Mortgages: March 2019 Archives

A mortgage or Deed of Trust (they're not the same!) is basically pledging an asset that you own as collateral for a debt. If you default on the debt, the lender takes your property. When you're talking about real estate in the state of California (and many others), this is generally accomplished by use of a Deed of Trust. There are three parties to a Deed of Trust: the trustor, trustee, and beneficiary.

The Trustor is the entity getting the loan.

The Beneficiary is the entity making the loan.

The Trustee is the entity which has the legal responsibility of standing in the middle and making sure the rules are followed. When the loan is paid off, they should make certain a Reconveyance is completed and sent to the trustor so they can prove it was paid off. If the beneficiary is not being paid, they are the ones who actually perform the work of the foreclosure.

One thing to keep in mind during all discussions of real estate and real estate loans is that the amounts of money involved are usually large - the equivalent of somebody's salary for several years on every transaction. The temptation to fudge the numbers or even outright lie to get a better deal, or to get a deal at all, is strong. Many people don't think they're really doing anything wrong by fudging things a bit, but this is FRAUD. Serious felony level FRAUD. Fraud, and attempted fraud are widespread. There are low-lifes out there who make a very high-class living at it (for a while). Every lender has to devote a large amount of resources to determining that each individual transaction is not being conducted fraudulently. To fail to do so would be to fail in their jobs to protect their stockholders and investors. I have told many stories about the most common sorts. But the reason everything in every real estate transaction is gone over with such a fine-toothed comb that adds thousands of dollars to the cost of the transaction is that people lie, cheat and steal with such large amounts under consideration. Every hoop that anybody is asked to jump through has a reason why it exists, and often that is because somebody, usually many somebodies, have committed FRAUD based upon that particular point.

One of the conditions I must attach, implicitly or explicitly, to every quote for services, is that this is based upon the condition that you are telling me the truth, the whole truth, nothing but the truth, and are being honest and forthright in your presentation of the facts without trying to hide anything and are specifically calling my attention to anything that you suspect may be a problem. And because the list of what is relevant information is long, complex, and conditional upon factors that are often opaque to non-professionals, sometimes, people quite honestly don't realize that something is a fly in the ointment so they don't mention it. I, or any other professional practitioner, have no way of knowing that said fly exists unless you, the client, tell me about it. Therefore what I tell you initially does not account for said fly. This is not unethical, it is just a due to the fact that I don't have all of the relevant information..

When you're talking about residential real estate loans there are basically two absolute requirements as to the nature of the collateral. The first is land - land as in real estate. A partial, fractional, or shared ownership of a common interest in land (as in a condominium) are each sufficient unto the task. A rented space to park your mobile home is not.

To that real estate, there must be permanently attached in a way so as to prohibit removal, or at least make it an extended project, a residence in which people can live. We're all familiar with you basic site-built house. Personally, I'm a big believer in the virtues of manufactured housing. To paraphrase Robert A. Heinlein in precisely this context, imagine a car for which all the parts are brought individually to your home and assembled on site with ordinary portable tools in an environment which was not specifically designed to facilitate said assembly. How much would you expect to pay, and how would you expect it to perform? The correct answers are "A LOT more than for your house", and "not very well, in terms of either reliability, speed, or economy."

Nonetheless, when a lender looks at a house that's been moved to the site, they see one that can be moved away from the site as well, and they are skeptical because many people have done precisely that. Furthermore, the way that residential real estate is valued is somewhat arcane. The lot itself may be worth $400,000 here in California because it has $150,000 of improvements on it in the form of a three-bedroom house on it, but take away that three-bedroom home, and the lot may be only worth a fraction of the amount. So they loan you money based upon a $550,000 value of the combination as it sits. Some time later, you back your truck up to the house and cart it off, and then default on the loan, leaving the bank a lot may only have a value at sale of $80,000. Now imagine yourself as the bank employee who made the loan. How do you explain this to your boss? Over the years, many bank employees have had to explain this to their bosses, all the way up the chain of command to CEOs explaining to investors and stockholders. Lenders know that most people are honest - but they've got a duty to make sure you are among the honest ones. And if you subsequently lose your job and can't pay your mortgage, might you not be tempted to back the truck up and haul the house off somewhere if you could so the bank can't take it? There are good substantial reasons why many lenders won't approach manufactured housing as residential real estate, and the ones who do treat it as such charge higher than standard rates, and place further limitations on lending.

When I originally wrote this, I was personally eyeing a beautiful manufactured home that more than meets my family's needs, was in the middle of the area I want to live in, and was priced more than $100,000 lower than comparable sized and lower quality site built homes on smaller lots. Yet there was a reason for that lower price. It's not like that owner just decided to list it for $150,000 less than he could get. The home carries many higher costs. If I had bought that home, I would be paying for it in the form of higher loan costs every month, and higher loan fees every time I refinance until I sold it, and fewer people able to buy the home when and if I do sell it as a result of loan constraints, and a I can expect lower eventual sales price as a consequence - which is the situation that owner was in when I was looking at it. I reluctantly decided that those costs outweigh the benefits. My decision was regretful, but until somebody comes up with a procedure that banks agree makes manufactured housing equal in every way to site built in their eyes, it is also firm.

Caveat Emptor

Original here

(And I must say that if somebody comes up with such a procedure, you will be a gazillionaire, and deserve every last penny and then some. I hereby publicly forswear all claims of compensation for the idea of such a procedure. If you can make it work and it makes you rich, I won't ask for a penny, although any contribution you care to make voluntarily will be happily accepted. I just want to be able to say you got the idea from me, as part of my contribution to a better world)

real estate mortgage manufactured housing

For a couple years, Mortgage Accelerators, or Money Merge Accounts, were the thing that everyone was pushing. I got so much junk mail about this from more originators (who don't know who I am) and wholesalers (who should) that I decided to take another whole go at the entire concept. The claim most often advanced is "pay off your mortgage in a fraction of the time!" In fact, typical numbers say they're only going to do a fraction of the good done by biweekly payment programs, which effectively make one extra payment per year. Money merge accounts or Mortgage Accelerators (to use the term I originally learned years ago) have been pushed and over-promised so badly of late that I hope whoever manages to do an elementary search will be able to find a voice of sanity.

These wasteful loans that waste a homeowner's money became the market's negative amortization loan as far as marketing goes. These things were being pushed hard, consumers were being led to expect far greater results from them than they are likely to achieve, with the results being that those consumers who sign up for them are wasting their money. If Mortgage Accelerators are not as bad as negative amortization loans, that's still damning with faint praise if ever there was such a thing. Not as bad as the loan that encouraged people to buy a more expensive property than they could afford, put them more deeply into debt with every passing month, ruined their credit ratings, and caused them to lose the property they over-extended to buy, as well as setting the United States as a whole up for the worst financial crisis we've experienced in the past eighty years. Well, it is kind of a high bar for lenders to get over, and they haven't done it here - but that's not due to concern for consumers.

(one way of looking at it with considerable merit was that the Era of Make Believe Loans was scamming investors, while these merely scam consumers)

What goes on with these accounts is complex, and they're not all identical. The basic idea is the same, however. You create a special account of some nature, where you deposit your entire paycheck in the mortgage account, where it lessens the amount of interest you pay on a day-to-day basis. Then you pay your other expenses of living out of the account, gradually increasing the amount back up until the next time you get paid. The idea is that by paying down the balance with your entire paycheck, less interest accumulates and people making the same regular payments will pay their balances down faster with the same balance.

Sounds like a cute idea, right? If it was free, they would be a pure gain for the consumer. Unfortunately, they're not free, and I've never yet seen one that wasn't more costly than it could possibly be worth.

Lenders like these things for a lot of reasons. Most obviously, they're getting pretty much all of a consumer's banking business. Checks come in, go out, clear or don't; all those lovely fees. In the vast majority of all cases, there's the initial cost and interest expense of an associated home equity line of credit. This also raises the bar to make it more difficult for a consumer to refinance away from their loan if someone offers them a better deal. Furthermore, there's usually an explicit charge of about $3500 to set the thing up. I'll show where this money would be better spent on a direct paydown of the mortgage.

Also, the people who sell these things have these beautifully intricate presentations. While people are watching the money whizzing about between one account and another, they're usually not considering whether those figures are reasonable, typical, or even anything like the numbers they personally experience.

Most importantly if consumers are shopping for a new loan, their attention is distracted from the most important part of shopping for a loan - getting the best possible tradeoff between rate and cost, focusing instead on this fascinatingly complex toy that doesn't make nearly the difference most of the people pushing it say it will. Taking the attention of consumers off the question of what rate they are getting, on what type of loan, at what cost, means that they don't have to compete nearly so hard to give you the most competitive rate-cost tradeoff. In plain English, their loans can charge a higher rate of interest. In fact, this difference will cost the typical borrower far more than they could ever hope to save via a money merge account. I'll go over that in this article, as well.

So, first off, let's consider what typical numbers are. Here in San Diego when I originally wrote this, the median property sale was $558,000. In order to qualify for the loan, consumers need a back end Debt to Income ratio of 45%. Front end will most typically be around 36%, with property tax, insurance, vehicle payments, credit cards, student loans etcetera. I'll be really nice and say 32% - chances are that if it's lower than that, the people would have bought a more expensive property. I'm going to assume 20% down payment or equity, which is, if anything, larger than typical. We'll postulate a rate of 6%, which is probably a hair higher than most folks with conforming loans have - and more favorable to the money merge account - and I'm going to put it all into one loan even though that's theoretically a jumbo loan amount, just to give the money merge/mortgage accelerator every possible benefit of the doubt. After all the smart thing to do is split the loan amount, which leaves roughly $30,000 out of this account in a higher interest rate loan, and so the scenario envisioned is more beneficial to the Money Merge than what happens in the real world.

This gives a loan of $446,400. At 6 percent, the payment would be $2676.40. Assuming 32% front end ratio, that's a gross monthly pay of $8365. I don't have withholding tables, so I'll use the actual tax rate for couples making slightly more than $100,000 per year with about $55,000 taxable, which is $7400, plus about $8700 in Social security taxes, plus state and local taxes which I will assume to be roughly $2000. This money gets withheld - it never comes to you in the form of a check. Since you don't get it, when your check goes into the money merge, it doesn't help you pay the interest. This leaves $81,900, or $6825 in take home pay. I'm not going to worry about other deductions like health care, or how your pay is structured, which further erode the benefit. I'm just going to assume it hits your account in full on the first day of the month, maximizing benefit, although I'm still going to assume all of the excess goes out every month. If nothing else, for investment accounts. It's pretty silly to have your money paying off a 6% tax deductible debt when you can have it earning about 10% elsewhere! The real point of this is it isolates the benefit gained from the actual Money Merge, and separates it from any benefit derived from making extra payments, which is in reality the primary way the people selling these play "hide the salami" with consumers, distracting them from what's really causing the benefit - the extra payment, which almost anyone can do, anytime they choose, for free. I'm even going to assume that you don't have an impound account, so the money you eventually spend for property taxes and homeowner's insurance goes to help the money merge as well.

So you get $6825, less the payment of $2676.40, leaves $4148.60. Over the course of the month, money goes out to pay for all of your expenses. The people who sell money merge accounts urge you to leave paying your monthly bills as late as possible to get the maximum benefit from these accounts, completely ignoring the costs of the occasional late payment this is going to cause, as well as detrimental effects upon your credit when it does happen. In fact, a certain amount of these bills are going to wrap into the next month, meaning that under the conditions we've agreed upon, you write that check to your investment account for this month and pay that bill out of your next month's pay if you're smart. Since you're going to write that particular check ASAP if you're smart, that's going to diminish the effects of the $4148.60. But I'm going to be nice and give you a $1000 "cushion" that you carry into the account from month to month (again, you won't do this if you're smart), while the $4148.60 is going to be paid out evenly over the course of the month, giving you a mean daily amount of $2074.30, plus $1000, or $3074.30 per month of temporary principal reduction. This reduces your interest paid by $10.37 that first month! I'm going to assume this is pure gain, every month, and that it continues to compound. If you do this every month for thirty years, you'll actually pay off that loan a grand total of three months early, and the last payment is reduced to a shade over $400! All of this hooting and hollering and shouting and frustration over three months of paying your mortgage off - in an absolutely optimized, perfectly favorable environment where the Money Merge account didn't cost you a penny in set up fees or monthly cost. And even in this ideal situation, with the maximum reasonable advantage compounding over the course of the entire mortgage, out of $963,000 in payments, the money merge saves you about $10,000 at the very end - just over 1% of total payments, heavily discounted for time value of money thirty years from now. That's not the "pay your mortgage off in twelve years for the same payment!" come on used by the most popular of these! Were I the regulatory authorities, I'd be looking very hard at their advertising! Yes, you can pay it off in 12 years by making massive extra payments, but people without a money merge can do exactly the same thing by simply sending in more money.

