The Mortgage Experts at Mortgage Support Services

Use the Web Site the Underwriters Use

Mortgage Support Services — Mon, 09 Nov 2009 17:03:23 -0600

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.

Should You Close One Credit Card Account and Open Another One?

Mortgage Support Services — Tue, 03 Nov 2009 08:56:27 -0600

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.

Are Closing Costs 2%, 2.5%, 3%, 3.5%, 4%?

Mortgage Support Services — Thu, 29 Oct 2009 17:23:32 -0500

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.

Banker Vs. Broker - What is the Difference?

Mortgage Support Services — Sat, 24 Oct 2009 11:29:28 -0500

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.

How Long Does Money Have To Be In A Bank Account?

Mortgage Support Services — Fri, 16 Oct 2009 15:33:41 -0500

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.

Seasonal Work - Can You Use it to Qualify for a Loan?

Mortgage Support Services — Thu, 15 Oct 2009 08:42:28 -0500

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.

FHA or Conventional Financing? Which is Best?

Mortgage Support Services — Tue, 06 Oct 2009 09:50:55 -0500

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.

New FHA Appraisal Rules

Mortgage Support Services — Wed, 30 Sep 2009 17:21:23 -0500

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.

Fannie Mae Lowers Its Maximum Debt-to-Income Ratio and Raises Its Minimum Credit Score

Mortgage Support Services — Thu, 24 Sep 2009 11:58:41 -0500

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.

Loan Fraud Red Flags

Mortgage Support Services — Thu, 17 Sep 2009 09:38:27 -0500

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

How Does the Final Settlement Statement Get Prepared?

Mortgage Support Services — Fri, 11 Sep 2009 17:33:38 -0500

We're often asked what the process is for getting the HUD-1 Settlement Statement prepared. Here you go:

The underwriter issues the final approval for the loan, often referred to as the "clear-to-close".
The mortgage broker lists the lender fees on the doc prep order form and sends it to the doc prep company (if he is acting as a mortgage banker) or the doc prep department at the lender (if he is acting as a mortgage broker).
The doc prep company prepares the figures and sends the order to the title company.
The title company adds their fees, prepares the settlement statement, and sends it to doc prep and the mortgage broker for review.
Any necessary changes are made (the most common error is incorrect payees for the line item fees) and doc prep and the mortgage broker send the change requests to title.
Any mistakes are corrected and the updated settlement statement is sent to doc prep and the mortgage broker for final approval.
After receiving the final approval from doc prep and the broker, title prepares the final settlement statement and sends it to everyone.

This can all usually be accomplished very comfortably within two days. Although the actual length of time that any one person is working on the settlement statement is relatively short, it's important to remember that the broker, the doc prep company, and title all have other deals in their pipelines. A good mortgage broker will make sure that any final settlement statements move to the top of his priority list, but for doc prep and title, one settlement statement is the same as any other. Rushes are possible, but typically they are totally unnecessary. The real important part of this process is to make sure that the borrower has plenty of time to review the settlement statement with the mortgage broker, so that when everyone gets to the closing, there are no financing questions.

Seldom Used Way to Buy a New Primary Residence

Mortgage Support Services — Wed, 02 Sep 2009 16:21:37 -0500

If a couple wants to buy a new primary residence and keep their current house as a rental, but are worried about qualifying based on the payments for both houses, here's a way to do things that sometimes makes it easier.

If only one spouse owns the couple's current house, and the other spouse can qualify on their own for the new house, then FHA will allow it, as long as the new house is more expensive or larger than their current primary residence. Here's an example: A husband and wife live in a house that only the husband owns (only the husband is on the title and the note). The couple wants to buy a new primary residence. If the wife can qualify for the new loan by herself, then the husband's debt does not have to be counted. Neither the husband's housing payments nor his other debt needs to be considered.

This won't work for everyone because only one person can own the current house, and only that person can be on the note for the current house. Remember that quit claiming someone off a deed does not release them from the responsibility of paying the note. The only way to get off a note is to sell or refinance.

Despite that limitation, though, there are plenty of couples who fall within the parameters of this type of deal. We have closed four of these loans in the past few months.

Half the Mortgage Brokers in Colorado THROWN OUT!

