Ever wonder how underwriters find out all the details about a buyer or a property?  One of the greatest resources for an underwriter is the Public Records Online Directory.  This web site is a portal to all the official Assessors', Recorders', and Treasurers' web sites. 

Here are just a few of the things that can be found by using this site:

• assessed value
• taxes
• current owners' name and address
• sales history
• deed recording dates
• zoning information
• property type (end the confusion about whether a property is a condo or a townhouse)

Here's the link to the site:

http://publicrecords.netronline.com

When the web page opens, just click on the state, then the county, and then the link to the Assessor, Recorder, or Treasurer.  If the link says "Go to Data Online" that means you will be able to access the information yourself.  If the link says "Website Only" or "No Information Online", then you won't be able to get the information yourself, but you can call the phone number listed next to the link to get what you need. 

We use this web site for every loan we originate, just so we'll know exactly what the underwriter is going to see when they start their research.  It's much better to head off problems early in the game than to have a deal fall apart at the last minute.

There was a financial advice column in the Denver Post on November 1 that incorrectly stated that closing a credit card with an annual fee and opening another one without an annual fee would have little effect on a person's credit score. That is simply not true. The length of time that an account is open has a great impact on credit scores. The longer an account is open, the higher the scores.

In addition, many lenders now require a minimum of three credit accounts to be open and active for a period of at least 12 months. Some lenders require one account to be open and active for a period of 24 months.

The most important thing to keep in mind when thinking about credit scoring is that the scores are meant to be an indication of a person's use of credit. If someone keeps closing accounts or only has one account, there is no way to tell whether that person is wisely or unwisely using the credit that is available to them. If someone has three or more credit cards and keeps a low balance on all of them, that is considered to be a wise use of credit and they will have a high score. If someone closes accounts because they can't trust themselves, or because they "don't believe in credit cards", or because they have received bad advice, that is considered to be an unwise use of credit and their scores will go down.

How much are the closing costs for a purchase transaction? 2.5%, 3%, 3.5%, 4%?

We get asked this question all the time, and here's why we can't answer it without actually preparing a Good Faith Estimate.

Many of the closing costs are fixed costs, meaning they are the same regardless of how big the loan is. Some examples of fixed closing costs are:

• Appraisal fee
• Credit report
• Underwriting fee
• Tax Certificate
• Loan closing fee
• Real estate closing fee
• Title insurance fees
• Recording fees

Other closing costs change depending on the size of the loan or the purchase price. Here are some examples of closing costs that change:

• Origination fee (usually 1% of the loan amount)
• State tax stamps

Still other closing costs depend on the individual property, the interest rate, the borrower's credit, or the closing date. Here are some examples:

• Property taxes (depends on the property and the date of closing)
• Homeowner's insurance (depends on the property and the borrower's credit score)
• Pre-paid interest (depends on the borrower's credit score - which determines the interest rate, the loan amount, and the date of closing)

Let's assume a property sells for $100,000 and the fixed costs are $2,000. The variable costs will probably be low because the taxes and insurance will be low. Let's assume the variable costs total $2,500. Total costs would be $4,500, or 4.5% of the purchase price.

Now let's assume we have a property selling for $500,000. The fixed costs would be the same - $2,000. The variable costs would be higher because the loan amount, the taxes, and the insurance would be higher. They might be $8,000. The total would be $10,000, which is only 2.0% of the purchase price.

Even though the closing costs are $5,500 less for the cheaper house, they are 2 1/4 times the percentage of the costs for the more expensive house - 4.5% versus 2.0%.

It's always a good idea to have your lender tell you how much the closing costs are. Guessing based on a "rule of thumb" is a very bad way to do it.

We are often asked what the difference is between a mortgage broker and a mortgage banker.  Here's the difference. 

A mortgage broker is any loan sales person who represents more than one lender.  Some brokers represent a few lenders and others represent dozens of lenders.  When a loan is funded by a mortgage broker, the money comes directly from the lender.  As an example, if the broker is selling a loan from Wells Fargo, the money will be sent by Wells Fargo to the title company. 

A mortgage banker can either be a retail banker or a wholesale banker.  If the mortgage banker is a retail banker, they can only sell loans from the one company they represent.  If a loan officer works for Wells Fargo, they can only sell Wells Fargo loans.  

If the mortgage banker is a wholesale mortgage banker, they can sell loans from more than one lender, just like a mortgage broker.  The difference is that the money for the closing comes from their own line of credit (called a warehouse line of credit).  After the closing, the wholesale banker sells the loan to the lender within a short period of time - usually a few days. 

The advantage of using a mortgage banker is that they have control of the funding.  The advantage of using a broker is that they represent more than one lender, so they may be able to get a loan that is unavailable to a retail banker.  The best option is a wholesale mortgage banker (they represent many lenders and control the funding). 

