Saved by… the Appraiser?

I think it’s time we cut them some slack. No doubt there are instances where the appraiser completely missed the boat – when values were quickly overturned either after correcting errors or reflecting missed facts. I hear countless stories where the FHA appraiser was “too picky” regarding some of the reported observations on the condition of the property.

Lately, I have had several borrower prospects complain about their realtor or mortgage broker not recommending a property inspection. “I bought the house and had no idea there was a roof leak.” “You should have seen the termites in the attic right after we closed the deal.”

Let me tell you something: Engaging a property inspector is entirely up to the borrower/buyer – caveat emptor. Sure, there are times when it is obvious – and therefore when it is incumbent upon the industry professionals to strongly suggest an inspection by a licensed contractor. But if you purchase a property, it is your fault if you elect to forego the inspection and later find serious problems.

One appraiser recently conditioned his report on the receipt of an inspection report – to address what appeared to be some insignificant siding damage. The lender refused to close and fund the loan until a professional contractor confirmed in writing that the damage was cosmetic. It was a great call by the appraiser, because it turned out there was over $15,000 of structural damage from dry rot. That “picky” appraiser saved my clients from committing to a serious money pit.

 

Beware of Bonus Income Guidelines

To qualify for a conventional mortgage, your income should be “…stable, predictable and likely to continue”. You need to demonstrate your ability to repay – and, ideally, that your income is likely to continue for 3 years. If you earn bonus or commission income, your employer needs to verify that you have received it for the past 12 to 24 months – showing positive factors that offset the shorter income history.

But what if you decide to move to a different location (i.e., to maximize your earnings, to be closer to family, or because it’s just too cold where you are)? Unless your “transfer” is with the same company, you won’t be able to use your bonus income to qualify for a mortgage in your new location.

One of my clients has had consistent earnings with the same major automotive company for 25 years. But because the dealerships are franchisees, each franchisee is deemed to be a separate employer – so his move from one franchisee to another disqualified him from using his bonus income. And because the majority of his income is always from bonuses, he couldn’t qualify for a conventional mortgage. Even though he generated consistent monthly bonuses over the past 7 months at the new franchisee, he needed to show at least 12 months of bonus earnings.

The Federal National Mortgage Association (FNMA) would not bend the rules for this solid income earner. The prevailing private lender agreed that the conventional bonus income guidelines do not incorporate common sense.

 

Condo Loan Craziness

Just because you have good credit, low debt-to-income ratios and a good size down payment, don’t think that qualifying for a purchase mortgage on a condominium will be a breeze. It may not be you that the Federal National Mortgage Association (FNMA) is concerned about. Since FNMA is the likely buyer of the mortgage advanced by your lender, they are fastidious about how the condo homeowners association (HOA) or property management company is managing the affairs of the building.

There are some rules you should know before making an offer:

• If you intend the condo to be an investment property, over 50% of the units in the building must be owner-occupied.
  WHY? Owner Occupants look after their units and are less apt to default on their mortgages
• If the building offers in-room housekeeping and concierge services, FNMA will assume the condo is operated as a hotel and your loan will be declined.
  WHY? Short-term rentals (daily/weekly/monthly) are prohibited – whether offered by the HOA or the unit owners (and if the latter, the HOA will need to police this use)

It is not easy for the HOA to monitor the number of rental units – in which case the appraiser will need to make what is often an unreliable estimate. If this estimate is high, it triggers a red flag in the eyes of the lender. Letters of explanation and verbal confirmations will be required, thereby causing substantial delays and increasing the odds that your loan may not close.

 

Free Money at the Closing Table

Free?  I think not!  But there are definitely “lender credits” available to you, depending on the interest rate you select.  The technical term for this credit is “yield spread premium”.  But is the lender passing this credit on to you, or are they keeping it – and therefore booking additional profit from your loan?  This profit would be in addition to their processing fee, and results from the earnings spread they generate between what you pay them versus what it costs them to fund your loan.

The higher the interest rate you pay, the higher the credit to which you should be entitled – all of which can be applied towards offsetting your closing costs.  In arriving at this credit, the lender factors in certain standard risk adjustments that are based on variables such as your credit score, loan amount, collateral type, and loan-to-value ratio.  The lesson to be learned is that your lender should always fully disclose the amount of this credit – even if it is in the form of a reduced interest rate.

Recently I had a client who was able to increase his lender credit by simply taking a few steps to improve his credit score.  After following a program of credit card debt reduction, his FICO score increased from 599 to 642.  This favorably resulted in an increase to his lender credit of 1.25% of his loan amount – a savings of $2,500 which he was able to apply towards the closing costs on his $200,000 residential mortgage.

 

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.

 

 

Really Bob? Are You Sure About That?!

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

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

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

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

 

 

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?

To 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.

 

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

Your 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.

 

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.

Since 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).

 

 

Private Non-QM Lenders Have Dropped Their Rates

Most lenders will only extend Qualified Mortgages. A Qualified Mortgage (“QM”) is a kind of loan having more stringent pre-qualification requirements. QM lenders must show the regulators that they have determined, prior to closing, that you, as a borrower, have the ability to repay your mortgage. This is logical, and will continue to be the norm for conservative lenders. Since these conservative lenders in turn have conservative investors who ultimately purchase your mortgage, their investors also want nothing to do with non-QM loans.

But if I lend you money at 6% (say 2% higher than conventional rates because of some additional risk) – there is no doubt that I already have an investor for the loan I just gave you who is willing to pay me, say, 6.5% for the same loan. Why would an investor do that? Because in a large financial market, he too has someone else on the line willing to pay him something more – and so on, and the business is profitable all around.

The old 12-13% “hard money” loans were being advanced to people having unfavorable credit when standard mortgage interest rates were at 5-6%. Now these non-QM lenders have lowered their rates to 6-8%, when today’s 30-year conventional rates have only dropped to about 4%. It’s not a bad deal to pay slightly higher non-QM rates for a brief period until you have satisfied your lender’s seasoning period requirement – and then you can refinance with a conventional mortgage without a prepayment penalty.