Mortgages: November 2019 Archives

As of July 1, 2005, mortgage providers have to have explicit written authorization to run credit.

I am not certain of the political forces that made this bill, and it is still not clear to me whether this extends to non-mortgage credit providers. If it does, this is probably one of the niftiest consumer protection things to come down the pike in a long time. On the other hand, if it's limited to mortgage providers, then it's a stab at making life difficult for Internet brokerages, which may do business at a remove of thousands of miles.

An Internet broker employee is talking on the phone with a client, not physically in the client's presence. They can be some of the cheapest and best loan providers out there, if they are so minded (as I keep saying, a far more important concern is how low a provider is willing to go, not how low they can go. Internet brokerages can also be consummate ripoff artists). It becomes a real hardship on their business if they can't run credit without explicit written permission, whereas it's not a major issue with a more traditional brokerage or direct lender.

Recent changes in the business mean that this is becoming less important. Nobody is locking loans any longer before they have a loan commitment (i.e. basic underwriting approval with enumerated conditions for actually funding the loan). I still can't run your credit until I get a signed form that says you give me permission. No big deal if I'm sitting right there. A real pain if I'm in California and the client is in Florida. I'm not even certain facsimile permission (no original signature) is acceptable, as it's not something that enters into my current business. This means a delay potentially of days while the form gets back to the lender. So life for an ethical Internet broker suddenly gets a lot more difficult, while life for the crooks becomes no harder.

On the other hand, if the requirement for written permission extends to all providers of credit, then it becomes worth the game. Mind you, an adult should be aware of what's going to happen if they give a social security number to a car dealer, furniture store, or anyone else. I've never heard of anyone using it just for liar's poker ("Oooh, this is a good one - four 8s!"). If you give a merchant your social, then they are going to run your credit. Treat it as a mathematical certainty, because it might as well be.

Each time somebody runs credit, it's an inquiry - a ding on your credit. Inquiry dings are progressively damaging. They cause your score to go down, each and every time you have an inquiry, and the more inquiries you have, the more each new inquiry drives it down. There used to be a game among mortgage providers until the new rules a few years ago - see if they could be the last ones to run your credit before it went under a threshold score, and some would run it multiple times if they could. Anybody running after that would be at a disadvantage, because you no longer qualified for a given credit score's pricing level.

The exception to "a ding for every inquiry" is mortgage credit. With the new rules that every consumer should get down on their knees and give thanks to the National Association of Mortgage Brokers for getting through Congress, consumers are now actually permitted to shop around for mortgage rates without getting dinged every time their credit is run - provided they run credit under a business code that say's "inquiry for mortgage." (So if you are mortgage shopping at a bank or credit union, be sure they run your credit under their mortgage inquiry code, and not a general inquiry code). All of the times it is run within fourteen days by mortgage providers count as exactly one inquiry. This gives consumers the ability to shop as much or more for a mortgage as they would for, say, a toaster oven, without being penalized.

But if the new rules apply to non-mortgage credit grantors also, this is a good thing. Here's why: Every time I start a loan, I have a set spiel that I go through. "Don't change anything, credit-wise, even if you think it will help. Don't buy anything. Don't charge anything on your credit cards. Make your normal payments - no more, no less, unless you ask me first. And don't allow anybody except mortgage providers to run your credit for any reason. Don't even let them have your social. Because they will run your credit, I guarantee it."

On every home loan, one of the last things that will happen before your loan is recorded in official records at the county will be that the lender will run your credit again to make certain nothing has changed. And if anything has changed, you will very likely lose the loan (and the house if it's a purchase). Even if the escrow company has the money or it's actually been disbursed, the lender will pull it back, as they can do that until the deed is recorded. So there is a real need for prospective borrowers to understand that until the final documents are recorded with the county, they shouldn't so much as breathe differently.

For a certain personality type, being told she can't shop for curtains and furniture and paint for her new house is nothing short of torture, and so I've learned to be very explicit. "It's okay to look, to talk to the nice salesfolk, and to get an idea of what you want. But don't actually buy anything. Tell the nice salesman who says he just 'wants to get a head start on your order' that your mortgage loan officer said that you're right on the line, and anybody else runs your credit and drives you under the line the first consequence to the furniture or paint or drapery salesperson will be no order, because they're likely to cost you the loan.

So while you have a home loan pending, tell the nice salespersons that you're really protecting them by not giving him your social, because if they run your credit and cost you the loan you'll have to tell your uncle Bruno the mobster about it. And we all know what happens then.

Back in the real world, things are not usually quite that bleak. But it's surprising how often people end up with higher rates and higher payments and worse loans because they didn't understand this one point. Suppose your monthly payment is $50 higher than you thought it would be, in addition to what you spent on the new stuff that caused money to go into that salesman's pocket. Doesn't that make you feel all Warm And Tingly towards that salesman? Didn't think so. And a certain percentage of the time, this new monthly payment you now have because you Bought Something means you Do Not Qualify for the loan. So: No loan. No house (if it's a purchase). No lower payment (if it's a refinance). No cash out of your equity (if that's what you were trying to do). And so now you've got this stuff, and no house to put it in. Now you've got to tap the vacation or retirement account to pay for it because you're not getting a refinance on reasonable terms. Not to mention all the times these people run credit and hurt people's credit scores without real permission when there's no mortgage loan in the offing. So I can put up with one segment of my industry have a slightly higher bar to jump over if that's the carrot.

Caveat Emptor

Original here

When you have more than one loan on your property, there are some issues you should be aware of. Keep in mind the fact that some states still use the mortgage system, requiring court action to foreclose, as opposed to Deed of Trust, which does not. For practical purposes they are similar, yet I have never done significant work in a mortgage state so there may be small but significant differences.

Each loan is secured by a different Deed of Trust. Two loans, two Deeds of Trust. A Deed of Trust is a three way contract between the borrower (called the trustor), the lender (called the beneficiary), and a third party known as the Trustee, to whom title is nominally conveyed for purposes of selling the property if you default on the loan. The Trustee and the Beneficiary are often the same, and while there is no legal impediment I'm aware of to the Trustor and Trustee being the same, I also cannot imagine a lender agreeing to it.

Trustees can be changed, and this is accomplished via a document known as "Substitution of Trustee," which is required to be recorded with the appropriate county in every state I've done business in.

Each Trust Deed operates independently of all others there may be against a given property. They take priority in order of date. When a Trust Deed is recorded against an property on which there already is an active Trust Deed, it automatically becomes a Second Trust Deed, if another happens it is a Third Trust Deed, and so on.

The reason they have the ordinal is because they are paid off in the order they happened. Suppose the property is sold, and the sale price is not sufficient to pay all of the debts. The trust deeds are not paid proportionally; The First Trust Deed is paid off in full before the holder of the Second Trust Deed gets a penny. Then the Second is paid before the Third, and so on. This is why Second Trust Deeds carry higher rates than First, because they are riskier loans for the lender. As I've said elsewhere, just because the property is sold doesn't mean you're clear. If there is not sufficient money from the sale to pay all debts, you can expect the lender to hit you with a form 1099, reporting that you have income from debt forgiveness, and you will be expected to pay taxes on it. Not to mention that there may be recourse in many cases.

Now, if for whatever reason you pay off your First Trust Deed, the Second automatically goes into the first position, and any subsequent loan goes into second position. This is most common when people go to refinance the loan secured by their First Trust Deed. Even if you do not particularly want to pay off your Second Trust Deed, it may be the best thing to do. Because what happens if you just pay off the First Trust Deed (only) and get a new Trust Deed, is that the new Trust Deed will go into the second position. Unfortunately, in order to get the quoted rates for a primary loan, it is a requirement that the loan be in first position. If it's not in first position, they will not actually fund it. In short, no loan.

This is not necessarily an impasse. Many times, the holder of the second trust deed, because their loan was priced to be second in line anyway, may agree to subordinate their loan to the new loan, which is a fancy way of saying "stand in line behind the new trust deed holder".

They don't have to do this, and there is no way, other than paying off their loan in full, to force them to do so. Some companies never subordinate, while some others are never willing to stand second in line at all, and others are in both categories.

For those that will consider it, they are going to stipulate some conditions. First of all, the new loan is likely going to have to put the borrower into a position where it is easier, or at least no more difficult, to make payments and pay off the loan. So monthly payment usually cannot rise.

Second, they are going to want their trust deed to be in no worse of a position than it was when the loan was originally approved, as regards the value of the home being able to pay their loan off too if for some reason either loan is defaulted. They may even require than you agree to a higher rate, higher payments, or a different loan altogether - as I said, there is nothing you can do to force them to cooperate.

Assuming that they are willing to cooperate, they will require that the entire process on the prospective new loan be essentially complete - that is, ready to draw documents and fund when the Right of Recission expires after three days, before they will even look at it. Some lenders take 48 hours to look at a subordination request, others take up to six weeks, and it can be even longer. For any given lender, it takes as long as it takes.

There is also going to be a fee involved. They have to pay their people to look at the loan situation and make certain it still falls within guidelines. They're the ones doing you the favor, they certainly are not going to do the favor for free. Whether the subordination request is eventually approved or not, the subordination fee is likely to be non-refundable, a sunk cost that you are not going to get back even if it's not approved.

Even more important than that, however, subordination takes time. When I first wrote this, I locked every loan as soon as I could. It's more complicated now, but I still prefer to lock early rather than later. No loan quote is real unless locked, all locks are for a specified period of time, no lock is good past the original period of time unless you pay an extension fee, and if you need to lock for a longer period of time in order to subordinate, either the rate, the cost, or possibly both will be higher. Since this can add anywhere from two days under idea conditions to six weeks or more for a refinance that takes three weeks to get approved and get funded in the best of times, this means a longer lock period becomes advisable. Most often, the extra costs mean that it's more cost effective to just pay off both loans rather than subordinating the second to the new loan.