There is much debate over the advantages of using a retail banker versus a wholesale banker, but the one true difference is that the retail banker has to take a shower every day and wear nice clothes when they report to work at the bank.  A wholesale banker (or broker) can sit at his desk at home in his boxers and a ratty T-shirt. 

Borrower funds used for the down payment, closing costs, and reserves must be "seasoned" for two months before they can be used to qualify for a mortgage.  This means the borrower must be able to provide proof that the money has been in their account for two months.  Cash on hand is not an acceptable source of funds for most loans.  If someone is going to use cash on hand to qualify, they need to put the money in the bank as soon as possible.  

If a borrower has a joint account with someone who is not a borrower, the money in that account can be counted, provided the person who is not the borrower states that the borrower has use of all the money in the account.  The money must still be seasoned for two months to count it. 

A borrower can also receive a gift from a relative for certain types of loans (most notably FHA loans).  In the case of a gift, the money does not have to be seasoned.  It must be deposited into the borrower's account before the loan can get a final approval, but it does not have to be in the account for a full two months.  One day is fine.

As the holidays approach, there will be questions about whether income from seasonal employment can be used to qualify for a mortgage.  Here are the rules:

• The borrower must have worked in the same job, or in the same line of seasonal work, for the past two years.
• The borrower's employer must confirm that there is a reasonable expectation that the borrower will be rehired for the next season.
• The income is then averaged over the past two years. 

Super important bonus tip: Make sure the lender involved in your transactions is re-disclosing the Truth-in-Lending disclosure (the TIL) whenever the annual percentage rate (APR) changes.  If the APR on the most recently disclosed TIL is not within 0.125% of the APR on the final TIL signed at closing, the loan cannot close until 3 days after the correct APR has been disclosed.  This is a federal regulation (it's part of the Truth-in-Lending Act).  Regardless of whether you are the listing agent or the selling agent, make sure you ask the lender if they are disclosing the TIL properly. 

There is a lot of confusion regarding when someone should get a conventional loan versus an FHA loan.  Here's a brief overview of the differences: 

FHA loans:

• The loan is insured by the federal government, so it is only underwritten once.  If the loan is approved by the lender, it automatically gets approved for mortgage insurance.
• The standard down payment amount is 3.5% of the purchase price.  If the borrower makes a full price offer on a HUD home, then the down payment is only $100.
• The borrower can get a gift or a loan from a relative to pay for the entire down payment.
• The guidelines are the same for all FHA loans, regardless of whether the property is in a declining market or not.
• Interest rates are the same for everyone with a credit score above 660.  They go up slightly for people with scores between 620-659.
• Reserves are not required and collection accounts do not need to be paid.

Conventional loans:

• The loan is insured by a private mortgage insurance company, so it gets underwritten twice - once by the lender and again by the mortgage insurance company.  The stricter guidelines are almost always from the mortgage insurance company.
• The standard down payment is 5% for first-time home buyers.  If the property is in a declining market, the mortgage insurance guidelines may require an additional 5% down for people who are not first-time home buyers.
• The borrower can get a gift from a relative, but they must have at least 5% of the purchase price from their own funds.  However, if a relative gives a gift of 20% of the purchase price, then the borrower doesn't need any money at all from their own funds.
• Everyone with a credit score above 720 gets the best rates.  For every 20 points below 720, the rates go up.
• The mortgage insurance companies SOMETIMES require the borrower to have reserves and to pay collection accounts.  (Do NOT advise anyone to pay collection accounts until their loan has been run through Fannie Mae's or Freddie Mac's online underwriting systems, because paying old collection accounts will lower their credit scores and they may not get approved.)

This may make it look like FHA loans are superior to conventional loans.  They are - but only for some borrowers.  For other borrowers, a conventional loan is better.  The way to tell is to fully qualify the borrower, determine what their financial goals are, and only then recommend a particular loan. 

Effective January 1, 2010, mortgage brokers and mortgage bankers will no longer be allowed to order appraisals directly from an appraiser for FHA loans. FHA is not adopting the Home Valuation Code of Conduct (HVCC), but they are adopting many of the guidelines spelled out in the HVCC.

At the moment, only conventional loans need to be ordered through an appraisal management company. Although HUD makes it clear that they are not requiring the use of appraisal management companies, that is the best way to ensure that the lenders are in compliance with the new FHA rules, so most lenders will probably insist on using appraisal management companies.

This new rule will have the same effect as the HVCC - longer appraisal turn times, uncertainty regarding values, and higher costs for the buyers. However, the lending industry seems incapable of policing itself, so this is what we get. There will be the usual outcry from the National Association of Realtors, the National Association of Homebuilders, and the various lending trade associations, but change is here to stay. Until the average American family can afford to buy a house with a full doc, 30-year fixed rate mortgage (and we are not even close to that point yet), the government has made it abundantly clear that underwriting guidelines are going to continue to get tougher.