But most people don't pay their mortgage off in this fashion, and these accounts are not free - or at least I've never heard of one that was. Most people refinance or sell within three years. When they do that, the accounts have to be set up again - which requires new set-up fees. In the example given above, that $10.37 per month compounding for three years is worth $407.92 - and that's if there are no countervailing expenses.

In point of fact, most of these accounts charge a monthly fee that ranges from roughly $1 to whatever they think they can get away with. Plus, there's an upfront cost that ranges from $1995, the cheapest I've seen, up to nearly $6000 depending upon the plan, with most seeming to fall in about the $3500 range. Plus, most of them require you to use a special Home Equity Line Of Credit (HELOC), which costs money in and of itself. The rates on HELOCs are higher than for regular mortgages, forcing you to effectively pay a penalty in interest of having $2000 or $5000 or whatever it is at a higher rate of interest, by usually about 2%. Keep in mind that this is ongoing, and for the entire month. The $2.30 to $8.30 per month this costs directly soaks off a large percentage of the $10.37 putative gain you get. Not to mention whatever the initial costs of the HELOC are. Some are cheap - I've seen others that had thousands of dollars in upfront costs. The HELOC costs, both upfront and monthly, are not relevant to the few plans that don't require HELOCs, but most do.

So with a middle of the line account, you've spend $3500 just to set the money merge (or mortgage accelerator) up, versus $407.92 in benefits over three years, which is longer than most people keep a given loan. Would I do that? Not on your life or mine! Why should I expect one of my clients to do so?

Let's consider some alternatives. Remember I told you the money merge account saves you $10.37 per month in optimal conditions, which works out to just about $10,000 saved at the end of thirty years? Well, let's ask ourselves, "What would be my benefit if I just took the $2000 the cheapest one of these costs me and instead used it for direct principal reduction?" In other words, what if you added that $2000 to your regular mortgage payment once? The answer is, for the example above, that you pay off your mortgage four and a half months early, as opposed to about 3.8, saving an additional $1800! Using the upfront costs for a direct paydown instead pays the mortgage off sooner than the accelerator account, and that's for the cheapest of these that I'm aware of !

After the three years that's all most people keep their mortgage, the person who just uses a $2000 sign up fee is still $1985 and change ahead of the poor stupid schmoe who signed up for the accelerator account! For a middle of the line $3500 set up fee, the difference, mutatis mutandis, is $3780 and growing at the end of three years, to the point where that mortgage is paid off 6.7 months early, as opposed to the mortgage accelerator's 3.8, saving thousands of dollars more than the "accelerator"! This doesn't count the monthly fees most mortgage accelerators charge, HELOC set up fees, or additional HELOC interest charges that the vast majority of these accounts require, and which do siphon off the benefits as noted above.

Keep in mind that with all of this, I've been building a "best reasonable case" to maximize the money merge's advantages. I've mentioned several assumptions that I was making in the account's favor. If any of them changes, the putative benefits basically vanish entirely, or even go decidedly negative.

Now, let's ask ourselves if getting distracted by a mortgage accelerator caused us to not shop as aggressively, or not pay as much attention to the tradeoff between rate and cost as I should have, and as a result, I end up with a mortgage rate that is a mere 1/8th of a percent higher for the same cost. An eighth of one percent is the smallest rate bump in the "A paper" world, and quite often I see differences of a quarter to half a percent for the same loan at the same cost between various A paper lenders when I'm shopping a loan. What would that cost me if I could have had 5.875% for the same cost instead, even keeping the benefits of the accelerator?

The answer is $35.77 per month on the payment, but more importantly, $46.50 the first month on the interest, and this adds up to $1641.77 less interest paid over the three years most people keep the mortgage, while the $10.37 per month benefit of the money merge put the 6% loan as having a balance that's actually $20 lower. Not counting fees of the money merge account, or anything else - just pure difference on the actual cost of that loan, in the form of interest you paid that you wouldn't have had to. How does that sound: Even if everything about the money merge was free, you'd be getting a $20 lower balance over three years in exchange for having spent $1600 more on interest. If you offered people $1600 for $20, what proportion do you think would take you up on it? If you offered them $20 for $1600, how many suckers do you think would go for it, even if you personally begged ten million people?

For those of you who may be loan officers - or real estate agents - reading this, can you point to one single putative benefit that you would think worth the cost that lenders charge to sign up for these programs yourself? As I've said, I can't. There is nothing here that justifies the wild ways in which these are being marketed, and the ridiculous promises that are being made about them. In point of fact, I can think of only a few possible reasons to sell these:

• Eyes only for a commission check (probably number one in terms of the overall market)


• You don't understand what's going on, took some marketers word, and haven't done the numbers yourself (hardly a recommendation of your services or professionalism)


• You just don't care about your clients welfare

When these started being marketed, I wrote about the broad outlines. Never had the urge to hose a client by selling one, so didn't really investigate any further, although I wrote another article about the benefits being quite minimal as compared to the costs. But the ridiculous promises and over-aggressive marketing these have been subjected to in recent weeks have finally motivated me to do a rigorous analysis, and what I see is not "merely" of minimal benefit in even the scenarios most amenable to said benefit, but actually costs more than any putative benefit. I can see precisely zero justification for counseling any client in any situation to pay the money that every one of these I have yet encountered to set it up, as the benefits derived from any of these programs with which I'm familiar never do manage to equal the opportunity costs.

Before I sign off, the point needs to be made that the psychology the account engenders in the consumer is likely to be beneficial, rewarding themselves psychologically for making what are extra payments on the mortgage, and as far as that goes, the account does accomplish something praiseworthy. But the vast majority of all mortgage borrowers can make extra payments of principal any time they want, for free, and when you consider these accounts strictly on the basis of actual numerical advantage over real alternatives, the costs of the program are literally never recovered.

Caveat Emptor

Original article here

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

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

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

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

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

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

This has implications. Suppose you have a 760 score spouse who makes $3000 per month, and a 560 score spouse who makes $5000 per month, you have a choice: Qualify based upon $3000 per month, go stated income (assuming it ever comes back), or drop to sub-prime (if you can find it).

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

The second alternative is going stated income. As of this update, stated income is essentially extinct. It's not quite illegal, but nobody actually does it because they can't sell the loan and the agencies that rate financial assets consider it a junk asset. This only works if the necessary income for the loan is believable for someone in that occupation. Even if it comes back someday, somebody who makes $3000 per month is not likely to be in a profession where $8000 per month is a believable income, and most people tend to overbuy a house rather than under-buy, regardless of the fact that under-buying is a lot more intelligent in most cases. Furthermore, you are committing fraud if the lender finds out and wants to prosecute.

The third solution is to go sub-prime, where you'll qualify, but get a higher rate and almost certainly a prepayment penalty. At this update, sub-prime lenders who will lend to someone with a lower credit score are difficult to find, and the down payment requirements are stiff. Furthermore, a single borrower with a 760 credit score gets a better loan, with proportionally less of a down payment, than the couple in this case - the primary borrower has a 560 score, remember - but they just won't qualify for as large of a loan because they can't afford the payments. Most people want to buy the more expensive property with a crummy loan rather than buy the property one spouse can afford, but it's just not on the list of options for most folks right now. The down payment, particularly for low credit scores, tends to be a major issue. Except for VA loans, 100% financing or anything close to it is very difficult to get.

Once upon a time, you might also have gone NINA, which is a "here I am - gotta love me!" approach where income is not verified, nor employment history. The loan you get is based totally upon your credit score and equity picture (how much of a down payment you make, in the case of a purchase). The rate was higher than stated income and the restrictions on equity were greater, but sometimes it was the best loan people could actually get. Unfortunately for those people, NINA went away even before stated income.

Now, as to what you were told, student does not, in general, count as time in line of work. Sometimes, exceptions are made for advanced professional degrees - medical doctor and lawyer and nurse - and have actually gotten easier than since I first wrote this. Even so, the lender is going to be careful because many folks get their degree and their license, then end up finding they can't stand the work. That's one of the main reasons for the two years line of work requirement. As a question to make why this more clear: How are you going to compute her average monthly income over the last two years? That is the way full documentation loans are justified. Some sub-prime lenders will accept it (not the better ones), or the person who told you this could just be planning to substitute a stated income loan based upon your income. The fact is, that unless you're talking ugly sub-prime, they're not going to accept your wife's income until there's some time actually working it. Many people graduate school and never work in the field. They don't pass licensing, or they decide soon after they start that it's not for them. When this happens, they generally end up not being able to afford the loan - and that's not something the lender wants.

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

Caveat Emptor

Original here

This is definitely not a "Who you gonna call?"

I've done a couple articles on the two ratios, debt to income and loan to value. These are the basic and most important parts of loan qualification. Nonetheless, there exist a plethora of reasons why someone can be turned down for a loan even though they make it on the ratios.

The first of these is time in line of work. "A paper" from Fannie Mae and Freddie Mac looks for two years in the exact same line of work. One change that trips a lot of people is going from being employed by a company to being self employed in the same line of work. Believe it or not, a promotion can also sink a loan if your job title changed, for instance from salesperson to sales manager. If it was with the same company, it can sometimes be okay, but if you changed companies to get the promotion, that's a really tough loan. Subprime loans will accept shorter time periods, but real subprime is almost nonexistent today.

Making payments on time is probably the most common deal buster for A paper. In general, you are allowed no more than one mortgage late, or no more than two other lates within the last two years, a late being defined as thirty days or more delinquent. The reason does not matter. It does not matter how justified you were in not paying. The fact remains that you are reported as being late. The only way to remove these reports is for the company to admit it was in error in reporting you late. Many people will not pay the charge as it gets marked later and later and later. This is self defeating. Pay it now, dispute it afterwards. Yes, it's harder to get your money back - but the money it saves you on your home loan is typically much larger.

Store credit cards are one of the biggest headaches here. If you buy merchandise with a generic credit card, you've got the card company, who are neutral, looking at the transaction. Both you and the merchant are their customers, and the merchant needs to take credit cards. They're not going to quit taking them. If you use your store credit card, the dispute department is pretty much guaranteed to take the view that you bought that merchandise at their store and therefore you owe the money. I run across five or six store card problems for every generic card problem I encounter.

Bankruptcy is another deal buster. People in Chapter 13, or just out of Chapter 7. Most banks won't touch them. It's not really rational, but you there you are. Some lender are fine with them, however. This is one place where going to a broker or a correspondent is likely to save you, because they know what lenders will take a Chapter 7. (Chapter 13 is almost certain to kill you via late payments, disqualifying you from A paper)

Reserves can be a deal buster. There actually is a reserves requirement for regular full documentation A paper, but it's pretty much a non-issue as responsible people get uncomfortable if they can't lay hands on a month's mortgage payment. Reserves were really an issue for stated income loans when we had stated income loans. A paper stated income required six months PITI reserves somewhere that you can get to it. Subprime is less demanding, but if you don't have the lender's requirements, you won't get the loan. Would you loan hundreds of thousands of dollars to someone with absolutely no cash in the bank? Payment shock, where your monthly cost of housing is increasing, can increase the reserve requirements. You were paying $1200 per month for housing, now you'll be paying $2000. That takes some adjustments to lifestyle, and some people take a while to adjust.

Related Party Transfers are another questionable point. All of the background for loans assumes that the transaction is between unrelated parties, who have no reason to cooperate in order to do the lender dirt. If you're buying the house from your brother or some other family member, that assumption goes out the window. Ditto between partners and their partnerships, and so on. Some lenders will do them, others wont. Some will but charge extra. Others will but have special requirements. Whatever they are, you have to meet them.

The appraisal coming in low is another. The lender evaluates the property on a "lower of cost or market" basis. The Appraisal is the "market" part of that, and the lender will only loan money based upon the lower of these two methods of evaluation. I have people tell me all the time that their new purchase is worth $20,000 more than the appraised value (or the purchase price). No it isn't. By definition - it's worth what a willing buyer and a willing seller agree upon. The bank's evaluations are necessarily conservative, and they don't want to take over the property. They're not in that business. They want you to pay back the loan. That's the business they're in.

