Mortgages: June 2018 Archives

One of the things that is really helping military families afford good properties is the military housing allowance and the way that lenders treat it, making it much easier for them to qualify with regards to debt to income ratio, while the magic bullet of VA loans makes loan to value ratio essentially a non-issue. Between these benefits, the military is sitting pretty for being able to afford housing.

I should mention that this math helps non-military getting a housing allowance just as much, but there are relatively few people outside of the military receiving a housing allowance.

Receiving a housing allowance actually works out far more advantageously for purposes of loan qualification than if they just paid them the extra money. $X basic salary plus $Y housing allowance is demonstrably more money than a salary of $X+Y as far as qualifying for a real estate loan goes. Here's how it works.

To start with, the housing allowance is generally non-taxable. I'm sure you know that's not the case with your basic salary. The $Y extra you get in allowance really is $Y, not the much lesser amount that you would get to keep if paid that in salary.

On top of that, the housing allowance is "soaked off" against the expenses of housing on a dollar for dollar basis. In other words, compute your cost of housing - principal and interest on the loan, taxes, insurance, Homeowner's Association dues, Mello-Roos, etcetera. Add them all up. From this, subtract housing allowance. If the housing allowance is more than actual cost of housing, we're all done. You made it, at least on the basis of debt to income ratio. If the costs are more than the allowance, all is not lost. At this point, you have to add in other debt service to whatever is left, but then so long as you are less than the normally allowed debt to income ratio as compared to your regular salary, you still qualify. Is this a great country, or what?

Here's a concrete example of how it all works: Let's say you make $3000 per month salary from the military. In addition to that, you get a $2000 housing allowance. You have other monthly debts of $250, and you want to buy a property where the monthly expenses of owning it (principal and interest on sustainable loan, taxes, and insurance, or PITI) are $2500. If you made that $5000 per month as a regular working schmoe, you would be told you aren't likely to qualify. Your "front end" ratio would be 50%, and adding the other monthly debt service makes 55%. Normal guidelines are 45% "back end" (housing plus all other debt service) for conforming loans, and you're way over that on the front end alone. Maybe in some circumstances such as disability or retirement income with a "walks on water" credit score, that might be accepted by one of the automated loan underwriting systems, but under manual underwriting rules you are dead in the water.

As the beneficiary of that housing allowance, however, things are quite different. The $2000 housing allowance draws off housing expense dollar for dollar, not at the 45% ratio of the rest of your salary. Instead of $1 enabling you to have forty-five cents of housing expense, it enables your to have $1. So subtract $2000 housing allowance from $2500 housing expense, and you have $500 left over.

If housing allowance was $2500 against that $2500 housing expense, or to use the general case, if housing expense was less than or equal to housing allowance, we'd be done, at least on the grounds of debt to income ratio. We're not done yet in this case, but the remaining $500 of housing expense plus $250 of other debt service equals $750, which divided by $3000 regular income yields a 25% back end ratio. Since this is less than 45%, bing! Debt to Income ratio works - by which I mean that you are over the most important hurdle in loan qualification.

So there you have an example where somebody making exactly the same number of dollars does not qualify where someone getting part of their salary via a housing allowance does. Since the military is pretty much the only folks that get paid that way (I can't remember the last time I had anyone not in the military with a housing allowance), advantage: military.

A couple of caveats need to be mentioned and emphasized right now. As should be obvious to the mathematically inclined, Comparatively small amounts of difference make much larger differences to debt to income ratio. Change the PITI payment to $3000, and your debt to income ratio stands at 40 percent, getting close to the ultimate edge of qualification.

You should also be careful that you really can make the payment on the loan. Foreclosure is no fun, as millions can attest right now. Make certain you really can make the payment, considering your family's lifestyle and other bills that may not be monthly debt but would be difficult to eliminate. I have written multiple times warning Never Choose A Loan (or a Property) Based Upon Payment.

Because I am normally careful to quote in terms of purchase price and loan amount and interest rate, I want to say why I did it this way, quoting in terms of payment, in this case. It's a complex subject, and the math gets hairy very quickly, and varies constantly and from market to market and time to time as interest rates and home prices change. Judging by my traffic, people are going to be reading this article months from now, if not years. I wanted a concrete, easily understood example of the subject that's not going to be completely out of line six months from now when the rates have changed and some housing markets are recovering strongly while others are in the process of crashing.