Mortgage Support Services — Mon, 31 Aug 2009 13:34:53 -0500

As of today, about half of the mortgage brokers in Colorado are no longer allowed to sell loans. We were told over a year ago that we needed to take classes and pass a test, but only half of us did it.

And we wonder why there are so many foreclosures!

***************

****NEWS ALERT****

The Colorado General Assembly passed House Bill 1085 in 2009. This bill became effective August 5th, 2009. House Bill 1085 defines circumstances in which the Director may inactivate a mortgage loan originator license if they have failed to comply with the education and testing requirements.

· As a result, the Director inactivated 4,560 licenses on August 31, 2009.

· Individuals whose licenses are inactive are prohibited from practicing as a mortgage loan originator or in any other capacity which requires a license.

· Individuals who continue to practice with an inactive license are subject to all forms of discipline prescribed in the Mortgage Loan Originator Licensing Act, including permanent revocation and fines.

· Direct managers of individuals with inactive licenses are also subject to disciplinary action if they allow such individuals to continue to practice.

Thank you,

The Colorado Division of Real Estate

***************

How High Can the DTI Go?

Mortgage Support Services — Fri, 28 Aug 2009 10:06:36 -0500

We are often asked what the maximum allowable debt-to-income (DTI) ratio is for the various types of loans. Here you go:

For FHA loans, the maximum allowable DTI is 43% if the loan is manually underwritten and it is unlimited if the loan is underwritten through FHA's online underwriting software. We routinely get approvals with DTI's in the 50% - 60% range if the borrower has good credit.
For VA loans, the maximum DTI is 41% if the loan is manually underwritten and it is unlimited if the loan is underwritten through VA's online underwriting software. Again, we routinely get approvals with DTI's in the 50% - 60% range if the borrower has good credit.
For conventional (non-government) loans, the maximum allowable DTI is 38% if the loan is manually underwritten and it is unlimited if the loan is underwritten through Fannie Mae's or Freddie Mac's online underwriting software. We routinely get approvals with DTI's in the 55% - 65% range if the borrower has good credit.

We calculate your DTI by adding up all of your new mortgage expenses - principal, interest, property taxes, homeowner's insurance, mortgage insurance, and homeowner's association (HOA) fees. We then add all the monthly expenses that are on your credit report, and divide that total number by your gross monthly income (income before taxes or any other deductions). Example: if your mortgage expenses are $1,000 each month and the total of all the monthly payments that show up on your credit report are $900, then your total expenses are $1,900 a month. If you make $3,800 a month, we divide 1,900 by 3,800 and get your DTI of 50%.

Don't lose out on a deal because your buyer's loan is being underwritten manually and the DTI is being restricted. Always use a mortgage broker who uses the online underwriting systems.

Gift Funds Used for the Down Payment - What are the Rules?

Mortgage Support Services — Fri, 21 Aug 2009 11:58:33 -0500

If a borrower does not have enough money to pay for the required down payment, it is permissible to have a relative give the borrower the money for the down payment.

With an FHA loan, the entire down payment amount can come from a relative. The gift donor must sign a letter stating that the funds do not have to be paid back. The donor must be able to show that they are able to provide the funds (a bank statement showing the money has not just recently been deposited into their account is sufficient), and the borrower must show receipt of the funds (a bank statement or deposit ticket is needed).

With a conventional loan, the rules are slightly different. A relative can give a gift to the borrower for the down payment, but the borrower must contribute the minimum required down payment themselves (usually 5%). The exception to this is if the gift is for at least 20% of the purchase price. Then, the relative can give the borrower the entire down payment and the borrower doesn't have to contribute any money at all. The documentation requirements are slightly different, too. The donor does not have to show that they are able to afford the gift - they just need to show that they have given it to the borrower. The borrower still needs to show that they have received the gift, and the gift letter still needs to be signed.

$8,000 Tax Credit Expires Soon

Mortgage Support Services — Thu, 20 Aug 2009 17:05:26 -0500

There is much news these days about an extension to the $8,000 first-time homebuyer tax credit. There is also talk that it might be expanded to include second homes and investment properties. PLEASE don't believe it. The tax credit is set to expire on November 30, 2009. Under the current IRS rules, if the closing is after that date, then the buyer does not get the credit.

