Mortgages: June 2021 Archives

With many people pushing various "cash back to the buyer" schemes in real estate, a note of caution is needed. Actually, it's more like an entire symphony of caution. Because if there is a loan involved, you run the risk of committing fraud.

Some people reading this won't care. "What the lender doesn't know won't hurt them," is something I've heard and seen too many times to count. After all, that lender is just some nameless faceless megacorporation, not anybody they care about.

To those people, I say, "The FBI will make you care." Given the spate of abuses, and the current level of panic at many lenders and investment houses, even if your transaction comes off without a hitch and the lender gets repaid in full, you may find yourself on the business end of an investigation. The kinds of real estate and loan places that are willing to pull so-called "harmless" fraud are also willing to pull no holds barred fraud where the entire idea is to defraud the lenders - or you. Where you have the lenders losing money, and a pattern of abuses, you have potential for the FBI to become interested in all of a businesses transactions, and once the FBI starts looking, rebate fraud is so easy to spot that a seven year old could probably do it. They find a known shady brokerage or a lender branch where management doesn't care, and it becomes what military pilots call a "target rich environment." It's worth the resources to investigate all of that brokerage's or office's transactions.

Here's what happens. A wants some cash to fix the property up, and so arranges with B to jack the price enough higher so that B can rebate the difference to A. A then procures 100 percent financing on the increased price, B gets the increased price, and rebates it to A.

Alternatively, A writes an offer with a real estate licensee who rebates part of their commission, while providing lesser "services". Usually, the question I want to ask those rebaters I encounter is "Why do you make more than minimum wage?" The answer is because suckers who think in terms of cash in their pocket don't understand what they're getting into.

In either case, this cash back somehow doesn't get disclosed to the lender, and it needs to be. Because if the official purchase price is $X, but B is giving A back $Y under the table, the real purchase price is $X-Y. If the lender knows about the cash back, they will treat the purchase price as being $X-Y. At the very most, for 100% financing, they will only lend $X-Y. Since this defeats the purpose of the cash back, the sorts of people who do this predictably will not disclose it to their lenders.

This is fraud. Even so-called "harmless" fraud where the people fully intend to repay the entire loan (and eventually do) is still fraud. The lender doesn't have to lose a single penny in order for you to have committed fraud. The definition of fraud is "An act of deception carried out for the purpose of unfair, undeserved, and/or unlawful gain, esp. financial gain." The legal definition is a little more complex, "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," but is essentially similar. Had you told that lender about the cash back, they would have treated the purchase price as being less than the official price. Hence, fraud.

There are all manner of crooks out there encouraging people to do this (and other things). I've seen numerous advertisements for various "real estate investment systems", and people who represent themselves as real estate professionals and real estate investors and real estate authorities and even real estate licensees who urge people to commit federal felonies for various reasons on the surface that always reduce to "So the crook can make money." Whether it's through a commission they wouldn't have because the client can't be persuaded to do it the legal way, or money they intend to make selling their "Foolproof System!" to thousands of pure deluded fools, they do a lot of damage. Nor does it get you off the hook if you were following the advice of alleged professionals, as lots of people in federal prison can testify. Even if you didn't know it was illegal, even if people you had reason to trust told you it was legal, you are still responsible.

The rebate itself is not illegal, according to my best understanding. Once again, I'm not a lawyer and I don't even play one on TV, so check that out thoroughly, but it is my best understanding. The illegality happens when you deceive the lender, either by omitting information a reasonable person would agree is relevant, or by actively saying something that isn't true.

It's more than possible to get cash back and be compliant with the law - it just defeats the purposes most people have in mind with cash back, which is to make the lender think they paid more for the property than they really did, and so lend a greater amount of money or on more favorable terms, or both, than the lender otherwise would have, had they known about the cash back. In other words, FRAUD

If you inform the lender, they will treat the purchase price as being the official price less the rebate. So if the official price is $400,000, but you're getting $20,000 back, the price the lender will lend based upon will be $380,000, and it doesn't matter if the appraiser says it's worth $400,000, or $400 million. $380,000 will be 100% financing, not $400,000, $360,000 will be 95% financing not 90%, and I'm certain you can figure the rest. Lenders evaluate property based upon the LCM principle, which is Lesser of cost or market. You only paid $380,000 in real terms, which makes it a $380,000 property at most. It doesn't matter whether this rebate is direct from the seller, or some third party. They look at it in terms of "How much of your hard earned money are you actually going to part with?" If some cash is coming back to you, you aren't really parting with whatever number is on the purchase contract, are you?

