Mortgages: December 2018 Archives

Can I qualify for first time home buyer financing if I buy a duplex and live in one and rent out the other?

I thought if I bought a duplex, lived in one side and rented out the other would be a good idea to help pay the mortgage. I would live there for a couple years then move and rent the entire duplex as an investment property

It would be very popular to answer "yes".

However, the fact is that the only nationwide first time buyer program in existence, the Mortgage Credit Certificate, explicitly disallows all multiple unit property from participating.

Furthermore, I've dealt with the federally funded local first time buyer programs throughout southern California (in excess of forty different municipalities). In every single case I'm familiar with, it's a requirement that it be a single family residence. Just like the MCC, no duplexes, no apartment buildings, no "2 on 1" properties. Condos, townhomes, and PUDs are fine, but nothing intended for more than one family to live in.

People sometimes get confused because of the way residential property is defined (1-4 units), but just because something qualifies as residential property doesn't mean it is eligible for a first time buyer program.

Finally, for every first time buyer program I'm aware of, the government assistance goes away (as with the MCC), or worse, becomes immediately due should you move out. For example, in one San Diego suburb they have a very nice "silent second" program. It means you only have to actually pay the mortgage on a potentially much smaller amount, usually wiping out a need for PMI or a conventional second mortgage, while the city's second accrues at a very low rate. But if you move out, they'll call the loan, which means you've got thirty days to get them their money somehow before they foreclose.

(They also flatly refuse to subordinate, meaning you're not going to be able to refinance without paying them off, so you'd better choose a fixed rate loan that you can really afford for your primary mortgage in the first place)

There may be municipalities somewhere where this is permitted under their local programs, but I've never heard of one, and I do suspect it's prohibited in the legislation and regulations for the federal administration that funds these local programs. The First Time Buyer programs are intended to stabilize neighborhoods, and make it a little easier for people to be able to afford to buy housing they intend to live in. They are not intended to help you build a real estate empire - as a matter of fact, that's somewhat counter to their purpose.

First time buyer programs are also never free of strings. If you intend on taking advantage of these programs, it would behoove you to make certain you understand what those strings are, as well as all of the implications, before you've got a purchase contract. Some of the strings on first time buyer programs are real deal-killers. For example, a city about a half hour's drive from my office has one that looks really nice at first glance, but restricts both who you sell to and what you can sell for, eviscerating the economic benefits of ownership and making you essentially a renter who also pays maintenance and property taxes. Unless you're just going to live there forever, which may not be under your control, that's not a desirable situation. Probably better to buy in the city next door to that one, which has a more useful for your financial future "silent second" program much like the one described above. You need to be careful with first time buyer's programs, lest you end up in a situation that does not justify your expenditures with future benefits.

Caveat Emptor

Original article here

This article started with another one of those desperate consumer fishing calls a while ago. Loan standards have tightened since then (In my considered opinion, over-tightened and the lenders and Wall Street will figure it out within a couple years). Stated Income is no longer available, and as much as I dislike stated income loans, there is a group of people for whom they are the right choice. Negative amortization (aka "Option ARM" "Pick a Pay" and many other friendly sounding names) is no longer available, and that's 99.999% a very good thing, but there was a tiny niche of people who had a legitimate use for them.

This particular phone call began with her saying said she had to have an Option ARM. I told her I had them available to me (then), but...

She interrupted me to say she had to have it Stated Income, or if necessary, no documentation. Yes, I told her, even those are still available (they were at the time), but...

She interrupted me again, wanting to know if they were no points and no prepayment penalty. I said that while I hadn't done a loan with a prepayment penalty in years, Option ARMS without prepayment penalties don't exist. She then said, "We've come to the end of the conversation," and hung up.

Obviously, she's been burned by someone. Just as obviously, someone else gave her a shopping checklist for a loan, or she made it up herself. She wants it all, she's not going to settle until she gets it, and she's not going to let some horrible awful salesperson lead her astray like last time. In fact, she's so determined on this point that she's not going to let anyone try to save her, either.

As regular readers have no doubt figured out by now, here's her history. She didn't tell me this, but It doesn't take much if you understand the way the market went during the relevant time period.

She either bought a property more expensive than she could really afford, or refinanced a property she already owned for cash out, and could not afford a real loan now. Not understanding that minimum payment is not the same thing as the cost of the money, and that you should Never Choose A Loan (or a House) Based Upon Payment, she signed upon the dotted line, not really understanding anything that was going on except that she wanted that house, or that cash.

Along she went, happy as a clam, until she got smacked upside the head with the real cost of money, aka the interest rate she was paying. Gravity never quits, and compound interest working against you is even worse than that.

And here's where it gets really sad. Instead of figuring out her mistake, or cutting her losses, she is determined to repeat the mistake and make it worse. So determined that she's not going to let anyone stop the process before it gets even worse than it is today, however bad that is. She didn't mention anything about loan to value ratio, but I'll bet it was higher than the 80% that's the most any lender would have accepted at that time for stated income (if debt to income ratio wasn't outside of any acceptable range there would have been better loans to do in the first place). What's the definition of insanity again?