I also should observe that companies looking to help their employees while conserving costs can do this every bit as much as the military does by carving off a portion of the salary and paying it in the form of housing allowance - but in order to do that, they'd have to admit these people were employees. Pay the social security taxes lots of companies are manipulating the law to avoid, give them all the rights contractors don't have in employment. Of course, the reason why that happens is due to government action. Every time the legislature or some judge adds another cost to having employees or makes it more difficult to terminate those who need to be terminated, they give corporations another reason to avoid hiring them in the first place.

Caveat Emptor

Original article 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. Or at least most of it.

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 (or was when this was originally written in mid 2006, and 100% financing will almost certainly be back), albeit as a 100% loan to value transaction instead of a 95% one, which means it will be priced as a riskier loan 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 as far as loan to value ratio goes).

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 loan to value ratio.

Once an appraisal happens, 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 appraisal 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, in which case you're better off walking away.

What can you do about a low appraisal? Your options reduce to four: You can come up with more cash than you initially planned. This option is not available to most purchasers, but it is there. You can renegotiate the purchase price. Not too long ago, when the quality of appraisals was better and more controllable, this was a very good option, but right now with Home Valuation Code of Conduct, a low appraisal means a lot less than it used to regarding leverage to renegotiate price. You can begin the process again with a new lender, hoping the new appraisal comes in higher - assuming the seller will wait. Or you can walk away and look for a different property.

Caveat Emptor

Original here

A while ago, I wrote Sourcing and Seasoning of Funds. You'd think I have a set spiel I give out, and I do. But I had a case where I didn't think I'd need it, and it burned me. Nice clean loan, plenty of down payment all sourced and seasoned, and then almost $100,000 appears in the account on the last statement as I'm getting ready to close it. Instant can of worms - Oops.

Any time money mysteriously appears, the mortgage loan underwriter is going to take an interest. I don't need all your financial statements, I just need enough to get the loan approved. But don't go dumping large amounts of money into the account, just like you shouldn't go apply for a non-mortgage loan while a mortgage loan is in process.

These two items are related because whenever a large amount of money appears, the underwriter's presumption is that you got another loan. Whereas there is nothing inherently wrong with doing so, when you get a loan, you're going to have to make payments. Those payments affect your debt to income ratio, the most important measure by which you qualify for a loan. The underwriter is going to want to know what the terms of that loan are, how much the payments are going to be, whether those payments are fixed or variable, and all of the other things that help them determine whether you qualify for this new loan even with making the payments for that other loan.

So when a large amount of money appears, the underwriter wants to see sourcing and seasoning of those funds. They want to know where the money came from and how you got it and how long you've had it. If it was a gift, they want to know how the person who gave it to you got it, and they want evidence that no repayment is expected. If you can't provide this information, the presumption is going to be that you got a personal loan of some sort. Obviously, if it's a loan, you're going to have to make payments. The payments are going to add to your monthly debt service, which adds to your monthly cost of housing to determine your debt to income ratio. Every dollar you add to monthly cost of housing or debt to income ratio is a dollar that might mean you don't qualify for the loan on your new property.

It's a horrible lie about people from Missouri, but think of underwriters as Missouri accountants. If you want them to believe anything but the worst possible interpretation of a given fact, they want you to show them on paper. That's their favorite phrase: "Show me on paper." It doesn't matter how much down payment you have, it doesn't matter how much equity in case of default. Lenders are not in the business of repossessing property; they are in the business of making loans that are going to be repaid. Especially in the current environment, they don't want to take any risks that your property is going to be one more property in their already too high inventory of lender owned properties.

When you move money from one account to another, you need to show that it has been in the previous account for a while, or where you got it from. You're going to need a paper trail back just as far as all of your other funds on this new money. If you got it from selling your previous property, the underwriters are going to want to see the HUD 1 form from that transaction. If it's a gift, they want a signed letter attesting to this fact from the donor, as well as a source of that money. If you got it from selling something else, the underwriter is quite likely going to ask for copies of the bill of sale. If you're going to be buying property in the near future (or refinancing), keep all the paperwork from anything you sell. And for crying out loud, before you move any large amounts of money around, talk to your loan officer about what you're going to need in order not to kill your loan. Even if you've got all the paperwork, it can make the difference between an easy, straightforward loan, and one where the underwriter takes it into his head that there's something funny going on. You really don't want them to do that, because when it does happen, they can start demanding more and more information, imposing more and more conditions to approving your loan, and in general, delaying your transaction and making the completion of it difficult. Every time one of their loans goes south, an underwriter is potentially in danger of losing their job - so when they think something may be not quite right, they are going to protect their job by requiring all of the information they can think of that might show something isn't quite copacetic. If they should find something specific they can point to, your loan will be declined, and your credit file could very well get an 'attempted fraud' tag. You don't want that, as it can lead to your loan being rejected not just at that lender, but everywhere. So you need to be very careful, and very clean, about moving money around, especially so within six months of applying for a mortgage.