Late payments. Whatever you do, while the loan is in progress, keep making all your payments on time. Whether just indirectly due to the credit score dropping, or directly because now you've got a(nother) thirty day mortgage late, this can raise your rate or even break the loan.

Sourcing and seasoning of funds to close. Just because you've got $100,000 in the bank doesn't mean the bank is happy. Nobody rational keeps that kind of money outside of investment accounts. At least nobody rational who needs a loan - Bill Gates might. Lots of folks attempt to hide loans that way. The bank is going to what to see that you've had it a while (seasoning) or prove where you got it from (sourcing). If you really just got $400,000 from the sale of a previous property, you're going to have the escrow papers and HUD 1.

Final credit check: I have a set spiel I go through, "Until this loan is funded and recorded, don't breathe different without getting my okay. Make the payments you've been making. Make them on time. Don't take out any new credit. Don't allow anyone (other than mortgage providers!) to run your credit. Just before the loan gets recorded, the lender will pull a final credit report. Woe be unto the person whose situation has deteriorated, and it means we'll have to start all over again, if there even is a loan that makes sense."

Failures of verification. Three biggies here: employment, rent or mortgage, and deposit. I do not know why people bother lying, but they do. Don't you be one of them. World of hurt if the lender wants to prove a point. Don't quit your job, don't change anything about your employment. I once had a guy quit to become an independent contractor two days before the loan due to be was funded. Guess what? No loan.

Lines of credit/credit history/no credit score: Most lenders want to see at least 3 lines of credit with a 24 month history of making payments on time. Freezing your credit cards in ice is a wonderful idea, but you need to use them to demonstrate a payment history. Once per month, I use mine for something small and stupid that I would otherwise pay cash for - just to show payment history (it also helps your credit score). Pay if off as soon as the bill gets there. Waivers for two lines of credit are fairly easy, but if a given bureau doesn't know you have two open lines of credit, they may not score your credit profile. If you don't have at least two credit scores among the big three - no loan.

Property is structurally unsound, is not certified for habitation, unsuitable or not zoned for intended use, etcetera. Wouldn't you really find out about this before you have a very large debt to pay? Okay, this can cost you money, but it's a "Thank (deity) I found out now!" moment. Finding out now means you can change your mind while it's still the seller's $400,000 problem, before it's your $400,000 problem.

So there you have them, most of the most common reasons why loans - and therefore real estate deals - fall through for people that are otherwise qualified.

Caveat Emptor

Original here

how soon should I start shopping around to refinance my home? I have a 2yr interest only and it's up in (four months)

Okay, the 2/28 loans which you are describing all have prepayment penalties for at least two years. Figure it's going to cost you 6 months worth of interest, on top of the cost of the refinance, if you refinance before the penalty expires.

(you could have specifically bought it off by accepting a higher rate, but that's unlikely to have been the case)

That said, about three weeks before the penalty expires you can start the refinance process. Be advised that until the day the penalty expires, the current lender will be quoting a higher payoff, but once it has actually expired, the payoff should be correct, at least in theory. You should not sign final loan documents until such time as your penalty will expire with or prior to your Right of Rescission expiring. No more than two to three days prior to expiration.

Indeed, sometimes lenders will want to keep charging penalties even after they're no longer due. I'm not certain if they just don't update the payoff correctly or what, but I've seen lenders try to charge penalties a month after they expired. Once they've got your money, they can make you pay a lawyer and go to court to get it back.

For this reason, I would avoid "cash out" refinances any time within three months after the penalty expires. Matter of fact, if you're refinancing during that period, not only don't refinance for cash out, but don't have an impound account for taxes and insurance, and don't plan to put any money at all into the loan balance if you can avoid it. Here's why: When escrow officer goes to request a payoff from the soon to be former lender, the payoff quote may include the penalty even if it's no longer due. if the money they have from the current lender covers the whole thing, they have two choices. Pay it and have a completed transaction (not to mention getting their company paid), or don't, and leave everybody hanging. If they pay it, this means that you, the consumer, only get a much smaller amount of money, but I'm disgusted at how often consumers are shorted by the loan process, and this is one more way it happens. You're expecting $20,000 cash, and that $20,000 was the entire reason you did the loan. Comes the proceeds check, and you've only got a check for $9000. You want the other $11,000, you're going to have to go through the whole process again. Not the kind of situation you want to be in. Not the kind of situation I want my clients to be in.

If, however, the escrow officer does not have enough money available to them to pay off the loan plus the penalty, they have no choice but to leave the transaction at that stage until the quote is correct. They won't let it sit - they'll find out what's going on and everybody involved will be doing what's necessary to resolve the conflict between the two issues. Not having any more money in the loan than necessary to pay off the old loan is a good way to insure that the escrow officer won't pay a penalty you don't owe.

Don't let the rush to pay off the old loan cause you to cut corners on either your shopping for a new loan or asking all the questions you should ask prospective loan providers. Rushing into a refinance because your loan is going to readjust is one of the best ways to waste large amounts of money that there is. To illustrate, let's look at a larger than average loan amount that sees a huge jump in the actual rate. $400,000 at 6%, and it goes to 9%. This makes a difference of $33.33 per day, or $1000 per entire month. That's the equivalent of a quarter point on the cost - basically nothing on the scale of differences between subprime loans, and not very much on the scale of differences between A paper loans. I'll usually beat the retail branch of the lender I place a loan with by several times that amount. If it makes a difference of 0.25% on the rate, that's $1000 per year that you're going to be stuck with the new loan. If you're still a subprime borrower, multiply that by the length of your new prepayment penalty in years. Doesn't it sound worthwhile to take an extra day which your old lender bills you $33 extra for, to shop the loan around for real and ask the hard questions that enable you to save $2000 or more on the new loan? Even if you're putting the money into your balance, you're still paying the extra. Not only that, but you're paying interest on it as well. On the scale of costs for a new loan, paying the soon to be former lender for a few more days at the increased cost is likely to be a wonderful investment if it gives you the opportunity to find a better loan.

On a note of personal relevance, at the time this was originally written, written rates were higher than they were two years previous, and the person who asked was in an interest only loan, while interest only loans were extremely difficult to get then (and harder now). The payment is likely going to end up higher in such circumstances, especially if you roll loans costs in even if the interest rate (i.e. actual ongoing cost of money) is lower. If the reason a borrower is in an interest only loan was that their debt to income ratio couldn't qualify for the real payment on a sustainable loan, that refinance is probably not going to happen for you. With prices having decreased locally by 25 to 30 percent, your loan to value ratio may not support refinancing either. If a refinance is not going to happen, and you can't afford your current payment, it's time to sell now. The FHA Secure program helps some people, but requires documenting enough income to afford all of your payments, and the 125% refinance programs Fannie and Freddie have out have the same restrictions. You owe what you owe and the rates are the rates. If the numbers don't work, get it sold. (On the plus side, due to underwriting paranoia the rates for those who can qualify at this update are very low)

One more piece of advice: Start improving your credit score now. Four months is plenty of time to bring your credit score up fifty points or more. If you can get into "A paper" loan territory, where penalties are much less common, you'll be much happier with your new loan than you are with this one. If you're in subprime territory and able to improve your loan to an "A paper" loan, your rate may go down despite the fact that the rates are higher.

As I cover in Getting Out of Paying Pre-Payment Penalties, if you're willing to refinance with the current lender, either directly or through a loan broker, your lender may be willing to waive the penalty in favor of sticking you for a brand new prepayment penalty on a larger amount. This is usually making a bad situation worse. As I said, you're likely to get a higher rate, be limited to an amortized payment on the new loan, and the new loan amount is likely to be higher (people in the situation usually roll the costs in), and all without even the benefit of lowering the tradeoff between rate and cost like penalties usually do. This seems pretty much the definition of lose-lose-lose-lose to me. Longer prepayment penalty on a higher balance at a higher rate, without getting any benefits in exchange. This is kind of why the best way to deal with prepayment penalties is not to accept them in the first place.

Caveat Emptor

Original article here

I refinanced my house and an existing lien was not discovered

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

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

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

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

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

Now suppose that you got a thirty year fixed rate loan at 3%, and suppose rates have gone up to seven and a half percent by the time you rediscover the lien. The lender can do better with that money from your loan, and so they are going to want to seize upon any excuse to make you pay it off. This, all by itself, is a really good reason to be careful with your liens.

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

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

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

Caveat Emptor

Original here

The overview is simple: The government has made it take slightly more effort to lie to consumers, while adding layers of delays that add an absolute minimum of a week - an average of three weeks - to the time it takes to do a loan. Meanwhile, lenders have changed the market in ways to hinder competition and make it tougher for the savvy consumer to find the real best deal.

In short, while a complete chump might be happy that the con artists have to work a little harder while ripping them off, the consumer who makes the effort of understanding what is going on has far less ability to ensure a positive result.

First the good news: the change for the better is the new government forms. It's been several years now since The new HUD 1 and Good Faith Estimate were approved, and they are more intuitive and easier for laypeople to understand than the old forms. There is also new verbiage on the forms that tells people that just because they applied for this loan in no way obligates them to actually complete it. That's also good

In exchange for that much good news, there is a litany of things that are worse. Let's start with the small stuff and build up to the most important.

First off, the Home Valuation Code Of Conduct (HVCC). Precisely how the Attorney General of one state used state funds to shake down Fannie Mae and Freddie Mac, provide cushy jobs for his political cronies and allies, and gain personal control over the way business is conducted in all fifty states should certainly be a subject for public scrutiny, but I'm mostly concerned with the impact upon the consumer. In exchange for allegedly freeing appraisers from "interference" by real estate agents and loan officers who want them to hit a specific number, consumers are now paying higher costs for appraisals, appraisers are getting less money for those same appraisals, an entire level of bureaucracy and political patronage has been created with control over the entire appraisal process. For our part, loan officers and real estate agents no longer have the ability to stop using a particular appraiser, no matter how terrible we know them to be - it's whomever the appraisal management company picks (i.e. the low bidder). As a loan officer, I am not allowed to so much as communicate with the appraiser except through an intermediary. And if they've chosen a really horrible comparable that unduly influences value in either direction, most of the appraisal management companies make it difficult or impossible to process that information into modifying the appraisal. I personally had an appraiser kill what should have been a perfectly good loan by choosing two trashed lender-owned properties as the prime comparables to a well maintained family home that was in a better location than either - and I couldn't choose another appraisal, another appraisal management company, or anything else. I had to tell the client I was real sorry about the money he wasted on the appraisal, but that was the limit of what I could do. Yeah, I could offer to pay for appraisals - by jacking my margin on loans enough to pay for the ones that don't work out. Lots of companies do that, with an added margin for themselves, of course - he who takes the risk always gets a reward, and when they set the terms they are going to set ones that result in a higher profit to them. But that's not the way I choose to do business. HVCC may eventually be repealed due to the problems with it being so blatant that they cannot be ignored. But it is a comparatively small issue in terms of real difference to consumers.

Yes, the others are more important than wasting several hundred dollars on a loan that now can't be done because the appraisal job was given to a bozo, despite whatever the loan officer may have wished. Oh, and it also delays the loan because I have to go through one Appraisal Management Company, and it takes as long as whomever they choose takes. Read on.

The elimination of stated income loans is not without its benefits. It was horribly abused, and those abuses are now a thing of the past. However, if you're a small business person or someone with a large amount in legitimate deductions, it means you may have to forego a lot of legitimate deductions on your income taxes in order to qualify for a loan, making it much more expensive to those consumers the stated income program was designed for. Especially if you bought the home you can really afford as opposed to the one your taxes say you can and you've got an adjustable loan. This elimination can, has and will continue to cost a noteworthy number of individuals who really could afford it their homes. It will continue to cost individuals who leave employment and go into business for themselves. It would have been better targeted by limiting it to people who are in the economic classes it was intended to serve. The cost of doing it the wrong but easy way isn't huge on a per capita scale, but it's highly concentrated in those consumers who are our best sources of economic growth.

