Michael J. Kanuka
Author Archives: Michael J. Kanuka

Identity Theft: Curious Advice…

idtheftImagine some guy by the name of “Greg” using your name and social security number to borrow three private loans totaling $10,000. Wouldn’t you feel violated? You would also be furious if this showed up on your credit report only 5 days before your new mortgage is scheduled to close!

The fraudster is not about to make principal and interest payments on the scam loans. So your credit score will immediately deteriorate because of late payments, which you likely won’t even know about – unless you frequently check your credit scores.

This happened to a client of mine last week. His attorney recommended that he: (i) request a fraud alert be placed on his credit report, and (ii) commence making the required monthly payments on the fraudulent loans…

PARDON??!

Imagine making payments on a fraudulent loan – and then trying to prove later that your payments should be recouped? I don’t actually blame the lawyer – because he was simply trying to stop the fraudster, and help the borrower get a mortgage by maintaining a decent credit score. What was missing, however, was that a new conventional or FHA mortgage lender will require evidence that an act of fraud had been committed – which will include the filing of a police report. The omission of or delay in filing this report gives the appearance of “hiding” the identity theft. It is very important to demonstrate to the lender that all the right steps have been taken to address the problem as quickly as possible.

Here’s the Point: You can’t hide identity theft when you apply for a mortgage. Promptly have the credit bureaus put a fraud alert on your credit report so that no further borrowing can take place without your approval.

 

Refinancing? The Grass Isn’t Always Greener

grassMy client made the right decision last week. He decided not to refinance his mortgage – even though:
(i) he qualified for a better interest rate (because his credit score had improved),
(ii) the value of his primary residence was way up, and
(iii) he could have used some of the equity in his home to consolidate debt.

His credit score was 650 – lower than what he had hoped for, mainly because of some unavoidable late payments a while back. Keeping his loan-to-value ratio at 80% (to avoid mortgage insurance premiums), he was surprised to discover that, with his credit score, he would still be assessed 3.0% of the loan amount at closing. In addition, because he was looking to pull out some equity (i.e., obtain a new loan greater than his existing loan amount), the “cash-out refinance adjustment” would have been another 2.625%. Along with a couple of other incidental adjustments for loan size and overall risk profile, the cumulative risk adjustments would have been 5.85% of his requested loan amount – or $5,850 on a $100,000 loan.

Sure – I found a lender who would offset all of these costs. The problem was his interest rate would be no different than the rate he already had on his existing loan. Also, his principal amortization schedule would reset upon the commencement of his new 30-year mortgage. Therefore, the portion of his new monthly mortgage payment attributed to principal reduction would be less than what his principal payment was under his existing loan.

Here’s the Point: Make sure to understand all of the “risk adjustments” (costs) that lenders assess before you refinance your mortgage – because you might be surprised.

 

Christmas Without a Mortgage

My lender declined my client’s mortgage today, four days before Christmas. His existing loan expires on December 31, and this was his last chance to refinance before the lender could commence foreclosure proceedings.

This 70-year old gentleman has no late payments on his credit report. However, a credit card company entered a judgment against him six years ago, and conventional lenders require this to be removed before extending new credit. Unfortunately, he lacks the liquidity to eliminate the judgment, and his age has been an obstacle to finding a job to augment his social security income. Although the private lender liked his story, they would not accept a Debt-To-Income (DTI) ratio over 50%.

Many people rent the other side of their duplex – but the key issue is whether the lender will classify the rent as “boarder” income (100% of which may be used for qualification purposes) or “investment” income (only 75% of which is allowable – to factor in the potential loss of the tenant). The boarder income argument was valid because the building has only one tax parcel number and is still technically his primary residence. But the Underwriter disagreed, and the resulting lower income caused his DTI ratio to exceed the maximum threshold.

In the end, the proposed structure was declined at a lousy time of year. Fortunately, the lender agreed to approve a lower loan amount – and at a better interest rate. My client also has the ability to raise rent, which the tenant knows is below market.

 

Here’s the Point: A loan may be declined as presented, but it should be incumbent on every lender to offer at least one alternative structure which would allow the loan to work.

 

Excuse Me? Who are the “Entitled” Ones?

There are lots of articles written about Millennials – you’ve read them (e.g., the notion that they are lazy, filled with too much self-regard, have unrealistic monetary expectations, etc.). The ages of Millennials varies depending on the author, but seems to focus on the era between 1982 and 2004 – or, said another way, their average age today is about 22.

https://i2.wp.com/msbusiness.com/wp-content/uploads/2015/08/Millennials.png
What does this have to do with mortgages you ask?!