Where most lenders will cut a certain amount of slack is in closing costs. If the money is not actually coming back into the buyer's pocket, but instead being used to pay for costs of the purchase transaction or costs of the loan, most lenders will give that their reluctant blessing. Because all parts of the transaction are subject to negotiation as to who gets what and who pays what, the lender will usually understand that in order to get that price, the seller agreed to pay this cost or that cost. I don't expect this to last forever because I can point to a lot of abuses that are happening, but it happens to be the case right now. I believe that sooner or later, lenders will clamp down on this practice and refuse to allow it, but for right now, most of them are still willing to do so.

Even the most forgiving of lenders, however, draws a bright and hard line if any of that cash finds its way back into the buyer's pocket. So make certain it doesn't, or that the lender knows about it. And make certain that the lender has been notified in writing of every penny that's paid on the buyer's behalf by anyone else for closing costs. Because you don't have to be directly involved in a conspiracy to get drawn into a fraud investigation, and once it gets started, you can never be certain you won't be sitting in a courtroom somewhere, charged with fraud and conspiracy and anything else they can think of to throw at you. Even assuming you win, it's going to be a big hit to your wallet and a bigger one to your reputation. Not to mention the little detail of some portion of your life spent wearing "special" clothing as a "guest" at Club Fed.

Caveat Emptor

Original article here

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

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

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

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

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

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

If you do decide you don't want a loan, the appraisal is the vast majority of the money you should be out, because that and the credit report (somewhere between $13 for a single person and about $40 for a married couple) are the only third party expenses. This doesn't mean that the less ethical won't try and soak you for other fees, because they will, and junk on top of those fees. Depending upon the origination agreement you sign, you could be on the hook for thousands of dollars - more than a low cost provider would make if they actually fund the loan.

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

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

Caveat Emptor

Original article here

That was a question I got.

One point, either discount or origination, is one percent of the final loan amount. After all of the loan amounts and fees and what have you are added, for a loan with one point, multiply the amount by 100 and divide by 99, and that will be your final loan amount. For a loan with two points, multiply by 100 and divide by 98. The general formula is multiply by 100 and divide by (100-n) where n is the total number of points. If you're just looking for a quick and dirty purely verbal estimate, it's ok to simply add 1 percent per point, but any actual paperwork should use the correct procedure.

Points come in two basic sorts, discount and origination. Origination is a fee your loan provider charges for getting the loan done. Some brokers quote in dollars, most quote in points because it sounds cheaper than an explicit dollar cost. Most brokers out there charge at least one point of origination. To contrast this, direct lenders do not have to disclose how much they are going to make on the secondary loan market. And many direct lenders still charge origination. Judging the loan by how much the provider makes (or has to tell you they make) is a good way to end up with a bad loan. My point is that it's the rate, type of loan, and total net cost to you that are important, not how much the guy is getting paid for doing your loan, or whether they have to disclose it all. Remember two things here, and they will save you. First, loans are always done by a tradeoff between rate and cost. For the same type of loan, the more points you pay the lower your rate will be, and vice versa. Second, remember to ask about "What would it be without a prepayment penalty?" It's a good way to catch people who are trying to slide one over on you, and the lenders pay a lot more for loans with a penalty, and the lenders make a lot more on them when they sell them to Wall Street, so they often do them on what looks like a much thinner margin until you ask the question "What would it be without the prepayment penalty?" Remember it.

Discount points are an explicit charge in order to offer you a lower rate than you would otherwise have gotten. To use an example I ran across the day I originally wrote this, six point five percent with one point, seven percent without. As I type this update, the rates are much lower, but the curve between the two is much steeper at the low rate end. On a four hundred thousand dollar loan, one point is essentially four thousand dollars, either out of your pocket where you're not earning money on it, or added to your mortgage balance where you are making payments and paying interest.

Is it a good idea to pay discount points, or is it a better idea to pay the higher rate? That depends upon the loan type and how long you keep it. Let's say the loan is $396,000 without the point, $400,000 with, just to keep the math easy. Your monthly interest charge on the first loan when I originally wrote this was $2310, on the second it was $2166. On the other hand, you would have paid $361 principal on loan 2, only $324 on loan 1. Here's the bottom line, though: You've got to get that $4000 back before you sell or refinance. Just a straight line computation, that second loan saves you $181 the first month. $4000/$181 per month is about 22 months to theoretically break even (and it's a little faster than that, because loan 2 pays off more principal per month). On the other hand, even after you've theoretically "broken even" there is a period where if you sell or refinance, you will inexorably lose money because you're paying interest on a balance that's higher than it would have been.

Let's run the actual numbers. If the above loan is a thirty year fixed and you keep it four years, you're well ahead. You've saved yourself $6944 in interest and your balance is only $2159 higher. $6944 - $2159 = $4785. Even if your next loan is at ten percent, you're only losing $215.90 per year. Especially when you consider that at a cost of money now versus later, you'll never make it up, because you can invest that $4785 you saved and it'll pay more interest than that. Similar numbers apply to today's loan tradeoffs.

