Wednesday, December 30, 2009

"I Don't Have My W-2 Yet and I Need a Mortgage!"

“I don’t have my W-2 yet. Can I still get a mortgage?” We are asked this question every January by nervous buyers.

No need to worry. The final pay stub of the year is acceptable proof of income and past employment, provided it includes the year-to-date income, which will be the same as the income reported on the W-2.

If the pay stub does not include the year-to-date income, then we can have a verification of employment form completed by the employer.

Friday, December 18, 2009

New FHA Short Sale Rules

FHA loans are used extensively by buyers who have sold their previous house in a short sale (sold it for less than what they owed the lender). FHA has just made some changes to the rules. Some buyers will have more difficulty getting an FHA loan, but many buyers will have an easier time getting an FHA loan. Here are the new rules:

• If the borrower has made all their mortgage payments on time for the previous 12 months before the short sale, and they have not had any late payments on any installment debts (car loans, furniture loans, etc.) in the previous 12 months, they are eligible for an FHA loan. However, if they sold their primary residence in a short sale just to take advantage of declining market conditions, and are trying to purchase a new house that is a similar or superior property within a reasonable commuting distance, they are not eligible for an FHA loan.
• If the borrowers are in default at the time of the short sale, then they are not eligible for an FHA loan for three years from the date of the short sale.

In other words, if the borrowers are not trying to game the system, they can get an FHA loan. If they are trying to game the system, they cannot get an FHA loan.

Tuesday, December 15, 2009

Easy Way to Raise Your Credit Score

One of the easiest ways to raise your credit scores is to maintain the correct ratio of debt to maximum credit. To calculate the ratio, divide the balance on your credit card by the credit limit. For example, if you owe $1500 on a credit card and your credit limit is $2000, you would divide 1500 by 2000 and get a ratio of .75 -- another way of expressing that is to say that you owe 75% of your credit limit.

Here's how to use that information:

• If the ratio is between 70% and 100%, it lowers your score the most.
• If the ratio is between 50% and 70%, it lowers your score a bit less.
• If the ratio is between 30% and 50%, it lowers your score even less.
• If the ratio is between 0% and 30%, it adds the maximum amount of points to your credit score.

If you pay down the balance on your credit cards to below 70%, or below 50%, or below 30%, your scores will go up because you are in a lower ratio category. Many times, someone will be able to raise their credit scores enough to qualify for a mortgage just by paying down the balances on one or more of their cards.

The scores probably won't go up immediately because the creditor (the credit card company) does not immediately report the new balance to the credit agencies. However, it is possible to expedite the process if someone needs their scores raised immediately.

Sunday, December 13, 2009

New Credit and Debt-to-Income Ratio Rules

Fannie Mae is making some very important changes to their underwriting guidelines, effective this weekend (December 12, 2009). Here's what everyone in the real estate and mortgage industries needs to know, and here's how to plan for the changes:

-- The lowest credit score acceptable to Fannie Mae (except for the government refinance bailout loans) is now 620.
-- The maximum debt-to-income ratio for Fannie Mae loans is now 45%, with a possible increase to 50% for borrowers with "strong compensating factors".
-- The debt-to-income ratio (DTI) is calculated like this: add up the monthly principal, interest, taxes, homeowner's insurance, mortgage insurance, HOA dues, and the minimum monthly payments for all debts that show on the credit report. Then divide that number by the borrower's monthly gross income (income before taxes).
-- Strong compensating factors include very high credit scores, very high residual income (income after all payments are made), very large assets, etc. These factors are analyzed by the Fannie Mae software, not by a human underwriter. If the software says they are strong enough to increase the DTI to 50%, then that's OK. An underwriter cannot override the software and increase the allowable DTI.

These new rules will definitely have an impact on the number of people who will be able to qualify for a mortgage, but being aware of the new rules can also help your business tremendously if you know how to capitalize on them. There is no way around these new guidelines, so you need to know what they are and how to deal with the changes.

Here's how you can very easily use the underwriting changes that take effect this weekend to your advantage:

-- Insist that your lender use the Fannie Mae pre-approval software before issuing a pre-approval. If your lender doesn't use it, then you don't have a legitimate pre-approval. Only a very few agents ever ask us if we have run their buyer's loan through the software to get a real pre-approval. We always do, but many lenders do not. Any lender who uses the software will be more than happy to tell you that they use it because it sets them apart from their competition. If you only use lenders who issue legitimate pre-approvals, then you will also set yourself apart from your competition.
-- Find a lender who knows about credit scoring. There is FREE software that lenders can use that will tell someone exactly what they need to do to raise their credit scores. They do NOT need to pay hundreds or thousands of dollars to a "credit repair" company. It can all be done for FREE. Insist that your lender use this free software. We have an ongoing pipeline of borrowers who are taking the advice we give them and eventually buy homes (typically 1-6 months after they contact us for credit advice). These borrowers are incredibly loyal to us and to the real estate agents who referred them to us. Referring people to companies that charge hundreds or thousands of dollars to improve their credit does not make for very loyal clients. Excellent free advice = loyal clients = $$$.

Set yourself apart from your competition by only using lenders who offer excellent free advice.

Tuesday, December 8, 2009

Free Credit Report

We are often asked how to get a free credit report. Here is the information, straight from the Federal Trade Commission web site: is the ONLY authorized source to get your free annual credit report under federal law. The Fair Credit Reporting Act guarantees you access to a free credit report from each of the three nationwide reporting agencies — Experian, Equifax, and TransUnion — every twelve months. The Federal Trade Commission has received complaints from consumers who thought they were ordering their free annual credit report, but instead paid hidden fees or agreed to unwanted services. Don’t be fooled by TV ads, email offers, or online search results. Go to the authorized source when you request your free report.

Tuesday, December 1, 2009

New Good Faith Estimate Causes World to End!

Beginning January 1, 2010, the federal government is requiring all loan originators (both bankers and brokers) to begin using a new Good Faith Estimate (GFE). It is vastly different than the current GFE. Some of the more noticeable changes are:

• All lender fees must now be combined into one number (no more separate origination fee, processing fee, underwriting fee, discount points, etc.)
• Lender fees cannot increase once the interest rate is locked
• The new GFE is 3 pages long
• Every lender must use the same form

You will hear a lot of complaining about the new GFE, but it's not really a very big deal at all. It's just a new form and there is an enormous amount of training available for lenders.

There's no question that it is a real pain in the neck to have to learn how to use the new software to complete the new GFE, but if someone can't figure it out, they probably shouldn't be selling loans anyway. So don't listen to anyone who tells you that the housing industry is going to collapse because we have to fill out a new form. That's just silly.

Monday, November 23, 2009

Tax Credit Confusion!

Tax credit confusion! We are hearing many agents tell their clients that the $6,500 federal income tax credit for people who have owned their primary residence for 5 of the past 8 years is only for move-up buyers (people buying a more expensive house). That is not true.

The tax credit can be claimed regardless of whether the buyers are moving up, moving down, or buying a house for exactly the same price as their current house.

Here's something to keep in mind, though. If someone buys a cheaper house than the one they currently occupy as their primary residence and they intend to keep their current primary as a rental, they may not be able to get a loan. The reason has nothing to do with the IRS tax credit. It has to do with the fact that so many people were cheating on their loan applications - saying they were buying a new primary residence when they were really buying a rental property - Fannie Mae, Freddie Mac, and FHA now enforce the rules. If someone is going to be moving from a big, expensive house into a smaller, cheaper house, they are going to have to document why they are doing what almost no one in America does. They will need to show an underwriter that they have a legitimate reason for moving into a smaller house. Cutting down on expenses is not a good reason because they will actually be increasing their expenses if they retain their current primary as a rental.

Sunday, November 22, 2009

Fannie Mae and Freddie Mac Loan Limits Stay the Same for 2010

Fannie Mae and Freddie Mac have announced that the maximum mortgage limits for conforming loans (loans that conform to their underwriting guidelines and are eligible for sale to Fannie and Freddie) will remain the same for 2010. That means most counties in the country will have a limit of $417,000 and some counties will have higher limits.

To see the limits for Fannie Mae, Freddie Mac, and FHA loans, go to this site:

From the drop down menus, select the following (you can ignore the rest):

• Sorted By (select "County")
• State
• Limit Type ("FHA Forward" - for regular FHA loans, "HECM" - for FHA reverse mortgages, or "Fannie/Freddie" - for conventional loans)
• Limit Year (CY stands for Calendar Year)

Then hit "Send" and the loan limits will be displayed.

Thursday, November 12, 2009

Link to the Fannie Mae Underwriting Guidelines

Everyone knows there are guidelines for determining whether someone gets approved for a loan, but have you ever actually seen the underwriting guidelines?

Here's a link to the Fannie Mae underwriting guidelines:

When the Fannie Mae Single Family page opens, click on "2009 Selling Guide", then on "Part B, Origination Through Closing", and then on "Subpart B3, Underwriting Borrowers". From there, you can get to all the guidelines for income, assets, credit, etc.