The next issue hits everyone who applies for a loan. It lies with MDIA, an act put into place by Congress in 2009. It is allegedly to help the consumer by forcing the mortgage provider - broker or banker - to provide accurate information on their Good Faith Estimate and Truth In Lending forms. I say allegedly because that's not how it works in practice. I can't speak for their intent, but I can tell you what happens in practice. First, the mortgage provider tells the consumer whatever lie it takes to get the consumer to sign up, same as it has always been. Then, a week before final closing but too late for the consumer to actually get another loan that will fund in time for their purchase, they have to tell the consumer something resembling the truth. Even if it's only a refinance, the consumer has sunk the money into the loan for the appraisal and there is all the time and effort they spent getting the loan to that point, meaning that they are still unlikely to go look for another loan. Real difference to the consumer: not much. Difference to the unethical loan officer: They have to do one extra Good Faith estimate and Truth in Lending in order to get the money that results from telling the lie. Forms that their computers are perfectly capable of spitting out. In practice, the amount of disincentive for lenders to lie about their loan to get people to sign up is zero.

(oh, I'm sorry, I meant "forget to tell the consumer about all the fees they'll be paying". Not really. These loan officers know about every fee that's going to get paid. If they don't, I sure wouldn't do business with them)

Furthermore, this delays the loan. I just closed a loan where everything I put down on California's version of the Good Faith Estimate, the Mortgage Loan Disclosure Statement was exactly the same from day 1 to the day we were ready to close - and I moved heaven and earth and gave up $1000 plus just so we could close it and get on with our lives - only to find that the lender I had placed the loan with calculated the APR by a different way - not compliant with Regulation Z which governs such - simply to cover their backsides and force redisclosure. This forced a re-disclosure and a minimum waiting period of seven days just to get this loan about which absolutely nothing had changed from day one closed. Extensions of rate locks cost money - this one cost two tenths of a point, which the consumer ended up paying because the government wanted to "protect" them from the "Nasty Rapacious Loan Officer" who told them the truth in the first place. But the penalties on the lenders are enough that they want to force this re-disclosure, delaying the loan, even when the consumer has been told the exact truth in the first place. After all, it doesn't cost that lender any money to force the redisclosure and waiting period.

The complexity of underwriting standards has skyrocketed. Can't force anyone to make a loan, or dictate conditions under which it is made. Nonetheless, it seems every week there are more baroque little curlicues to the loan process trying to reassure nervous investors. Every one of these means trouble for some people, and at this point it's well-qualified people. All the government can and should do is what it has: provide an alternative in the form of FHA loans. They're intended for first time buyers, but you don't have to be a first time buyer to take advantage. If someone can't qualify conventional but can qualify FHA, they will pay the extra cost. Unfortunately, the lenders are adding their own little curlicues to FHA loans in order to short circuit this natural process - and it's not like FHA loans aren't baroque enough already.

This segues into the elimination of everything that isn't straight A vanilla loans or government insured loans. Actually, conforming A paper loans are essentially government insured now that the government owns Fannie and Freddie. But subprime is gone, Alt A is gone, and A minus is essentially gone. Fannie and Freddie have eliminated all but the first tier of their expanded approval programs for people who almost but don't quite fit their ideal models of who qualifies. I personally haven't had an expanded approval loan since but I understand they're not funding in the real world. The impression I get is very strongly "We don't want to do these any more, but we have to leave the possibility open as a political fig leaf. Good luck getting us to actually fund one."

This has implications for home ownership and home retention. Bad things happen to good people. Identity theft, illness, job loss, business failure. All of these now have a much higher probability of costing you your ability to buy a property, and of costing you the ability to retain that property for years after you work your way through the main problem. I really like hybrid ARMs and have done them for myself for a long time, but the probability of having something happen which completely sabotages any ability to refinance has become unacceptably high, in my opinion. You can save a lot of dough by using hybrid ARMs, but what happens if you can't refinance at all before the fixed period ends? Net result: consumers who would have been comfortable and saved money with hybrid ARMs are now forced to reconsider and choose fixed rate loans at higher rates of interest. Net result: higher costs to consumers and more income to lenders and investors.

All this increased complexity adds to the time it takes to do loans. When I started this website I could reliably get a purchase money loan funded in about two and a half weeks, and a refinance done in under 30 days (Right of Rescission basically adds a week to the time it takes to get refinances done). Until and unless things change, the thirty day escrow for purchases is history and the 45 day escrow is becoming increasingly difficult. Add a week to that time for refinances. I know loan officers who won't accept less than a sixty day escrow for purchases any more. This extra time costs consumers money, especially if they are buying or selling a property. If you're just refinancing, your living situation really isn't going to change - but if you need to move, the extended escrow period makes things more unsettled and more costly. If you don't believe me, you haven't bought or sold property recently.

All of these pale in comparison to something that has drawn precisely zero scrutiny from outside the mortgage industry: lenders are now charging brokers for loans that are locked and not delivered. It's not a figure in dollars charged immediately - it's a differential in the form of higher costs to get the same rate that the brokers and all of their future clients have to pay. The practical upshot to this is that those brokers who were working in favor of consumers can no longer lock the rate and cost upon application for the loan, which means they can no longer stand behind what they tell you when you sign up for the loan with a Loan Quote Guarantee. Lenders rationalize this by saying the failure to deliver on the lock costs them money - but they don't charge their own "in house" loan officers this differential.

The effect is to limit competition and make brokers unable to guarantee their quotes. Good luck getting that sort of guarantee from a traditional lender. It also makes it impossible for consumers to get a backup loan in case they have been lied to. Because I can't lock my loan until we're actually sure it's going to close, I certainly can't guarantee to beat the other guy when it comes to the final push - and if the rate cost tradeoff declines, a quote that's pure nonsense today may become realistic. On the flip side, a quote that's conservative today may become impossible if that rate/cost tradeoff goes up. Guess what? Each one of these events happens about fifty percent of the time. So another practical upshot is that there's no way to really know what's going to be delivered at closing unless we can lock the loan. Under these circumstances, people tend to take flight to the big comfortable names with lots of advertising, not the small broker doing the right thing with no overhead who really can deliver a better loan. Cost to consumers: High, as in multiple thousands of dollars. If lenders could and would really compete with brokers on price, there would have been no economic niche for brokers in the first place.

One by one, changes in the lending environment has demolished the usefulness of pretty much all of the concrete "do this, not that. Require this from your loan provider" type help that I have been trying to disseminate since day one on this website. The softer, contextual stuff still stands well, but the concrete step-by-step instructions, not so much. The practical upshot is that while the situation for the complete babes in the woods applying for a loan has improved slightly, the ability of the well-informed consumer to influence the lending process for a positive result has been severely eroded. Now more than ever, it comes down to the individual loan officer and their intentions. I'm not happy about it, but that's the business as it is today. I can adapt or I can get out of the business, and it's not like me getting out of the business would change things for the better.

Caveat Emptor

Original article here

I enjoy your blog very much and figured you would be a good person to ask this prepayment penalty question to.

Is there a prepayment penalty if you dont pay down the whole amount? For
instance, say I owe 620k and want to refinance this. Can I get a loan for
say 610k from another lender and leave 10k with the orignal lender?

Does that avoid the prepay penalty?

No.

Have to admire the ingenuity, but it won't work. Here's why:

First, the penalty is triggered by paying a certain amount extra. There are two main trigger points for a prepayment penalty, usually known as "first dollar" and "twenty percent." "First dollar" prepayment penalties are uncommon, but they do exist. What such a penalty means is that if you pay one extra dollar of principal during the time the penalty is in effect, you will get hit for the penalty - usually six months interest on the prepaid amount. Not so bad if you pay an extra dollar and get hit with a three cent penalty, but you have to pay a substantial amount to get any noticeable good out of it. You pay $1000 extra, and that's $30 they're going to hit you with on a 6% loan. Pay off $100,000 at 6%, and they're going to have their hands out for $3000 extra.

The other trigger point, "twenty percent" lets you pay down the balance by up to twenty percent for any given year without triggering the penalty. Note that this includes not only any extra you pay, but normal amortization as well. If you have a $100,000 balance, and would normally pay $3000 down through regular amortizationduring the year, this leaves you with "only" $17,000 of extra that you can pay before the penalty starts hitting you. Most often for this type of trigger, the prepayment penalty will only be assessed on any amount over 20% of the balance, but I have seen these charge the full penalty once triggered. So paying off $20,001 of a $100,000 balance at 6% might, depending upon your loan contract, cause a $600.03 penalty to be assessed - but most often it will only be that three cents. In this case, paying off the loan in full would only cause the penalty to be assessed on $80,000 - $2400 instead of $3000. It's also something to be cognizant of that this 20% paydown applies to the balance as of the start of the loan year, which runs from contract anniversary to anniversary. Say you have such a penalty in effect for three years. The first year you only pay it down to $80,000, escaping the penalty. The second year, you can only pay it down to $64,000 - by 20% of the beginning amount for the year - before triggering the penalty. If you do so, in year three you can only pay it down as far as $51,200 without triggering that penalty. This type of trigger is used when the lender is mostly worried about a complete refinance or selling the property. (A "soft" prepay is one where the penalty is not due if you actually sell the property, but most loans with prepayment penalties have "hard" penalties that are assessed at a certain trigger level, no matter the reason.)

No matter whether your penalty trigger is "first dollar" or "twenty percent" though, you're not going to refinance without paying it off completely. Here's why: In order for the new loan to be first in line, the old loan has to be paid off completely. The rates and prices on home loans that we all see advertisements and such for are predicated upon them being first trust deeds. They can only do this by paying off the previous loan in full and having a Reconveyance of the Deed of Trust recorded. Not paying the old loan off completely means no Reconveyance, which in turn means no new loan because their Deed of Trust will not be first in line. You'd have to content yourself with the higher prices for a loan priced as a second trust deed.

There are only four ways to avoid a prepayment penalty that I'm aware of. 1) Don't accept one in the first place, 2) Don't sell or refinance until it expires if you do accept one, 3) Convince a court the lender has done you sufficient dirt for the court to order part of the contract voided (this takes a lot of dirt), or 4) Swap your old penalty period for a brand new one by refinancing with the same lender, if they will allow it (They don't have to).

Caveat Emptor

Original article here

(This was originally published September 29,2005)

Here's another advertisement that I got in the mail:

"Pick a Pay, Any Pay!' The Revolutionary Option ARM!"

"Start rates as low as 1%!"

Loan amount $100,000 Payment $321.64

$200,000 $643.28

$300,000 $964.92

$400,000 $1286.56

Could this help save you money?

Let's see, given the real rate on these, there is negative amortization of about $500 to start with per month on the $300,000 loan, compounded over the three years the pre-payment penalty is in effect. Cost me $19,000 to "save" this money - even if the underlying rate doesn't rise. Not counting what it costs to do the loan. Or I refinance out of it and pay a pre-payment penalty of about $9200.

Doesn't matter the friendly sounding name you give it. An option ARM is a Pick-a-pay is a negative amortization loan.

What this guy (in this case) is hoping is that you'll be so enticed by this "low payment" that you won't ask questions. These are easy loans to sell to people who don't understand them, and impossible to those who do unless you're the person it's really designed for. Indeed, many prospective clients do not want the problems with this loan explained to them. It's like they've chosen to be insulated from reality for a time.

But this is no surgical anaesthetic. Most folks are going to want to be homeowners for the rest of their lives, and unless your income has increased commensurate with your loan balance (and prospective interest rate increases) I guarantee you that the pain will go on for quite a long time after the time of "affordable low payments". I'd rather not shoot myself in the foot in the first place.

More from the ad:

You could also lower your monthly payments. Free yourself from high interest rate credit cards and debts with a loan that could reduce your monthly payments by hundreds of dollars and leave you with enough cash to buy a car, remodel, or pay property taxes. And don't forget that mortgage interest is usually tax deductible. So you could save more at tax time.

This is all true - and only a part of the story. Remember that the easiest way to lie is to tell the truth - just not all of it. What they're selling you is the seductive "cash now - pay later". This was how you probably got into the situation they're talking about. What most people do is then take the money out and spend it, and then when the payments get to be too much, refinance again. What are you going to do when the overall payments get larger (again) next time. What are you going to do when there's no more equity? What are you going to do when you can't afford the payments?

The consolidation refinance can be a real financial lifesaver, if you do it right, have a plan, stick to it, and pay everything off, or at least pay your mortgage down below where it was before you go acquiring more debt. Fiscal responsibility is not what they're selling here.

You've earned a 30-day break from payments!