My loan? The client had the paperwork necessary to satisfy the underwriter. Loan funded, he's living there today. But not everyone has that level of paperwork. Better not to raise the flag in the first place by showing the underwriter the statements for the money you actually intend to use for the down payment.

Caveat Emptor

Original article here

One of the things that most mortgage and real estate consumers get mixed up on is the distinction between low-balling and junk fees. Junk fees are when they add fees that really aren't necessary to what you're paying. Low-balling is when there's an essential cost (or the associated rate) that either gets underestimated or they somehow neglect to tell you about. This can also take the form of costs such as subescrow fees which happen because your representatives did not choose your service providers with your best interests in mind.

A lot of this has abated since the 2010 Good Faith Estimate became required, but there are still loopholes that unethical people can drive a truck through.

As I said in Mortgage Closing Costs: What is Real and What is Junk?, "The easy, general rule is that legitimate expenses all have easily understood explanations in plain English, they are all for specific services, and if they are performed by third parties, there are associated invoices or receipts that you can see." In my experience, the vast majority of what extra fees that appear on the HUD 1 despite not being on the earlier forms are not the result of junk fees being added for no good reason, but are the result of real fees that your agent or loan provider knew were going to need to get paid, should have known the amount, and chose not to tell you about them or chose to tell you they would be less than they are. In short, low-balling is a much worse problem in the industry than junk fees. I've had people tell me my closing costs seemed high, because despite the fact that I have negotiated for discounts from providers, other loan providers were quoting significantly lower costs. What's going on is not that my costs are high - in fact they're pretty darned low when you compare the fees clients actually end up paying - but the fact that a large proportion of my competitors will pretend that a large percentage of those costs aren't going to happen. The penalties for this, in case you weren't aware, are pretty much non-existent. It's harder now to cross the is and dot the ts of increasing what was quoted on the Good Faith Estimate, but the real crooks have the entire process honed to a science.

The reason they do is is to make it appear for the moment as if their loan is more competitive than it is. What happens is that because it appears that their loan is cheaper for the same rate, people will sign up for their loan. They then invest the six to eight weeks necessary to fund that loan working with that loan provider. By the time they discover the real costs and the rate of that other loan are going to be much higher than they were initially quoted, there's no time to go back and get another loan - and that's if the people notice, and industry statistics say that over half of the people do not realize even massive discrepancies between the initial quote and eventual loan delivered.

This is why most loan providers don't want to tell you what your loan is really going to cost. It isn't that the extra is junk or in any way unnecessary. It's that they want their loan to appear more competitive that it may really be. All of the incentives are lined up in favor of this behavior - they got you to sign up, didn't they? - and there is no penalty in law. Of those people who do notice discrepancies, eight to nine out of ten will give in and sign anyway. For the unethical, their experience is that 90 to 95% of the people who sign up because of their false quote will consummate the loan and they will make money - and they make so much per funded loan that they're doing ten times better than the ethical people who practice full disclosure. That the ethical people are almost certainly going to end up cheaper is your incentive to do what it takes to find them.

This principle applies also to many agents' "estimate from proceeds of sale" form. Despite the fact that the default purchase contract and usual custom may have the seller paying for certain items, such as a home warranty plan and an owner's policy of title insurance, many agents will leave these costs off the estimate. Unless you're selling a fixer in utterly "as is" condition, you're going to end up paying for a home warranty plan. Unless the buyer's agent utterly hoses them, leaving that agent completely open to lawsuits, you're going to pay for an owner's policy of title insurance. Unwillingness to do so is a universal deal killer unless the buyers are getting a price more than good enough to make it worth their while to pay for it themselves. Even if they've deliberately chosen escrow and title providers such that you're going to pay subescrow costs, they'll likely leave those costs off their estimates. Why? To make it seem like you're getting a better deal from them than you actually are.

I've seen more than a few people who signed up with other agents or loan providers based upon ridiculous low-balls (and over-estimates of sale price). Without exception, these people end up paying every single one of those loan costs. It's not like the people who do the work are going say, "Oh well, it's not like we want to get paid for all this work we did." In the case of sales transactions, that's if it sells - and it's very unlikely to sell at all if it's overpriced. Nonetheless, this gives the person who gives the great line of patter - a supposedly "bigger better deal" - a large advantage in getting people to sign up with them. By the time the clients learn the truth, it's too late. Most people don't want to do the research up front to find out what's really going on. They wait until after they've already been hosed to do the research they needed to do in the first place.

Caveat Emptor

Original article here