The loan she wants is not going to happen. But that won't stop people from telling her that they can do it, figuring once they get an application and psychological investment, not to mention hundreds of dollars of her cash, then they come up with something else at final loan signing, chances are that she'll sign it and they'll get paid. I went over this in The Doctrine of Delaying The Moment Of Truth. The loan they'll get her probably won't be as bad as what she wants, but it's unlikely to do her any good. She owes what she owes. If she could afford the loan, she wouldn't need stated income or negative amortization, and she probably wouldn't have needed them in the first place.

Furthermore, she's shopping her loan from a checklist of things somebody told her were good or bad, completely ignorant of the fact that she can't have them all. There's a reason I tell people they need to ask all the questions on this list from a prospective loan provider. It's not a simple matter of shopping your loan until you get everything on a shopping list. Some things do not go together at all, like negative amortization loans without a prepayment penalty. In all cases, there are tradeoffs between A and B, C and D. You decide which you want more, or which you don't want more, or, in the case of points and cost vs. rate, where on the spectrum of the tradeoff between rate and cost you want to be. Some providers may give you a better set of tradeoffs than others, but those tradeoffs still exist, and pretending they don't is a good way to end up with a putrid loan. Somebody will tell you about a loan that doesn't exist in order to get you to sign up with them.

Before you can ask the questions, however, you've got to let a professional have a reasonable chance at figuring out the best loan for your situation. In order to do that, you've got tell them enough information so they know what your situation is. After I propose a solution, then you can ask those questions and give me the third degree, and if you're smart, you're going to shop it around until you get a couple or three different opinions, and cross check the information each provides against the other. You might still get conned, especially if you don't make the effort of comparing and cross-checking answers. But as I went over in The Ultimate Consumer Horror Story, if you won't talk to sales persons, as in real conversations, I can pretty much guarantee you're coming away with your own private version of the Nightmare (mortgage) on Elm Street.

Caveat Emptor

Original article here

One of a long series of emails about this horrid product: (identifying details redacted)

Learn How To Make More Money Per Client ($500-$1000)

In This Workshop You Will Learn Why The Most Successful Mortgage & Real Estate Professionals Across The Country Partnering With DELETED?

To Maximize their Income

To Gain and instill Loyalty with current and past clientele

To Exponentially amplify their business success

A Win/Win decision that will impact your business and your client's lives

Because the Demand for Mortgage Protection Insurance is exploding across the country

You notice how "helping your clients" is nowhere on the list of benefits?

Here's another ad of theirs I found online, in the help wanted section:

DELETED is now looking for former Account Executives of Direct Mortgage Lenders, former Account Executives for Title companies & Current Life insurance salespeople that are licensed. DELETED Insurance is offering a new way for Mortgage companies to add an additional revenue stream to their company. We are offering Mortgage protection to them to sell to their clients. You will be responsible of managing your pipeline and territory management. This position is 100% commission. We offer the highest commission splits in the business. First year earning potential can be a 6 figure income. There is also opportunity for you to become an area sales manager in your area. If you are familiar with Mortgage protection insurance or Mortgages, you will know why mortgage professionals will say yes to this product.

Notice how they say they'll take currently licensed people, but those are not the candidates they're really looking for? There's a reason for that. People who have been around the insurance business know about this market sector's history of abuse, and how it always seems to be the sales people who take the fall when the regulators shut it down, while the higher ups walk because they "have it right here in writing that we told those people what they were doing was illegal," while winking at anything that brings in more sales, if not actually encouraging it - just not in writing.

and one more ad,

I am offering Mortgage companies to sell mortgage protection insurance.

Here now simple it is to sell.

1. get your lifie insurance license (sic)
2. sell to past and exsisting clients (sic)
3. Earn 80% of the total commission
4. wrap the first year premium into the loan (emphasis mine)
5. Never have to meet the client
6. everything is done at the time of close
7. Recieve check 72 hours after closing (sic)

average commission is $650

Look forward to speaking with you on this.

At purchase, you can't really put the premium into the mortgage. The only way to do so is fraud. You're either paying for it in cash, or you're paying for it by effectively decreasing your down payment. You cannot do it in conjunction with 100% financing, unless the seller is paying, and I wouldn't want my clients doing so. At refinance, it's at least a possibility. But does a sane financial planner want you increasing your mortgage by about $1000, paying interest on it and possibly kicking the loan over into the next higher Loan to Value category (thereby effectively raising the rate on the whole loan) so that you can purchase the most awful policy of life insurance going? Additionally, many states have rules on buying insurance with borrowed money, and agents knowingly accepting such. California is one of these. This entire pitch element would appear soliciting someone to break the law, perhaps in multiple particulars. Experienced agents know this - newly licensed ones may not.

In order to understand what's going on with this product, you have to understand what Mortgage Protection Insurance is and what it is not. First, what it is not: It is not Private Mortgage Insurance (PMI). Private Mortgage Insurance is an insurance policy that insures the lender against loss, which you pay for as long as you require it. Private Mortgage Insurance can be a required item in getting a certain loan, and as much as I detest it, for loans above 90% of the value of the property, it's the only real alternative as of this writing, for reasons I go into in this article.