By rolling it into your mortgage, where you pay points and fees on it and the loan provider gets a bigger commission because of it. There is no such thing as a free lunch! You'll be better off if you stop looking for it. The bank is never going to give you one day that is free from interest, much less thirty. And because you don't make a payment now, you will be paying more later. Probably much more. You Never really skip a payment

You're probably going to see a lot of recurring themes when I do these quasi-fiskings. That's because the lenders and real estate agents and everybody else keeps advertising the same misleading nonsense over and over and over again, they just say it in slightly different ways. As far as I am concerned, anybody who sends out one of these ridiculous things deserves to have their name engraved on my personal blacklist of people I will never do business with. I hope for your sake that you feel the same way.

Caveat Emptor

Original here

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

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

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

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

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

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

Since this was originally written, underwriting has gotten completely paranoid. I have had clients in the lender's ideal situation - high credit scores, low debt ratio, steady income, plenty of equity - given the underwriter runaround. Actually, this is basically every client. It has to do with investor paranoia, as the lenders are doing everything they can - not merely everything they reasonably should to persuade the investors these loans are not going to lose money and are therefore worth paying a higher price for. But in my experience the additional conditions seem to be falling almost entirely on the "prior to documents" (before you sign) side, rather than "prior to funding"

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

So what can the average person do to safeguard themselves against this happening? Well, you can't - not completely. The underwriter can always add conditions, and so can the funder. Even if the loan gets funded, they can pull the money back right up until the moment that trust deed gets recorded with the county. That's just the way it is. What you can do is ask for copies of the loan commitment, and of the outstanding conditions, those that have yet to be met. Refusal on the part of a loan officer to provide this is always a bad sign. Ditto the inability. I definitely wouldn't sign the loan papers without a copy of the outstanding conditions in my possession, and it may be smart to ask for copies of the conditions at several points in your loan. Yes, they can be faked, pretty easily, but then they are ammunition in your lawsuit if something goes wrong, and most of the bad loan officers are too lazy to fake them anyway. Before you even apply, you can ask questions about necessary income, what the program guidelines for debt to income and loan to value ratio are, etcetera. Much of the stuff in my article Questions You Should Ask Prospective Loan Providers is aimed at defusing that kind of situation. Remember, at sign up you have all the power, but at closing, the lender has all the power. They have the loan, and nobody else does. Many times, the loan they deliver at closing will have nothing in common with the loan that got you to sign up. I used to advise people to sign up for a back up loan, but even I can't do them anymore because of the high cost failing to deliver a locked loan carries.

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

Caveat Emptor

Original here

I want to state that I am in no way shape or form an FHA loan guru. Between my general knowledge of loans and this information from someone who is an FHA guru, I think I can make some sense on the subject. Besides, one of the best ways to understand something better is trying to explain it to someone else.

FHA will guarantee loans up to 96.5% of the purchase value, not 100%. This means that you do need a minimum of 3.5% down from some source. The FHA will allow seller paid closing costs only of up of 6%, and the really cute thing is that they will also allow the down payment component to be a gift from family members or government agencies (provided they are not otherwise involved in the transaction). FHA loans can also be interfaced with some types of locally based first time buyer programs, although whether there is money in the budget at the time you apply for those programs is subject to funding, which usually goes quickly.

The first thing you need to understand about FHA loans is that they are intended to enable people to transition from renting to ownership of a primary residence. They are not intended to help anyone grow a real estate empire. For this reason, they will not work with investment property except in the case of non-profit organizations. Individuals looking to buy property via FHA loan must plan for it to be owner occupied. Second homes are only allowed where you already own a home elsewhere and can show an employment related need. Vacation homes are not allowed.

Refinancing is possible for existing FHA loans, up to a maximum of 95% (see Mortgagee Letter 2005-43) loan to value ratio, provided it was purchased via FHA owner occupied loan. The only exception allowing FHA refinance of non FHA loans is the FHA Secure plan. There is no prepayment penalty on FHA loans, and they can be refinanced into conventional loans anytime you can qualify for conventional financing. Most folks do refinance FHA loans into a conventional conforming loans as soon as they can, because FHA rates aren't as good as conforming and conforming loans don't carry financing insurance. It's something to be decided on a case by case basis, on the basis of what is best for a given homeowner.

I did say conforming loans. FHA had loan limits which has precluded them being a big player in most areas for at least a decade. With the decrease in housing prices that has hit many areas and new legislation raising the conforming and FHA loan limits, they are now a major player for first time buyers and people getting back into the market. Especially since traditional lenders are seemingly more fearful every day. Truthfully, I anticipate FHA loans as being what saves the bacon of traditional lenders and provides the upwards impetus to the market that will cause traditional lenders' fears to ease and relax their restrictions.

With loan limits preventing them from lending upon most single family residences these past few years, you'd think FHA would be friendlier to condominiums. Unfortunately, government bureaucracy being what it is, condos have to be approved by the FHA before they will fund loans upon them. Since relatively few developers care to do that, that means that most developments don't have blanket approval from the FHA. Some people think that if theirs is one of the few with FHA approval, this gives them a lock on FHA buyers and they attempt to extort a huge premium in the form of purchase price. I have seen people who intend FHA loans advised to get a list of FHA approved projects and work only from that list. This is nonsense.

Just because the FHA hasn't issued blanket approval to a condominium development doesn't mean that you can't get spot approval. The requirements, in addition to the usual ones, are no ongoing class action suits open or pending, and 60% or more owner occupancy for the complex. This last tends to be the most difficult requirement, as it's a little unusual that a particular complex has 60% owner occupancy, but there are many condominiums out there that can qualify even though the complex does not have pre-existing approval.

Like all government programs, FHA loans require full documentation of sufficient income to afford the loan. No stated income or lesser documentation loans will be funded or ever have been by this program. This is another reason they were unpopular in the Era of Make Believe Loans, as mortgage products for those with eyes bigger than their wallets proliferated, and agents and loan officers became accustomed to qualifying people for properties and loans far beyond their means. Now that that's all over and we're all back to solid fundamentals as far as loan qualification, you can decide to stay within the budget for a loan you can prove you can afford, you can put a significantly larger down payment on the property to qualify for conventional financing, or you can do without buying any property at all. But FHA does not do stated income loans and never has.

Matter of fact, the FHA doesn't do "interest only" financing, either. All FHA loans are fully amortized. However, the FHA does accept some hybrid ARMs as well as fixed rate financing. But no interest only, no stated income, no negative amortization. You must qualify for an FHA loan based upon the fully amortized payment and full documentation of income only, which eliminates most of the ways that people were being qualified for loans beyond their means during the Era of Make Believe Loans, and is one more reason why the FHA was not a major provider of loans in for several years.

Allowable debt to income ratios are 31% front end and 43% back end, according to the written guidelines. However, both can be individually waived upwards, higher even than conventional loan qualifying ratios of 36 and 45% respectively in the case of strong credit , high reserves, and a stable job, with high reserves being probably the most important factor. For instance, owner of a stable business of long standing. Nobody fires owners. Large amounts of money in retirement accounts is one way of getting the default debt to income ratio increased. The range of 45-49% (back end) is supposed to be reasonably possible to get the FHA to approve. Beyond that, exceptions are fewer and significantly harder to get. In my professional opinion, making it difficult to go higher is a good thing.

There is no requirement for reserves with an FHA loan at all. With that said, however, having reserves can be a major point in your favor, particularly above 43% back end ratio. People with hundreds of thousands of dollars in retirement accounts that they could fall back upon if they had to is something the FHA will consider while traditional lenders would not. They'll even allow non-monetary reserves, the most memorable example given to me being a collector of old motorcycles which could be sold. Jewelry, automobiles, and other non-liquid assets may be considered. Of course, it's a very good idea to source and season every dollar you're using to justify the transaction, but the FHA has even been known to accept "mattress money" for down payments (not generally reserves), which is unheard of in other loans.

Here's the really cool part about an FHA loan: It's not FICO driven. You technically don't even have to have a credit score in order to be approved. With that said, however, even when underwriting was at its loosest a sub-600 credit score made it difficult to get approved, and these days we're looking at 640 to 680 as a reasonable minimum. You can also use alternative credit , of which utility bills are probably the best example. Especially in some cultures, credit can be a thing that people aren't accustomed to having or using, so these capabilities are very helpful. You don't even have to be a citizen, but you do have to have the right to work in the United States. This is reasonable: If you don't have the right to work, how are you supposed to pay it back?

Prior bankruptcy is allowable. Chapter 7 with two years of seasoning and re-established credit, chapter 13 with one year payment history and court approval.

Even prior foreclosure is not an automatic disqualification from an FHA loan. They will, however, require documentation of extenuating circumstances such as major illness. Job transfer is explicitly disallowed as an acceptable extenuating circumstance, so people who walk away from properties thinking they're going to get an FHA loan are going to be disappointed. What the FHA really seems to be looking for is debilitating illness, either one which you personally went through, or one where you had to care for an immediate family member.

For how easy they are to work with for individuals, however, loan providers find themselves with many additional requirements, which is yet another reason FHA loans had been less popular while there were other choices. As of right now, in addition to everything else, in order to originate FHA loans, originators have got to go though an annual audit with an accountant who's specially certified FHA auditor. This audit costs a minimum of about $5000 just for the auditor, never mind the cost of the originator's own time or that of anyone else they may have to pay. The audit requirement is in the process being relaxed for originators (finally). The FHA does not permit an agent to hang their license with one broker for real estate and another for loans, either, and your FHA loan officer can not be your real estate agent. If your broker does both, however, it may be permitted. The extensive paperwork means fewer providers - especially discount providers - are interested due to the increased costs, which drives things exactly opposite to what you'd expect the government to want - it drives prices of FHA loans up, by restricting the supply of those willing to do them. It is hoped by many that FHA modernization will change some aspects of this, but that has been stalled in Congress for a very long time. It's pointless to speculate as to what will and will not be included in FHA modernization until Congress sends an actual bill to the president.

One thing not likely to change is the FHA's blacklist. It's not called that, but that's what it is. Once a real estate agent or loan provider is on their list, they are on it for life, and the FHA scrutinizes all transactions for anybody affiliated with it being on their "naughty" list. If someone should default on an FHA loan, the insurer is going to look for a reason not to pay the guarantee, which insures that every FHA foreclosure gets scrutinized for fraud and a number of other offenses. If the agent or loan officer was involved in such an offense, onto The List they go, and they are forever barred from transactions involving an FHA loan. For this reason, it's probably a good idea for consumers to ask about this in their first meeting with a prospective loan officer or real estate agent - on the phone would be better. Just say that you're going to be needing an FHA loan, so if they're on the FHA's "naughty" list, they might as well tell you now, because they're going to be wasting their time. If they try and talk you out of an FHA loan, well, that should tell you everything you need to know. FHA loans are equal or superior to anything that isn't conforming A paper, and if you haven't got the qualifications for that, FHA beats Alt A, and beats subprime like a drum (OK, so the VA is a better deal than FHA as well).

The FHA does not normally permit secondary financing, either in the form of second trust deeds or seller carrybacks. The one exception to this is in the FHA Secure program, which will have to be another article.

One final thing: FHA loans aren't free. There is an upfront cost of 1.75 points to fund the loan. This is over and above all other loan related fees. This pays for an insurance policy that insures the lender against loss, much like private mortgage insurance on conventional loans. In addition, there's an annualized cost of 0.55% on top of principal, interest, taxes, insurance, etcetera - and this is included in debt to income ratio calculations. This will continue until the loan to value ratio is 78% or less, and if the loan period is over 15 years, cannot be removed for five years. If the loan period is 15 years or less and the loan to value ratio is initially less than 90%, there will be no continuing (i.e. the annual component) mortgage insurance charged, but the only way to elude the 1.75 point initial charge is by having a loan to value ratio of 80% or less. Since in any of these cases, it's overwhelmingly likely there will be better choices available to the consumer, essentially all FHA loans are going to have this financing insurance. The continuing cost is one of the main reasons people refinance to non-FHA mortgages, incidentally.

With lenders fearful and paranoid about the state of the market, FHA loans are an excellent way to qualify someone for financing that's at least close to 100%. Given the state of the housing market, particularly the starter market, and the legislation increasing FHA limits, the FHA loan is a very powerful force for market stabilization, leading to market recovery. It's a good alternative for consumers who cannot currently qualify for conventional loan financing.

When I originally wrote this, there were down payment assistance programs in effect to enable what was essentially 100% financing. Those have been essentially dead since April 2008, when Congress did away with the provisions that allowed it except in the case of government agencies. Figure you're going to have to come up with your down payment out of your own funds somehow.