Since Home Equity Lines of Credit are always secured by a trust deed, they count as any other second mortgage would. You'd be amazed how often people do not disclose Home Equity Lines of Credit even when directly asked about them. They are only hurting themselves, but they often get angry to no good purpose when, if they had been upfront about them, the loan officer could have designed around any difficulties. Furthermore, people are often resistant to the idea of paying off and closing Home Equity Lines, despite the fact that they are easy to get. I've had people stonewall, utterly in denial that this is a Deed of Trust upon their residence until I have the title company fax me a copy of the Trust Deed, and reference it with the Preliminary Report, and ask to see the Reconveyance (which is a fancy way of saying the piece of paper proving that the trust deed has been paid off). If it's a legitimate lien, we have to deal with it. Actually, we have to deal with it if it's not a legitimate lien as well, just in a different manner. On the other hand, some time ago I had some seasonal resident clients whose ex-caretaker had managed to take out a loan against the property. It does happen, and it's a mess, but most times it's just the people themselves who weren't told - and didn't figure out - that this financing agreement they signed for the pool or air conditioner or roof was a second trust deed on their house.

To summarize then, second loan means second trust deed, if you refinance they must be paid off or subordinated, and subordination takes time such that it may be better to pay it off than go through the rigamarole of subordination.

Caveat Emptor

Original here

Every so often I run across a reference to a "rate buydown" I don't like to use them because they don't benefit the client, but I should explain them, what they are, and how they work.

A rate buydown is where for an upfront price, the lender agrees to give you a temporarily lowered interest rate on what is usually a fixed rate loan. 2/1/0 buydowns, where the rate is two percent lower the first year, one percent lower the second year, and then at the loan rate the third year, are the most common, but I've seen one year buydowns of two percent, two year buydowns of one percent for those first two years period, and any number of other tricks.

This isn't free. A 2/1/0 buydown usually costs three points. In fact, what usually happens is the three points go into an escrow account somewhere where they pay out the money to make up the difference in interest to the lenders as the loan goes along. When the buydown period is over, the lender who originally funded your loan then gets to keep what's left over.

Here's what this means to you. Let's make this easy. Say you would have had a $291,000 loan, fixed at 7 percent, without a buydown. But with the buydown, you have a $300,000 loan at 5 percent the first year, six percent the second, and 7 percent from there on out. In order to really understand this, let's first take a look at your loan without a buydown:

Month 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

Balance $291,000.00 $290,761.47 $290,521.55 $290,280.23 $290,037.50 $289,793.35 $289,547.78 $289,300.78 $289,052.34 $288,802.45 $288,551.10 $288,298.28 $288,043.99 $287,788.22 $287,530.95 $287,272.19 $287,011.91 $286,750.12 $286,486.80 $286,221.94 $285,955.54 $285,687.58 $285,418.06 $285,146.97

Payment $1,936.03 $1,936.03 $1,936.03 $1,936.03 $1,936.03 $1,936.03 $1,936.03 $1,936.03 $1,936.03 $1,936.03 $1,936.03 $1,936.03 $1,936.03 $1,936.03 $1,936.03 $1,936.03 $1,936.03 $1,936.03 $1,936.03 $1,936.03 $1,936.03 $1,936.03 $1,936.03 $1,936.03

Interest $1,697.50 $1,696.11 $1,694.71 $1,693.30 $1,691.89 $1,690.46 $1,689.03 $1,687.59 $1,686.14 $1,684.68 $1,683.21 $1,681.74 $1,680.26 $1,678.76 $1,677.26 $1,675.75 $1,674.24 $1,672.71 $1,671.17 $1,669.63 $1,668.07 $1,666.51 $1,664.94 $1,663.36

Principal $238.53 $239.92 $241.32 $242.73 $244.14 $245.57 $247.00 $248.44 $249.89 $251.35 $252.82 $254.29 $255.77 $257.27 $258.77 $260.28 $261.79 $263.32 $264.86 $266.40 $267.96 $269.52 $271.09 $272.67

Tot Int. $1,697.50 $3,393.61 $5,088.32 $6,781.62 $8,473.50 $10,163.97 $11,852.99 $13,540.58 $15,226.72 $16,911.40 $18,594.62 $20,276.36 $21,956.61 $23,635.38 $25,312.64 $26,988.40 $28,662.63 $30,335.34 $32,006.51 $33,676.14 $35,344.22 $37,010.73 $38,675.67 $40,339.02

Tot Prin $238.53 $478.45 $719.77 $962.50 $1,206.65 $1,452.22 $1,699.22 $1,947.66 $2,197.55 $2,448.90 $2,701.72 $2,956.01 $3,211.78 $3,469.05 $3,727.81 $3,988.09 $4,249.88 $4,513.20 $4,778.06 $5,044.46 $5,312.42 $5,581.94 $5,853.03 $6,125.70

Now let's look at it with the buydown:

Month 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

Balance $300,000.00 $299,639.54 $299,277.57 $298,914.09 $298,549.10 $298,182.59 $297,814.56 $297,444.99 $297,073.87 $296,701.22 $296,327.01 $295,951.24 $295,573.90 $295,257.63 $294,939.77 $294,620.32 $294,299.27 $293,976.62 $293,652.36 $293,326.47 $292,998.96 $292,669.81 $292,339.01 $292,006.55

Payment $1,610.46 $1,610.46 $1,610.46 $1,610.46 $1,610.46 $1,610.46 $1,610.46 $1,610.46 $1,610.46 $1,610.46 $1,610.46 $1,610.46 $1,794.15 $1,794.15 $1,794.15 $1,794.15 $1,794.15 $1,794.15 $1,794.15 $1,794.15 $1,794.15 $1,794.15 $1,794.15 $1,794.15

Interest $1,250.00 $1,248.50 $1,246.99 $1,245.48 $1,243.95 $1,242.43 $1,240.89 $1,239.35 $1,237.81 $1,236.26 $1,234.70 $1,233.13 $1,477.87 $1,476.29 $1,474.70 $1,473.10 $1,471.50 $1,469.88 $1,468.26 $1,466.63 $1,464.99 $1,463.35 $1,461.70 $1,460.03

Principal $360.46 $361.97 $363.48 $364.99 $366.51 $368.04 $369.57 $371.11 $372.66 $374.21 $375.77 $377.33 $316.28 $317.86 $319.45 $321.05 $322.65 $324.26 $325.89 $327.51 $329.15 $330.80 $332.45 $334.11

Tot Int. $1,250.00 $2,498.50 $3,745.49 $4,990.96 $6,234.92 $7,477.35 $8,718.24 $9,957.59 $11,195.40 $12,431.66 $13,666.35 $14,899.48 $16,377.35 $17,853.64 $19,328.34 $20,801.44 $22,272.94 $23,742.82 $25,211.08 $26,677.71 $28,142.71 $29,606.06 $31,067.75 $32,527.79

Tot Prin $360.46 $722.43 $1,085.91 $1,450.90 $1,817.41 $2,185.44 $2,555.01 $2,926.13 $3,298.78 $3,672.99 $4,048.76 $4,426.10 $4,742.37 $5,060.23 $5,379.68 $5,700.73 $6,023.38 $6,347.64 $6,673.53 $7,001.04 $7,330.19 $7,660.99 $7,993.45 $8,327.56

It is also to be noted that in the very next month, your payments go to $1982.23, as opposed to the $1936.03 they would have been in the first place, and that they will stay there the rest of the loan, all 336 months should you keep it the rest of that time. Why? Because your balance is larger than it otherwise would have been, so the payment is higher, in this case by $46.20, due to the higher loan amount.

Finally, let's look at the differences:

Month 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

Escrow Acct. $8,552.50 $8,176.27 $7,796.79 $7,414.04 $7,028.00 $6,638.63 $6,245.92 $5,849.83 $5,450.34 $5,047.43 $4,641.06 $4,231.22 $3,817.87 $3,647.29 $3,475.21 $3,301.60 $3,126.46 $2,949.78 $2,771.53 $2,591.72 $2,410.32 $2,227.32 $2,042.72 $1,856.50

Net cost $8,552.50 $7,982.95 $7,413.19 $6,843.21 $6,273.02 $5,702.62 $5,132.02 $4,561.21 $3,990.21 $3,419.02 $2,847.64 $2,276.08 $1,950.65 $1,687.67 $1,424.51 $1,161.18 $897.67 $633.98 $370.13 $106.11 -$158.09 -$422.44 -$686.97 -$951.65

What this means is that your lender's escrow account ends up with $1850 that they get to keep, on top of everything else they made from the loan. The final column is the net cost to you, what you paid to get it less the interest it saved you. Hey, look at this! In month 21 it goes negative! You must be saving money if you keep it that long, right?

Nope. This is a temporary and illusory savings phenomenon, and I don't know of any way to make it permanent. You see, the benefits stop in month 24. They are over. Kaput. Gone. That's all, folks. But you owe $6798.14 more (at the start of month 25, not illustrated above) than you would have without the buydown. There are exactly three possibilities as to what happens. First, that you keep the loan. Due to the extra interest you're paying every month, you are in the red again in month 56, and it keeps getting worse the longer you keep the loan. After 120 months of the loan, you are $1755 down. This particular example actually peaks in month 242 at $3351 negative, then starts decreasing, but you don't get it back before the loan is paid off.

The second possibility is if you refinance the loan. Let's say you get a really fantastic deal and refinance at 5 percent on a 30 year fixed rate loan, and I'll even give you that your higher balance doesn't cost you any more in fees. Your payment is $85.35 per month higher than it would otherwise have been, your interest charges $28.32 higher (and the difference represents you paying the principal off faster if you don't pay for a buydown). Your savings is gone in less than three years, and there's nothing you can do about it.