Mortgage Protection Insurance is a decreasing term life insurance policy, which is supposed to pay the lender off directly in the event of your demise. It is not required by any lender. If lenders were going to require some sort of actual insurance policy, they'd require disability insurance, which is needed three times more often than life insurance, with worse longer term consequences for loan viability. Lenders do not waive requirements or fees for Impound Accounts because you buy Mortgage Protection Insurance. As I said, disability is a far more common cause of lender losses than life insurance. But I got email from someone in California who was told that by a loan officer who wanted to sell Mortgage Protection Insurance (FYI, in California it is a prohibited practice to require an Impound Account, or to charge a higher fee for not having one. Yes, this means that we all pay for it with a slightly higher rate/cost tradeoff. But we all have to live within the law, and my point is that purchasing Mortgage Protection Insurance makes no difference to the impound account, despite what this person was told).

This is a very lucrative field as far as making money goes, as you can see not only from the advertisements above but also a on-line search. The ability of practitioners and sales persons to make money is not an indication that a product is bad, but it is a sign of potential abuse. Any time you have the potential for a lot of money by cutting not very many corners, it's a warning sign that says in no uncertain terms to be careful.

The first real objection I have to this product is that decreasing term life insurance is probably the worst life insurance policy that it's possible to buy, and I'm telling you this from the point of view of someone who wants life insurance and can't get it on any kind of reasonable terms (This is not an invitation to a solicitation. I tried very hard to get life insurance on reasonable terms when I was licensed, because I understand what a good investment it can be). First off, it's term life insurance, with all the issues inherent in term insurance: rising cost of insurance, no use of tax advantages, likelihood of voluntary cancellation, likelihood of wasting every single penny you pay. Now add the fact that as your overall cost of insurance goes up, your coverage goes down. It doesn't take any kind of genius to tell you that increasing revenue for decreasing liability is an insurance company's dream scenario, while not being nearly so wonderful from the consumer's point of view. At some point before the insurance company's risk of (decreasing!) payout becomes significant, actuarially speaking, the vast majority of consumers simply cancel. Their premium tables are calculated to encourage this.

Next to consider, we have health considerations. Entropy hits us all. More and more health conditions start happening as we get older. It's scary to think about, but right now is probably the best health you will be in for the remainder of your life, and you're buying a policy of life insurance where the benefits decrease in absolute terms when most people need them to at least stay constant, if not increase. Inflation isn't going to stop because you bought a policy of life insurance. Thirty years ago, $25,000 was a fairly serious policy. These days, most companies don't sell amounts that small, and the ones that do, charge much higher rates for such small policies. The more you understand about financial planning, the more you understand that your ability to profit from life insurance is likely to increase as you age, not decrease. But when you go to buy more later, because you've finally figured all this out, you find out (as I did) that now you've got health conditions that either disqualify you, or raise your rates outrageously. And you want to buy decreasing term insurance?

There are also estate tax considerations. The Congress of 2001 understood the need for estate tax reform, but in order to get the votes to pass it, the advocates had to accept a sunset date of December 31, 2010, after which time everything went back to the way it was prior to the reform. The people who passed that legislation knew that Congress was going to have to revisit the issue before it expired. However, the Democratic controlled Congress of 2010 had to be bullied (by 60+ of them losing their jobs!) into allowing another temporary fix at the last moment. As I've said, I'd rather have AMT reform because estate tax is essentially voluntary, but most people seem to volunteer to pay estate tax, which is and remains the highest rate taxation in the country, and it has crushing implications. The value of a life insurance policy, unless you've done the work necessary to avoid volunteering for estate tax, is part of your taxable estate. In this case, your family will owe taxes on on it, and the lowest bracket is almost forty percent, just on the federal level. Lots of folks assumed that estate tax was going to be going away, as that was the obvious signal sent by the Congress back then, but that's looking less and less likely given the current Administration. Maybe it's just me, but I don't see any advantage to paying off the mortgage only to have my heirs forced to visit a loan shark in order to pay the taxes.

But the ultimate killer objection to this product is the fact that it's just plain a bad idea to take life insurance proceeds (that can be completely tax free if you take the proper steps) and pay them to anyone except your chosen beneficiary. I've gone over this before, in Mortgage Life and Disability Insurance. What your heirs can do with such money, prudently invested, completely shatters any consideration of taking the money and paying off the mortgage, which your heirs can nonetheless decide to do with any policy. Why in the world would you want to take that decision out of their hands with a policy that dedicates the benefit if you should die to that lender? You buy life insurance to benefit your family, not your mortgage lender! Even if you understand nothing about leverage and how it works, this just isn't good financial planning!

So if anyone tries to sell you this product, just say, "no thank you!" and indicate in no uncertain terms that you will not be purchasing this product, and if it's a requirement to get the loan done, you're going to go elsewhere to get your loan. I'm not saying life insurance isn't a good thing - in fact, I'm saying the exact opposite - but you don't want to buy this particular sub-species of policy. Go get a real policy that will actually benefit your family if the circumstances where it is needed arise.

