Wednesday, December 24, 2008

Does a Buyer Have To Initial the Pages On a Sales Contract If There Is a Counter-Proposal?

Q: Why do some underwriters ask for the seller's initials on a sales contract when there is a counter-proposal?

A: Although a seller does not sign the original offer if there is a counter-proposal, the offer is still the bulk of the contract. By initialing the pages, the seller is indicating that they have agreed to everything in the contract except the terms that are changed by the counter-proposal. Underwriters ask for the initials for the protection of the seller.

Not all underwriters will ask that the pages be initialed, but if they do ask, then the pages need to be initialed.

Monday, December 22, 2008

What Happens if the Underwriting Guidelines Change After a Loan is Started?

Underwriting guidelines change constantly these days and we are often asked what happens if the guidelines change between the time a loan application is taken and the loan closing.

Q: Does the lender have to honor the old guidelines?

A: No, a lender is under no obligation to honor underwriting guidelines just because a loan application has been taken. Some lenders will honor the existing guidelines once the interest rate has been locked and some will honor them once a clear-to-close (the final underwriting approval) has been issued.

Find out up-front from your mortgage broker what the rules are for the lenders they plan to use.

Tuesday, December 16, 2008

What is the Difference Between a Collection and a Charge Off?

Q: What is the difference between a collection account and a charge off?

A: A collection account is an account that is delinquent and has been sold (usually at a discount) to a collection agency. The consumer now owes the collection agency, and not the original creditor, for the debt.

A charge off is a delinquent account that has been "written off" the creditor's books. The creditor takes a tax deduction for the loss, and no longer attempts to collect the debt from the consumer.

Sunday, December 14, 2008

The Two Biggest Credit Mistakes

We've mentioned this tip before, but it is so important, we've got to post it again. Too many people are not qualifying for mortgages because they don't know this.

These are the two biggest mistakes people make regarding their credit:

-- They pay off an account and then close it. DO NOT tell anyone to do this. It will make their score go down for two reasons. 1) They have stopped the amount of time the account has been opened -- the longer an account is open, the higher the score. 2) They have lowered the amount of available credit that they have, and that raises the ratio of used credit to available credit. In addition to their score going down, they could also run the risk of having too few accounts to get a loan. Three open accounts is the minimum that underwriters are looking for these days. Less than that, and many loans get denied. Not always, but often enough.

-- They pay off old collection accounts. DO NOT tell anyone to do this. Collection accounts begin to stop hurting your score as soon as the collection company is not bugging you to pay the account. Most collection companies give up very quickly - a couple of months at most. If someone pays off an old collection account that no one is trying to collect from them, the "date of last activity" on the account will be the current date. The old collection account turns into a new collection account, and it kills the credit score. Also, neither Fannie Mae, Freddie Mac, FHA, nor VA require that collection accounts be paid off. This rule has been in effect for quite a while now, but unless you read the updates to the underwriting guidelines every day (and there are very few people who do), you might not know that.

Again, do NOT close accounts and do NOT pay off old collection accounts. You will see plenty of information online telling you this advice is incorrect, and there are plenty of mortgage brokers and retail loan officers who will tell you that it is incorrect, but that bad advice leads to loans falling apart. A deal should never fall apart once it has been pre-approved, unless the value of the property is lower than expected.

Should You Use a Credit Repair Company?

Q: Should someone use a credit repair company to improve their credit score?

A: No one should ever use a credit repair company. The vast majority of them are complete rip-offs. There are no "secrets that the experts don't want you to know." If there is an error on your report, you can correct it yourself, for free, by writing a letter to the three credit reporting agencies (TransUnion, Experian, and Equifax) and sending them the documentation showing that there is an error. It costs nothing. If someone tells you that you can raise your score by protesting everything, they are giving you extremely bad advice. Old collection accounts can become new collection accounts if the collection company starts trying to collect from you again, accounts that were in bankruptcies can be erroneously reported as not being in the bankruptcy, etc. No matter what is on your credit report, if the date of last activity is more than two years old (and it's not an unpaid tax lien or an unpaid judgment), it will not lower your score. As mortgage brokers, we are approached regularly by credit repair companies trying to get us to rip people off by selling them credit repair services. Do not fall for it!

Friday, December 12, 2008

What Does POC Mean?

Here's another common question:

Q: What does POC mean on a final settlement statement?

A: POC stands for Paid Outside of Closing, and refers to any fee that is not being disbursed at the closing. The two most common POC charges are the appraisal fee (if it has been paid by the borrower before the closing) and the yield spread premium (the rebate that the lender pays the mortgage broker).

If a fee is marked as POC, it is not included in the bottom line on the settlement statement because the borrower has either already paid it (in the case of a paid appraisal) or the borrower does not owe it (in the case of a yield spread premium).

Thursday, December 11, 2008

Is the $7500 Tax Credit for First-Time Home Buyers a Good Deal?

By now, everyone has probably heard about the $7500 tax credit that first-time home buyers can get this coming tax year. We're hearing many people question whether they should claim the credit because they have to pay it back over the next 15 years (at no interest). Because $7500 is not a huge amount of money - certainly not enough to make anyone rich - it's a difficult decision, especially because the IRS is involved (we're always pretty suspicious of the tax man).

Here's a great way to tell whether something makes sense. Multiply the numbers by 1000. It will become very obvious whether something is a good idea if it's exaggerated by 1000. It will either seem really good, or really bad.

So instead of thinking about the tax credit as just being $7500, assume it's 1000 times $7500, or $7,500,000. If someone told you that you could have $7.5 million and all you had to do was pay it back - with no interest - over the next 15 years, would you take the $7,500,000, or would you think it was a bad idea because you had to pay $500,000 back each year? $7.5 million now, and only half a million paid back each year.

Makes it a lot easier that way, doesn't it?

When Does the FHA Down Payment Go to 3.5%?

Q: I know the FHA down payment goes from 3% to 3.5% on January 1, but what is the down payment if the sales contract is signed in December and the closing is in January?

A: The down payment is determined by the date that the lender gets the FHA case number. As soon as a sales contract is signed, your mortgage broker can get a case number. It takes about 5 minutes. As long as the case number is obtained in December, the 3% down payment applies -- it doesn't matter when the loan closes.

Tuesday, December 9, 2008

How Did the Lender Know My Buyer Quit His Job?

Here's another question from a recent presentation we gave:

Q: "I had a buyer quit his job right before a closing and the deal fell apart. How did the lender know he quit his job?"

A: Every lender calls the borrowers' employer right before the closing (generally within 5 days of the closing) to see if the borrower is still employed. This is one of the conditions on all loan approvals that must be satisfied before the loan can fund.

The verification is known as a verbal verification of employment and is done over the phone. It does not include income information, just the borrower's start date and position, and whether they are still employed.

Monday, December 8, 2008

Licensing for Mortgage Brokers

All mortgage brokers in Colorado need to take 40 hours of training and pass a test by January 1, 2009 in order to maintain their licenses and be able to legally originate mortgages. The training and testing has been available since April 1, 2008. However, so few mortgage brokers have bothered to take the training and sign up for the test, the state is being forced to extend the deadline until March 31, 2009.