Every time a lender says a borrower is pre-approved for a mortgage, they are supposed to have checked all of these guidelines. In addition to these, a mortgage broker needs to check the guidelines for the individual lender they intend to use, and then, if the loan will have mortgage insurance, they need to check the mortgage insurance underwriting guidelines.

Ever have a deal fall apart? Your lender didn't read the guidelines!

Monday, November 9, 2009

Public Records Web Site

Ever wonder how underwriters find out all the details about a buyer or a property? One of the greatest resources for an underwriter is the Public Records Online Directory. This web site is a portal to all the official Assessors', Recorders', and Treasurers' web sites.

Here are just a few of the things that can be found by using this site:
• assessed value
• taxes
• current owners' name and address
• sales history
• deed recording dates
• zoning information
• property type (end the confusion about whether a property is a condo or a townhouse)

Here's the link to the site:

When the web page opens, just click on the state, then the county, and then the link to the Assessor, Recorder, or Treasurer. If the link says "Go to Data Online" that means you will be able to access the information yourself. If the link says "Website Only" or "No Information Online", then you won't be able to get the information yourself, but you can call the phone number listed next to the link to get what you need.

We use this web site for every loan we originate, just so we'll know exactly what the underwriter is going to see when they start their research. It's much better to head off problems early in the game than to have a deal fall apart at the last minute.

Tuesday, November 3, 2009

Should You Close a Credit Card Account and Open Another One?

There was a financial advice column in the Denver Post on November 1 that incorrectly stated that closing a credit card with an annual fee and opening another one without an annual fee would have little effect on a person's credit score. That is simply not true. The length of time that an account is open has a great impact on credit scores. The longer an account is open, the higher the scores.

In addition, many lenders now require a minimum of three credit accounts to be open and active for a period of at least 12 months. Some lenders require one account to be open and active for a period of 24 months.

The most important thing to keep in mind when thinking about credit scoring is that the scores are meant to be an indication of a person's use of credit. If someone keeps closing accounts or only has one account, there is no way to tell whether that person is wisely or unwisely using the credit that is available to them. If someone has three or more credit cards and keeps a low balance on all of them, that is considered to be a wise use of credit and they will have a high score. If someone closes accounts because they can't trust themselves, or because they "don't believe in credit cards", or because they have received bad advice, that is considered to be an unwise use of credit and their scores will go down.

Thursday, October 29, 2009

Are Closing Costs 2.5%, 3%, 3.5%, 4%?

How much are the closing costs for a purchase transaction? 2.5%, 3%, 3.5%, 4%? We get asked this question all the time, and here's why we can't answer it without actually preparing a Good Faith Estimate.

Many of the closing costs are fixed costs, meaning they are the same regardless of how big the loan is. Some examples of fixed closing costs are:
• Appraisal fee
• Credit report
• Underwriting fee
• Tax Certificate
• Loan closing fee
• Real estate closing fee
• Title insurance fees
• Recording fees

Other closing costs change depending on the size of the loan or the purchase price. Here are some examples of closing costs that change:
• Origination fee (usually 1% of the loan amount)
• State tax stamps

Still other closing costs depend on the individual property, the interest rate, the borrower's credit, or the closing date. Here are some examples:
• Property taxes (depends on the property and the date of closing)
Homeowner's insurance (depends on the property and the borrower's credit score)
Pre-paid interest (depends on the borrower's credit score - which determines the interest rate, the loan amount, and the date of closing)

Let's assume a property sells for $100,000 and the fixed costs are $2,000. The variable costs will probably be low because the taxes and insurance will be low. Let's assume the variable costs total $2,500. Total costs would be $4,500, or 4.5% of the purchase price.

Now let's assume we have a property selling for $500,000. The fixed costs would be the same - $2,000. The variable costs would be higher because the loan amount, the taxes, and the insurance would be higher. They might be $8,000. The total would be $10,000, which is only 2.0% of the purchase price.

Even though the closing costs are $5,500 less for the cheaper house, they are 2 1/4 times the percentage of the costs for the more expensive house - 4.5% versus 2.0%.

It's always a good idea to have your lender (preferably us) tell you how much the closing costs are. Guessing based on a "rule of thumb" is a very bad way to do it.

Saturday, October 24, 2009

Banker Vs. Broker - What is the Difference?

We are often asked what the difference is between a mortgage broker and a mortgage banker. Here's the difference.

A mortgage broker is any loan sales person who represents more than one lender. Some brokers represent a few lenders and others represent dozens of lenders. When a loan is funded by a mortgage broker, the money comes directly from the lender. As an example, if the broker is selling a loan from Wells Fargo, the money will be sent by Wells Fargo to the title company.

A mortgage banker can either be a retail banker or a wholesale banker. If the mortgage banker is a retail banker, they can only sell loans from the one company they represent. If a loan officer works for Wells Fargo, they can only sell Wells Fargo loans.

If the mortgage banker is a wholesale mortgage banker, they can sell loans from more than one lender, just like a mortgage broker. The difference is that the money for the closing comes from their own line of credit (called a warehouse line of credit). After the closing, the wholesale banker sells the loan to the lender within a short period of time - usually a few days.

The advantage of using a mortgage banker is that they have control of the funding. The advantage of using a broker is that they represent more than one lender, so they may be able to get a loan that is unavailable to a retail banker. The best option is a wholesale mortgage banker (they represent many lenders and control the funding).

There is much debate over the advantages of using a retail banker versus a wholesale banker, but the one true difference is that the retail banker has to take a shower every day and wear nice clothes when they report to work at the bank. A wholesale banker (or broker) can sit at his desk at home in his boxers and a ratty T-shirt.

Friday, October 16, 2009

How Long Does Money Have to be in a Bank Account?

Borrower funds used for the down payment, closing costs, and reserves must be "seasoned" for two months before they can be used to qualify for a mortgage. This means the borrower must be able to provide proof that the money has been in their account for two months. Cash on hand is not an acceptable source of funds for most loans. If someone is going to use cash on hand to qualify, they need to put the money in the bank as soon as possible.

If a borrower has a joint account with someone who is not a borrower, the money in that account can be counted, provided the person who is not the borrower states that the borrower has use of all the money in the account. The money must still be seasoned for two months to count it.

A borrower can also receive a gift from a relative for certain types of loans (most notably FHA loans). In the case of a gift, the money does not have to be seasoned. It must be deposited into the borrower's account before the loan can get a final approval, but it does not have to be in the account for a full two months. One day is fine.

Thursday, October 15, 2009

Seasonal Work - Can You Use it to Qualify for a Loan?

As the holidays approach, there will be questions about whether income from seasonal employment can be used to qualify for a mortgage. Here are the rules:

• The borrower must have worked in the same job, or in the same line of seasonal work, for the past two years.
• The borrower's employer must confirm that there is a reasonable expectation that the borrower will be rehired for the next season.
• The income is then averaged over the past two years.

Super important bonus tip: Make sure the lender involved in your transactions is re-disclosing the Truth-in-Lending disclosure (the TIL) whenever the annual percentage rate (APR) changes. If the APR on the most recently disclosed TIL is not within 0.125% of the APR on the final TIL signed at closing, the loan cannot close until 3 days after the correct APR has been disclosed. This is a federal regulation (it's part of the Truth-in-Lending Act).

Tuesday, October 6, 2009

FHA or Conventional Financing? What's the Difference?

There is a lot of confusion regarding when someone should get a conventional loan versus an FHA loan. Here's a brief overview of the differences:

FHA loans:
• The loan is insured by the federal government, so it is only underwritten once. If the loan is approved by the lender, it automatically gets approved for mortgage insurance.
• The standard down payment amount is 3.5% of the purchase price. If the borrower makes a full price offer on a HUD home, then the down payment is only $100.
• The borrower can get a gift or a loan from a relative to pay for the entire down payment.
• The guidelines are the same for all FHA loans, regardless of whether the property is in a declining market or not.
• Interest rates are the same for everyone with a credit score above 660. They go up slightly for people with scores between 620-659.
• Reserves are not required and collection accounts do not need to be paid.

Conventional loans:
• The loan is insured by a private mortgage insurance company, so it gets underwritten twice - once by the lender and again by the mortgage insurance company. The stricter guidelines are almost always from the mortgage insurance company.
• The standard down payment is 5% for first-time home buyers. If the property is in a declining market, the mortgage insurance guidelines may require an additional 5% down for people who are not first-time home buyers.
• The borrower can get a gift from a relative, but they must have at least 5% of the purchase price from their own funds. However, if a relative gives a gift of 20% of the purchase price, then the borrower doesn't need any money at all from their own funds.
• Everyone with a credit score above 720 gets the best rates. For every 20 points below 720, the rates go up.
• The mortgage insurance companies SOMETIMES require the borrower to have reserves and to pay collection accounts. (Do NOT advise anyone to pay collection accounts until their loan has been run through Fannie Mae's or Freddie Mac's online underwriting systems, because paying old collection accounts will lower their credit scores and they may not get approved.)

This may make it look like FHA loans are superior to conventional loans. They are - but only for some borrowers. For other borrowers, a conventional loan is better. The way to tell is to fully qualify the borrower, determine what their financial goals are, and only then recommend a particular loan.