For all the perceived negatives, these “kids” (I can call them that because they are younger than my children) are the most adaptable and cooperative of all my clients. EVERYONE (note the emphasis) must open their books to get a mortgage done today – regardless of age or socioeconomic status.  This is mainly thanks to the Consumer Finance Protection Bureau (CFPB), which significantly tightened the regulations for mortgage qualification purposes after the 2007 U.S. Housing Crisis. Sure, I complain about the paperwork all the time, but welcome to the new reality – which, by the way, is here to stay.

For the most part, I don’t have a problem with the requirements – and I deal with them every day.  Consumers get more sensible mortgages and banks have stronger balance sheets to return dividends.  From my experience, the people who have the biggest problem with regulations are the affluent Baby Boomers (1946-1964).  Is it because many of them have never had a mortgage?  Regardless, they have the perceived notion that: The higher the net worth, the less paperwork that should be required.  Wrong.

Here’s the Point: No one is “entitled” when it comes to providing paperwork for obtaining a mortgage – and that is exactly the way it should work in the marketplace.

 

Rent: Still Paying Cash?

If you need a mortgage, but you do not have established credit – i.e., at least two active credit cards or a car loan/lease, then all you can do is demonstrate that you are honoring your rent obligations. Sign a lease, pay rent via check each month, and retain your bank statements and cancelled rent checks for at least 12 months. Without these items, you better have a good relationship with your landlord – because you’ll need a letter confirming you consistently pay rent on time.

Here are some statements which will fall on deaf ears at the bank:

“I’m sharing an apartment with a friend and I pay him cash for my share. He then sends the full amount of rent by check to the landlord on time every month.”

⇒That’s nice, but you need to show consistent cash withdrawals from your bank account every month in the exact amount of your share.

“I live at my daughter’s place and I cook, clean, and I timely pay for most utilities every month. And lately I have covered all of the capital improvement and repair costs.”

⇒That’s nice, but you need consistent outflow of your contributions, and to show that the utility receipts match the corresponding withdrawals from your bank account.

“I’m renting from my aunt. She trusts me so there has been little point in drawing up a lease contract.”

⇒That’s nice, but without a contract you can neither demonstrate that you have any obligations nor lived up to them!

Here’s the Point: To obtain a mortgage without established credit lines, the lender will require at least 12 months of cancelled rent checks and/or a landlord “Verification of Rent” letter.

 

Too Much Rehab Brain Damage – I’ll Pass

How many times have you walked out of a property viewing promptly after seeing how much work was needed on the floors, kitchen, bathrooms or some other deferred maintenance? There is a good chance the Seller has way less interest in renovating than you do – especially because they are about to move out.

But Sellers know how much work is required. They probably already had quotes and were sick about what it would take to upgrade before listing their property. Therein lies the opportunity! Make an offer subject to obtaining two things:

  1. An acceptable quote from a contractor to complete the work, and
  2. A pre-qualification letter from a lender who has extensive FHA 203(k) loan experience.

FHA 203(k) Rehab Program

As a home-buyer or a real estate agent, you could save the deal and put money in your pocket by knowing the 203(k) rules. Buyers can acquire and renovate their new home without dipping into personal savings – because the costs for the purchase plus the required capital expenditures (to fully renovate the property) can be combined into one 30-year fixed rate mortgage. After purchasing the property using the loan, you simply tap into a loan reserve that is set aside by the lender at closing.

The mortgage amount is based on 96.5% of the lesser of: (i) the combined “as-is” value and cost of improvements, or (ii) 110% of the “after improved” market value. And, the 3.5% down payment can even be borrowed from a family member.

 

Here’s the Point: Think twice about passing on a home purchase because of too much renovation work. FHA’s 203(k) program can help you negotiate a better price, quickly build equity, and tailor custom improvements to your liking.

 

Really Bob? Are You Sure About That?!

Oh, really?I’m buying another property, but I plan to call it a second home so that I can get a better interest rate.

No You’re Not: Unless it has vacation/resort amenities and is 50+ miles away from your primary residence, it will be treated as an investment property and carry a higher interest rate].

  • WHY? Because it’s not your vacation home

Oh, really?I have an FHA loan on my home, and I’m going to use FHA again to minimize the down payment on my second property.

No Sir: You can only have one FHA loan at a time and it must be on your primary residence (and besides, there are conventional financing programs that offer loans as high as 97% of value).

  • WHY? Because FHA financing is meant to help consumers purchase their home

Oh, really?Unless I’ve had 24 months of self-employed earnings, I’ll never get a residential loan.

Not True: Depending on your ability-to-repay, Freddie Mac may only require one year of tax returns from your new business.

  • WHY? Because Freddie takes compensating factors into consideration

Oh, really?I’ll still profit by selling one of my properties to my son – and he can get maximum FHA financing because I will co-sign and it will be his primary residence.

Incorrect Again: A parent/child profit-sharing relationship is deemed an “identity of interest” transaction, and the buyer is restricted to 75% loan-to-value when there is a non-occupying co-borrower.

