Club Chaos Agents - All Things Hollish, Wacked, and Jacked

Mortgage 101 in New Jersey – Getting to know the borrower’s wants and needs

In today’s delicate world of mortgages in New Jersey and any where else, getting a mortgage not only takes understanding, but patience. I am still finding many loan officers trying to fit that round peg into that square hole. Let me explain….

I currently have a client whose realtor got him to talk to her loan officer. This loan officer has my borrower pre-qualifed for about $35,000 more than I do. How can there be such a difference?

Before I get into the differences, let’s try and establish a pattern of questions that should be talked about, when a loan officer interviews a borrower.

• What mortgage payment in New Jersey would you feel comfortable with, to include your property taxes and homeowners insurance. Please give me an honest and realistic amount that you would not want to exceed.
• Secondly, what areas would you prefer to live in. This is very important, because it comes down to the different property tax amounts. Depending on why you would want to live in that town or neighborhood, would help determine your monthly mortgage payment because of the property taxes.
• My next question would be the type of property that you would want to purchase. Whether it would be a single family dwelling, a townhouse, a condo, etc. This helps me determine your payment as well, because there could be association dues or PUD fees based on the type of property and location.

In my opinion, I consider these 3 questions to be the most important that should be asked in the beginning, besides their name, credit scores, credit history, and income information. I actually get to those sets of questions next.

So, with that addressed now, let’s get back to my story.

My borrower wants to live in one of two places, because one of his main focuses is to be in a good school system. Keep in mind, they have 1 child at 8, another at 1, and one on the way. How do I know all of this? I got to know my borrower.

Now, the areas that they are interested in, the property taxes run about $6,000 a year on $180,000 properties. This other loan officer has them pre-qualified at $200,000, but using property taxes of $5,200. To be realistic, if buying a $200,000 home, the property taxes average around $7,000 a year. As you can see, this could become a huge issue for the borrower when shopping for a home in their respective areas, to later find out that they don’t qualify based on higher taxes. But it gets better.

In my very first question, I asked what mortgage payment that he would feel comfortable with. If I used the $200,000 property, even at the unrealistic property taxes of $5,200, he would be about $117 over his comfort zone regarding the mortgage payment. With the correct property taxes, not only does he not qualify for a mortgage, but his monthly nut would now be about $267 more than what he would be comfortable with.

Conclusion : In my 18+ years in the mortgage business, even after the government tightening down on loan officers with their licensing requirements since the beginning of 2011, I keep seeing these basics get over-looked more than they should.  It shouldn’t be about who can pass a test, even though the test itself is only about 30% mortgages directly. But about asking the proper questions and preparing the borrower.

I have a borrower right now who has a 617 credit score and that their current loan officer is telling them that they need a 620. Once they get that 620, they can close. Settlement was suppose to be June 30th and he keeps saying it will be soon. yet when I reviewed their current credit, it doesn’t mean the credit guidelines. I wrote about this example that happens more than it should. Please read - Your credit score is more than just a number -

Hey, it’s a dog-eat-dog world out there. I know it’s easy to trust someone when they say such words as : “trust me”, “no problem”, I promise”, “I guarantee”, etc.  Who do you trust?  Get to know your loan officer, listen to how they talk, and how confident they sound. Not just the sales words that one might use. I call these words The Red Flags of mortgages.   If you listen close enough, you can sometimes hear someone contradict themselves. Just food for thought.

Shopping for Mortgages & Shopping for Interest Rates Smartly

You now want to buy a home and need a mortgage. You would think it would be easy to call around to mortgage companies and ask, “What is today’s interest rate”. Sounds simple, right?  Au contraire mon frere…. On the contrary.

There are a few misconceptions that many have when shopping for interest rates.

• That all lenders have one basic rate to offer

• That big lenders or big banks have better rates than smaller lenders and can give discounts

• That referrals will get you a better interest rate

All lenders have many different types of interest rates, which is dependent on many different factors. The end result, all rates should be relatively close, as long as you aren’t being deceived or that your rate will be baited and switched. Why should interest rates be the same or very close? Because we all get the rates from basically the same place, which are dictated by investors on Wall Street.