Every mortgage broker must be individually licensed. As of the end of November, only 1166 out of 9402 licensed mortgage brokers in Colorado have taken the training and passed the test. That's just a little more than 12%.

Don't lose deals. Make sure the mortgage brokers you use are not only licensed, but have also taken the training and passed the test. If they are not in compliance, the deal cannot legally close.

What Does Underwriting Mean?

Q: What does underwriting mean?

A: Underwriting is the process used to determine whether a borrower falls within the risk guidelines for a particular loan product. On it's simplest level, underwriting is a "check off the boxes" process. Do the borrowers have high enough credit scores? Do they have enough money for a down payment and closing costs? Do they make enough money to be able to pay the loan back? The underwriting guidelines are different for every type of loan. When a mortgage broker "qualifies" a borrower, he makes sure the borrower fits within the underwriting guidelines for the loan they are applying for.

Saturday, December 6, 2008

Are Co-Signers Allowed?

Q: Can a buyer have a co-signer on a loan if the co-signer doesn't live with them?

A: Yes, this is allowed for all loans, but the occupying borrower must be able to qualify for the loan by themselves if the loan is not an FHA loan. If the loan is an FHA loan, then the occupying borrower doesn't need a credit score, income, assets, or anything else, as long as the co-signer (who must be a relative) can qualify for the loan.

Friday, December 5, 2008

HUD Home Info

A HUD home is a house that the Department of Housing and Urban Development (HUD) owns and wants to sell. HUD is the owner because the house used to have FHA financing and the previous owner went into foreclosure. HUD is the government agency that oversees the Federal Housing Administration (FHA).

Ever wonder where to get all the information you could want about HUD homes? Here's the link:

Make sure you click on the "Broker Handbook" link on the right of the page.

Does an Ex-Spouse Count as a Relative?

Here's another question from a real estate agent:

Q: I have a buyer who needs gift money to pay for closing costs and I know the money needs to come from a relative. Does an ex-spouse count as a relative?

A: No. Exes, boyfriends, and girlfriends are not considered relatives. Fiancés and fiancées are considered relatives, however, provided some proof is available showing that the couple is actually engaged. A marriage license, a receipt from a jewelry store for an engagement ring, and a newspaper announcement are all examples of proof that has been accepted by underwriters. Same sex domestic partners are considered relatives as well.

Wednesday, December 3, 2008

What Is an Origination Fee?

Q: What is an origination fee?

A: The origination fee is pure profit for the mortgage broker. Part of it may go to the mortgage broker's employer, but it is still 100% profit for the mortgage company.

Sometimes a mortgage lender will tell you that the origination fee is being used to buy down the rate, meaning it's being used to secure a lower interest rate by making a one-time up-front payment. That is not correct. Loan discount fees (sometimes referred to as "paying points"), and not the origination fee, are used to buy down the interest rate. It's important to have the fees listed on the correct lines on the Good Faith Estimate and the final settlement statement in order to be in compliance with the Real Estate Settlement Procedures Act (RESPA).

Tuesday, December 2, 2008

Do All Lenders Allow a Power of Attorney?

Here's another question we're frequently asked:

Q: Do all lenders allow a Power of Attorney (POA) if one of the buyers cannot be present at the closing?

A: If the buyers are related, then it's generally not a problem. If they are not related, then the lender must approve the person who will be acting as the attorney-in-fact. In all instances, the lender has to approve the format and wording of the POA. The title company will be able to prepare the POA.

Monday, December 1, 2008

Quit Claim Deeds

Q: Does transferring the title to a property using a quit claim deed release someone from the responsibility of paying the loan?

A: No, it does not. The only way to release someone from the responsibility of paying a mortgage is to refinance or sell the property. A quit claim deed only transfers ownership, not liability for the loan.

FHA and VA Classes

Government loans (FHA and VA) now account for more than 40% of all loans nationwide, up from less than 10% a year ago. The number is growing every month and is expected to be greater than 50% in the next month or two.

That means about half the deals that are closing right now are unavailable to buyers, real estate agents, and mortgage brokers who don't use government financing. The primary reason for not using government financing is a lack of understanding about how the programs work.

We are approved by the state to offer continuing education units (CEUs) to Colorado real estate agents for FHA and VA loan classes we have developed. Here's a quick little quiz to see if you should take the classes:

A -- Are FHA loans for first-time homebuyers only?
B -- Can the seller pay 6% towards the buyer's closing costs with an FHA loan? How much for a VA loan?
C -- Do FHA and VA consider declining markets when calculating the maximum loan-to-value (LTV) ratio?
D -- Is the loan limit $368,000 in the Metro-Denver area for FHA loans? What is it for VA?
E -- Do collection accounts have to be paid off to get an FHA loan?
F -- What are the income limitations for FHA and VA loans?
G -- Can a borrower's relative lend money to the borrower for the down payment on an FHA loan? Can they just give it to them?
H -- How many years out of bankruptcy does a borrower have to be to get an FHA or VA loan? How many years since a foreclosure?

Here are the answers:

A -- FHA loans are for anyone, not just first-time homebuyers.
B -- The seller concessions limit is 6% for FHA and it is unlimited for VA.
C -- Neither FHA nor VA consider declining markets.
D -- Loan limit is $368,000 for FHA in the Metro-Denver area (higher in Boulder) - beginning January 1, 2009. The limit for VA is $417,000.
E -- There's no need to pay off collections.
F -- There are no income limitations.
G -- A relative can either give or lend the down payment to the borrower.
H -- Chapter 7 BK is 2 years for FHA and VA. Foreclosure is 3 years for FHA and 2 years for VA.

Did you get them all correct? If not, call us to set up a class because you need to know these things and much more to close 40% of the deals that will come your way.

Friday, November 28, 2008

Do Car Lease Payments Count as a Liability?

We're often asked if car lease payments count as a liability when qualifying a borrower for a loan.

The answer is yes, even if there are only one or two payments left on the lease. There is a reasonable expectation that the borrower will have to either buy a car or lease another one after the current lease is up, so the payment needs to be counted as a liability.

Wednesday, November 26, 2008

My Spouse Had a Bankruptcy - Can I Get a Loan?

Q: If someone's spouse has had a bankruptcy, does that affect the length of time before they can buy a house?

A: Not necessarily. If both people are going to be on the note (the loan), then it does. If the couple can qualify for a loan with just the income of the person who did not have the bankruptcy, then they can get a loan in just that one person's name.

Tuesday, November 25, 2008

Re-Establishing Credit After a Bankruptcy

Q: What does "re-establishing credit" after a bankruptcy mean?

A: After a bankruptcy, a lender will be looking at a borrower's credit report to make sure they have either kept some accounts open or opened new ones. If the borrower has three open lines of credit (credit cards, car loans, mortgages, etc.), and they do not have any late payments for the 12 months preceding the loan application, then they have "re-established" their credit.

Monday, November 24, 2008

Can Closing Costs Be Rolled into a Loan?

Here's another question we get asked all the time:

Q: Can loan closing costs be rolled into the loan amount?

