Category Archives for "Real Estate – General"

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.

Walk Away From The Deal

walk away

I admire my clients. They find the perfect home – or so they think, and then are driven to close the deal regardless of financing roadblocks that surface. Sometimes, though, they don’t see the forest for the trees.

Typically, there are relatively simple solutions to resolve issues. For example, if a lender requires a borrower to evidence timely rental payments via cancelled checks (but in some months cash was paid), the landlord can confirm this with a signed Verification of Rent (VOR) form.

But when several solutions are required, stretching is likely not the best answer. I’m all for rolling up the sleeves and making it work, but there is a point when you need to walk away so that either your economics are more comfortable or you truly know your Seller’s bottom line.

Having some of these example issues should give you pause:

Problem

Solution

Debt-To-Income Ratio Too High

>Restructure Vehicle Loan to Reduce Overall Monthly Payments

Low Appraised Value & Seller Is Price Inflexible

>Obtain Gift Funds to Cover New Equity Required

Higher Gift Funds Introduces Risk to Lender

>Evidence More Cash Reserves in Bank Account

Uneconomical Homeowners Insurance Costs

>Change from Replacement Cost Coverage to Actual Cash Value

There is Asbestos in the Siding & Ceiling Tiles

>Accept the Fact that Fibers Are Not Airborne Unless Disturbed

Dry Rot and a Ceiling Leak

>Seller to Set Aside Sufficient Repair Reserves

Remember: Your best solution may very well be to find another property!

Here’s the Point: Don’t fall in love with your real estate purchase until you are Cleared-To-Close, because your judgment might be clouded.

Short Sellers Are Back

Homeowners who entered into short sales after the U.S. Housing Crisis are back purchasing homes again.

Between 2010 to 2014, a significant number of foreclosures took place. Lenders exercised steps to take title to many homes – typically because borrowers were unwilling or unable to correct their late payments or defaults. Now, 7 years after receiving a Certificate of Title evidencing the property foreclosure sale, many borrowers can qualify for conventional financing (only 3 years to qualify for FHA financing).

Instead of allowing a foreclosure, however, many people took the time to sell their homes for less than the amount of the outstanding debt – at the approval of their lenders. As indicated in the following chart, these “short sale” arrangements require less of a waiting period to obtain a conventional mortgage than the waiting period for a foreclosure.

Years of Seasoning for Mortgage Qualification:

Conventional

FHA

VA

Foreclosure

7

3

2

Deed-In-Lieu

4

3

2

Short Sale

4

3

2


Provided 4 years have elapsed since the HUD-1 Closing Statement was finalized from a short sale, mortgage financing can generally be made available again (only 3 years for FHA, and 2 for Veterans Administration loans). These waiting periods are the same if, instead of a short sale, title to the property was voluntarily transferred to the lender in exchange for a release from the mortgage obligation – i.e., a Deed-In-Lieu of Foreclosure (DIL).

According to the Federal Housing Finance Agency (FHFA), short sales and DIL’s are down at least 65% since 2014 – and therefore a large segment of home purchasers are buying homes again, which is contributing to increased home values.

Here’s the Point: Many people are now able to qualify for mortgage financing, now that their short sale or foreclosure seasoning periods are over since the U.S. Housing Crisis.

Immigrant Lending: An Odd Discussion With A Banker

Immigrant Statue of Liberty“Mike, I’d like to refer you a typical immigrant client who doesn’t have a social security number and runs a ‘cash business’ – and I think you know what I mean”.

“No, actually, I don’t know what you mean.  Does their business generate a lot of cash earnings that they do not report to the IRS?”

“Well, I didn’t say that – but okay”.

“Sorry, I can’t help you – I don’t risk my reputation by recommending that my capital sources conduct business with someone who illegally evades taxes.  Moreover, I think it’s offensive to imply that immigrants typically operate cash businesses to evade taxes”.

“Well then what exactly do mortgage brokers do?”

Before quickly ending my conversation with the banker (for obvious reasons), I indicated that I would be happy to work with self-employed people who legally minimize their taxes with legitimate expense deductions.  Also, I would be happy to source mortgages for those who have not yet become U.S. citizens, do not have U.S. permanent residency, or even have not yet qualified for a social security number.

Surprised?!

As long as a “foreign national” or non-U.S. citizen can evidence an adequate two-year foreign or domestic credit history, there are capital sources who will gladly underwrite their mortgage.  In fact, it is a preferred business platform because statistics prove that these borrowers work hard to repay their debts – and tend to have solid liquidity and reserves.  One key issue is that all required documents written in a foreign language need professional translation.

Here’s the Point: Not having a social security number or green card doesn’t mean you can’t qualify for a mortgage – but you must be properly reporting your income.

Since When Do Builders Dictate Your Loan Terms?!

Do you really want to build your own house? The planning, budgeting, change orders, cost overruns, time commitment and anxiety… but, admittedly, it still may be the most economical way to own a home.