The third and final possibility is that you sell the house. You get $6798.14 less in your pocket. This means that you don't have $6798.14 earning money for you in the stock market. At ten percent your benefit is gone in less than a year and a half. If you take the money and buy another property, that's $6798.14 higher your loan balance will have to be. Let's say you get that same fantastic 5% loan we talked about two paragraphs ago on the new property. Guess what? The same math applies here also. There is no way to win in the end with a buydown, unless someone else pays for it (for example, seller paid closing costs).

So they are a piece of garbage. Why are buydowns attractive, and why do otherwise rational people sign up for them?

The answer is "Because they lower the payment for a while". People choose loans based upon the payment. In particular, they choose loans based upon the payment in the first check they are going to have to write. Most people figure that the check they are going to have to write two or five years out isn't important. Unscrupulous lenders and loan officers know this. That's why the horrible negative amortization loans were so popular, despite them being time-delayed financial poison. So don't shop for loans based upon the payment, and if someone starts talking about ways to cut the payment as opposed to the interest rate, put your hand on your wallet and leave. If they persist, drag them out into the sunlight and put a wooden stake through their heart. It's the only way to be sure.

Before I go, I want to mention one specific group that gets targeted for these things, and that is veterans. The Veterans Administration loan, aka VA loan, has the ability to roll (not coincidentally) three points closing cost over and above the cost of the home into the loan. Most military folks are busy learning their trade, which is usually not something having to do with finance. Indeed, I've never heard of any MOS that included this type of financial training. So when the loan officer whispers sweet nothings into their ear about cutting the payments for the first couple of years, they don't know any better and they sign right up. They could have used those three points for something potentially useful, like discount points that buy you a lower rate for the entire term of a VA loan. If you keep it long enough, they will eventually net you money. The veterans could just not pay those three points, and not start out with what is basically negative equity. But rate buydowns make a loan appear attractive on the surface to someone with insufficient financial training, while costing them money in the long term and allowing the initial lender to make more money than they otherwise would.

Caveat Emptor

Original here

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

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

The real hurdle faced by most buyers is that they owe too much money to too many other people for too many other reasons. Every dollar you have in existing monthly obligations is another dollar you can't afford on your house payment. People don't think about this until they want to buy a house, at which point they probably already have tens of thousands of dollars of debt, costing them hundreds or even thousands of dollars per month.

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

(When I originally wrote this, that was true. At the update, rates are lower while 100% conventional financing is not available, but this is still a valid illustration of the principle of debt to income ratio, which is what we're looking at).

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

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

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

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

For people who have a down payment, often the only way they are going to qualify is by spending it on their pre-existing debt. If they don't have a down payment to pay existing debts off, they are not going to qualify "full documentation," which is a fancy way of saying that the income they can prove isn't enough to qualify them for that loan. Furthermore, the manner in which you pay that debt off can be restricted. Sub-prime lenders don't really care as long you can show where you got the money and the debt gets verifiably paid off. "A paper," however, has to deal with Fannie Mae and Freddie Mac guidelines, which are less forgiving. In case you're unclear, 'A paper' loans are much better. But 'A paper' guidelines are that you cannot pay off revolving debt to qualify, and even installment debt is at the discretion of the underwriter. In short, once your credit has been run, what you can pay off to qualify "A paper" is limited. A lot of folks end up stuck with sub-prime loans because of this. Higher rates, shorter term fixed period, pre-payment penalty. This was one of the big reasons "stated income," was abused so much, at least when stated income loans were available. This always was one of the markets that was tempting for homebuyers to go "stated income" for precisely that reason, but there are real reasons why it is, and always has been, a better idea to buy a less expensive home than go stated income on the loan if you don't really make the money. Lots of folks been getting a concrete real world education in that in the last few years.

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

So you should be able to see some of the issues that existing debt can cause. Existing debt quite often means that you do not qualify for a property you would easily be able to afford - if only you didn't have those pesky consumer loan payments every month. It can force you to undertake a less desirable loan type, it can force you to accept a pre-payment penalty, and it can prevent you from being able to qualify for the property you want. Alternatively, it can force you to choose between not buying at all, and intentionally defeating one of the most important safeguards consumers have, the debt to income ratio. The smartest thing to do is probably to buy the less expensive property that you can afford now, but all too many people refused to do that, and are finding out right now the reasons why it would have been smarter.

Caveat Emptor

Original article here

(Rates were much higher when I originally wrote this)

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

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

The most common mortgage advertisements when I first wrote this were negative amortization loan payments. When I originally wrote this, those were ubiquitous. Now, of course, the regulators have essentially banned them because of all the foreclosures. The first advertisement I found when I originally wrote this (I actually had to look at two web pages completely at random, too, not just one) said "$430,000 loan for $1399 per month." It says nothing about the rate, which was about 8.25% as opposed to the low 6s of a good 30 year fixed rate loan with reasonable costs at the time. It says nothing about the fact that if you make that payment, next month you will owe over $1550 more than you owe today. That's not what most people think of as a real payment, and every time I look at one, I'm thinking, "I really hope they're practicing bait and switch on that," because anything else is better for their client's financial future.

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

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

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

What the people advertising mortgages have learned works are the advertisements that offer the illusion of something free or something extra. There is no such thing, but that hasn't (and never will) stop them from pretending that there is. Since Negative Amortization loans went out the window and they can't advertise a ridiculously low payment, biweekly payment schemes have largely taken their place - neither of which is worth paying for, and both of which play "hide the salami" with hidden assumptions of extra money you're going to use to pay your mortgage down.

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

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

Caveat Emptor

Original article here

(I have noticed a fair number of hits to this article that, judging by their search query, probably want the article on What Happens When You Can't Make Your Real Estate Loan Payment instead)

I got a question about legal late payments in California.

Unfortunately, there really is no such thing as a legal late payment. You borrowed the money, signed a contract, and it accrues interest according to that contract. You owe this money, and it only gets worse if you don't pay it. There is some wiggle room so you don't get unduly hit for a day or two late, or if the right to receive payments is sold, but that's about it.

The law gives you some wiggle room in the timing of the payments. First off, the laws of California and most other states give you fifteen days after the due date to pay the mortgage before a penalty can be assessed. I know of a lot of people who make consistent use of this. If it's due on the first, it's supposed to be there on the first, but many people take advantage of the fact that there is no penalty as long as it's paid within fifteen days of due date (i.e. before the sixteenth), and consistently mail their payment on the tenth or twelfth.

If you miss the extended deadline by even one day, the penalty is up to six percent of the amount due here in California. As you might guess, most lenders charge the maximum penalty, or close to it. When you compute it out, four percent times 360 divide by 15 is ninety-six percent annualized, and six percent is 144% when annualized. I had my check get lost in the mail once and the lender waived the penalty when they called me on the eighteenth because I always paid on the first or before, but they didn't have to do that. I got the distinct impression that if I were the kind of person who pays on the twelfth or fourteenth every month, they would not have waived the penalty.

There is also some wiggle room on when the new lender receives your payment if your contract is transferred between lenders. Because once upon a time some unscrupulous lenders would sell notes back and forth between their own subsidiaries because it made them more likely to get late fees, or even able to foreclose on appreciated property when there were relatively few protections for borrowers in law. Mind you, you still have to send it on time, but if it gets hung up in forwarding between lenders, that's not your issue. Within sixty days, the old lender must forward the payment promptly, and it counts as received when the old or the new lender receives it, whichever is first. It's still better to send to the new lender at the new address if you have it or know it.

In short, although there are some small period where payment is allowed to be delayed due to one factor or another, it is never to your advantage to do so. Make your payments on time.

Caveat Emptor

Original here

Cash to close has always been an underwriting standard, but more people are running into it as a reason why they cannot buy that property, why their buyers cannot perform, and why they can't get that refinance approved. With lender requirements as to what they will and will not loan on, not to mention impacted equity situations, "cash to close" has become more important than it was, when for about fifteen years it was barely on the radar. Whether you are a buyer, seller, agent for either, loan officer, or someone who wants to refinance the property you already own, you need to be aware of the requirements for "How much cash needs to be there to make this loan happen?" If you anticipate them and structure the transaction correctly, said transaction will have a lot fewer stumbling points.

During the Era of Make-Believe Loans, 100% financing was routine, and with seller paid closing costs, the buyers often literally did not need a penny to buy property. Indeed, such was one reason the real estate market got so wildly out of hand. Not the only reason, nor the main one, but when people could believably say, "You haven't got any money in it, so just walk away if anything goes wrong," they could get a lot of takers, even when that's a lie precisely equivalent to the con man's "trust me!"

Right now, the only generally available 100% financing is the VA loan. 100% stated income financing, which was the gravy train for many god-awful real estate agents and loan officers, might as well be story on the lines of a Greek myth in the current environment - stories of what they called hubris abound in Greek Mythology.

Furthermore, lenders are looking hard at seller paid closing costs. They're desperate to make what they think of as good loans, so they're still mostly giving these a pass - but there are more instances of snags with them now than I can remember hearing of at any time in the recent past.

The upshot is that you have to consider "Cash to Close." You have to remember it and keep it always just as much in mind as loan to value ratio, credit score and debt to income ratio. Not only do you have to have the money for the down payment, you've got to have all the cash you need to close the transaction. This is a prior to documents condition: the lender will not so much as generate loan documents for signature until you and your loan officer can demonstrate that you have enough cash to actually make the down payment and everything else that you are going to need to pay to make the transaction happen.

The largest component of all is usually the down payment: 3.5% or more of the purchase price for FHA financing, 5 to 20 percent or more for conventional financing, depending upon what's available to you and some choices that get made. 5% down has become more available for conventional financing again as mortgage insurers have started insuring those loans again, and these loans all require private mortgage insurance unless and until the down payment reaches 20% of the purchase price. There are exceptions in some municipal first time buyer programs, but those are not "generally available" in that they run out of money at Warp Speed whenever they do get an allotment.

