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The Insiders Guide to Obtaining

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									    The Insiders Guide to
  Obtaining The Mortgage You
 (but just might not know how to get)


  The Six Simple Things You Can Do to Ensure
   Your Home Purchase is a Smooth Process


 The Six Biggest Lies in Mortgage Advertising

Andrew Nathan
First Security Loan
                Table of Contents


  Chapter 1: Types of Mortgage Lenders………………………………………………………….

  Chapter 2: The Mortgage Process………………………………………………………….………..

  Chapter 3: The Four Fundamental Steps in
     Closing a Home Mortgage………………………….………………………………………………...

  Chapter 4: Types of Loans……………………………………………………………………………….

  Chapter 5: Important Mortgage Subtleties…………………………………………….….

  Chapter 6: Powerful Techniques and Strategies
     To Employ When Buying a Home………………………………………………………….…….

  Chapter 7: Refinancing Your Mortgage…………………………………………………………

  Chapter 8: Closing Costs for Your Mortgage and
    The Required Governmental Disclosures……………………………………………..…….


  Appendix A: What Your Loan Agent Does During the
    Home Purchase or Refi Process………………………………………………………….………

 Appendix B: Can Go Wrong During the Home Buying

 Appendix C: Glossary………………………………………………………………….…………….………..
      The Insiders Guide to Obtaining The
             Mortgage You Deserve
        (but just might not know how to get)

         Introduction – The Purpose of This Guide

Obtaining a mortgage today can be an intimidating and/or frustrating
experience or a straightforward and painless process if you are properly
informed (and represented). As an experienced mortgage professional, I
have long recognized the need for a comprehensive and objective source of
information about the mortgage process, given its complexity.

Every industry has it’s built in secret processes, and systems. After all,
most people dislike buying a car because of the process. Most dislike
shopping for appliances. Not many people enjoy shopping for insurance.
Each of these industries has things about the way business is done that
make them uncomfortable for the consumer.

The mortgage industry is probably the most complex marketplace, and by
our definition the least enjoyable arena that a consumer shops in. Almost no-
one enjoys the mortgage process. When you don’t understand what’s going
on with your loan application, it invariably leads to feelings of frustration
and powerlessness.

Hence, my goal is to empower you with the knowledge gleaned from a long
tenure in the mortgage industry, and the successful completion of thousands
of loans. Do you need to read this cover to cover? Well, that’s up to you.
Along the way in the manual, I have provided what I call “Insiders Tip’s”, and
if you were only to read the tips, you would be a well informed mortgage
consumer. However, should you desire, the information enclosed will allow
you to understand any part of the loan process you need to, and make
decisions based upon that knowledge.
Obtaining the “right” mortgage is both an individual and personal decision.
There is no best home loan for every borrower. As you begin your journey
into the mortgage process, I wish you well, and trust that this guide will help
you identify and obtain the very best mortgage available for you and your
family with a minimum of frustration and anxiety.
                            About Andrew

Andrew Nathan is a Bay Area native with more than thirty years experience
in the real estate business. First as a builder and later as a Realtor, Andrew
has developed, renovated, bought and sold real estate both for himself and
for his clients. For the last seven years he has been a top producer with
First Security Loan in San Rafael as a real estate financing consultant for
both residential and commercial clients.
A resident of San Anselmo, he is married and has a 14 year old son. He has
been an active volunteer member of the San Anselmo Recreation Department
and the West Marin Baseball league coaching soccer and baseball for eight
years and a twenty five year sponsor of Save the Children through whose
programs he has adopted and supported children from Nepal, India, and
Central America..
As a builder Andrew was a partner in Bailey Nathan Properties, a general
contractor and developer of live-work space in the east bay during the 1980s
and sold real estate with Mason Macduffie, Marvin Gardens and Prudential
California Real Estate from 1989 to 1996. From 1996 through 1997 he was
vice president of sales for Davidson, Ballantine, Stroud, a custom
homebuilder in Marin County. He is currently a member of the California
Association of Mortgage Brokers.
                  What Andrew’s Clients and

                Business Partners Are Saying

Andrew has always provided our clients with the highest level of service. He
also has been our choice to handle our own mortgage needs.
Todd Hodson
Owner- Marvin Gardens Real Estate
2003 Berkeley Association of Realtors Realtor of the Year
2004 Berkeley Association of Realtors President
Marion Henon
Owner-Broker Marin Gardens Real Estate

Thorough, cost conscious, and no nonsense, I know I can rely on what Andrew
tells me.
Zachary Epstein
Attorney at Law
Certified Public Accountant

Andrew is one of our most competent and productive Brokers. If he submits
your loan it’s going to be done correctly. Your transaction will go smoothly
with no surprises at the last minute.
Gary Scoma
Underwriting Manager
Residential Mortgage Capitol

We see dozens of mortgage professionals in the course of the many
purchase and refinance transactions we handle at the title company. Andrew
is the one who handles my personal mortgage transactions.
Jackie Boccabella
Senior Escrow Officer
California Land Title
Andrew made the whole refinance process as painless as possible. We got
exactly what we were promised with no surprises at the last minute.
Mark and Louise Franz
Chef and owners-Farrallon Restaurant

We have financed more than a dozen investment properties over the last
five years with Andrew. We once had a two week close requirement on a
purchase loan that another lender dropped the ball on. Andrew got it done
and we closed on time.
Ed and Virginia Gerson
AAA Drywall

Not only did Andrew get me in to my first home, he makes me look like a
million bucks whenever I send any of my clients to him.
Gabriel Haneford
Enrolled Tax Preparer

In my line of work we deal with all kinds of people in the course of doing
business. I really appreciate Andrews’ integrity and I know I can always rely
on what he tells me. That’s not as common as one might think.
Keith Rey
General Manager-Marin Honda

Andrew got us a loan with no documentation of any kind other than an
appraisal after a well known bank couldn’t get it done.
Susan Kelley
William Hicks
Owners- Sandpiper Inn Stinson Beach

We had some real time constraints and needed money for an investment
opportunity. Andrew got our refinance done in less than three weeks.
Jim and Laura Maser
Owners-Café Fanny and Picante Restaurants

Andrew helped me restructure my finances and got me a good fixed rate
mortgage with a minimum of intrusion during a difficult time in my life.
Laurie Castell-Kemp
Owner-Picoli Pre-School
Andrew went back to our lender and renegotiated a better rate when rates
went down during our purchase. We closed on time at below our locked in
Magdy Tawadrous
Cardiologist-Kaiser Hospital

I never thought I would own my own home until Andrew explained how we
could make it happen with no money down and a seller assist on the closing
costs. I just moved in at the end of the year.
Wendy McPhee-Teacher-Hayward Unified School District

Ease and efficiency are of primary importance to me. Andrew fulfilled these
criteria during my refinance coming to my home to take my application and
arranging a mobile notary to sign me up at my convenience.
Susan Leal
Treasurer-City of San Francisco

Andrew helped me buy my first home with no money down and delivered a
rate that was better than his original quote.
Bryan Geraldo
IT Security
Symantec Corp.
                            About Nevin…

Nevin grew up in Marin County, attending the University of California at
Berkeley for his undergraduate degree, followed by his graduation from
Stanford University with a Masters Degree in 1985. After graduation from
Stanford, Nevin left the Bay Area to work in the field of Venture Capital in
Canada for four years, before returning to Marin County in 1989.

Nevin started in the mortgage industry as a mortgage broker in late 1989
after he bought his first home and was intrigued by the mortgage process.
He quickly fell in love with the business because it allowed him to combine
two of the things he enjoyed doing most, working with and helping people,
and creatively working with finances.

During the 14 years he has been in the industry, Nevin has closed thousands
and thousands of loans, and originated nearly $1,000,000,000 (One Billion
Dollars) in home mortgages. During that time period he has seen just about
every scenario possible, and experienced and solved just about every
problem that could come up during the mortgage process.

Nevin focuses his practice on helping people buy homes, whether their first,
their second, their last or for investment purposes. He approaches the
business with an eye on creativity and problem solving, and is viewed by his
peers as one of the most skilled and dedicated agents in the business.

He is very happily married to Rebecca Miller, and they have two sons, Westin
Miller who is 14 and Dylan Miller who is 11. They live in Novato in the
waterfront community of Bel Marin Keys, have a second home in the Sierra’s
and enjoy an activity filled life focused on their two sons.

Nevin can be reached as follows:

Marin County     415-448-6340
Sonoma/Napa      707-939-2585
Internet:   www.nevinmiller.com     E-mail: nevin@fslc.com
What Nevin’s Clients and Associates are Saying….

I’ve bought and sold investment property for my own portfolio for years. My
deals have always been complicated, and Nevin has routinely and brilliantly
solved one problem after another. I heartily recommend Nevin as a
mortgage professional you can count on.
                                             - Gerard Q. Decker IV

When Nevin told us we could buy a home with no-money down, frankly we
didn’t believe it could happen. He patiently explained the process to us in
spite of our continued questions and ignorance to the process. His
thoroughness was evident at the closing of the transaction because we
actually understood exactly what we were doing.
                                              - Brian and Lorien McKenna

Nevin has helped my wife and I buy and refinance a number of commercial
properties over the years. What I’ve always been impressed by is his desire
to go below the surface of the transaction, to understand our motivations,
and then make sure that the financing we were applying for was the best for
that situation.
                                             - Stan and Jenifer Anton

Having run a large residential real estate company for years, I’ve seen a lot
of mortgage agents come and go. I first met Nevin in 1996 and immediately
recognized in him a characteristic that I greatly admire. Too many sales
professionals go from one deal to the next without seeing the people behind
the deal. Nevin initially impressed me that he was always greatly in tune with
his clients, and now almost ten years later, he’s as committed to being deeply
involved with the people he represents as ever.
                                              - J. Gerrett Snedaker
                                                  Owner, Frank Howard Allen
                                                  Realtors, The Wine Country
I’ve been in the mortgage industry for almost 25 years, having founded one
of the first, and still one of the largest Mortgage Brokerages in the country.
I’ve valued my relationship with Nevin since we were first associated with
him in 1995, and count him among a small handful of our most professional
agents in our Company and in our industry.
                                               - Jim Chapman
                                                  Owner, First Security Loan

Nevin has represented dozens of our clients since 1996. Frankly, we try not
to let our clients obtain their financing anywhere else. When we refer a
client to Nevin, and he tells us the deal is do-able, we can relax and go on to
the next transaction.
                                                - Steve and Marla Ericson
                                                  Realtors, St. Helena, Ca

I have been buying and selling real estate for the last 20 years as an
investor. I was referred to Nevin recently after the loan agent I had been
using just couldn’t get a complicated deal done for me, in spite of submitting
my loan to 3 lenders. Nevin got the deal done with the first lender he went
to, but what really impressed me was his incredibly high level of personal
customer service and complete confidence in his ability. To say that I
recommend him is an understatement.
                                              - Dr. Barry Baum
                                                  Real Estate Investor

Don’t use anyone else!
                                              -   Henry Mayo
                                                  Owner, Mayo Family Winery

Nevin knows his stuff better than any other loan broker. If he says it will
close, it will close. Plus, he does it with minimum pain to you!

                                              -   David Faudman
                                                  Founder, cleanoffer.com
       Chapter One:
Types of Mortgage Lenders

  Banks and Savings and Loans

       Mortgage Brokers

        Mortgage Banks

       Internet Lenders

         Credit Unions
   Chapter One: Types Of Mortgage Lenders

A frequent source of confusion in        There is a perception that
the mortgage industry is the many        consumers may be served
different kinds of “lenders”             efficiently at Direct Lenders, as
available to the consumer today,         the entire transaction occurs
and the overlapping names and            within the institution. However,
terms used to identify them.             dealing directly with a Direct
Obviously, not all mortgage lenders      Lender has many disadvantages,
are the same. There are                  which the sophisticated consumer
substantial and distinct advantages      should be aware of.
and disadvantages with each, so
let’s review them briefly.               First, the loan agent at the Direct
                                         Lender represents the Lender, not
                                         the borrower, and by definition,
Banks and Savings & Loans
                                         may not have the borrower’s best
                                         interest in mind.
Banks and Savings and Loans
(S&L’s) both collectively referred
                                         Second, the borrower only has
to hereafter as Direct Lenders)
                                         access to the loan programs
were, until the late 1970’s to early
                                         offered by that particular
1980’s, about the only place you
                                         institution, which usually are not
could get a mortgage. Direct
                                         the best available in the
Lenders are still sources of
                                         marketplace. After all, with
mortgage money, but a far less
                                         literally thousands of Direct
important one than they once were.
                                         Lenders operating in the State of
Direct Lenders usually lend out
                                         California, the odds are very much
money that they receive from
                                         against you that the specific
depositors, and then retain the
                                         lender you have chosen
loan in their institution, “servicing”
                                         coincidentally has the best priced
the mortgage themselves. Typical
examples of Direct Lenders active
on the California mortgage
                                         Third, if the Direct Lender
marketplace that you’ve probably
                                         declines the loan application (which
heard of are Bank of America,
                                         happens far more often than
Wells Fargo, and World Savings.
                                         Direct Lenders would like you to
believe), you have to start over       the same time to ensure that a
again at another institution, which    borderline loan application gets
may jeopardize a purchase              approved for a borrower.
transaction, or cause the loss of an
important rate lock in a refinance     The mortgage brokerage industry
transaction. Finally, the Direct       originally developed about 25 years
Lender controls the appraisal          ago to serve the credit-impaired
process, which as we will see later,   borrower, as most lenders at that
can have negative results.             time only made loans to borrowers
                                       with the best credit. The
                                       Mortgage Broker emerged to
         Insider’s Tip                 represent those borrowers who
Going directly to a bank for           had a tough time finding a
your loan is usually not in your       mortgage, since as a Broker he had
best interest, for reasons             access to many sources of
that you’ll understand as you          mortgage money, and as a result,
                                       was often effective at placing
read ahead.
                                       difficult loans.

When a borrower goes directly to
                                       Over the past 20 years, the
a Direct Lender, this is called a
                                       Mortgage Broker has become the
“Retail” loan origination in the
                                       dominant player in the mortgage
mortgage industry.
                                       arena, responsible in 2003 for
                                       arranging over 70% of the loans in
Mortgage Brokers                       California. As the industry began
                                       to develop, many lenders would not
Mortgage Brokers have been key         accept loans from mortgage
players in the mortgage industry       brokers. However, lenders quickly
for the past 20 years. Simply          saw that mortgage submissions
defined, a Mortgage Broker is the      from brokers cut down the work
agent of the borrower, who has         that they had to do in order to
access to many different lenders,      originate a mortgage, and the
and is able to compare the various     process streamlined the manner in
programs available, and shop for       which many lenders began
the best mortgage rate on behalf       operating.
of his/her client. If necessary, a
Mortgage Broker can submit a loan
application to multiple lenders at
                                       retail loan to, as they do not
         Insider’s Tip                 accept loans from the public.
  You’ll have many more                Some of these sources of
options available to you if you        mortgage money are among the
use a broker, rather than a            largest Lenders in California, and
“lender”.                              are generally referred to as
                                       Mortgage Bankers.

Mortgage Brokers have access to
                                       Mortgage Bankers
most of the same Lenders that the
consumer can go to directly, but
                                       A Mortgage Bank is a technical
when a mortgage broker takes a
                                       term for an institution that funds
client to a lender, the mortgage
                                       mortgages, either on it’s own
broker is offered “Wholesale”
                                       behalf (for it’s own portfolio), or
pricing. This pricing is usually
                                       on behalf of an investor. Mortgage
substantially less than the retail
                                       Banks are generally wholesale
price for the same loan as it costs
                                       operations, usually accepting loans
the Lender much less to close a
                                       only from Mortgage Brokers, and
wholesale than a retail loan, as the
                                       are usually the least expensive
Mortgage Broker does most of the
                                       source of mortgage money
work in putting the loan together.
Additionally, the lenders recognize
that the Broker is a significant
                                       With lesser frequency, we are
source of business and have
                                       starting to see retail mortgage
created pricing and servicing
                                       banks grow in the marketplace, but
advantages to the Brokerage
                                       there are only a few large enough
community. The existence of
                                       to offer a product range necessary
multiple pricing levels is what
                                       to attract good loan agents. Retail
allows mortgage brokers to offer
                                       Mortgage Banks employs loan
loans to consumers at equal to or
                                       agents like Direct Lenders do, and
below the price as if the consumer
                                       have the “service aspects” a Direct
went straight to the lender.
                                       Lender does (in-house
                                       underwriting, funding and
Perhaps the single most important
                                       documents), but will have the
advantage the mortgage broker
                                       product array available to a
has is that mortgage brokers also
                                       mortgage broker.
have access to many lenders that
the consumer cannot submit a
A single Mortgage Bank may offer              Insider’s Tip
the loan products of many, many
                                      A loan agent who works for a
different financial entities at the
same time. My license is with a       large retail mortgage bank
large retail mortgage bank that       with a wide range of investors
offers 30 year fixed rate             and products, but retains the
conforming money from Fannie          right to broker loans to other
Mae and Freddie Mac, Wall Street
                                      lenders, gives you the best
money for jumbo or non-
                                      combination of products,
conforming loans which will be
resold on Wall Street as mortgage     pricing, and service.
backed securities, portfolio
products from large banks such as     Mortgage banks preferring to
Washington Mutual, Bank of            make their money with high volume
America and Citibank, as well as      origination and narrow margins.
products from other Mortgage          This is also an explanation for why
Banks. A large mortgage bank can      your loan is so often sold within
have as many as 100 or even more      the first month or two of your
types of mortgages and investors      transaction. The Mortgage Bank
to whom they sell their loans.        sells it back to the investor or a
Sometimes an aggressive Mortgage      large bank that is equipped to
Bank may have these loan products     handle servicing your mortgage.
at better interest rates than the
bank they are selling loans to due    A common misperception
to the correspondent lending          consumers have is that upon
relationship with these money         finding out their mortgage has
sources.                              been placed with a lender they may
                                      have heard of or even done
Correspondent loan relationships      business with, they assume they
are wholesale arrangements            may be able to get a better deal by
between mortgage investors and        going directly to that institution.
Mortgage banks. This relationship     Reputable Mortgage Brokers or
may result in a very competitive      Bankers will almost invariably be
loan for the consumer as many         able to beat the price of the bank
mortgage banks preferring to          for precisely the reasons
Mortgage banks. This relationship     described above even if you
may result in a very competitive      currently have a mortgage with the
loan for the consumer as many         bank you are refinancing through.
Finally, from this point in our         local real estate market. One of
manual, both retail mortgage            the largest Internet lenders failed
banking loan agents, and mortgage       suddenly in the winter of 2000,
brokers, will both simply be            citing “competition from the
referred to as brokers, due to          mortgage brokers” as the biggest
their similarity and ability to place   reason for their demise.
loans with a variety of mortgage
sources.                                         Insider’s Tip
Internet Lenders                        Internet lenders are very
                                        difficult to get anything but
As we have witnessed the growth         the most basic of loan
of the Internet over the last           applications closed with due
several years, we have also seen        to the lack of sophistication
the birth of On-Line, or Internet
                                        of the “loan consultants” and
Lending. Internet Lenders are
sometimes Lenders, sometimes
                                        their limited product lines.
Mortgage Brokers, sometimes             Buyer Beware!
Mortgage Bankers, and sometimes
a combination. Internet lenders         As you understand by now, almost
typically site the ease, price, and     all mortgage bankers and brokers
convenience of originating an on-       have the same sources of money.
line mortgage.                          That being said, the only way that
                                        an Internet lender can be less
Industry studies have predicted         expensive than the competent
that over the next five years,          mortgage broker is to earn less
Internet lending may account for        money for completing the loan.
as many as 3-5% of the mortgages        The only way for the fee to be
originated in California. However,      lower is for the Internet lender to
early reports about experiences         pay someone willing to work for
with on-line lenders have been          less than what a good broker would
consistently negative, with the         work for. In my experience, those
common threads being poor               willing to work for less are usually
customer service, generally             less qualified – and I sure wouldn’t
inexperienced staff, and the            want someone unqualified handling
associated difficulties of arranging    my mortgage. The non-emotional
a mortgage when the Internet            truth of the matter is that a very
lender has no knowledge of the          small percentage of the loans
originated on-line ever close due to
the lack of competent people to
take an on-line application through
the mortgage process. The old
saying “you get what you pay for”
certainly applies to Internet