A: On a refinance transaction, yes, provided there is sufficient equity in the property. On a purchase transaction, the closing costs cannot be rolled into the loan. Two exceptions to this rule include the up-front mortgage insurance premium for FHA loans and the funding fee for VA loans. It may sometimes seem as if the closing costs are being rolled into the loan on a purchase, but in those cases, the fees are actually being paid by a second mortgage from a down payment assistance organization. If there is no down payment assistance program involved, then the buyer or the seller has to come up with the closing costs.

FHA Loan Limits Are Changing Again

FHA loan limits are changing again! Here are the new rules.

Effective January 1, 2009, the limits will be lowered to comply with the Housing and Economic Recovery Act of 2008 (the big bail out act passed back in July). The loan limits had been raised when the Economic Stimulus Act of 2008 was passed in February (that was the previous bail out act), but those were just temporary increases due to expire at the end of 2008. To make it a bit more complicated, the lenders who underwrite the FHA loans are concerned that they will get stuck with loans that are over the limit and FHA won't insure them, so just about everyone lowered the limits this past week, even though FHA rules say they can keep them at the higher amounts until January 1.

It's not as bad as it sounds, though. The new limits are still much higher than the old limits that were in effect before February, even though they are lower than they have been for the past 9 months.

The bottom line is this. In Adams, Arapahoe, Broomfield, Denver, Douglas, and Jefferson Counties, the new limit is $368,000. In Boulder County, the new limit is $402,500. These numbers are the most that FHA will lend on a one-unit purchase. The limits go up significantly for 2, 3, and 4 unit properties.

These new limits are posted on FHA's loan limit web site, but so are the old limits for 2008, so if you use the web site, make sure you choose the correct year. All you need to do is select the correct STATE and the correct LIMIT YEAR from the menus, and then click on SEND. There is no need to select anything else to get the loan limits. Here's the link to the FHA site:

Just a reminder, FHA loans are NOT limited to first time homebuyers and there are NO income limitations. AND the seller can pay a full 6% towards the buyer's closing costs. Don't lose out on a deal because you are getting incorrect information.

Friday, November 21, 2008

How Much Money Can a Buyer Get Back at Closing?

Here's a question we get asked at just about every real estate training seminar we teach:

Q: How much money can a buyer get back at closing?

A: The most a buyer can get back is the amount of their earnest money, less any amount (if any) that they are required to contribute towards the purchase by the loan program guidelines. For example, if the borrower has paid $3,000 in earnest money and the loan program they are using requires a minimum contribution of $1,000, then the most they can receive back at closing is $2,000. If they get any more than that, it would be the same as if the seller was writing them a check for that extra amount. That's considered a seller inducement to purchase (a fancy term for kickback), and that is against the rules.

Thursday, November 20, 2008

International Clients Seminar

Today's tip comes to us courtesy of Jacqui Jeffress at Infinity Real Estate Service. Jacqui's number is 303-887-4210 and her email is

Jacqui would like to invite everyone to attend a seminar being taught at the North Metro Denver Realtor Association (NMDRA) that will shed some light on how to get international clients. Here's some info from the NMDRA promotional flyer:

In this seminar you will learn about the effect of the current economic conditions and exchange rates on International Buyers and Investors coming to Colorado. You will also learn how you can get in front of these potential Buyers and Investors for your local listings and services. Manfred will also tell you how to get deals done in these challenging times.

In addition to all of this, you will also find out:

Who are the buyers? Where are they buying? What are they buying? How can you get in front of them and get some of that? How can you show them your listings and your services? How you can make more money from the clients you already have and make them more loyal to you? What are the best ways to list properties internationally? What are the top 10 world listing sites? What are the most effective ways to market in today’s challenging times?

Dec. 11 at the North Metro Denver Realtor Assoc., 1:00PM - 4:00PM, 3 hours C.E. credit, Instructor Manfred Chemek, $35, Realtor or not, you need this class, call 303-451-5757 to register.

Thank you , Jacqui, for the tip!

What Is an Underwriting Exception?

Q: When a mortgage broker says they are trying to "get an exception" from an underwriter, what does that mean?

A: Underwriters follow underwriting guidelines to determine whether a loan application falls within the risk parameters for a particular loan program. If a loan is not approved because it does not meet all of the guidelines (debt-to-income ratio is too high, reserves - or money in the bank - are too low, the borrower has not been self-employed for long enough, etc.), then the underwriter can still approve the loan if there are "compensating factors". Compensating factors are things that reduce the risk level of the loan. Some examples would be very high credit scores, very low debt-to-income ratios, etc. If the underwriter thinks there are sufficient compensating factors, they may issue an "exception" to the guidelines and approve the loan, even though it does not meet all of the underwriting guidelines.

Wednesday, November 19, 2008

Should Someone Ever Pay a Pre-Payment Penalty?

Here's another question we were asked at a class we taught recently:

Q: Should a buyer ever pay a pre-payment penalty?

A: No, a buyer should never have to pay a pre-payment penalty (PPP). PPP's are added onto loans so the lender and the mortgage broker can make more money. The lender makes more because the borrower is locked into a loan that they are much less likely to refinance. The mortgage broker makes more because the lender pays the broker a rebate for adding the PPP onto the loan. Some mortgage brokers will argue that they will use the rebate they get to pay some of the borrower's closing costs, but that is rarely what actually happens to the money. Typically, the mortgage broker just keeps it for himself.

Tuesday, November 18, 2008

Why Does a Lender Want My Mortgage Statement?

Q: If someone owns a house and is buying another one, why does a lender sometimes want to see the mortgage statement for the buyer's current property? I thought the mortgage payments would be listed on the credit report.

A: The underwriter is looking to see if the homeowner's insurance and property taxes are included in the monthly payment. There is no way to tell from a credit report if the taxes and insurance are included in the amount reported to the credit agencies. If they are not, then they have to be added to the monthly payment to get the correct debt-to-income (DTI) ratio.

Monday, November 17, 2008

Important New Appraisal Changes

Fannie Mae just announced that there are some new appraisal requirements going into effect, in order to make sure that properties are valued correctly. The main change is the addition of the Market Conditions Addendum, which requires the appraiser to go into great detail to support the claim that a market has declining, stable, or increasing property values. This is something that everyone should be familiar with - sales will depend on it. The announcement from Fannie is 9 pages long, so we're supplying the link to the document, rather than pasting the entire thing in this email. Here is the link:

The new addendum must be used for all appraisals dated after April 1, 2009.

There are other changes as well.

- Supervisory appraisers can no longer just sign off on an appraisal - they must inspect the property themselves.
- The sales contract and all addenda must be given to the appraiser. If the contract is updated, the updated contract must be given to the appraiser.
- If the appraiser uses comparable sales from outside the neighborhood where the property is located, they must now explain why they are doing it.

Fannie also clarified some appraisal issues:

- Repair escrows can be used for minor problems with the property (worn carpet, minor plumbing leaks, holes in screens, cracked window glass, etc.).
- The appraiser must comment on each time the property has been listed for sale in the previous 12 months.
- The appraisal must be for the entire property, not just for a part of it (all acreage must be counted).
- If an adjustment for the effective age of the property is used in the appraisal, it must be explained.
- When anyone with a financial interest in the transaction (real estate agents, buyer, seller, mortgage broker, etc.) provides the appraiser with comps, the appraiser must verify them.
- Neighborhood boundaries cannot be expanded to encompass comps.
- Time adjustments must reflect the difference in market conditions between the date of sale of the comp and the date of the appraisal.