Closing costs for the loan are another component of cash to close. It takes money to pay the people and companies working on your loan. For a rule of thumb, I use $3500 even though it's probably going to be less than that, excluding discount points, which are used to buy the rate down, and impound account money. Title insurance, escrow fees, appraisal, processing fees, lender fees of various kinds, government fees such as recording, and usually a charge for origination, itself usually measured in points. These all have to get paid, or your loan doesn't get done. Nobody is going to agree to pay these costs for you unless they get something for it in the form of a higher interest rate.

There is always a tradeoff between rate and cost in real estate loans - you don't get a lower rate without paying for it, and you don't get costs paid for without agreeing to a higher rate in exchange. Points are measured as a percentage of the gross loan amount. If, for example, you're paying two points to buy the loan rate down, then after you've added in all the closing costs and impound fees and anything else that applies, this amount is only 98% of your total loan amount. On purchases, you're going to have to have this two percent of the loan amount in cash if you want to buy that rate down, effectively adding to your down payment requirements. So even though I've taken this slightly out of order here, in reality, points are the last things figured into the loan, assuming that there are any.

Impound accounts are seed money for paying your property taxes and homeowner's insurance, giving the lender assurance that they will be paid on time and in full, thereby not jeopardizing the lender's interest in your property through unpaid property taxes or having the property damaged or destroyed while uninsured. Many people like having these details taken care of by just writing a slightly larger monthly check in the first place. They are your money, but the lender wants enough money to seed these accounts so that they will have enough in them to pay these charges when they are due. As I have said and demonstrated, impound accounts can be several thousand dollars, and lenders can, in many states, charge extra for not having them.

Finally, there are the buyer costs of the purchase. Around here, they really aren't much - half the purchase escrow, recording costs and a few other minor things. I generally include them in the closing costs of the loan (as above), but they really are different. In other areas of the country, however, the rules are different and the traditions are that the buyers pay more of the costs of transference. Neither way is necessarily right or necessarily wrong; it's more a matter of what everybody is used to, and the fact that the usual method for your area is what the rest of the market is priced for.

On purchases, all of this money can only come from cash in addition to the down payment, or by moving cash away from money that would otherwise be used for the down payment. For refinances, if there is enough equity then these costs can usually be rolled into your new loan amount - but do not confuse that with not paying those costs. You are not only paying all of those costs, you are paying interest on them and they are still in your loan balance until you find enough in the way of payments to pay them off. Don't Roll Mortgage Refinance Costs Into Your Balance If You Wouldn't Pay Them Cash. And to further drive this point home, as many people are discovering now that they don't have this equity on refinancing, they are having to come up with thousands of dollars if they hope to get that loan actually funded. Real refinancing is not a case of blindly rolling what may potentially be tens of thousands of dollars into your loan balance. It's okay if you have the equity and make a conscious choice that this is the best way to handle it for you; it is not okay if by doing so you merely get to pretend that it isn't real money.

Down payment plus closing costs plus impounds plus buyer costs, plus points (if any) equals cash to close. You need to have this money available in cash, and you have to be able to convince the loan underwriter of its provenance - sourcing or seasoning the funds. Where did all of this money come from? The lender wants to know that it is not from an undisclosed loan, which you're going to have to make payments on, possibly thereby putting the entire transaction into the realm of unaffordability because your debt service is now too high a proportion of your income. You are going to have to show you got the money from some source that is not a loan, or that you have built it up and saved it over time. The lender is going to ask for supporting documentation, of course. For refinancing, there is at least potentially a little more leeway, if you've got equity in the property you can borrow further against that equity as an equivalent to cash, in order to close that loan. But that is a very different thing from not needing the cash in the first place, which is a pipe dream. For purchases, this very elementary, completely foreseeable difficulty is probably at fault in at least half of the transactions that are failing to close - all because lazy agents and loan officers got used to sloppy practices and are having difficulty weaning themselves away. Cash to close is real, and it's something that everyone needs to concern themselves with, lest they be made very unhappy when the entire transaction falls apart because the cash to close wasn't there to begin with.

Caveat Emptor

Original article here

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

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

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

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

The fact that a loan has been sold does not cause the penalty to be assessed. Otherwise, people would be assessed a penalty for something under control of the bank, not themselves. On the other hand, it doesn't let you off the hook of any penalty clause you agree to, either. The only difference when your loan is sold is who gets the payments. If there is a prepayment penalty, and you sell or refinance while it is in effect, it will be assessed exactly the same as if the loan had never been sold.

Caveat Emptor

Original article here

An email:

Greetings, I've recently been pitched the idea of refinancing my home and investing in apartments, or more precise, a four-plex. The idea is to refinance and get a negative amortization loan on my house. With the money I pull out of my home, put a down payment on a four-plex, also with a negative amortization loan. That way, I am told, my payments would stay relatively the same on my home and I can have a positive cash flow from the four-plex. Along with the pitch I am told that I can refinance after five years and get another plan, or sell outright, the apartments. Their belief is that in five years, the apartments and my home would have gone up enough to offset the interest that I will not be paying in a negative loan.

I've read, on this site and elsewhere, that negative loans are not the way to go for most people. I'd like some more input as to what to do in my situation.

Here are the specifics in my case:
Home --- owe - 200k
worth - 600k
would get around 200-215 from refi
Apartments --- worth about 900k
downpayment would be 20%, or 180k
keep the money left over from refi in savings for emergencies

loans for both properties is a five year fixed rate of 7%
paying only 4.25% of it, with the rest being added to debt

Is it too good to be true?

Now I know how Hercules must have felt fighting the Hydra. Cut off one head, two more grow back.

This situation can be called many things, but "Too Good To Be True" is not among them. It not only isn't true, it isn't good.

Let's go over what's going on in the situation as proposed.

You would have a loan on your home for about $420,000, including closing costs. This is just over the (basic) conforming limit of $417,000, but negative amortization loans are not A paper and pay no attention to the conforming loan limit. A real principal and interest payment on that loan is $2794.28, of which you are paying $2066.15. Over the course of three years, your loan balance would increase to about $435,327.16, at which point that $15,200 and climbing pre-payment penalty is no longer hanging over your head. After 5 years, you owe $447,480. Total of payments to that point: $123,969.00.

On the apartment building, you would have a $720,000 loan at 7%. The real payment on that is $4790.19, of which you would be paying $3541.98. After three years, you would owe $746,275, at which point that pre-payment penalty of $26,100 (to start, and climbing) is no longer over your head. After your planned five years, you owe $767,109. Total of payments is $212,518.80.

Now, I'm going to compare and contrast with two other loans I really do have as I'm typing this, but will be out of date by the time anyone reads it. I should mention that I have difficulty believing that the investment property, especially, would not be at a higher rate than you have been quoted. I don't believe that these are zero points loans, but I'll even assume that they are, in order to have a fair compare and contrast. I know for a fact that this isn't even the best I can do, but I'm just picking the first rate sheet that comes to hand. This is with all costs included: loans I could lock at the time I originally wrote this. A 30 year fixed on $417,000 (maximum conforming) at 6.25%, and I could even give you about $750 to help cover your closing costs, but let's say net total cost to you is $3000, and therefore your net is $214,000 when all is said and done. The payment on this is $2567.54. There is no prepayment penalty on this loan. After 5 years, you owe $389,216.30 and your payments will total at $154,052.44.

The loan on the apartment building would be bumped all the way to 7.375% because it's non-conforming, and so that the yield spread covers the adjustments for investment property and 4 units. Every lender has these charges, and these are on the mild side. So you see why I do not believe the real rate on the investment property loan would end up being 7% without they charge you some pretty stiff figure in points. I'm not sure your real rate can be bought as low as 7% on such an Option ARM. This lender does both A and Alt A, and their adjustments on the Option Arm are a half point more expensive, which means even the highest rate on their sheet only buys your net retail points to one, but let's run with our assumptions as stated. Payment is $4972.87, after 5 years you will owe $680,400 and your total of payments will be $298,371.66.

Let's look at the end of those five years.

HOME Balance Total paid Net

Neg Am 447,480 123,969 571,439

30 fixed 389,216 154,052 543,268

difference -58,264 +30,083 -28,171

So you see that every dollar you saved on cash flow cost you two dollars in real terms. Lenders love this kind of math! Nor am I certain that this is really a fair comparison between the loans, but it's what I have to work with.

Now, lets do the apartments. As I said, I am as certain as I can possibly be that this is not a true and fair comparison between loans. I'm restricting myself to "no points" loans, and if that lender told you there were going to be no points on an option arm at 7% on a 4 unit investment property, I'd call him a liar to his face.

Apartments balance payments total

Neg Am 767,109 212,518 979,627

30 fixed 680,400 298,372 978,772

difference -86,709 +85,854 -855

So you see that, even giving this person every possible benefit of the doubt, you come out better on the thirty year fixed, even though I don't believe their loan really exists at the rates they stated.

Now I'm have not, thus far, allowed for the possibility that you wouldn't qualify for both loans, (with all the lovely potential for gain on the apartments) with both sets of fully amortized payments. There is a pretty serious monthly income zone ($3800 wide) where you would qualify for negative amortization but not fully amortized, at least "full documentation." It is to be noted, however, that these loans can be done independently of one another, dropping the monthly income range gap where you qualify for at least one full documentation to just over $800. I am intentionally ignoring the possibility of "stated income" loans because stated income is a very dangerous game to play in these circumstances (or anything similar). Also keep in mind, however, that property values don't have to go up in five years. It's a pretty reasonable bet, especially right now, but I don't think we're going to see more than 5% annualized for a while.