The one positive thing I can say
about Internet lenders is that
they often serve as a reference
point for the consumer. I have
completed dozens of transactions
over the past few years where a
client has shopped on line to
educate themselves and “see
what’s available”, and then come to
me to obtain that loan. The
mortgage process is sufficiently
complex that most consumers are
better served by having an
experienced mortgage professional
guide them through the

Credit Unions

Despite the evolution of the
Mortgage Brokerage industry,
Credit Unions remain a somewhat
popular place for consumers to
obtain mortgages. Like Direct
Lenders, they usually lend for
their own portfolio, have a limited
number of loan programs, and leave
a borrower with little recourse if
their transaction is declined.
          Chapter Two:
What’s Involved in Getting a Home

 The “Normal” Components of a Mortgage





             The Appraisal

           The Title Report
  Chapter Two: What’s Involved in Getting A
              Home Mortgage

The “Normal” Components of            any stocks, bonds or other assets
                                      easily convertible to cash. Lenders
a Mortgage Application
                                      will want to see that your down
                                      payment assets for a home
Lenders make their decision about     purchase have been “seasoned”
whether to lend to a borrower         (under your control) for at least
based of the combined and             two to three months, and will want
overlapping analysis of four          either three months of bank or
separate categories of                account statements, or a
information. It is important to       “Verification of Deposit” form that
clarify at this point that the term   confirms you have had the money
“lender” is used here in a very       for at least this period of time. In
generic sense, because as you’ve      the eyes of the lender, home
just seen in the previous chapter,    buyers who risk their own hard
there are many different types of     earned and saved money for their
“lenders”.                            down payment have proven to be
                                      better risks than buyers who have
The four categories are referred      none of their own money invested
to as Cash, Credit, Income and        (as in the case where a parent
Property. Please be aware as we       gives or loans their child the down
examine each of these categories,     payment funds).
that most of the rules are general
rules; there are sometimes more
specific rules with some lenders,              Insider’s Tip
and sometimes the rules and           If you are buying a home,
guidelines below are substantially    try not to move substantial
relaxed.                              amounts of money from one
                                      account to the other in the
                                      60 days prior to making
                                      your loan application.
“Cash” is the combination of the
money you have in bank or
brokerage accounts, combined with
The minimum amount of Cash that                 Insider’s Tip
needs to be documented (and
                                       While Some Lenders are
seasoned) for a typical home
purchase transaction, includes the     very willing to make 95%
funds required for the down            Loan-to-value loans, they
payment, the closing costs             are sticklers about the 5%
necessary to complete the              down payment being your
transaction, and three to six
                                       own money.
months of cash reserves.
Seasoning is usually required, as
lenders don’t want to see a big        making the gift states the dollar
recent deposit into your bank          amount of the gift, their
account that most likely was a gift.   relationship to the recipient, and
Cash reserves are usually defined      their name and home address. In
as the amount of your mortgage         addition, the person giving the gift
payment, property taxes, and           must provide evidence (usually by
insurance calculated on a monthly      way of an account statement) that
basis.                                 they have the ability to give the
                                       gift. Finally, the lender will usually
                                       require a copy of both the gift
Cash from relatives in the form of
                                       check and the deposit slip of the
a gift is usually acceptable for
                                       account they deposited the gift
down payment funds, especially if
you have 5% of the purchase price
of the home in your own funds. If
you don’t have 5% of the purchase      Because seasoning is so important
price in your own seasoned funds, a    to most lenders, it is usually unwise
gift can still be acceptable with      to move large sums of money from
some lenders as long as the down       one account to another after you
payment is 20% or more of the          have begun the mortgage process.
purchase price.
                                       Finally, the larger the cash asset
                                       base you have, the more likely the
If a gift is planned for your
                                       lender is to be flexible in other
transaction, be aware that most
                                       areas where you may be less
lenders will require up to four
                                       qualified. You will see this trend
specific pieces of documentation
                                       repeated throughout this section
to ensure the funds received were
                                       of our analysis.
a gift. The lender will want to see
a gift letter, where the person
Credit                                 timely payments on the mortgage
                                       being applied for.
Credit is one area of the mortgage
process that has seen rapid            Credit Scoring was developed
advances in technology over the        about 5 years ago or so by a San
past several years. Just five years    Rafael, Ca based company, named
ago, the interpretation of a           Fair, Isaac, and Company. Fair
borrower’s credit report was           Isaac developed a complicated
generally left to the mortgage         computer model of a borrowers
underwriter on a qualitative basis.    entire credit profile that analyzed,
Underwriters generally looked at a     among other factors, the amount
borrower’s credit on the basis of      of credit a borrower had
how many of their accounts were        outstanding, the amount of their
always paid on time and the            credit that was near or at it’s
underwriter made a personal            limit, the frequency and
judgment about whether the             recentness of late payments, the
borrower was a good credit risk.       age of their outstanding credit,
As we will soon see, the expression    and the number of collection
“looks good to me” is a thing of the   accounts and public records. All of
past.                                  those factors contribute to a
                                       credit grade, or credit score. The
I recall counseling clients many       credit scoring system that most
times in the early 90’s about how      lenders look to is called, no
they could improve their credit        surprise, a FICO score. Because
report by contacting the creditor,     there are three major credit-
and getting a letter from the          gathering companies in the United
creditor that a derogatory entry       States, each a borrower will have a
was an error. Unfortunately, the       credit score developed from each
ability to do “quick repairs” on       of these repositories. FICO scores
credit reports is now much more        range from 500 up to 900 and you
complicated as the qualitative         will typically have three credit
(please read “human” here) aspect      scores in a fairly narrow range.
of the interpretation of a credit
report is history. Lenders today       Because there are three scores
look for good “credit scores” to       for each borrower, lenders
determine whether a borrower will      typically rely on the score in the
be likely to make consistent and       middle. If your middle FICO score
                                       is above 680, that generally means
that you will get the best available    scores lower than they should be,
financing. If your middle FICO is       we use a system called “rapid
above 720, some lenders will            resolve” to repair and increase
reward you with even better rates       credit scores. Perhaps a quick
and fees than borrowers with            example will help. Let’s say that
lower scores. Conversely, if your       Mr. Smith reports to our office
middle FICO score is below 620,         with a 620 credit score, a recent
you will likely be considered a         late payment on a mortgage and a
greater credit risk and may not         generally perfect credit report
get the best available mortgage         otherwise. There is no question
rate.                                   that the 620 score will adversely
                                        affect him. If he can show that
One of the disadvantages of the         the late payment was reported in
FICO system is that even in the         error, we are able to force the
event that you can prove that           credit bureaus to increase his
something negative on your report       score by re-scoring with the
is an error, it has historically been   correct information. If Mr. Smith
very difficult for a borrower to        had gone directly to a lender, this
quickly improve their FICO score.       re-scoring would have been out of
Unfortunately many lenders have         the question and Mrs. Smith would
very ironclad rules about whether       have been pretty upset at Mr.
a borrower gets a certain loan          Smith.
based upon your score. I have
personally seen many situations in               Insider’s Tip
which a borrower has provided
                                         A sophisticated mortgage
clear and convincing evidence that
                                        broker is invaluable in
there was an error on their report,
only to have a lender deny a loan       working through credit
based solely on the credit score,       “issues”.
which was showing up lower than it
should be because of the error on       One advantage of Credit Scoring is
their report.                           that borrowers who used to be
                                        judged substantial credit risks -
Here we see yet another example         for example, someone with a
about the reason to have a              recent late payment on their
mortgage broker in your                 mortgage, can still have acceptable
transaction. When a credit report       scores if that’s the only “negative”
comes through our office with           on your report.
A quick word of warning on credit      Loans Where Your Income is
scores is appropriate. Credit          Documented
scoring is very new in the consumer
credit world and not terribly well     Complete income documentation is
understood. It is not always           referred to as “full doc” (for fully
obvious what will improve a            documented) within the mortgage
borrower’s credit score, and           industry. A full doc loan file
sometimes consumers can be well        includes two years of W-2s and a
intentioned, and damage their          month of current paycheck stubs
scores when attempting to improve      if you are a salaried employee or
them.                                  two years of federal income tax
                                       returns and a current profit and
                                       loss statement if you are self-
         Insider’s Tip
                                       employed. In some cases both may
As just one example, your              be required. For instance, if you
credit scores will not go up           are in sales and have expense
if you pay off many of your            reimbursements, or if you own
consumer accounts and then             income producing real estate,
                                       there are aspects of your tax
close them. The FICO
                                       returns that need to be analyzed.
score looks favorably on
                                       For an investor whose income may
available, but unused credit.          be derived from capitol gain or
                                       dividend payments three years of
Income                                 taxes may be necessary to
                                       establish a consistent income base.
The amount of income that you
make (and keep) is obviously a key     This level of income documentation
element in the determination of        (along with good credit and three
how much money you can borrow on       months worth of bank or
a home mortgage.                       brokerage statements verifying
                                       funds for down payment in the
Of the four key elements of your       case of a sale or liquid reserves in
mortgage application, the one          the case of a refinance) will entitle
allowing most flexibility is how you   a borrower to access the very best
present your income. Let’s examine     interest rates and the widest
the different kinds and levels of      selection of loan programs.
income verification required by
         Insider’s Tip                 referred to as Quick Qualifiers or
                                       QQ’s. Ironically, the term QQ this
Don’t think about changing
                                       has nothing to do with the speed
employment in the middle of            at which your mortgage can be
the loan process. Pre-                 approved. A fully documented loan
funding employment                     package can often be approved
verifications are very                 more quickly than a so-called QQ.
                                       Consequently a better, or more
common in today’s mortgage
                                       accurate name for this kind of loan
                                       is a “stated income” loan. These
                                       loans are generally available for
In the broadest sense lenders will     people who are unwilling, or
want to see no more than 40% of        (believe it or not) unable to
your income going to service all of    document enough income to qualify
your revolving and installment         for a mortgage through the means
debt, the principle and interest on    above.
your loan, as well as property tax
and insurance calculated on a
                                               Insider’s Tip
monthly basis. For an employee
this would be less than 40% of         Stated Income loans require
your pretax income and for self        higher credit scores than
employed borrowers 40% of your         full-doc loans. Credit scores
adjusted gross. The 40% debt to        are very susceptible to rapid
income ratio is not written in stone
                                       movement, so do your best
but a reasonable rule of thumb. It
                                       to monitor them from time
is important to note that
employees can qualify at their         to time.
current salary, whereas self-
employed borrowers must use a          The three fundamental
two-year average.                      requirements to obtain a stated
                                       income loan are 1) excellent FICO
Loans Where Income Verification        Scores (usually above 680), and 2)
is NOT Required                        liquid assets on deposit, which
                                       reasonably support the income
The next tier of income
verification involves no actual        stated on the loan application (and
verification of income. You may        is appropriate for the profession),
have heard these kinds of loans        and 3) the name of your self
                                       employment business, and 4) in the
case of a home purchase, a               indicate. This can be true of
substantial down payment.                employed borrowers too who may
                                         have second businesses or
Many stated income lenders also          investment properties.
now require that you provide a           Additionally, most stated income
letter from your CPA stating that        loans require a substantial down
you have been self employed for a        payment and nearly perfect credit,
least the last two years. You may        two things that you probably
or may not pay a premium for this        wouldn’t have if you didn’t earn
kind of loan (in contrast to a full      enough money to service the new
doc loan) in the form of a higher        mortgage debt you are applying
interest rate, but if so it will range   for.
from (at most) a quarter to a half
per-cent in rate.                        I’m not aware of any statistical
                                         studies that show there is a
         Insider’s Tip                   greater risk to lenders on stated
                                         income deals than there is on full
Newly self-employed people
                                         doc loans.
(less than two years) can
have a very difficult time                        Insider’s Tip
obtaining mortgage
                                          Makes sure that the stated
                                         income loan you are getting
                                         does not require you to sign
If you’re wondering why a lender         the IRS form 4506 or
would ever do a stated income            9921, which allow the
loans, as I wondered when I first        lenders to ask the IRS for
started in the loan business, a          copies of your tax return –
little perspective may help. Many        that could end up really
lenders recognize the fact that
self employed people may have
sufficient income subject to
                                         Even Less Documentation in Some
legitimate deductions or that
fluctuations in income from year to
year do not allow for consistent
                                         Beginning about five years ago,
tax returns, and that you are able
                                         lenders developed additional loan
to afford a larger mortgage than
                                         programs, requiring even less
your adjusted gross income might
documentation, that we still joke      calculated. Once again good credit
should be called “Fog a Mirror”        is a requirement and the interest
programs. In other words, if you       rate may be higher than on loans
are breathing, and your breath         with more documentation.
could cause a mirror to fog, you       Borrowers who are not currently
could get one of these loans.          employed, or who are newly self-
                                       employed usually use no Ratio
         Insider’s tip                 loans. Assets are usually verified
                                       on No Ratio loans.
 Self-employed borrowers
are almost always better               And finally, the extreme form of
served by a Mortgage                   “Stated Income” loan is a loan we
Broker. Having an                      call a “No Doc” loan. A No Doc loan
independent agent in your              application has little information
                                       on it, other than your name, social
corner as your advocate can
                                       security number, address of your
mean the very real
                                       current home and the one you are
difference between getting             buying. No Doc loans are typically
and not getting your loan.             utilized by borrowers unwilling, or
                                       unable to state their income and
There are three more forms of          employment, AND their assets.
“Fog a Mirror, or “Stated Income”
loans available today. The first of             Insider’s Tip
these is known as a “stated income,
                                        With a low Loan to Value
stated asset” loan and requires
very good credit. No                   (under 65%), No-doc loans
documentation is supplied for          can be used for investment
either income or liquid assets. The    properties, or cash out
interest rate may be higher than a     refinances, at the same
full-doc file and depends on loan to
                                       aggressive pricing levels as
value of the subject property and
                                       owner occupied loans.
the borrower’s credit scores.
The next to the last tier of loan      Let’s do a quick recap on all of this
documentation is known in the          as it relates to interest rates to
business as “No Ratio”. For this       give you some perspective, which
kind of loan you don’t need to state   after all of the above, is probably
your employment on the application     badly needed. If the most
and no “debt to income ratios” are     qualified borrower, one who could
                                       verify income and assets enough to
qualify, got a Full Doc loan at 5%,    whether the property is adequate
then a borrower with the same          collateral for the lender.
credit scores who verified nothing
and did a No Doc loan would get an     The Appraisal
interest rate of approximately 6%.
                                       An appraisal is a report prepared
This section of our guide is one of    by a licensed professional that
the most important at illustrating     places a value on the property. An
the value of a competent mortgage      appraisal utilizes a comparison of
broker (or banker with a good          the property in question with
product line). The array of            properties recently sold in the
products that is available for the     same geographic area, which the
consumer today mandates that if        appraiser deems to be of similar
you are to be fairly and honestly      age, size, location and quality. The
represented in a mortgage              appraiser then makes adjustments
transaction, then you need to work     using the subject property as the
with an agent with access to all       base from which to compare and
potential products. I know that        then adjusts the value of the
might sound alarmist, but I have       comparables upwards or
seen far too many transactions         downwards as appropriate. Once
either; fall apart at direct lenders   adjustments have been made on
due to a lack of products              the comparables, the appraiser
necessary to suit an individuals       makes a final determination of the
special needs, or have seen            value of the property.
borrowers settle for higher
interest rates and fees loans than     As you can probably tell, appraising
they were entitled to.                 is an art not a science, and
                                       (fortunately) most appraisers feel
Property                               as though the price a prudent
                                       buyer is willing to pay for the home
Real estate is the underlying          is the single most significant
collateral for literally all           determiner of value (although you
mortgages, thus establishing the       sure won’t see that statement in
value and the condition of the         the appraisal).
property is clearly of paramount
importance. There are two              There are a few variables about
documents in the mortgage              appraisals and the appraisal
process that are utilized to judge     process that you should be aware
of as well. Let’s look first at       defects can often cause a Direct
Direct Lenders and their appraisal    Lender to decline to lend on a
process. If you go directly to a      property. However, when a
lender for your loan, then the        borrower is putting down 20%,
lender controls the appraisal         there really is no risk to the lender
process, not you (or your broker).    of a default even if there is a
Having an unfriendly appraiser on     minor property defect. Second
the job can create many               appraisers who work for banks
difficulties in the loan process.     tend to be conservative by nature,
With all other things being equal,    and routinely under-appraise
appraisers who work for Direct        homes in contract for purchase by
Lenders are much more likely to       educated buyers. A low appraisal
make a big deal over a minor          in a purchase scenario can literally
property defect that a fee            “kill the deal”.
appraiser (hired by a broker) would
not even mention. When you work       Occasionally lenders will offset
with a mortgage broker, you have      risk on larger loans, or properties
an immediate fundamental              with higher values, by requiring
advantage that the appraisal is       two complete appraisals. This is a
ordered by the broker, who will       trend that is increasing, especially
usually have a good working           on higher priced properties, as
relationship with the appraiser.      lenders are becoming increasingly
Some lenders will only accept         nervous about property valuations,
appraisals from appraisers that       given the recent large increases in
are approved to submit to that        the values of residential real
lender.                               estate.