Everything other than the use of the new addendum goes into effect on January 1, 2009.

Again, these are big changes and they will have an impact on listing prices and sales prices (probably to lower them - that's the whole point of all of these changes). Make sure you read the Fannie Mae announcement and pass the word on to everyone you work with.

Are the Property Taxes Paid?

Q: How do I know that the property taxes are up to date and paid when I buy a house?

A: The lender requires a tax certificate from the county showing the status of the property taxes. If the taxes are not current, the lender will insist that they be brought up to date at the closing.

Friday, November 14, 2008

Does All Income Need to Be Listed On the Loan Application?

We are often asked if borrowers have to include all of their income on a loan application. Except in the case of a loan where there are maximum income limits (an affordable housing program, for example), the answer is no. It is always best to submit a loan to underwriting with the least amount of income necessary for the approval because everything that is included on the application must be documented.

A good example of how this would work is if a borrower has $50,000 base income and $30,000 commission income. If the borrower can qualify for the loan with just base income and that's all we enter on the application, then all we have to document is base income. That can be done with just a paystub. However, if we included the commission income on the application, we would also need to provide the last two years of tax returns to prove the stability and continuity of the commission income. That slows down both the documentation collection process and the underwriting process. An easy loan has turned into a more difficult loan.

The same is true for assets. If a borrower only needs to have $5,000 in the bank to get an approval, but has $400,000 in ten different accounts, all we would include on the application is one account that has at least $5,000 in it. Again, it simplifies the loan process and results in faster turn times. Plus, the underwriters love us because we make their lives easier, and our loan submissions go to the top of the pile :-)

Thursday, November 13, 2008

FHA Repair Escrows

If someone is buying a HUD home that has a repair escrow amount listed, and is using FHA financing, they can include the amount of the repair escrow in the FHA loan without having to get a rehab loan. Let's say the house is listed at $100,000 and the escrow amount is $2,000. They would be able to pay $100,000 for the house, but get the extra $2,000 included in the loan.

The amount listed for the repairs is not a set number. Before getting the loan, the buyer would need to get an estimate, and that number would be the amount that is included in the escrow account. It could be higher or lower than the amount estimated by HUD. Just about the only limitation on these repair escrow loans is that the buyer cannot add any other repairs into the escrow account. If HUD says the escrow is to "repair the heating system", then it can only be used to repair the heating system.

These repair escrow loans are available with HUD's $100 down program also.

Which Payroll Deductions Count As Liabilities?

Q: Do payroll deductions count as liabilities when calculating the debt-to-income (DTI) ratio?

A: If the deduction is used to pay a debt, such as child support, mandatory loan repayments, etc., then it must be counted as a liability. If the deduction is for payroll taxes, a contribution to a 401(K), union dues, etc., then it does not count as a liability.

Wednesday, November 12, 2008

Borrower is Separated from Their Spouse - Does All Debt Count Against Them?

If a borrower is separated from their spouse, an underwriter will require a separation agreement in order to determine which liabilities each spouse is obligated to pay, and also to determine if any child support or spousal maintenance is involved.

If a formal (legal) separation agreement does not exist, some lenders will approve the loan if both spouse's liabilities, including the housing expenses of both people, are counted in the debt ratio.

Tuesday, November 11, 2008

Bank Statements - Why Do They Need the Blank Pages?

Q: Why does a lender want to see all the pages of bank statements, even if some of them are blank?

A: The main things lenders look for are insufficient funds charges, car loans that are not reported to the credit bureaus (fairly common with credit unions), overdraft loans that are not on the credit report, and unusually large deposits. They also don't have any way of knowing a page is blank until they see it.

Monday, November 10, 2008

Interest Rate Buydowns

Today's tip comes to us courtesy of Tony Kerstiens at Metro Brokers dotcom RealEstate -- 303-880-3579,

An interest rate buydown is something that first time home buyers should consider if they are concerned that there's not much difference between their current rent payment and the amount of a mortgage payment.

A buydown is a temporary reduction in the interest rate of a fixed-rate mortgage. A 2-1 buydown has a reduction of 2% the first year, a reduction of 1% the second year, and then the regular note rate for the rest of the loan term. As an example, a 2-1 buydown for a 30-year fixed rate mortgage with a note rate of 6% would have a payment based on 4% for the first year, 5% for the second year, and 6% for the remaining 28 years.

Buydowns are not free, but if the seller is willing to pay the full 6% in buyer closing costs they are allowed to pay with FHA loans, the money in excess of the usual closing costs can be used to pay for the buydown. Buydowns make it easier for buyers to buy houses, and they make it easier for sellers to sell houses.

Buydowns are not restricted to first time home buyers.

Should You Protest All Accounts on Your Credit Report?

Q: Is it a good idea to do what many "credit repair" companies do, and protest everything listed on a credit report, in the hopes of getting accounts removed?

A: Generally not. If an account is truly an error, then it makes sense to get it removed, provided it is affecting the score. In many cases, however, protesting everything lowers the score because old collection accounts, change-offs, accounts included in bankruptcies, etc. are now listed with a more recent "date of last activity". The more recent the date of last activity is for a derogatory account, the more it lowers the score.

Friday, November 7, 2008

Here's How to Get the Down Payment for an FHA Loan

Now that seller-paid down payment assistance (Nehemiah, AmeriDream, etc.) is gone for FHA loans, it's good to know what the alternatives are if you do not have the mandatory 3% FHA down payment (it goes up to 3.5% on January 1).

If you have household income that falls below the income guidelines established by the Colorado Housing Assistance Corp. (CHAC) and all the other non-seller-paid down payment assistance programs, then that is the easiest way to get the money for the down payment. There is an assistance program for every county in Colorado.

If you have household income above the guideline limits, then the best way to get the down payment is to have a relative either give or lend you the money. It's OK for the relative to borrow it themselves before they give or lend it to you.

If the money is a gift, then the relative needs to sign a gift letter stating that the money does not have to be paid back.

If the money is a loan from a relative, then they have the option of making it a secured loan (making it a second mortgage), or making it an unsecured loan (the only lien against the property will be the FHA loan).

There is a bill in Congress to re-establish seller-paid down payment programs, but it is anyone's guess at the moment whether that will pass and be signed into law.

Thursday, November 6, 2008

Buying a New Primary Residence and Keeping Your Current Residence as a Rental

Just a reminder that the new rules for buying a primary residence, while retaining a current primary residence as a rental, have gone into affect. Here's how it works.

If someone is planning to retain their current primary residence as a rental, they must have 30% equity in their current primary residence if they need to include any rental income to qualify for the loan. They also need a lease agreement and proof that the security deposit for the rental has been deposited into their account.

If they don't have 30% equity in their current primary residence, they can still buy a new primary residence, but they cannot count any rental income from their current house. In other words, they need to be able to qualify for the loan counting both house payments.