On the other hand, let's say the rate was only fixed for two years rather than a fixed rate loan. After that, it is a universal feature of hybrid ARMs that they all adjust to the same rate. You are theoretically ahead by $363, but because of your higher balance, even if the loan adjusts to five percent, you're losing $154 per year due to your higher balance, and there is nothing you can do about it. Play now, pay later - and you still owe more.

There is no cut and dried answer about whether it's to your benefit to pay points. I tend not to do it, myself, because rates do vary a lot with time, and money you add to your balance sticks around in your balance. If I've got a zero or low cost loan and the rates drop half a percent, it's worthwhile to refinance for free. If I have a loan I paid a point for, I'm going to have to pay that same point again to see a benefit on refinancing, and as we've already discussed, if you don't keep the loan long enough, you've wasted your money. The national median time between refinances was about two years when I wrote this; now it's up to three. I see no reason to pretend I'm any different from everyone else, but some folks do have a history of keeping loans a long time. You need to make your own choice to fit your own situation.

Caveat Emptor

Original here

I got a question about "what does it mean if my loan is not funded after right of rescission?"

It likely means your loan provider lied to you, probably from day one. Once you have signed documents, there shouldn't be anything but procedural matters left. Things that cannot be taken care of earlier. Things like final payoff coordination, the escrow officer using funds to pay homeowners insurance. Every once in a while, a good loan officer will get a subordination moved to prior to funding because it's on the way, but it is necessary to start the three day right of rescission now in order to fund on time under the rate lock you have.

Every once in a while, it'll be because of something happening to you in the meantime. Lenders who are risking hundreds of thousands of dollars don't just sit there and presume nothing has changed since the first time they checked it out. They are going to check again, right before they put the money to the loan, to make certain that nothing the loan was based upon has changed. So sometimes while they are doing a final Verification of Employment (making certain you still work there), the answer comes back that the borrower doesn't. The final credit check comes back with a score that no longer qualifies under that program. These are not the loan officer's fault, except inasmuch as they didn't warn you not to do whatever it was. Whether you quit your job or were fired, the result is no loan. So I always tell folks not to change anything about their life or credit without checking with me first. Neither I nor they can really do anything about layoffs, of course, but the point is not to voluntarily do anything that messes up your loan.

The vast majority of the time, however, what's going on is that the loan officer never had the loan. There's some condition holding it back that you, the borrower, can't meet. They have a choice between hoping to get around it or going out and actually finding a loan that you can qualify for and telling you about that instead. I shouldn't have to draw you a picture as to which choice they will likely make. Many times, they were teasing you with a loan that you had no hope of qualifying for as an incentive to get you to sign up. This is a standard "trick". They get you wanting that loan, which sure sounds good, and you apply. Unfortunately, that loan was never real, or never something you had a chance of qualifying for, but now they've got you signed up. Now you've done their paperwork, and you're mentally committed to their loan.

If it's an honest mistake, they are not going to have you sign documents. They're going to come back and tell you as soon as there is a condition they can't meet on loan qualification. But the question was about when you have signed documents and the loan doesn't fund. They can keep stringing you along, hoping it will happen, or they can come clean and tell you they can't do the loan. In the first instance, they might still get paid. In the second, they likely won't, because if you're smart you'll go elsewhere. Needless to say, this can waste a lot of time getting "one more document" from you or jumping through one more hoop. If the loan doesn't fund at the end of the rescission period and you are not certain as to why, you've probably been had. This is why I always tell people to ask for a copy of all outstanding conditions on the loan commitment before you sign final loan documents. Ask them to explain them, too. You see, once you sign loan documents and the rescission period expires, you're stuck with that loan provider. You can't go elsewhere unless and until they give up. Even if you have a back-up loan waiting to go, they can't do anything until the other loan funds or gives up, which could be weeks. Not a bad situation for an unethical loan provider to be in. In the meantime, the seller cancels your purchase and you're out the deposit. Or the rates go up and you're not getting a refinance on anything like the terms you might have really qualified for at the start of the process.

Caveat Emptor

Original here

"challenging underwriters mistakes in housing loan paperwork" was a search that I got.

You can't challenge them. Butting heads with an underwriter is stupid and counterproductive. There's only one person who gets a vote, and it's not you, whether you are an applicant, processor, or loan officer. The underwriter may not be the original application of the saying "a majority of one," but it certainly fits the situation.