Wednesday, September 30, 2009

New FHA Appraisal Rules

Effective January 1, 2010, mortgage brokers and mortgage bankers will no longer be allowed to order appraisals directly from an appraiser for FHA loans. FHA is not adopting the Home Valuation Code of Conduct (HVCC), but they are adopting many of the guidelines spelled out in the HVCC.

At the moment, only conventional loans need to be ordered through an appraisal management company. Although HUD makes it clear that they are not requiring the use of appraisal management companies, that is the best way to ensure that the lenders are in compliance with the new FHA rules, so most lenders will probably insist on using appraisal management companies.

This new rule will have the same effect as the HVCC - longer appraisal turn times, uncertainty regarding values, and higher costs for the buyers. However, the lending industry seems incapable of policing itself, so this is what we get. There will be the usual outcry from the National Association of Realtors, the National Association of Homebuilders, and the various lending trade associations, but change is here to stay. Until the average American family can afford to buy a house with a full doc, 30-year fixed rate mortgage (and we are not even close to that point yet), the government has made it abundantly clear that underwriting guidelines are going to continue to get tougher.

Thursday, September 24, 2009

Fannie Mae Lowers Its Maximum Debt-to-Income Ratio

This is something that will have incredibly far-reaching effects in the real estate industry.

Fannie Mae just announced that they are LOWERING the maximum debt-to-income ratio for all loans underwritten by their automated underwriting system to 45%, and to 50% for loan files that have strong compensating factors (very high credit scores, large cash reserves, etc.). Currently, there is no limit to the maximum debt-to-income ratio when the automated underwriting system is used. We routinely see loans get approved with ratios in the 60% range.

Fannie Mae is also adopting a new standard for credit scores for loans run through the automated underwriting system. Anything less than 620 will now be denied. The old minimum was 580 if the borrower had compensating factors (big down payment, low debt-to-income ratio, etc.). For loans that are not run through the automated system, the minimum credit score is 660.

There is a good argument for these new guidelines because many of the loans that are being approved recently are going into foreclosure (just because a house is cheap does not mean the buyer can afford it).

It is more important than ever to make sure your mortgage broker is using the automated underwriting system, that they know how to help someone raise their credit score (paying off old collection accounts and closing active accounts will lower a score, by the way), and that they know how to structure a loan correctly. Conventional loans that were approved in the past will not get approved going forward, and you need to make sure your deal has the best possible chance of getting approved.

Thursday, September 17, 2009

Loan Fraud Red Flags

We get a lot of questions about loan fraud - how does anyone know if something is fraudulent, who checks to see if there's fraud, etc. Loan fraud is detected by reviewing the loan application (and all supporting documentation), sales contract, title commitment, closing docs, and anything else related to the transaction. The people who are responsible for detecting loan fraud are the underwriter, mortgage broker, loan processor, quality control staff - basically anyone involved with the loan.

Following is a list of red flags from Fannie Mae's "Common Red Flags" document.

Fannie Mae makes it clear that the presence of one or more of the following red flags does not necessarily indicate that the transaction is fraudulent, but the more red flags that exist, the higher the chance that there is fraudulent activity.

High-level Red Flags

•Social Security number discrepancies within the loan file
•Address discrepancies within the loan file
•Verifications addressed to a specific party's attention
•Verifications completed on the same day they were ordered
•Verifications completed on weekend or holiday
•Documentation includes deletions, correction fluid, or other alteration
•Numbers on the documentation appear to be "squeezed" due to alteration
•Different handwriting or type styles within a document
•Excessive number of AUS submissions

Mortgage Application

•Significant or contradictory changes from handwritten to typed application
•Unsigned or undated application
•Employer's address shown only as a post office box
•Loan purpose is cash-out refinance on a recently acquired property
•Buyer currently resides in subject property
•Same telephone number for applicant and employer
•Extreme payment shock may signal straw buyer and/or inflated income
•Purchaser of investment property doesn't own residence

Sales Contract

•Non arms-length transaction: seller is real estate broker, relative, employer, etc.
•Seller is not currently reflected on title
•Purchaser is not the applicant
•Purchaser(s) deleted from/added to sales contract
•No real estate agent is involved
•Power of Attorney is used
•Second mortgage is indicated, but not disclosed on the application
•Earnest money deposit equals the entire down payment, or is an odd amount
•Multiple deposit checks have inconsistent dates, i.e., #303 dated 10/1, #299 dated 11/1
•Name and/or address on earnest money deposit check differ from buyer
•Real estate commission is excessive
•Contract dated after credit documents
•Contract is "boiler plate" with limited fill-in-the-blank terms, not reflective of a true negotiation
Credit Report

•No credit history or "thin" credit files
•Invalid Social Security number or variance from that on other documents
•Duplicate Social Security number or additional user of Social Security number
•Recently issued Social Security number
•Liabilities shown on credit report that are not on mortgage application
•Length of established credit is not consistent with applicant's age
•Credit patterns are inconsistent with income & lifestyle
•All tradelines opened at the same time
•Authorized user accounts have superior payment histories
•Significant differences between original and new or supplemental credit reports
•Also Known As (AKA) or Doing Business As (DBA) indicated
•Numerous recent inquiries
•Missing pages and/or supplements
•Employment discrepancies
•Social Security alerts

Employment and Income Documentation

•Applicant's job title is generic, e.g., "manager," "Vice President"
•Employer's address is a post office box, the property address, or applicant's current residence
•Applicant's residence is (will be) in location remote from employer
•Employer name is similar to a party to the transaction, e.g., utilizes applicant's initials
•Employer unable to be contacted
•Year-to-date or past-year earnings are even dollar amounts
•Withholding not calculated correctly (check FICA tables)
•Withholding totals don't foot from pay advice to pay advice
•Pay period dates overlap and/or don't correspond with other documentation
•Abnormalities in paycheck numbering
•Handwritten VOE, pay stubs, or W-2 forms
•W-2 form presented is not the employee's copy
•Employer's identification number has a format other than 12-3456789
•Income appears to be out of line with type of employment
•Self-employed applicant does not make estimated tax payments
•Real estate taxes or mortgage interest claimed, but no ownership of real property disclosed
•Tax returns not signed or dated
•High income applicant without paid preparer
•Paid preparer signs taxpayer's copy of tax returns
•Interest and dividend income don't substantiate assets
•Applicant reports substantial income but has no cash in bank
•Large increase in housing expense
•Reasonableness test: income appears to be out of line with type of employment, applicant age, education and/or lifestyle

Asset Documentation

•Down payment source is other than deposits (gift, sale of personal property)
•Applicant's salary doesn't support savings on deposit
•Applicant doesn't utilize traditional banking institutions
•Pattern of loyalty to financial institutions other than the subject lender
•Balances are greater than the FDIC, SIPC insured limits
•High asset applicant's investments are not diversified
•Excessive balance maintained in checking account
•Dates of bank statements are unusual or out of sequence
•Recently deposited funds without a plausible paper-trail or explanation
•Bank account ownership includes unknown parties
•Balances verified as even dollar amounts
•Two-month average balance is equal to present balance
•Source of earnest money is not apparent
•Earnest money isn't reflected in account withdrawals
•Earnest money is from a bank or account with no relationship to the applicant
•Bank statements do not reflect deposits consistent with income
•Reasonableness Test: Assets appear to be out of line with type of employment, applicant age, education and/or lifestyle


•Appraisal ordered by a party to the transaction
•Occupant shown to be tenant or unknown
•Owner is someone other than seller shown on sales contract
•Appraisal indicates transaction is a refinance, but other documentation reflects a purchase
•Purchase price is substantially higher than predominant market value
•Purchase price is substantially lower than predominant market value
•Subject property obsolescence is minimized
•Large positive adjustments made to comparable properties
Comparables' sales prices don't bracket the subject's value
•Comparable sales are not similar in style, size and amenity
•Dated sales used as comparable sales
•New construction / Condo conversion: All comparable sales located in subject development
•Comparable properties are a significant distance from the subject, or located across neighborhood boundaries (main arteries, waterways, etc.)
•Map scale distorts distance of comparable properties
•"For Rent" sign appears in photographs
•Photos appear to be taken from an awkward or unusual standpoint
•Address reflected in photos does not match property address
•Weather conditions in photos inconsistent with average marketing time, date of appraisal
•Appraisal dated before sales contract
•Significant appreciation in short period of time
•Prior sales are listed for subject and/or comparables without adequate explanation


•Prepared for and/or mailed to a party other than the lender
•Evidence of financial strain may indicate a compromised sale transaction (flip, foreclosure rescue, straw buyer refinance, etc.), or might suggest undisclosed credit problems in the case of a refinance
•Income tax, judgments or similar liens recorded
•Delinquent property taxes
•Notice of default or modification agreement recorded
•Seller not on title
•Seller owned property for short time
•Buyer has pre-existing financial interest in the property
•Date and amount of existing encumbrances don't make sense
•Chain of title includes an interested party such as Realtor or appraiser
•Buyer and seller have similar names (property flips often utilize family members as straw buyers)

Owner Occupancy

Purchase Transactions:

•Real estate listed on application, yet applicant is a renter
•Applicant intends to lease current residence
•Significant or unrealistic commute distance
•Applicant is downgrading from a larger or more expensive house
•Sales contract is subject to an existing lease
•Occupancy affidavits reflect applicant does not intend to occupy
•New homeowner's insurance is a rental policy (declarations page)

Refinance Transactions:

•Rental property listed on application is more expensive than subject property
•Different mailing address on applicant's bank statements, pay advices, etc.
•Different address reported on credit report
•Significant or unrealistic commute distance
•Appraisal reflects vacant or tenant occupancy
•Occupancy affidavits reflect applicant does not intend to occupy
Homeowner's insurance is a rental policy (declarations page)
•Reverse directory does not disclose subject property address

Foreclosure Rescue Red Flags

•The borrower was advised by a foreclosure assistance consultant that they should avoid contact with their servicer
•The borrower has paid someone to negotiate with the servicer on their behalf
•The borrower states that they are sending their mortgage payments to a third party
•Borrower receives a purchase offer that is greater than the asking price
•Borrower states that they will be renting back from new owner
•Cash-back at closing to the delinquent borrower, or disbursements that have not been expressly approved by the servicer
•The borrower has quit claimed title to a third party at the advice of a foreclosure assistance consultant

Short Sale Fraud Red Flags

•Sudden default, no workout discussions, and immediate offer at short sale price
•Ambiguous or conflicting reasons for default
•Short sale offer is from a related party

Monday, September 14, 2009

How Are the Final Loan Figures Prepared?

We're often asked what the process is for getting the HUD-1 Settlement Statement (the document that has all the final figures for the loan) prepared. Here you go:

• The underwriter issues the final approval for the loan, often referred to as the "clear-to-close".
• The mortgage broker lists the lender fees on the doc prep order form and sends it to the doc prep company (if he is acting as a mortgage banker) or the doc prep department at the lender (if he is acting as a mortgage broker).
• The doc prep company prepares the figures and sends the order to the title company.
• The title company adds their fees, prepares the settlement statement, and sends it to doc prep and the mortgage broker for review.
• Any necessary changes are made (the most common error is incorrect payees for the line item fees) and doc prep and the mortgage broker send the change requests to title.
• Any mistakes are corrected and the updated settlement statement is sent to doc prep and the mortgage broker for final approval.
• After receiving the final approval from doc prep and the broker, title prepares the final settlement statement and sends it to everyone.

This can all usually be accomplished very comfortably within two days. Although the actual length of time that any one person is working on the settlement statement is relatively short, it's important to remember that the broker, the doc prep company, and title all have other deals in their pipelines. A good mortgage broker will make sure that any final settlement statements move to the top of his priority list, but for doc prep and title, one settlement statement is the same as any other. Rushes are possible, but typically they are totally unnecessary. The real important part of this process is to make sure that the borrower has plenty of time to review the settlement statement with the mortgage broker, so that when everyone gets to the closing, there are no financing questions.

Wednesday, September 2, 2009

Seldom Used Way to Buy a New Primary Residence

If a couple wants to buy a new primary residence and keep their current house as a rental, but are worried about qualifying based on the payments for both houses, here's a way to do things that sometimes makes it easier.

If only one spouse owns the couple's current house, and the other spouse can qualify on their own for the new house, then FHA will allow it, as long as the new house is more expensive or larger than their current primary residence. Here's an example: A husband and wife live in a house that only the husband owns (only the husband is on the title and the note). The couple wants to buy a new primary residence. If the wife can qualify for the new loan by herself, then the husband's debt does not have to be counted. Neither the husband's housing payments nor his other debt needs to be considered.

This won't work for everyone because only one person can own the current house, and only that person can be on the note for the current house. Remember that quit claiming someone off a deed does not release them from the responsibility of paying the note. The only way to get off a note is to sell or refinance.

Despite that limitation, though, there are plenty of couples who fall within the parameters of this type of deal. We have closed four of these loans in the past few months.

Monday, August 31, 2009

Half of Colorado Mortgage Brokers THROWN OUT!

As of today, about half of the mortgage brokers in Colorado are no longer allowed to sell loans. We were told over a year ago that we needed to take a class and pass a test, but most of us didn't do it.

Just one more reason we have so many foreclosures!

Don't let your deal fall apart because you find out at the last minute that you're working with an unlicensed mortgage broker.

Following is an email that was sent out today by the Colorado Division of Real Estate, the government agency in charge of mortgage brokers.

****NEWS ALERT****

The Colorado General Assembly passed House Bill 1085 in 2009. This bill became effective August 5th, 2009. House Bill 1085 defines circumstances in which the Director may inactivate a mortgage loan originator license if they have failed to comply with the education and testing requirements.
• As a result, the Director inactivated 4,560 licenses on August 31, 2009.
• Individuals whose licenses are inactive are prohibited from practicing as a mortgage loan originator or in any other capacity which requires a license.
• Individuals who continue to practice with an inactive license are subject to all forms of discipline prescribed in the Mortgage Loan Originator Licensing Act, including permanent revocation and fines.
• Direct managers of individuals with inactive licenses are also subject to disciplinary action if they allow such individuals to continue to practice.

Thank you,
The Colorado Division of Real Estate

Friday, August 28, 2009

What is the Maximum Debt-to-Income Ratio (DTI)?

We are often asked what the maximum allowable debt-to-income (DTI) ratio is for the various types of loans. Here you go:

• For FHA loans, the maximum allowable DTI is 43% if the loan is manually underwritten and it is unlimited if the loan is underwritten through FHA's online underwriting software. We routinely get approvals with DTI's in the 50% - 60% range if the borrower has good credit.

• For VA loans, the maximum DTI is 41% if the loan is manually underwritten and it is unlimited if the loan is underwritten through VA's online underwriting software. Again, we routinely get approvals with DTI's in the 50% - 60% range if the borrower has good credit.

• For conventional (non-government) loans, the maximum allowable DTI is 38% if the loan is manually underwritten and it is unlimited if the loan is underwritten through Fannie Mae's or Freddie Mac's online underwriting software. We routinely get approvals with DTI's in the 55% - 65% range if the borrower has good credit.

We calculate your DTI by adding up all of your new mortgage expenses - principal, interest, property taxes, homeowner's insurance, mortgage insurance, and homeowner's association (HOA) fees. We then add all the monthly expenses that are on your credit report, and divide that total number by your gross monthly income (income before taxes or any other deductions). Example: if your mortgage expenses are $1,000 each month and the total of all the monthly payments that show up on your credit report are $900, then your total expenses are $1,900 a month. If you make $3,800 a month, we divide 1,900 by 3,800 and get your DTI of 50%.

Don't lose out on a deal because your loan is being underwritten manually and the DTI is being restricted. Always use a mortgage broker who uses the online underwriting systems.

Thursday, August 20, 2009

$8,000 Tax Credit Ending Soon

There is much news these days about an extension to the $8,000 first-time homebuyer tax credit. There is also talk that it might be expanded to include second homes and investment properties. PLEASE don't believe it. The tax credit is set to expire on November 30, 2009. Under the current IRS rules, if the closing is after that date, then the buyer does not get the credit.

Congress might extend the credit, but they might not. They might expand it to include second homes and investment properties, but they might not. If there is one piece of advice that we can pass on to anyone, it is this: It is extremely foolish to assume that something will happen in the housing or mortgage industries just because we all want it to happen. Remember stated income loans? 100% financing? Houses that went up in value? Everyone in America loved all of those things and they still went away.

At the moment, it is best to assume that the $8,000 tax credit for first-time homebuyers will end on November 30, 2009. If it doesn't, that's great, but assuming that it will be extended could very easily shatter the trust you have built with your clients, or cost you $8,000.

Monday, August 17, 2009

Is Anyone Reviewing the Title Commitment?

It's important to make sure your mortgage broker is reviewing the title commitment on all your deals. Many times, there are issues that must be addressed by the seller that could be deal-killers if they are not dealt with correctly. Some examples of things that might show on the title commitment include:

- Tax liens
- Judgments
- Mortgage liens that far exceed the value of the property
- Foreclosure proceedings have been started
- Etc.

Although these are all issues that the seller must address before the closing, the lender should make sure they are being resolved in a timely fashion.

Monday, August 10, 2009

Read the Counter-Proposal!

We're seeing a lot of sales contracts with counter-proposals from the seller stating that the seller will only pay for non-recurring closing costs. A non-recurring closing cost is a fee that is only paid once, at the closing. If a fee will need to be paid more than once over the life of the loan, then it is known as a recurring closing cost. In the counter-offers we're seeing, the dollar amount of the closing cost concession in the counter-offer will very often be the same as in the offer, but there can be a big difference in how much money actually gets passed from the seller to the buyer if only non-recurring closing costs are going to be paid by the seller.

As an example, let's assume that the buyer asks that the seller pay $6,000 towards the buyer's closing costs and pre-paids. The seller counters by saying they will agree to pay $6,000, but only towards the buyer's non-recurring closing costs. If the buyer agrees to that, the seller will not have to pay for the following recurring closing costs:

• the first year of homeowner's insurance
• the money used to set up the insurance portion of the escrow account
• the money used to set up the tax portion of the escrow account
• interest from the date of closing until the end of the month

In many cases, the total of these fees is well over a thousand dollars. That's extra money that the buyer will need at closing.