There are also reserve requirements that must be met. Reserves are liquid assets (bank accounts, retirement accounts, etc.) that the borrower will have left over after the closing. The required reserves could be as high as 6 times the house payments, but if the loan is run through an automated underwriting system, they are usually lower than 6 months.

For FHA loans, the amount of equity that's needed is 25%, not 30%. The 30% equity requirement is for conventional (non-government) loans.

How Long Can an Appraisal Be Used?

Q: How long can an appraisal be used before a lender will require a new appraisal?

A: The general guideline is 6 months, although an underwriter is allowed to ask for an update before 6 months if they think the property value might have changed. This is a common requirement in an area that has been involved in a natural disaster (flooding, hurricane, etc.). The update to the appraisal is not a full appraisal, but it does include a new exterior photo and the appraiser must use current market data to determine if the property has declined in value since the date of the original appraisal.

Wednesday, November 5, 2008

Calculating Income for a Sole Proprietor

We are often asked how a lender calculates income for a borrower who has their own business and reports that income on IRS Form Schedule C (used for sole proprietorships). It's really very easy to do. Here are the Fannie Mae guidelines:

"The income (or loss) from a borrower’s sole proprietorship business is calculated on the Profit or Loss from Business (Schedule C) and transferred to IRS Form 1040. However, the lender may need to make certain adjustments to the net profit or loss shown on Schedule C to arrive at the borrower’s cash flow. For example, Schedule C may include income that was not obtained from the profits of the borrower’s business. If the lender determines that such income is not recurring, it should adjust the borrower’s cash flow by deducting the nonrecurring income. In addition, the lender may add back to the borrower’s cash flow any deductions the borrower took on Schedule C for depreciation, depletion, business use of a home, amortization, or casualty losses. The lender should deduct from the borrower’s cash flow any exclusion for meals and entertainment expenses that the borrower reported on Schedule C."

There is a form that we complete and send to the underwriter along with the tax returns. For each of the last two years, we start with the borrower's net income, and then add or subtract the items listed above. The bottom line is the amount we can use for income for each year. The income is then averaged over the last two years, and that average is the amount that the underwriter will consider as income. The income must also be stable or increasing from year to year.

The two-year average is an underwriting guideline, but it's important to remember guidelines are meant to guide the underwriters and are not etched in stone. Fannie Mae allows the underwriter to exercise some discretion. If the rest of the loan file is strong enough (good credit, good income, good reserves, etc.), then the loan may be approved with less than 24 months of self-employment. One of the biggest mistakes real estate agents and borrowers make is assuming that a loan will not be approved. It's always best to get a definitive answer from an underwriter.

Tuesday, November 4, 2008

Can Someone Own a House and Not Be Obligated to Pay the Loan?

Q: Can someone be on the title to a property, but not be on the note?

A: Yes, it is not a problem at all. The title deed says who owns the property. The note says who has to pay back the loan. It is possible for someone to be on title (own the property), but not be on the note (be obligated to pay for it).

This can be used to your advantage when qualifying for a loan. If a couple is buying a house and one of them has good credit and the other one has bad credit, it would probably be best for the person with the good credit to qualify for the mortgage and be the only one on the note, but both people could be on title and own the house.

The only disadvantage to doing it this way is that the person with the good credit needs to make enough money to qualify for the loan by themselves. If you want to include someone's income to qualify, then you have to include their liabilities and use their credit score as well. The lowest credit score of all the borrowers is the one that the underwriters use.

Monday, November 3, 2008

USDA Rural Housing Loans - 100% Financing

For properties in places outside of the urban areas of Colorado, the USDA Rural Development (or Guaranteed Rural Housing) loan program allows borrowers to purchase a home with no money down. Here are some of the highlights:

-- 100% financing
-- Not limited to first-time homebuyers
-- No monthly mortgage insurance
-- The seller can pay up to 6% for closing costs and prepaids
-- If the seller won't pay the closing costs, then a gift to cover the closing costs is acceptable from a disinterested third party (a friend of the buyer, for example)
-- Some repairs can be financed into the loan

All counties in Colorado except Denver County are eligible to use this program. However, Adams, Arapahoe, Boulder, Douglas, El Paso, Jefferson, Larimer, Mesa, Pueblo, and Weld have ineligible areas, so any properties in those counties would need to be checked for program compliance.

Here are some areas around Denver where these loans are available: Brighton, Bennett, Firestone, Larkspur, Dacono, Frederick, Lochbuie, Ft. Lupton. There are hundreds of other towns in the state that are eligible as well. Please give us a call with your property address and we can let you know if the property is eligible for the program. There are some income limitations, but they are not so low that most buyers will be excluded ($66,100 for a 2-person family in the Denver-Aurora area, $70,700 for a 2-person family in the Boulder area, etc.).

Rates After the Election?

Q: Will interest rates go up or down after the election?

A: There's no way to tell. Long-term mortgage interest rates are driven by the demand for the mortgage backed securities that Fannie Mae, Freddie Mac, and Ginnie Mae sell, not by the political environment, despite what many people will have you believe. If rates go up after the election, half the pundits will be correct. If they go down, the other half will be correct.

Friday, October 31, 2008

What Is the Difference Between HUD and FHA? Do You Need FHA Financing to Buy a HUD Home?

Q: What is the difference between HUD and FHA? Do you need FHA financing to buy a HUD home?

A: HUD is the U.S. Department of Housing and Urban Development, and oversees a wide range of federal housing, economic development, and anti-discrimination programs. FHA is the Federal Housing Administration, and provides mortgage insurance on loans made by FHA-approved lenders. FHA is part of HUD.

When a house that has an FHA-insured mortgage goes into foreclosure, it is known as a "HUD home" because HUD, rather than a bank, takes title to the property. It is not necessary for a buyer to get FHA financing to buy a HUD home. HUD doesn't care where the money to buy the house comes from - they just want to sell it.

Thursday, October 30, 2008

Down Payment Requirements and Availability of Funds

Two things to address today: down payment requirements and funds available for mortgages.

There was a story on the news last night saying that borrowers will soon need 20% down to buy a house. That is NOT true. Down payment requirements are determined by the secondary market (Fannie Mae, Freddie Mac, Ginnie Mae) -- companies that buy loans from the lenders, securitize the loans (package them up in large "pools"), and then sell them to large investors (mutual funds, foreign governments, etc.). They decide what the down payment requirements should be based on the rate of return the investors are demanding in order to buy the mortgage backed securities (MBS). There is very little demand for sub-prime MBS because many of the loans go into default. However, there is an almost insatiable demand for US prime mortgages within the investment community. FHA loans have always been guaranteed by the US government, and now Fannie Mae and Freddie Mac loans are guaranteed by the US government. If someone has 3% down for a primary residence and a credit score above 580, they will have very little trouble getting a loan. The investors want to buy them because they're backed by our government, so there's no reason to raise the down payment requirements.

No one in the mortgage industry can make any money if no loans are made, so it is in no one's interest to make it hard to get a loan.