Larger Banks/lenders vs smaller lenders – I just heard from a potential client shopping for a mortgage that her realtor told her that BofA can give her discounts on the rates. First off, this coming from a realtor that is speculating. This is a blanket statement, because again, way too many factors involved when determining interest rates.  Food for thought… Just because a bank or lender might be servicing your loan from the get go, doesn’t mean that is how they can offer lower rates. In reality, even that bank or lender that is servicing your loan, has sold bits and pieces of it to other investors. Big Bank A might own 70 percent of your loan, even though they are servicing it, yet two other investors might own the rest of the loan. Hence why some foreclosures were becoming difficult at times, trying to determine who owned how much of the primary mortgage.

When it comes to getting a referral from a friend, co-worker, realtor, etc; one just can’t assume that all will go well and that you will get the best deal.  I have three new stories just from the last several weeks that would make you cringe. Story A – My sister referred me to a friend of hers after hearing of her most recent mortgage story. Back in December, this couple tried refinancing and was promised an interest rate of 4.5 percent. After about 2 months, they finally found out that this loan officer never locked in their interest rate. And this was a referral from a friend. Just recently, they got another referral from someone at their church. I happened to get the call 3 days later and after reviewing the different cost sheets, I was about $5,500 more in total costs. But wait, the other loan officer was very misleading in what they estimated. This person didn’t calculate their 30 days of interest in the pay off, was $100 lower per month on the property taxes, only escrowed 3 months worth of taxes when I estimated 5 months, and two other items. All of these items aren’t lender related, but 3rd party estimates. After it was all said and done, I was about $48 off. Yet this person had an interest rate that was 1/8 percent lower in me. And guess what, there was one important question that wasn’t asked by the other loan officer, in which carried a pricing penalty from any lender/bank for this particular loan.

Many different factors involved when shopping for a mortgage or shopping for an interest rate

Goals – What are your goals, for the next 3, 5, 7, and 10 years. This could help a good loan officer determine if you should pay points or not, or what mortgage program to put you into.

Credit scores- Your credit scores are a huge factor when it comes to determining your interest rate and or the penalties because of your credit scores, aka fico scores. – Understanding credit scores – Read the series at the bottom

Interest Rate Lock-In Period- Such an important detail that is usually not mentioned to borrowers when shopping for that all almighty interest rate. How long is my interest rate good for and when can I lock it in should be talked about. I once lost a deal to another loan officer who was beating me out by 1/8% and $500, but found out that he couldn’t lock his rate in until the appraisal came back. This could be a difference of 3 to 7 days, and interest rates could get worse. Besides, the loan officer in a few days could just raise the rate an 1/8% and say that rates got worse, but did they? Key Point – You need to shop on the same day, because rates change daily, sometimes twice in one day.

Loan Amount – Believe it or not, the size of the loan amount will have some impact on your interest rate. All lenders have a basic profit margin that needs to be met on each loan. The lower the loan amount, the more points it may require or a higher rate that pays more premium back to the lender.

Size of down payment – This holds more true for conventional loans, because Fannie Mae and Freddie Mac have pricing hits depending on how much you put down and what your credit scores are. Please read : Conventional pricing hits

Conclusion – One size does not fit all. It might seem simple, like when buying a new television, as long as you know the model that you want. Then all you have to do is pick the 3 nearest stores and see who has the lowest price. As you can see, when shopping for an interest rate, there is a lot more involved. Something that I have witnessed 3 times in the last 2 weeks are borrowers that weren’t locked into their rate and then rates changed on them. The moral to this story is that any loan officer can bait you with a little better rate at first, if they aren’t going to lock you in at time of shopping or mortgage application. 

Lastly, just because one has advertised a low rate, doesn’t mean it’s true. All of the factors that I mentioned above need to be found out before offering any such rate.

On another note, I have included some very important articles below that should help you better understand the mortgage shopping process.

For more info regarding shopping for interest rates and shopping for mortgages, please read :

• I want the same interest rate my friend got

• Locking in interest rates – Knowing the facts

• Low interest rates published on the internet

• All Mortgages should cost the same – by : Ken Cook

• Finding the best interest rate

• Mortgage Advertising can be very deceptive

• The myths about Zero point mortgages vs paying points

• Shopping for mortgages

Mortgage Market Report - Interest Rates hit historic low for 2011

As of yesterday, mortgage interest rates were hitting historic lows for 2011. Today was the key focal point if rates were to continue to go lower based on non-farm payrolls and on unemployment.  As of this morning, the news is reporting that non-farm payrolls only increased by 54,000 in May, significantly less than 150,000 increase that the economists had been expecting. Regarding the private sector, private employers only added 83,000, instead of the 180,000 that was anticipated. And unemployment rose from 9.0% to 9.1% the month prior.