  • WHY? Because the borrower should solely benefit from primary home ownership

 

Here’s the Point: The number of rules imposed by Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA) can be daunting – but most of the time they actually make sense.

 

ARM’s Had A Bad Rap

Unlike “Fixed Rate Mortgages”, having an interest rate that remains the same for the entire loan term, rates on Adjustable Rate Mortgages (ARM’s) change periodically.  You would think in a rising interest rate environment that locking your interest rate would make the most sense – to avoid higher monthly mortgage payments.  Then why are ARM’s making a comeback?

armsTo start, ARM’s have lower interest rates than 30-year fixed rate mortgages (so the monthly payment is lower, allowing borrowers to maximize their cash flow).  ARM’s therefore offer more payment flexibility (not only can borrowers use the resulting savings towards personal expenses, but they can elect to make additional principal payments on their mortgage).

Plus, people generally do not stay in the same home for more than about 7 years.  If you enter into a “7/1” ARM, this means that the interest rate is fixed for 7 years, and then the rate adjusts thereafter based upon prevailing rates at that time.  Sound risky?

In the past, ARM’s were much riskier loans.  Depending on the lender, ARM’s may have had:

  • prepayment penalties
  • more frequent rate adjustment periods
  • less or no principal amortization
  • high or no ceilings on the amount the rate could increase upon adjustment

All of these onerous terms changed with the onslaught of regulations after the housing crisis. Today, ARM’s “cap” the amount of rate increase at the time of the required adjustment – and the interest rate is prevented from increasing by more than 5% over the life of the loan.

Here’s the Point: For savvy, budget-conscious borrowers not likely to retain their real estate asset long term, it would be worthwhile to explore the pros and cons of an ARM.

 

Cost To Pull Your Credit Report: 5 Points*

When a third party looks at your credit score, this is called an “inquiry”.  A “soft inquiry” does not affect your credit score, but a “hard pull” does. Limiting your hard pulls will qualify you for the best interest rate available when you apply for a loan.

Here are some soft inquiry examples:

  • By credit card companies before they send you a solicitation in the mail to see if you qualify
  • By prospective employers as a part of their background checks
  • By banks to verify that you are who you say you are when opening an account

https://i1.wp.com/cdn2.business2community.com/wp-content/uploads/2013/11/credit-inquiry-blog-post-image.jpgYour credit score will not be affected if you check your own credit report. You should confirm the accuracy of what is being reported about you, and you can do so for free once per year from each of the three credit bureaus at: https://www.annualcreditreport.com (there is a nominal charge if you want to see your score).

 When you apply for a loan or a new credit card, however, the lender or mortgage broker will conduct a hard pull on your credit report. A hard pull stays on your record and it lowers your credit score by about 5 points for six months. For these reasons, it is important to guard your credit report from too many hard pulls. So if you get a store credit card just to save 10% on a single purchase, know that you have hurt your credit score – and it is probably not worth the savings.

*Source: Credit Plus, an unaffiliated company that provides third party pre-loan application and post-loan closing verification services – such as tri-merge credit reports.
Here’s the Point: Make sure you know what kind of credit inquiry is being made – a hard pull stays on your credit report and lowers your credit score by about 5 points for six months.

 

Sweet Loan Arrangement for Veterans (Mostly)

The Department of Veterans Affairs (“VA”) guarantees a portion of all VA mortgages. This makes the loan safer for lenders providing these loans. As a result, VA lenders generally charge about one half percent less than the fixed rate on a standard 30-year conventional mortgage. Unfortunately, many veterans are either unaware of these savings and other VA mortgage benefits, or they have forgotten about them.

https://i2.wp.com/www.vahomeloannews.com/wp-content/uploads/2013/04/qualify-va-loan.jpg?resize=291%2C220Since veterans can finance 100% of the purchase price of their primary residence, one might think the loan may be risky. Yet historically, veterans have the best track record for timely repayment – which is not surprising given their unwavering commitment to our country. Most veterans are required to pay a pre-closing VA Funding Fee (an insurance policy to the VA in case of a default), but there is no ongoing monthly mortgage insurance premium requirement – as is the case for conventional or FHA mortgages when the down payment is less than 20%.

But there is one key problem with the program when financing a condo: VA must approve the building and all condo association documents. While this would seem reasonable, most associations reserve the right to approve the buyer. VA views this as an ability to “screen” a prospective purchaser, and therefore discriminatory. Association documents must be revised to delete this approval right, and most condo boards are reluctant to do so (not because of veterans, but because they do not wish to allow the sale of a unit to individuals of ill repute).

Here’s the Point: It’s Memorial Day coming up, so take the time to thank our veterans. Offering them preferential mortgage terms is the very least we can do.