Keep in mind that as a loan applicant, you will never communicate directly with your underwriter. It is an anti-fraud measure constant throughout the industry. If someone tells you that you are talking to your loan's underwriter, either they are lying or the loan has just been rejected on procedural grounds.

If a loan officer believes that the underwriter has made a mistake in the underwriting of the loan, it is far more constructive to find out what it was - on what grounds the client was rejected. Actually, loans are usually not flatly rejected, they simply come back with conditions the client cannot meet. A loan that actually gets rejected usually has further adverse consequences for the borrower's credit, and is usually pretty good evidence that the loan officer was promising something they couldn't deliver.

It does happen that underwriters, like loan officers, mis-compute things, miss things, and misconstrue things. This is one of the hardest lessons for a loan officer to learn: NEVER tell the underwriter anything that they do not absolutely have to know in order to approve the loan. The client has a rich uncle that gives them $10,000 every year? The client makes millions in the stock market as well as their salary? The client simply has millions in assets and they could buy the property for cash if they wanted? I wouldn't breathe a word of any of this to the underwriter. Not a peep, if I had my druthers. The underwriter will start asking all kinds of questions, asking for all kinds of documentation, both on the existing assets or income and on the likelihood of it continuing. If you're familiar with how the stock market works, you might have an appreciation for how hard it can be to prove that you're going to have income from it in the future. That underwriter isn't interested in trends or suppositions or even the fact that it's happened the last twenty years in a row. They want proof it's going to happen in the coming years. When accountants won't write a testimonial (trust me, they won't), you're out of luck.

Sometimes the underwriter comes back with conditions that are beyond the bounds of reason. Dealing with this is part of my job, but it's more akin to a negotiation than a confrontation. I've got to get them to tell me what has them concerned, and see if there isn't some other way to reassure them on whatever grounds they may have for concern. Remember, if the loan goes sour, both the underwriter and I are going to hear about it. It may cost them their job, and I may have to come up with thousands of dollars to pay the lender. Not to mention that the client isn't exactly happy. The underwriting process, properly used, is as much for the protection of the client as the lender.

So what I've got to do is find out what concern caused the underwriter to place this condition on the loan, and then a more reasonable alternative may suggest itself. If you ask in the right way, conditions can be changed if the request is reasonable. But you've got to know what you're doing. If the alternative you suggest does not adequately address the underwriter's concerns, they are within not only their rights, but also in full compliance with regulations where you are probably not, to refuse to make the change. Sometimes the underwriter and the loan officer disagree as to the computation of income, for example. By definition, the underwriter is right - unless I can persuade them that my way is better. Just human nature, you can't do that by challenging them, you have to persuade.

It is possible to run into an intransigent underwriter. That's one reason why brokers have the advantage over direct lenders, who are stuck with the same group of underwriters all the time. I can pull the loan and resubmit it elsewhere. Given that particular lender isn't going to approve the loan anyway, they won't fight too hard. On more than one occasion I have had the lender come back and issue an exception on their own when I pull it for re-submission elsewhere, but the ability and willingness to actually take it elsewhere is essential to this. And it is sometimes possible to go over a given underwriter's head and get an exception from the supervisor, but it tends to poison the well when you attempt this, whether it is successful or not. When you're asking for special consideration for your clients, they tend to look much harder at all of your clients. I've seen a couple loan officers talk themselves into one approval through an exception with the supervisor, only to have their other loans that were going through smoothly kicked back out for further underwriting. So you have one happy client, and three or four that otherwise would have been happy and who now are not. Sounds great if you're that one client, but how would you like to be one of those three or four others? Not a good situation for anyone to be in. Taking the approach of collaboration works better.

Caveat Emptor

Original here

A Home Equity Loan, or HEL (pronounced "heel") is a one time loan, much like a car loan. You get the money all at once, pay it back so many dollars per month, and when it's paid, it's over. The most common Home Equity Loan is probably the 30/15, which is like a fully amortized thirty year fixed rate loan except that it's got a balloon payment at the end of fifteen years, when the remaining balance is due. Since very few people do not sell or refinance much sooner than that anyway, the fact that it has a balloon just isn't important to most folks. I do not know why, but the rates for true thirty year fixed rate home equity loans are much higher than for 30/15s. Fifteen and twenty year fixed rate Home Equity Loans are also pretty common, these being truly fixed rate loans without balloon payments, but the payments for those are significantly higher, so many people are not willing to consider them.

