The Mortgage Minute

Russian Real Estate Agent Spy

Get Back Your 5.0 with a 4.5

Dealing with low Home Appraisals

Mortgage Rate Locks: How They Work

100% Financing - the VA Loan

Annual Percentage Rate

FHA is seeking YOUR Opinion - not that it really matters

Artwork Tips When Selling a Home

7 Tips for Negotiating The Sales Contract

July 27, 2010

6 New Hurdles for Home Financing

Buying a home is never easy, but these current obstacles make it especially problematic.

If you've been in the market for a mortgage recently, you've no doubt noticed how difficult it can be to get approved. You're not imagining it, and it's not just you.

Underwriting standards have tightened, meaning that borrowers need higher credit scores, more income and higher down payments. And that's not all. There are many challenges to financing a home, but the following six are especially problematic in today's market.

1. Higher credit score requirements
Want a loan? You'd better have top-notch credit to get the best deal or, in some cases, to get approved at all. Although loans can be had in most cases for credit scores down to 620, they often come with a higher rate and/or fees.  In 2006, a 680 FICO would get you into a house. Now it takes about a 720.

2. Greater scrutiny of income and assets

Homebuyers better get ready to prove that just about anything that looks hinky on their application is not an issue. Mortgage lenders today have to verify, reverify and reverify again. Qualified buyers are now put through the wringer and often turned down because of appraisal issues, property issues or anything that looks strange, even if the buyer can prove they can pay cash for the property.

3. Ever-changing borrower requirements
Many borrowers are finding that they can't pin down just what they need to do to get their mortgages approved.  A couple of years ago, anybody with decent credit could get a loan for any size home. Now it is critical to have credit scores above 700, total debt ratios below 36%, a minimum of 20% down to avoid [private mortgage insurance] and good, stable employment. Unfortunately, a buyer can have all of these items fall into the current guidelines, only to have the guidelines change.

4. Home appraisals are coming in low
Because of slow sales, which lead to few comparables, and the large amount of short sales, sheriff's sales and bank-owned sales, which are priced at a fraction of a dollar, houses are not appraising for the contract price.  Part of this problem can be blamed on the government enacting [the Home Valuation Code of Conduct], which regulates the appraisal industry, and was an attempt to curtail fraud, but has turned into an unexpected hindrance on the real-estate market recovery.  The problem with the HVCC is that appraisals are now often completed by appraisers who are inexperienced and often unfamiliar with the markets they are working in, resulting in inaccurate appraisals and unnecessarily rejected loan applications.

5. Fewer opportunities for small business owners and independent contractors
Congress recently introduced legislation that would make low- or no-documentation loans illegal.  Some borrowers have used these loans to deceive their way into a mortgage they didn't really qualify for. However, these loans are also a valuable tool for many honest workers who are not U.S. citizens or who are self-employed and therefore don't receive regular paycheck stubs or have a simple, straightforward way to prove their income to lenders.  Typically, a business owner pays himself the minimum amount to avoid paying payroll taxes while reinvesting profits into his business. Banks will no longer make exceptions for circumstances like these and turn many loans down that previously would have been granted.

6. Condo purchases face additional tests
Condo loans are much tougher these days as we have to approve the condo building in addition to the buyer. We are documenting cash reserves, owner occupancy rates, low delinquency rates on monthly assessments and more. Additionally, the [Federal Housing Administration] recently changed the condo approval method, which has further inhibited many buyers who only qualify for FHA loans.

The quest for homeownership
For worthy borrowers seeking to take advantage of today's low interest rates and relatively low home prices, having to jump through hoops that homebuyers just a few years ago didn't have to can seem mighty unfair. If there's any upside to the tight credit market, it's that we should see fewer foreclosures in the years ahead.

July 23, 2010

7 Tips for Negotiating The Sales Contract

Negotiation is the process of communication back and forth in order to reach a joint agreement. There is no "one size fits all" strategy of negotiating a real estate contract.

1. What do we want to achieve in a negotiation?

The best negotiators bring an attitude of high expectations to the table. They are hard on the problem and soft on the people. Letting the seller know what you need, in a clear and reasoned way, is the first step toward getting it. We try to keep all of these goals in mind:

Enable you to move into your new home.