(At this update, rates are lower but stated income is completely unavailable, at least for now)

People sell Negative Amortization loans based upon apparent cash flow, not based upon how wonderful they are to your bottom line. When you consider them on anything other than a short term cash flow basis, their virtues become non-existent. They are popular because they are easy to sell to most people. Most folks think of cost in terms of the check they are writing every month, and that's just not all there is to it. There are also deferred costs - costs that have the potential to step out and grab you with a bill, in this case for another $85,000 that most people won't realize they owe. This is 2003 thinking in a 2011 world: "The equity increase will more than pay the difference." Except that it isn't necessarily so. Apartments have to cash flow, yes, but they have to cash flow in real terms, not something manipulated to make it look like you're making money. They don't appreciate except based upon their rental income net, and unless you get a clueless newbie for a buyer, that's what your offer is going to be (Any resemblance between this and the bigger fool theory is purely intentional).

It's much easier to persuade people to give the bank tens of thousands of dollars in equity that they might have someday, than it is to persuade them to write a larger check or endure negative cash flow in the first place. Persuading them to write the larger checks remains the correct thing to do in 99% plus of all cases. You can't fault loan officers and real estate agents as sales folk for making the easy sale - but you can fault them to the extent they represent themselves as analysts, consultants, or advisers, and I just don't see a whole lot of people in either of my professions representing themselves as straightforward sales persons. When I originally wrote this, I had a property one of my clients was in escrow on with about eighty business cards on the kitchen counter - and mine was one of about three cards on that counter with anything like a sales representation ("Loan Officer and Agent"). Some say things like "Real Estate Consultant", while others say things like "Relocation Specialist" or "Financial Vice President". It's all very deliberate to convince people to drop their defenses, because "I'm not a salesperson," but if you are going to represent yourself that way, you have a responsibility to comport yourself in accordance with that representation - and all the evidence I'm seeing says that this is not the case. I would like to see some civil cases make their way through the courts which fault agents and loan officers on the basis of their self-representation as something other than sales folk.

Actually, let me take that back. If they're acting as your real estate agent, they do have a fiduciary duty to you no matter what they're representing themselves as. Loan Officers do not in most of the country - which is one of the reason the loan side is so messed up - but Real Estate Agents do, and if they're also doing the loan, they have a responsibility to advise you that this appears to be beyond your means, and exactly what risks you may be taking with this purchase - something I'm seeing more evidence in contradiction of than in support of.

Negative amortization loans can serve a valid purpose as refinances in certain limited circumstances. They can help people avoid worse consequences than necessary, when the numbers are right for it. But as purchase money loans, they are like playing Russian Roulette with your financial future. Sure, the market might take off like it did a few years ago - but it also might sit stagnant for the next several years, or even decline a little. Even if it goes up, it may not go up enough to pay the extra money you now owe. Of all the scenarios listed, the market taking off at 10% plus gains per year is the least likely, in my opinion, at least for the forseeable future.

Caveat Emptor

Original article here

The only Pre-Approval I trust is one that I wrote myself.

I got this search engine hit:

pre-approved loan underwriter changes terms illegal

I have gone over these issues in discussing the pre-qualification.

Loan officers are salespersons. There is intense pressure on them from supervisors, brokers, stockholders and their own pocketbook to tell you what you want to hear. A large proportion of the people who ask me for a either pre-qualification or pre-approval already have a property in mind, and they get angry if I tell them it appears to be beyond their means. They should be kissing my shoes because I'm trying to keep them from making a half-million dollar mistake, or at least make certain they go into it with their eyes open, rather than just keeping my mouth shut and pocketing my commission. Most of these folks just go get their "Think Happy Thoughts" letter elsewhere.

Furthermore, if the loan officer is counting upon referrals from real estate agents for a living, if they tell people what they can really afford, they're getting the agent angry to no good purpose. This agent thinks they have a commission check all lined up, and the loan officer is trying to talk the buyer out of it, threatening that commission check. Most Real Estate Agents do not respond well to this, I'm sad to report. In that situation, I would be thinking, "Boy, I'm glad I found out now, before the default, when investigators and lawyers and courts get involved," but most agents (and their brokers) see only the immediate check that just evaporated. One such experience is all it takes before they not only stop referring to that loan officer, but try getting any clients they may have in common away from that loan officer. This may be short-sighted, but it is also human nature.

Not to mention the fact that nothing about a pre-approval or pre-qualification is binding. In fact, until the underwriter writes a loan commitment, there is nothing that says you have a loan at all. Furthermore, it's rare for loans to be rejected outright. What happens far more often is the underwriter puts one or more conditions that the applicant cannot meet on the loan commitment.

Furthermore, there is nothing about any loan that says the terms cannot change unless there's a rate lock in effect. If the loan isn't locked, it's not real. Quite often, loan officers will tell people their loan is locked when it's not. Locking paperwork can be easily faked.

Finally, while the new 2010 Good Faith Estimate makes lowballing on the costs more difficult in that it adds more hoops for the unscrupulous to jump through, it does not prevent the practice or stop it. Keep in mind that last word "estimate". Furthermore, they are not promising that you will get the loan. That requires a loan commitment written by an underwriter, and if further investigation by the underwriter reveals more questions they want answered in order to fund your loan, the underwriter can always add more conditions. None of the paperwork you get at loan sign up promises you will end up with a loan at all. You want to know why, consider that when the lender starts to verify the applicants information, they come across information indicating it's all fraudulent. This happens. It has happened to me, and it happens to loan officers somewhere in the United States every day.

Even with the best will in the world, I can't guarantee you've got a loan until I get the loan commitment from the underwriter. I can go through all the guidelines for a given program, and make certain the borrower meets every single one of them. It doesn't mean anything until the underwriter writes that loan commitment. I don't have the power to approve that loan - no loan officer does. Loan commitments are the exclusive province of the underwriter. A good loan officer can and does go through guidelines to ascertain whether there's an known reason that you will be turned down. If the underwriter rejects the loan, none of it means anything.

This is one of the reasons that I have written several articles explaining how to calculate what you qualify for, in terms of payment and in terms of purchase price, so that you will not be at the mercy of somebody who tells you, "Sure you can afford it," while qualifying you for a "stated income" negative amortization loan. The most mathematically correct and detailed of those articles is Should I buy a Home Part I, while the most accessible is How to Tell If You Can Afford This Property.

If you don't have a lock, the loan is not real, and it will fluctuate with the market - every day for A paper. Until mid-2009, I used to lock every single loan upon application, but the lenders have now made that practice financially prohibitive - a loan officer who does it can expect to pay "fall out fees" that drive their cost of business up until what they can offer consumers is no longer competitive with anyone. What I can still do is guarantee all fees except the tradeoff between rate and cost, and consult with a client upon the optimum time to lock those in, which now has to wait until after the loan commitment. Even that is not absolute, however. The loan officer cannot really promise you that loan until the underwriter writes a loan commitment with conditions you can meet. Even that can change if the underwriter discovers new information, but always remember that the loan officer is not the underwriter, and there are regulations preventing direct contact between consumers and underwriters. If the underwriter rejects the loan (or doesn't approve it), you still don't have that loan. You can choose another one, that you are likely to qualify for, or you can do without. I'll tell people that if the loan officer gets back to them within a week with a change, it's likely that they're honest and they really thought you qualified for the loan they told you about in the first place. If it takes them three weeks or longer, or if they spring it on you at closing, I wouldn't believe they were honest with sworn testimonials from George Washington, Abraham Lincoln, and Diogenes that they saw the whole thing, and it's not the loan officer's fault. It's not for nothing I tell people, "When There Is A Problem, It's Good If They Tell You Right Away"

Only when you have a lock agreement, loan costs guarantee, and a loan commitment from the underwriter do you have a deal going that somebody might be able to stand behind, in the sense of being able to hold them responsible if they don't deliver on exactly those terms, and even then there are limitations. Of course, what really used to happen with most loans (and still does with a large number) is that loan officers tell you about loans they have no prayer of being able to deliver in order to get you to sign up. This is despicable, but it's the way things are. There are reasons why the situation is complex, but that's no excuse for loan providers to play any additional games to obscure or confuse something that is already complicated enough. Part of the reason that I'm writing here is that I would like to change this for the better, but the power to demand real change is in the hands of consumers, not any individual provider.

Caveat Emptor

Original article here

Once upon a time, I received an email about the virtues of zero interest credit cards as opposed to Home Equity Lines of Credit. I've organized both the email and my response in order to facilitate understanding:

You raise a lot of issues. Some I'm going to deal with very quickly, others I'm going to spend some effort on, but nothing as in depth as a full article would have. I'm going to keep referring to material found in Credit Reports: What They Are and How They Work

I'm going to take the email in chunks:

Turns out I made the Two-Loan choice myself, independent of your article, a couple years ago. I was motivated to get a conforming first loan (~$322K @ 5.75%), and put the other ~$45K of a prior mortgage into a HELOC (besides, the HELOC rate was lower than the 30-yr fixed at the time!).

Well, times (and HELOC rates) have changed, and I now have
~$65K on my HELOC, and relatively tight budget.

That was 2003. considering that I had 30 year fixed rate loans at 5.375 percent or lower without any points for months and 5.25 for literally zero total cost for about one month, you likely paid more than you needed to. There was a period in late August when rates spiked up, but I was calling the same clients back in December and into 2004, asking if they wanted to cut their rate for free. No prepayment penalty, no points. Those would have lowered the rate further.

HELOCs (Home Equity Lines Of Credit) have the disadvantage that they are month to month variable, based upon a rate that is controlled by the bank. On the downside, you're somewhat at their mercy. On the upside, the rate is based upon that lender's Prime Rate plus a margin fixed in your loan papers. They can't change your rate without changing everyone else's also. There is absolutely no legal reason I'm aware of why they can't set prime at twenty-four percent. There are plenty of economic reasons why they won't. Unfortunately, given the high demand low supply of money currently, the banks are competing for new business with a better margin, not a lower prime. They didn't cut rates every time Greenspan's Fed did, but they have religiously boosted prime every time the overnight rate has gone up since the Fed started raising it. Banks are making a killing in real historical terms right now with variable rate lending.