I have witnessed many
transactions (from afar) over the
years that blew up over appraisal
problems when a borrower went to
a Direct Lender for two distinctly             Insider’s Tip
different reasons. First, bank
                                      When buying a home, don’t
appraisers are under an obligation
to protect their employer by          remove your loan
pointing out the defects of the       contingency until you are
security that the bank is going to    sure the lender has signed
lend on, and the smallest of          off on the appraisal, and
that there is no review

The Title Report

The document that deals with the
ownership of real property is
known as a title report. When a
real estate transaction starts
through the opening of escrow at a
title company, the title company
generates a document known as a
preliminary title report, or pre-lim.
The pre-lim is prepared by a title
company in order to research the
chain of title (ownership) on a
given property as well as
discovering any liens filed against
the property or the seller, which
might impact the lenders ability to
make the loan.

Often, upon receipt of a prelim,
many issues which might, “cloud
title” can be dealt with and
resolved but there always will be
transactions which will be ineligible
for traditional mortgage financing
due to legal claims recorded
against the subject property. All
mortgage pre-approvals will
invariably be subject to a
satisfactory preliminary title
          Chapter Three:
The Four Fundamental Steps Involved
       in Closing a Mortgage

              The Application

              The Submission

 Mortgage Underwriting, Loan Approval, and

        Loan Documents and Closing
                 Chapter Three:
     The Four Fundamental Steps Involved in
               Closing a Mortgage

As we will see over and over again      what happens when you decide to
throughout this manual, the             apply for a mortgage.
mortgage industry can often be its
own worst enemy. Have you heard         The Application
those radio commercials that
glorify the uncertainties of the        Once you’ve made the decision to
mortgage process? They’ll either        apply for a purchase or refinance
make fun of the fact that your          mortgage from your lender or
loan has been in the “mortgage          broker, the first step is to
committee” for weeks without an         complete the mortgage application.
answer, or that your loan officer is    A skilled loan officer will usually
“on the golf course” or “getting a      assist you in completing the
massage”, or that “the corporate        application, or review it with you in
office in Missoula is going to get      detail after you have filled it out.
back to you any day now.”               It is usually at this time that the
                                        loan officer will determine what
         Insider’s Tip                  kind of documentation is necessary
                                        to support your application. Once
If you are interested in
                                        the application is completed, it will
understanding exactly what
                                        go from the loan officer’s desk, to
a competent loan agent does             the loan processor.
during a mortgage
transaction, please see                 The loan processors job, whether
Appendix A.                             at a lender or broker, is pretty
                                        much the same. The processor
A basic understanding of what           formally sets up the loan file,
goes on behind the scenes will          orders the credit report and
greatly reduce the uncertainty          appraisal, sends out verifications
that many borrowers feel as they        of employment and or deposits as
go through the mortgage process,        is necessary, and returns the file
and in that spirit, let’s review just   to the loan agent for review. It
can take anywhere from 24 hours        not to grant the loan request
to two weeks to ready a file for       applied for. Underwriting is a
submission to an underwriter           complex process and involves the
depending on the complexity of the     analysis of the four aspects of the
borrower, and the associated time      loan application as we have
frames necessary to gather all of      previously discussed.
the documentation necessary.
                                       Different lenders can have
The Submission                         dramatically different
                                       “underwriting guidelines”
Once the loan file is complete, the    determined by management in
loan agent will typically direct the   keeping with their business
processor to “submit” the loan to a    philosophy. A knowledgeable
lender, if he is a broker, or to his   mortgage broker will know the
underwriting department if he is a     lender whose guidelines best
direct lender (or banker). The         match that of the application he is
word submit from here on will be       submitting. Generally speaking,
generic and apply to both              the tougher the underwriting
scenarios, that of a broker sending    guidelines, the better the
the loan to a lender, and the case     mortgage product you will obtain.
where a processor at a lender
walks the file over to the             Consumers often find the
underwriting department.               documentation requirements of
                                       lenders to be unreasonable and or
It is necessary to have determined     intrusive. The mortgage world
the parameters of the transaction      today is greatly driven by lenders
by the time the file reaches the       ability to re-sell mortgages to
underwriter.                           investors in the secondary
                                       mortgage market. There is a
Mortgage Underwriting, Loan            uniform set of underwriting
                                       guidelines, which if adhered to in
Approval, and Conditions
                                       the underwriting and approval
                                       process, will ensure that a lender
Once the file is “submitted” the
                                       is able to sell a loan if necessary.
file makes its way to the
                                       So the fact that the lender wants
underwriter. Underwriting is
                                       to understand why you might have
defined as the “Assessment of
                                       moved money from one place to
Risk”, and it is ultimately the
                                       another, or see that your parents
underwriter’s decision whether or
really had the money to give you      (prior to docs) or PTF, which
for the down payment, is all about    means they must be satisfied prior
their guidelines, and nothing to do   to the actual funding of the loan
with you personally. It is the job    (prior to funding). PTD conditions
of a good mortgage agent to make      are usually those that the
sure that they gather as much of      underwriter feels he/she must see
the information that they think       to satisfy themselves that all of
will be required of you up front,     the information submitted in the
but if they come back to you later    loan file is in fact accurate or
asking for just one more piece of     where additional information or
paper, do your best to help them      clarification is required. PTF
and not complain too much.            conditions are generally more of a
                                      formality necessary to close the
A loan that is approved and meets     loan.
uniform underwriting guidelines is
readily re-saleable in the                    Insider’s Tip
secondary mortgage market. Loans
                                      Even though your purchase
that don’t meet stringent
guidelines are often sent to          money loan may be
lenders with more relaxed             approved, it’s best not to
underwriting criteria. These types    remove your loan
of lenders are known as “portfolio    contingency until your
lenders”, because, their loan
                                      conditions are satisfied.
remain in their portfolio, and do
not have to meet the more
                                      Loan approval will typically take
stringent guidelines of loans that
                                      one to five days from the formal
may be sold.
                                      submission of the file depending on
                                      the lender, their workload, and the
Once the underwriter has
                                      complexity of the loan.
approved the loan, she will issue a
                                      Additionally, the size and or
“conditional loan approval”. Loan
                                      complexity of a loan application
approvals are frequently
                                      may require the original
accompanied by “conditions” that
                                      underwriter to seek the approval
need to be addressed and
                                      of a more senior underwriter
satisfied. Conditions are typically
                                      (typically called a second
PTD, which means that they must
                                      signature). In some cases a “loan
be satisfied prior to the
                                      committee” will review the loan,
generation of loan documents,
                                      which is typical in the case of
portfolio lenders. Loan                Perhaps the most significant
committees are typically made up       benefit of DU/LP is that risk
of members of senior management        assessment is a key component of
whose goal is to protect the assets    the decision making process. For
of the institution.                    example, most underwriters would
                                       normally deny a loan where a
In the last few years many             borrower had 65% debt-to-income
lenders, particularly those who sell   ratios. However, if that loan had a
to Fannie Mae or Freddie Mac, the      loan-to-value ratio of 20%, then
largest buyers of mortgages in the     that loan really isn’t risky for the
secondary market, have developed       lender because no borrower in his
and implemented automated              right mind is going to allow a his
underwriting systems. These are        loan to go into default and risk
computer programs capable of           losing all of that equity. DU/LP
pulling credit and making instant      systems will most often approve
decisions about loan applications      this type of loan scenario and
once basic information has been        others that are outside the box of
input. The most common names for       normal underwriting. Because
these systems are Desktop              DU/LP approvals seem based in
Underwriting (DU) and Loan             common sense, their approvals are
Prospector (LP). A capable Broker      often cleaner and may involve less
can often access a lenders             paperwork.
automated underwriting system
and approve a loan before it is        Once the approval is received, you
actually submitted. This can           and your loan agent need to work
reduce paperwork and even              together in order to obtain the
eliminate the need for many            additional documentation required
conditions including an appraisal in   and move the process to the next
certain cases. More and more           step.
lenders are using these systems
and while it would seem to
eliminate the need for the human
touch, it is in fact more important
than ever to have a competent
professional evaluate your
situation to make sure the correct
data is input.
        Insider’s Tip                 docs to the lender. The escrow
                                      officer and the “funder” at the
A competent mortgage
                                      lender then work together and
professional will have direct         coordinate the funding of the loan,
access to automated                   which typically involves wiring the
underwriting systems, and             money from the lender to the title
should be able to issue a             company and paying of any existing
                                      loans on the property, and in the
conditional approval within
                                      case of a home purchase, giving
hours of your application.
                                      the proceeds of the sale to the
                                      home seller. A purchase loan can
Loan Documents and Closing            fund the day after the signing and
                                      record or “close” the following day.
Once all PTD conditions are           In the case of a refinance
satisfied, the documents can be       application, the loan will fund four
drawn up to facilitate the closing    business days later because of the
of the loan. The lender sends         legally mandated three-day
these papers, known as “loan docs”,   recession period during which time
to the escrow officer at the title    you may cancel your loan if you
company. The escrow officers’ job     have second thoughts.
is to act at the instruction of the
lender and do what is necessary to             Insider’s Tip
close the loan.
                                      Don’t allow your refinance
                                      transaction to fund on a
        Insider’s Tip
                                      Thursday or Friday unless
Make sure you have
                                      your escrow officer can
obtained the proper form
                                      assure you that you will not
and amount of homeowners
                                      be paying interest to two
insurance at least a few
                                      lenders (old and new) over
days, if not a week, prior
                                      the weekend!
to the planned closing of
your loan.                            Please refer to section 8 for a
                                      detailed breakdown of closing
The escrow officer typically meets    costs and expenses.
with the borrowers and has the
borrower’s sign all of the papers
necessary, and returns the loan
         Chapter Four:
    Types of Mortgage Loans

        Fixed Rate Mortgages

   Adjustable Rate Mortgages (loans)

Second Mortgages and Home Equity Lines

           Sub Prime Loans

          Balloon Mortgages

      No Down Payment Financing

        Swing and Bridge Loans

              Land Loans

          Construction Loans

           Bi-Weekly Loans
     Chapter Four: Types of Mortgage Loans

Fixed Rate Mortgages                   interest rate than the regular
                                       Jumbo loan.
Fixed rate mortgages are defined
by having a fixed interest rate for             Insider’s Tip
the life of the loan. Some loans do
                                             If your loan amount is
have fixed rate periods, but unless
                                       just above the conforming
foxed for the life of the loan, they
are not truly considered “fixed        limit, or the jumbo or super
rate loans”. Fixed rate loans are      jumbo limit, you may get a
popular as they offer the stability    better deal if you add a
and security of knowing that the       small second mortgage
mortgage payment will not change
                                       behind your first to keep
during the life of the mortgage.
                                       the first loan in the best
Fixed rate loans fall into two         “pricing category”. This
general categories, conforming and     strategy works for most
jumbo. Conforming loans generally      purchases and refinances.
have lower loan amounts, with the
current limit on single-family
homes being $332,700 (effective        Fixed Rate Loan Terms - 15
January 2004). Conforming loans
                                       Year vs. 30 Year
generally have interest rates that
are up to one-half percent less
                                       There are usually just 15 year and
than jumbo loans.
                                       30 year fixed rate mortgages
                                       available in the marketplace, and
Jumbo loans are those fixed rate
                                       the 30-year loan is by far the most
mortgages between $332,700 and
                                       popular due to its affordability.
$1,000,000. Loans over $650,000
                                       There are occasionally 10 and 20
generally have a higher interest
                                       year fixed rate loans available, but
rate than those between $332,700
                                       they just have never really caught
and $650,000. An additional sub-
                                       on. The affordability of the 30-
category of Jumbo loans is those
                                       year loan is showcased in the
loans above $1,000,000, which are
                                       following example.
called super-jumbo loans. They
usually have a slightly higher
      For every $100,000                       Insider’s Tip
      borrowed at 6.0%, the
                                      A 15-year mortgage usually
      respective payments on each
      loan are as follow:             has a slightly lower interest
                                      rate than the 30-year note,
            15 Year = $834.86         but not enough in my opinion
            30 Year = $599.55         to justify being locked into
                                      that higher payment.

                                      The relatively new class of
                                      “hybrid” loans which have an initial
      The total payments over the
                                      fixed rate period of 3, 5, 7 or 10
      life of the loan are very
                                      years and then convert to an
                                      adjustable rate note are not
                                      considered by the mortgage
            15 Year = $151,894
                                      industry fixed rate loans and will
            30 Year = $215,838
                                      be covered in the section on
                                      adjustable rate mortgages.
The choice of a 15 Year mortgage
is usually made by people who
intend to pay off their home, can
afford the higher payments, and       Adjustable Rate Mortgages
will no longer need the interest
deduction at the time their home      Adjustable Rate Mortgages
is paid off. If all three of those    (hereinafter called ARM’s) are
factors are true for you, but you     mortgage instruments that have a
don’t want to be permanently          variable interest rate. When the
locked into the higher payments of    interest rate on the loan changes,
the 15 Year Mortgage, you can pay     and we’ll discuss the many ways
off a 30 Year mortgage in 15 years    that these loans work in a minute,
by making just 1-2 more mortgage      your payment obligation changes
payments during each year. To         correspondingly.
determine how best to achieve 15-
year payoff in a 30-year note, just   The interest rate on an ARM is
ask your mortgage professional to     usually calculated monthly
help you with an amortization         according to a simple formula:
                                                  Interest Rate = Index
                                            + Margin
There are many different indexes      fixed period, typically 15 or 30
for ARM’s, and they are usually       years. Potential-Neg loans can
some function of money such as        have payments that are less than
the One-Year Treasury Bill            are necessary to make the loan
average, the 12 Month Treasury        normally amortize, so the principal
Average or the Cost of Funds          balance can go up, not down. These
Index. The Margin on ARM’s is a       loans have starting rates that are
fixed number, designed to give the    as mush as four or five percent
lender a constant spread over the     less than the fixed rate loan loans
underlying index during the life of   available at that time. There are
the loan.                             limits to how much negative
                                      amortization can occur, because at
While ARM’s carry with them the       some point the loan needs to begin
uncertainty about the future of       to normally amortize, or the lender
the interest rate and mortgage        would never get paid back.
payment, there are many
advantages to ARM’s that we’ll see            Insider’s Tip
as we go through this section.
                                      Some Neg Am loans allow
Types of Adjustable Rate              the maximum amount of the
Mortgages                             loan to increase to 110%,
                                      and some to 125%, of the
There are three basic classes of      original loan amount – make
ARM’s, those with the potential       sure you know the terms of
for negative amortization             the loan you’re getting.
(potential-neg ARM’s), those
without any possibility of negative   Potential-Neg loans have many
amortization (no-neg ARM'S), and      features that make them
ARM’s with a fixed rate for an        attractive for consideration as
initial term before the loan turns    your mortgage instrument. They
adjustable. Let’s do the Potential-   offer very low initial payments,
Neg loan first.                       making homes much more
                                      affordable than it would be with a
Potential-Neg Loans                   fixed rate loan of the same
                                      amount. They provide the
Normal amortization is defined as     borrower with control over their
equal, periodic payments calculated   monthly payment, with a monthly
to pay off the loan at the end of a   statement that lets you choose the
monthly payment that best suits                    that would fully
your financial situation. You can                  amortize the loan in a
pay the minimum amount to free up                  shorter period of
funds for other uses, or make                      time.
larger payments for faster equity
build-up. It’s an ideal vehicle for    The minimum payment increases
self-employed people whose income      once a year, with a payment cap of
fluctuates or will increase during     7.5% per year. In an environment
the coming years.                      with stable interest rates, the
                                       minimum payment increases to the
Every month the mortgage               point where it is a normally
statement on a potential-neg loan      amortizing payment between years
provides four payment choices.         4 and 6.
You can:
                                       In the event that you choose to let
      a.    Pay the minimum            the loan go negative (by making the
            amount due, which will     minimum payments during the early
            likely result in           years) your principal balance will
            negative amortization      increase. I remember well a
            (especially in the early   comment a Realtor friend of mine
            years of the loan),        made recently about potential-neg
                                       loans being like quicksand. He was
      b.    Pay the loan on an         of course referring to the fact
            interest only basis,       that if you let your loan go
            the principal doesn’t      negative it’s like swimming in
            go up or down, and it’s    quicksand – which is impossible –
            a lower payment than       because you’ll never pay your loan
            the full principal and     off. However, this Realtor lived in
            interest amount,           Oklahoma before moving to the
                                       Bay Area and the value of land in
      c.    Pay the full principal     Oklahoma has not appreciated very
            and interest amount        much in the last century. It’s
            to fully amortize the      understandable that he would feel
            loan over the              this way. Over the last 15 years in
            remaining term,            the Bay Area, the appreciation of
                                       real estate has been much greater
      d.    Pay principal and          than the equity erosion caused by
            interest in an amount      neg-am mortgages!
Potential-neg ARM’s generally are        c.     Allows you to buy a home
tied to stable indexes, have low                for less than the normal
life caps, and are generally easier             payment and use the
to qualify for, all things being                excess money for debt
equal, than fixed rate loans.                   reduction, college
                                                funding, vacations, etc.
         Insider’s Tip
                                         d.     Allow first time buyers
The choice of index is very
                                                to enter the housing
important when choosing a                       market, and begin using
potential-neg ARM. Make                         the principal of leverage.
sure you don’t choose a
volatile index in a potential-           e.     Allow you to buy a home
                                                during periods of
neg loan.
                                                high(er) interest rates.