Obtain the lowest possible price for the property.

Close within an acceptable time frame. Solve any repair issues fairly.

Have no title, survey or loan problems, or solve any that do arise.

Develop a good working relationship with the seller.

Have no future problems after closing.

2. Is a cooperative or combative approach more effective?
Our experience shows that the cooperative style is the most effective and efficient way to complete a transaction. Professional negotiators usually try to preserve the relationship between the parties, and work together to resolve problems. The goal is not to reach an impasse in which neither the seller's nor the buyer's needs are met. Buyers sometimes submit a letter to the seller describing why their house is not worth what they are asking, pointing out deficiencies, etc. This almost always backfires, and starts the negotiation off with a defensive seller. It is best to anchor your price to the marketplace, while remaining very complimentary of their home.

How do you work with a combative strategy by a seller or agent?

The combative style is sometimes encountered. This strategy includes: negative comments, emotional statements, table pounding, threats to walk out, ego involvement, and stated positioning. Creative solutions and trade offs are not as likely to be found in this environment. Working with a combative style negotiator requires a considered approach:

Do not respond emotionally. An angry or defensive response will escalate the negotiation into a no-win battle.

Do not argue. Arguing usually positions them more strongly and drags the negotiation process off course.

Do not ignore their arguments or statements. Listen carefully, but do not accept or reject.

Firmly anchor pricing and other terms to outside data. Show that the price has not been chosen arbitrarily.

Reduce misunderstanding by following up with written summaries of discussions.

Do not allow hazy or unclear proposals to stand.

Offer some "wins" on some of the terms. Face saving is very important.

Look for ways to meet their underlying interests.

Remember that they may have a beautiful home that satisfies the buyer's goals.

3. Is every point in the contact negotiable?

Yes. However, one of the most effective means of coming to an agreement is to rely on consistent standards or norms when possible. For example, it is common practice for the seller to pay for the title policy and for the buyer to pay survey cost. Using accepted standards prevents buyer and seller from haggling over every point. Working within the accepted "norms" for our area helps to legitimize offers, and focus the negotiation on just a few points. On the other hand, all the points in an offer can be used to help structure the deal. They offer trade-off opportunities for both parties to get what they want from the negotiation.

4. The value of trust in a negotiation.

The value of trust in a negotiation cannot be overstated. Most people are fair minded and reasonable. They respond well to respectful treatment and to having their concerns heard. If the seller feels that the buyer and agent are acting with integrity, their attitude will be much more cooperative. Contract negotiation is a sensitive area, and anxiety can be high. The buyers may have had an unpleasant past experience with buying a home. The seller may be under pressure, with future plans at stake. Acting with integrity does not mean that all "cards have to be put on the table." It is not proper to discuss personal issues that affect the buyer, such as your financial ability or urgency to move in. It is valuable to develop rapport because trust increases your leverage. Here are ways:

Listen and understand what the seller has to say.

Express appreciation for the seller's home, gardens, decorating.

Respond within a reasonable time to counter offers.

Reassure the seller of your ability to close.

Reveal some personal information about yourselves.

Finding common ground with the seller can be a very powerful tool in the event of multiple offers. I can think of several instances in which sellers selected their contract for very personal reasons. (The family reminded them of themselves when they moved in with young children years before. Or, they were both of the same religion. Or, the new owners would care for their gardens.)

5. Understanding your leverage.

The more we can find out about the seller's needs, the better chance we have to find solutions to negotiation hurdles. We will be able to offer information or concessions that appeal to the seller's deepest concerns. Obviously, if the house has been on the market for 300 days, you have a lot more leverage than you would with a brand new listing. If their time frame is immediate, and you can meet it, you have some leverage. If they have multiple offers, you have very little leverage!

6. How much under list price should you offer?

Buyers usually offer less than list price, unless it is a strong sellers market. There is no standard percentage "under list price" that can be used. A market analysis will show recent sales for the neighborhood, which is the best way to establish the offer price.

It is usually counter-productive to offer so low that the seller will automatically reject the offer. This will set a negative tone, and may result in an emotional response from the seller.