Caveat Emptor

Original article here

"What do I do when the loan falls through"

If you're unable to refinance your balloon in time, lenders whom you ask for forbearance will generally will give you at least some time in extension of the old loan, but at a much higher interest rate. This is very kind of the lenders because they don't have to give you an extra minute under any terms. The agreement ran out last week and you didn't pay them; they are entitled to foreclose if they want to. Good thing that the lender usually doesn't want to.

If you're doing a purchase, loans are taking 45 to 60 days now. Or more. That's just a fact of life. The agent who writes a purchase contract for less than 60 days in escrow is not your friend if there is a loan involved.

However, I also need to say that if purchase money loans fall apart, it's a real good idea to re-confirm that you can afford this with some independent expert. It's not a red flag, precisely, but it is definitely a yellow caution signal. Ask "Why did the loan fall through?" Make certain it isn't something to do with basic affordability or needing cash you don't have. Loans do fall through for stupid reasons (I had a loan I had to move from one lender to another not too long ago because they first lender wouldn't give them the usual credit for 3/4 of the rent because the tenant in their rental property had paid the deposit in cash despite the tenant having been there for nearly a year, showing rental checks, etc, and without that rental income, my client's other income fell short of qualification). Loans also fall through because the basic checks show you cannot afford the property. Loan qualification is there for your protection as well as the lender's

However, loan providers will generally not admit that loans fell apart before the last minute, even if they were rejected out of hand back on day three. Actually, that's a trick they pull quite often; tell you about loan A intending to deliver loan B, and then at the last minute tell you that you don't qualify for A but you can have B. This keeps you from having time to shop around after you discover what a rotten loan they really have for you. They knew about what loan you would and would not qualify for within a week unless they are hopelessly incompetent, but their advantage lies in keeping mum until you have no choice but to accept loan B. In another amazing coincidence, loan B usually has a long prepayment penalty, and buying it off - if you can - costs two percent on the rate, and they'd have to send it all the way back to underwriting to see in you qualify, and that will take weeks, so why don't you just sign for this loan right now. They may even say, "We'll fix it later." Yes, they will volunteer to get paid again after you've spent several thousand dollars on that prepayment penalty. I had a guy come to me quite recently, trying to fix one of those after the original company failed to do so. Unfortunately, the coals he'd been raked over, and with his credit score, there was nothing I could do and he lost the property.

So it's now day thirty-one of a thirty day escrow, you've got a $10,000 deposit on the line, as your loan contingency expired back on day eighteen. What now? I used to tell people to apply for a back up loan, but nobody can do them any more. Well, the situation isn't necessarily lost.

First, call your seller, or actually, have your agent call their agent, and find out if they'll extend escrow. If it's a hot seller's market and they won't, you're hosed, but in a buyer's market, they will if they're smart. Most sellers, even in a buyer's market, will want you to pay extension fees and that is to be expected. The reason escrows are usually limited days is so they don't have to keep spending money on you if you can't qualify, and they do spend money on the transaction. This may cost you an extra $100 per day for up to ten days, but when the alternative is losing $10,000, that's very worthwhile.

Loan providers who admit in the first week after you've given them standard qualifying information that you're not going to qualify for the loan they initially told you about are almost certainly honest, and likely thought you really would qualify. Because they could have put off telling you, but didn't, I would bet serious money they're honest, and it's worth giving them another shot. But the longer it goes, the less likely it is they intended to deliver the original loan. I might believe someone like that in the second week - but I wouldn't believe that story from anyone in the third week after applying, even if they were backed up by affidavits from everyone from Diogenes to George Washington.

Loans fall apart all the time. Locally, the percentage of purchase escrows that fall apart because the buyer cannot in fact qualify for the necessary financing is around forty percent. So take precautions to make certain that situation does not happen to you.

Caveat Emptor

Original here+

The answer is "Yes." You don't have to lose your home in bankruptcy. I've done loans for many clients who kept their homes through bankruptcy. But they kept their mortgage payments current, or close enough to current.

The condition that causes you to lose your property is called foreclosure. The specifics vary from state to state, but here in California, the lender has the option of marking you in default when you are 120 days in arrears on your mortgage.

Default causes you to lose some rights, and the lender to gain some. Since properties can go into arrears literally for years before they go into default, this seems appropriate. You could theoretically stay at 90 days behind throughout the whole term of your mortgage (except the first 90 days), and the lender can't really do too much about it except hit your credit. Please, don't try this at home. This is for purposes of hyperbolic illustration only. It really does kill your credit rating. Refinancing (or getting another loan after you sell) will be extremely difficult, and the rates will be sky high if you can get it.

But at the point you enter into default, your lender can require that you bring the loan completely current in order to get them to rescind the default. A Notice of Default, or NOD, is a matter of public record, and if one is recorded against your property, you can count on getting hundreds of solicitations from bankruptcy attorneys, hard money lenders, real estate agents, and just plain sharks. Additionally, the lender is going to hit you with thousands of dollars in fees when they put you into default. These go into what you owe.

