The Insiders Guide to Obtaining The Mortgage You Deserve (but just might not know how to get) Including….. The Six Simple Things You Can Do to Ensure Your Home Purchase is a Smooth Process and… The Six Biggest Lies in Mortgage Advertising Andrew Nathan First Security Loan 415-448-6344 email@example.com www.andrewnathan.com Table of Contents Introduction………………………………………………………………………………………………………………… 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……………………………………………..……. Appendices Appendix A: What Your Loan Agent Does During the Home Purchase or Refi Process………………………………………………………….……… Appendix B: Can Go Wrong During the Home Buying Process…………………………………………………………………………………………………………….. 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 rate. 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: firstname.lastname@example.org 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 Group 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 Corp. 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 mortgages. 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. available. 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 lenders. 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 transaction. 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 Mortgage The “Normal” Components of a Mortgage Application Cash Credit Income Property 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 Cash 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 into. 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 lenders. 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 world. 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 financing. 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 messy! self employed people may have sufficient income subject to Even Less Documentation in Some legitimate deductions or that Cases 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 requirement. 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 report. Chapter Three: The Four Fundamental Steps Involved in Closing a Mortgage The Application The Submission Mortgage Underwriting, Loan Approval, and Conditions 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 k 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 different: 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: schedule. 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. World 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 home. 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 locks. 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 documents. 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 oranges. 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 ce, 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 documentation. 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 Seller How to Finance Some or All of Your Closing Costs 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 lender? 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 help! 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. backs. 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 insurance. 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 Introduction Cash Out Refinancing No-Cash Out Refinancing No-Cost Refinances Conclusions 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 refinance. 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. Conclusions 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 second. Chapter Eight: Closing Costs for Your Mortgage and the Required Governmental Disclosures Introduction A Lender Generated GFE Federal Truth in Lending (TIL) Disclosure Statement Discussion of the Actual Costs of Closing a Mortgage Conclusions and Comments Chapter Eight: Closing Costs for Your Mortgage and the Required Governmental Disclosures Introduction 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 transaction. 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 sensationalism. 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 Lender • Confirms Funding and Recording of Transaction • Provides Copies of All Relevant Closing Documents Appendix B: What Can Go Wrong During the Home buying Process 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: Glossary 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. Amortization 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. Appraisal Estimate of the value of property by a qualified professional called an "appraiser." Assumption Agreement between buyer, seller and lender wherein the buyer takes over the payments on an existing mortgage. B 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 time. Broker An individual in the business of assisting, arranging, funding or negotiating loans for a client, but does not loan the money himself. Buy-Down 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. C 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. Closing 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 settlement. Commitment 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. D Deed of Trust Document used in many states to secure the payment of a note. Default Failure to make the required payments on a loan. Often results in foreclosure. Deferred Interest See NEGATIVE AMORTIZATION. Delinquency Failure to make loan payments on time. This could lead to default or foreclosure. 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 See 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. E 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 programs. Equity The difference between market value and current loan, also known as owner's interest. Escrow 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. F 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. Foreclosure 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. G Gross Monthly Income The total amount the borrower(s) earns each month, before any expenses are deducted. H 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 ratio. I Impound 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. Index 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. Investor Money source for a lender. J 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. K L Lien 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. M Margin 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. Mortgagee The lender. Mortgagor The borrower or homeowner. N 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. O Origination Fee Fee charged by lender to prepare loan documents, credit checks, etc.; usually computed as a percentage of face value of the loan. P PITI 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. Prepaids 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. Principal 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. R Realtor Real estate broker or agent belonging to the National Association of Realtors. Recession 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 mortgage. S Servicing 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 inspections. 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. Survey 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. T Term Mortgage See balloon payment mortgage. Title 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. Truth-In-Lending 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. U Underwriting 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. V VA Loan Long-term, low-or no-down payment loan guaranteed by the Department of Veterans Affairs. Borrowers qualified by military service or other entitlements. 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 salary. W Wraparound 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 process. 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. Relax….. 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 Advertising 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 loan (Also expressed as “not one dollar will be added to your principal”) 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?