A Home Equity Line of Credit, or HELOC (pronounced hee-lock) works more like a credit card than anything else. At one point in time, I actually had a VISA card linked to a HELOC. There is an initial draw, which can be $0, and your monthly payments are based upon your actual balance. If there is no balance, no payments. The main difference is where credit cards are usually indefinite period and you can keep charging on the card as long as you pay your bills and stay within your limit, HELOCs usually only have a five year initial "draw period" when you can actually take more money, followed by what is most commonly a twenty year repayment period where you are making payments, but cannot draw any additional money. Unlike Home Equity Loans, HELOCs are variable interest rate loans based upon the prime rate on a certain day of the month. Also unlike Home Equity Loans, HELOCs are lines of credit, where you can take more money as long as you are within the draw period and under your limit. Also, so long as you are within the "draw" period, the minimum payment is usually based solely upon the interest accruing in any given month. It's only after the draw period ends that most of these loans begin to amortize as far as the minimum payment is concerned, but you can always pay extra.

With both Home Equity Loans and HELOCS, they are assumed to be Second Trust Deeds, with a different kind of mortgage in first position. But because the closing costs can be much lower than for a regular first trust deed, it need not necessarily be so - you don't have to have another mortgage in front of them. Indeed, sometimes with comparatively small mortgages (usually under $100,000) it can save you money by selecting a Home Equity Loan or HELOC instead. Even if the rate for the Home Equity Loan is a quarter of a percent higher than for a fixed rate first mortgage, it can save you money by not costing you $2500-$3500 in closing costs. Often, you can find competitively priced second mortgages where the closing costs are zero. So if you can save $2500 on a $100,000 balance, it'll take you ten years to recover the difference in closing cost at a quarter of a percent per year, if you buy with a traditional first mortgage, and most people refinance within three years anyway. In such cases, it can make sense to choose a Home Equity Loan or Line of Credit instead.

Home Equity Loans and HELOCs are priced upon the degree of risk that lender is assuming. If you're taking out a $100,000 loan on a half million dollar "free and clear" property, you can expect better rates than someone taking out the same loan when there's a $300,000 loan already in place. One thing to be aware of is that because Private Mortgage Insurance is typically not available, lenders for Home Equity Loans and HELOCs have significantly greater equity requirements, and they are not typically willing to insure any amount over 90% CLTV, or comprehensive loan to value ratio, at least not as of this writing. Given how badly they were burned by piggyback loans, I would not expect this to change any time soon.

Caveat Emptor

Original article here

Not interested? Most people aren't when it's talking about how they got taken advantage of in the past. First off, it's in the past so it is over and done with, and there's no use dwelling on it, right? Second, there's the ego thing. Nobody who's been bragging about what a great deal they got likes to find out they've been had. Taken for a ride. Conned. Big time.

Anyone reading this who isn't interested in improving what happens next time can tune out now, because that's what the rest of this article is about: educating you in how to shop for a loan and what the tricks are, and if you've never had a real estate loan but want one someday, chances are you'll benefit from reading it too. If you're the sort of person who isn't interested in improving your future loan, chances are you're not a regular reader because helping folks understand their financial options for next time is the most consistent thing I do here.

On a very regular basis people tell me how they got taken advantage of by a loan provider. Actually, a lot of them think they're bragging about what a great deal they think they got, when in their situation, I wouldn't take that loan if the bank paid me. High points charges that stick around in the balance essentially forever. Points on hybrid ARM loans (3/1, 5/1 and 2/28 are the most common). Prepayment penalties, especially needless prepayment penalties, or prepayment penalties that last longer than the period of fixed interest rate. Fixed rate loans where hybrid ARMS are more appropriate. Long terms where a shorter term would be more in your best interest. Most loan officers are looking for an easy sale, and no loan officer ever complains that a sale was too easy to make. Failing an easy sale, they'll look for any sale. If they don't get you signed up for any loan, they don't make any money. They are not responsible for your best interest, they are responsible for making money and not stepping over legal limits which are very different (in the sense of being less restrictive to loan officers) than most members of the public believe. If ever a loan officer tells you that in your circumstances, they wouldn't refinance, make sure you get their contact information and put it someplace you will be able to find it when you go looking for your next loan because such a loan officer is a treasure worth keeping.

First off, if your credit score is above about 660 and you have a prepayment penalty, chances are excellent that you were taken for a ride. People with credit scores above 660 should usually be A paper, not subprime. A paper does not need a prepayment penalty except when the loan officer wants to get paid more. A 2 year prepayment penalty is worth a good chunk of change on the secondary bond market - usually about 4% of the loan amount. This means that if you have the $270,000 loan I use as the default here, they made almost $10,000 over and above the normal price spread when they sold your loan. And even when they retain servicing rights, lenders sell loans over 95 percent of the time. At the very least, you should get some kind of benefit for accepting a prepayment penalty A paper. A current "maximum conforming" loan of $417,000 would be worth almost $17,000 more to the lender with a prepayment penalty than without. This, all by itself, is often a reason they stick folks in subprime situations. If you think you're A paper, make them show you the turn-down from the automated loan underwriting program (Desktop Underwriter or Loan Prospector) before you even consider a subprime loan.

