Mortgages: May 2007 Archives

I have questions to ask you about the loan for house. I have been work with one broker since DELETED and I just tell her on the phone that I chose her and that she can start to do the escrow but I didn't sign any application and papers for her. Two weeks later, the appraisal had been done. Can I stop to work with her because she promised me to look for lower rate later, but she didn't do anything about it. If I stop to work with her, do I have to pay any fees for the appraisal and bank approval for the loan and how much it may costs? (she had only done the bank approval and ordered the appraisal). Thank you very much for helping me.

This is pretty open and shut. Usually it's less clear. You haven't signed anything committing you to the loan. She probably has civil recourse on the appraisal - if she wants to spend thousands in lawyer fees to recover a few hundred. Since that's silly, I don't think it's likely she'll pursue it. Her case hinges on her having ordered it because of your verbal representation you wanted the loan. One more thing in your favor is that the date on the Good Faith Estimate or California MLDS needs to be within three days of the date she ran your credit report, not to mention the Truth In Lending Advisory and everything else. Not likely, if you haven't signed anything.

Most loan providers, ethical or otherwise, won't start work without a loan application package. Ethical ones because they've got legal obligations to meet, less ethical ones because there will be an origination agreement in there obligating you to pay their expenses if you don't go through with it.

If you have signed such an agreement, there's probably something in there obligating the loser to pay the prevailing party's legal fees. Since you're likely to lose if they push their case, this shifts the presumption as to what you want to do, which is pay the appraiser. You can fight it in court if you want to, but you're likely to end up paying for both sides legal expenses in addition to the appraisal bill. Since the chances of you winning in court are pretty minuscule, you would be well advised to just pay the appraiser.

I've said it before, but it's likely that lenders who promise to pay for an appraisal are going to more than recover those costs elsewhere in the loan. Suppose you've got a $300,000 loan. If all you see is the fact that you're not writing a check for $400, that loan provider can, by being willing to loan you the $400, trivially make two extra points on the loan, or $6000. Just because you're not writing that check directly doesn't mean you're not paying every penny of it via higher rates, or higher origination. Furthermore, they're not likely to pay for the appraisal without an origination agreement that obligates you to make good their expenses.

The true low cost mortgage providers won't pay for the appraisal. If you've got a low cost provider, they're either going to have to absorb the costs of the appraisals that don't pan out, or they're going to have to charge their clients whose loans fund for the ones who don't. In either case, this means a higher loan margin. Usually, there's a good margin there on top of the appraisal. I can point to providers who use the fact that they pay for the appraisal as a wedge to extract thousands of dollars in junk fees as well. Most of the people for whom that is a selling point only understand money when they write a check or fork over cash. They don't understand about how money they roll into their loan balance is every bit as real.

If you do decide you don't want a loan, the appraisal is the vast majority of the money you should be out, because that and the credit report (somewhere between $13 and about $30) are the only third party expenses. This doesn't mean that the less ethical won't try and soak you for other fees, because they will, and junk on top of those fees. Depending upon the origination agreement you sign, you could be on the hook for thousands of dollars - more than a low cost provider would make if they actually fund the loan.

I need to say this again, also: Just because you paid for the appraisal, and are therefore entitled to a copy, does not mean you are entitled to take it to another loan provider. The appraisal must be in the name of the correct loan provider, and if the prior loan provider does not release it, the appraiser will not re-type it. The games that are played by loan providers who refuse to release appraisals are legion. Most will want money to release it, money such that you may be better off getting another appraisal. Even the most ethical will not likely release the appraisal just because you find a better deal - or think that you have. They've spent anywhere from hours to days of time - time they have to pay for, even if they can't show a receipt - on your loan. Expecting a loan provider to release the appraisal without money is like expecting your mechanic to release your car without being paid. Therefore, you want to be the one that controls the appraisal, if you possibly can. Some appraisers don't like this, because it's in their interests for you to pay for more appraisals, but the law in most states isn't nearly so hard nosed as most appraisers would like you to believe.