Fortunately, in most cases it's pretty easy to refinance a HELOC. Credit Unions are a great place for this; variable rate consumer credit is where they shine. There are some internet based lenders where you can obtain no cost, easy documentation HELOCs at rates right around prime, or even a bit below if you have the credit. Most HELOCs also have "interest only" options for five or ten years. Brokers really don't do a whole lot for HELOCs except keep lenders honest; there is not enough money in them to make them worth chasing and the lenders won't pay for them the same as for first trust deeds; it's too easy to refinance out of them. (Brokers can beat the stuffing out of credit unions on first trust deeds, however).

Unfortunately, your credit score is a problem now:

I have multiple credit card companies offering me low introductory rates (some 0%, some 2%) for short terms (up-to 1 year).

Why would I NOT want to take them up on their offer?

In truth, I've already done this a number of times in the past 12-18 months, always at 0%. So I've learned the "minimum payment" trade-off (and I wish congress hadn't forced CC companies to raise their minimum payment requirements!) [ last year, one fine bank only made me pay $10/month on their loan of ~$10K! Now I'm seeing minimum payments of 1-3 %]

The difference between cash flow and real cost, and the fact that each time you accept a new credit card thus, it is a MAJOR hit on your credit. Let's say you have two credit cards now that you have had for over five years, and get four new ones. Your FICO score modeling goes from over five years to about a year and a half on your length of credit history (the average of your accounts, except that five years is the maximum you get credit for an account). Open four more six months down the line, and now you have ten, with an average time open of just over a year. Furthermore, since most people move as much as they can into the new credit accounts, this gives major credit hits for being essentially maxed out on a card. Thirty to forty points on your FICO score per card, perhaps more. You say you've been doing this a while. Not to mince any words, I wouldn't want to have your FICO right now.

There are always two concerns when you're looking for the best deal. Minimize your costs, of which interest is far and away the largest, and be able to make your payments. I don't know if you have other payments here, but if so I would do everything I could to live cheaply enough, long enough to use the money I save to make a difference on both of those scores. In your position, I'd sell any cars I still have a payment on, just to get out of the payment. This is a concern I've been telling people about since 2003, when the rates on everything were so cheap. There is more than one way to do things, but you have to be prepared for the consequences of the way you chose. I had some clients up in Los Angeles about July of 2003. They wanted to cut their payments. I gave them the option of a conforming loan (like yours) with a HELOC, and they took it. As soon as the loans funded, the wife called me and said I deceived them about the loan, and they wanted me to pay for another loan. Unfortunately for their contention, I had a piece of paper in the file with their signatures saying exactly what I tell everyone else about this situation, that the rate on the HELOC is month to month variable and subject to change, and that they understood this was a risk and they elected to take it. It looks like you went in with your eyes open, but the risk didn't work out as you hoped. I'm trying to think of other strategies to help you out, but other than "live frugally for a while", it's all little stuff around the edges.

Tonight I'm "running the numbers" on whether a 2% rate (nondeductible) is better than an 8% (tax deductible). And according to my simple calculations (I'm an engineer, not a financial advisor!), it's a no-brainer (go for it!). For the $40K currently on the HELOC (other $25K is already temporarily in 0% accounts), the one-time transfer fee ($50-90/transfer) and lower interest amount (~$70/mo) is ~$200/month less than the deductible interest-only (minimum, ~$435, @ 8%) HELOC payment, AFTER adjusting for the tax deductibility (@ 30% [fed + state], ~$130 on $435).

My plan is that in months when my "income"/cash flow cannot cover all the minimum payments, I'll just use a HELOC check to cover the difference. That is, slowly transfer SOME of the debt back to the HELOC. But in the meantime, my theory goes, I'm paying down my principle faster than if I was just making "extra payments" on the HELOC.

Yes, in most cases you will make more progress, faster, this way, but at such a long-term cost as to make it prohibitive, particularly if you have to leave the credit lines open after you transfer the money out six months down the line. Lots of very silly folks do all kinds of weird and non-remunerative things because it's a deduction, but deductions are never dollar for dollar. If that were the only concern, 2% nondeductible beats 8% deductible by a huge factor. Given what's going on in the background, however, kind of a different story. All these newly opened lines of credit are going to drag you down for years. Make certain to pay it off before the adjustment hits; one month at 24% will kill almost all of your savings. Two months at 18% will more than kill it. Given what your score has likely dropped to, I'd bet that it's closer to the former than the latter.

I also finally had a 0% application turned down, due to "too much credit already, for your income level". So I imagine having all these cards may be hurting my credit score? But I'm not going to re-fi my house (or buy a new car?) anytime soon, so I think I don't care.

I imagine you're going to care. FICO scores require care and tending and time to rise back up. Close off any cards you opened for the zero interest period that you have paid off, and that will mitigate the damage. Keep only a few long standing accounts. But a large amount of damage is already done. When Credit Card companies are saying that, your FICO has dropped big time. Without running your credit, from the foregoing information, I'd guess you are below the territory where I can get a 100% loan, these days, even sub-prime (lower 500s). You might be below 500, where only hard money can lend to you.

(At this update, there are no 100% loans except VA. Given current underwriting standards, someone with a sub-580 credit score basically can't get a loan without 30% equity/down payment)

Another concern is that HELOCs have "draw periods", usually 5 years, and (at the time he was) about three years into yours. I'd be very certain to move it all back into the HELOC prior to the expiration of the draw period. Your credit card options are already getting worse, meaning that you're not getting the cards or not getting approved for enough to be useful. The HELOC's rate, by comparison, is set by a margin in an unalterable contract, and you're not going to be able to qualify for a new HELOC that's anywhere near as good while those card accounts are open. Move the money back in at least a couple months before the draw period expires and close the credit cards, and you might be able to get a new HELOC on decent terms.

Your credit is always vitally important. Guarding a very high credit score is something worth stressing about. You never know when you might need to apply for credit. Most credit cards, nowadays, can alter your rate if your score drops or if you make one late payment anywhere, not just on that card. A good credit score saves you money everywhere, from borrowing to insurance. In your situation, I'd be stocking up on pasta and Hamburger Helper while seeing what I could do to increase my income, so I could live cheap enough to pay my bills down enough that I'm not squeezed. It's your life, but that's the way I see it.

Caveat Emptor

Original here

(For full disclosure, the original email is below in a body).

Hi Dan,

While using Google to seek the wisdom of others regarding my current financial situation, I came upon an article of yours, and have now read at least a handful of others. In particular, "One Loan Versus Two Loans" caught my attention.

Turns out I made the Two-Loan choice myself, independent of your article, a couple years ago. I was motivated to get a conforming first loan (~$322K @ 5.75%), and put the other ~$45K of a prior mortgage into a HELOC (besides, the HELOC rate was lower than the 30-yr fixed at the time!).

Well, times (and HELOC rates) have changed, and I now have
~$65K on my HELOC, and relatively tight budget.

I have multiple credit card companies offering me low introductory rates (some 0%, some 2%) for short terms (up-to 1 year).

Why would I NOT want to take them up on their offer?

In truth, I've already done this a number of times in the past 12-18 months, always at 0%. So I've learned the "minimum payment" tradeoff (and I wish congress hadn't forced CC companies to raise their minimum payment requirements!) [ last year, one fine bank only made me pay $10/month on their loan of ~$10K! Now I'm seeing minimum payments of 1-3 %]

Tonight I'm "running the numbers" on whether a 2% rate (non-deductible) is better than an 8% (tax deductible). And according to my simple calculations (I'm an engineer, not a financial advisor!), it's a no-brainer (go for it!). For the $40K currently on the HELOC (other $25K is already temporarily in 0% accounts), the one-time transfer fee ($50-90/transfer) and lower interest amount (~$70/mo) is ~$200/month less than the deductible interest-only (minimum, ~$435, @ 8%) HELOC payment, AFTER adjusting for the tax deductibility (@ 30% [fed + state], ~$130 on $435).

My plan is that in months when my "income"/cash flow cannot cover all the minimum payments, I'll just use a HELOC check to cover the difference. That is, slowly transfer SOME of the debt back to the HELOC. But in the meantime, my theory goes, I'm paying down my principle faster than if I was just making "extra payments" on the HELOC.

Seems so obvious when I look at the numbers, that I cannot figure out why more people aren't doing it, or at least talking about it!

Why does a thorough website like yours not say anything about this (that I could find anyway)? Is it just to keep those low-rate credit offers coming? Am I missing something? I am really the only person to ever think of doing this? I also finally had a 0% application turned down, due to "too much credit already, for your income level". So I imagine having all these cards may be hurting my credit score? But I'm not going to re-fi my house (or buy a new car?) anytime soon, so I think I don't care.

Thanks for reading this far. If you post an article on this topic rather than replying, will I get a least a pointer to it in reply?

Again, thanks for considering a comment on my situation!

Identity withheld by request

(UPDATE NOTE: After several years of it being unavailable, I've recently started getting lender solicitations for stated income loans again. I haven't done any of these new loans yet, but as much as I don't like stated income there is a legitimate market segment that it served: The self employed and those with large amounts of business deductions, who actually could afford these loans because they got to pay for things with "before tax" dollars while it is only "after tax" dollars that are considered by traditional underwriting standards. Given the growth in the self employment segment of the economy, somebody is going to decide they want the income from serving it and figure out appropriate controls to prevent its abuse. That does not alter the basic thrust of the article, however, which is that you will save money by providing full documentation if you can)

No matter which provider, no matter what type of loan you get, nobody is going to loan you money without the appropriate documentation. The more documentation you have that you are a good risk, the better the rate you are going to get, and the lower your costs are going to be.