This is something that will have incredibly far-reaching effects in the real estate industry. 

Fannie Mae just announced that they are LOWERING the maximum debt-to-income ratio for all loans underwritten by their automated underwriting system to 45%, and to 50% for loan files that have strong compensating factors (very high credit scores, large cash reserves, etc.).  Currently, there is no limit to the maximum debt-to-income ratio when the automated underwriting system is used.  We routinely see loans get approved with ratios in the 60% range.  

Fannie Mae is also adopting a new standard for credit scores for loans run through the automated underwriting system.  Anything less than 620 will now be denied.  The old minimum was 580 if the borrower had compensating factors (big down payment, low debt-to-income ratio, etc.).  For loans that are not run through the automated system, the minimum credit score is 660. 

There is a good argument for these new guidelines because many of the loans that are being approved recently are going into foreclosure (just because a house is cheap does not mean the buyer can afford it). 

It is more important than ever to make sure your mortgage broker is using the automated underwriting system, that they know how to help someone raise their credit score (paying off old collection accounts and closing active accounts will lower a score, by the way), and that they know how to structure a loan correctly.  Conventional loans that were approved in the past will not get approved going forward, and you need to make sure your deal has the best possible chance of getting approved. 

We get a lot of questions about loan fraud - how does anyone know if something's fraudulent, who checks to see if there's fraud, etc.  Loan fraud is detected by reviewing the loan application (and all supporting documentation), sales contract, title commitment, closing docs, and anything else related to the transaction.  The people who are responsible for detecting loan fraud are the underwriter, mortgage broker, loan processor, quality control staff - basically anyone involved with the loan. 

Following is a list of red flags from Fannie Mae's "Common Red Flags" document. 

Fannie Mae makes it clear that the presence of one or more of the following red flags does not necessarily indicate that the transaction is fraudulent, but the more red flags that exist, the higher the chance that there is fraudulent activity.

High-level Red Flags

• Social Security number discrepancies within the loan file
• Address discrepancies within the loan file
• Verifications addressed to a specific party's attention
• Verifications completed on the same day they were ordered
• Verifications completed on weekend or holiday
• Documentation includes deletions, correction fluid, or other alteration
• Numbers on the documentation appear to be "squeezed" due to alteration
• Different handwriting or type styles within a document
• Excessive number of AUS submissions

Mortgage Application

• Significant or contradictory changes from handwritten to typed application
• Unsigned or undated application
• Employer's address shown only as a post office box
• Loan purpose is cash-out refinance on a recently acquired property
• Buyer currently resides in subject property
• Same telephone number for applicant and employer
• Extreme payment shock may signal straw buyer and/or inflated income
• Purchaser of investment property doesn't own residence

Sales Contract

• Non arms-length transaction: seller is real estate broker, relative, employer, etc.
• Seller is not currently reflected on title
• Purchaser is not the applicant
• Purchaser(s) deleted from/added to sales contract
• No real estate agent is involved
• Power of Attorney is used
• Second mortgage is indicated, but not disclosed on the application
• Earnest money deposit equals the entire down payment, or is an odd amount
• Multiple deposit checks have inconsistent dates, i.e., #303 dated 10/1, #299 dated 11/1
• Name and/or address on earnest money deposit check differ from buyer
• Real estate commission is excessive
• Contract dated after credit documents
• Contract is "boiler plate" with limited fill-in-the-blank terms, not reflective of a true negotiation

Credit Report

• No credit history or "thin" credit files
• Invalid Social Security number or variance from that on other documents
• Duplicate Social Security number or additional user of Social Security number
• Recently issued Social Security number
• Liabilities shown on credit report that are not on mortgage application
• Length of established credit is not consistent with applicant's age
• Credit patterns are inconsistent with income & lifestyle
• All tradelines opened at the same time
• Authorized user accounts have superior payment histories
• Significant differences between original and new or supplemental credit reports
• Also Known As (AKA) or Doing Business As (DBA) indicated
• Numerous recent inquiries
• Missing pages and/or supplements
• Employment discrepancies
• Social Security alerts

Employment and Income Documentation

• Applicant's job title is generic, e.g., "manager," "Vice President"
• Employer's address is a post office box, the property address, or applicant's current residence
• Applicant's residence is (will be) in location remote from employer
• Employer name is similar to a party to the transaction, e.g., utilizes applicant's initials
• Employer unable to be contacted
• Year-to-date or past-year earnings are even dollar amounts
• Withholding not calculated correctly (check FICA tables)
• Withholding totals don't foot from pay advice to pay advice
• Pay period dates overlap and/or don't correspond with other documentation
• Abnormalities in paycheck numbering
• Handwritten VOE, pay stubs, or W-2 forms
• W-2 form presented is not the employee's copy
• Employer's identification number has a format other than 12-3456789
• Income appears to be out of line with type of employment
• Self-employed applicant does not make estimated tax payments
• Real estate taxes or mortgage interest claimed, but no ownership of real property disclosed
• Tax returns not signed or dated
• High income applicant without paid preparer
• Paid preparer signs taxpayer's copy of tax returns
• Interest and dividend income don't substantiate assets
• Applicant reports substantial income but has no cash in bank
• Large increase in housing expense
• Reasonableness test: income appears to be out of line with type of employment, applicant age, education and/or lifestyle

