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.