Here in California, if you don't bring the loan current within sixty days, the lender has the option of dropping a Notice of Trustee's Sale on you. This publicly recorded document basically says "Bring it current now, or we're going to sell it at auction." Actually, at this point they can require you to pay them off in entirety to make them go away, and I don't know anyone except hard money lenders that will refinance you out of default. They can do this because you signed a Deed of Trust when you got the loan. Things are different in states that still use the mortgage system - there, the lenders have to go through the courts, which you're also going to end up paying for if you're in one of those states. The Notice of Trustee's Sale will tell the owner to be out at least five days prior to the auction. You also lose the legal right to redeem the loan at that point, although most lenders will keep working with you until the gavel falls. There must be a minimum of 17 days between Notice of Trustee's Sale and the actual auction. This is the actual act of foreclosure.

Bankruptcy is a different process entirely, and has to do with solvency, the ability to make required contractual payments on all of your debts. Within limits, you can choose to enter or not enter bankruptcy, and which creditors are and are not included in the bankruptcy. It's usually better not to include everything in the bankruptcy, because post bankruptcy credit history is critical re-establishing your credit. No matter what else, if you can stay current on the loan against your personal residence, that has more rights of preservation against other creditors than anything else (usually). Please consult an attorney in your state - there may be differences in the rules, or you may fall into one of the exceptions, and there are all kinds of relevant details I'm not going into here.

If you can hang onto your personal residence, and keep the loan current through bankruptcy, you not only (usually) get to keep your property, but you have a ready made mechanism to rebuild your credit. Those monthly payments you keep making to your mortgage lender? They count for credit re-establishment. In fact, if you have zero balance credit cards or revolving lines of credit, you can often choose not to include them in the bankruptcy, get to keep them, and all that nice jazz having to do with duration of credit, etcetera. You might want to read my article Credit Reports: What They Are and How They Work for more.

Foreclosure and bankruptcy are two different issues that often go together - but not necessarily. The law gives consumers a lot of protections on their primary residence, even through bankruptcy, but if you go into default on your mortgage, it's very hard to keep your home if you're in bankruptcy also.

I have seen people fresh out of Chapter 7 bankruptcy qualify for an A paper loan. It's unusual, but it does happen. What usually causes it to happen is that they have one or two lines of credit, often business related, and they file bankruptcy promptly, rather than spending months getting their credit dinged because they're in denial, and they keep everything else current. It's uncommon that someone who keeps their mortgage payments current will even have the home encumbered further during bankruptcy due to the difference between secured creditors (ones with a specific asset pledged as collateral) versus unsecured creditors (ones where the loan is not secured by any specific asset). Compromising the interests of secured creditors is something the law is reluctant to do.

But if you keep your mortgage payments current, whatever else happens, frequently you will emerge from bankruptcy with your property. The issue that most people are having right now is that their home loan, which is a secured loan with the property as collateral, is what is more expensive than they can afford. That's the exact opposite of the case I'm describing here, where the home loan is affordable but there's something else that's causing the basic problem of financial insolvency.

Be advised: I'm not a lawyer in any state. Consult one for all the gory details, especially for how they apply to you.

Caveat Emptor

Original article here

The question that inspired this was

can a mortgage company use the flood insurance claim money towards homeowners mortgage loans?

This is equally applicable to every other form of insurance on your home - earthquake, regular homeowner's insurance, and any others that you may have or require.

The short answer is yes.

The reason that the lender requires being added to every policy of insurance you have on your home is so they have a claim on the policy proceeds. Let's say you buy a $500,000 home for nothing down, and the value of the structure is $150,000 while the value of the land is $350,000. Let's say the house burns down next week. If they weren't on there as beneficiary, you could theoretically take that check for $150,000 and head off to Tahiti, leaving them with a $500,000 loan that they're maybe going to net $270,000 for by selling the property that secured it - after all the time for foreclosure, et al, which means they're out all those costs plus thousands of dollars in interest. If you're a lender, you're going to suffer this loss once at most before you decide not to trust anybody.

This is also a reason to keep your insurance updated, to the full value of what it's going to take to replace your property. It's a bummer to own a $500,000 house that burns down, and you're only insured for the $150,000 you owe the lender. Insurance is not a "Get out of trouble free" card. If you're not paying the insurance company for a policy large enough to cover a loss of the item, don't be surprised or angry when what they pay you doesn't replace it. In this case, you told them it would only take $150,000 to replace the asset, and that's how much coverage they sold you. They're not to blame if that's not enough.

On the other hand, the lender doesn't want the property or a partial repayment. They want the loan repaid in full. What they're going to do is sit on any funds they get and make certain they're used to rebuild, unless they have some reason to believe that rebuilding is a bad risk. Banks don't throw good money after bad, so if this is the case, they're going to keep the money. On the other hand, if you've been keeping your payments up, they're going to want you to rebuild. Their taking custody of the money is a way to make certain that you do, too.

Caveat Emptor

Original here

do mortgage companies usually seek a deficiency judgment on home foreclosures

Depends upon whether it is a recourse loan or not. A recourse loan is one where the lender can come after you for any excess amount of money you owe. Whether a loan is recourse or non-recourse varies with the state you are in, whether it was a purchase money loan or a refinance, and always, what it says in the Note.