Asset Documentation

• Down payment source is other than deposits (gift, sale of personal property)
• Applicant's salary doesn't support savings on deposit
• Applicant doesn't utilize traditional banking institutions
• Pattern of loyalty to financial institutions other than the subject lender
• Balances are greater than the FDIC, SIPC insured limits
• High asset applicant's investments are not diversified
• Excessive balance maintained in checking account
• Dates of bank statements are unusual or out of sequence
• Recently deposited funds without a plausible paper-trail or explanation
• Bank account ownership includes unknown parties
• Balances verified as even dollar amounts
• Two-month average balance is equal to present balance
• Source of earnest money is not apparent
• Earnest money isn't reflected in account withdrawals
• Earnest money is from a bank or account with no relationship to the applicant
• Bank statements do not reflect deposits consistent with income
• Reasonableness Test: Assets appear to be out of line with type of employment, applicant age, education and/or lifestyle

Appraisal

• Appraisal ordered by a party to the transaction
• Occupant shown to be tenant or unknown
• Owner is someone other than seller shown on sales contract
• Appraisal indicates transaction is a refinance, but other documentation relects a purchase
• Purchase price is substantially higher than predominant market value
• Purchase price is substantially lower than predominant market value
• Subject property obsolescence is minimized
• Large positive adjustments made to comparable properties
• Comparables' sales prices don't bracket the subject's value
• Comparable sales are not similar in style, size and amenity
• Dated sales used as comparable sales
• New construction / Condo conversion: All comparable sales located in subject development
• Comparable properties are a significant distance from the subject, or located across neighborhood boundaries (main arteries, waterways, etc.)
• Map scale distorts distance of comparable properties
• "For Rent" sign appears in photographs
• Photos appear to be taken from an awkward or unusual standpoint
• Address reflected in photos does not match property address
• Weather conditions in photos inconsistent with average marketing time, date of appraisal
• Appraisal dated before sales contract
• Significant appreciation in short period of time
• Prior sales are listed for subject and/or comparables without adequate explanation

Title

• Prepared for and/or mailed to a party other than the lender
• Evidence of financial strain may indicate a compromised sale transaction (flip, foreclosure rescue, straw buyer refinance, etc.), or might suggest undisclosed credit problems in the case of a refinance
• Income tax, judgments or similar liens recorded
• Delinquent property taxes
• Notice of default or modification agreement recorded
• Seller not on title
• Seller owned property for short time
• Buyer has pre-existing financial interest in the property
• Date and amount of existing encumbrances don't make sense
• Chain of title includes an interested party such as Realtor or appraiser

• Buyer and seller have similar names (property flips often utilize family members as straw buyers)

Owner Occupancy

Purchase Transactions:

• Real estate listed on application, yet applicant is a renter
• Applicant intends to lease current residence
• Significant or unrealistic commute distance
• Applicant is downgrading from a larger or more expensive house
• Sales contract is subject to an existing lease
• Occupancy affidavits reflect applicant does not intend to occupy
• New homeowner's insurance is a rental policy (declarations page)

Refinance Transactions:

• Rental property listed on application is more expensive than subject property
• Different mailing address on applicant's bank statements, pay advices, etc.
• Different address reported on credit report  
• Significant or unrealistic commute distance
• Appraisal reflects vacant or tenant occupancy
• Occupancy affidavits reflect applicant does not intend to occupy
• Homeowner's insurance is a rental policy (declarations page)
• Reverse directory does not disclose subject property address

Foreclosure Rescue Red Flags

• The borrower was advised by a foreclosure assistance consultant that they should avoid contact with their servicer
• The borrower has paid someone to negotiate with the servicer on their behalf
• The borrower states that they are sending their mortgage payments to a third party
• Borrower receives a purchase offer that is greater than the asking price
• Borrower states that they will be renting back from new owner
• Cash-back at closing to the delinquent borrower, or disbursements that have not been expressly approved by the servicer
• The borrower has quit claimed title to a third party at the advice of a foreclosure assistance consultant

Short Sale Fraud Red Flags

• Sudden default, no workout discussions, and immediate offer at short sale price
• Ambiguous or conflicting reasons for default
• Short sale offer is from a related party