Since I first wrote this, it has become more difficult to get A paper loans in the 660 to 720 range, especially if you're in a situation above eighty percent loan to value ratio. Keep in mind, however, that 720 is the median credit score nationally (half above, half below). It isn't difficult to get a 720 credit score if you will try, and that FHA loans are now much more useful than they were for avoiding the need for subprime loans. No to mention that it's very difficult to find a real sub-prime loan these days - the few sub-prime lenders left that I'm aware of have basically the same qualification standards as A paper. The way I'm putting it is they're looking for borrowers who don't think they're "A paper" but are.

If your credit score is below 620, you're almost certainly stuck with a loan where you have a prepayment penalty by default. Buying it off is usually a good idea, but buying them off isn't free. Between 620 and 659, there's some wiggle room as to whether you will get an A paper loan. If you have twenty percent equity in the property or are making a 20 percent down payment, chances are good you'll make it full documentation. Since Stated Income loans are not available anywhere I'm aware of at this update, full documentation is the only way to get a loan.

But most people never undertake the most important step they can to get a better loan. They don't shop multiple lenders, and by shop multiple lenders I mean have conversations about the best loan for your situation. When I first wrote this, I advised people to ask for a quote guarantee and sign up for a back up loan, but changes to the way lenders handle mortgage loan rate locks mean that nobody can give those at loan sign up. But shopping a very few lenders and having real conversations will likely save you $10,000 over the period you keep an average loan. There are lenders out there doing oodles and scads of business charging borrowers thousands of dollars more than the average lender.

I have changed where I hang my license several times since I entered the business, and the one thing (other than looking for loan officers who don't understand the way the business works) that most of the firms out there have in common is that they don't want to compete on price. They know they may have to the first time, but they want the client that just automatically comes back to them that they can soak for two or three points on every loan, in addition to whatever they earn for the prepayment penalty. I understand this yearning very well; it's a normal human desire to want to make more for the same amount of work, and also to lock up the customer for the future. If all you think about is how easy the loan is to get, you are these firms' favorite type of client. Guess what? You may not see their extra $10,000 or $15,000 as a separate charge on any of your paperwork, but it is there and you are paying it, and someone who knows what they are looking for can find it. Most folks would never dream of paying $50 for the same toaster that everyone else is buying for $13.99 at Target, but the way loans are priced is confusing at first sight, and people don't want to sort it out. It's pretty easy, actually. Figure out what kind of loan you want and qualify for, then price the rate/cost trade-offs of that loan type amongst the various loan providers. Figure break-evens on the extra cost of the lower rate. One rule I have never encountered an exception to is that if a loan provider pushes a low payment to sell a loan, they are a crook. If they sell by interest rate, they may be worth talking to, providing the loan type is what you're looking for. If they sell by the Tradeoff between rate and cost, they're definitely worth talking to. And if someone suggests a different type (i.e. not 30 year fixed), hear them out but make certain they tell you all of the details. There is always a reason why one loan is significantly cheaper than another loan. Never sign up for a loan until you are certain you understand what that reason is

Another very common tactic used to induce your business is advertising. Remember the loan ads that went "Lost another one to (mega corporation which shall remain nameless)"? That particular mega corporation is not competitive rate-wise or underwriting wise with others. Joe ShadyBroker who earns six points on every loan can often deliver better rates than they will. What they were trying to via their advertising is create the illusion of low prices by telling you they have low prices. Then, when you call and they quote the superficially low payment due to a rate where you have to pay three points to get it, they've got the average potential client suckered. Because their payment on a 2/28 loan with a 3 year prepayment penalty where you have to pay three points to get the rate is lower than mine on a thirty year fixed with zero points, people will sign up. Why? Because it looks more attractive to them at first glance. Get the calculator and the checklist of questions and ask the questions and do the math. Nobody can take advantage of you without your consent, but those who allow themselves to be intimidated by numbers are giving their consent. Actually, with most places, it's like begging, "Oh, please, I want to pay thousands of dollars more to get a higher interest rate!"