For a non-recourse loan, that's it. If something happens and the property does not fetch enough money at sale to pay the lender off, that lender is out of luck whether they want to be or not. These are often used in reverse 1031 exchanges, where the accommodator is going to hold title to the property for a while but is usually unwilling to shoulder the risk that the lender may be able to come after them for a deficiency. Due to the fact that the lender cannot come after the borrower for the difference, these are riskier loans and therefore carry a higher rate-cost trade-off than recourse loans. This is nothing more than any rational person would expect.

The law is different everywhere, but I don't think have never seen a cash out refinance that was not a recourse loan. In short, take the money now, but if you don't pay it back, they are going to come after you in court and with a multitude of tools to get that money back.

Note that just because a loan is non-recourse does not mean that the lender will necessarily approve a short payoff. In fact, it is usually harder to get those approved because the lender knows that this is the only chance they have to get their money, whereas with a recourse loan they can attach other assets to pay for their loan. However, note that just because your loan is non-recourse doesn't mean they can't try for a deficiency judgment. If you don't show up in court, they win by default. If you did something to invalidate the non-recourse protection, such as fraud in obtaining the loan, the lender can and probably will win in court.

Finally, it is to be noted that just because a lender does have recourse and can attach other assets does not mean that they will. If you're down to $0.47 to your name, they'd have to be pretty silly to waste a lawyer's time doing so. However, just because you don't have it now doesn't mean that you will never have it. Statute of limitations also varies, but if you receive a financial windfall within the first few years, don't be surprised if the lender who you thought forgave the difference is standing right there, demanding their metaphorical pound of flesh.

Caveat Emptor

Original here

If I am buying a foreclosed home for 220k of which 200k is being financed, and the home comes back at being valued at 285k from my mortgage company, am I still required to pay PMI? If so, how in the future would I be able to eliminate it?

At purchase, the lender treats the value as being the lesser of cost (i.e. purchase price) or market (i.e. appraisal value).

So if your purchase price is $220k, that's the most the lender will consider the property to be worth at purchase. You will be required to pay PMI for any single loan amount over $176,000, or eighty percent of this. The only exception to this is the VA loan. Since second mortgage lenders don't want to loan over ninety percent of the value of the property right now, you can either come up with a couple thousand dollars more, or accept PMI.

A couple years ago the wisdom was just to refinance in a few months. Lots of luck with that in the current market. In the current market, lenders are reverting to their standards of several years ago, which is that unless you spend some major sum upgrading it, the most a lender will believe within one year of purchase is 10% - and even that is subject to an appraisal done under HVCC. Were I in your shoes, I'd plan on waiting a year, then doing whatever your state law says is necessary to remove PMI. This might be pay for an appraisal, this might be get a broker's price opinion based upon recent comps, but there have just been too many people over-evaluating property in return for some special compensation (i.e. accepting bribes to return a higher number on the value). They want to see some time to season the transaction between purchase and evaluation. Scam artists don't want to hang onto the property for a year.

Private Mortgage Insurance (PMI) is not a good thing, but it may be the only way to get the loan in the current environment, as I discuss in 100% Financing or Low Down Payment or Low Equity: PMI May Be The Only Option. 100%

You do have the option with a lot of lenders of converting to LPMI, or lender paid mortgage insurance. This folds PMI right into the basic rate of your loan, so (unlike regular PMI), it usually becomes tax deductible. On the other hand, because it's written into the basic Note rate, it has a disadvantage that unlike regular PMI, you need to actually refinance to get rid of it. Since most people spend thousands of dollars to refinance, this isn't a good bargain unless you figure the rates to go down. I don't, or at least not much. Were somebody to put a gun to my head and force me to make a bet right now, I'd bet they were going up over the next twelve months. If I were to decide to accept LPMI, I'd almost certainly want a true zero cost loan now, with the loan I'm getting for the purchase. I would accept the higher rate that comes with it, and quite likely a hybrid ARM as well instead of a thirty year fixed rate loan. The reason for this is that I'm never going to recover closing costs through lowered cost of interest in only one year. In other words, accepting LPMI means I've made up my mind to refinance in a year, or sooner if I can find a lender that will do it, and that I'm not going to willingly pay any loan costs that take longer than a year to recover. Furthermore, if I can get even a slightly lower rate by accepting a shorter term hybrid ARM, that's worth a good idea under these circumstances. As I said, If I'm accepting that I'm going to refinance in a few months, I'm going to want a loan with costs as low as I can get it, and it just isn't important to me to have a thirty year fixed rate loan in such circumstances. Makes no sense to worry about having it be fixed for the entire duration if the loan you're getting will go away in a few months regardless.

(In the zeal to scapegoat brokers and make life better for their campaign contributor major banks, Congress has passed a law that Yield Spread must legally be treated as a cost to the consumer in defiance of all accounting, mathematics, and logic. Without Yield Spread, zero cost loans and minimal cost loans cannot be done, much to the detriment of the savvy consumer. If that doesn't point you to exactly what Barney Frank's and Chris Dodd's priorities really were, there isn't much hope for you)

If I was getting a loan for the purchase where I'm paying closing costs and points to buy it down, regular PMI is the way to go. That can be removed without a full refinance. If I have to refinance in a year to remove LPMI, the vast majority of those loan costs will be wasted, because I need to refinance to get rid of LPMI, and when I do, I'm letting the lender off the hook for the rest of that loan period, and if I haven't yet recovered the closing costs, I certainly won't get any additional benefit from my current rate after I refinance!