Which brings us to the availability of funds. Many people have called us in the past week asking if there is money available for loans. Please don't listen to anyone who tells you that funds for loans are not available or are shrinking. Anyone who tells you that is seriously misinformed. There may not be money available from a particular lender because they had shady lending practices, or because they maintain their own loans rather than sell them on the secondary market (lenders who keep their own loans are known as portfolio lenders - they keep the loans they make in their own investment portfolio). However, as long as big investors want to buy securities that are backed by the US government, there is absolutely nothing to worry about.

The flow of money within the mortgage finance industry is extremely complicated and very few people who have not studied it can understand it. It's easy to get on TV and in the papers by announcing that no one can get a loan without 20% down, or by saying the money for loans has dried up, so people make stuff up or repeat what they heard from someone who didn't know what they were talking about. Please don't ruin your business by telling your buyers it's hard to get a loan or that there's no available money. It's simply not true.

Mortgage Rates and the Federal Funds Rate

Q: Why don't mortgage rates go down when the Federal Reserve lowers the fed funds rate?

A: The federal funds rate is the rate that banks in the Federal Reserve system charge when they lend money to each other, usually on a very short-term basis (as short as one day). The Prime rate is 3% higher than the fed funds rate, and is what banks use to determine the interest rate for Home Equity Lines of Credit (HELOCs). However, long-term mortgage rates are determined by what large, long-term investors (mutual fund managers, foreign governments, other fabulously wealthy types) are willing to accept as a return on their investment money. The best indication of whether mortgage rates are going to go up or down is the yield on the 10-year Treasury note, which changes all day long, depending on the trading in the bond market (just as stock prices change constantly, so do bond prices). Mortgage rates are always a bit higher than the 10-year yield.

Wednesday, October 29, 2008

Seller Concession Limits

On most loans these days, the seller pays part of the buyer's closing costs, so it's important to know what the limits are. Here are the Fannie Mae limits for seller concessions (the amount the seller can pay towards the buyer's closing costs):

-- 2% of the sales price for an investment property.

-- 3% for a primary residence or a second home, if the buyer has less than 10% as a down payment.

-- 6% for a primary residence or a second home if the buyer has between 10% and 24.99% as a down payment.

-- 9% for a primary residence or a second home if the buyer has 25% or more as a down payment.

For FHA loans, the limit for seller concessions is 6% of the purchase price, regardless of the down payment.

For VA loans, there is no limit on the amount that the seller can pay towards the buyer's closing costs. However, some of the fees that are typically thought of as being "closing costs", such as the money used to set up the buyer's property tax and homeowners insurance escrow account, have a limit of 4%. In almost all cases, the seller is allowed to pay all of the buyer's fees.

Tuesday, October 28, 2008

Paying Off Debt to Qualify for a Loan

If you don't qualify for a loan because your debt-to-income ratio is too high, you are allowed to pay off debt in order to qualify for the loan. This applies to both installment debt (car loans, furniture loans, etc.) and revolving debt (credit cards).

For a conventional (non-government) loan, Fannie Mae underwriting guidelines permit it, but individual lenders are allowed to add their own restrictions on top of Fannie Mae's, so not every lender will be able to offer you the option of paying off debt to qualify. Always check with the lender to make sure it's allowed under their guidelines.

For FHA loans, every lender follows FHA guidelines, so they will all allow debt to be paid off to qualify. One additional benefit of getting an FHA loan in a case like this is that FHA allows the money that's used to pay off the debt to come from a gift from a relative.

Monday, October 27, 2008

VA Funding Fee

VA loans have a borrower fee known as the VA Funding Fee, which ranges from 1.25% to 3.3% of the loan amount on purchase transactions. The exact amount depends on whether the borrower is/was in the regular military or the Reserves/National Guard; the amount of the downpayment, if any (VA loans can be for 100% financing); and whether the borrower has previously used their VA entitlement.

The VA Funding Fee can be financed into the loan, and typically is. However, there are certain circumstances which exempt the borrower from the funding fee. The following people do not have to pay the funding fee (taken from the VA Handbook):

-- Veterans receiving VA compensation for service-connected disabilities.
-- Veterans who would be entitled to receive compensation for service-connected disabilities if they did not receive retirement pay.
-- Veterans who are rated by VA as eligible to receive compensation as a result of pre-discharge disability examination and rating.
-- Unmarried surviving spouses of veterans who died in service or from service-connected disabilities.

Among other advantages, VA loans have the lowest interest rates (same as FHA), allow 100% financing, and require no mortgage insurance. They are almost always the best financing option for veterans, or members of the active military or Reserves/National Guard.

Mortgage Broker Licensing

Q: Do mortgage brokers need to be licensed in Colorado?

A: Yes. At the moment, mortgage brokers need to have a criminal background check, a $25,000 bond, errors and omissions insurance, and they must register with the state. Beginning January 1, 2009, Colorado Mortgage brokers need to take 40 hours of training and pass a test on federal law, state law, and mortgage basics to maintain their licenses.

Friday, October 24, 2008

Credit Score Tips

Good credit scores are important for people interested in buying a house. Here are two things that buyers should NOT do if they want to have the highest possible credit score:

-- People should NOT pay off old collection accounts or charge-off accounts. Fannie Mae no longer requires either of these types of accounts to be paid, and the same holds true for FHA and VA loans. The problem with paying off old collection or charge-off accounts is that the "date of last activity" for those accounts will be moved up to the current date if they are paid. That in effect turns them into new derogatory accounts, which will lower the score dramatically. The only time a collection account should be paid is if the collection company is currently demanding payment. If you would like to pay off old collection accounts, wait until after the closing on your loan.

-- People should NOT close old accounts. The longer an account is open, the higher the credit score, even if the account is not being used. Many people close accounts to "get them off my credit report". That is a huge mistake because it raises the ratio of debt to credit limit.

Thursday, October 23, 2008

Updates to Fannie Mae Risk Factors

Fannie Mae has recently made some changes to the way they consider risk factors when underwriting a loan. A risk factor is something that makes a loan more risky or less risky. Here are the changes:

-- The presence of a co-borrower no longer makes a loan "significantly" less risky. However, if the co-borrower has a strong credit history (credit score of 700 or above), then the risk is reduced somewhat.

-- If a borrower has less than 2 months of reserves (principal, interest, taxes, insurance, mortgage insurance, HOA fees), then the risk of a loan is increased. If they have more than 6 months reserves, then the risk decreases. Between 2 and 6 months is considered to be "risk neutral". This does NOT mean a borrower is required to have reserves. Reserves requirements are determined by the individual loan underwriting guidelines or by the underwriting software.

-- Self-employed borrowers are no longer considered to be more risky than salaried or hourly employees.

Borrower's Right to See the Final Settlement Statement

Q: How long before a closing must a mortgage broker give a borrower the final settlement statement (HUD-1)?

A: Under federal law, the borrower has a right to request the settlement statement 24 hours before the closing. Under Colorado law, the mortgage broker must provide the borrower with the HUD-1 one day before the closing, unless the borrower waives their right to receive it.

Wednesday, October 22, 2008

Fixing Bankruptcy Errors on Credit Reports

Many people have bankruptcies on their credit report. Very often, the accounts that were included in the bankruptcy are not reported correctly on their credit report and appear as if they are still open (and very delinquent) accounts. This lowers the credit score tremendously. If you have bad credit scores following a bankruptcy, there may just be mistakes on the report.