How to Avoid Closing Delays

The federal Truth-in-Lending law changed a couple weeks ago. One of the most important parts of the law says that if the Annual Percentage Rate (APR) on the final Truth-in-Lending disclosure differs by more than 0.125% from the APR that was disclosed on the most recent Truth-in-Lending disclosure issued by the lender, then the loan cannot close until 3 days after the lender delivers an updated disclosure showing the correct APR. Ensuring that the APR is correct is the responsibility of the lender. However, there are a couple things that routinely change near the end of a transaction that are the responsibility of the real estate agents. Here's what a real estate agent needs to look out for:

-- Changing the closing date. If you change the closing date, the number of days of pre-paid interest will change and affect the APR.
-- Not telling the lender if there is a change in the amount of seller-paid closing costs or the sales price. If there is an amendment to the contract that changes the amount of seller concessions or the sales price, that will affect the APR. You MUST tell the lender about any changes so they can re-disclose the APR.

Remember, if the APR changes by more than 0.125% (either higher or lower), then there is a federally mandated 3-day waiting period before the closing can take place. The way to avoid delays is to send all contract changes to the lender immediately and to resist the temptation to change the closing date during the week before the scheduled closing. If you do those two things, then you can blame all delays on the lender :-)

Friday, July 24, 2009

New Closing Date Restrictions

For loan applications taken on or after July 30, 2009, the Mortgage Disclosure Improvement Act imposes new waiting periods before closings can take place. There are many changes, but here are the things that will affect the closing date:

-- No loan can close in less than 7 business days from the time the Good Faith Estimate (GFE) and the Truth-in-Lending (TIL) disclosures are delivered to the borrower or placed in the mail by the lender.
-- The TIL that the lender gives the borrower must show the annual percentage rate (APR) within 1/8th of a percentage point, or 0.125%, of the final APR.
-- If the APR is off by more than 0.125%, then the loan cannot close until three days after a corrected GFE and TIL are given to the borrower.

What does this mean for agents? It means that your lender (whether you use a mortgage broker, a mortgage banker, or a retail lender), must know what they are doing. If they are in the habit of low-balling the GFE or lying about the interest rate, then the APR will be wrong and the loan cannot close until they correct the GFE and TIL and deliver them to the borrower. There are dozens of fees that affect the APR. If they are not shown correctly on the GFE, then your deal is not going to close.

This is a GREAT law. It is the federal government's attempt to rid the mortgage industry of crooked and inept loan officers. The government is telling us that we have to learn how to do our job, or no one gets paid. If the GFE is done correctly (and there is absolutely no reason for it to be done wrong), then your deals will close on time. If your lender does not know what they are doing, then your deals will not close on time. There will be lots of complaining by the lenders who don't know what they're doing. Any lender who already knows what they're doing doesn't have to change the way they do business at all.

Wednesday, July 22, 2009

Who Decides if an Improvement Location Certificate (ILC) is Needed?

We are seeing an increasing number of title companies requiring an improvement location certificate (ILC) before they will issue a title insurance commitment. An ILC differs from a survey in that the ILC simply identifies the location of the property improvements (buildings), encroachments, and easements, but it is not evidence of the exact boundaries of the property. Although it is not a full survey, it's usually sufficient documentation for properties that are located within subdivisions. It is less expensive than a survey, also.

If a real estate agent enters "N/A" in the survey section of the sales contract, indicating that an ILC is not needed, that has absolutely no bearing on whether an ILC is actually needed. The title company decides whether they need one before they will issue the title commitment. If the contract states that an ILC is not needed, but the buyer will pay for it if it is needed (we see this a lot), then your buyer is on the hook for the ILC fee if the title company needs one. On deals where money is tight for the buyer, this can be a big problem.

Thursday, July 16, 2009

Give Yourself Enough Time to Claim the Tax Credit

The $8,000 income tax credit for first-time home buyers expires on December 1, 2009. If the buyers do not close by November 30, they will not be eligible for the credit.

We are anticipating that underwriting turn times for every lender in the nation will be a bit longer during the weeks leading up to that date because many buyers will probably wait until the last minute to take advantage of the free money. It would be wise to advise your buyers to plan on having a signed contract in hand at least 6 weeks prior to November 30. That should give them enough time to close.

There is much talk about an extension to the tax credit. At the moment, it is just talk. Until a bill is passed by the House and the Senate, and then signed by the President, it is not a law. There is no indication from anyone other than the special interest groups (Realtors, mortgage brokers and bankers, builders, etc.) and the members of Congress they support financially, that an extension is being planned. Please don't counsel your buyers to expect an extension. If it happens, that's great for everyone, but every time the credit is issued by the IRS, that's $8,000 less the Treasury has to spend on other things, and they are running mighty low on cash these days.

Wednesday, July 15, 2009

New Changes to Fannie Mae Loans

New qualifications rules go into effect for certain types of Fannie Mae loans on October 1, 2009. For 5-year ARMs and loans with temporary interest rate buydowns, the borrower will need to qualify for the loan based on the greater of the note rate or the fully-indexed rate. Here's what that means:

-- A 5-year ARM (adjustable rate mortgage) has a fixed rate for the first 5 years, and then the rate can go up or down (it is designed to go up, so don't pay attention to anyone who tells you it will go down). The interest rate for the first 5 years is generally a little bit cheaper than it would be if you got a 30-year fixed rate mortgage. In the past, you could qualify for the 5-year ARM based on the lower, starting interest rate. The assumption was that when the rate went up in five years, the house would be worth more money and you could just refinance into a new mortgage, rather than paying the higher rate. Now, you must qualify based on the fully-indexed rate, which means you have to qualify based on the higher rate.

-- A mortgage with a temporary interest rate buydown is a loan that has a lower rate for the first 1, 2, or 3 years. It works like this: if the rate for a 30-year fixed rate loan is 6%, you can buy the rate down to 3% for the first year, 4% for the second year, and 5% for the third year. After that, the rate would be the normal 6% for the life of the loan. It is expensive to buy the rate down, so not many people use this type of loan, with the exception of builders. Because builders have so much profit potential, they are able to pay for the buydown, allowing them to advertise those low interest rates you see for new construction. Many people ran into trouble with these loans because they qualified for the loans based on the lower, initial interest rate. When the rate kept getting higher every year, they couldn't afford the new payments. To prevent this from happening in the future, you now have to qualify based on the higher, long-term rate.

Both of these changes make a lot of sense, even though they may prevent some people from qualifying for as large a loan as they would like. Ignoring the fact that rates can go up and values can go down is still the standard way of thinking. Fannie Mae seems determined to change that way of thinking. Ask anyone who is stuck in an ARM they can't refinance out of, and I'm sure they would agree.

Tuesday, July 7, 2009

What is the Property Tax Credit?

One of the most common questions we get asked is "What is the property tax credit and how is it calculated?"

Property taxes are paid in arrears, meaning the property taxes for this year are paid to the county next year. If you bought a house on July 15, 2009, then the property taxes for all of 2009 will be due in 2010. But wait! You only lived in the house from July 15, 2009 until the end of the year - why should you have to pay the taxes for all of 2009? Well, you don't. That's where the property tax credit comes in.

At the closing, the seller will pay you one day's worth of property taxes from January 1 until the last day that he owned it - July 14. That's 6 1/2 months of taxes that get moved from the seller's account into the buyer's account.

It doesn't matter when you close on your house - you will only pay property taxes for the time you owned it. As the year goes on, the property tax credit gets larger. For example, if you close on a house on January 2, you will only get 1 day of taxes from the seller. If you close on December 31, you will get an entire year of taxes from the seller (less the one day you lived in it - December 31). This is important to know because the most money you are allowed to get back at closing is the amount of money you paid as an earnest money deposit. If you paid only $1,000 in earnest money, but you are owed $3,000 for the property tax credit, the most you could get back as cash at the closing is $1,000. The remaining $2,000 would be taken off the closing costs you owe. However, if the seller is paying all your closing costs for you, then the seller would get to keep that $2,000. To take full advantage of the property tax credit, you would need to ask for $2,000 less in seller-paid closing costs. Just one more reason why you should always use a mortgage broker who knows what they're doing before signing a sales contract for a house.

Tuesday, June 30, 2009

HUD Conference Call on Condos

Want to get the scoop on all the changes to the FHA condo approval process? Following is the HUD announcement for a conference call.

FHA will be holding an industry conference call on “FHA Mortgagee Letter 2009-19, Condominium Approval Process – Single Family” on Wednesday, July 1, 2009 at 3:00 pm Eastern Standard Time (EST). (That's 1:00 pm Mountain Time.) The conference call will feature a brief overview of the mortgagee letter, followed by an open question and answer session.

To participate in the FHA condo conference call on July 1, 2009 at 3:00 pm EST, please dial: (866) 207-0413 and provide to the operator the conference ID #17834469.