Then there are ramifications behind financing either the construction of a to-be-built home, or the acquisition of a home nearing completion. If you own the land, then you would need a construction loan – and your land investment would likely act as the equity or down payment for your lender. Construction loan draws would reimburse the builder as the home reaches certain levels of completion. Once completed, the construction loan would convert to a standard mortgage.builder lenderIf you are buying a speculative or partially completed home, then standard purchase mortgage guidelines should apply after you sign the builder’s purchase contract. Once the builder completes your home, your mortgage lender provides you acquisition financing (loan closing would coincide with receipt of the certificate of occupancy).

In either case, builders also hope to profit from your loan. They do this by offering attractive financing incentives, such as covering a portion of your loan closing costs if you use one of their affiliate or approved lenders. But be careful, because when they say: “We will cover closing costs if you use one of our approved lenders”. Not only will your interest rate likely be higher, this really means: “We will not provide any closing cost credits unless you use our affiliate lender” (thereby essentially “tying” you to their loan source).

Here’s the Point: When financing a property purchase from a builder, always compare the loan terms offered by the builder’s “approved” lender to those from other unaffiliated lending sources.

 

Would You Lend Money to Donald or Hillary?

Trump and ClintonYou may have been conscientiously deliberating which candidate to vote for over the past several months. Your selection might become clearer if you contemplate this title question – as if you were a lender deciding whether to extend them a loan! Not voting is always an option, but not likely a decision that would sit well with you (even though reports suggest this option is seriously being considered by many voters).

When a client applies for a mortgage, the assignment is either accepted or declined – with concrete rationale behind either decision. But a lender electing to entirely avoid making the decision to either lend or not – may be compared to not voting. Imagine a lender choosing never to return your phone call to give you their credit decision. In this analogy, not voting (or not providing a credit decision) doesn’t help either candidate (or borrower) – nor would it likely help yourself.

There is no excuse for lender/voter unresponsiveness. Borrowers/candidates deserve prompt, reliable feedback which, from a lender’s perspective, is generally based on the following 5 “C’s” of credit:

  1. Credit History (Repayment History & Credit Score)
  2. Capacity (Ability to Repay & Earnings Stability)
  3. Capital (Down Payment & Liquidity)
  4. Collateral (Property Type & Value)
  5. Conditions (Loan Terms & Purpose)

The first one above was formerly entitled “Character” – which arguably is still the most important factor. But by telling a client their loan was declined because of “Character” (or lack thereof), the decision could be judged as discriminatory.

Here’s the Point: Don your lender’s cap and consider the key factors that would be used before advancing money to either candidate – and focus particularly on “character” before making your decision.

 

Student Loans Matter

The Wall Street Journal recently reported that 43% of the 22 million people with federal and private student debt are notstudent loan debt making their monthly loan payments.  This includes those who are in default (more than twelve months late), delinquent (more than one month late), or received permission to postpone their payment due to economic hardship.  It’s no wonder lenders have tightened their related underwriting requirements!

Some say the consequences of simply assessing a higher default rate of interest is not harsh enough.  Others say student borrowers are more apathetic now because they are in the same boat with 10 million others – and the problem is just too large to penalize everyone.

A lender cannot generally repossess a borrower’s car or other assets in the event of a student loan default.  But to recoup losses, the government is now garnishing wages and withholding tax refunds once students commence a job after graduation.

When seeking mortgage pre-qualification, applicants have not been required to include deferred student loan payments in their debt-to-income ratio calculation – provided the deferral was for more than 12 months beyond the proposed mortgage closing date.  Now, FHA lenders will generally use the known monthly payment or 2% of the student loan balance – versus conventional lenders using the greater of the actual monthly payment or 1%.  Assuming a $37,000 deferred loan (the average U.S. student loan balance today), suddenly having to include a 1% or $370 monthly projected payment would certainly have an adverse effect on a mortgage qualification ratio.

Here’s the Point: Even when your student loan is deferred, lenders are now likely to take the projected monthly payments into consideration when qualifying you for a mortgage.

 

Foreclosure? No Problem

Image result for foreclosureIt is surprising how many people have zero remorse after a foreclosure. There are those who think nothing of going through the process again to advance their self-interest, with little regard for either their ability to repay or their reputation with a lender. For this reason, lenders do not zealously arrange mortgages for post-foreclosure loan applicants without a thorough screening process.

It doesn’t take long to deduce moral character and integrity. If it is evident the “incident” will never happen again, there are reputable private lenders who are willing to provide a new mortgage – even one day after the foreclosure is finalized (at interest rates that are reasonable under the circumstances).

The Federal National Mortgage Association (FNMA), the ultimate buyer of a conventional loan advanced by a mortgage lender, requires borrowers to wait seven years after title has transferred in a foreclosure proceeding. However, the Federal Housing Administration (FHA) requires that just 3 years elapse before they insure the mortgage advanced by an FHA lender – whereas the Department of Veterans Affairs (VA) needs only 2 years to elapse before guaranteeing the mortgage of a VA lender.

As long as the Certificate of Title is produced evidencing that the 3-year anniversary requirement has been met, a post-foreclosure borrower may obtain an FHA mortgage. And the loan application can be made in advance so that borrowers are ready and able to close on a timely basis, regardless of how the foreclosure is reported on a credit report by the credit bureaus.

 

Here’s the Point: After a foreclosure, an FHA mortgage is the most common type of conventional financing used because only 3 years need to elapse from the Certificate of Title transfer date.

 

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