If someone doesn't ask questions like "how long are you planning to keep it?" or "how long do you usually keep real estate loans?", especially if they just launch right in to a spiel based upon a low payment, they are a cash-sucking Vampire. They may be an intelligent vampire doing what they are doing in full cognizance of what it does to you, or they may be an innocent vampire who doesn't really understand the business and who is being controlled by a green-blooded master cash-sucking vampire, but in either case you don't want to do business with them. Yes, these are sales questions. Yes, they get you talking to a salesperson, who then has a possible opening to talk you into something that may not be in your best interest. If they don't ask the questions, I guarantee that they're trying to push you into something that isn't in your best interest. Which is better: Not talking to a salesperson and being certain of being messed with, or talking to a salesperson and possibly being messed with? Note that there is no option that says "Don't talk to a salesperson and not get messed with." If their people don't know enough to help you from their own knowledge, those sales folk were probably intentionally hired because they didn't know any better. It is not a crime to make money. They are looking to make money, I am looking to make money, everybody in every line of business is looking to make money, including your employer - that's how they pay you. If I were independently wealthy and never needed or wanted to make money again, I certainly wouldn't be doing real estate loans, and neither would anyone else. You can take the attitude that you're going to pay a reasonable amount, and while you can take steps to hold that amount down and make certain it doesn't get outrageous, you know you're going to pay what it costs, or you can take the attitude that a cheaper quote means you'll actually get that rate at that cost when the overwhelming probability is that they're lying to get you to sign up. You need to look gift horses in the mouth. If someone's quoted fees are lower or higher than everyone else's, there is a reason. If they're too low, it's probably because they're pretending that a large percentage of what you are going to pay doesn't exist, because that gets people to sign up. Ask them if they will guarantee their total fees in writing. If the answer is anything less than a (qualified) "yes", they are lying. Actually, most of the liars won't tell you "no" in response to that question. They'll try to distract you with some line about how they're a major corporation or how they honor their commitments or any of several other lines that mean absolutely nothing. The MLDS and Good Faith Estimate are not commitments. Major corporations pull the same games as everyone else. In fact, they usually get away with playing even worse ones than Joe ShadyBroker because of their "name recognition". Even though the government has stepped in and made it harder to justify changes to the amounts, the companies who do this have figured out all the loopholes - and there are some big ones.

So shop around. Ask every single prospective loan provider every single question in this article. Pull out the calculator to see if it's believable, to see if the numbers work.

The typical savings of being a savvy consumer is literally thousands and likely tens of thousands of dollars every time you get a real estate loan. You may not see the savings directly on the HUD-1 at closing, but they will be present nonetheless. If you don't accept a prepayment penalty, that's thousands of dollars you've saved yourself down the line when you've been transferred and need to sell. If you get a rate that's a quarter of a percent lower (for the same price!) on a $270,000 loan, that's $675 interest you are saving per year. That's a couple of car payments; perhaps enough to let you buy for cash next time you need a car. If you invest the difference over the potential lifetime of your mortgage, a difference of over $127,000! If you save yourself the two extra points of origination that they were going to charge you, that's over $5500 that either is in your pocket, and that you can invest or spend on other things, or $5500 that isn't in your mortgage balance, where you're going to pay hundreds of dollars in interest on it per year ($357.50 per year at 6.5% interest), in addition to owing the base sum.

My point is this, folks. If I were a financial advisor trying to score an extra quarter percent commission off of you, most of you would be upset. Many people are so upset by 0.25% 12b1 fees in mutual funds that they won't pay the advisor who would save them a lot more money than the 0.25% per year simply by simply reminding them of sound investment principles. If I were a car salesperson trying to pad the cost of the car you were interested in by $5500, a large percentage of the population would most likely slug me. But because real estate transactions are complex and people don't want to take the time to understand them, they unwittingly walk into situations like this, and many people do so repeatedly throughout their lives, making the same mistakes about every two years. The dollar amounts are large enough that even small differences are thousands of dollars. If you're not going to guard your pocketbook, most loan providers will pick it.

The workman is worthy of his or her hire. The person who gets you the loan is entitled to be paid. Judge the loans on the bottom line to you; how much it costs and what you will get. The proof that they got you a better deal was that they delivered a better loan, not that they made less money. And if the person who does your loan can make an extra half-point while actually delivering you a loan that is the same rate on the same loan at less cost than the other provider, haven't they earned that money? You came out ahead because of their work - had you gone with any other loan, you would have paid more or had a higher rate. They made more. Definition of win-win. There is a loser here, by the way, but you'll never know who it was. It is the lender or the broker you didn't sign up with. But by finding you a program you fit better, the loan officer you did sign up with got you a better deal and made more money. It happens every day, if you make the effort to look for it, and go about it in the right fashion.

Caveat Emptor

Original here

I have never had someone tell me they wanted more information than this letter provides. I also require the prospective loan officer to fill if out for prospective purchasers of my occasional listings.

DELETED (Mortgage Corporation)
Address DELETED
City and ZIP DELETED
Phone DELETED

My name is Dan Melson and my License number with the Department of Real Estate is DELETED. I have funded in excess of one thousand real estate loans

This is to certify that I have performed initial investigation as to whether Mr. Client and Ms. Client are eligible for the contemplated loan and purchase under the purchase contract being submitted on (property address)

I have run their credit score with all three major credit reporting agencies. Credit scores as of DATE are

The credit report lists their current monthly debt service as being a total of $X/month, and according to Mr. Client and Ms. Client, they have no other debts.