Please note: FHA Mortgagee Letter 2009-19 represents the implementation of legislative changes established under the Housing and Economic Recovery Act of 2008. We do plan to hold another call to discuss the market-related problems you may be experiencing in condo developments. On both this week’s call and the future call, we welcome your comments and / or recommendations for programmatic changes that you would like for FHA to consider to address these problems.

You can obtain a copy of “FHA Mortgagee Letter 2009-19, Condominium Approval Process – Single Family” in advance of the conference call by visiting:

Friday, June 26, 2009

FHA Condo Information

FHA loans are great loans. However, if you're thinking of FHA financing for a condo, there are some important things to keep in mind. All condo projects must be approved by HUD, but don't assume that if a project has already been approved, you are good to go for an FHA loan. There is also a review process that FHA requires when someone applies for an FHA loan in an approved project. Here are some of the things that are checked:

• A single investor cannot own more than 10% of the units.
• The number of units that are in arrears (more than 30 days past due) on their HOA fees is limited to 15% of the total units.
• 50% of the units must be sold or pre-sold (a sales contract and loan approval will prove it is a valid pre-sale).
• At least 50% of the units must be owner-occupied (second homes can count as owner-occupied if they are not vacation homes and if the owners spend less than 50% of their time living there).

There are other restrictions as well, but these are the biggies.

Tuesday, June 23, 2009

No More Spot Approvals for FHA Loans

HUD has done away with their "spot approval" process for condominiums. A spot approval was a way to get just one unit in a condo project approved by HUD so the buyer could get an FHA loan.

Effective June 12, 2009, FHA loans are not available for condos unless the entire project is approved by HUD. What does this mean? If your buyers can only get FHA financing, don't waste your time showing them condos that are not already approved by HUD, unless you are willing to spend a LOT of time gathering the documentation that is necessary to get an approval for the entire project.

If you want to check whether a particular project is approved by HUD, go to this web site:

Choose the state and type in as little information as possible in the "condo name" field (we recommend just the first letter of the condo project name). Then click on SEND and you will get the results. If you need help, give us a call.

Thursday, June 18, 2009

Tip Income and 2-Unit Property Guideline Changes

Here are some more recent changes to the Fannie Mae guidelines.

-- Tip income may be used to qualify a borrower for a loan, but the borrowers must prove that they have earned tip income for the past two years and their employers must verify that tip income will continue in the future. The amount of tip income that can be used is the average income over the past two years.

-- The guidelines for 2-unit properties are getting more restrictive. The new down payment requirement is 20% (up from 5%) if one of the units will be a primary residence (the borrower lives in one unit and rents out the other unit), and 25% (up from 15%) if the borrower rents out both units. If the property is a duplex and the borrower is only buying one unit, then the regular 1-unit guidelines still apply.

-- This last guideline change is included here to make you realize that it could always be worse than it is in Colorado. Pity those poor Hawaiian real estate agents :-) "Effective immediately, Fannie Mae will only purchase or securitize mortgage loans secured by properties located on the island of Hawaii that are located within lava zones 3 through 9. Properties in lava zones 1 and 2 are not eligible due to the increased risk of property destruction from lava flows within these areas."

Monday, June 15, 2009

Recent Underwriting Changes

There have been some important changes to the Fannie Mae underwriting guidelines that are sure to have an impact on the number of people who can qualify for a loan. Here are a couple of them:

-- You can no longer count 100% of the value of stocks, bonds, and mutual funds when they are used for reserves. The new rules states that only 70% of the current value can be used.

-- Only 60% of the vested value of retirement accounts can be counted as reserves (the old guidelines allowed 70%).

-- Fannie Mae "highly recommends" (meaning "do it or else") that all lenders now include a copy of the borrowers' income tax transcripts in the loan file, even if the actual income tax returns are not required. Tax transcripts are ordered directly from the IRS.

-- All files will now require a verbal verification of employment within 10 days of the closing for hourly, salary, and commission income, and within 30 days of the closing for self-employed income. Any good mortgage broker always did this, but it is now mandatory.

Fannie Mae is very clear in stating that they are instituting these new guidelines in order to combat the rampant fraud and misrepresentation that exists in the mortgage industry, and because the economy is not getting any better, despite what many people believe.

There are two camps in the real estate and mortgage industries right now. One maintains that if we could only start being positive about things and ignore the constant barrage of bad news, everything will turn around and the glory days of the past will return. The other camp maintains that accepting the current situation is the key element in an individual's success.

We are firmly in the "acceptance" camp. The economic situation is not the greatest, but it also presents an unprecedented opportunity to those who realize things have changed. Hoping for change kills businesses. Accepting change grows businesses. We are now in the busiest part of the year in the real estate industry. If your business is still down, maybe you're in the wrong camp.

We talk to a lot of realtors and a lot of loan officers. Most are not making anywhere near as much as they have in the past, but some are doing very well. The common theme we have noticed among the people who are doing well (both real estate agents and lenders) is that they accepted the new reality of our economy a long time ago. They realized that sub-prime loans and stated income are gone, and higher credit scores and larger down payments are going to be with us for a long time. They realized that nothing is more important at the moment than knowing more about your job than your competition does. How you go about learning more than your competition is totally up to the individual. It could be reading, it could be classes, it could be finding a mentor, etc. The important thing is to learn as if your job depended on it because your job does depend on it.

Here's an example of what we do to stay ahead of our competition. The first hour of every day is spent reading the Fannie Mae, Freddie Mac, FHA, VA, and mortgage insurance underwriting changes. Every single tip we send people is in one of the documents we read. Look at the tips at the top of this email. These are available to anyone at all on the Fannie Mae web site, but very few people bother to read them. Instead, they send in loans to underwriting and wonder why the deals fall apart. We get deal after deal after deal because we spend one hour a day reading. Today alone, we received three calls from real estate agents who just had deals fall apart because of underwriting changes. That's three deals we now have because we read for an hour every morning and our competition doesn't.

My father used to be a high school English teacher in NY. He taught the seniors who were considered un-teachable. Losers, idiots, hopeless cases. One year, he taught them two things. One was how to fill out a job application. Day after day, they all filled out a job application. Over the course of the year they slowly learned to read and write correctly. When they graduated (most were awarded a diploma just to get them out of the school), every one of them had a decent job by the end of June. 30 losers, 30 jobs. The second thing he taught them was that America is truly the land of opportunity - but only for the educated.

Thursday, June 11, 2009

Can the $8000 Tax Credit be Used for the Down Payment?

HUD has recently announced that the $8,000 income tax credit for first-time home buyers can be used to make an additional down payment (in addition to the mandatory 3.5% down payment) on FHA loans. However, NO lenders have instituted the program yet. Most probably won't. It makes very little sense from a business perspective to put processes in place for a program that expires in a few months.

The Colorado Housing and Finance Authority (CHFA) allows $6,000 of the $8,000 tax credit to be used as collateral for one of their programs (it's called CHFA JumpStart), but the CHFA rates are much higher than regular rates. Here is the link to see CHFA daily rates (CHFA rates are the same for every lender - there is no negotiation regarding rates):

Our recommendation is to ignore the HUD announcement about getting an advance on the $8,000 credit, simply because even though HUD allows it, it doesn't exist anywhere.

Thursday, June 4, 2009

New Guidelines for Non-Traditional Credit

Fannie Mae is changing its requirements for non-traditional credit. Non-traditional credit is used when a borrower does not have a credit score. The underwriting guidelines allow a lender to develop a credit history for the borrower based on four alternative credit lines, which are credit accounts that do not appear on a credit report. Some examples are rent, utilities, cell phone payments, car insurance payments, etc. This has always been allowed. The change is that now, rent payments MUST be one of the alternative credit lines. To prove rent has been paid on time, the borrower needs to provide the previous 12 months of rent checks. If the rent is paid to a management company, a written verification of rent from the management company is acceptable in lieu of the rent checks.

FHA guidelines are slightly different than Fannie Mae guidelines. FHA only requires three alternative credit lines (not four, like Fannie Mae), and there is no requirement that rent payments be one of the alternative credit lines. However, individual lenders are allowed to add their own requirements on top of FHA's guidelines, and some lenders do require that rent be included as one of the alternative credit lines.

Sunday, May 31, 2009

Are Electronic Signatures Allowed on Sales Contracts?

Electronic signatures on real estate sales contracts are becoming common, but there are a few things that you need to know to make the financing go smoothly when electronic signatures are involved.

-- For VA loans, electronic signatures are not allowed. Everything must be signed with a pen.

-- For FHA loans, electronic signatures are allowed by HUD (which makes the rules for FHA loans), but not every lender will allow them.

-- Fannie Mae and Freddie Mac allow electronic signatures, but again, not every lender will allow them.

Typically, an underwriter will allow everyone to re-sign the contract in pen at the closing, but not always. Sometimes (almost always with VA loans), the underwriter will require the contract to be signed in pen before issuing the final loan approval.

The main thing to keep in mind is that it does not matter what the real estate contract rules are. If the buyer is financing the house they are purchasing, the companies that are providing the money (the lenders) get to make the rules.