7. What if we have a multiple offer situation?

Occasionally the seller receives more than one offer on their property. By simply disclosing that there are multiple offers, the seller is not "shopping" your contract. Shopping occurs when the seller discloses the terms of an offer to induce a buyer to submit a better offer. This can result in major distrust of the process by the parties, and the likelihood of loss of the buyers.

Usually the procedure is to notify each party that multiple offers have been received. Each party is then given the opportunity to raise or adjust his offer by a certain time. After that time, the seller is free to review all offers and choose one to work with. They are not obligated to choose the "first" offer that came in. The selected offer may be countered, or accepted as is.

July 21, 2010

Artwork Tips When Selling a Home

Oil painting is one of my hobbies so when I found this article, I could not resist sharing it. 

When selling a home, the number of works displayed and how they’re showcased may differ from when they’re just hung for personal enjoyment.  To avoid distracting buyers, art needs to play a secondary role to the lead: the home’s architecture and significant features, such as a fireplace. 

     Less is more. Don’t fill every wall with artwork.  Instead, put one great piece in an entry, over a sideboard, or above a fireplace.

    No leaning. Even though it’s considered quite chic, avoid leaning artwork against a wall, since there’s a risk of it being knocked over.

   Use art as a solution.  Spaced along a long hallway, art can break it up so it doesn’t resemble a bowling alley, or can cover ugly electrical panels.

    Draw inspiration. Encourage clients to look in magazines and books for more solutions.

Artwork can add a personalized, finishing touch to any room, but too much can distract buyers from a home's architectural pluses.

Properly displayed and tasteful artwork can instantly bring life to an otherwise dull room. Whether home owners have painted or papered their walls, most want to hang some artwork on them, perhaps by displaying fine paintings, prints, or photographs, or more casual, affordable pieces from nature, travels, or favorite magazines. 

Any artwork display should involve careful selection in choosing the right mat, frame, backing, or container, as well as determining the best location to hang the art, including how high or low it should be on a wall and whether it stands alone or as part of a group, designers say.

July 19, 2010

FHA is seeking YOUR Opinion - not that it really matters

The U.S. Department of Housing and Urban Development published a Notice, seeking public comment on three specific measures to reduce financial risk and preserve affordable mortgage financing for responsible consumers.

For the next 30 days, HUD is seeking public comment on the following policy changes, each of which are designed to mitigate risk to the Mutual Mortgage Insurance Fund while promoting sustainable homeownership for FHA borrowers:

1. Update the combination of credit and down payment requirements for new borrowers. New borrowers seeking FHA-insured financing will be required to have a minimum FICO score of 580 to qualify for FHA’s flagship 3.5 percent down payment program. New borrowers with credit scores of less than a 580 will be required to make a cash investment of at least 10 percent. Borrowers with credit scores of less than 500 will no longer qualify for an FHA-insured mortgage.

* This one is a joke.  No one will fund a FHA loan with a 580 credit score much less a 500!  They should have added 20% down for credit scores below 400 and 30% below 300; it would have made just as much sense.

2. Reduce allowable seller concessions from six to three percent. Allowing sellers to contribute up to six percent of the home’s sales price to offset a buyer’s costs exposes the FHA to excess risk by potentially driving up the cost of the home beyond its appraised value. Reducing seller concessions to three percent will bring FHA into conformity with industry standards.

• If FHA wants to conform to industry standards than why have FHA?  IF they don’t want to offer something different than just do away with the Federal Housing Administration and everything will be a Conventional loan.

3. Tighten underwriting standards for manually underwritten loans. When using compensating factors in the underwriting process, lenders will be required to consider those factors which are the best predictive indicators of loan performance, such as the borrower’s credit history, loan-to-value (LTV) percentage, debt-to income ratio, and cash reserves.

* How much tighter can they get?  Underwriters already use compensating factors.  We may have to wait and see how this one affects loan approvals.

July 15, 2010

Annual Percentage Rate

The APR is not the actual rate or note rate advertised by the lender. It is the effective rate which represents the cost of borrowing a mortgage loan. Lenders calculate APR taking into account the closing costs and the interest rate on a mortgage. The Annual Percentage Rate is often used to compare mortgage lenders and the programs they offer

The Truth-In-Lending Disclosure

The Truth-In-Lending Disclosure Statement (TIL) should be given to the consumer at the time of application.  If it is not, the lender has three business days from the date of application to mail the disclosure to the borrower.

