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.