One final thing: As of the date of this writing, rates have risen quite a bit in the last few weeks. I have a purchase client whose transaction hit a snag in a defect that has to be corrected before any loan can be funded, and it's much more cost effective for them to pay for rate lock extensions than it is to float the rate. A tenth of a point per five calendar days is a lot less than the almost half of a percent re-submitting the loan to a new lender would make in the rate. Any reasonable loan that's been locked for a couple weeks is likely to be better than anything available today. I can look for a lower rate all I want. It's not likely to be found, unless their current provider is pretty high margin.

Caveat Emptor

article UPDATED here

I got a question about what the number one obstacle is to most people qualifying for the loan on the property they want.



The answer is "existing debt." Credit cards, student loans, car payments, etcetera. It seems like more people than not have a reasonable idea of the property people making what they are making might be able to afford. Whereas I do get people who want a four bedroom house despite only making enough to be able to afford a two bedroom condo, it seems that more folks than you'd think really do have an idea what people making what they do should be able to afford. They can be lured down the primrose path of negative amortization, but even most folks who fall for it, know on some level that it's not real. They may not realize exactly how nasty it is, but they know it's not the whole truth.



The real hurdle faced by most buyers is that they owe too much money to too many other people for too many other reasons. Every dollar you have in monthly obligations is another dollar you can't afford on your house payment.



Let's say that Mr. and Ms. Homebuyer make $120,000 per year between them - $60,000 each. They are making $10,000 per month. By the calculations for A paper fixed rate loans, they can afford total monthly payments of $4500 per month. This is a forty five percent debt to income ratio. If housing is their only debt, they easily qualify for a $500,000 property with zero down payment. As of the time I'm writing this, $2367 first at 5.875% with one point, thirty year fixed rate first mortgage, $752 second at 8.25% 30 year due in 15, $521 per month prorated property taxes, and $120 per month for a good policy for home owner's insurance. Total: $3760. They're $740 under their limit. They would actually qualify for a significantly larger loan if they had no other debt.



However, Mr. and Ms. Homebuyer still have student loans, because everyone knows you don't pay your student loans off. Right? But because Mr. and Ms. Homebuyer owe $50,000 between them, and they're paying $180 each, for a total of $360 per month, that's $360 in housing costs they can't afford.



Now Mr. and Ms. Homebuyer both have $30,000 automobiles they're making payments on. On five year loans, Mr. and Ms. Homebuyer are paying $600 each. He has four years to go, she has two. That's still $1200 more in housing costs they can't afford.



Ms. Homebuyer charged their vacation trip to the Bahamas that cost $10,000 to their credit card, and Mr. Homebuyer put the furniture he bought Ms. Homebuyer on an installment plan. The credit card is $500 per month, the furniture is $400. Net result: $900 more that they can't afford for housing payments, because they have to pay it out for existing consumer debt.



By the time Mr. and Ms. Homebuyer have paid all of the monthly payments they already owe, the lender calculates that they can only afford $2040 per month in housing payments. Now, instead of easily affording a $500,000 house, they don't even qualify for a $300,000 condo. $240,000 first at 5.875 is $1420, $466 for the second at 8.625% (below a price break), $313 property taxes and $240 in association dues. Total: $2439! They're $400 per month short!



For people who have a down payment, often the only way they are going to qualify is by spending it on their pre-existing debt. If they don't have a down payment to pay existing debts off, they are not going to qualify "full documentation," which is a fancy way of saying that the income they can prove isn't enough to qualify them for that loan. Furthermore, the manner in which you pay that debt off can be restricted. Sub-prime lenders don't really care as long you can show where you got the money and the debt gets verifiably paid off. "A paper," however, has to deal with Fannie Mae and Freddie Mac guidelines, which are less forgiving. A paper guidelines are that you cannot pay off revolving debt to qualify, and even installment debt is at the discretion of the underwriter. In short, once your credit has been run, what you can pay off to qualify "A paper" is limited. A lot of folks end up stuck with sub-prime loans because of this. Higher rates, shorter term fixed period, pre-payment penalty. Some folks just flat out will not qualify unless they go "stated income," and state more income than they make.