Everybody hates filling out forms and providing documentation. When I originally wrote this, there was a billboard two blocks from my house advertising, "Stress free loans." Actually, these signs are all over. And I'll bet they bring in a lot of business. Low documentation loans are easy money - I could do them all day and all night, and make more money, and make the lender more money, while doing less work, than I can by hunkering down and actually serving my clients best interests. Those billboards say "stress free loans" which three words look like an English sentence meaning this will be easy, but the real translation to English reads, "Hello, I am a lowlife scum who wants to take advantage of lazy people who are too ignorant to know better by making a lot of money providing loans at higher interest rates and less favorable terms than they could obtain elsewhere, and putting a large proportion of my clients into loans that they cannot afford, from which point they will inevitably default and lose the property and whatever investment they may have made"

The fact is, that for something dealing with this much money, if there is documentation you can produce to prove that you are a better risk and gets you a better rate, you should be eager to present it. If I can spend half an hour instead of fifteen minutes filling out forms and as a reward I save $40 or more every month until the next time I decide to refinance, I want to fill out the extra papers. If I refinance every two years, I have essentially been paid $960 for a quarter hour of work. That works out to $3840 per hour. I don't know about you, the reader, but even when I'm completely inundated with clients, I don't make that kind of money per hour. I don't know any job that pays that much, unless you want to include wealthy investor. And let me tell you, the wealthy investors I've dealt with are eager to spend the extra time filling out said forms. It really is a "Rich Dad, Poor Dad" situation. They know it will Save Them Money, and don't have to be sweet talked into filling out one more form or providing a little more documentation. They've got it already copied for me, and if I want their business, I'd better buckle down and get to work on finding the loan with the best terms possible. If you, the reader, wish to be wealthy, you could do worse than emulate their example.

There are, when you get right down do it, three different levels of documentation. The lowest level of documentation is NINA, which is short for "No Income, No Assets." There are other names for it ("No Ratio" being the most common, while "ninja" was the creation of a reporter with samurai fever). This is a loan where the rate you get is purely driven by your credit score (as well as other factors, such as the equity in your home or down payment you're making, but those are constants endemic to the situation, not variables about which I am talking). You're not even documenting that you have a source of income. You're basically saying, "Here I am! Gotta love me!" to the bank, and they really do love you because you're filling their coffers by paying the highest rates for your loan. Guess what? You're still filling out all the forms (or somebody is doing so on your behalf, which they can do to the same extent on other loan types!), and you're still providing all the documentation on the property - how much it's worth, proving you own it, proving the taxes are current, etcetera. Owing to identity theft and homeland security laws, you can expect to have to provide two things that basically show that you are you. You can expect to deal with problems if the county doesn't show the taxes as current, your landlord or current mortgage holder shows you as being behind or that you have a history of being behind or the county doesn't show you officially in title of record, or any of a host of other potential problems, but hey, at least you didn't have to show that you've got a source of income!

The next level of documentation is a "Stated Income" loan. This is where you document that you've got a source of income, but not that said income is sufficient to justify the loan, so you tell the bank you make that much, and they agree not to verify the actual numbers. This is going to require two additional items: verification of employment, or a testimonial letter if you are self-employed, and reserves. Reserves are quickest to explain. Industry standard is money sufficient to pay the loan, your taxes, and your homeowner's insurance for six months, in a form that is sufficiently liquid such that the money can be accessed, for a long enough period that the bank will believe it isn't borrowed - and the bank will require documentation of its availability if it's in an account type such as 401k where access may be restricted. Verification of your employment is somebody in the HR department filling out a form on your behalf and verifying it over the phone. The testimonial letter for self-employed borrowers comes from your lawyer, accountant, or tax preparer on their letterhead saying that you really do have a legitimate business. It basically reads: "To whom it may concern. John Smith is self-employed as the owner of business X. He has been doing this for Y years. Based upon information provided to me, he will earn the same amount of money this year as last year." The person providing the testimonial must sign the letter. It really is only about three sentences, but that person is putting their business on the line for you if it's not true. So they tend to require evidence if you're coming to them for the first time to get this letter written and signed.

The bank is basically looking for two years in the same line of work or at the same company to approve this one. Subprime lenders - when we had those - would sometimes accept a year or even six months, although their terms will not be as favorable. What the bank is looking for is evidence that you can really afford the loan. The thinking goes like this: "He's got a source of income, He's got a good credit score, he's making all his payments, he's got money in the bank, okay, we think he's living with his means and can afford to pay us back. We'll lend him the money." There are variants on stated income of which "stated income, stated assets" is the most common, but these carry higher rates, higher charges, or both, in many cases actually end up looking more like a heavily propagandized NINA loan than anything else.

It is a misapprehension to believe that Stated Income Loans have no debt to income ratio or income requirement. They are precisely that: You are allowed to state your income, which the lender agrees not to verify, in exchange for paying a higher interest rate. It's still got to be believable within the context of your profession and locale, and if believable amounts of income do not justify the loan, then you can expect to have it rejected. This income must also be sufficient to convince the lender that you can make the payments upon all of your known debts according to lender guidelines, mostly having to do with the aforesaid debt to income ratio. For these reasons, while you can always move a "stated income" loan to "full documentation," going the other way is forbidden.

I've heard Stated Income (and NINA) commonly referred to as "liars loans", and they are often used for such, but that is not their intended use. As a matter of fact, people get in a lot of trouble with these loans, and many times it comes back on an unscrupulous loan officer or real estate agent trying to push something through for which their clients really aren't qualified. If you can't afford the payment, am I really doing you a favor by qualifying you for the loan? I submit that I most emphatically am not. Before they push such a loan through, an ethical loan officer using it for this purpose should sit down, tell the people what the real payment is going to be, and make certain they can afford it - and not just by words, either! The loan officer has responsibility to both the lender and the borrower, and putting somebody into a loan they cannot afford harms both of those parties. On the other had, I have run into situations where they borrowers were renting and their effective cost of housing was going to go down! And in that case, I submit that I probably are helping the clients. On the other hand, if you're doing Stated Income or NINA (especially on a purchase) and the loan officer doesn't sit you down and cover what the payment is going to be within a couple dollars per month, and make certain you're okay paying it, this is a red flag in no uncertain terms!

What Stated Income is meant for is self employed people and people working on commission who really do make the money, but have write-offs such that their taxes aren't going to show enough income. Or people who had a bad year, or large losses or high write offs one year, but are still basically solid. I am going to observe that regulating stated income out of existence is doing no favors for the people it is meant for, nor the market at large. I certainly understand why Stated Income and NINA have evaporated currently and agree with those reasons due to the abuses that have been practiced. However, it doesn't do anyone except politicians any good to pretend that there haven't been people who could have otherwise afforded their loans hurt by this development.

The highest form of documentation is Full Documentation (almost everyone says "full doc" because the unabbreviated phrase is a mouthful). This does not necessarily mean I've got to prove to the bank that you make every penny you actually make, but only that you make enough to justify the loan. The proof the bank will accept is very straightforward. Self-employed borrowers are still going to need that testimonial letter from stated income. They will additionally be asked for their federal income tax packet. This is all of the forms, front and back, that you sent to the IRS last April 15th, and perhaps the April 15th before that, too. It's got to be a signed copy, and it must include copies of any w-2s or 1099s that you get. People in the construction profession, as well as those who may be w-2 employees but work on commission will also need to furnish their taxes, and the bank's underwriter can always require it of anyone. It is to be noted that banks did not have to accept your loan on a stated income basis even when it was available - the underwriter could always require that you furnish full documentation.

Those people who are hourly or salaried employees of a company can usually get by the full documentation of income requirement with just w-2 forms. If you are a company employee, the last 30 days worth of pay stubs will also be required.

The basic rationale for this is simple. Very few people tell the IRS that they make more money than they do, because the consequence is higher taxes. So the bank is willing to use tax forms to prove your income. In the case of a w-2 employee, the company is telling the IRS that those are the wages it paid you, and therefore wants to deduct your wages as a business expense, and you went and paid taxes on it, so the bank will usually accept that. Similarly, your pay stubs should have year to date pay on them. Here the bank will accept the word, metaphorically speaking, of a third party without a stake in the outcome of the loan.

A subset of the full documentation loan is the streamline refinance. As the name indicates, it is available on refinances only, not purchases. There are a lot of limits on these loans, but when I get to do one it is the easiest of all loans. Basically, it's a case where the same lender is now offering better rates, and no equity is being taken out of the home, and they'll allow you to do it because otherwise you'll take this client elsewhere. 90 percent of a loaf is much better to them than none.

Within the sub-prime mortgage world (when it existed, which it probably will again - once again, it's a legitimate market that someone will decide they want the money from servicing), those lenders would often take the deposits from 12 consecutive months of bank statements (sometimes 6 or 24), usually discounted by a certain amount, and accept that as proof of income. This is called Lite or EZ doc, although there's nothing easy about it and as a matter of experience there are more fights with the underwriter and jumping through hoops here than with any other type of loan documentation. The rates are somewhat higher than for full documentation, but not nearly the rates for stated income. Mind you, sub-prime rates are higher in the first place as well. Furthermore, many of these sub-prime lenders would advertise the fact that "EZ doc rates same as full doc!" I shouldn't have to explain to adults that this phrase translates to English as they don't give the lower rates to true full documentation loans, now should I?

So, on the subject of documentation, I think you should be able to tell that the higher the quality of your income documentation, the lower the rate that you are going to get from a given lender. If you can qualify, a full documentation loan is probably going to save you more than enough money to pay you to do the extra paperwork, the amount of which is marginal anyway. The only reason not to do the extra paperwork is if you can't supply requisite proof, which is pretty much the reason why the lesser loan types such as stated income and NINA have been so abused and I can't find a single investor offering them today.