Wednesday, May 27, 2009

Credit Score Minimums are Raised

GMAC just raised their minimum credit score for FHA loans to 600. They were the last holdout at 580. Most lenders have been at 620 for months.

This means that credit scores are more important than ever, but what can you do if your buyers have scores below 600? Here are the two most important things you can do to raise your credit score, and the three most important things that you should NOT do.

Things to do:
-- Pay your bills on time.
o Every time you pay a bill 30 days late, it lowers your score. The more recent the late payment is, the more that late payment lowers your score.
-- Keep balances low on credit cards and other revolving credit accounts.
o If your balance is more than 70% of the credit limit, it lowers your score the most.
o If your balance is 50% - 70% of your credit limit, it lowers your score a bit less.
o If your balance is 30% - 50% of your credit limit, it lowers your score even less.
o If your balance is below 30% of your credit limit, it will improve your score.

Things NOT to do:
-- Do not close old accounts.
o The longer your accounts are open, the higher your score will be.
-- Do not pay off old collection accounts.
o If you pay off an old collection account, the "date of last activity" will be the current date, and your score will go down.
-- NEVER pay anyone to “repair” your credit or to remove old derogatory information from your credit report.
o This is a rip-off -- 100% of the time! You can fix errors on your report by yourself – for free.

Tuesday, May 26, 2009

New Class Schedule

Our new class schedule is now available on our web site. Here's the link:

If you need Continuing Education Units (CEU's), then sign up for one of our FREE classes. At the moment, we have classes scheduled on the following subjects:

- FHA Loans - if you're staying away from FHA, you're losing money - these deal are easy, easy, easy
- VA Loans - always the best way to go for someone who has served our country
- Automated Underwriting Systems - learn what goes into a pre-approval (or what is SUPPOSED to go into a pre-approval)

We also have classes at Colorado Free University that are open to the general public. Tell your prospects about these and look like an expert:

- How to Choose the Right Mortgage - no hype, just the facts about every kind of loan that's available
- How to Read a Credit Report - what to do and what not to do to raise your credit scores - if you've ever lost a deal because a client's credit score was too low, this class is a must
- How Not to Get Ripped-Off When Buying a House - learn all the ways a lender can rip-off your buyers - send your prospects to this class and they will love you forever

Tuesday, May 12, 2009

New Appraisal Rules

Confused about the new appraisal rules? Here's what you need to know:

Beginning May 1, 2009, all conventional (non-government) loans that are going to be sold to Fannie Mae or Freddie Mac require compliance with the Home Valuation Code of Conduct (HVCC). The HVCC prohibits mortgage brokers and bankers from having any direct contact with an appraiser. All conventional appraisals must now be ordered through an Appraisal Management Company (AMC). The lender no longer gets to choose the appraiser.

Lenders are forbidden from having any contact with the appraiser, even if the underwriter needs something changed, such as another comp, correcting a typo, etc. Here is the new process:

-- The lender orders the appraisal from an Appraisal Management Company (AMC).
-- The AMC orders the appraisal from one of the appraisers on its list of approved appraisers.
-- AMC waits to hear back from the appraiser to see if they want to do the appraisal. This could be hours or days, depending on the contract the AMC has with its appraisers.
-- If the appraiser is busy or not able to do it, he notifies the AMC.
-- The AMC orders the appraisal from another appraiser on their list.
-- This is repeated until one of the appraisers accepts the job.
-- The appraiser does the inspection and prepares the appraisal report.
-- Appraiser sends the report to the AMC.
-- The AMC sends the report to the lender.
-- The lender sends the appraisal to the underwriter.
-- If the underwriter has any questions, he contacts the lender and tells the lender what needs to be corrected.
-- The lender calls the AMC and tells them what needs to be corrected.
-- The AMC calls the appraiser and tells him what needs to be corrected.
-- The appraiser makes the correction and sends the updated appraisal to the AMC.
-- The AMC sends the updated appraisal to the lender.
-- The lender sends the updated appraisal to the underwriter.

This all needs to be done online, also. No more picking up the phone and getting things done in 5 minutes. Remember that lenders cannot contact appraisers any longer.

The purpose of the law is to prevent lenders from ordering appraisals from appraisers who will give a property whatever value is needed to make the deal work. We all know inflated values cause foreclosures eventually (like now), so in one respect this is a good law. However, it will slow things down and in most cases will raise the cost of an appraisal because the AMC wants to get paid for their work. In that respect, this is a horribly executed law. VA already has an online system in place to prevent appraisal fraud, but I guess no one thought about using the system that was already in place.

The bottom line is that this is going to slow down your deals. It's probably not going to go away, no matter how much anyone complains because it does help to prevent appraisal fraud, so everyone needs to get used to the new rules.

The main thing to remember at the moment is that conventional appraisals MUST be ordered this way or the deal will not close.

Sunday, April 26, 2009

New Condo Insurance Rules

There are new rules regarding insurance coverage for attached condominium projects. For all loan applications dated on or after March 1, 2009, lenders are now required to verify that hazard insurance covers fixtures, equipment, and other personal property inside individual units.

If the master insurance policy provides this type of coverage, then the borrower does not need to purchase additional insurance. The master insurance policy is the one that is included in the HOA dues. Most master insurance policies for condos DO NOT include this type of coverage, so the borrower needs to purchase additional insurance before the loan can close.

This type of insurance is known as "walls-in" coverage, commonly referred to as an HO-6 policy. The HO-6 policy must provide coverage for no less than 20% of the condominium unit's appraised value.

What this means for real estate agents and mortgage brokers is that there is now an additional cost to the buyer if the master policy does not provide the "walls-in" coverage.

The cost of the coverage is NOT escrowed, like hazard insurance for a single family residence normally is. However, a full year's payment must be made at closing.

Make sure you tell your buyers that they need this new coverage if the master policy doesn't provide it.

Wednesday, April 22, 2009

Can I Use My 401(K) for the Down Payment?

A number of people recently asked us if they could borrow money from their 401(K) or mutual fund account and use that to pay for their down payment. The answer is yes, and here are the underwriting guidelines:

If the 401(K) is being listed as an asset on the loan application, the total amount of the 401(K) must be reduced by the amount that was borrowed. However, the 401(K) loan payments do NOT have to be counted as liabilities against the borrower. This is a great way to secure the funds for a down payment or closing costs without increasing a borrower's debt-to-income ratio.

If the buyer borrows money against a non-liquid asset (real estate, cars, etc.) then the payments do have to be counted as liabilities.

Friday, April 17, 2009

What Are the Processing and Underwriting Fees?

Ever wonder what the processing fee and the underwriting fee are for on a Good Faith Estimate and final settlement statement?

The processing fee pays for the person who does all the paperwork involved in getting a loan into underwriting, taking care of any conditions, and making sure the loan closes. The processor orders the appraisal, the insurance certificate, the flood cert, any verifications that are needed, etc. If the loan officer hires a processor to do this work for him, then the processing fee goes to the processor. If he does the work himself, then he keeps the processing fee for himself. The typical fee for processing is between $350 and $450.

The underwriting fee goes to the lender and pays for the person who determines whether the borrower and the property fall within the loan program guidelines (credit, income, assets, etc.). The underwriter verifies everything that the processor has sent to the lender. The underwriting fee is different for every lender, but typically, the fee is about $625.

Tuesday, April 14, 2009

Property Tax Credit - Can it be Used to Pay for the Down Payment?

We are often asked if the property tax credit (the pro-rated share of the property taxes that is taken out of the seller's account and put into the buyer's account) can be used to pay a part of the buyer's down payment requirement.

The answer is no. However, the property tax credit can be used to pay some of the buyer's closing costs.

As an example, assume someone is buying a house for $100,000 and the down payment is 3.5% of the purchase price, or $3,500. The property tax credit cannot be used to pay any of this amount. It doesn't matter how large the tax credit is - the buyer still has to contribute $3,500 towards the transaction. Depending on the type of loan, the $3,500 can come from a relative or a down payment assistance program, but it can never come from the property tax credit.

Just a reminder - this has NOTHING to do with the $8,000 first-time home buyer credit.

$8,000 Tax Credit - a Reminder on How it Works

We get calls every day from people who are confused about the $8,000 tax credit for first-time home buyers. Here's what you need to know:

- If you (or your spouse, if you are married) have not owned your main home in the past three years, you are eligible for the tax credit. A "main home" is defined as the house you live in most of the time. This means you could have owned investment properties, or even a second home, as long as you did not own your "main home".

- If you have already filed your 2008 taxes, you can get the tax credit this year by filing an amended return. An amended return form is very easy to complete - it is not a full tax return.

- You need to purchase the house between January 1, 2009 and November 30, 2009 to get the credit.

- You do NOT have to pay the credit back.

- This is a tax credit, not a tax deduction, so you get all the money in your fist.

- If the house you're buying is less than $80,000, then you only get 10% of the sales price as a credit - not the entire $8,000. A $70,000 house would give you $7,000, a $60,000 house would give you $6,000, etc.

- If you make more than $75,000 and you're single, or more than $150,000 as a couple, the credit starts to get phased out.