Finally, a caveat. Many sellers don't want to work with FHA or require higher offers in order to do so. They aren't as bad as they used to be, but FHA requirements for financing are still tougher than conventional financing rules - especially if you've got a condo that needs so-called "spot approval". This costs sellers money, and means their transaction isn't as certain as a conventional loan. If you're looking for a bargain or even just a better than average deal on purchase price, it's a good idea to avoid an FHA loan for that reason. Furthermore, many agents still have their heads in the old days when FHA financing was a nightmare for the seller. Especially if there are competing offers, expect seller preference to work against you if you're making an offer that includes FHA financing, and be prepared to need to offer significantly more than the competition if you want them to choose your offer over theirs. When I'm listing a property and the offers are otherwise equivalent, I would still prefer the buyers who are intending any other sort of financing over FHA loan buyers - and I explain why, in detail, to seller clients who are evaluating multiple offers.

Caveat Emptor

Original article here

(The original article was from September 2005)

From an email:

Anyway, my wife and I are about to purchase a place here in the X area and we've been hearing that "a tough loan" line due to the fact that I'm only 10 months into my new small business although I've been profitable the entire time. We're stuck doing No Doc/Stated Income setups - I think you called these "liars' loans" - and the rates are a bit painful.

My wife's scores... at 720 are the lowest we have and mine are (higher).

Well, the good news is that your credit scores place you in the highest band of credit scores. When this was originally written, there was no category beginning higher than 720. Now there is, but it's a pretty nominal difference in most cases.

The difficulty is that you're running afoul of one of the background rules of the whole loan process. Fannie Mae/Freddie Mac rules limit A paper loans to those with two years in the same exact line of work. With some limitations, a good loan officer can usually get it approved for two years with the same employer, if they've been progressing normally within the company. However, changing from a W-2 employee to self employed is a change that cannot be approved, at least from the point of view of A paper. A minus and Alt A rules are mostly similar. So you're looking at subprime loans. Let's examine A paper documentation levels to see if they're a possibility.

Full Documentation: Requires documenting two years income same line of work. You can't; you've only been self-employed for ten months.

Stated Income: Requires documenting that you've had the same source of income for two years. Nope. Yes, these and NINA loans were often called "Liar's loans" in the business because the lender agrees not to verify your amount of income. That's because loan officers eager to make a commission on a loan where the client really doesn't qualify on the basis of debt to income ratio commonly used these to qualify such clients. The qualification standards are there for your protection as well as the lender's. Just because you could use these to qualify doesn't mean it was smart. Most of the reason for the huge house of cards we had was due to unstable and unsustainable loans. Loan officers use these to qualify clients for negative amortization loans. Yeah, the temptation to make a commission is there, but am I really serving the client's best interest by securing them a loan they can't really afford where even the payment they can't afford has them owing more money each month? I submit that the answer to this question is usually no. Stated Income loans are designed for self-employed folks and people on commission who make the money, they just have write offs and such so that they can't really document it. Using stated income to say you make money that you don't is a dangerous game, as literally millions of people found out the hard way. It's likely to result in foreclosure. I am sorry it's completely unavailable as of this update because if it is used properly there are people it is both beneficial and necessary for, but it wasn't used properly in the vast majority of cases.

NINA: Requires a good credit score. This might be your ticket. On the other hand, you don't state how much of a down payment you have, percentage-wise. A paper NINA requires some equity in the property; I've never seen an actual A paper NINA approved with less than about ten percent equity. On the other hand, these were very easy loans to actually do when we had them. It was trying to qualify you for something better that was hard. Once again, however, they're completely unavailable at this update.

On the other hand, if we move down into subprime, the rules aren't set by Fannie and Freddie. When I first wrote this, there were subprime lenders with one year same line of work programs, and even a few with six month programs. On one hand, they're subprime loans, carrying a higher rate/cost tradeoff just by virtue of that, and subprime loans carry prepayment penalties by default. On the other hand, because you're documenting your income, you get a break for that. You probably would have ended up with a rate a quarter to half a percent higher, albeit with a prepayment penalty.

One of the great universal things of the loan business is this: The looser the underwriting standards, the higher the rate, and the tighter the underwriting standards, the lower the rate. If a given lenders underwriting standards are looser, it's rates will be generally higher.

Now, given that you've only been self-employed for ten months, you're not going to have much of a paper trail. There are three possible ways that banks will accept to document income. W-2? Even if you have them, they're no longer applicable. Income tax forms? Given that it's September, counting back ten months leaves you starting the business in November of last year. Even if you had enough monthly income to qualify for that month and a half or two months, the tax forms effectively spread it across all of last year, and that's unlikely to show enough income. The third method of income documentation, unique to subprime, is bank statements. This, you might be able to do. Most subprime lenders have 24 and/or 12 month bank statement programs, and a large number have six month programs as well. The longer you can document for, the better the rate, but better six months than nothing.

(I should note that at this update, I haven't done a subprime loan in the last 5 years, and even finding real subprime lenders has become extremely difficult, but they haven't been regulated out of existence like stated income and NINA so they are likely to return eventually)

Will this get you a better rate, at a better cost (two concerns that always go together), than an A paper NINA? If so, is the better rate worth the prepayment penalty to you? The answer to that was on a case by case basis when we had both. Now the NINA is nonexistent and the subprime is harder to find than an honest politician. There is no way to be certain without pricing it around by the full details of your case, but there's a good chance, and you can get 100 percent financing this way.

I will warn you that bank statement programs (often called by the misnomer "EZ doc" or "lite doc") are THE most difficult loans to actually get approved. There are more problems with these than any other loan type. On the other hand, as I've covered in Levels of Mortgage Documentation, or, Why You Should Demand to Do More Paperwork, if it gets you a better loan, the effort is likely to be worth it. Furthermore, there is a question of whether you qualify for the loan by the bank's standards. Some lenders discount the amount of money coming into the account, some do not.

So which is the better alternative for you? When we had both, I couldn't tell you without actually pricing it for your situation. I don't know for certain that either can be done for your situation without information like how much income your bank statements show, and how big your loan needs to be, and how much of a down payment you're making. Get a couple of good loan officers working on it in your area, and find out.

And yes, this was a always tough loan situation. Both A paper NINA and subprime bank statement programs have their limitations. Failing that, you fall all the way back to subprime NINA, where your credit would have formerly justified 100 percent financing, but it's as gone now as every other such program. Even when it was available however, the rates for subprime NINA were rough on the pocketbook.

Caveat Emptor

Original here

I have mentioned this form several times in the past as the only form in the entire real estate loan process which is actually required to be accurate. Department of Housing and Urban development form 1, the so-called HUD 1 form, is required to be filed and correct for every real estate transaction. Whoever your provider is, this is the one and only form they cannot play games with. This article is goes over the form line by line, referencing previous entries.

The top section has to do with identifying information on your transaction. Your name, the name of the other party to the transaction, escrow numbers, name and address of lender, date of settlement.

The meat starts with line 100, the Summary of Borrower's Transaction, and line 100 the section on Gross amount due from borrower.

101 Contract Sales Price: Should be the same as on your purchase contract.

102. Personal property: Say you agree to pay $500 extra if they leave the sofa. Here's where that goes.

103. Settlement charges to borrower (line 1400) adds the costs of the transaction to the total.

106 and 107 are repayments for any taxes the seller may already have paid as of the date of settlement, but are not their responsibility as the time period covered includes some time after the effective date of sale.

120. Adds all the lines up to this together. The rest are simply blank lines that may or may not be a factor in your particular transaction. If they are a factor, it should be because you specifically agreed to pay them!

The 200 section is about stuff that is paid for, or on behalf of the borrower, or you have simply already paid.

201. Deposit or earnest money: The deposit you made, either with escrow (purchase) or the bank (on a refinance) to persuade them that this was a good transaction.

202. Principal amount of new loan(s): Check and make sure this matches your new Note. In some states, they may be able to combine the amounts of two loans here, but they shouldn't.

203. Existing loans taken subject to: If you're assuming a loan or something similar, it goes here.

204. Second mortgage loan: Compare against your new second mortgage amount.

205 and 206 are blank lines for things that may not be a factor in every transaction.

210 and 211 are for city and county taxes that have not yet been paid by the seller, but the cost has been incurred. Let's say today is September 1, and we're in California, where the property taxes run July 1 to June 30. On September 1, the seller owes two months of property taxes, but those taxes haven't been paid, and won't be due until November 1. So there will be a credit here from the seller to the buyer for two months of property taxes, which the seller is responsible for until the effective date of sale, but the buyer will have to pay on November 1. 212 to 219 are blank lines unless something special is relevant to your transaction.

220 is total paid by/for borrower: This is a total of everything paid by you or on your behalf.

300 Section tells if you are due money at settlement or have to come up with some. 301 is transferred from line 120, 302 from line 220. If 302 is larger, you get cash back. If 301 is larger, you have to provide the check in order to close.

The second column is a summary of the seller's transaction, if there is a seller and it's not just a refinance.

Section 400 is about what's due to the seller, starting with 401 Contract Sales Price, then 402 which is a mirror or 102, then 403, Impound Credit, which is rarely used, as it is pretty much applicable to loans being assumed.

406 and 407 are mirrors for 106 and 107, as are 408 to 418 mirrors of the 108 to 118 section. 420, Gross amount due to seller, is a summation of all of these.

The 500 section has to do with stuff the seller is paying other people.

501 is excess deposit, 502 is settlement charges to seller, 503 is loans that are being assumed.

504 and 505 are mortgage payoffs being made, 507 through 509 are blank spaces for things not applicable to every transaction.

510 and 511 are mirrors of 210 and 211, as 512 through 519 mirror 212 through 219, blank lines not applicable to every transaction.

Section 600 is analogous to but not mirroring section 300. Line 601 is line 420 brought down. Line 602 is line 520 brought down. The difference is line 603 cash to seller (This can be line 603 cash from seller in the case of a so-called "short sale")

All of this is good and necessary information, but The Really Good Stuff™ is all on page 2. The lines at the right list who is paying it (buyer or seller)

Section 700: division of commission

Line 701 is compensation to the listing broker, line 702 is to the selling broker (i.e. the buyer's broker, the people who "sold" the property), and line 703 total commission paid at settlement. I've never seen this paid by buyer, it's always been paid by seller.

Section 800 is items payable in connection with the loan itself. This doesn't mean that these are all the loan-related charges - far from it.

Line 801 and 802 are dollar amounts of points. If these aren't zero, divide them by the loan amount to make certain they are the numbers agreed upon.

Lines 800 through 1317 are linked on a 1:1 basis with the appropriate lines on the Good Faith Estimate (Mortgage Loan Disclosure Statement in California, but the explanation in that article refers you to the Good Faith Estimate). In an ideal world, the total of these should be exactly what was indicated on the Good Faith Estimate/Mortgage Loan Disclosure. There are some few items that are not under the loan officer's control (again, see the article on the Good Faith Estimate for which are and are not). A good rule is that if it isn't on the Good Faith Estimate/Mortgage Loan Disclosure in one form or another, it shouldn't be here. Compare it to the Good Faith Estimate/Mortgage Loan Disclosure to find discrepancies. Other than things like prepaid interest, which the loan officer does not control but should have a pretty accurate estimate of, the most difference there should be between the two documents is one big fee gets broken down into little fees. But if you're told, for example, that the $795 amalgamation of lenders fees was broken up into A, B, and C, make sure that A+B+C=$795, and do not allow additional fees to be lumped in. Grab a piece of scrap paper and take notes. Make certain these numbers jibe. It is easy to hide thousands of dollars in unsuspecting fees to clients in this page if you, the client, are not careful.

Line 1400 is a summation of these lines.

Once again, look hard at the numbers on these two pieces of paper. It is the only honest accounting many people get of the transaction, and the fact that it comes at the end of the transaction makes hiding all kinds of things easy. You, the client, are tired of the whole process and want it to be over, a fact which many loan officers and loan providers rely upon. Put your guard up for a few more minutes, long enough to be certain what you sign for here matches what you signed up for back at the start of the process.