The Benefits of Potential             A word of comment and caution is
Neg Loans - Outlined                  appropriate at the end of this
                                      section. Many so called mortgage
I am a strong advocate of potential   industry experts and writers
neg loans if understood and used      frequently make negative
properly. Here are just some of       comments about Potential-Neg
the advantages of these loans:        loans. I believe that the negative
                                      sentiment originates from the
   a.     Potential neg loans allow   early experience some borrowers
          you to buy substantially    had when these loans first became
          more home than you          available - while the learning curve
          could otherwise afford –    was still steep. Many mortgage
          with your potential         professionals today still do not
          increases in income         know how to properly explain
          coming at the times that    Potential-neg loans, and you can
          the payments go up.         imagine how much misinformation
                                      must have been passed around
   b.     The mortgage can be         when these loans first became
          used as part of your        available.
          financial planning due to
          the payment options.
I’m certain that many of the first    No-Neg Adjustable Rate
borrowers using these loans just      Mortgages
didn’t know that making that low
payment would cause their             The second major class of ARM’s is
principal to rise. Then, when they    called No-Neg Adjustables (No-
went to sell their homes (or          Neg’s). No-Neg’s are ARM’s
refinance them) they found out        without the potential for negative
their principal was higher than       amortization and offer you the
when they started. I do find it       ability to make payments between
kind of hard to swallow the notion    one and two percent lower than
that you aren’t aware your            current interest rates for six
principal is rising when it’s right   months to a year. The interest
there on your monthly statement,      rate on No-Neg ARM’s adjusts on a
but I’m sure there were lots of       periodic schedule, usually every
borrowers who complained like hell    three, or six months, or once a
that they had been given a “bad       year. They are generally tied to
loan”, because their principal        more volatile indexes than
balance had increased. They           Potential-Neg loans, and should
conveniently forgot (or were just     only be considered as short-term
simply ignorant) that they got this   loans because they historically
great benefit of paying less than     quickly adjust towards the fully
they owed for a long time.            indexed rate under the note, and
                                      when they do the interest rate
Unfortunately, many so-called         may be significantly higher than
experts who write about the           what would have been available on
mortgage and real estate world,       a fixed rate basis at the time they
have also jumped on the bandwagon     got the loan
that you should never take a
mortgage where your principal         Historically, No-Neg ARM’s have
might increase. I believe that        been in favor during the bottom of
these experts do more harm than       an interest rate cycle (when rates
good from a combination of            are at a low) as lenders try to
ignorance and stupidity, because as   make them attractive to borrowers
we have seen, Potential-neg loans     by offering them with no points
have wonderful benefits if            and no prepayment penalty.
understood and used wisely.
Hybrid ARM’s, or Short                  allows you to pay only the interest
Term Fixed Rate Loans                   owing on your loan, and not pay the
                                        lender any principal, and offers the
The third type of ARM is one with       security of a fixed rate loan.
an initial fixed rate period. These
periods are usually 3, 5, and 7 or      Let’s back up a moment and see
10 years, after which time the loan     why this is important. In a typical
turns into a no-neg adjustable.         amortized mortgage, some of the
These loans are amortized over 30       payment goes to reduce the
years, not just the initial fixed       outstanding principal on the loan
rate period.                            (otherwise you’d never pay it off)
                                        and some goes to interest. In the
The incentive for a borrower to         early years of a fixed rate loan
take the interest rate risk after       most of that payment is interest,
the initial fixed rate period is that   but not all. Let’s look at an
the loan generally carries a lower      example. On a $500,000 fixed
interest rate than fixed rate loans.    rate loan at 7%, the payment
These loans are perfect for             necessary to make the loan
borrowers when they know upfront        amortize over 30 years is $3,326.
how long they will be in the home,      However, a simple calculation
or know that they will be               shows that only $2,916 of that is
refinancing in the near future.         interest, and that $409 per month
                                        is going towards principal.

         Insiders Tip:                  Making that payment of $2,916
     Be very careful that it            instead of $3,326 will feel like you
you are offered a no-points,            have an interest rate of 5.74%.
short-term, fixed rate loan,
                                        Perhaps the best of these interest
that it does not have a pre-
                                        only loans is a 5-year, interest
payment penalty.
                                        only, combining a fixed rate loan
                                        period, amortization over 30 years,
Interest Only Loans                     and a low payment. If we follow
                                        the theory that the reason that
One of the most important new           we’re doing a 5 year fixed rate
types of mortgages in years has         loan is that we only plan to be in
recently become available to            either the house or the mortgage
borrowers. This type of loan            for about that length of time -
then the natural progression of        Interest Rate Cycles and
that thinking is that there’s          Their Influence on Your
certainly no reason to be giving the
                                       Loan Choice
lender any money in the form of a
principal reduction. Paying on a
                                       In the most general view, fixed
fixed rate, interest only basis is
                                       rate loans are most popular when
the safest, and least expensive
                                       interest rates are low, and ARM’s
means of home ownership, while
                                       when interest rates are high, for
losing none of the tax deductions
                                       obvious reasons. However, there
of ownership.
                                       are many exceptions to the rule.
                                       An ARM may be a good choice for
Types of ARM Indexes                   you just because you want the low
                                       payment option, or if you believe
There are generally two classes of     interest rates will decline further
ARM indexes, volatile indexes that     giving you a chance to refinance
respond quickly to underlying          the loan at a lower fixed rate, at a
financial changes that drive the       later time.
index, and stable indexes which
respond more slowly to changes.        Additionally, when choosing an
Examples of volatile indexes are       ARM, stable indexes are best if
the CD index, the Treasury             you believe interest rates are
Average, and LIBOR. Examples of        going up in the future, and volatile
more stable indexes are the Cost       indexes best if you believe
of Funds Index (COFI) and the 12       interest rates are going down.
Month Treasury Average (12-
MAT). Clearly, each of the
                                       Niches in the Mortgage
indexes carries with them
advantages and disadvantages.
Please see the glossary for
detailed definitions of each of the    FHA, VA, and First Time
indexes.                               Buyer Loans

Generally speaking, more stable        In Northern California’s expensive
indexes are usually tied to the        real estate market, we see little
Potential-Neg ARMS, and the more       utilization of these types of
volatile indexes are tied to the No-   programs since they have loan
Neg ARMS.                              amount limits insufficient to
purchase much of the real estate       typically about one percent higher
sold in this area.                     than a conventional 30 year fixed
                                       rate loan and the maximum loan
However, for certain buyers in         amount at this time is $208,800
more affordable areas, these loans     (CHECK). Loan limits are less in
can allow a purchase when more         certain counties where housing
conventional programs have failed.     prices are lower. Many lenders do
This is particularly true of low or    not offer FHA loans but a
no down payment transactions or,       competent mortgage broker will
in the case of FHA loans, when a       know where to place your loan
borrower might not meet                should you be qualified to
conventional underwriting              participate in a FHA program. It is
guidelines due to credit or income     worth noting that, in this market,
issues.                                we often see condo buyers as FHA
                                       applicants. In order to complete a
FHA Loans                              purchase using this type of
                                       financing the condo project must
The Federal Housing Authority was      also be FHA approved.
created in the late 1930s to assist
low and moderate-income families       VA Loans
become homeowners by lowering
some of the costs of their             The Veterans Administration (VA)
mortgage loans. While not a direct     offers this program to members of
source of mortgage funds itself,       the armed forces currently serving
the FHA provides the protection        or who have been honorably
of mortgage insurance to direct        discharged. In order to qualify you
lenders encouraging them to make       must contact the VA and obtain a
loans that would otherwise not         Certificate of Eligibility. The VA
meet standard investor criteria.       will also provide detailed
This insurance would payoff the        information about the process and
loan in the case of a borrower         a list of eligible lenders. The
default. FHA loan programs include     primary advantage to this program
down payments of three percent         is the ability to obtain 100%
(which can be all gift), the ability   financing in a single loan at a
to finance certain closing costs,      competitive interest rate.
and competitive rates for              Mortgage insurance is required and
borrowers with less than perfect       the maximum loan amount is
credit. The interest rate will be      currently $203,000 (check).
         Insider’s Tip                 qualify the borrower must fit
                                       income criteria, which varies
If you are a veteran, or
                                       depending on the location. If you
thinking of an FHA loan, it            make more than the maximum
would be wise to check with            qualifying amount you will be
a competent broker as there            ineligible.
are now many mortgage
                                       It is worth asking your mortgage
conduits at 100% financing
                                       professional if there are local
that are superior in loan
                                       municipal or county government
limits and terms to the VA             opportunities in your community if
and FHA.                               you think you might be a candidate
                                       for this type of program.
First Time Home-Buyer
Loans                                          Insider’s Tip
                                       WARNING: Many first-time
This is a subject which gets lots of
                                       home buyer loans have
press, and ironically, which less is
                                       substantial “deed
actually known about than almost
any other kind of loan program.        restrictions” attached to
First, there is no standard “first     the home that dictate the
time buyer loan” available industry    manner in which you can sell
wide. The majority of these            the home.
programs are available through
local municipalities, which have
allowed developers to construct
                                       Second Mortgages and Home
housing in exchange for making         Equity Lines
some of the units “low cost
housing” eligible for “first time      There are two basic types of
buyers”. Additionally, these           second mortgages, fixed and
programs enable lower income           adjustable. Second mortgages
buyers to enter the housing            originally developed as a technique
market with low or no down             to withdraw some of the equity out
payment and a discounted interest      of your home, and are still widely
rate. These programs are               used for this purpose. Take the
sometimes available through the        case of a couple that have a 7%
lending entities established by the    fixed rate loan and they are 10
cities themselves. In order to         years into the 30-year mortgage.
They need some money out of their       you’ll get a checkbook in the mail
home for a very short time (for a       from your lender and will get a
pool or tuition, or something), so it   statement every month on how
makes no sense to upset their           much you own on the line. An
existing loan and disrupt its now       advantage of a HELOC is that you
well-established pay-down               can write checks against the
schedule. Instead, they can get         available equity, and in turn, write
the money they need by borrowing        checks back to the lender to
against the equity in the home with     reduce the amount of money
a second mortgage.                      outstanding on the line at any time.
                                        The principal disadvantage is that
Fixed rate second mortgages             they are always adjustable rate
generally carry interest rates          mortgages with interest rate risk.
about a percent or two above
prevailing interest rates. When                  Insider’s Tip
you take out a fixed rate second,
                                        Even if you don’t need it,
you receive all of the funds you
borrowed at closing. You then pay       think about getting a HELOC
back the loan on a routine and          (that you don’t use) at your
regular schedule according to the       time of your home purchase
term of the second mortgage.            to go behind your first
                                        mortgage. That way it’s in
Home equity lines (sometimes
                                        place if you ever need it.
called HELOCS, for Home Equity
Line Of Credit) are also great          It’s my experience that
sources of money for people who         people can always get
need to borrow against the equity       HELOC’s when they don’t
in their home – but have                need them, but frequently
advantages and disadvantages
                                        can’t when they do.
compared to fixed rate second
mortgages. The home equity line
                                        In today’s modern, make sense,
works kind of like a checkbook
                                        mortgage world; HELOC’s (and
against your savings or checking
                                        fixed second mortgages to a
account, but the source of the
                                        somewhat lesser degree) are
money that comes out of the
                                        powerful instruments to assist
checkbook is the equity in your
                                        buyers in the home buying process
home. When your home equity line
                                        as well. HELOC’s today are
application is approved and closed,
                                        commonly used in combination with
another mortgage in purchase           combine HELOC’s with first
transactions, having the benefit of    mortgages allowing borrowers to
allowing the buyer to put less         obtain much more leverage, make
money down to buy a house, and         smaller down payments, and avoid
here’s why. Let’s take the case of a   the use of mortgage insurance.
buyer looking at purchasing a          HELOC’s today are available all the
$500,000 home. Bread and butter        way to 100% of the value of your
first mortgage lenders will usually    home for either purchase or
not allow a borrower to have more      refinance, and as you might
than an 80% loan against that          imagine, have higher interest rates
house, which means a pretty hefty      the higher the loan-to-value.
down payment of $100,000 is
required. However, the lender will             Insider’s Tip
allow the combined-loan-to-value
                                       Inquire as to whether the
to be 90%.
                                       HELOC you are getting has
Before HELOC’s were generally          an interest only option for
available as purchase money            the payments.
instruments (they showed up
around 1996), Realtors with clients    HELOC’s have such a great place in
with only 10% down would often         the creative or sophisticated
ask the seller to carry that other     mortgage structure that our
10% allowing the buyer to get the      office today probably closes five
home for only a $50,000 down           to ten high LTV transactions a
payment. This type of transaction      month that involve HELOC’s, as
has the common name of 80-10-10.       opposed to one or two a year
Well, as you might imagine, not        before purchase loan HELOC’s
many sellers want to carry that        became available.
$50,000, and so not many buyers
got to buy with the smaller down
                                       Sub Prime Loans
payment. I think I completed just
3 or 4, 80-10-10 transactions in
                                       The mortgage world today is also
the early 90’s, as there just
                                       kind to borrowers who have less
weren’t that many people who
                                       than perfect credit. Known as sub-
would carry the second note.
                                       prime loans, these mortgages
                                       generally have higher interest
Sophisticated mortgage
                                       rates and fees than are available
professionals today routinely
to borrowers with close to perfect    rate second mortgages) and so
credit.                               we’ll spend very little time on
                                      them. Balloons mortgages are
The sub-prime loan industry has       mortgages with due dates where
many lenders offering many loan       the balance (or balloon) of the
products to the consumer. The         note is due at some specific time,
most common of these is the 2         usually after a five or seven year
year fixed rate mortgage, which       fixed rate period. Balloon
usually has a two year prepayment     mortgages never made much sense
penalty associated with it. I         to me, after all if a lender was
always thought that it was ironic     willing to make the loan, why would
that a lender, who was in theory,     they want it back at a set time is
reluctant to give someone a loan      kind of odd. I guess that’s why
due to his or her bad credit, would   they’re not very popular any more.
then make the borrower stay in
the loan for two years, but that’s    No Down Payment Financing
another story. The reason for
the two year fixed, two year          The typical obstacle to home
prepay structure is that two years    ownership for most people in this
of making consistent payments on a    country is how to save up the
mortgage will generally improve       money necessary for a down
your credit to the point where you    payment. Saving is an obstacle for
can then qualify for a non sub-       most people today who don’t own
prime mortgage.                       homes as they; 1) have to save
                                      after-tax dollars and 2) don’t have
        Insider’s Tip                 the single best tax break available
                                      to tax payers today, the home
The prepayment penalties
                                      interest mortgage deduction.
associated with sub prime
mortgages may be onerous.             The mortgage industry has been
If you are taking one, make           through a lot of changes in the
sure you understand it.               past 15 years, and perhaps the
                                      area with the biggest change is the
Balloon Mortgages                     willingness of lenders to allow
                                      buyers to purchase homes with
Once very popular, balloon            smaller and smaller down payments.
mortgages are pretty much a thing     The changes have been dramatic.
of the past (except for some fixed    In 1989 when I started in the
industry, 90% financing was rarely    is simple. If you want to purchase
available past $400,000. Today,       a new home, but have not yet sold
you can buy a home with 5% down       your old home, yet need the equity
all the way to $1,000,000 or more.    from your old home to provide the
                                      down payment for the new home
Well, the end of the spectrum has     purchase, then you need a “bridge”
been reached. Today, many lenders     loan. The term bridge is applied to
allow buyers to put no money down     that period of time where you
on their home purchase, and get       need to “bridge” the gap between
100% of the purchase price            buying a new home and selling the
financed all the way up to            old.
$750,000. Some of these lenders
even allow the seller to pay all of   Traditional bridge loans were
the borrowers closing costs,          offered by the bank or institution
making transactions virtually free    that was offering the purchase
to the buyer.                         money financing, and were usually
                                      expensive money, given its short-
No down payment financing is          term nature.
almost always “piggy-back”
financing, the combination of a       We have a new class of bridge
first and second mortgage, and is     loans in the industry today, high
an extremely powerful way for         loan-to-value equity lines available
people who never thought they         chiefly through mortgage brokers
could afford a home to enter the      and mortgage bankers. If you
world of home ownership.              think that you may be in need of a
                                      bridge loan, talk to your competent
        Insider’s Tip                 mortgage professional at the first
                                      opportunity, as timing and strategy
As in the case of sub-prime
                                      are crucial in these complex
loans, it pays to be cautious         transactions.
about the prepayment
penalties associated with             Land Loans
some 100% financing.
                                      There are two fundamental
Swing and Bridge Loans                categories of land loans; loans
                                      made on unimproved land (raw land)
The concept of a swing, or as they    where there is no infrastructure
are sometimes called a bridge loan,   (roads, septic, electricity) and
loans made on improved parcels          know these loans are typically
with infrastructure intact.             retired after a short term.

Raw land loans are usually limited               Insider’s Tip
to 50% of the value of the parcel
                                        Going directly to a bank for
being sold or financed and are at
higher rates, usually with points,      your land loan would
and are made by local lenders           significantly limit your
familiar with the market for land       options (no surprise). Use a
in their area. On occasion, land        qualified broker for your
loans can be made at higher loan to
                                        land acquisition for the best
values dependant on the
                                        choice of loans.
parameters of the transaction and
the strength of the borrower. Raw
land loans are available for lots, or   The only kind of land loan that
parcels as large as 100 acres or        would fall under the same general
more. Raw land loans are usually        guidelines (loan to value, etc) as a
short-term loans, with terms from       typical real estate loan is a
1 to 5 years and usually paid on an     construction loan (see our section
interest only basis.                    regarding construction loans)
                                        where the actual loan is made on
Improved land loans are made on         the basis of a set of plans and
parcels of land that are “ready to      permits accompanying a contract
build upon”, with infrastructure        specifying a dollar amount to
such (roads, water, electricity, and    complete the structure. A “future
sewer lines) brought near or to the     value” appraisal is used to confirm
lot line in preparation for             the value of the soon to be
connection to the home to be built.     completed house.
Loan to value parameters as high
as 70 to 75% of the value of the        Construction Loans
land are generally available from
local lenders. These are also           Construction loans, which are
usually short-term loans as they        usually refinance mortgages, are
are refinanced or “taken out” when      available for borrowers who are
construction financing is acquired.     wishing to either a) build a home
Again the rate will be higher and       upon raw land that they own, and
points will be charged, as lenders      b) improve the property they
                                        already own.
Construction loans differ from          Advocates of BW’s claim that it’s
regular loans as follows. First,        the making of the bi-weekly
construction loans are based upon       payments that somehow causes
the future value of a property, i.e.,   your loan to amortize more quickly.
what it will be worth when the          It’s just not true. Here’s why.
construction is complete and the        There are 26 bi-weekly payments
amount of the loan requested is         in a 52-week year, and that’s the
based upon that future value.           equivalent of 13 monthly payments.
Second, construction loans require      Aha! It’s the function of an extra
borrowers to be intimately              payment a year that causes the
involved with the construction          loan to amortize more quickly, not
lender during the course of             the manner in which the payment is
construction as the lender makes        made.
periodic inspections of the
construction as they pay the
construction bills. Finally, most               Insider’s Tip
construction loans are short-term       Want to have your loan pay
loans, requiring yet another            off more quickly? Just
mortgage (called a take out loan)       make an extra payment a
to replace the construction loan
                                        year, or increase your
when the project is complete.
                                        payment on a monthly basis
This topic is far more complex          by 1/12th of the amount.
than can be succinctly dealt with in
this manual. Please do not hesitate
to call us with questions, or to set
up a consultation.

Bi-Weekly Loans

Bi-Weekly (BW’s) loans are a sham.
Some lenders shamelessly promote
them as a method to pay your
house off sooner, and while that
may occur, it’s not for the reason
that you think.
         Chapter Five:
  Important Mortgage Subtleties

     Tax Advantages of Home Ownership

   Mortgage Insurance and Piggy back Loans

             Prepayment Penalties

             Interest Rate Locks

   What are Points and Should I Pay Them?

