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Brokers Are Back

The Mortgage Bankers Association reported that retail banks (Wells Fargo, Bank of America) held 75% of the U.S. mortgage market before the Housing Market Crash of 2007. This ratio has now reduced to 50%, after the tightening of regulations from the Dodd-Frank Wall Street Reform & Consumer Protection Act of 2010. The other 50% of mortgages are extended by “nonbanks”, which are mortgage lenders who do not take federally insured deposits from consumers to make loans.

Like retail banks, some nonbanks lend directly to the public (Quicken Loans, Rocket Mortgage). But nonbank lenders also include “wholesale lenders”. Wholesale lenders offer the most competitive interest rates because they use mortgage brokers to originate loans (and therefore do not have the corresponding overhead costs).

United Wholesale Mortgage (UWM) is the largest U.S. wholesale lender, closing $22.9 billion of mortgages in 2016. UWM reports that mortgage brokers handled 35% of all U.S. residential mortgage closings in 2005. After the housing crisis, this ratio bottomed at 10%.

Mortgage broker loan originations are now back up to 14%, with UWM projecting an increase to at least 20% by 2020. This market share growth is supported by what the public is embracing again, which is that only mortgage brokers:

(i) help consumers shop among many well-developed capital sources for the best mortgage rates and fees
(ii) have a multitude of mortgage products from which to choose (far more than any one lender), and
(iii) do all the consumers’ legwork and negotiate for the fastest loan execution.

Here’s the Point: Consumers are taking notice that only mortgage brokers shop the best mortgage lenders in the nation – which means a better interest rate and a faster closing.

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.

 

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.

Here’s the Point: If you decide not to have a licensed contractor perform a property inspection, then you are to blame for problems uncovered after your purchase.

 

Beware of Bonus Income Guidelines

bonusTo 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.

Here’s the Point: If you do not have at least 12 months of bonus or commission earnings, you will not be able to use that income in your mortgage qualifying ratios.

 

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.

Here’s the Point: Need a loan to buy a condo unit? If the building offers short-term rentals, chances are you won’t get your loan.

 

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.

Here’s the Point: The next time you get an interest rate quote from a lender, be sure to ask them how you can increase the “credit” to which you may be entitled to apply against your closing costs.

 

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.