Caveat Emptor

Original here

mortgage real estate home education

(NOTE: AT this update, laws exist enacted in the latter part of the 2009-10 congressional session that essentially make it impossible to legally call zero cost and low cost loans what they are by requiring loan providers to count yield spread as a cost to the consumer. It isn't a cost to the consumer - it's a cost to the bank, offsetting charges the consumer would otherwise have paid. If you can't use yield spread for that purpose without counting it as a cost to the consumer, you can't do a low (or zero!) cost loan. One of the things that should be on everyone's wish list - except maybe banks who don't like paying it but would economically have to - is repealing Dodd-Frank)

Rates move up and down constantly. This is one of the strongest reasons both Intelligent consumers and intelligent loan officers love zero cost loans. Every time rates drop, I call or send an e-mail to those clients who signed up for low cost loans since the last time rates dropped this low, and voila, I'm saving them money for basically nothing. They got a low cost loan to start with, and on the refinance they're getting the same rate as someone who paid multiple points at the same time they got their current loan - for nothing extra.

A streamline refinance is a refinance where there is no cash out by Fannie and Freddie's definition. The rate must be lower, the payment must be lower, and the equity situation must qualify for at least the same program the borrowers had last time. If you roll the expenses into the balance cannot be higher than what was approved last time. Most streamline refinances are with the same lender, but there are a very few lenders who will or have in the past allowed streamline refinancing of another lender's loan.

Here's how and why it works. There is always a tradeoff between rate and cost. Rates had increased notably in the month prior to originally writing this, but that's good fodder for an example. I'm going to assume a $400,000 current loan. Closing costs on that loan were $2815 including appraisal, escrow, and title insurance. Usually, appraisals are not required for streamline refinances, but right now, lenders are in panic mode, so they are. Those who have the gold make the rules for lending it out. The A paper rates for the day I originally wrote this were a thirty year fixed rate loan at 5.875% for two points, 6.25 for one point (actually about 3 tenths), or 6.375 for zero points. Here's a table listing new rate, new balance, monthly interest cost, and how long it takes to recover the cost for the loan via lowered cost of interest in months as opposed to the 6.75% loan that I can do for no cost to the borrower at all.

Now once you've paid those costs, they're sunk into the loan. Furthermore, your rate is locked into concrete. Just because better rates come along does not mean the lender is automatically going to lower your rate, any more than they can raise it if rates go up. That Note is a binding contract on both sides. So if you want to refinance before you've broken even, any money you haven't recovered yet is just gone. The alternative is not to refinance at all, and keep your old loan, horrible though it may be by the standards of a later time. And if you do want to refinance again, it doesn't matter what your current rate is - you're going through the entire qualification process anew, and you have to pay closing costs again as well as, if you want them, discount points to buy the rate down.

Let's say it's a year from today, and rates drop to where they were a month previous. 5.25 for two points, 5.5 for one, 5.75 for zero points, and 6 percent even for zero cost. Let me stress for the hard of understanding who may be reading this that this is a purely hypothetical supposition. Depending upon the loan you chose today, here's your situation in twelve months:

At our hypothetical rates one year from now, the person who chose 5.875% initially cannot be helped without spending some money. In fact, I can move anyone who chose a loan costing one point or less down to a rate almost as good as what they spent $11,000 to get for absolutely zero cost. So their balances stay exactly the same, and here's the new situation

Notice that the person who chose that zero cost loan in the first place has a monthly cost of interest that's $8 to $17 lower than anyone else - and he owes thousands of dollars less on his loan! The people who spent money buying the rate down will literally never catch up to him! Even though the interest for the guy who keeps the initial 5.875% interest rate is a little lower, with thousands of dollars difference on the balance, you're still talking fifteen years or so for him to break even with the people who initially spent less to buy the rate down, straight line computation, never mind time value of money!

This isn't magic, and it isn't totally hypothetical. This is almost predictable. A few years ago the median age of mortgages was down to sixteen months. I can't seem to find it in the current Statistical Abstract, but I've heard it's all the way up to 28 months - still less time than it takes to break even for the costs of the expensive loan above, and pretty much the same as the break even for the loans where you spent some money to get the loan. Why in the name of whatever divinity you worship would you want to spend money that most people are never going to get back?

Considering this information, there's another loan that actually makes even more sense for most folks - a hybrid ARM. This is a thirty year loan with an interest rate that is initially fixed by the loan contract for a certain number of years, after which it will become an adjustable rate mortgage. For a long time, I've been doing 5/1 ARMs for myself. Even when the rates on thirty year fixed rate loans were ten percent, I've always been able to get a 5/1 ARM around six percent or less. For a couple of years, the rates on 5/1 ARMs were essentially the same as for thirty year fixed rate loans - meaning there was no real reason not to buy thirty years of insurance that your rate wouldn't change. Why not, when it's been cheaper than 5 years worth of the same insurance? But ARMs are now diverging significantly below the rate/cost tradeoff of thirty year fixed rate loans, so now we're getting back to the normal situation, where people willing to relax just a little bit on a mental requirement for a thirty year fixed rate loan can reap substantial rewards. A month before I originally wrote this, a 5/1 ARM at zero cost was at 5.75%. Despite 30 year fixed rates skyrocketing, the 5/1 when I originally wrote this was around 6.125. So for the same zero cost of a 6.75% thirty year fixed rate loan, you can get a five years of fixed rate at 6.125% then - and move you down below 5% at this update. On a $400,000 loan, this saved you $2500 per year when I originally wrote this - more than a full month of interest on the thirty year fixed rate loan. At the update, you save more than $5000 per year more. Furthermore, we've already covered the fact that the vast majority of people aren't going to keep their loan long enough for a 5/1 ARM to turn adjustable anyway. If you're among those 95% of all real estate borrowers who aren't going to keep the loan five years, there isn't any practical difference between a thirty year fixed rate loan and a 5/1 ARM except that you pay five eighths of a percent less interest - slightly over $200 per month saved in this instance. You can pay the same as a thirty year fixed rate loan and apply the interest savings to principal - which means you'll owe $14,000 less at the end of five years, assuming you keep it that long, and that rates don't drop so you can refinance at a lower rate, again for free. Another alternative is that you can invest the difference, in which case you'll have over $15,000 extra in an investment account, assuming an average 10% return per year. Who cares if you then need to spend $3000 of it refinancing if the rates never get this low in that period? Okay, I care, but since I'm still $11,000 or so ahead after I spend it, if I need to spend it, that is one heck of a good investment!

Some people prefer other ARMs. I see people encouraging the 10/1 and 7/1 for people who think the 5/1 isn't long enough. And if you're one of those folks who is going to lie awake every night for five years because you don't have a thirty year fixed rate loan, the difference between a 5/1 ARM and a thirty year fixed rate loan makes a difference of about $6 interest per night. Split two ways, for you and your significant other, that's $3 each for a good night's sleep. A good night's sleep is worth $3 to me, it's worth $3 for my wife, and I presume your sleep worth $3 per night to you, also. There's nothing explicitly wrong with choosing a 7/1 or a 10/1 as opposed to a 5/1, either. It's mostly a mental comfort issue. Most folks don't keep their loans 5 years anyway, so if I'm one of that huge majority of homeowners, why would I want to buy seven or ten years worth of insurance that my rate won't change? The only answer that makes any sense other than mental comfort is if the rate/cost tradeoff for those loans is cheaper, and that is only rarely the case. At the rates when I originally wrote this, you were giving away three eighths of a percent for the same zero cost loan on a 10/1 basis - 60% of your savings, although the 7/1 was almost exactly the same cost as the 5/1, so that's a good choice. Most folks won't use the two extra years, but if it's essentially free, why not take it in case you do? For the 3/1 ARM, on the other hand, was actually slightly more expensive at the zero cost level we're considering today, and even if it was cheaper, you're getting down closer to average holding period, so perhaps a third of the people who got it might want to hold it longer than the fixed period. Furthermore, I don't think I've ever seen a zero cost 3/1 more than an eighth of a percent lower rate than a 5/1 at the same cost. Let's say you could get one at 6% today for that loan, instead of 6.25. You save $41 extra per month - $241 over the thirty year fixed - but you've only got a maximum of 36 months of savings. $241 times 36 is only $8676, as opposed to $200 times 60 months, which is $12,000, not to mention more ability for compounding to have an effect in the case of the 5/1 ARM, and that the idea is refinancing to a favorable rate before the end of the fixed period. For all of these reasons, I can't really see choosing a 3/1 for any set of circumstances I can remember seeing any time in the last fifteen years or so.

To summarize, rate/cost tradeoffs between loans go up and down constantly - the rates for A paper change every business day, at a minimum. Nobody can predict exactly when they will rise or drop again, but that they will vary over a given range is pretty much axiomatic. Furthermore, there is always a tradeoff between rate and cost for any given loan type at any time, and if you choose a loan with low rates for that time but comparatively high costs, it will be years before you have recovered your initial investment via cost of interest. Since by that point it is very probable that rates will have fallen below today's rates at least temporarily, and you will have wanted to refinance, this is only rarely a good investment. A better way to cut your cost of interest is to choose a hybrid ARM with a fixed period likely to cover the period of time you will keep a given loan in effect.

Caveat Emptor

Original article here

i was sold a bad home mortgage who do you talk to

If you've just applied, not yet signed the actual loan papers, go talk to another loan provider. It's not like you're committed to the company, and it's not like it never happens. Even the most ethical loan provider loses loans between application and funding. It happens. Go make certain that you are getting the best loan for you. In order to do this, you need to actually discuss your situation with several loan officers - and I mean really discuss it. Ask the hard questions. I've got a list of questions for loan officers.

If you've signed the final papers but are in the rescission period, contact the escrow company and rescind in writing. Walk it in, don't rely upon a fax or registered letter. Mind you, if it's the last day and after closing time, a faxed rescission before midnight will prevent it from taking place - if the escrow company actually gets it. Faxes go astray. This is one reason why you want to contact the escrow company, who is paid to be a neutral third party. I've heard stories of people who supposedly contacted the loan provider and it somehow "got lost" and the loan got funded. Bad situation to be in, and the legal presumption is not in your favor. Now you've got to prove that you sent the rescission in time, and that they should have known not to fund your loan. This is hard.

The most common time to realize you've "been had" before the loan funds is right when you get the final loan documents to sign. That's always the moment of truth, and there are few legal protections in advance of that moment. Many people think that the federal Good Faith Estimate or California Morgage Loan Disclosure Statement mean more than they do, when the fact is that there are very few regulations upon the accuracy of either document, and unethical loan providers are adept at not running afoul of them. In particular, the government wants people to believe that the 2010 Good Faith Estimate fixes all the problems, when the reality is that the same people who made a habit of lying on the older versions have the loopholes in the new form down pat.

If your loan is already funded, you can contact your state's Department of Real Estate and your lawyer, but odds are extremely poor of those folks being able to do anything that changes the situation. There basically have to have been major rules broken to invalidate the contract, and those unethical providers who pull this garbage are adept at not breaking those few rules which really will land them in trouble. I've had a fair number brought to me to see if I could tell them how to fix it, and the form response is, "If your lawyer and the Department of Real Estate can't help you, all I can do is take the situation today as a starting point and see if selling or refinancing from this point forward put you in a better situation." In other words, the only way to reliably fix the problem is another (hopefully better) loan, or if that won't help, selling the property. The lender is not going to amend the contract because you've got a bad deal. The seller is not going to say, "Oh, I'm so sorry that you had a bad experience!" and restore you to where you were before you bought. This is why you need to make certain that what you're getting is a good deal before you are stuck with it. I'm trying to produce the knowledge that makes this possible here, but you still need to sit down and really talk the matter over with several professionals, and make the effort to find out if a proposed deal is real or nonsense. I am sorry to report that there is no easy way to do this, but you might want to start with these four articles mine. (I used to recommend back up loans too, but changes in the loan business have made them prohibitively expensive to the point where even I can't do them anymore)

If you go in alert with your eyes open and do your homework, you can avert the vast majority of problems before they affect you. If you are one of those who won't do this, then you will be placing yourself in one of three categories: Those with an unreasonable amount of pure dumb luck, those poor schmoes who've been had but know better now, or those poor schmoes who've been had and don't realize it.

Caveat Emptor

Original here

I got a search result for how to get out of mortgage pre-payment penalties, although I've never really dealt with the issue.

Prepayment penalties on real estate loans are something some people, often with less than stellar credit, accept, either in order to either get their mortgage rate lowered or because they don't know any better, or because they didn't ask, were lied to, didn't stick to their guns, didn't protect themselves from unethical loan providers, or any of a dozen other reasons people end up with them. Standard prepayment penalties are six months interest on the outstanding balance, but many companies with "twenty percent" allowances only require eighty percent of that.

Prepayment penalties come in two major varieties, "hard" and "soft", with the vast majority being hard prepayment penalties. Hard means that if the prepayment happens for any reason, you will pay the prepayment penalty. Soft means that if the reason you pay early is because you actually sold the property, there will be no prepayment penalty due.