          No Point vs. No Cost Loans

        Annual Percentage Rate (APR’s)

Why Last Minute Stuff Happens (before closing)

      Interest Rate Quotes in the Media
 Chapter 5: Important Mortgage Subtleties

                                       only basis) including taxes would be
Tax Advantages of Home                 approximately $2,400 at a 6%
Ownership                              interest rate. They would qualify
                                       for this financing as long as their
Without a doubt, the single            credit was good.
biggest tax break afforded to us
by the Federal Tax Code in this        Every penny of that amount of
country is the 100% deductibility      money is deductible off the top of
of home mortgage interest (and         their income. Their taxable income
property taxes). The importance        thus drops by $28,800 per year,
of this deduction cannot be            making their taxable income
overstated.                            $46,200. At the same tax rate,
                                       their tax bill will be $11,550, thus
Let’s look at an example of            their actual cash savings will be
someone renting a home for             $7,200 per year ($18,750 less
$2,000 per month who has never         $11,550), or $600 per month.
thought they could afford to buy       Applying that tax savings to their
their own home. This analysis is       new mortgage payment of $2,400
simplified with assumptions with       means their after- tax-savings
regard to tax rates, yet they are      home payment will be $1,800, or
conservative. This fictitious          $200 less per month than when
couple’s salaried income is $75,000    they were renting.
per year. With no deductions
other than the standard, it’s a safe   I like to call that $2,400 figure of
assumption that they are paying at     home ownership, the $1,800 rental
least 25% of their income              equivalent. No matter how you
($18,750 per year) in various state    slice it, if you can own, for the
and federal taxes.                     same or less than you can rent with
                                       the tax benefits factored in,
If this couple were to buy a home      continuing to rent is, well, foolish.
for $400,000, and let’s pretend        Unfortunately, too many people
that they could make no down           who think they can never afford a
payment and had $400,000 in            home continue, incorrectly, to
100% financing, their monthly          think that way for their whole
mortgage payments (on an interest      lives.
                                        the original mortgage is now about
                                        70%, not the original 90%, and it’s
                                        pretty clear that the borrower no
         Insider’s Tip                  longer needs to protect the lender
                                        in the case of default. The
Paying rent is making a non-
                                        lenders protection now is that
deductible contribution to              there is so much equity in the
someone else’s mortgage.                property that the borrower is, a)
                                        unlikely to default, and, b) if they
Mortgage Insurance and                  do the lender will not be damaged
Piggy back Loans                        because they’ll be able to
                                        foreclose and sell the property for
Mortgage Insurance (or PMI –            far in excess of the amount
which stands for private mortgage       initially borrowed.
insurance) is a form of insurance
that lenders require borrowers to       Why can’t you get rid of the PMI
purchase on their behalf to             virus? While in the past few years
protect the lender in the case of a     many legislators have jumped on
borrowers default on the loan.          the bandwagon of making PMI
PMI may be required in a mortgage       companies more responsive to
transaction if your loan-to-value       consumers who try to get rid of
exceeds 80%. Generally speaking,        the PMI, these insurance
the more the LTV exceeds 80%,           companies remain aloof and loath
the more expensive the monthly          to cut off their own income
PMI premium is for the borrower.        stream.

One of the biggest problems with                 Insider’s Tip
PMI is that once you have it, it’s      Two loans are better than one
like a virus, virtually impossible to
                                        if you might have to pay for
get rid of, and here’s why that’s
                                        PMI. My advice: avoid PMI at
not fair. Let’s take an example of
a consumer who puts 10% down,           all costs!
and buys a $200,000 home, with
PMI required. Five years later, all     There are some lenders who make
the while the consumer has been         loans without PMI over 80%, but
paying a PMI premium of $200 per        don’t be fooled by their claim that
month; the home is now worth            there’s no PMI in the transaction.
$250,000. The loan to value on          Lenders who do these loans “self-
insure” their loans by adding          a prepayment penalty is a fee that
anywhere between ¼ and ½% to the       you will have to pay the lender if
interest rate on the equivalent loan   pay off any more of the mortgage
at 80% LTV or less. You pay for it     than some pre-determined
one place or the other.                percentage in the early years of
                                       the mortgage. Refinancing your
So, how do we avoid PMI, or self-      mortgage would obviously trigger
insured loan programs, and still       your pre-payment penalty.
make a small down payment?             Prepayment penalties can exist for
Sophisticated mortgage                 a variety of reasons, but their
professionals use the cutely named     overriding purpose is to protect
“piggy-back” loan programs which       the lender who incurs expense to
combine a traditional first            originate a mortgage, and needs to
mortgage at 75 or 80% LTV with a       have the loan on their books for
fixed second mortgage or equity        some time to recover those costs
line which “piggy backs” on the        and begin to earn a return on their
first mortgage at up to a combined     investment.
loan to value (CLTV) of up to 100%.
                                       One of the most standard pre-
The second mortgage is usually at      payment penalties is the so-called
a higher interest rate than the        3-2-1 Prepay. In this case if you
first, sometimes as much as 2-3%       pay off more than 20% of the
over the prime lending rate, but       original mortgage balance in any of
the combination of the payments is     the first three years you will pay a
usually less than the larger           penalty of 3% of the original
mortgage plus the PMI premium,         mortgage balance if this occurs in
and all of the money is either         the first year, 2% in the second
interest (which is usually tax         year, and a penalty of 1% in the
deductible) or principal. This is in   third year.
direct contrast to the PMI
premium, which is neither.             There are many forms of pre-
                                       payment penalties besides the
Prepayment Penalties                   basic 3-2-1. A new and popular
                                       form of prepay is the “waived if
Many mortgages today carry with        sold” prepayment penalty. This
them an option to have a               prepay is also called a “soft”
prepayment penalty, and some           prepay in the industry. This
mortgages require one. Put simply,     particular type of prepay is
frequently attached to low cost        slightly lower rate, than no return
loans, and works just like the name    at all.
implies. You will not pay a
prepayment penalty to the lender       The most common form of
if you sell the home and the           prepayment penalty today is
mortgage gets paid off, but you        attached to no-point loans. Make
will incur the penalty if you          sure that you understand whether
refinance during the pre-pay           the deal that looks “too good to be
period.                                true” just might have a big
                                       surprise attached to the end if you
         Insider’s Tip                 need to refinance or sell your
Never accept a pre-payment
without a clear understanding          Over the years, I have rarely seen
as to why it’s necessary (and          it make sense for a homeowner to
maybe a second opinion).               have a prepayment penalty
                                       associated with their loan. There
Finally, with respect to types of      are just too many uncertainties in
prepayment penalties, there is one     life to have the possibility of a
to be avoided if at all possible, or   large penalty hanging over you if
only entered into with eyes wide       something necessitates a sale of
open. This type of prepayment          your home. Of course, there are
penalty is for either two or three     many times when a lender requires
years and is popular with sub-prime    a pre-payment penalty irrespective
loans and 100% financing. The          of whether it’s a low cost loan.
penalty, instead of 1 or 2%, is 80%    These situations can involve
of six months interest. Let’s see      borrowers with less than perfect
what that looks like. On a             credit, are frequently seen with
$500,000 loan at 6%, 80% of 6          100% financing, or with borrowers
months interest is $12,000. Ouch!      who in the view of the lender,
                                       exhibit a pattern of frequent
Some lenders are now offering          refinancing activity.
lower rate loans (as much as ¼%
less interest or so) for borrowers     If the loan options offered to you
will to accept a prepayment penalty    carry with them a loan with a “pre-
- the rationale certainly being that   pay”, don’t be afraid of accepting
they would rather have a               that loan. Instead, make sure you
guaranteed return, even if at a        understand the terms of the pre-
pay, because as we have seen, some     money, you have no negotiating
of them have advantages worth          ability. Some lenders will let you
considering.                           “float” your interest rate, and lock
                                       it at a time in the process when it
         Insider’s Tip                 feels right to you to do so.
                                       Generally speaking, when you lock a
Unscrupulous brokers and
                                       loan with a direct lender, the rate
lenders might suggest you              is then non-negotiable, i.e., if
take a prepayment penalty              interest rates were to decrease
where one is not required as           during the period of your
it may increase their income           transaction, yours would not!
on the transaction.
                                       If you use a mortgage broker for
                                       your loan, the mortgage broker can
Interest Rate Locks
                                       lock your loan with a lender at the
                                       time of your application, as long as
The discussion about interest rate
                                       you have identified a property in
locks for home mortgages is a
                                       your application that you are
complex one as there are so many
                                       intending to purchase. Rate locks
parameters involved. An interest
                                       are available to brokers for many
rate lock means that you have
                                       different periods of time, from as
negotiated, or a broker has on your
                                       short as 7 days, to as many as 60
behalf, an agreement with the
                                       or more. You will get the best
lending source to guarantee that
                                       rate, if you lock for the shortest
rate through closing. Let’s look at
                                       period of time, all other things
how lenders, and then mortgage
                                       being equal. However, most
brokers, deal with the issue of
                                       lenders will not allow rate locks of
                                       less than 30 days unless the loan
                                       file is “condition free” and in a
If you go directly to a lender for
                                       position to be ready for the loan
your mortgage, some of them will
require you accept their interest
rate at the time of application, and
                                       Using a mortgage broker can offer
then it is “locked” or “guaranteed”
                                       substantial advantages in this
through the time of closing. Some
                                       arena as well. When a mortgage
lenders even charge you a fee to
                                       broker locks a loan for you, he is
lock your loan up-front that I
                                       not legally required to deliver than
would never advise you pay. Once
                                       loan to the lender he has locked it
you have given the lender your
with. That generates an inherent       relationship. With all other things
willingness on behalf of the lender    being equal, if you pay two points,
to re-negotiate the rate if            you get about a half-percent lower
interest rates decrease before         interest rate than if you didn’t.
the transaction has closed, so as to   Simple math will illustrate that it
not lose the loan. A good mortgage     usually takes about 50 months to
broker will “protect” their clients    recover the cost of paying points
by locking the loan with a lender at   through the lower rate, only after
the time of application (even          which will you realize a benefit
though that longer term rate lock      from that up-front payment.
costs more) always knowing that
the rate can either be re-                      Insider’s Tip
negotiated with the lender, or that
                                       Points may be called “discount
another lender can ultimately be
used to fund the loan. When you        points”, “origination points”,
are with a direct lender, they know    or “mortgage broker
that they have you “held hostage”      commission fee”. They are all
and that you have little to no         the same, a percentage of the
negotiating ability.
                                       loan amount paid up front to
                                       get a better rate.
         Insider’s Tip
Generally speaking, only a             Of course, there are other factors
mortgage broker can                    to consider. The first is that the
renegotiate your interest              calculation is actually more
                                       complex than indicated above
rate when rates fall.
                                       because a proper analysis would
                                       also take into account the lost
What are Points and Should             earning ability that money would
I Pay Them?                            have if invested or just left in the
                                       bank. Second, points are
Points are upfront fees paid to the    deductible from your tax returns
mortgage lender and/or broker. A       in the year you incurred the
point is one-percent of the loan       expense if the transaction was a
amount you have financed. Why          home purchase. Third, many loan
would anyone pay points if they        products today are not available
didn’t have to, would be the first     today for no-points without a
obvious issue to addressee? Points     prepayment penalty.
and interest rates have an inverse
Fixed rate loan products are the       that is typical with longer term
most frequently available for no-      fixed rate loans.
points without a prepayment            No Point vs. No Cost Loans
penalty. Lenders have determined
that anyone getting a long-term        I probably get more questions
mortgage is unlikely to be quick to    about this topic than any other
sell or refinance the home. ARMS       during periods of heavy refinancing
have pre-payment penalties much        activity, as some lenders and
more often than fixed rate notes       brokers advertise the advantages
for the opposite reason.               of no-cost loans mercilessly. Be
                                       aware that it may not always be a
In general, it is my strong advice     good idea to do a “no-cost” loan. In
to pay as little in points as          the long run, ironically, it may end
possible, although arguments can       up costing you much more.
be easily made that if you are
positive you’ll keep the loan for      We’ve discussed the advantages of
over 6 years, you should pay points.   not paying points in the section
I’ve just seen far too many clients    above. The logical extension of not
think that they’ll be in the home      paying points is not paying any fees
for a long time, invest $5,000,        whatsoever to accomplish a
$10,000 or even $20,000 in points,     refinance (or purchase)
and then have a life circumstance      transaction. The technique that is
come up that causes them to            used to accomplish a no-cost loan
either refinance or sell their home    is to raise the interest rate on the
within a few years. When that          loan to the point that the amount
happens, they’ve essentially thrown    of money the lender will pay to
the money they paid on points out      obtain the loan is enough to pay
the window.                            those costs as well. After all, the
                                       costs are real; they’re just being
However, some mortgage products,       paid by the lender, not by you.
typically short term fixed rate        Well, with all other things being
loans are set up to encourage the      equal, if you’re going to keep the
payment of a small loan fee to get     loan more than a year, you may do
the best relationship between fee      far better in the long run by paying
and interest rate. In these cases      your own fees and costs, than
the payment of loan points results     having a higher rate and having the
in a much more rapid re-capture of     lender pay them for you.
that expense than the 5 or 6 years
As is always the case, it is best to   disagreeing at this point, let’s take
get competent advice from              a look at how this works.
someone you trust with respect to
this matter. It is a sufficiently      Let’s say that you are offered a
complex topic that each                $500,000 mortgage at a 5% rate
transaction should be evaluated on     with a 2-point loan fee and $500 in
a case-by-case basis.                  lenders costs. The payment on that
                                       loan is $2,684.11. However, it cost
                                       you $10,500 ($10,000 in points,
                                       and $500 in lenders fees) to get
         Insider’s Tip                 that loan. If you reduce the loan
                                       by that figure and do a backwards
Don’t get sucked into a
                                       calculation you will see that the
lenders advertisement with             APR is 5.187%. Let’s look at that
respect to an “always” or              loan without points, but with the
“never” scenario, as in “never         $500 in costs. In this case the
pay points or fees”.                   rate would be 5.5%, the payment
                                       $2,838, and the APR 5.509%.
                                       Those two numbers – 5.187% and
Annual Percentage Rate
                                       5.509% - can’t really be compared
(APR’s)                                because they are apples and
The Annual Percentage Rate
(hereafter APR) is a number
determined by looking at the                    Insider’s Tip
interest rate and factoring into       Be very careful relying on
the rate the costs of obtaining        just the APR for the
that rate. The APR is promoted by      comparison of two different
our various governmental agencies
                                       loan offers – as the above
that feel as though the APR is the
                                       example clearly points out.
one true benchmark for comparing
one loan to another. The thinking
behind the importance of the APR       Which of those loans you would
is that a 5% mortgage with a 10        rather have is a personal decision
point loan fee is not as good as a     related to how long you are going
5% mortgage with a two point loan      to stay in the house and whether
fee, and only the APR can show you     you should invest $10,000 to save
that. Without agreeing or              $154 per month sometime 6 years
                                       from now.
                                         understandably promoted by the
However, the APR calculation is          government).
helpful for comparing one lenders
offer to another if the rate (not         Why Last Minute Stuff
the APR) they are offering is the         Happens (before closing)
same. In that case, the loan with
the lower APR would be the loan           You may have heard from a friend who
with lower costs, all things being        recently went through the mortgage
equal. However, as we saw in the          process that all of a sudden, just before
above example, if the rate is not         their transaction closed, the lender needed
the same, using the APR to                 a bunch of additional information
compare loans is, well, an exercise
in futility (and something that is
                                          of these can be supplied before you
immediately or their loan wouldn’t fund. While
this seems like the ultimate in incompetenhave an accepted offer to buy a house.
there are valid reasons why this happens. The lender prior to your loan documents
                                          being generated reviews many
Unfortunately, this frequent occurrence “borrower” conditions, but many are not
is usually not a result of the mortgage   reviewed until just before closing. If the
agent’s oversight but principally due to conditions supplied just prior to closing
the way that lenders systems are          are deficient or incomplete, such as
structured. To date, most lenders have bank statements with missing pages or
not come up with a more efficient plan    paycheck information that is considered
for closing so a good broker (or agent)   dated (over 90 days old) the lender will
tries to anticipate these requests and    ask that the necessary information be
prepare their clients for them.           updated – and that could occur just
                                          before closing.
There are several different but over-
lapping reasons for the “last minute      However, the area in which lenders
rush”. First, we'll look at the borrower perform most poorly is on the timing of
side of the transaction. When an          their review of the funding package.
application is originally submitted to a  The funding package is what the lender
lender it will generally be approved      receives back from the title company
subject to certain conditions. This is    with the loan documents - which
especially true of purchase pre-          includes evidence of homeowners
approvals since this kind of approval is  insurance. Part of this problem is
always subject to appraisal, preliminary that home closings are usually
title report, and purchase contract. None tightly orchestrated events. The
lender needs to review a host of          advertiser quotes a rate for it to
documentation once they receive           make it to the press. During that
the package back from the title           time rates can go up or down, so the
company, and doing it at                  quoted rate may or may not be
the last minute while maybe efficient for obtainable. Additionally, many
them, is not for you and me.              lenders advertise rates that may be
                                          valid, but only for a loan that’s ready
           Insider’s Tip                  to close, in other words a short-
                                          term lock. Whether you get that
The best way to avoid last
                                          rate or not depends on whether
minute issues is to sign your             you’re willing to gamble on working
closing papers early, and                 with a lender with whom you have no
respond promptly to all of                experience. Finally, for an
your agent’s requests for                 advertiser to give you the rate
                                          they’ve advertised means that they
                                          are working for as little income as
                                          possible. Given that set of facts, the
Interest Rate Quotes in the               lowest priced lender in the
Media                                     marketplace would not be the lender
                                          I would feel best about smoothly
Advertising interest rates is a           completing my transaction (or
little like advertising the prices        closing it at all).
for new cars with the “one at this
price” small print. Advertising           Again, my best advice is to get a
interest rates by nature                  referral from someone you trust and
encourages the advertiser to quote        then rely on that persons
the lowest rate possible. The             professional expertise to complete
disclosure of the APR is supposed         your transaction.
to make comparison easy, but as we
saw in the above example, the APR
can just confuse things.
                                                     Insider’s Tip
                                          No where is it more truly said
That being said, advertised               than in the mortgage industry:
interest rates should be viewed at        “if it looks too good to be true,
as best as a yardstick for                it probably is”.
comparison, and not something to
rely on, for many reasons. It takes
2-7 days from the time that an
          Chapter Six:
    Powerful Techniques and
Strategies to Employ When Buying
             a Home

  What to Do Before You Make an Offer

        Pre-Qualification Letters

         Mortgage Pre-Approval

Strategies to Employ When Making an Offer

            Loan Contingency

     Inspections and Termite Reports

           AS-IS Transaction

  Should You Make an Offer to Purchase,
   Contingent on the Sale of Your Home?

              Quick Closings
          Free Rent Backs to Sellers

    Increased Deposits and Pass-throughs

Non-recurring Closing Cost (NRCC) Credits From

  How to Finance Some or All of Your Closing
      Chapter 6: Powerful Techniques and
   Strategies to Employ When Buying a Home

What to Do Before You                  the widespread poor use of
Make an Offer                          vocabulary.