Congress might extend the credit, but they might not. They might expand it to include second homes and investment properties, but they might not. If there is one piece of advice that we can pass on to anyone, it is this: It is extremely foolish to assume that something will happen in the housing or mortgage industries just because we all want it to happen. Remember stated income loans? 100% financing? Houses that went up in value? Everyone in America loved all of those things and they still went away.

At the moment, it is best to assume that the $8,000 tax credit for first-time homebuyers will end on November 30, 2009. If it doesn't, that's great, but assuming that it will be extended could very easily shatter the trust you have built with your clients.

Is Anyone Reviewing the Title Commitment?

Mortgage Support Services — Mon, 17 Aug 2009 12:29:29 -0500

It's important to make sure your mortgage broker is reviewing the title commitment on all your deals. Many times, there are issues that must be addressed by the seller that could be deal-killers if they are not dealt with correctly. Some examples of things that might show on the title commitment include:

Tax liens
Judgments
Mortgage liens that far exceed the value of the property
Foreclosure proceedings have been started
Etc.

Although these are all issues that the seller must address before the closing, the lender should make sure they are being resolved in a timely fashion.

How to Avoid Closing Delays

Mortgage Support Services — Mon, 10 Aug 2009 09:17:13 -0500

The new Truth-in-Lending law recently went into effect. One of the most important parts of the law says that if the Annual Percentage Rate (APR) on the final Truth-in-Lending disclosure differs by more than 0.125% from the APR that was disclosed on the most recent Truth-in-Lending disclosure issued by the lender, then the loan cannot close until 3 days after the lender delivers an updated disclosure showing the correct APR. Ensuring that the APR is correct is the responsibility of the lender. However, there are a couple things that routinely change near the end of a transaction that are the responsibility of the real estate agents. Here's what you need to look out for:

Changing the closing date. If you change the closing date, the number of days of pre-paid interest will change and affect the APR.
Not telling the lender if there is a change in the amount of seller-paid closing costs or the sales price. If there is an amendment to the contract that changes the amount of seller concessions or the sales price, that will affect the APR. You MUST tell the lender about any changes so they can re-disclose the APR.

Remember, if the APR changes by more than 0.125% (either higher or lower), then there is a federally mandated 3-day waiting period before the closing can take place. The way to avoid delays is to send all contract changes to the lender immediately and to resist the temptation to change the closing date during the week before the scheduled closing. If you do those two things, then you can blame all delays on the lender :-)

Read the Counter-Proposal!

Mortgage Support Services — Mon, 10 Aug 2009 09:11:10 -0500

We're seeing a lot of sales contracts with counter-proposals from the seller stating that the seller will only pay for non-recurring closing costs. A non-recurring closing cost is a fee that is only paid once, at the closing. If a fee will need to be paid more than once over the life of the loan, then it is known as a recurring closing cost. In the counter-offers we're seeing, the dollar amount of the closing cost concession in the counter-offer will very often be the same as in the offer, but there can be a big difference in how much money actually gets passed from the seller to the buyer if only non-recurring closing costs are going to be paid by the seller.

As an example, let's assume that the buyer asks that the seller pay $6,000 towards the buyer's closing costs and pre-paids. The seller counters by saying they will agree to pay $6,000, but only towards the buyer's non-recurring closing costs. If the buyer agrees to that, the seller will not have to pay for the following recurring closing costs:

the first year of homeowner's insurance
the money used to set up the insurance portion of the escrow account
the money used to set up the tax portion of the escrow account
interest from the date of closing until the end of the month

In many cases, the total of these fees is well over a thousand dollars. That's extra money that the buyer will need at closing.

New Waiting Periods Before Closings - Good or Bad?

Mortgage Support Services — Fri, 24 Jul 2009 16:43:22 -0500

For loan applications taken on or after July 30, 2009, the Mortgage Disclosure Improvement Act imposes new waiting periods before closings can take place. There are many changes, but here are the things that will affect the closing date:

No loan can close in less than 7 business days from the time the Good Faith Estimate (GFE) and the Truth-in-Lending (TIL) disclosures are delivered to the borrower or placed in the mail by the lender.
The TIL that the lender gives the borrower must show the annual percentage rate (APR) within 1/8th of a percentage point, or 0.125%, of the final APR.
If the APR is off by more than 0.125%, then the loan cannot close until three days after a corrected GFE and TIL are given to the borrower.