Depending on your credit scores, the type of mortgage, your down payment, and your loan amount, interest rates yesterday were from 4.375% to 4.875%. As of right now, the FNMA 30 year 4.0% coupon is up 41 bps at $101.22 and the US 10 y T-note is up 59 bps at $101.38.

Summary : What does this all mean for today?  That interest rates should be getting even better today. Another reason for the MBS’s and bonds getting better is because it looks more attractive for those countries overseas such as China, who look for good investments.

For those of us that keep track of this information, I had been advising clients to wait until today’s news, even though rates were the best that we had seen for 2011.  I will be locking in several borrowers today that will be closing in the next 10 to 30 days. Yes, there are a few indicators that could even drop rates a little more for next week. But in my experience, no matter how one might tend to read the markets and those indicators, just a small hiccup could reverse all of these gains. And what goes down, will go up, but ‘when‘ is the question. Some so-called experts will tell you to float cautiously, but with interest rates literally dropping about 3/8 of a percent just in the last two weeks, it’s my opinion that it would be a huge gamble to lose these excellent gains.

For more news like this, you can always go to the www.fhaloansfhamortgages.com 

Understanding Mortgage Insurance and the different types

The keys to home ownership can be tricky and confusing, unless handled by a true professional loan officer. You’ll sometimes hear loan officers and or realtors talk about one mortgage program over the other, telling you how great it is or that the monthly mortgage insurance is less than the other program. But wait, one main ingredient is still missing in this whole equation. What are the credit scores, aka fico scores. Why is this important?

When comparing a conventional loan to any other type of mortgage loan, many of the MI companies (mortgage insurance) will have certain restrictions when it comes to credit scores, the percentage of the down payment, and area restrictions.

Let’s quickly look at the four major types of mortgages.

Conventional Loans – If you have less than 20 percent down, you are required to have some sort of mortgage insurance. The standard mortgage insurance is called monthly mortgage insurance. There are such programs called LPMI (Lender Paid Mortgage Insurance) and BPMI (Borrower Paid Mortgage Insurance). ps.. Mortgage Insurance doesn't always fall off when you hit 78% LTV (loan-to-value). Specific guidelines must be met still.

FHA loans – You have upfront mortgage insurance and monthly mortgage insurance. No matter if you have 20 percent or more down, you are still required to have monthly mortgage insurance. Depending on your credit scores, even with 20 percent down, a FHA loan still might be your better option. FHA raised it’s mortgage insurance as of April 18th,2011. New FHA mortgage insurance   – Reminder – If you do put 20 percent down, the mortgage insurance falls off in 5 years.

USDA Loans – As it stands, there is no monthly mortgage insurance. But this will change come October 1st, 2011. New USDA monthly mortgage insurance.

VA Loans – There is no monthly mortgage insurance.

Summary of mortgage programs : Three of the major types of mortgages mentioned above, FHA loans, USDA loans, and VA loans, all have some sort of upfront mortgage insurance. Each one has a different name for it.

Here is a comment that I just heard the other day.

“The FHA Premium Rate Increase Makes conventional MI a Better Option for Many Borrowers.”

To me, this is a blanket statement, and a huge reason why so many people get put into the wrong types of mortgages. Sometimes the basic reason was because it was just easier for the loan officer and not what was better for the borrower. Mortgage Insurance guidelines change, but as of right now, you typically need a 680 credit score of better when putting 5 percent down. Many MI companies want a 700 credit score. When you hear about these special MI programs such as BPMI, you need a 700 or 720 credit score.

 

Summary :

When it comes to conventional mortgage insurance, not only do you need specific credit scores that have to be higher, but the loan gets underwritten again by the MI company. When it comes to FHA loans, it’s a one time thing. Again, you need a professional loan officer that understands these differences and who will dissect the different types. It might seem easy to some, but if not done correctly, it can be a long and confusing process.

The bottom line, just be careful of what you hear out on the street. Blanket statements could be expensive.

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~ Credit Score Series ~

• Do I need 20% down and or 700 credit scores?

• Understanding your credit and your credit scores

• Your Credit Score is more than just a number

Do you feel that today's mortgage gudelines are hurting realtors from selling more homes?