Most Realtors® want their clients      Pre-qualification letters
to have seen a loan agent, and
obtained a mortgage pre-approval,      The manner in which prospective
prior to committing serious            homebuyers have begun and then
amounts of their time looking at       finished the loan process has
homes for many reasons. After all,     undergone dramatic change in the
in good conscience the Realtor®        past 10 years. Not too long ago it
has to know that the home-buyer        was sufficient for a prospective
can qualify for a home mortgage        real estate buyer to provide a
before they write an offer on the      lender some basic financial data
home, to say nothing about wasting     including credit, income, and asset
their time with person looking for     information in order for the lender
a home that might not be qualified     or mortgage broker to issue a
to get the loan they need to buy       letter of “pre-qualification.” This
the home.                              letter typically represents an
                                       informed professional opinion that
In this section we’re going to first   the borrower would be approved
look at the different levels of        for the purchase loan in question
mortgage “qualification” that a        when submitted to a lender. This
borrower may bring into the            letter accompanied your offer on a
transaction, and the resulting         house to give the seller some
conclusions about how to be best       comfort that if they accepted
prepared for your home purchase.       your offer, you would be able to
                                       get a loan.
This topic is the source of a
significant amount of confusion
between agents, buyers and
mortgage brokers/lenders due to
         Insider’s Tip                  approvals” should remain subject
                                        to only a satisfactory appraisal,
Pre-qualification and pre-
                                        purchase contract and title report.
approval are not the same.              Obtaining a loan “Pre-approval”
Make sure you understand the            gives buyers a strategic advantage
difference!                             when attempting to purchase a
                                        home as sellers and their agents
Mortgage Pre-Approval                   pay more serious attention to a
                                        buyer who had already gone
If you think about it, the old          through the loan process and is
process was really backwards.           ready to close on a home, instead
Does it make sense to make an           of just beginning the process.
offer to buy a home, when you
don’t even have your financing          Even though you may be armed
approved?                               with a pre-approval, most buyers
                                        will still want to have a time period
The solution to this situation          in which to conduct inspections on
happened in the mid 1990’s as the       the property. There are specific
real estate market heated up and        additional issues on the mortgage
multiple offer situations became        side of the transaction to be aware
the rule rather than the exception.     of even if you have obtained a pre-
Sophisticated lenders began to          approval. First, the property may
offer their clients the ability to      not appraise for the full value. In
obtain “formal loan approval”, even     this case you would have to make a
thought they hadn’t found a home.       decision as to whether you still
The language that is used to            wanted to buy the home. Second,
convey that fact is that they are       you may discover defects in the
“pre-approved” or have a “pre-          property during your property
approval”. To obtain a pre-             inspections that were not
approval, a prospective homebuyer       previously disclosed to you. Third,
literally goes through the loan         the title report may reveal liens or
process before identifying a home.      other “title” issues that may
A complete loan application is filled   affect the value and marketability
out, and the “cash, credit and          of your home.
income” portions of the loan
application are reviewed and
approved by a mortgage
underwriter. Real and valid “pre-
         Insider’s Tip                 a contract to consider before you
                                       write an offer to purchase, let’s
Be certain your pre-approval
                                       take a look at the most important
really means a lender has              ones.
approved you. I once
reviewed a letter from a               Loan Contingency
mortgage broker as a favor to
a real estate agent friend of          Your commitment to purchase a
                                       home is easily measured by the
mine. The letter had language
                                       home seller and their agent if you
to the effect of “I have pre-
                                       make an offer to purchase a home
approved the Jones’ for a              and it is still subject to your
mortgage”. Can a broker                ability to obtain a loan. It is far
really pre-approve you, or             better to make your offer with a
doesn’t it actually require a          mortgage pre-approval in hand, and
                                       have the contract (with respect to
                                       the loan) be subject only to an
                                       appraisal at or above the market
As such, it rarely makes sense to
                                       value of the property.
make an offer that is completely
non-contingent. When making an
offer with a pre-approval letter               Insider’s Tip
attached, most competent               The strongest offer is one
Realtors® will still have a            without a loan contingency!
contingency period in the offer
with respect to the mortgage;          All other things being equal, the
specifically that the property         more quickly you can get the house
appraise at the purchase price.        appraised and remove loan
                                       associated contingencies, the more
Strategies To Employ When              attractive you are likely to be to
Making an Offer                        the seller. In our offices, we
                                       prepare clients to make offers
A skilled mortgage professional will   contingent on the appraisal only
work hand in hand with your            (not including inspections which we
Realtor® to structure your             talk about below) and routinely
purchase offer in as strong terms      offer to remove this contingency
as possible to ensure you get the      in 3 to 7 days. Sellers usually
home. There are many aspects of
respond positively to this kind of      you to order a pest report, see the
offer.                                  defects if any, and not alert the
                                        lender to the problems.
Once you have the appraisal and
mortgage approval you will be in a               Insider’s Tip
position to remove the loan
                                        Mortgage lenders usually do
contingency, which usually is
accompanied by an increase in your      not call for an inspection
funds deposited to the escrow.          report if it wasn’t specifically
                                        identified in the purchase
Inspections and Termite                 contract. Make sure your
Reports                                 agent doesn’t automatically
                                        call for a pest report.
The most common inspection you
will want to make of the home you       Then, if there are problems that
are going to buy is for the             need to be dealt with, the usual
presence of “pests”, including but      manner that your Realtor® will
not limited to dry-rot, fungal          likely recommend to compensate
infections, termites, water damage      you for the defects is to either
and any other obvious property          reduce the purchase price by the
defects. The problem with asking        amount of the negotiated price to
for a pest inspection in the            repair the defects, and/or have
contract is that the lender, a party    the seller give you a credit for
to the trans-action, gets to see        non-recurring closing costs in the
the pest report if it’s called for in   escrow (recall that they can’t give
the purchase contract. As we have       you a credit for the defect itself
touched on a couple of times            because it points it out to the
already, if there’s a defect, it has    lender).
to be fixed!
                                        AS-IS transaction
Sophisticated Realtors®
understand this and use a clause in     As-Is clauses in a purchase
their purchase contracts that           contract, whether put in the offer
allows them to “Conduct any and all     by the buyer, or added as a
inspections that the buyers deems       counter offer by the seller, if
necessary” without pointing out         accepted by the parties mean that
what is specifically going to be        the buyer and seller agree that
looked at. This technique allows
whatever property defects may          seller accepts your offer. As-Is
exist should not, in theory, become    purchases carry substantial risk to
a negotiable item in the               you if there are hidden problems
transaction.                           and should be used very carefully.

There are many occasions in which      With all of that said, As-Is offers
a seller might not want a buyer to     can be made on homes that are
inspect a home prior to their final    probably free of defects or
decision to buy it. Take any home      needed repairs. Making such an
with a substantial and/or              offer can relieve a seller that
expensive defect that has an           there just won’t be any re-
unknown repair cost. If you were       negotiating, period. That kind of
the seller you wouldn’t want to get    an offer can be very attractive to
into escrow with a buyer, and then     some sellers for obvious reasons.
have them re-negotiating the price
after the fact.                                 Insider’s Tip
                                       Just because you might
On the other hand, if you, as the
buyer, know about a defect, and        choose to make an as-is offer,
are willing to proceed with a          that doesn’t mean you can’t
purchase anyway (because for           continue to negotiate with the
example you’re going to tear the       seller.
home down, or you want it so much
it doesn’t matter), your offer will
                                       Should You Make an Offer
be much stronger if you agree to
buy the home “As-Is”, not subject      to Purchase, Contingent on
to inspections on the property.        the Sale of Your Home?

The risks of an as-Is offer are        One of the most important
obvious, you are agreeing to buy       decisions you need to make when
the home no matter what shape it’s     you are in the process of buying a
in. If your As-is offer is not         new home, is what to do with your
contingent on your ability to obtain   old one (assuming you have one)
formal loan approval, then you are     during the process. You can sell
likely locked into purchasing that     your home before you buy another,
home, or risk damaging the seller      or make an offer to buy contingent
if you don’t perform on your           on the sale of your home (assuming
purchase – from the day that the       here that you need the equity out
of your home to complete your
next purchase).                       The dilemma that buyers often
                                      face when they need the equity
The problem with contingent           out of their home to complete the
offers is that you are in a far       next purchase is how to avoid
weaker situation on both of the       exactly that scenario described
transactions you are going to enter   above. The time-honored way to
into.                                 solve this problem has been to
                                      simply put your home on the
Looking at the purchase first,        market, and sell it before making
sellers don’t like to accept          an offer to buy something else.
contingent offers as there is no      The problem with this approach is
guarantee that your home will sell,   that you might find yourself
and the seller has no control over    without a home if yours sells and
that process. Thus, you’ll need to    then you can’t find a replacement
make a stronger offer, all other      home before you need to vacate
things being equal, than you would    you old one. You might then find
if you didn’t have that contingency   yourself renting until you find your
in the contract. Assuming now         new home and this process
that you are in contract to buy the   certainly involves moving twice. Or,
new home with yours for sale,         even worse, you might find a home
potential buyers of your home will    you want and not be able to buy it
know that you have to sell it         before yours sells.
quickly so that you can complete
your other purchase. In short, you    The creative solution to this
are likely to lose on both sides of   problem is to refinance your
the transaction trying to make        trailing home before you begin the
your purchase contingent.             process, taking the money you need
                                      out of the home via a cash-out
        Insider’s Tip                 refinance on either a new first
                                      mortgage or a simple equity line. A
If you think you might need
                                      creative mortgage professional is
to buy before selling, contact        invaluable when you are faced with
a competent mortgage                  this problem, and don’t want to
professional as early as you          make an offer contingent on the
can in the process. There are         sale of your home.
solutions – read on for more
Quick Closings                           When structuring a purchase
                                         offer, the combination of a fast
Offering to close a transaction          close, and then an extended rent
quickly may be appealing to some         back, can be unbelievably
sellers, and an offer to close           attractive to a home seller. Take
quickly may be a valuable                the case of a seller who needs to
negotiating tactic. If your loan is      be sure their house is sold before
pre-approved, subject only to the        making an offer elsewhere, yet
appraisal and title report, you          needs to continue to live in their
could close a transaction in as few      home until they can close on the
as five working days.                    home they are buying. In that
                                         scenario an offer with a fast close
                                         and free rent back could help your
Free Rent Backs to Sellers
                                         negotiating power tremendously.

If the seller of the home needs to
occupy the home after closing,
                                         Increased deposits and pass
often the case when the home that        throughs
they are buying isn’t available for
occupancy, offering the seller the       There are times that sellers will
ability to live in the home rent         respond to a buyer who is willing to
free after closing for a period of       put more money into escrow in the
time may be attractive to them           form of either initial or supple-
and assist in your negotiation. It       mental deposits to escrow. Making
is important to note that your           a more substantial initial deposit
lender will likely object if you don’t   to escrow (than is typical) may
take occupancy within 30-60 days         make a seller feel that you are
of closing, so caution is necessary      more motivated than a buyer with
when offering free lengthy rent          a more routine deposit.
                                         Additionally, once you are sure you
                                         are going to complete the
         Insider’s Tip
                                         purchase, authorizing the release
Make sure you carefully                  of some of the escrow funds to
consult with your mortgage               the seller in advance of closing my
professional before making an            be attractive to the seller and
offer with a free rent back.             provide you with additional
                                         bargaining strength. Be receptive
                                         if your agent presents you with a
scenario where this may offer you     credit in closing for the amount of
and advantage.                        the repair cost.

Non-recurring closing cost            However, the only things that
(NRCC) credits from seller            “mainstream” lenders will allow a
                                      credit for in their transaction, is
Following your inspection of the      for non-recurring closing costs
property, it is not uncommon for      (NRCC’s) and here’s why. Let’s
you to find some defects that         imagine a severe defect to a
were not readily apparent (or         property (such as it needs a whole
disclosed) when you made your         new roof – immediately), which is
offer. It is also normal for you to   going to cost $20,000 to repair.
expect the seller to be willing to    It would certainly be simple for
either pay for the repairs before     the lender to allow the seller to
the transaction closes, or if that    credit the buyer $20,000 in
cannot happen during the time         escrow to pay for the repair…but
frame of the transaction, or give     the lender then has no assurance
you something to compensate you       that the money will be spent on the
for the defect, either in the way     intended repair – and in fact in the
of cash, a reduction in the           extreme example the house could
purchase price, or credits in your    be ruined, and the lender’s
closing.                              security for their loan worthless,
                                      if the buyers don’t fix the roof.
In most transactions, any
substantial discovered defects        Put simply, lenders don’t want to
cannot be cleared (repaired)          know that they are lending on a
before you close. Thus, a method      property with defects, even if
needs to be incorporated into the     they are just putting their heads
contract, through a further           in the sand so they don’t know.
negotiation, that compensates you
for the defect. There are really      Given that the only credit lenders
only two practical ways to do this.   will allow is for NRCC, if the
The first is to simply reduce the     amount of the repair is greater
purchase price by the amount of       than the amount necessary to
the defect by way of an addendum      repair the defect, come
to the contract. The second is to     combination of a reduction in price
have the seller give the buyer a      and a NRCC credit may be used by
                                      your Realtor®.
                                     seller could contribute at much as
        Insider’s Tip                $15,000 to the seller for their
                                     expenses. Most sophisticated
Any amount of money
                                     Realtors are familiar with this
credited from seller in the          technique and can effectively
form of NRCC not spent on            negotiate this kind of a credit for
NRCC in the closing reverts          you.
to the seller of the home.
                                     The net effect of a seller paid
                                     NRCC is that you are likely to be
How to Finance Some or all
                                     paying more for the home than if
of Your Closing Costs                you didn’t ask for the credit. You
                                     are in essence “financing” your
Many homebuyers scrimp and save      closing costs, and adding them to
to put together a down payment       the amount of money borrowed
for their home purchase, and         from the lender.
coming up with the closing costs
just makes the savings
requirement even more daunting.
Other homebuyers prefer to keep
as much of their cash as they can,
and pay as little as possible in
closing costs.

There is a well-accepted technique
that will allow you to not have to
pay some or all of your non-
recurring closing costs. This
technique only works for the non-
recurring costs and excludes
interest, property taxes and

Most lenders will allow a credit
from the seller to the buyer in
closing for up to 3% of the
purchase price, if used for non-
recurring closing costs. In a
purchase of a $500,000 home, the
      Chapter Seven:
Refinancing Your Mortgage


    Cash Out Refinancing

   No-Cash Out Refinancing

     No-Cost Refinances

  Chapter Seven: Refinancing Your Mortgage

Introduction                          There are two general types of
                                      refinance loans. The first is where
When I first started in the           pay off your old mortgage and take
industry in 1989 interest rates for   additional equity out of the home –
home loans were approximately         this type of refinance is called a
12% for 30 year fixed rate loans.     cash-out refinance (cash-out refi).
Adjustable rate loans with            The second type is where you are
negative amortization started in      just paying off the old mortgage
the 7’s. Since that time we have      and this type is a no cash-out
experienced 14 years of steadily      refinance (no cash-out refi). No
decreasing rates, with a few bumps    cash-out refi’s are also called rate
along the way. Over that period, I    and term refinance transactions,
have helped homeowners complete       meaning you are only changing your
thousands of home refinances, and     rate, and the remaining term
have learned that there are many      (length) of your loan. No-cash out
different ways to look at the         refi’s will allow you to borrow
benefits of refinancing your          enough additional money to pay the
mortgage. Unfortunately, far too      costs (recurring and non-recurring)
many loan officers lack the           of the transaction and still be
sophistication that is necessary to   considered a no-cash out deal.
be able to give their clients sound   Cash out refi’s are generally
financial advice; so lets take a      offered at lower loan to values
quick but thorough look at the        than no-cash out refinances.
how’s and why’s of mortgage
refinancing.                          Cash Out Refinancing