- You need to keep the house as your main home for 3 years to keep the credit.

Check out our web site for access to the IRS form to claim the credit.

CHFA Loans - 99.395% Financing

Need 100% financing with an FHA loan WITHOUT getting a gift or a loan from a relative? Check out CHFA loans. The Colorado Housing and Finance Authority (CHFA) can't quite get you to 100%, but they can get you to 99.395%, which is pretty close.

Only a small percentage of mortgage brokers and lenders are approved to sell CHFA loans, so you might not know how good they are. Here's how they work:

-- There are two loans. The first mortgage is a regular FHA loan. It requires a 3.5% down payment.
-- The second mortgage is for 3% of the first loan amount. The total of the two loans is 99.395% of the purchase price.
-- The interest rate for both mortgages is the same and they are both 30-year fixed rate loans.
-- CHFA requires the borrower to contribute $1,000 towards the purchase.
-- There is an online class that all borrowers must take (it is free).
-- There is no property price limit, but the maximum loan amount for the first mortgage is the same as for FHA loans. They FHA limits went up recently. Check our web site for the details.
-- There is NO first-time homebuyer requirement.
-- The seller can pay up to 6% of the purchase price towards the buyer’s closing costs – more than enough to cover everything.
-- There are income limitations, but they are much higher than for any other down payment assistance program. Check our web site for the income limits.

We have a Quick Reference Guide for CHFA loans on our web site. Follow the link at the bottom of our home page. Here's the link to get to our home page:

Monday, March 23, 2009

Classes for Realtors and the Public

Need some CEU's? We are approved by the State of Colorado to offer continuing education units for classes we teach on the following subjects:

- FHA Loans - if you don't know about FHA loans, you are probably losing money.

- VA Loans - 100% financing, no mortgage insurance, no income limits - you need to know about VA loans.

- Automated Underwriting Systems - these are the underwriting systems that your mortgage broker SHOULD use before giving you a pre-approval letter. Deals don't fall apart when automated underwriting systems are used correctly.

We also offer classes to the general public at Colorado Free University on:

- How to Choose the Right Mortgage - no hype, no sales pitch - just everything you need to know about all the different loans and all the closing costs.

- Understanding Your Credit Score - credit scores determine whether you get a mortgage and what your interest rate will be. Learn how to raise your score, how to keep it there, what to do, what not to do, and how to fix errors for free.

To get a copy of our most recent class schedule, go to the bottom of our home page and click on the link to download the schedule. Here's the link to our web site:

Tuesday, March 17, 2009

What's the Difference Between the Loan Origination Fee and the Discount Fee?

One of the most common questions we are asked is what is the difference between the loan origination fee and the loan discount fee. Here's the answer:

The loan origination fee is profit for the mortgage broker. 100% profit. If you're using a retail lender, then it's 100% profit for the lender. Don't let anyone tell you differently.

The loan discount fee is a fee that the lender charges the mortgage broker to get a lower interest rate than the "par" rate. The par rate is the lowest interest rate that does not cost the broker any money if he locks the loan at that rate. If the borrower wants a lower interest rate than the par rate, then it costs the broker some money to lock the loan at the lower rate, and the broker will pass that fee onto the borrower. This is known as "buying down the rate" and the fee is typically known as "paying points". The lender is basically saying, sure, you can have a lower rate, but it's going to cost you X amount to get that rate.

One thing to keep in mind is that the discount fee is rarely (if ever) a nice round number, such as 1%, 1.5%, 2%, etc. The discount fee is actually a number that is carried out to 3 decimal places, such as .438% or .189%, or some other odd number like that. If a broker or banker ever tells you that the discount fee is 1%, 1.5%, 2%, etc., that means he is pocketing the difference between the actual discount fee and the fee he is charging.

Shame on him.

Friday, March 13, 2009

Why Are There Two Closing Fees?

Ever wonder why there are two closing fees on a Good Faith Estimate (if it's done correctly) and on the HUD-1 settlement statement? The answer is because there are actually two closings being conducted at a purchase closing. The first, which is the loan closing, is between the buyer and the lender. The buyer generally pays for all of this fee.

The second closing is between the buyer and the seller, and is called the real estate closing. The buyer and the seller generally split this fee. Half of the fee will be in the buyer's column and the other half of the fee will be in the seller's column. Since the Good Faith Estimate only lists the buyer's closing costs, only half of the total real estate closing fee is listed on the Good Faith.

These fees are two distinct fees, so they are listed on two different lines on the Good Faith and the HUD-1.

If the transaction is a refinance, then there is only a loan closing fee.

Check out our web site for a description of all the closing fees. From our home page, click on the "How to Get Approved" link on the menu bar to the left. Here's a link to our web site:

Thursday, March 12, 2009

Mortgage Rescue Details

We've been getting a number of calls regarding the new mortgage relief programs that are a part of the economic stimulus plan that was recently signed. Here are the details as they stand right now:

Fannie Mae and Freddie Mac have two programs to help out homeowners who are having trouble making their mortgage payments. The first program involves refinancing the current mortgage. It is aimed at homeowners who have a property that has declined in value. In order to take advantage of the refinance program, the homeowner must be current on their mortgage payments. The second program is aimed at homeowners who are behind on their mortgage payments or are in imminent danger of falling behind on their payments. This second program is a loan modification, and the interest rate and possibly the balance of the loan are reduced to a point where the loan is now affordable.

At first blush, these programs seem wonderful. However, there are several inherent problems.

-- The programs are voluntary. The lenders are not required to participate, despite what you may read in the paper.
-- These mortgage programs are only available to homeowners whose mortgages are either owned or securitized by Fannie Mae or Freddie Mac. "Securitized" means that Fannie or Freddie bundled many loans together and sold bonds to outside investors, using the mortgages as collateral. Securitizing mortgages keeps the flow of money going.
-- The same lenders who got homeowners into trouble in the first place are now responsible for getting them out of trouble. This suggests that incredibly unethical companies are now suddenly being run in an ethical manner. I will believe that when the banking executives stop taking million dollar trips to vacation spots, and when Bernie Madoff gives his $50 billion back to the people he suckered. Having been involved in the mortgage industry throughout the sub-prime glory days, I can say with absolute certainty that neither the banks nor their sales force (loan officers) have done anything to clean up their acts. If anything, the level of fraud and deceit is greater now than when sub-prime loans were being sold, only because everyone is desperate for money at the moment. A comfortable crook is bad enough; a desperate crook is really bad.
-- The issue of mortgage insurance has not been addressed by these programs. The government admits that these programs may not work at all because no one is willing to insure the loans.
-- These programs ignore the fact that many people in trouble have two mortgages. The guidelines say that second mortgages cannot be included in the refinance or the modification. They are allowed to be re-subordinated, meaning that the current second lien holder (the bank that owns the second mortgage) can keep their loan in place, but they must agree to go back into second lien position. These programs are basically telling the second lien holders that they will never get a dime if the house goes into foreclosure. There's not much incentive to go through all the work to re-subordinate the loan if you know you will be left holding the bag.
-- The borrowers still must qualify for these loans. If you are out of work, or over-extended on your other debt, how do you qualify for a mortgage?

None of this is to imply that the loan programs are not a step in the right direction. Unfortunately, the problem goes much deeper than most of us are willing to admit. The almost universal denial that our country is in at the moment will need to change before things can even begin to get better.

To learn more about these programs and to find out about eligibility, click on the link at the bottom of the home page on our web site. That will take you to the government site. Here's a link to our web site:

One last word of caution. The thieves will be coming out of the woodwork trying to take advantage of people who are desperate to get out of their mortgages. Make sure you read the foreclosure rescue scam warning on the government site!

Wednesday, March 11, 2009

VA Loan Limits Have Been Increased

The loan limits for 100% financing have gone up for VA loans in some areas. Here are the new amounts for Colorado counties:

BOULDER -- $437,500.00
EAGLE -- $887,500.00
GARFIELD -- $450,000.00
HINSDALE -- $460,000.00
LAKE -- $887,500.00
OURAY -- $456,250.00
PITKIN -- $1,094,625.00
ROUTT -- $690,000.00
SAN MIGUEL -- $962,500.00
SUMMIT -- $785,000.00

For all other counties in Colorado, the loan limit for 100% financing remains at $417,000. It is possible to get VA financing for an amount that exceeds the loan limit, but 25% of the amount over the limit must be paid by the borrower at closing.

Just a reminder - VA financing is almost always the best deal for a veteran, or a member of the active military, the Reserves, or the National Guard. 100% financing, no mortgage insurance, low interest rates. If someone tries to talk your buyers out of getting a VA loan, it probably means they are not approved to sell them. That's not how we should treat people who have served our country.

Wednesday, March 4, 2009

US Government Refinance and Modification Programs

The guidelines for the new mortgage bailout programs, the Home Affordable Refinance and the Home Affordable Modification, are now available. We have posted the link to the government web site on the bottom of the home page of our web site.

Make sure you read EVERYTHING on the government site. And make sure you read the warnings about foreclosure rescue scams. There are many people pretending to modify loans who are more than willing to rip you off.

Here's the link to our web site: