Category Archives for "Mortgage Brokerage"

Ramifications Persist – Thanks In Part To Unscrupulous Brokers

Subsequent to the Housing Crisis, the 2010 Dodd-Frank Wall Street Reform Act imposed many new rules. This was a response, in part, to some unscrupulous mortgage lenders and brokers charging excessive fees to consumers.

Mortgage lenders and brokers cannot charge origination fees to borrowers that represent more than 3.0% of the loan amount (the “Points & Fees Cap”). As reasonable as this fee cap concept sounds, it is fraught with restrictions that are unfair to the people it was meant to protect.

Let’s take an example of a consumer wishing to borrow $120,000 to buy a home:

$2,700.00 - Mortgage Broker Fee (2.25%* of Loan Amount)
     975.00 - Lender Administration (Standard Average Flat Fee)
$3,675.00 - Total Origination Fees

* Average Florida mortgage broker fees range between 2.0% to 2.75% (based on the interest rate selected, the borrower is eligible to receive a credit at closing to fully cover this fee for most conventional loans).

On the surface, the loan fails the 3.0% Cap (i.e., $3,675 of fees represents 3.1% of the loan). This renders the loan a “Non-Qualified Mortgage”, in which case Fannie Mae could elect not to purchase the loan from the mortgage lender. The lender might stamp “decline”, given their potential inability to monetize the loan.

And, if the lender imposes customary “risk adjustment fees” to compensate for a higher loan-to-value or lower credit score (or if the borrower pays a reasonable fee to “buy-down” the rate), these “Discount Points” must also be added into the calculation – making it impossible for the borrower to obtain a Qualified Mortgage. Fortunately, the regulators have acknowledged that some “bonafide” fees may be excluded from the cap calculation, allowing most mortgages to qualify after time-consuming compliance checks.

Here’s the Point: Regulators imposed a “Points & Fees Cap” to ensure the mortgage lender and broker fees are reasonable, but the resulting time-intensive compliance checks can delay closings.

No Way I Will Be Declined

declined

You went under contract to purchase a property, and then started accumulating the supporting documents to obtain your mortgage.Well, guess what? Your steps should have been reversed! Here are some common excuses for those who figured getting a mortgage would be easy, but then discovered there would be some difficulties:

  • “XYZ Credit Co. said my FICO score was 665, which I knew would be good enough for me to qualify for a mortgage. Plus I could always add my spouse, who has an even higher score than me.” Unless you use https://annualcreditreport.com, or have a licensed mortgage broker or lender pull your tri-merge credit report, 90% of the time the score you receive from your source is likely to be 10-50 points higher than your true score. This could be enough to disqualify you from getting a mortgage. Also, the lender will use the lower score of the two – so your spouse can only help if you need to show additional income.
  • “I had a mortgage before, and I have never had trouble qualifying for a credit card or an auto loan.”Most lenders require that you have at least three (3) separate tradelines, one of which should have been in place for as many as 12 months – with an authorized amount of $1,000 or more. You also need to be the primary card holder, not just an “Authorized User”. And, if your prior mortgage has been repaid, that doesn’t count towards the minimum tradeline requirement.

Here’s the Point:Have your credit score pulled before you start making offers – and make sure it is a tri-merge report from all three credit bureaus.

Mortgage Pitfalls for Self-Employed

Pitfalls

Have the revenues from your business been solid over the past two years? Great! Well that’s not good enough to get a mortgage. Here are two main reasons:

  1. If you have been maximizing expenses in order to minimize your taxes payable, remember that it is the net (after expense) income from your business that is used by a lender to calculate your qualifying ratios
  2. If your projected income in the current year is lower than the income reported in your tax returns over the past two years, a conventional lender may decline your loan request outright

The Federal National Mortgage Association (Fannie Mae) publishes self-employment income guidelines for lenders. To qualify for a mortgage, your self-employed net income should be stable, predictable and “likely to continue”. While having guaranteed, contractual income is not a requirement, lenders carefully analyze the financial strength of your business, your sources of income, and the economic outlook for your industry.

Some suggestions to maximize loan approval probability:

  • Understand how the lender calculates your debt-to-income (DTI) ratio – especially if your most recent tax return shows declining net income
  • Produce a current year Profit and Loss Statement (P&L) showing year-to-date actual figures along with realistic projections for the remainder of the year
  • Show that your company distributes less income than it earns (to demonstrate growing cash reserves)
  • Ensure the new mortgage payment (for which you are applying) is in line with or lower than your current rent or the mortgage payment on your existing loan.

Here’s the Point: Make sure you produce a solid Letter of Explanation (LOE) to your lender that will support the continuity of earnings from your business.

Be Nice To Your HOA


If you are financing the purchase of a condominium unit, you are going to need help from the homeowners’ association (HOA). A property management company is often hired to manage the affairs of the complex, but the HOA is ultimately responsible for many things – including:

  • Building structure, machinery and equipment (roof, HVAC, security, electrical/mechanical)
  • Common areas (lobby, pool, work-out facilities, BBQ area, landscaping)
  • Other functions (insurance, accounting, budgeting, approving leases, collecting HOA fees)

Your lender will require a detailed project review whenever your down payment is less than 20%, or if your condo will be a rental property. This means the HOA will likely need to provide you with several documents (e.g., bylaws, financials, master insurance certificates) and complete a condo questionnaire to confirm that:

  • There is no existing or pending litigation
  • Sufficient reserves exist in the repairs and maintenance budget
  • The condo does not have short-term “hotel-type” rentals
  • No more than 15% of the owners are delinquent in their association fees
  • One owner does not own more than 10% of the units

The questionnaire takes time to complete, and so the HOA may charge you a fee for doing so. But in the end, knowing everything about your purchase will protect you from unforeseen events – including special assessments for which you may be responsible right after your purchase.

In addition, the HOA’s insurance agent will need to provide you with written evidence that the condo master property and liability insurance also applies specifically to your unit being purchased.

Here’s the Point: When you purchase or refinance a condo, there are several reasons why you will want the homeowners’ association on your side.

Know Before You Owe

loan estimate mortgage disclosure rules


In 2015, the Consumer Finance Protection Bureau (CFPB) created “Know Before You Owe” mortgage disclosure rules. These were implemented to ensure that consumers would have easy-to-understand information before making what is usually their largest financial decision – namely, the purchase of their own primary residence.

There were a bunch of disclosures required by the CFPB – with changes introduced every year. The key disclosures are the Loan Estimate (which replaced the old Good Faith Estimate), and the Closing Disclosure (which replaced the old HUD-1 Settlement Statement). A lender or mortgage broker is required to issue you a Loan Estimate within three (3) business days to a prospective borrower who is “in application”.

Borrowers refinancing or purchasing a residential property are deemed to be “in application” when the following six items have been received:

  1. Full Name
  2. Social Security Number
  3. Property Address (for a purchase, there should be a reasonable probability of going under contract)
  4. Estimated Value (for a purchase, what the offer is expected to be)
  5. Loan Amount (this item would not be considered received if the down payment is uncertain)
  6. Income (the borrower’s actual and projected earnings should be reasonably reliable)

This was a good rule, because consumers often never really knew what their loan costs and reserves would be until right before closing. Unscrupulous lenders and brokers had been “hooking” their borrowers – thereby making it difficult to change lenders right before funding.

Interestingly, these rules do not apply to commercial, reverse, mobile home or HELOC mortgages.

Here’s the Point: Get a Loan Estimate as soon as possible when applying for a mortgage – so that you know what your costs are likely to be.

Should You Buy That Home in Your Name?

mortgage individual name


Most mortgage lenders specializing in residential mortgages will not extend financing unless you own the property in your personal name. This is usually a requirement of the investor who purchases the mortgage from the lender who closes on your loan. And this is the case whether the property is your primary residence, second or vacation home, or rental/investment property.

Why would you create an LLC or corporation to hold title to your real estate?

The main reason is usually to limit your personal liability – say, in case someone slips and falls while on your property. For example: If title is in your LLC, you are more likely able to shield your personal assets against a claim (however you should always consult with your attorney).

If you decide not to purchase a residential property in your personal name, however, the loan will be deemed a commercial loan – not a residential loan. While there are many community banks that will lend to an LLC or corporation, you would generally always need to personally guarantee the loan in any event. Also, commercial loan interest rates tend to be a little higher than a residential loan in your name.

Some people acquire their residential properties in their personal name, but then later transfer title via quit claim deed to an LLC. As a general rule, this is not permitted within the loan documentation – but residential lenders do not typically audit title (especially if you continue making your monthly mortgage payments on time).