        Insider’s Tip                 Cash-out refinance transactions
                                      have been very popular refinance
That old rule that said “Never
                                      loans over the last ten years as
refinance your mortgage               homeowners have sought to take
unless you can lower your rate        advantage of lower interest rates
by 2% or more” is completely          and rapidly appreciating real
outdated by the size of               estate values. Cash out loans are
                                      generally limited to 75% of the
today’s mortgages.
                                      value of your home, on a first
mortgage only. However, the                     Insider’s Tip
addition of an equity line either in
                                        Refinance transactions
combination with the new first
mortgage, as a stand alone deal, or    generally cannot be closed on
as a concurrent transaction after      homes under “substantial”
the closing of a new first mortgage    renovation. If you think you’ll
can allow you to take up to as much    need funds to complete a
as 95% of the value of your home
                                       remodel, make sure you
out in cash.
                                       complete your refinance
Cash out refi’s are generally          transaction before beginning
applied for when you need money.       the remodel.
That cash can be used to
consolidate other bills, to add an     carries as few points as possible if
addition to the home, to pay for       this situation applies to you
college tuition, to make other         because you will rarely recover the
investments including other real       points through the lower rate you
estate, or for many other reasons.     get by paying points in less than
Given that the purpose of the          five years. Additionally, make sure
transaction is to take money out of    that the low cost loan you are
the property, the analysis of the      seeking doesn’t have a prepayment
refinance is not as complex as the     penalty, which is common on this
no-cash out deals we’ll look at        type of loan.
shortly. Here, the choice of new
mortgage should be dependant           If your stay in the home is going to
upon two factors, the amount of        be lengthier, then – if you can
payment you can afford, and the        afford the payment – a long-term
length of time you’ll be in the        fixed rate loan is probably your
home.                                  best choice. There are a myriad of
                                       scenarios we could evaluate with
If your anticipated stay in the        cash out loans – make sure you get
home following the refinance is        advice from a loan agent with the
less than five years - then a short    experience and financial
term fixed rate loan or an             background to properly understand
adjustable is probably your best       and evaluate your particular
choice. Make sure that the loan        circumstances.
As a last word, please be aware        the home, and you are refinancing
that most lenders have limits on       to lower the ultimate cost of your
the amount of cash you can take        mortgage.
out in a cash-out refi. For some
reason some time long ago, lenders              Insider’s Tip
determined that cash-out refi’s
                                       Don’t ever be tempted to
where borrower took large
amounts of cash out of the home        refinance a rental property
where more prone to default than       claiming it is your principal
loans where smaller amounts of         residence. Pre and Post
cash were obtained. That’s never       funding occupancy checks
really made sense to me, if the
                                       have become very common.
loan to value cash out limit is 75%,
not many borrowers would be
willing to leave 25% of their equity   Lowering Your Mortgage
in the home by walking away from       Payment Through a No-cash
it after a large cash-out refi.        Refi
Nevertheless, only a small handful
of lenders allow a borrower to take    Lower interest rates may equate
out more than $150,000-200,000         to lower payments. If you are in a
regardless of the amount of equity     position where you want to lower
remaining in your home.                your mortgage payment, and you
                                       aren’t sure how long you’re going to
No-Cash Out Refinancing                be in the home, then a simple
                                       mathematical calculation can
No-cash out refinancing requires       determine whether it is worth it
more analysis than does a              for you to refinance.
transaction where taking equity
out of the home is your motivation.    Here’s the simple calculation. If
Here, there are usually just two       you can recover the cost of the
reasons to refinance. The first is     refinance through the lower
when you just want to lower your       interest rate in less than the
mortgage payments, without             amount of time you are fairly sure
regard to what the transaction is      you will live in the home, then
going to do to the amount of           refinancing into a lower rate
remaining time on the mortgage.        usually makes sense. Here, your
The second is when you clearly         best guess about how long you’ll be
have a goal to ultimately pay off      in the home will dictate your
choice of mortgage. If you have a       the money left on the table for
3-6 year scenario, then a five year     the costs of the previous
fixed rate loan is a great choice       transaction. This is one of the
because of the lower rate these         strongest reasons that advocate
products offer. A great choice of       doing low cost refinances, i.e. a
loans here is an interest only loan,    deal without points or with low
because you’ve already made the         points, because you leave a lot of
decision not to pay off the home,       money on the table when you pay
so why pay any principal to the         two points for a refinance, and
lender if you don’t have to. If your    then refinance a year later.
scenario involves being in the home
longer than 3-5 years, then the         Paying Your Home off
focus of your analysis is how long it   Sooner With a Lower Rate
will take to recover the costs of
                                        No-cash Refi
the refinance through the lower
mortgage rate. If it’s
substantially less than the amount      This is perhaps the most complex
of time you’re pretty sure you’ll       of the refinancing scenarios, and
stay in your home, then that            the one that most loan officers
transaction makes sense as well.        aren’t capable of counseling you
                                        about. I’ve seen far too may cases
                                        of well meaning consumers who
         Insider’s Tip                  have refinanced their loan to lower
Make sure your refinance                the payments, not realizing that
makes sense. A lower                    they were 10 years into the payoff
payment isn’t the only factor           of their old loan, and refinancing,
                                        while lowering their payment,
to be considered.
                                        added ten years to their loan term.
                                        A mistake like that can cost you
Over the last ten years I have had
                                        literally hundreds of thousands of
many clients refinance their homes
                                        dollars over the life of the loan.
two, three or even four times as
                                        Let’s talk about this section
rates have continued to fall. One
                                        without the mathematical analysis.
issue that often arises is when the
                                        Your competent loan officer can do
opportunity to refinance occurs
                                        that with you; let’s instead just
before you have recovered the
                                        discuss the theory of the early
cost of the last refinance. In this
                                        mortgage payoff. If you have an
case you need to look at the new
                                        8% mortgage, and you are two
transaction only and not dwell on
        Insider’s Tip                strongly promote so-called “No-
                                     Cost” refinances. The theory
The most common mistake
                                     behind a no-cost refinance is that
homeowner’s make is to lower         if you can refinance your home
their payment without                without it costing you any money,
understanding what the               and lower your payment without
refinance does to the term of        expense, it makes sense to do so.
                                     In my opinion, the theory proposed
their loan.
                                     by the no-cost refinance is often
                                     not beneficial to consumers
years into a thirty-year loan,
                                     because it is too simplistic a way to
there’s a very straightforward way
                                     look at refinancing.
of determining whether your
refinance makes sense. First,
                                     Let’s quickly look at why these
compute the new payment in the
                                     loans are sometimes a bad idea.
lower interest rate. Then apply
                                     First, the idea behind a no-cost
your old payment to that new lower
                                     refinance really says, If you can
interest rate and see the effect
                                     lower you payment without it
of making the old payment in the
                                     costing you anything, you should do
new interest rate on the remaining
                                     so. The important analysis we
term of the loan (you need a
                                     discussed above is ignored by the
sophisticated financial calculator
                                     theory, which is too bad. Second,
to do this). If you’ve been in the
                                     the way in which the costs of the
loan for only a few years, and you
                                     transaction are paid is by raising
can lower your rate a ½% or more,
                                     the interest rate as compared to a
you probably save five years on
                                     no-points loan where you pay your
your loan term. If you can lower
                                     own costs.
the rate by just 1%, you could cut
as many as 7 or 8 years off your
                                     It rarely makes sense to avoid
term. You can then determine the
                                     paying those costs in a refinance
real benefit of the refinance by
                                     and here’s why. If the refinance
looking at how many years of
                                     makes sense on it’s own merits (you
payments you save through the
                                     can recover the costs through the
                                     lower rate in a reasonable amount
                                     of time) then why accept a higher
No-Cost Refinances                   rate and higher payment to avoid
                                     the costs.
Over the last few years the
mortgage industry has begun to
         Insider’s Tip
There is no such thing as a
no-cost refinance. From a
lenders point of view it’s “pay
me now or pay me forever”.

It is too bad that the mortgage
industry has so vigorously
promoted these loans. Many
consumers are already mistrusting
of the industry (in some cases for
good reason), and misleading
advertising does little to help the
industry’s image.


Real estate finance has changed
dramatically in the last 20 years.
Today, we have a wide variety of
products available, from a wide
variety of lenders. A professional
should do the analysis of your
refinance transaction with access
to all of the available products, and
with one who has the skill to
conduct the proper analysis. Using
a mortgage broker instead of a
loan officer at a bank is the right
first step, making sure that they
are very experienced is a good
            Chapter Eight:
Closing Costs for Your Mortgage and
     the Required Governmental


          A Lender Generated GFE

 Federal Truth in Lending (TIL) Disclosure

 Discussion of the Actual Costs of Closing a

         Conclusions and Comments
    Chapter Eight: Closing Costs for Your
   Mortgage and the Required Governmental

                                               Insider’s Tip
There is perhaps no source of         Take with a large grain of salt
greater confusion in the mortgage     the media’s reporting about
process than the documents            the “appropriateness” of fees
associated with the costs of          in the closing of your loan.
closing a mortgage transaction.
                                      Read on for the whole story.
Let’s start at the beginning. When
                                      time that you make your initial
your loan is first entered into the
                                      mortgage application. The reality
processing system at a mortgage
                                      is that most of our clients have not
broker, lender or banker, the
                                      completely decided what type of
federal government requires the
                                      loan they want, let alone what
issuance of two disclosure
                                      combination of interest rate and
documents that were designed to
                                      fee they will ultimately choose.
attempt to inform a borrower
                                      Nevertheless, the GFE requires we
about the costs of the transaction.
                                      identify a loan, a rate, and a fee
These documents are named the
                                      when we set up the loan, resulting
“Good Faith Estimate of Closing
                                      in a disclosure that may be miles
Costs” (hereinafter “GFE”) and the
                                      away from what we ultimately end
“Truth in Lending” (hereinafter
                                      up with for a mortgage.
“TIL”). Perhaps at one time these
were well-intentioned documents,
                                      In addition, when your loan is sent
but in my opinion they do more
                                      to a lender by your mortgage
today to generate confusion in our
                                      broker, the lender (whether a
industry than they help.
                                      mortgage bank, Savings and Loan,
                                      or a direct lender) is required by
The reasons for much of the
                                      the same set of laws to also send
confusion are pretty simple. The
                                      out their own versions of a GFE
GFE is required by law to be
                                      and a TIL, which may also be less
generated within 72 hours of the
than accurate if the details of the   time that the file was submitted
transaction change in any way from    and the GFE generated (and we
the time that the loan was            submitted the loan to the lender
submitted, until closing. Virtually   that we have locked the loan with).
all mortgage transactions change in   In most cases, we have not made a
some way during that process.         final determination of interest
                                      rate and related fees, so this is
A Lender Generated GFE                most likely a best guess by the
                                      lenders computer. If we have
If you started the mortgage           already locked your loan, the rate
process with a broker, then when      and fees shown will usually match
the loan application is sent to a     the lock we have agreed upon.
lender, the lender (believe it or
not) is also required to send you a           Insider’s Tip
GFE. The Lender GFE is also an
                                      Please call your agent on
estimate in many areas, but may be
                                      receipt of your GFE if you
accurate in others. Here’s where
the lender GFE differs from the       have any questions about the
Broker GFE. First, the Lender         accuracy or appropriateness
GFE will be accurate with respect     of the charges. As we have
to the lenders charges for            seen, things are not always
“processing” the loan. These
                                      what they seem to be.
charges are usually called
processing, funding, underwriting,
or documentation fees, and usually    Federal Truth in Lending
do not exceed $500 in total.          (TIL) Disclosure Statement
Next, the lender’s GFE will not be
accurate with respect to the title    You will also see attached to the
and escrow fees because they do       GFE, the Federal “Truth in
not determine them, but they may      Lending” statement. The TIL is
be close. As above the title          supposed to properly disclose the
company chosen for your               cost of your credit over the length
transaction sets these fees.          of time you will have the loan. The
                                      first thing you will notice is that
Finally, the interest rate, and       the “Finance Charge” is larger than
points, or lack thereof, may be       the amount of the loan. The
accurate if the consumer and          Finance Charge is the total amount
broker locked the loan prior to the
of interest you will pay during the    at that point to make the
life of the loan.                      comparison of APRs of any value.

The next part of the TIL that is       One more very important point
important is the presentation of       about the TIL should be noted.
the APR, which, as discussed           There is language in the TIL that
extensively in Chapter 5, stands       has caused confusion for many
for annual percentage rate. The        people who read all the fine print.
APR is the federal governments         There is a sentence in the TIL
attempt to level the playing field     that says, “If you pay off the loan
and allow for the comparison of        early you will not be entitled to a
different loans. As we discussed,      refund of any part of the finance
the APR is a simple calculation that   charge”. The reference to finance
takes into account all of the costs    charge is any points or fees you
of the loan at the lender (points      might have paid in closing you loan
and fees) and determines the           and NOT the interest amount
interest rate with the fees            listed in the box at the top of the
“attached”. For example, many          TIL. In spite of the language in
brokers and lenders have in the        the TIL, you are not required to
past unscrupulously advertised a       pay any additional “Finance Charge”
very low interest rate intentionally   beyond what you have already paid,
omitting the fees and costs            once you have paid off the loan.
associated with delivering that
rate. When those fees and costs                Insider's Tip
are disclosed, via the APR, then
                                       Ask your broker, banker or
the unbelievably low rate is
disclosed for the scam it is!          lender to have the title
                                       company prepare a
The APR analysis may or may not        “Borrowers Estimated
be a legitimate way to compare         Settlement Statement” as
different brokers (or lenders)
                                       early in the process as you
fees, costs and interest rates;
                                       can. The document prepared
however, the problem with the APR
presentation on the TIL is the         by the title company stands a
same as the problems of the GFE –      far better chance of being
often times not enough of the          accurate than the brokers or
transaction has been determined        the lender.
Discussion of the Actual               the Estimate. Closing costs in both
Costs of Closing a Mortgage            purchase and refinance
                                       transactions can be significant
As we have previously discussed,       amounts of money. Let’s look at an
the title company that was chosen      Estimate together and understand
for your transaction handles the       where the costs come from and
closing of your loan. When the         who’s getting paid for what
escrow officer receives the loan       service.
documents from your lender,
she/he (hereinafter she) acts on       Please refer to figure 8.1 during
the instructions she receives from     this discussion. Figure 8.1 is an
the lender. The lender generated       actual “Buyers Estimated Closing
these instructions with input from     Statement” created for this
many sources; a part of the input      discussion. Please note that
is the instruction from your           different title companies use
mortgage lender with respect to        different forms of this estimate,
your particular combination of         but for all practical purposes they
interest rate and fee.                 are very much the same in
                                       substance, just not in appearance.
The result of the escrow officer       Your escrow officer will prepare
receiving the instructions (and loan   the Estimate (again, according to
documents) is the preparation of       the lenders and Realtors
closing papers for your loan. The      instructions) in a form similar to
document in your closing that          the example we are going to
explains the costs of the closing is   discuss. The example will typically
the “Borrowers Estimated Closing       be broken down into categories so
Cost Statement” (hereinafter           that the charges associated with
“Estimate”). There are many            the closing are easily identifiable.
reasons that the document is still
an Estimate including the fact that    The first thing to notice about the
your exact closing date of your        estimate is that it is broken down
loan might not yet have been           into two columns, the first being
determined, in the case of a           “debits”, which are expenses to
refinance the payoff to the old        you in the transaction, and the
lender might not be finalized, and     second being “credits” which are
a few others. However, by this         contributions to your closing
point, most of the costs of closing    already made (in the form of your
are pretty accurately defined in
deposits to escrow) or to be made        office in your county. For
by another party.                        example, this seller has already
                                         pre-paid the property taxes due on
Next, the estimate lists the             this home until July 1st of that
expenses or credits by section,          year. Since your closing is going to
let’s start at the top and work our      occur March 15th, you owe to the
way through the estimate. The            seller of the home the funds they
first section is entitled “Financial”,   have already paid in taxes. Be
and lists the Total Consideration,       aware that this pro-ration will not
which in this case is the purchase       be all of the taxes you will owe for
price of the home. The next item         that period. You will likely get a
is the line entitled “New First          supplemental tax bill from the
Trust Deed” is the amount of your        assessor for this tax period that
loan. Notice that it is listed as a      represents the assessor’s office
credit because your lender is            recalculation of the additional
supplying it to you.                     taxes due on the home given the
                                         higher assessed value that
The next section entitled                resulted from your purchase of
“Deposits” represents any advance        the home.
funds you have put into the escrow
pursuant to the terms of the                      Insider’s Tip
purchase contract on the house
                                         Refinancing your mortgage
between you and the seller of the
home. By the time this estimate is       will not result in the assessor
typically prepared, you have             raising your property taxes,
removed the contingencies from           no matter what the new
your transaction and your deposit        appraisal comes in at!
will typically be 3% of the
purchase price of your new home.         Following that section is the one
This section may break down your         entitled “Title Charges”, which
deposits individually if more than       represents the Title Insurance
one has been made.                       expenses in the transaction. You
                                         will see that there are two charges
The next section is “Pro-                for title insurance, the CLTA
rations/Adjustments” and serves          charge which is your insurance
to balance any payments that the         that the title to the house you are
seller of the home might have            receiving is free of liens and/or
already made to the Tax Assessors        encumbrances. Let’s talk about
this for a minute from the                the fee that the county recorders
perspective of why you need this          office charges the title company
insurance. Let’s pretend that the         to make this transaction a matter
previous owner of the home got            of public record.
into trouble with the IRS over
unpaid income taxes. The IRS
placed a lien on his home for the
amount he owed them, which could                  Insider’s Tip
have been $50,000. When you buy
                                          If you plan on refinancing
the home, the Title Company’s
responsibility includes making sure       your home either shortly
that the IRS lien has been                after purchasing it, or after
satisfied or released and no longer       refinancing it, ask your title
is attached to the home when you          or escrow agent about a
buy it.
                                          “binder”. It can lower the
                                          cost of the subsequent title
The next Title Charge is the ALTA
title insurance, which you pay for        insurance.
on the lenders behalf. All lenders
require the ALTA policy because it        The “Escrow Charges” section is
guarantees the lender that their          next. An escrow, simply defined, is
loan is in the first lien position, and   an impartial third party to a
there are no liens remaining on the       transaction that acts at the
property. Initially, it never made        mutually agreed upon instructions
any sense to me that the lender           from the parties to a contract.
couldn’t just rely on your                Title and escrow services are
insurance, but if you think about it      sometimes performed by the same
a little you can easily see that the      company, and sometimes by two
lender needs protection of their          separate entities. In Northern
own. A quick side note, when you          California, title and escrow are
go to refinance the home, you will        both handled by the same company,
not need to pay for a new CLTA            but title and escrow fulfill two
policy because you got one when           very different functions. As we
you bought the home, but you will         saw above, the title charges were
need a new lenders policy for the         for the insurance for your home.
new lender. The final charge in           The escrow charges in this section
this section is the “Recording            are for the third party services
Trust Deeds” line item, which is          that escrow performs. The first
charge is the “Escrow Fee”, and it     your loan package and its’ eventual
is the fee charged for acting as       funding. The final item is the
the intermediary in the                prepaid interest on your loan. This
transaction, and is earned by          is not a true closing cost since it
causing the parties to the             represents the interest you will be
transaction to sign all of their       paying on a monthly basis on your
papers, accept funds from various      mortgage payment. For instance, if
parties, record the transaction as     you close your escrow on the
a matter of public record, and then    fifteenth of the month the lender
make the appropriate                   has no effective way to bill you for
disbursements. The other fees in       a partial monthly payment. As a
the escrow section are                 result they will collect the fifteen
administrative fees or costs           days interest in advance at closing.
incurred by the escrow that you        Let’s say you close on March 15.
are obligated to pay.                  Because your mortgage payment is
                                       always collected in arrears on the
The next section titled New Loan       interest accrued in the previous
Charges, details all the costs         month you will have no mortgage
involved in obtaining your             payment in April with your first
mortgage. As you can see the costs     payment due the first of May. So
are stated as a total and are then     in a sense, you recoup the cost of
broken out item-by-item and            the prepaid interest.
attributed to the third party
charging the fee. Any charge that      The final section, Miscellaneous
you may have paid before the close     Charges, will detail any unusual
(not including your deposits) will     charge involved in you transaction
show as a POC or “paid outside of      that you are paying at closing. The
closing”, in this case the appraisal   estimated insurance premium is
is a POC because you deposited the     not, however, unusual.
appraisal fee in your Brokers’ trust   All lenders will require you to
account when you completed your        prepay one year of homeowners
application. After the appraisal       insurance in a purchase and three
was completed your Broker paid         to six months in a refi.
the appraiser directly on your
behalf. The next set of fees           Conclusions and Comments
include the points or origination
fee you paid and all lender fees       In summary, there are many
associated with the completion of      charges associated with the
closing of a real estate
transaction. Most of them are not
finalized by the time that you
receive your GFE, so it’s wise to
ask your agent for the most
accurate closing cost estimate he
can provide early in the

There is a certain real estate
columnist (there are actually more
than just one) that has done
immeasurable harm to the
mortgage industry over the years.
This “writer” refers to many
closing costs as “garbage fees”,
implying that they are fees you are
paying and receiving nothing for.
What nonsense. As we have
discussed and shown, you can see
that for each of the fees in your
transaction a service was provided,
and for that service a fee was
paid. Calling the expenses of a real
estate transaction “garbage fees”
in a blanket manner reflects both
ignorance and journalistic
               Appendix A:
What Your Loan Agent Does During the Home
        Purchase or Refi Process

•   Provides Up Front Analysis and Qualification of Client
•   Takes Loan Application
•   Provides Preliminary “Needs List” for Client
•   Qualifies Client
•   Provides Pre-Qual (or pre-approval) Letter to Agent and Client
•   Discusses Potential Loan Options
•   Locks Loan With Lender
•   Sets Up Application with Loan Team
•   Assigns Team Coordinator
•   Orders Appraisal
•   Obtains Copy of Preliminary Title Report
•   Sends out Verifications of Deposit and Employment
•   Orders Credit Report
•   Reviews Purchase Contract Paying Attention to Key Dates
•   Reviews Title Report
•   Reviews Credit Report
•   Counsels Client about Credit Report
•   Assists with Credit Letters of Explanation
•   Reviews Appraisal with Client and Agent
•   Submits Completed Loan Package To Lender (or Underwriter)
•   Obtains Loan Approval From Lender
•   Provides Letter of Loan Approval to Agent, Client
•   Reviews Approval Conditions with Client
•   Provides Conditions to Lender
•   Communicates with Agent and Title Officer About Closing
• Obtains Preliminary Clients Closing Cost Estimates
• Provides Estimate to Client and Agent
• Orders Loan Documents from Lender
• Confirms Fees with Client and Lender
• Coordinates Loan Documents, Title Company, Client and Agent
• Reviews Loan Documents
• Coordinates Close of Escrow Date With Title Company and
• Confirms Funding and Recording of Transaction
• Provides Copies of All Relevant Closing Documents
              Appendix B:
 What Can Go Wrong During the Home buying

The process of buying a home involves the successful interaction
of many related parties. As you will see below, there are 100’s of
things that can go wrong during a transaction. Selecting a team
of dedicated and competent professionals will minimize the
number of errors and provide you with the expertise to solve real
problems when they arise.
So, here’s a partial list of the things that can happen during your
escrow period, some of them affecting the transaction more than
others, some solvable, and some not.