“Annual percentage rate” sounds a lot like “interest rate” to most borrowers.  The APR is not an interest rate, but a theoretical measure of the cost of credit expressed as a percentage rate.

The purpose of the APR is to provide consumers with a uniform measure of the cost of a loan.  The APR equation includes the contract interest rate and adds the costs of the loan, including any prepaid costs (points, fees, etc.) that are part of the cost of borrowing.  Ideally, borrowers can compare costs from company to company by comparing the APR.

The APR Formula

1. Compute total of payment by multiplying payment schedule, including PMI by amount of payments.
2. Amount Financed is the loan amount, less points, prepaid interest, PMI, and lender fees
3. Finance Charge is the Total of Payments less the Amount Financed
4. Compute the APR by dividing the Total of Payments by the number of payments and apply that against the Amount Financed, as if it were the loan amount

The first step in determining an APR is to subtract the prepaid finance charges from the loan amount.  The result is the “amount financed.”  Next, the full principal and interest payment (including Private Mortgage Insurance or PMI ) is applied against the “amount financed” as if it were the loan amount.  The resulting interest rate is the APR.

Determining the Amount Financed-What are Finance Charges?

A prepaid finance charge is any charge one must pay in exchange for obtaining a loan (charges you would not incur if you were paying cash for the property).  Like the APR, it can be used by consumers as appoint of comparison between lenders.  Finance charges include loan fees (discount points, origination few, PMI) and miscellaneous fees (tax service, underwriting, document preparation, or lender review few).

In addition, some prepaid items such as per diem interest and escrows for PMI or prepaid PMI, FHA upfront MIP (Mortgage Insurance Premium), and the VA (Veteran’s Administration) funding fee are considered finance charges.  Other prepaid items, such as association dues, are not included.

Appraisal and credit report fees are not included when they are collected as part of an application fee.  Any inspections (termite, well, septic, etc.) that are required by lenders are not considered finance charges.  Fees for recording a deed of trust are not included either.  The only exception is a construction loan draw inspection. 

Third Party Fees

Regulation Z (12 CFR 226.4(b).) lists the following charges from third parties as examples of fees that the creditor must include when calculating the finance charge:

        Interest, time-price differential, and any amount payable under an add-on or discount system of additional charge

        Service, transaction, activity, and carrying charges

        Points, loan fees, assumption fees, finder’s fees, and similar charges

        Investigation and credit report fees

        Premiums on insurance protecting the creditor against the consumer’s default

        Charges imposed on a creditor by another person for purchasing or accepting a consumer’s obligation

        Premiums or other charges for credit life, accident, health, or loss-of-income insurance, written in connection with a credit transaction

        Premiums for homeowner and liability insurance written in connection with a credit transaction

        Discounts to induce payment by a means other than the use of credit

        Debt cancellation fees

Fees Excluded from the Finance charge

• Application fees charged to all applicants for credit
• Charges for unanticipated late payments, exceeding a credit limit, or delinquency
• Charges imposed by a financial institution for paying items that overdraw an account
• Fees charged for participation in a credit plan, whether assessed on an annual or other periodic basis
• Seller’s points
• Interest forfeited as a result of an interest reduction required  by law on a time deposit used as security for an extension of credit
• Real-estate related fees such as fees for title examination, charges for the preparation of loan documents, credit report fee, notary fees, appraisal fees, and amounts paid into escrow, if these fees are bona fide and reasonable
• Discounts offered to induce payment by cash, check, or other means

Insurance and debt cancellation coverage can also be excluded if the coverage is not required by the creditor, the premium for the initial term of insurance is disclosed, and the consumer signs or initials a written request for the insurance.  If itemized and disclosed, certain taxes and fees prescribed by law are also excluded from the finance charge.

Explaining the amount financed would be much simpler if each loan came with an “itemization of amount financed.”  The itemization would include a detailed list of the loan amount, the payment schedule, and each finance charge.