This is a very easy error to get fixed. You need to send a letter to the credit reporting agencies (TransUnion, Equifax, and Experian) explaining that the account in question was included in the bankruptcy and should be reported that way. Include a copy of the bankruptcy filing papers (which list the accounts included in the bankruptcy) and the discharge papers (which state that the bankruptcy is finished). If you are in a hurry to get it fixed, your mortgage broker can do a Rapid Re-score, which shortens the time to fix the errors from 30-60 days to 2-4 days.

Tuesday, October 21, 2008

FHA and Fannie Mae / Freddie Mac Loan Limits

The maximum loan amount that is allowed for FHA loans depends on the county where the property is located. Here is the link to the FHA web site that shows all the limits.

Once you're on the site, choose the correct state from the "State" drop-down menu. Then hit "Send". There is no need to select any other menu items.

In the "Limit Type" drop-down menu, the default entry is "FHA Forward". That is the name for regular FHA loans, as opposed to "HECM", which stands for Home Equity Conversion Mortgage, commonly known as a reverse mortgage.

You can also get the Fannie Mae and Freddie Mac loan limits by selecting "Fannie/Freddie" from the "Limit Type" drop-down menu.

Monday, October 20, 2008

Approved Appraisers

When a mortgage broker chooses an appraiser, one of the things that must be checked is the "approved appraisers" list for the lender that is financing the loan. Many lenders have a list of appraisers whom they have already approved, and they will not consider appraisals that have been completed by anyone who is not on that approval list.

The approval process is usually fairly easy - in most cases the appraiser must submit a license, a resume, and proof of E&O insurance. However, the approval process sometimes takes a long time (weeks, not days) and some lenders are not allowing anyone new to be on their approval list. If a lender has already been chosen and the appraisal has been completed by an appraiser who is not approved by the lender, another appraisal will have to be ordered and paid for.

Portfolio Loans

Q: What is a portfolio loan?

A: A portfolio loan is a loan that is maintained by the lender and is not sold to another lender, Fannie Mae, Freddie Mac, et al. It is a loan that the lender keeps in its own portfolio, or group of investments. In the old days before the sub-prime mess (6 - 12 months ago), portfolio loans very often had relaxed underwriting guidelines. If the loan was not being sold to Fannie Mae, for example, then the lender did not have to comply with Fannie Mae's underwriting guidelines. Many portfolio lenders have gone out of business because so many of these loans went into foreclosure. Indymac Bank is a good example of a portfolio lender that is no longer in business. Some portfolio lenders still exist, but generally speaking, the underwriting guidelines for loans they will retain in their own portfolio are just as strict as the guidelines for loans that will be sold to another lender.

Friday, October 17, 2008

Loan Conditions

We get asked many questions about loan conditions. Here's a brief overview of the different types of conditions and a few examples of each:

-- Prior to docs conditions. These are things that must be reviewed by the underwriter before a final approval (clear-to-close) is issued. Examples: pay stubs, bank statements, loan application, credit report, appraisal.

-- At closing conditions. These conditions must be satisfied at the closing. The list of "at closing" conditions is usually included in the lender's closing instructions to title, however, underwriters occasionally forget to include some. It is the mortgage broker's job to know what the "at closing" conditions are so there won't be any problems after the closing. Examples: correct seller concessions, maximum allowable monthly payment, loan application must be signed again, flood cert.

-- Prior to purchase conditions. For loans that are not directly funded by the investor, these are the conditions that must be satisfied before the investor will buy the loan from the mortgage banker. Examples: telephone verification of employment, closing protection letter, state-specific disclosures.

-- Prior to funding conditions. These are things that have to be verified before the loan can fund. Some lenders will not allow a loan to be funded, even though it has closed, unless they see various documents. Examples: copy of the signed HUD, signed Deed of Trust, signed loan application, proof of the wire from a down payment assistance program.

Thursday, October 16, 2008

Colorado Housing and Finance Authority (CHFA) Rates

Q: Are the rates for Colorado Housing and Finance Authority (CHFA) loans negotiable?

A: No, CHFA loan rates are set by CHFA, and it doesn't matter which mortgage broker a borrower uses - everyone who is approved to sell CHFA loans gets the same rate. The rate that a borrower gets is the rate in effect on the day that the mortgage broker reserves the funds from CHFA. That rate is then tied to the borrower, so even if the buyer changes their mind and gets another property, the same rate will apply.

Rapid Re-Score Saves the Deal

We've had a few deals recently where the buyer did not qualify at first. We ran the buyers' credit through credit analyzing software that we have, and in each case, if the buyer paid down the balance a bit on just one credit account, their scores would rise enough to get approved. Credit scores go up when balances go below 70%, 50%, or 30% of the available limits for an account.

Once the buyer paid the balances down the appropriate amount (all we needed as proof was a print-out of the new balance), we ordered a rapid re-score from the credit company and got the approvals. The longest we've ever had to wait for a rapid re-score was three days.

Wednesday, October 15, 2008

Pre-foreclosure Sales and Short Sales

Fannie Mae has issued guidance regarding the amount of time that must elapse before someone can get a new loan when they have had a pre-foreclosure or a short sale. There is a difference between the two, even though most of us use the terms interchangeably.

A pre-foreclosure sale occurs when a borrower is delinquent on their mortgage and the lender accepts a lesser amount than is owed to speed up the foreclosure process and save expenses. There is a 2-year time period from the completion date of the transaction before that borrower (the seller) will be able to get another Fannie Mae loan.

A short sale occurs when a borrower who is NOT delinquent sells a property and the lender agrees to accept a lesser amount than is owed. The borrower will be able to get a Fannie Mae loan immediately after the short sale, provided the short sale agreement states that they are not obligated to pay the deficiency (the amount between what is owed and what the lender actually gets).

Pre-foreclosure sales and short sales both lower credit scores, but there is no standard way of reporting these actions to the credit bureaus, so it is impossible to say how much the credit score will be affected. A pre-foreclosure sale typically lowers the score much more than a short sale, only because the borrower has had recent mortgage payment delinquencies. Those late payments will show up on the credit report regardless of how the pre-foreclosure is reported.

Monday, October 13, 2008

Prepayment Penalties

If a loan has a prepayment penalty, that means the borrowers will have to pay a penalty if they pay off more than a certain percentage of the loan principal before the prepayment penalty period expires. Generally, even with a prepayment penalty, borrowers can pay off 20% of the loan amount each year and not be penalized. The penalty period can be up to three years, and is typically either 6 months interest, or 1% of the loan amount for every year remaining in the penalty period (3% the first year, 2% the second year, 1% the third year). Prepayment penalties do not have to be three years long, however. They could be for one year or two years, also.

There are two different types of prepayment penalties. One is called a "hard" prepay and the other is a "soft" prepay. A hard prepayment penalty penalizes the borrower if the borrower sells the house or refinances the house. A soft prepayment penalty penalizes the borrower if the house is refinanced, but not if the house is sold. Some prepayment penalties are hard for the first year and soft for the remaining years. In that case, the borrower could sell the house after owning it for one year and avoid the penalty, but they would incur the penalty if they refinanced it before the penalty period was over.