Do you think it could be the buyer not being in a good position?

People, I get the fact that lending guidelines have become more strict over the last 12 months. I think I have seen it all in the 18 + years that I have been in the mortgage business. But in my honest opinion, I think the biggest hurdle has been the credit score requirements. But is it a challenge that can be over come in a short time period? Read more for my answer/opinion on this topic.

What prompted me to write about this was this article by Christine Ricciardi - Real Estate agents want subprime alternative for too-strict underwriting - Here are a few statements from the article.

I wish I could have interviewed all of these real estate agents. My question would be, "How are these down payment requirements too stringent?"  "Could you please give me examples."

Let's review some facts. You can still get a FHA loan with 3.5 percent down. You also have USDA loans and VA loans which allow for for 100% financing. Sure, there are restrictions for these two types, but it is available. In regards to conventional loans, you can still do 97 percent financing, but the credit score requirements are extremely higher, which is why FHA would work out for more if it was a down payment issue.

Don't get me wrong, I am not one of these "must have skin in the game" type of advocates. FHA loans have been around since 1934 and for the most part, the down payment requirements were 2.25 percent down. So it's up to 3.5 percent now. Yes, depending on the purchase price, that could be another $1,500 to $4,500. But we aren't talking about $10,000 to $20,000 more. People need to stop writing that now is a great time to buy. And buyers need to stop thinking that this is the best time. It's always a great time to buy, when you are in a good position to buy.  Read : When is it a good time to buy a house?

Ouch... I could write a whole book on this statement. "needing a High quality subprime mortgage program" Let's revisit history. In the late 90's, the government forced Fannie Mae and Freddie Mac to make housing more affordable. This is when they came out with 100 percent financing and better yet, when they allowed these same buyers to have back-end ratios of 55 percent. My common sense says that you are just looking for trouble with this equation. We are talking about 55 percent before taxes being taken out. The borrower's gross income. Then the subprime market grew leading into 2000 to 2005, to where these investors would allow 50 to 55 percent one-time ratios, which would be a part of your front-end.

Quick education. Your front-end ratio is your principal & interest, plus taxes and homeowners insurance divided by your gross monthly income. Your back end ratio is the same formula, but adding on all monthly reoccurring debt, such as car payments, credit cards, bank loans, student loans, etc, etc.

The end result was that many investors got greedy and loosened the subprime guidelines. I knew loan officers that would put a decent borrower into a subprime loan because it was easier and quicker than getting them a FHA loan. Yet the FHA loan would have been much cheaper.

My problem with this statement? People making blanket statements, but not offering up solutions. Give me a few good examples of what the "subprime mortgage" should allow.  I hated when people were calling FHA loans the new subprime after the demise of the subprime industry. But from what I know after 18 years, you really can't get much better than an FHA loan that still has decent guidelines than what a subprime mortgage would allow with less down. What could be the main argument? Credit scores....

The BAD Credit score argument

I don't want to point the finger at just realtors, because I think many loan officers are just to blame when it comes to credit scores. In my opinion, it's called, "setting your clients expectations to a certain level". We all want to help now. But many mislead or make it sound easy because they might have a 600 credit score program, but don't fully understand it. In my opinion, people should not be waking up one day and say, "I want to buy a house tomorrow". It should take some careful planning and consideration. In reality, people shouldn't be buying a home if their credit and finances are screwed up, especially in the last 12 months. Yes, I understand that things can happen unexpectedly.

Let's take a look at the credit scores. Many lenders want 640 or higher. Some of us can still do down to 620 or even 600. I get that there are some people with 590 credit scores who have decent credit, that would be in the category of 'less than perfect credit', but that they are still a good risk. I just closed on a VA loan in which the borrower had 592 credit scores in December of 2010. When they went to closing, I had their credit scores up to 638. I have another borrower who had a mid score of 598 in January of this year and as of now, their mid score is a 645.