Payment Schedule

The payment schedule is another factor in calculating your APR.  To determine the payment amount to apply against the amount financed, divide the total of payments by the number of payments and use this average amount.  On a fixed-rate loan, the payment schedule is quite simple-the monthly payment is the same through the life of the loan.  Variable payments (as in an ARM, Buydown, GEM, or GPM) may be more complicated on a payment schedule.  The APR or ARMs can change based upon future interest rate changes.  Buydowns, GPMs, and GEMs have fixed payment schedules, so the APR on these loans will not change.

Total Finance Charge

The APR, amount financed, and total of payments have all been calculated—what is the total finance charge?  The difference between the total of payments and the amount financed represents the cumulative total of all interest and prepaid finance charges accrued on the loan, or the total finance charge. Subtracting the amount financed from the total of payments reveals this number.

July 14, 2010

100% Financing - the VA Loan

The VA home loan guaranty program was originally conceived in 1944 as a part of an attack on the harsh aftermath associated with wars.  The overall objectives of this attack were to diminish to the greatest possible extent the economic and sociological problems of post war readjustments of millions of men and women then serving in the Armed Forces.

NO MONEY DOWN!  There is a financed VA funding fee of 2.15%, and no monthly mortgage insurance.   The seller can pay all of the closing costs & pre-paid items.  Even veterans earning entitlement from the Reserves can participate.   Disabled veterans don't pay the VA funding fee.

July 12, 2010

Mortgage Rate Locks: How They Work

When considering a mortgage rate lock-in, you can negotiate the terms and time period you need.

A mortgage rate lock (also called a lock-in) is a lender's promise to hold for you a certain interest rate at a certain number of points for a specified period of time while your loan application is processed. Depending upon the lender, you may be able to lock in the interest rate and number of points that you will be charged when you file your application, during processing of the loan, when the loan is approved, or later.

Why Get a Mortgage Rate Lock?

Most locks are designed to protect homebuyers from rates that rise while their loan application is processed. But people refinancing can also benefit from rate locks. If you don't use a rate lock, you are at the mercy of mortgage market while it ebbs and flows as your loan is processed. That means that a 5.5 percent rate when you begin the loan application process may rise to 6 percent by the time the loan closes.

Higher interest rates can also increase other loan costs. For example, it might mean:

·                     you must pay more points, or

·                     you have to put more cash down. (This might occur because higher interest rates mean higher monthly payments. The lender may want more cash down in order to keep your monthly payments in line with what you can afford or what the lender will allow.)

What If Interest Rates Fall?

If interest rates fall during the lock period you can't take advantage of the lower rate unless you:

·                     have included a "float down" provision in the original lock, or

·                     rewrite the rate lock at additional cost.

When you include a float down option in your rate lock, the lender must give you the locked-in rate if interest rates go up before closing but, if rates go down, you have the right to lock again at a lower rate. Because this increases the lender's risk, the price of a float down is higher than the price of a lock without a float down.

The Mortgage Rate Lock Contract

Because there are many variations on rate lock provisions, be sure the lock contract gives you the options and time period that work best for you. Then get the agreement in writing with a ‘Financing Agreement’. The agreement should include all of the details, such as:

·                     the terms you've locked in, such as interest rate, points, and other costs

·                     the lock's effective date

·                     the lock cost

·                     the lock's expiration date and time, and

·                     any post-lock options.

When negotiating terms, here are some things to consider:

When to lock. Lock the rate in as soon as you see the rate you want or when you first apply for the mortgage so that your rate is locked as you spend time getting the application approved. That's particularly important if you barely qualify at today's rates and an increase would push buying right out of your reach.

You can also choose to set the lock upon approval of the loan. This might make sense in markets where the processing of loan applications is prolonged due to heavy demand for housing, but interest rates are trending down.

How long should the lock last? Before choosing a lock-in period, determine the average time for loan processing in your market. Ask your lender to estimate the time necessary to process your loan and verify the information with your realtor. Locks average 30 days, but can range from 15 to 60 days. Longer is usually better. If the loan doesn't close on time, lenders can extend your lock for a fee.  If the market has not changed you may get a small extension at no cost.

Shopping for a Mortgage Rate Lock

While we at Primary Residential Mortgage don’t charge you to lock a rate, some mortgage companies do.  Shop around for both the terms of the lock contract and its cost, which varies from lender to lender. Some lenders want up-front lock fees. Others take them at settlement. There are nonrefundable fees, flat fees, and fees based on a percentage of the mortgage, among other variations.