Indeed, this is probably the most common reason why people do stated income loans. However, stated income loans mean that your rate is higher, and you might not be able to use all of the money you were intending to as a down payment, because you've got to have reserves for a stated income loan. Finally, and most importantly, stated income loans are dangerous. The debt to income ratio is not just there for the lender's protection - it is also there for your protection. Stating more income so that you can get around the limits on the debt to income ratio is intentionally disabling an important safety measure, meant to keep borrowers from getting in over their heads with loans and payments they cannot really afford. You make $X, which equates to being able to afford total monthly payments of forty five percent of $X. You state that you make an additional $Y per month so that you qualify for higher payments, and you are intentionally defeating that safety precaution. You are going to have to make those payments. The people who loaned you the money want their payments every month! Where is the money going to come from? I would be very certain I could really afford the payments before I agreed to a stated income loan!



So you should be able to see some of the issues that existing debt can cause. Existing debt quite often means that you do not qualify for a property you would easily be able to afford - if only you didn't have those pesky consumer loan payments every month. It can force you to undertake a less desirable loan type, it can force you to accept a pre-payment penalty, and it can prevent you from being able to qualify for the property you want. Alternatively, it can force you to choose between not buying at all, and intentionally defeating one of the most important safeguards consumers have, the debt to income ratio.



Caveat Emptor

UPDATED here

Recently, a couple of mortgage places have been advertising "30 year fixed rate loan at 5.65%" like that's the lowest rate out there and it's some kind of great loan. It's not. I have 5.375% available to me. If you read my site, you may be wondering why I'm not pushing 5.375 for all I'm worth. The reason I'm not is that it's a rotten loan. It costs 3.7 total points retail in addition to closing costs. If you came to me with a $300,000 loan balance and demanded that loan, just to pay closing costs and points would bring you up to a balance of about $315,200. It costs $15,200 to do that loan. As opposed to the 6.25% loan I can do without points (based upon the same assumptions) which ends up with a balance of $303,500. It takes 69 months - almost 6 years - before the total of what you paid plus what you owe on the high cost but low rate 5.375% loan is as low as what it is for the higher rate but lower cost 6.25% loan, and you still haven't broken even then, because you still owe a higher balance. That higher balance is going to cost you either more money on your next loan, or mean you don't earn as much on the proceeds of selling when you invest them. According to my loan comparison spreadsheet, you have to keep your new loan 93 months - almost 8 years - just to break even on the additional costs of the loan with the lower rate. Most people will never keep one loan that long in their life.



I called one of the companies advertising that 5.65% to find out about the terms of that 5.65% loan. They admitted to it costing 3 points discount and it having a pre-payment penalty, which my loan doesn't have. They didn't want to admit how much origination they were going to charge, but they're bumping up against California's Predatory Lending Law's ceiling on total costs of a loan, because a $300,000 loan with 3 points of discount has already cost over 4.25% of the base loan amount (they're allowed no more than 6% maximum), assuming that their closing costs are no more than mine. I can look at it and tell you it isn't as good as that 5.375% loan that I'm not pushing because the costs are so high that it isn't as good as a 6.25% loan for most folks.



The most common mortgage advertisements are negative amortization loan payments. These are ubiquitous. I just went looking and the first one I found (I actually had to look at two web pages, too, not just one) said "$430,000 loan for $1399 per month." It says nothing about the rate, which was about 8.25% as opposed to the low 6s of a good 30 year fixed rate loan with reasonable costs. It says nothing about the fact that if you make that payment, next month you will owe over $1550 more than you owe today. That's not what most people think of as a real payment, and every time I look at one, I'm thinking, "I really hope they're practicing bait and switch on that," because it's better for their client's financial future.