Caveat Emptor

Original article here

I recently received an email asking about a Good Faith Estimate on a $200k loan. The person asking my opinion attached the actual "estimate" to the email. In addition to a point of origination and a point of discount and $3000 in other closing costs plus $2500 in alleged government charges separate from the $3500 in FHA's initial mortgage insurance premium, it just assumed a 6% seller credit of $12,000 which made it look like the loan wasn't going to need much more than the down payment money to close the loan. They just automatically assumed that the seller would offer that much or be willing to pay that much, because the FHA says they will permit the seller to do so.

Ladies and gentlemen, the FHA allowable limit on seller-paid closing costs may be 6%, but that doesn't mean every transaction has 6% concessions - or any at all, for that matter. I don't think I've heard about any where the seller concession was maxed out - and I have heard of a couple FHA loans recently where they was no seller concession. Keep in mind that on FHA loans there is no mandatory concession, unlike VA Loans which prohibit the veteran from paying some very real and necessary transaction costs that buyers and borrowers traditionally pay. Nor does it change the fact of how expensive the loan is. If you had a less expensive loan, it would be even less net money out of the seller's pocket.

It also makes it appear as if their loan was less costly because of lowered requirements for cash to close. People are often stupid about cash, because they understand that this is real money which they accumulated in their bank account little by little. Loan amounts, not so much - at least not until they've been paying on them for a while. This has the effect of low-balling the cash necessary to close, and the buyer possibly ending up shy on cash to close.

The loan referenced was a damned expensive loan, but by playing "let's pretend someone else is going to pay this" with the consumer and pretending that consumer weren't going to have to pay these costs, they hope to assuage consumer skepticism. But you always pay these costs. If there's a $10,000 seller concession for whatever in the cost, any well-advised seller would also take $10,000 less with no concession, as they will end up with more money in their pocket. This loan officer was pretending to give with the right hand while taking with the left - the standard lender game of making it appear as if their loan is lest costly than it is so you sign up with them and not the competition. By subtracting that 6% of the sales price off the loan cost, they are making their loan look more attractive than it really is.

Except for VA loans, I would advise people to never accept estimates or figures that assume a seller concession. Even with VA loans, you're paying for it one way or another, so I would want to know the real cost of the loan without seller concessions. After all, if the seller is going to pay $5000 more of the proceeds if he accepts my offer than if he accepts someone else's offer, he's going to want at least $5000 more in sales price in order to accept my offer over the other guy's. That is, assuming his agent has anything like a clue - and I never assume the other side is stupid or clueless until they prove it. Even if there are no competing offers, they should accept an offer of $5000 less without the $5000 in costs you're asking them to pay. I get the same amount of money to start, but then I don't have to pay for higher commissions, higher title and escrow fees, or anything else. Subtracting the amount of the needed concessions from your offer and submitting it without a demand for such is always superior to an offer that may be for the higher amount, but has more givebacks to compensate. Seller concessions cost the buyer/borrower money - it just might not leap off the page in black and white.

The higher purchase price necessitated by seller concessions in this manner has a possible consequence that may completely torpedo your loan: If the property doesn't appraise for the required amount. Something between forty and fifty percent of all purchase transactions are hitting this iceberg right now. Sometimes it can be fixed by the buyer coming up with more cash, occasionally by the seller agreeing to take less money. I haven't been hitting the issue where I'm the buyer's agent for several reasons, but it still could happen. There is also the issue of the higher purchase price causing your property taxes to be higher.

Finally, unless you have a fully negotiated purchase contract, you have no idea whether a given seller will actually be willing and able to give those concessions. Many times, the lenders in short sales will disallow them even if the purchase contract price reflects those concessions. Asking for closing costs says two things to those in the know - you don't have a lot of cash and there is a high risk the transaction won't actually close. Neither one of those is a signal you want to send to sellers or listing agent if you can help it. On lender owned properties, it can cause the lender to bypass your offer in favor of a lower offer without that request, because the one thing that costs them even more money than accepting a lower offer is accepting an offer that doesn't close. Even on "regular" sales, a competently advised seller is going to know they're risking a lot of money because of the likelihood of you not having enough cash to close.

Caveat Emptor

Original article here

Hello, I've been reading your website for awhile now, and have found it very helpful as I'm learning to navigate this crazy loan process! I had a question I was wondering if you could write about/answer.

We currently have a mortgage and a secondary line of credit on our condo (we didn't have a down payment, so we had to do it like this). We have been here one year, and the home values in our complex have gone up about $70,000 - $100,000 in that time period. (We live in Southern California.)

Recently we got a notice in the mail telling us that they can reduce our monthly payments ("by as much as $1,500!)" if we refinance with them. Frankly, it sounds way too good to be true, and I have a feeling they're not really telling us the truth in this notice. But it did raise a question in my mind: would it be wise to attempt to refinance, in the hopes that our higher valued home would allow us to refinance with only one mortgage, instead of two? I'm not even sure if that's possible...I'm having a hard time understanding how refinancing works. I should mention that we are currently in an interest-only loan, with no prepayment penalties. Our first loan is 4.75%, and our secondary line of credit is 6.375%.