Here’s the Point: ​The interest rate will usually be more favorable when you purchase a residential property in your individual name.

First-Time Homebuyer Programs?

first-home-buyers


First-time homebuyer programs (FTHP’s), when available, can make purchasing a home more affordable for low-to-moderate income individuals and families – but there is generally always a catch. For example, the Florida Housing Finance Corporation advertises that they offer fixed, low-interest rate FTHP loans. This is true, however the rate is actually higher than what is offered by the most active mortgage lenders in the industry.

Before you get excited about being approved under a government-sponsored first-time homebuyer program, you should know:

  • Some grants can only be used towards your down payment, not closing costs – and in most cases are required to be repaid (getting a gift from a relative may be better)
  • A home inspection report (not required under a conventional loan) may crater the deal because all costly repairs will likely need to be completed prior to closing
  • Some programs have long waiting lists, so be prepared that it may take well over a year before you find out if you qualify
  • Including all other income sources with your application (such as alimony and child support) will often disqualify the applicant because the maximum income threshold may be exceeded

First-time homebuyer programs generally always require another separate government approval stamp. It is therefore not uncommon for loans to be declined at the last minute when it would appear the borrower could qualify for a regular conventional loan.

Sometimes all it takes is a little more preparation and guidance – and a first-time homebuyer can comfortably qualify for more cost-effective conventional financing.

Here’s the Point: First-time homebuyer programs, if available, are not always the best or most cost-effective solution.

You Really Think You Are Pre-Qualified!

mortgage pre-qualify


“My real estate agent said I need a pre-qualification letter, and I was wondering if you could provide one to me within the next hour so that I can make an offer on a property.”

It is very rare when a borrower has pre-prepared all of the paperwork required to demonstrate their ability to repay the mortgage they are seeking.

A pre-qualification letter is absolutely useless, unless it confirms that the preparer has verified the prospective borrower’s income, liquidity and credit. This would include at least the receipt and review of the following, as applicable:

  • last 2 years of tax returns, W-2’s or 1099’s
  • last 30 days of paystubs
  • last 2 monthly bank and retirement account statements
  • tri-merge credit report from the 3 national credit reporting agencies 

Without the above, there is no way a lender can properly confirm that a borrower is truly pre-qualified.

Real estate agents showing “pre-qual” letters to sellers that do not confirm the above are likely wasting their and their seller’s time.

Ideally, an “Approve/Eligible Finding” should also be obtained from government-approved software, evidencing that a greenlight was received from FannieMae or FreddieMac to proceed with a bona fide mortgage loan submission.

Many people are in such a rush to make their offer, they avoid mortgage professionals who take the time to diligently ensure the buyer is a capable borrower. Instead, some buyers actually call around until they find a lender who accepts verbal confirmations alone – and then a letter is issued that usually does more harm than good.

Here’s the Point: ​You can get a mortgage pre-qualification letter in less than 10 minutes – but they are not worth the paper they are written on.

Are You Sure About Value?

appraisal


When valuing your home, don’t simply rely on a few houses that recently sold in the neighborhood. Just because Fred sold his place across the street for $450,000 (or because Trulia/Zillow estimated your value to be $435,000) doesn’t mean your home is worth the same.

Fred’s house is not a good sales comparable if he has:

  • a pool (and you don’t)
  • 4 bedrooms/3 baths (versus your 3 bedrooms/2.5 baths)
  • a 2-car garage (to your carport)
  • a newly renovated kitchen (versus your limited renovations)


Without doing your homework, you may be unable to sell your home for the price you want – or your loan entitlement could be much less on a cash-out refinance or reverse mortgage.

The lender will require an appraisal prior to closing – unless an appraisal inspection waiver is granted (such as when you may have substantial equity in your house).

In a conventional or government purchase mortgage, you can get pre-approved by a lender before getting an appraisal (so you shouldn’t spend $485 on an appraisal until you see the loan closing conditions). Whereas in a reverse mortgage, you generally cannot get pre-approved without the appraisal (so make sure your home value estimate is accurate before paying for the appraisal – otherwise you may be disappointed when your approved loan amount is far less than you had expected).

Analogous to lawyers being trained not to ask a question without knowing the answer, you, as a borrower, should be confident in your home valuation before paying for an appraisal.

Here’s the Point: Before you refinance, don’t waste your money on an appraisal until you have done your own homework on value.

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