Stop yourself and ask a minute: Is the sort of loan provider who uses either of these advertisements the sort of loan provider who is likely to have good loans? To compare the real costs and virtues of one loan with another? To help you similarly weigh the costs? Do either of the loan advertisements I've talked about seem like beneficial loans that you should want, or should you be running away as fast as you can? Even if they are practicing bait and switch, that practice is bad enough when you're not talking about half a million dollars, as you are with a mortgage.



Mortgage advertisements aren't honest about rate, mortgage advertisements aren't honest about cost, and mortgage advertisements definitely aren't honest about what that company intends to actually deliver. In short, the vast majority of all mortgage advertisements aren't advertising anything that an informed consumer would even be interested in. All that most mortgage advertisements are doing is trying to get you to call with a "bigger, better deal" pitch. Why? Because a loan is a loan is a loan. There is no Ford versus Chevy versus Honda versus Toyota, and few people feel any particular need to trade their loans in every three years just because they're tired of driving that loan. There is only the type of loan, the rate, and what the costs are in order to get it. If the rate isn't better, and the costs aren't paid by the interest savings, there just any point to actually getting a new loan, is there? And if you don't get a new loan, lenders and their loan officers don't get paid. But if they make it look like they're offering something better (even if they are not) you might get them paid.



Low rate, by itself, means nothing, as I have demonstrated. Rate and cost are ALWAYS a tradeoff. Every lender in every loan market has a range of available trade-offs for every loan type they offer. You're not going to get the lowest rate for anything like the lowest cost. For the vast majority of people out there, they will never recover the additional costs of high cost loans before they need to sell or decide to refinance. This is real money! If you had invested thousands of dollars with an investment firm, and upon every occasion you did so, you had failed to get back as much money as you gave them, pretty soon you would stop investing with that firm, right? Nobody brags that their investment got them a negative 20 percent return over a five year period. Why in the nine billion names of god would you want to invest in such a loan?



Nonetheless, the financial rapists continue the same old advertisements. They continue these fairy tales, and increase their next ad buy, because these advertisements work. The suckers will call in droves - or sign up on the internet, which is even worse than the same thing. If you merely call, only one company gets your phone number. If you sign up on the internet, you're going to be inundated by dozens, if not hundreds of companies, calling, mailing, and e-mailing, then selling your information when you tell them not to bother you any more. All of this makes advertising these abominations quite lucrative.



Nonetheless, now that you've read this article, you know better. You're going to understand some of what isn't being said in the advertisement, and if you do decide to respond, you're going to go in with your eyes open rather than naively believing something that might as well begin, "Once Upon A Time..." If there's one thing I can guarantee about the loan business, it's that those who go into a situation believing such stories do not end up living "Happily Ever After."



Caveat Emptor

article UPDATED here

my question today is about what happens to the prepayment penalty if the loan is sold to someone else? A friend of mine told me that he called and was told there was no prepayment penalty with the new lender but I'm skeptical. Why would the terms of the loan change just because someone else is servicing it?

They wouldn't, unless the state your friend lives in has an unusual law.

Your friend hasn't paid off the loan. Therefore, there will be no pre-payment penalty assessed simply because the original lender sold off the rights to receive the payments.

On the other hand, just because the right to receive payments has been sold does not invalidate or alter the terms of the contract, among which is the pre-payment penalty clause. If your friend does something which would have caused the penalty to be assessed with the original lender, it will still be due to the replacement lender.

The fact that a loan has been sold does not cause the penalty to be assessed. Otherwise, people would be assessed a penalty for something under control of the bank, not themselves. On the other hand, it doesn't let you off the hook of penalty clause you agree to, either.

Caveat Emptor

Article UPDATED here