Any help would be greatly appreciated.

Your feelings that they aren't telling the whole truth are justified.

Refinancing is the process of replacing one loan for another on the same piece of property. The idea is that the terms of the new loan are more advantageous to you than the terms of the existing loan. There are three main issues that you need to be aware of, however. The first is that there are always costs associated with doing the new loan. The second is that there may be a prepayment penalty to get out of the existing loan. The third is to make certain the terms you are moving to are enough better, for your purposes, than the existing terms to justify the costs associated with the first and second issues.

You state that you're in California, which is where I work. Realistic costs of doing the loan are about $3500 with everything that is necessary. This doesn't include origination, to pay the loan provider for the work they do on the loan, or discount, to pay for a rate the lender might otherwise not offer. I explain those costs, the difference between them, and many of the games lenders play in my article on Good Faith Estimate, part I. There will also be the possibility of you having to come up with some prepaid items, explained in Good Faith Estimate Part II.

Note that not every loan has points. I actually think that, given most client's refinancing habits, it's usually better to pay for a loan's cost, and the loan provider's compensation, through Yield Spread rather than out of pocket or adding it to the mortgage balance. Yield spread can be thought of as negative discount points, and discount points can be thought of as negative yield spread. Discount points are a fee charged by the lender to give you a rate lower than you would otherwise have gotten. Yield Spread is a premium paid by the lender for accepting a rate higher that you could otherwise have gotten, and can be used to pay the loan provider and/or loan costs. Each situation must be considered upon its own merits, of course, but most people don't keep loans long enough to recover the higher costs required to buy the rate down. There is always a tradeoff between rate and cost of a real estate loan

Now, let's take a look at your specific situation. Your current first mortgage is at 4.75% interest only. You don't mention what sort of loan this is (updated via email: it's a 5/1 Interest Only ARM), but there is no such thing as a thirty year fixed rate interest only loan. At most they are interest only for a certain period, usually five years, before they begin to amortize over the remaining twenty-five. On the other hand, you said you bought one year ago, and that rate didn't exist on thirty year fixed rate loans then and it doesn't exist now. (Via later email, the first mortgage is a 5/1 Interest Only ARM). Your second loan is a line of credit at 6.375. I'm also guessing that either you, or the person who sold to you, paid a good chunk of change in discount points to buy the rate down, and I'm hoping it wasn't you.

There's no way that this is a loan that's going to serve you indefinitely at that rate. When I first wrote this, there wasn't a 30 year fixed rate loan comparable to that available, with any lender I know of, no matter how many points you paid (at this update, it's trivial). So what you have is at most a hybrid ARM (Yes, 5/1 Interest Only). No worries; I love hybrid ARMs. They are the only loans I consider for my own property in most circumstances. But they do have one weakness. There is likely to come a time when it is in your best interest to refinance, because after the fixed period the rate on them adjusts every so often, based upon a stated index plus a contractual margin, and the sum of these two is likely to be significantly higher than the rate for refinancing into another hybrid ARM.

Now what are they offering you? They're talking about cutting your payment by $1500 or more. But there just aren't any rates that much lower than yours available. Nothing even vaguely close. So how are they going to cut your payment?

The only hypothesis I can come up with that is not contradicted by available evidence is that they are offering you a loan with a negative amortization payment. I explain those in these articles:

Option ARM and Pick a Pay - Negative Amortization Loans and Negative Amortization Loans - More Unfortunate Details

There is more information on marketing games with this loan type in these articles: Games Lenders Play (Part II) and Games Lenders Play (Part IV).

Finally, there are a few more issues that may not be relevant to everyone in these articles: Regulators Toughen Negative Amortization Loans? and Negative Amortization Loan Issues on Investment Property

One thing to understand is that when lenders are sending out advertising, they are not looking for Truth, Justice, and the American Way. They're looking to get paid for doing a loan, and most lenders will do anything to get you to call, and then to get you start a loan. The creative fiction on many Good Faith Estimates and Mortgage Loan Disclosure Statements is only the start of this. If you find a loan provider who will pass up loans that they could otherwise talk you into because it doesn't put you into a better situation, keep their contact information in a very safe place, because you've found a treasure more valuable than anything Indiana Jones ever discovered. A valuable treasure that you can and should nonetheless share with friends, family, and anybody you come into contact with because you want them to stay in business for the next time you need them. Most lenders and loan providers could care less if they are killing you financially - what they care about is that they get paid. A negative amortization loan pays between three and four points of yield spread. Assuming your loan is $300,000, they would be paid between $9000 and $12000 not counting any other fees they charge you for putting you into a loan where the real rate is at least 1.5 percent higher than the rate you're paying now, and month to month variable. Warms the cockles of your heart, right? Didn't think so.

In short, they're offering you a teaser no better than a Nigerian 419 scam for most people in your situation. My advice is not to do anything unless you're coming up on the end of your fixed period, in which case you need to talk with someone else, who might have your interests somewhere closer to their heart than the Andromeda Galaxy.

Caveat Emptor

Original here