Prepayment penalties can be further sorted into "first dollar" and "twenty percent". Either can be in the contract for either a soft or hard prepay, but first dollar prepays are uncommon for soft prepayment penalties. If you have a "first dollar" prepayment penalty and you pay one extra dollar above your regular payment, you will be assessed the penalty. These are most common with Negative Amortization loans, and are somewhere between ten and twenty percent of all prepayment penalties, judging from my experience with the problems people bring to me. A so-called "twenty percent" penalty allows you to pay up to twenty percent of the loan balance in any given year without triggering a penalty.

Common terms for prepayment penalties are one, two, three, and five years, although I have seen ten. Since the median time between refinancing is less than two years, and ninety-five percent of everyone has refinanced or sold within five years, it's very much like a hidden fee to the bank in most cases, one that will not appear on your loan costs summary of the HUD 1, and yet since most people who accept them end up paying them, I would certainly advocate disclosure of a dollar value being mandatory if there is a prepayment penalty associated with a loan. This is not to say that they are never beneficial or never necessary, but in a large majority of all cases they are simply the result of a loan provider who wants to make more money, who hides the prepayment penalty until it is too late to avoid. They want to raise your cost of going elsewhere so that you will keep the loan at least a minimum amount of time. No matter whether they are a broker or an actual lender, this means they make more money when they do or sell your loan. A lot more money. A two year prepayment penalty is worth two to four points (point = percent of loan amount), more or less, on the secondary market. Longer penalties are more.

Now, the answer to the question. I know of precisely four ways to get out of paying a prepayment penalty, and three of them are trivially easy to describe.

The first is not accepting a prepayment penalty in the first place. No matter how bad your credit is, you do have this option. Your interest rate will be higher, or they will charge you more for the loan, but you won't have a prepayment penalty. In general, my experience has been that the higher loan rate is worth not having a prepayment penalty. If your loan amount is $300,000 and your rate is 6 percent, your prepayment penalty will be about $9000. Nor is it, in general, tax deductible if you have to pay it. In this case, if you had to accept a rate one full percent higher to avoid a three year prepayment penalty, you'd be breaking even.

The second is equally trivial. Wait to sell or refinance until the prepayment penalty has expired. Let's say your loan amount is that same $300,000 at that same six percent, and that you have a year and a half to go. In order to be worth refinancing, you would have to save two full percent on your new rate, and that's not counting anything you pay, costwise, to get the new loan.

The third way involves something not under the personal control of the borrower, in that it requires legal intervention for perceived legal wrongs done you, the borrower. It has happened in the past that courts have ordered prepayment penalties waived in such cases. It has also happened that companies have agreed to waive a prepayment penalty as part of a settlement. Both events, however, are rare and require you to have gone through something bad enough to merit this. The one case I'm personally familiar with involved the lender playing games with payments that were being made on time to the point where they actually marked the people as being in default. I got them to a lawyer specialist and did exactly what that lawyer told me to, when he told me to, and nothing else. They went through something worse than purgatory at the hands of this lender and ended up paying thousands of dollars in attorney's fees, which they didn't recover, but at least they kept their home. Getting out of a prepayment penalty this way is a cure that's worse than the disease.

The fourth and final way to avoid a prepayment penalty is to refinance with the same company. Most (although not all) lenders will agree to swap the old prepayment penalty for a new one if you do your refinance with them. This does not mean that if you've got eighteen months left on a three year prepayment penalty, you've got eighteen months left on the penalty under the new loan. This means you've got a whole new three year prepayment penalty. It's like putting a problem off for another day, allowing it to fester. Far superior in most cases to just wait until the penalty is gone, because in the vast majority of all these cases your balance under the replacement loan will be significantly higher, and thus, the amount at risk due to a prepayment penalty will be more.

There you have them. The four ways to avoid paying a prepayment penalty. None of them is exactly wonderful, I know. But consider that the borrower agrees to the penalty when they accept the loan. It's part of the terms, and they do have alternative loans without prepayment penalties. It's just that most people jump to conclusions that this is a loan they want as soon as they hear the payment, and, if they're more cautious than average, the interest rate. Which is why you should be one of those who asks every potential loan provider about them, before you are stuck with one. I highly recommend asking the question, "And what is it without the prepayment penalty?" An ounce of prevention is worth many pounds of cure.

Now I get all sorts of questions about other ways to avoid pre-payment penalties. These range from good, such as "What if my spouse dies?" to understandable, such as "What if my employer transfers me?" to the ridiculous: "What if my cat has kittens?" What they have in common is that in none of those cases will the prepayment penalty be waived. Bottom line: Accepting a pre-payment penalty is a risk you decided to accept, and without the pre-payment penalty, you would not have gotten as good a rate, and your payments would have been higher. That is a concrete, certain benefit that you got. The price for it was accepting the pre-payment penalty, so don't be surprised or hurt or even gripe if the lender wants the money you agreed to pay in the event you did something that is under your control. You can always contact the lender and ask if they'll waive it under the circumstances, but the answer is going to be "no", and for the same reason that your auto insurance company won't pay the repair bill if you crash after your policy expires. You decided to assume the risk of pre-payment yourself, and you've been putting money in your pocket because of it. When that bill comes due, don't expect someone else to pay it for you when you have been putting money in your pocket because you said you would pay it if it happened. As I said above, an ounce of prevention is worth many pounds of cure.

Caveat Emptor

Original here

From an email:

I was wondering if you could tell me whether the following ways to save on interest are actually possible. If they are what are the penalties typically associated with these suggestions. I know you have mentioned a pre-payment penalty but what amount is reasonable?

1) Pay a certain amount over your monthly mortgage payment to pay your mortgage off sooner, pay more in principle, and to save on interest. Example: Your minimum monthly payment is $2000 so you pay $2200 a month instead.

2) Pay your mortgage twice a month so that more principle is paid off before interest catches up. Another nice thing about this is that most people are paid twice a month.

Prepayment penalties are something that is associated with the loan your loan officer chooses for you when you sign up. They become set in stone when the documents are signed, the loan is funded and the documents are recorded.

Sad to say, only a very small minority of clients ask about pre-payment penalties at sign up, and judging from my experience with people at a later time, most people either cannot spot it in the documents (there should be a section entitled something like "Pre-Payment" or "Borrower's Right to Pre-Pay". On the other hand, you need to read the whole Note that you're signing enough to understand what every piece says).

As I've said in Mortgage Markets and Providers and Yield Spread Explained, pre-payment penalties are a function of the market you're shopping in. Not necessarily the best market you can shop in, but most loan officers are going to be looking to make money, not necessarily to get you the loan that's really the best possible loan. Pre-payment penalties add to what they get paid, and it's invisible to the client while you're getting the loan unless you go looking for it. In all markets, there is a trade-off between what you pay in up-front costs to get a given rate on a given type of loan, and what rate you get. Adding a pre-payment penalty (or not removing one) adds to the loan provider's commission, sometimes multiple points, and out of this they give you back a half point or so to make their loan look more competitive. A Good Question to ask and catch many loan officers off-guard is "and what is it without any pre-payment penalty?"

Pre-payment penalties are a thing to avoid if you reasonably can. On the other hand, circumstances can force you to accept one. No loan officer works for free, and if about all you've got is the money for the down payment, accepting a two year pre-payment penalty (meaning it is in effect for two years) can get the loan officer paid while you still get a affordable rate at a cost that is within your means.

Here in California, the maximum pre-payment penalty is six months interest, and that is the industry standard for when there is a pre-payment penalty. A few lenders will pro-rate it, but for the vast majority, they will charge the same penalty on the day before it expires as on day one. This is pure profit, and they're generally not going to turn down pure profit any more than most people will turn down a bonus. So if your interest rate is 6 percent, you're going to pay a 3 percent pre-payment penalty if you sell or refinance before the pre-payment penalty expires. For Negative Amortization loans, the pre-payment penalty is based on the real rate, not one percent, of course.

On some loans, the pre-payment penalty is triggered by paying any extra money. One extra dollar and GOTCHA! But probably eighty percent or so give you the option of paying it down a certain amount extra each year, usually 20 percent of the principal at year's beginning, without triggering the pre-payment penalty. This amount INCLUDES the normal pay down of principal via the monthly payments, so if you have a $200,000 balance at the start of the year, a lump payment of $40,000 is going to trigger the penalty because the regular payments will then push the pay down over 20%.

Now as to the alternate payment schemes you mention, the first method, paying extra, is very possible and recommended with most mortgages. Anything extra you pay should be applied directly to principal. Especially in the early years of the mortgage, this has a multiplier effect, as now that you don't owe that money any more, your interest charges in the future will be less so less of your payment goes to interest and more to principal. On a $300,000 30 year mortgage at 6%, your monthly payment is $1798.65. Of this, $1500 is interest - which you're paying just to break even - and 298.56 is principal, which actually goes to pay off your loan. Let's say you pay $200 per month extra. If you're one of those extremely rare people who actually pay off your mortgage, you'll be done in 278 months - 82 months early. Almost 7 years. The interest you pay drops from $347,514 to $256,000 - you saved $91,514 in interest charges by paying $200 per month early.

If, as is far more likely, you refinance after 2 years, instead of owing $292,404, you'll only owe $287,284, a savings of $5120, which means you owe $5120 less on your refinance, and might get better terms because of it. Or you have $5120 more in your pocket if you sell. So it's only a 7.5% rate of return - it is guaranteed. If this mortgage outlasts 95% of all loans and makes it to five years - sixty months - you'll only own $265,114 instead of $279,163, a difference of $14,049. This is money in your pocket or money you don't owe on the refinance, which you're not paying fees on, and which might get you a better deal. Or it's $14,049 more from the sale of your property to buy another one. It's a 17 percent overall return on every penny in you added in five years, including the last payment you made. That's better than you'll do with CDs with the first month's money.

Suppose you only make one extra payment, once. Let's say you make an extra payment at the end of the month when you buy or refinance instead keeping the money in your checking account until the end of the next month. Making that one payment saves you more than five months at the end of your mortgage if you keep it the full thirty years. Let's say you just pay $200 extra once, that first month that you actually make a payment. You owe $225 less after 24 months, $270 less after 5 years, and $1207 less in the last month of your loan (assuming you keep the loan the full thirty years).

Furthermore, the higher your interest rate, the more difference these payments make.

Your second question, about paying your mortgage twice a month, is trickier, and here's why: What most people who do this are doing is actually making payments every two weeks, not every half month, which means you're making an extra payment per year in pure principal. To separate the two phenomena, let's drag the calculator out. Cut the interest rate in half, cut the payment in half, and double the number of payments. Punch in n=720, i=3%, and let's see what happens. The payment comes out to $898.92. Double this to $1797.85. This is about 81 cents per month difference. If you pay half of the $1798.65 twice per month, you shave less than half a month off of your payment schedule.

On the other hand, make 13 payments in 12 months, and (to make things simple for a simple calculator) that's roughly equal to making payments of $1948.54 per month, which has you done in the 295th month - almost five and a half years early.

So you see, the twice a month schedule really does comparatively little for you - it's the fact that you are making an extra payment per year that really helps in this case.

So with some banks charging hundreds of dollars to sign you up for things like this (I know of lenders who charge $400 and up just to sign up), I'd suggest instead to instead spend the sign-up money on a direct pay-down of your mortgage (providing you don't have one of those "one extra dollar" prepayment penalties), and keep making those monthly payment with a little extra on the side instead.

This "service" banks provide for their customers is nothing more than a cash-cow fee to pad their own bottom line, all for something the vast majority of borrowers have the right to do for themselves for basically nothing.

And for the rest of you out there, I say the same thing I said to this person "Please ask if you have further questions you'd like answered."

Caveat Emptor

Original here

My lender told me that there is an application fee?

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

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

Never pay for more than a credit report up front. You should want to choose the appraiser if you're going to pay them - that way you own the appraisal, not them. Just because Home Valuation Code of Conduct now prohibits this doesn't mean you shouldn't want to do something that is in your best interest (I do not believe HVCC could withstand a serious legal challenge). You should also choose the building inspector if you've got to have one - most refinances don't, but only a complete idiot wants to spend that much money to buy a property and doesn't pay a few hundred for the inspection first. If the lender orders them, they own them. They have to give you a copy, but you can't take it to another lender to use if this one hoses you.

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

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

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

Caveat Emptor

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