I should probably repeat one final time that as of this update, true full documentation loans are the only thing available. The others will almost certainly make a comeback at some point, but with some changes. They were badly abused by the marketplace, but the fact that they went away caused a lot of people who really could afford their loans to be unable to refinance, or unable to get a purchase loan. Eventually someone will decide they want the profit for serving this market segment and figure out a way, but until then, lesser documentation loans are gone.

And as one final warning: If a loan officer requires originals not only of the forms they ask you to sign (A couple of the standard forms require original signatures - really!), but of your own documentation, it is a BIG RED FLAG. I can't think of any client-supplied document that lenders will not accept copies of. The only reason to require your originals is that loan provider does not want you able to apply for a loan with someone else, so they're putting an end to your shopping, and once they've got them, good luck trying to get them back (at least until the loan is done so they get paid). A good loan officer needs good readable copies - not your originals. An ethical loan officer doesn't need or want custody of your originals any longer than is necessary to make good copies, and if you hand them a good readable copy in the first place, that isn't a problem.

Caveat Emptor

Original here

You would think these nitwits would learn. You would think they'd all be out of the business. Sadly, that is not the case.

It started innocently enough. It always starts innocently.

This was an email I got (specifics redacted).

Hi Dan, I came across your blog looking for information on what to do when your mortgage loan might not go through at the very last minute. I live in DELETED, and realize your in the San Diego area, but you really opened my eyes on the subject and I had to let you know. We are in escrow with a close date of DELETED, and our VA lending agent no longer works with the company after 2 months of paperwork, assurances and promises. The newly appointed agent says they don¹t know how DELETED was going to close the loan and everything is falling apart. DELETED went as far to say he could close the loan in 5 days to use as a negotiating tool to get a contract with the seller which won us the house. We never heard of getting a back up loan or a purchase money loan? It¹s not over yet, but any advice would be GREATLY appreciated as we are 1st time home buyers and really feel taken.

My response

(name deleted),
VA loans are dead simple providing you have the following qualities:

-VA eligibility

-sufficient income to cover the payments and other debt (see debt to income ratio)

-acceptable loan to value ratio. In the case of VA loans, this can be up to 103% of the purchase price or appraised value, whichever is lower. This is the only widely available "no down payment" loan right now.

-Property that meets VA and FHA standards (No holes in walls or cracks in windows, subfloors all covered, etcetera)

-enough time to get the government bureaucrats to do what they need to.

Unfortunately, there's a lot of loan officers and real estate agents out there who still don't understand how the market has changed. I have always built client affordability and a budget into my transactions from day one, but the reason we're having problems is that a lot of my competitors didn't.

Here's what you need to do: Find out if there is a reason this transaction is not going to fly.

Obvious reasons why it definitely would not fly:

• Can't document enough income for a long enough time
• something wrong with the property
• property appraises way too low
• no VA eligibility

There are other possible reasons, but those are the main ones. If there is such a reason, bail out NOW. If there isn't such a reason, find someone who knows what they're doing IMMEDIATELY. Alas, I don't know anyone in DELETED, but I believe my company does business there. The good news is you still have almost a month, which should be enough time.

If this property doesn't work out for you, may I suggest finding DELETED or DELETED and asking one of those fine gentlemen to be your agent? They're both ethical agents who won't be searching for properties you can't afford and who do know competent loan officers. I can get their contact information if needed, but they're both easy to find online. Tell them I sent you - they both know I neither ask for nor accept referral fees, but that the occasional free client I send their way will disappear if they mistreat anyone I send.

I went out looking at property, and when I came back this email was there:

Thanks for your quick reply Dan, I know you must be busy, and I really appreciate all your information.

The only factor the new agent is citing is that we do have a high income to debt ratio. We know this. Everyone knows this, and it has not changed since we started the process 2 months ago. The first loan agent was going to get by this by paying down one of our high credit cards with seller money. We asked for 4% back from seller for this reason which they agreed to. Done. Now the new lending agent is saying that won't fly, that we can't pay down the debt we have to pay it off, and the 4% is 2000 short of our credit card debt. So she does not know how she can do it but is getting back to us today.

We have not talked to our real-estate agent yet, but we will today as well. Would you recommend we contact your mortgage company in the mean time to try to push through and cover ourselves?

Oh my.

Lions and Tigers and Bears and people trying to commit fraud. Oh, my!

My heart goes out to this person, especially as they are a veteran, but there's very little I can do beyond make them aware of some facts before things get any worse.

This is fraud. No maybe about it. I have written about this before in Real Estate Sellers Giving A Buyer Cash Back is Defrauding the Lender. If the purchase price is $400,000 but the seller is returning cash back to the buyer under the table, then the buyer isn't really paying $400,000, are they? Nor is the seller really getting $400,000, are they?

here's the legal definition of fraud:

All multifarious means which human ingenuity can devise, and which are resorted to by one individual to get an advantage over another by false suggestions or suppression of the truth. It includes all surprises, tricks, cunning or dissembling, and any unfair way which another is cheated.

Now if they don't disclose that 4% cash back, they are misleading the lender and the government into believing that the property is worth more than it is. In other words, fraud. Furthermore, the former loan officer evidently hadn't disclosed it from the fact that the new loan officer is saying the lender isn't buying off on it now.

(I should say that the Department of Veteran's Affairs apparently allows this, but they are not lenders or loan officers, and whether the lenders would accept it is another matter. They can add other requirements if they so desire, and I would not expect this to pass muster with any lender I am aware of, as it violates generally accepted accounting principles (GAAP). Truth be told, I've never tried to get such a thing accepted, but I would try if the client really needed it and understood what needed to happen and the dangers to them. Even if the VA and the lender both permit it, it must be disclosed to them and approved by the underwriter in order for it not to be fraud. For standard conforming "A paper" loans, and for that matter even subprime ones, cash to the buyer from the seller, or cash to pay the buyer's debts, is strictly forbidden. Finally, considering such things from a dispassionate neutral point of view such as "are they a good idea?" or "Is the consumer likely to be able to repay the loan?" or "Is this a good risk for the lender?", I have to agree with GAAP - the answer is no, and the prognosis is that given the consumer's financial habits, this is setting them up for failure. But "good idea" and "legal" are two distinctly different concepts.)

Whatever the lender's fraud policy may be, the government comes down on people who participate in mortgage fraud that involves VA or FHA guarantees like a ton of bricks. Just because the VA permits it doesn't mean it isn't fraud if the lender doesn't, or didn't approve it in this particular case. They are going to throw the book at you. Have you ever seen the list of government regulations? Ouch, both literally and figuratively.

Let's suppose the buyer and seller do not commit fraud, fully disclosing the cash back to the lender and the government. If they do this, the lender and the government will both treat the purchase price as being the appropriate amount less than whatever cash is going from seller to buyer. As I said in When The Appraisal Is Below The Purchase Price for Real Estate, this will mean the borrower basically has to make up the difference in cash. Net result, the buyer/borrower needed that 4% cash not to pay off their consumer debt, but for the down payment on the property. Net gain to the buyer from that money: Zero. Nada. Zip. Zilch.

Both the loan officer and real estate agent and their brokerages need to hear about this, at a minimum. The loan officer for actively planning a fraudulent transaction, the real estate agent for not speaking up and putting their foot down, because they should have known better, but were keeping their mouth shut to get a bigger commission check.

Now that stated income is, to use Miracle Max's wonderful phrase, "mostly dead", there seems to be no shortage of nitwits trying this fraudulent trick to get loans and transactions through. It is not a minor violation that nobody cares about. It goes straight to the heart of the notion of property value, and the lender's expectation that if you do default, they will be able to get their money back by selling the property. This trick fraudulently persuades a lender to accept more risk than they are aware of, or worse, tricks them into taking a risk that they would reject were they in full command of the truth. That's fraud.

It also goes right to the heart of whether the client can afford the property. In this case, they clearly can not. If they could, there would be no need to commit fraud in order to generate a false picture of them being able to afford it. Debt to income ratio is there for the borrower's protection as much as the lender's.

Here's the rest of my response to the clarification:

Your loan officer has hosed you badly. I really hope it's not going to end up losing your deposit. If so, in your place I would talk to their company about paying it in your stead. Their loan officer was trying to make a fraudulent transaction fly; that's failure to supervise. If they don't promptly agree to indemnify you in writing, talk to a lawyer. Actually, talk to a lawyer anyway. But if your loan contingency is still in effect you may be able to get out of it without losing your deposit.

I don't know your situation or your state's law or the contract you signed on this, and I definitely am not a lawyer. Talk to your real estate agent about getting out of the contract RIGHT NOW because this transaction is not going to happen.

Once you're out of the contract, I'd fire that agent if I were in your shoes. He helped negotiate the contract, he should have known it was fraudulent and the requirements for making it legal and the consequences thereof.

After sober reflection several hours later, I am, if anything, madder than I was. I would be ready to do violence to these two twits for what they did to someone who not only wants to put money in their pocket, but served our country, so it's a good thing they're not here in front of me. If it were me, or some situation I had an interest in (legal standing), I'd certainly make a written complaint to the regulatory authorities. I want these clowns gone, out of business, locked up in prison so they can't attempt to repeat this nonsense with some other innocent client who doesn't know any better, and I want their enablers and those who fail to supervise them gone, too. Helping someone with their home buying is a trust, and I have no more sympathy for those who knowingly and willfully violate that trust than I do for pedophile priests.

I'm not here to act like the Black Knight, shouting "None Shall Pass!" That didn't work out too well. But you need to consider 1) Can you really afford it? 2) Is it consistent with your financial habits?, and 3) Is it fully disclosed to everyone it needs to be? That lender is loaning out hundreds of thousands of dollars based upon their understanding of the situation. If that understanding is not in full accordance with what is actually going on, that's a problem. A big problem that's likely to come back and bite you and everyone else involved.

Caveat Emptor

Original article here