Why do some loans have prepayment penalties and others do not? It's simple -- the mortgage broker gets paid a rebate from the lender if there's a penalty, and the rebate gets larger as the penalty period gets longer. Lenders encourage mortgage brokers to sell loans with prepayment penalties because the lender is able to trap the borrower in the loan.

There is no reason to ever have a prepayment penalty on a loan. It only benefits the mortgage broker and the lender. A borrower is certainly not helped by a prepayment penalty, and a real estate agent will get fewer referrals from buyers who have been directed towards mortgage brokers who sell loans with prepayment penalties.

Extra Payments on Interest-Only Loans

Q: If a borrower has an interest-only loan and makes a payment towards the principal, does the payment go down or does the loan get paid off sooner?

A: The monthly payment for an interest-only loan is calculated by multiplying the principal by the interest rate, and then dividing by 12. So every time a borrower makes a principal payment, their monthly mortgage payment goes down.

On a fully amortized loan (both principal and interest payments are made each month), if the borrower makes an extra payment towards the principal, the payment stays the same, but the loan will be paid off sooner.

Which Credit Score Is Used?

Q: Is the borrower's or the co-borrower's credit score used to approve a loan?

A: If the loan is a Fannie Mae, Freddie Mac, FHA, or VA loan (this is the majority of loans at the moment), the lower of the two credit scores is used for qualification. This is why it is sometimes a good idea to take someone off the loan application. For example, if a couple is applying for a loan and one of them has a much lower score than the other, it may be better to only have the spouse with the higher score apply for the loan. Of course, if we do this, then the income from the spouse who is not applying for the loan cannot be used.

If the loan is a VA or FHA loan, it doesn't matter quite as much what the scores are because scores are not considered with government loans, although the applicant's credit history certainly is.

For loans that are not being sold to Fannie Mae, Freddie Mac, VA, or FHA, it is up to the lender which score to use. This is one of the reasons there are so many foreclosures. Lenders ignored poor credit scores, but still counted the income of the borrowers with those poor scores to qualify them for the loan. If someone has a history of not paying their bills, putting their name on a mortgage does not make them suddenly start paying their bills.

FHA Down Payment

FHA has issued new guidance regarding the implementation of its higher down payment requirement (3.5%, up from the current 3%). The 3.5% down payment goes into effect on January 1, 2009. Any FHA loan that has had a case number assigned to it prior to January 1 will only require a 3% down payment. The mortgage broker can obtain the case number as soon as a contract is available.

Power(s) of Attorney for Bank-Owned Homes

If you ever have transactions that involve bank-owned homes, this is important to know. If the owner of record (the person or company whose name is on the title report) is different than the name of the seller on the sales contract or the name of the seller that is on an amend/extend to the contract, most lenders are now requiring Power(s) of Attorney allowing the various banks and loan servicers to sign the documents for the owner of record. Sometimes when a loan goes into foreclosure, it is sold repeatedly between different banks, and the buyer's lender and the title company need to know that the seller actually has the right to sell the property.

This is not a particularly difficult problem to resolve, but it often takes weeks to establish a paper trail between all the different people, banks, and loan servicing companies that have signed the various documents. Make sure everyone involved in the transaction is aware of this issue so contract dates are not missed.

Public Records Web Site

Here's a web site that will save you lots of time.

It provides access to the public records sites for every county in the nation. If the county does not have a public records web site, it still provides the phone numbers for the county offices you need: assessor, treasurer, recorder, etc.

Underwriters use this site when they get a loan. We use it for every file we get so we'll know exactly what the underwriter is going to be looking at.

Online Underwriting Systems

Ever think you had a mortgage approval and then find out you didn't?

Fannie Mae and Freddie Mac (the two biggest mortgage purchasers), FHA, and VA are very interested in making sure that doesn't happen. Each of these entities has online underwriting software that will approve a mortgage in minutes.

The names of the software programs are Desktop Underwriter (Fannie Mae's version, referred to as DU), and Loan Prospector (Freddie Mac's version, referred to as LP). DU and LP provide access to the FHA and VA systems as well.

When using the software, the borrower's loan information is entered into the online system, a credit report is pulled, and the approval results are available in seconds. As long as the information entered in the software is accurate, the loan is good.

In addition to getting a fast, accurate pre-approval, here are some other advantages of using DU and LP:

-- Reduced income and asset documentation. When a loan is submitted to DU or LP, the report issued by the system (known as the "findings") will list the required documentation. Depending on the credit score and overall strength of the file, we often see a "verbal verification of employment" as the only thing required -- no W-2's, no pay stubs, no taxes, no bank statements.

-- Higher debt-to-income allowances. If a loan is submitted to an underwriter without first submitting it to DU or LP, the lender is obligated to limit the borrower to the debt-to-income ratio listed in the underwriting guidelines. However, if the underwriting software determines that those limits may be exceeded (and it almost always does), Fannie Mae, Freddie Mac, FHA, and VA will still purchase the loan. This increases the number of approvals tremendously.

-- If the loan is not approved by the software, we are given the reason for the denial. Very often, loans are denied because the borrower has inadequate cash reserves. If that's the case, we can add more reserves, resubmit the loan, and get the approval. Sometimes, just one more month's reserves will mean the difference between getting a loan and not getting a loan. Of course, the borrower must actually have the reserves, but some loan programs allow gifts from relatives to be used for reserves!

We always run every loan through the online systems. That way, there's no guess work. It saves us an enormous amount of time because we aren't sending loans to undwrwriting that have no chance of getting approved, and it is really good for business when all our loans close.

Friday, October 10, 2008

Address, Zip Code, and County Lookup

We see many sales contracts that have an incorrect street name or zip code. When an underwriter gets a loan to underwrite, one of the first things they do is check the official United States Postal Service (USPS) web site to verify the address. If the address on the USPS site is different than the address on the contract, the contract will need to be amended to show the USPS address. Here's the USPS web site to look up the correct address:

We use it on every loan we originate before we submit the loan to underwriting, and we recommend that every agent check the site before drawing up the sales contract. If you click on the "Mailing Industry Information" link once you get the correct address, it will tell you the county, which is often entered incorrectly on listings.

This will save lots of time.

Thursday, October 9, 2008

The Credit Freeze - What Does It Mean?

We are getting many calls from real estate agents and borrowers asking about the "credit freeze" and how it affects someone's ability to qualify for a mortgage. A credit freeze exists when banks are unwilling to lend to each other because they don't trust each other. Their attitude is this: if I, as the owner of a bank, lend to you, the owner of a different bank, will you be able to pay me back? The answer for most banks is a resounding NO. They don't trust each other, so they won't lend money to each other.

However, that has no affect on their willingness to lend to individuals looking for mortgages. There are hundreds of different loan programs available, but the bottom line is this: if a buyer has a 580 credit score, has paid all their bills on time for the past year, and has 3% for a down payment, they will have very little problem getting a 30-year fixed-rate mortgage with no prepayment penalty for a primary residence. With a credit score below 580, it gets more difficult, but it's not impossible.

The loans available today are full doc loans - employment, income, and assets must be documented.