I have in my possession copies of paystubs for current year and w-2s or tax forms for the prior year, acceptable to lenders for documentation of income. These indicate pay for the last thirty days as well as year to date pay and prior year.

Total Income for the period to be averaged $X (DELETED months)

This indicates an average monthly income of $X

This monthly income, per (details of specific loan) guidelines, allows a total debt service plus housing of up to $X per month.

Projected Property Taxes: $X/month
Homeowner's Insurance: $X/month
HOA Dues: $X/month
Mello-Roos: $X/month

Fully Amortized Loan Payment: $X/month ($X at Y%, type of loan, pricing date)

Total of housing and other debts : $X/month

Since this is less than the total allowance based upon income, I have reason to believe Mr. Client and Ms. Client will qualify for the loan based upon Debt to Income Ratio. Projected back end Debt to Income Ratio: X%

The Allowed Loan to Value Ratio for contemplated loan per lender guidelines is X%.

I have in my possession current bank and other asset statements indicating the presence of liquid assets in the amount of over $X

Projected down payment: $X
Projected loan closing costs: $X (includes loan closing costs including all third party costs as well as points, if any)
Projected impound account and prepaid: $X
Other projected expenses: $X (Inspection and anything else I know we'll need)

Total: $X

Accordingly, Mr. Client and Ms. Client appear to be in possession of sufficient cash to fund the projected down payment and other closing costs.

Therefore, according to known underwriting guidelines applicable to the specific loan indicated above, having verified and tested Debt to Income Ratio, Loan to Value Ratio, Credit Score, and cash to close, I have a reasonable basis to believe that Mr. Client and Ms. Client will qualify for the above contemplated loan in a timely fashion to complete the contemplated purchase in a timely fashion.

Sincerely

Dan Melson, Loan Officer
DELETED (Mortgage Corporation)
Address DELETED
City and ZIP DELETED
Phone DELETED
Fax DELETED

This website does not speak for my brokerage, therefore I do not use their name here, but those are filled in on the real thing. Actually, I use computer generated letterhead. This is the precise equivalent of an accountant's testimonial letter. Whomever it is given to needs to be able to contact me with questions, and I am responsible for specific details I mention. Without those details, I might add, whatever paper this is printed upon is completely worthless.

I write every one of these specific to a given property and a given purchase contract and loan pricing as of a given date, and usually with quite a bit of wiggle room on the actual rate and cost. It doesn't do any good to write that the loan depends upon getting financing that may not be available tomorrow if the rates rise even slightly. It certainly doesn't do anyone any good to write that "Mr. Client and Ms. Client are pre-approved for a loan up to $X" without specifying the parameters I used to justify that statement. Debt to Income Ratio, Loan to Value Ratio, Size of loan, size of payment, estimated closing costs, estimated cash to close, specific tradeoffs between rate and cost that vary daily (at least) - all of these have an effect upon whether the prospective buyer will qualify for this loan under this proposed contract today. Without all of this information, the seller's determination as to whether to grant credit by signing that purchase contract is missing some vital information. It's not that any prequalification or pre-approval is actually worth anything, in the sense of being able to hold that loan officer responsible for any and all failed loans, but they can be held responsible for material misrepresentation. Without a representation or relevant facts used to reach the conclusion, what assurance have you that the person who wrote it didn't just flip a two-headed coin? "Sure, they qualify!" (I'll figure out what they really qualify for later, but they sure are happy with me for saying they qualify...)

The whole idea of such a letter is that the person to whom it is presented can go to any competent loan officer and ascertain whether or not this loan can be done. I have never had anyone call me for more information or for verification - which means one of three things must apply: 1) The people on the other end can tell that the loan can be done, 2) They're just putting the letter in the file for CYA, 3) They're just asking for this letter so they can illegally refer people to a specific loan provider who refers the clients back to them or gives even better kickbacks.

I'd like to see this or something like it standardized across the industry. If you're going to write a letter, you might as well write one that means something, that contains enough information for the person on the other end to be able to make a reasonable determination of whether this is, in fact, a reasonable transaction that has every likelihood of becoming a fully consummated transaction. That is the only possible excuse for requiring such a letter in the first place - your client's best interest. You can satisfy your client interest without violating RESPA - all you need is the information to know whether the loan officer writing the letter based that letter on solid facts or not.

Caveat Emptor

Original article here

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:

Now let's look at it with the buydown:

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:

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. You paid that money! 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