1.    Buyers Side of Transaction
Disclosure failures on Loan Application
Disclosure failures with Agent
Buyer doesn’t qualify
Source of down payment not verifiable
Credit problems that show up late
Loss of employment
Endless negotiation by buyer
Fails to obtain homeowners insurance
Buyer changes mind
Buyer deposits funds to escrow late

2.    Sellers Side of the Transaction
Seller loses motivation to sell
Illness or divorce
Hidden or non-disclosed defects
Unknown defects are discovered
Seller can’t clear property liens
Seller leaves town without leaving a Power of Attorney
One party to sale decides not to
Seller refuses to negotiate inspection results
Seller delays closing date
Seller removes real property
Access to property denied by tenants
Tenants damage property at last minute

3. Title and Escrow Side:
Fails to get proper signatures
Buyer and/or Seller doesn’t sign papers on time
Fails to follow escrow instructions
Doesn’t uncover liens on title report
Doesn’t get payoff figures in time
Doesn’t return
Fails to get proper insurance
Doesn’t ask for funds on time

4.    The Property Side
Fails to appraise
Is too “land heavy”
Has no foundation
Has no central heat
Has too much Section One Work
Has well/septic problems
Has a diesel storage tank
Construction isn’t complete
Has too much adjacent rental property
Has unrepairable defects

5.   The Mortgage Agents Side
Fails to properly qualify client for the loan
Fails to properly disclose terms of transaction
Doesn’t review Credit report
Misquotes the loan program costs, guidelines, or criteria
Submits loan to an untested or unfamiliar lender (rate shopping)
Isn’t approved with lender he chooses (believe it or not)
Fails to submit loan in timely fashion
Uses un-approved appraisers
Fails to communicate with agent, buyer or lender on regular basis
Fails to communicate and/or obtain approval conditions
Delays ordering Loan Documents

6.   The Lenders Side
Changes terms
Denies the loan
Has slow underwriting, loan docs, funding
Has an unreasonable loan condition
Loses file
Presents review appraisal problems
Finds new credit issues
Requires property repairs
Adds last minute conditions
Requires prepayment penalty

7.    The Realtors Side
Doesn’t disclose later stage negotiations to mortgage broker
Adds new negotiations after loan docs
Ordered inspections in contract
Changes closing date
Negotiates credits in excess of 3%
Is financially unsophisticated
Doesn’t understand lending
                             Appendix C:

Acceleration Clause

Allows the lender to demand immediate payment of the balance of the loan
should you default on your payments.

Adjustable Rate Mortgage (ARM)

A mortgage in which the interest rate is adjusted periodically based on a
designated financial index. Also known as variable rate mortgage.

Adjustment Interval

On an adjustable rate mortgage, the time between changes in the interest
rate and/or monthly payment.


Equal periodic payments calculated to pay off the loan at the end of a fixed
period, typically 15 or 30 years.

Annual Percentage Rate (APR)

An interest rate reflecting the cost of a loan as a yearly rate. This rate is
likely to be higher than the stated note rate on the mortgage, as it takes
into account points and other credit costs. The APR is supposed to allow
borrowers to compare different types of mortgages based on the annual
cost for each loan.

Estimate of the value of property by a qualified professional called an


Agreement between buyer, seller and lender wherein the buyer takes over
the payments on an existing mortgage.


Balloon (Payment) Mortgage

Usually a short-term loan involving small payments for a set period of time
and one large payment for the remaining principal balance at a specified


An individual in the business of assisting, arranging, funding or negotiating
loans for a client, but does not loan the money himself.


When the lender and/or the home builder subsidizes the mortgage by
lowering the interest rate during the first few years of the loan. While the
payments are initially low, they will increase when the subsidy expires.


Caps (Interest)

Consumer safeguards that limit the amount that the interest rate on an
ARM loan may change per year and/or life of the loan.

Caps (Payment)

Consumer safeguards which limit the amount monthly payments on an
adjustable rate mortgage may change.


Meeting between the buyer, seller and lender escrow officer where the
property and funds legally change hands. Also called settlement.

Closing Costs

Usually include an origination fee, appraisal fee, title search and insurance,
taxes, deed recording fee, credit report charge and other costs assessed at


An agreement, often in writing, between a lender and a borrower to loan
money at a future date subject to the completion of paperwork or
compliance with stated conditions.

Construction Loan

Short term interim loan for financing the cost of construction. The lender
advances funds to the builder at periodic intervals as the work progresses.

Conventional Loan

A loan not insured by FHA, VA or Farmers Home Administration.

Credit Report

Report listing borrowers' consumer credit use, including past and current
debts, payment ratings and terms.


Deed of Trust

Document used in many states to secure the payment of a note.

Failure to make the required payments on a loan. Often results in

Deferred Interest



Failure to make loan payments on time. This could lead to default or

Department of Veteran’s Affairs

Independent agency of the federal government, which guarantees long-term,
low or no-down payment loans to eligible veterans.

Discount Points


Down Payment

Money paid to make up the difference between the purchase price and loan
amount. Down payments usually are 10 to 20 percent of the sales price on
conventional loans.

Due on Sale Claus

A provision in a mortgage or deed of trust that allows the lender to demand
immediate payment of the balance of the mortgage if the mortgage holder
sells the home.

Earnest Money

Money given by a buyer as part of the purchase price to bind a transaction
or assure payment. Also called DEPOSIT.

Equal Credit Opportunity Act ( ECOA )

Federal law requiring lenders and other creditors to make credit equally
available without discrimination based on race, color, religion, national origin,
age, sex, marital status or receipt of income from public assistance


The difference between market value and current loan, also known as
owner's interest.


Neutral third party that carries out the instructions of both the borrower
and lender to handle settlement or "closing." Escrow may also refer to an
account held by the lender into which the borrower pays for tax or
insurance payments.


FHA Loan

Loan insured by the Federal Housing Administration open to qualified home
purchasers. While limited in size, they are generous enough to handle
moderate-priced homes almost anywhere in the country.
Fixed Rate Mortgage

Loan in which the interest rate is constant for the term of the loan.


A legal procedure in which property securing debt is sold by the lender to
pay the defaulting borrower's debt.

Freddie Mac

See Federal Home Loan Mortgage Corporation.


Gross Monthly Income

The total amount the borrower(s) earns each month, before any expenses
are deducted.


Hazard Insurance

Insurance which protects the borrower and home from specified losses,
such as fire, windstorm, etc.

Housing Expenses-to-Income Ratio

The ratio, expressed as a percentage, obtained by dividing borrower's
housing expenses by his/her gross monthly income. See debt-to-income


Portion of the borrower's monthly payment collected by the lender to pay
taxes, hazard insurance, mortgage insurance, and other items as they
become due. Also known as reserves.


The rate against which lenders measure the difference between the current
rate on adjustable rate loans and that earned by other investments, (U.S.
Treasury security yields, monthly average interest rate on loans closed by
savings and loans, and monthly average costs-of-funds incurred by savings
and loans), which is then used to <>adjust the interest rate up or down.


Money source for a lender.


Jumbo Loan

Loan which is larger than the limits ($214,600) set by FNMA and FHLMC.
Because jumbo loans cannot be funded by these agencies, they usually carry
a higher interest rate.




A claim upon a piece of property for the payment of satisfaction of a debt
or obligation.

Loan-to-Value Ratio

The relationship between the amount of the loan and the appraised value of
the property expressed as a percentage.


Rate expressed as a percentage that a lender adds to the index on an
adjustable rate loan to establish the adjusted interest rate.

Mortgage Insurance

Paid to insure the mortgage when the down payment is less than 20 percent.
See Private Mortgage Insurance.


The lender.


The borrower or homeowner.


Negative Amortization

Occurs when your monthly payments are not large enough to pay all the
interest due on the loan. This unpaid interest is added to the unpaid balance
of the loan.

Net Effective Income

The borrower's gross income minus federal income tax.

Non-Assumption Clause
Statement in a loan contract forbidding the assumption of the loan without
the prior approval of the lender.


Origination Fee

Fee charged by lender to prepare loan documents, credit checks, etc.;
usually computed as a percentage of face value of the loan.



Principal, interest, taxes, and insurance. Also called monthly housing expense.

Points (Loan Discount Points)

Prepaid interest assessed at closing by the lender. Each point is equal to 1
percent of the loan amount.

Power of Attorney

A legal document authorizing one person to act on behalf of another.


Expenses necessary to create an escrow account or to adjust an existing
account. Can include taxes, hazard insurance, private mortgage insurance and
special assessments.

Prepayment Penalty

Fee charged for early repayment of some types loans. Usually 6 months
interest on 80% of current balance or 1 or 2% of loan balance.

The balance, not including interest, left on a loan.

Private Mortgage Insurance (PMI)

For loans over 80% loan-to-value. Lenders will loan up to 95% in some cases.
With the higher LTV loans, borrowers are required to carry private
mortgage insurance, which requires an initial premium and may require an
additional monthly fee depending on your loan's structure.



Real estate broker or agent belonging to the National Association of


Law that gives the borrower 3 days after signing to cancel a contract in
some cases, if the transaction uses home equity as security.

Recording Fees

Paid to the county for recording a home sale, thereby making it part of the
public records.

Renegotiable Rate Mortgage (RRM)

A loan in which the interest rate is adjusted periodically. See adjustable
rate mortgage.

RESPA Real Estate Settlement Procedures Act

Federal law allowing consumers to receive and review information on known
or estimated settlement costs after application and again at settlement.
Requires lenders to furnish information after application only.

Reverse Annuity Mortgage (RAM)

A Mortgage in which the lender makes periodic payments to the borrower
using the borrower's equity in the home as security. Also called a reverse



All steps and operations a lender performs to keep a loan in good standing,
such as collection of payments, payment of taxes, insurance, and property

Settlement/Settlement Costs

See closing/closing costs.

Shared Appreciation Mortgage (SAM)

Borrower receives a below-market interest rate and the lender (or another
investor) receives a portion of the future appreciation of the property.


Measurement of land, prepared by a registered land surveyor, showing
location of the land with reference to known points, dimensions, and the
location and dimensions of any building.


Term Mortgage
See balloon payment mortgage.


A document that gives evidence of an individual's ownership of property.

Title Insurance

A policy, usually issued by a title insurance company, which insures a
homebuyer against errors in the title search.

Title Search

An examination of public records to determine the legal ownership of
property. Usually is performed by a title company.


A federal law requiring disclosure of the Annual Percentage Rate to
homebuyers shortly after they apply for the loan.

Two-Step Mortgage

Mortgage in which the borrower receives a below-market interest rate for a
specified number of years (usually 5 or 7 years), and then a new interest
rate adjusted (within limits) to market conditions at that time.



The decision whether to make a loan based on credit, employment, assets,
and other factors and matching this risk to an appropriate rate, term and
loan amount.

VA Loan

Long-term, low-or no-down payment loan guaranteed by the Department of
Veterans Affairs. Borrowers qualified by military service or other

VA Mortgage Funding Fee

Premium of up to 17/9 percent (depending on the size of the down payment)
paid on a VA loan.

Variable Rate Mortgage (VRM)

See adjustable rate mortgage.

Verification of Deposit (VOD)

Form signed by the borrower's bank or lender verifying the status and
balance of financial accounts.

Verification of Employment

Form signed by the borrower's employer(s) verifying his/her position and



When an existing assumable loan is combined with a new loan, resulting in an
interest rate somewhere between the old rate and the current market rate.
The payments are made to a second lender or the previous homeowner, who
then forwards the payments to the first lender after taking the additional
amount off the top.
Six Simple Things You Can Do to Ensure Your
    Home Purchase is a Smooth Process

Trust Your Realtors® (or CPA, or Financial Planners) Referral

There is a natural inclination to seek advice from a number of
different sources when you are in the home-buying or refinancing
process, and it is a new experience for you. A word of caution
here is very appropriate. Getting feedback from more than one
or two sources is likely going to confuse you more than help.

Place trust in the people that have been referred to you by your
friends, family, or professionals. There is no substitute for the
experience of a competent professional in your transaction.
Want an example? Going after a low rate advertised by some
company you don’t know, and then working with a loan agent whose
background and experience is a mystery, has the very real
potential for disaster. Disaster and real estate don’t go very well
in the same sentence, ever. If you were referred to our office by
a Realtor®, it’s because that Realtor® knows we’ll make sure your
home purchase closes – their livelihood depends on it.

      Be Prepared - Get Pre-approved for your mortgage

Sellers of Real Estate respond positively to buyers who make
their offers to purchase non-contingent on their ability to obtain
a home loan. If you were a home seller, given a choice, would you
accept an offer on your home from a potential buyer who didn’t
even have his financing arranged, or a buyer who does? With all
things being equal, pre-approved buyers are more likely to get
better deals because they can negotiate from a position of
strength. In a multiple offer situation, you will almost always win
out over buyers who are not yet approved. See Section 6.2 for a
thorough discussion of pre-approvals,

             Don’t Make any Major Changes in Your
Financial Life During the Home Buying (or Refinancing) Process

While this might seem obvious, changing your employment, co-
signing for someone else’s loan, buying a car or another piece of
property, going out on maternity (or disability) leave, or moving
large sums of money from one place to the other can have
disastrous implications on the approvability of your loan.

Be sure to talk to your mortgage professional if you have any
doubts about whether the financial move you are making is going
to affect your loan application.

             Be As Responsive As Possible to Your
         Lender and Realtors Needs during the Process

The home buying process requires planning, and action, from a
team of professionals, including you. The collaborative nature of
this effort, requires your timely input. Be aware of the key dates
in your transaction, understand their significance, and enjoy the

              Make Sure You are ready for Closing

The closing of your home purchase (and your refinance) is a
carefully orchestrated event. Make sure that you are going to be
in-town and available in the week before closing, that your down
payment funds are ready to be wired into the escrow account, and
that you have your home insurance in place, well ahead of time.


and trust the team of professionals whose job it is to get you
safely in your new home! If there is worrying to be done, let the
experts do it for you!
              Watch Out For…
   The 6 Biggest Lies in Real Estate Finance

We’re a direct lender, so there’s no middleman and no
           expensive brokerage fees to pay

This is perhaps the most misleading statement in Real Estate
advertising (although there are bunches as we’ll see). The
expression “brokerage fee” implies that something has been
added to the cost of the transaction by the use of a mortgage
broker. This is complete and utter nonsense. When a
conscientious mortgage broker is involved in your transaction he
is using a wholesale lender for your transaction and being paid on
the difference between the wholesale and retail cost of a
mortgage. This is the first example of the real estate finance
community being its own worst enemy. Mortgage brokers will
usually make your transaction less expensive, and will likely ensure
you the best priced loan available.

               When banks compete, you win

This one runs a close second. Have you seen the commercials
where the happy couple is in their kitchen and an army of bankers
is in their living room underbidding each other? This is a
ridiculous and shameful advertising sales technique. To portray
this lender’s operations as occurring in this manner completely
misrepresents the manner in which mortgage companies operate.
This lender is simply using this language to con you into thinking
this occurs, when there is really no competition for your individual
loan (between lenders) of this manner involved behind the scenes.

The manner in which you can ensure that you are getting the best
mortgage is to have a mortgage broker, who is the expert, do the
shopping for you. Be a smart consumer!

   Look at the fabulous rate on our no point’s loan …
        (just make sure you don’t look at our APR)

Far too many lenders aggressively advertise their low interest
rates on their “no-points loan”, and then hide their expensive fees
in the APR. This is truly embarrassing! A no-points loan should
have an APR similar to the advertised rate, period! If the APR in
a transaction is substantially more than their interest rate, then
that’s going to be a very expensive loan to obtain, whether there
are points or not. Unfortunately, points are not the only place an
unscrupulous lender can make extra money off your loan.

  Never pay costs and fees when you refinance your
 (Also expressed as “not one dollar will be added to your

To use the word “never” is obviously a scare tactic by an
advertiser. Portraying your company as the expert, and then
making blanket statements about all loans, is beyond foolish and
would be truly laughable if not for it being so irresponsible and
damaging. Every real estate transaction is different, and needs
its own analysis, not a trite advertising slogan. The reality is that
in most refinance transactions, paying your own costs and fees
may very well benefit you in the long run, but it’s strictly case by
case and needs to be reviewed by a competent loan officer.

          We’ll beat their rate or pay you $500

And just exactly how is this going to work? They know this is
impractical, that the comparison won’t ever happen, and this
makes their slogan unseemly. The reality is that the mortgage
process is so dynamic that an “absolute” comparison is difficult at
best and impossible at worst to complete. The only way this could
work would be to process your loan request with this lender and
another – doing twice the work yourself – until you got to a point
in the process where you could make the comparison – probably at
loan approval, just prior to close. That doesn’t seem like it would
even be worth the $500.

               A better way to get a loan
           (A well known internet lenders slogan)

Why? Why is the internet a better place to get a home loan? A
better place than where else? The drugstore? The supermarket?
The liquor store? They just don’t say, do they? However, if you
just apply common sense to this one, the only way they can be “a
better place”, that connotation being “less expensive”, is that
they use less qualified personnel to get your loan done. When you
use an internet lender, your “loan agent” is most likely an
inexperienced $10 per hour clerk. The absolute truth is that
most mortgage transactions can benefit through the creativity
and experience a competent mortgage agent brings to the
transaction and that is really the “better” way to get a loan.
Want to really learn about what is takes to get a good loan, then
let’s look inside?

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