***While shopping, verify that the rate lock is from the bank, mortgage lender, credit union, or other entity actually writing the loan and not from a broker, loan officer, or go-between. A broker can obtain a rate lock from the lender, but he or she can't actually write the lock.

Final Considerations

Once you lock in a rate, if you haven't already, quickly submit the application and other required documents. You should have previously checked your credit report and prepared evidence of your income, employment, debts, assets, and other relevant financial information. Stay in close contact with the lender (or broker) to be sure that the application is progressing quickly enough.  There are many other factors that can cause delay such as appraisers, title companies, and underwriters.

* Pay attention to the deadlines.  The benefits of the lock are only good for as long as the term of the rate lock. If you fail to complete your home purchase or don't refinance before the clock runs out, and interest rates rise, you'll have to pay the increased rate, along with any other increased costs.

July 9, 2010

Dealing With a Low Home Appraisal

Whether you're buying or selling a home, you may have cause for concern that the deal will fall apart for reasons that weren't on the real estate radar a few years ago; that the appraiser, usually sent by the buyer's lender, will assign the house a value that's significantly lower than the agreed-upon sale price, and as a result, the lender will refuse to loan more than the house is worth, and the deal may end right there.

What's Changed With Appraisals?

This trend toward problem appraisals is relatively new. Part of the issue is the federal Home Valuation Code of Conduct (passed by Congress in 2008), which requires that appraisals be done by someone chosen by an independent third party. Instead of the lender being able to choose an appraiser that it knows and trusts, this third-party intermediary sends in someone from its list. And, according to reports, the third party's choice of appraisers isn't always appropriate.

How bad is the appraisal problem? According to reports by the National Association of Realtors, in 2009:

·                     37% of NAR members reported losing at least one sale because of the Home Valuation Code of Conduct

·                     70% of NAR members saw an increase in non-local appraisers, and

·                     85% of NAR members reported that appraisal quality had gone downhill.

Put into plain English, the agents for many disappointed homebuyers and sellers feel that their appraisal was badly done, by someone who didn't know the local area and perhaps didn't even know how to handle the appraisal job in a professional manner.

Get an Appraisal You Can Live With

A faulty appraisal shouldn't and needn't derail your sale. Appraisers operate under a set of national rules known as the Uniform Standards of Professional Appraisal Practice.

Of particular note is the section of the standards called "COMPETENCY." Take a look, for example, at where it says "the appraiser must understand the nuances of the local market." If your appraiser doesn't, you have grounds to demand that another appraiser be sent to evaluate the house you're planning to buy or sell. With everyone in the transaction probably demanding the same thing, the third party is likely to listen.

The homebuyer may alternately try to come up with the extra cash to match the appraisal amount, or look elsewhere for a loan, hoping to encounter a more generous appraiser.

If none of these options work, the seller is going to have to decide whether to accept a lower price likely, the appraised value, which is the maximum the lender will allow the buyer to pay.

July 7, 2010

Get Back Your 5.0 with a 4.5

Yes, many homes are under-appraising and some are going into foreclosure but the good news for everyone else is borrowing money is cheap!  Interest rates are in the 4's!  Below 5%!  The rates have not been this low in 40 years.  If you think you already have a good rate you should check again.  Wouldn't it sound great to say "Four point...something"?  I remember when 5.0 was cool  like my brothers 5.0 GT convertible mustang that he traded for a minivan (not cool).  If you can save $100, $200, $300 each month would you do it?  What would you do with all the extra cash?  Would you pay off an auto loan, put it in savings, start a college fund, or buy back the 5.0 GT?  Lets see how much I can help you save.

July 6, 2010

Russian Real Estate Agent Spy

Are you old enough to remember the ‘good ole’ days’ when the U.S.S.R. was the enemy, the Cold War, and Russian Spies?  Well, they’re back and it is notable that two happen to have chosen (or been assigned?) the real estate profession and none of them are loan officers!  Take a good look; this is what a Russian Real Estate Agent Spy looks like.  According to Russia, this is a face that will blend into the real estate industry.  So is it possible all agents are ‘Agents’? ;)