Conclusion : I am hearing many complain that it's nearly impossible to sell homes because the mortgage guideliness are way too strict.  Yes, you have issues when it comes to conventional loans that will only allow for a 45 percent back-end ratio if the credit score is a 720 or above. Or a back-end ratio of 41 percent for those with a credit score from 680 to 719. All of this is because of the MI companies, the mortgage insurance companies. And yes, you can do lender paid MI and such. But with a FHA loan, you don't have to worry about all of these differences. But given a few of my examples above, you can easily see that if a buyer speaks to a very qualified loan officer, they should be able to buy in 6 months. Sorry, but the mentality with so many realtors and buyers is that they must buy NOW.... and that is not the case. Waiting 3 to 6 months to get their stuff in order is not going to kill anyone. Besides, as I mentioned, buying a home should not be a split second thought, that you get up and do it now. As a buyer, if you know you don't have the best credit now, get with a true professional to help you get to that point. Articles such as the one I mentioned above, makes it sound like it's nearly impossible and because of it, it's hurting the economy. Yes, the economy needs the housing market. But there are way too many tracks that lead to the main station. One needs to truly understand the ins and outs of mortgages, and not just what they hear from each other, aka, water cooler chit chat. Just think about it...

UPDATE as of 5-14-11 2:15 pm - I just did some more reading and apparently some of us seem to be on the same page or have some of the same thoughts. The bottom line, many people want it now, and not to work for it. Two excellent reads below... please take the time to read these.

George Souto wrote : I want it now!!

Lenn Harley wrote : Mortgage loan denied!!!  What???  I have excellent credit!! What's going on?

There comes some responsibility and understanding of the mortgage process when buying a new home. Some think that just because you are approved for a mortgage in New Jersey, you can sit back and wait for the closing to happen now. There are many things a buyer must be careful of, even after they have been approved for a mortgage.  This isn’t always explained by the loan officer, hence why I wanted to give a list of items.

We hear so much talk about buyers being pre-qualified or pre-approved, but what about pre-qualifying the house that is being sold.

I was inspired to write this post after reading a post and its comments that was written by Valerie Osterhoudt. ~ FHA guidelines are making it hard to keep deals together ~ She talks about a home that she is trying to sell and just came across another change to FHA loans because the buyer was qualified with a FHA loan. The key point in this conversation was that "everything was going smoothly until ...."  Until the loan was being processed after the appraisal was done. Read the article that Valerie wrote in order to get more details. (ps - The issue mentioned in the article is also an issue for USDA loans - Just food for thought)

What I wanted to bring up is that some of these issues can be addressed prior to a buyer accepting an offer. Not everyone can remember every detail when it comes to what is allowed and not allowed, no matter what type of financing the buyer is obtaining. Let's take a look :

Why can this be such a great idea?

You could get a true expert that would know many of the lending guidelines when it comes to appraisals. If one would suggest an appraisal, I would make sure that appraiser is approved to do FHA appraisals also. And have this person view the home from all angles. Some of you might think about just hiring a home inspector. My advice would be to hire an appraiser.

The second idea would be to list the issues regarding the home being sold and not hide them from prospective buyers. Hey, I have heard many types of stories. My main point, if you know about it, make it known to everyone.

Lastly, get your loan officer involved with the issues. Have them run it by their underwriter. I would suggest all things that aren't ordinary within the surrounding area. Valerie's story is a perfect example, because it was well water. Another is that Erica Ramus just listed a property and asked me if this property would be okay for specific types of financing.

Wait, I know many will harp because it would be another cost to the seller when trying to sell their home. Maybe $375 to $500. How could a realtor explain this cost to the seller?

•    The listing agent can sell it as the cost of selling the home.

•    Split the cost with the seller when trying to win that listing or pay for yourself.

•    Have the buyer pay for the cost within the sales price.

Reminder : Throwing caution to the wind. Some of you will think or sell the idea that the appraisal could be used by the new buyer. I would not recommend this at all. To many new appraisal rules on how appraisal should be ordered and or the time period in which an appraisal is good.

Summary :   The ending result, how about being pro active. Market yourself aas the problem solver prior to unexpected problems, and not just keeping the fingers crossed. If you get resistance from the seller, use Valerie's story as an example.

Times have changed. Be ahead of those changes before you find out the hard way. It's easy to criticize after the fact, asking why certain loans are tougher on certain issues. This is another reason why FHA loans sometimes get a bad name. But a few things to keep in mind. As I mentioned, Valerie's issue is also an issue on USDA loans. And do you truly know what is the better loan for that buyer? That a conventional loan could be more expensive than a FHA loan, even with decent credit scores?

• Comparing FHA loans & conventional loans with 10% down - 699 credit score - FHA wins

• FHA loans vs USDA loans - A true comparision