don't qualify.

Lest it not be obvious to you, the less debt you have currently, the more you can afford to take on for a housing payment. One of the real problems, and reasons for abuse of a stated income loan, is couples who make $4000 per month each, but have $1200 or $1500 or $2100 in monthly payments for the two cars, credit cards, student loans, etcetera. Their coworkers all have $3000 mortgage payments, and $3000 buys a lot more house than the $1800 which is all they can afford. Actually, it's a pretty critical difference right now, since $1800 is the payment on about $275,000, which buys a decent two bedroom townhouse in an okay area, or a rotten three in an awful area, while $3000 is the payment for about $450,000 or a little more, which can buy a 3 or maybe 4 bedroom home in a decent area.

Take 45 percent of your gross monthly income, call it X. From X, subtract your current debt service. This is car payments, credit card payments, furniture payments, any actual debt you have.

The number that is left over, call it Y, is what you can afford for housing by traditional measures. It needs to cover principal and interest of the loan, property taxes, home owner's insurance, and association dues (if any), PUD fees (if any), and Mello-Roos (if any).

Assuming that there are none of the last three, you're left with PITI, the acronym you're going to hear about what this covers: Principal and Interest (on the loan), Taxes (property) and Insurance (home owner's insurance).

Right now, there are A paper thirty year fixed rate loans in the low sixes with 1 total point or less. Any loan calculator (except auto loans) can handle that calculation. Except that if you're not putting a down payment, you're going to want to split your loan into a first and a second to avoid PMI. To do this, you're only going to put 80% of your loan on the first mortgage. Adding the remaining 20% back in at 9.00% (doing this saves you about two and a quarter percent on the whole amount), for which you're going to need to do a separate calculation. Put the two numbers together and that's the principal and interest (PI) part of the PITI acronym. This assumes you've got decent credit, by the way.

I have no way of knowing your property taxes. Every state in the union has their own way of doing it. California's is actually one of the lower tax rates, considered on an assessment per unit of value basis. There are also zones where bond issues have passed, Mello Roos assessment districts to pay for the costs of bringing utilities to the development, and so on and so forth. Your county assessor will have the details. One of the things a good agent can often do here in California is deduce the presence of assessment districts based upon the taxes paid by a particular property, but it's subject to error, and your county assessor's office will have the information, and it won't b subject to guesswork.

I have no real way of knowing what home owner's insurance might be. I usually guess $100 to $110 per month for a good policy covering detached housing, but that's a guess, and it could be much more, or slightly less. The only way of moving from guess to certainty is to ask insurance agent how much to insure a given property.

Now, if the sum of these numbers (PITI) is less than $Y, that portion of your monthly income available for payments and left over after monthly debt service, you've got an excellent chance of qualifying for that loan. If not, you're going to have to go sub-prime, where the allowed debt to income ratio is higher, but the rates will also be higher and the terms less generous, for instance in the presence of a pre-payment penalty. It is actually likely that instead of playing games to stretch your ability to qualify, you would be better off shopping for a less expensive property in the first place. But that's a hard thing to get most buyers to accept. They've fallen in love with the brand new house and they don't want to hear that they can't really afford it. The universe knows that these good deeds do not go unpunished. But informing the client is still the right thing to do.

Caveat Emptor

UPDATED here


My lender told me that there is an application fee?

He said an application fee of $250 and then we'll need the appraisal fee and of course we'll need an inspection. Does all this sound legit, is there always an application fee?


If they are asking for upfront money, they are trying to hold your money hostage to commit you to the deal. Most of the companies that do that know that 1) Better rates are available to the public and you're likely to find something better if you try, 2) they're going to hit you with a bunch of extra stuff they didn't tell you about at the end.

Never pay for more than a credit report up front. You should want to choose the appraiser if you're going to pay them - that way you own the appraisal, not them. You should also choose the building inspector if you've got to have one - most refinances don't, but only a complete idiot wants to spend that much money to buy a property and *doesn't* pay a few hundred for the inspection first. If the lender orders them, they own them. They have to give you a copy, but you can't take it to another lender to use if this one hoses you.

Now, at closing, you can expect to pay some fees. How much depends upon a lot of factors. I tell people with entry level single family residences to expect about $3500 total in actual loan costs, plus whatever points are paid to buy the rate down, plus the expenses related to the purchase, which vary a lot. By the time you're done with title and escrow and appraisal and lender's fees, that's what it really is. I'd rather tell the truth and guarantee the total, but since most people don't realize how many games prospective lenders can play, quite often the person signs up with the person who talks a good game but won't guarantee the quote. Usually you can choose a higher rate to get some or all of your costs paid (I love doing zero cost loans myself, and they actually are a good thing for most clients), but there is ALWAYS a trade-off between rate of the loan and cost of the loan.

Nonetheless, the idea of money you pay before the loan is ready is to commit you to the lender. People understand checks that they write in their gut. That $1500 check for the deposit on the loan is more important to many people than the $450,000 loan that comes with it. As evidence, I have offered people loans that were more than $5000 cheaper on exactly the same loan type and rate, but people would not sign up for my loan because they didn't want to "lose" that $1500 deposit. I've shown people better loans at lower rates on exactly the same terms that saved $1500 per year in interest, and they wouldn't switch. Why? Because they are thinking about that money that came out of their checking account, that they scrimped and saved and set aside laboriously over a period of months, not the money in the loan, which is just as real, but they haven't had to save it, and they don't realize that it is real in the same way as that deposit check.

So lenders who want large deposits typically do so because they know that their loan will not stand the light of scrutiny, and competition from other lenders, so they want to tie you to them emotionally, with money you don't get back if you switch lenders. Money that you've physically got in your checking account, money that you understand on the gut level. Be very wary of this sort of lender. Seeing as there are many loan providers who will do your loan without requiring such a deposit, I would suggest you find one of them (or better yet, two of them) to do your loan instead.

Caveat Emptor

UPDATED here

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About this Archive

This page is a archive of entries in the Mortgages category from November 2006.

Mortgages: October 2006 is the previous archive.

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