What does this mean for agents? It means that your lender (whether you use a mortgage broker, a mortgage banker, or a retail lender), must know what they are doing. If they are in the habit of low-balling the GFE or lying about the interest rate, then the APR will be wrong and the loan cannot close until they correct the GFE and TIL and deliver them to the borrower. There are dozens of fees that affect the APR. If they are not shown correctly on the GFE, then your deal is not going to close.

This is a GREAT law. It is the federal government's attempt to rid the mortgage industry of crooked and inept loan officers. The government is telling us that we have to learn how to do our job, or no one gets paid. If the GFE is done correctly (and there is absolutely no reason for it to be done wrong), then your deals will close on time. If your lender does not know what they are doing, then your deals will not close on time. There will be lots of complaining by the lenders who don't know what they're doing. Any lender who already knows what they're doing doesn't have to change the way they do business at all.

Who Decides if an ILC is Needed?

Mortgage Support Services — Wed, 22 Jul 2009 10:00:38 -0500

We are seeing an increasing number of title companies requiring an improvement location certificate (ILC) before they will issue a title insurance commitment. An ILC differs from a survey in that the ILC simply identifies the location of the property improvements (buildings), encroachments, and easements, but it is not evidence of the exact boundaries of the property. Although it is not a full survey, it's usually sufficient documentation for properties that are located within subdivisions. It is less expensive than a survey, also.

If a real estate agent enters "N/A" in the survey section of the sales contract, indicating that an ILC is not needed, that has absolutely no bearing on whether an ILC is actually needed. The title company decides whether they need one before they will issue the title commitment. If the contract states that an ILC is not needed, but the buyer will pay for it if it is needed (we see this a lot), then your buyer is on the hook for the ILC fee if the title company needs one. On deals where money is tight for the buyer, this can be a big problem.

An Easy Test to See if You Are Part of the Problem

Mortgage Support Services — Wed, 22 Jul 2009 09:45:49 -0500

I am highly amused by the posts that deal with who is to blame for the tough times our nation is facing. It's always the "other guy" who was dishonest or unethical. It's never us. The problem with this way of thinking is that if everyone blames the other guy, then no one really is at fault.

Here's a great little sanity check to see if you are actually part of the problem:

If you're a real estate agent, did you ever

Direct a buyer to a lender who you knew bent the rules?
Demand a kickback from a lender, a title company, or an inspector?
Exchange funds that didn't show up on the HUD with anyone else in the transaction?

Let's assume you did one of these things. Are you still dishonest? Do you still deal with those same people? If you do, then you're part of the problem. Stop blaming the "other guy". You are the other guy.

If you're a lender, did you ever

Back into the income needed to qualify a borrower for a stated income deal?
Sell an option ARM to someone and tell them that it was a "great product for the right person"?
Add a pre-payment penalty to a loan so you could make more money?
Sweet talk or strong arm an in-house underwriter to get a deal approved?
Low-ball a Good Faith Estimate?
Pay a kickback to a real estate agent to get a referral?
Tell an appraiser you wouldn't use him again if they didn't get the value you needed?

Let's assume you did one of those things. Do you still lie to your borrowers? Do you still deal with the same people? If you do, then stop blaming the "other guy". You are the other guy.

Listen up, everyone. We are the problem. There is no "other guy". Everyone who blames the "banks" or the "lenders" is failing to admit that the sales force for the lenders is the mortgage broker and the mortgage banker you deal with every day. If the guy you deal with every day is willing to break the rules "just this one time", then you are part of the problem.

Everyone lender who blames the real estate agents who lie, but still deals with those agents, is part of the problem.

There are plenty of honest mortgage brokers, mortgage bankers, and real estate agents out there. There are also many crooks. If you deal exclusively with the honest people, even though it may cost you a deal now and then, you are the good guy. If you still deal with dishonest people, then you are the bad guy and you're to blame. It's a simple choice every one of us gets to make every single day. Good guy or bad guy?

Give Your Buyers Enough Time to Claim the Tax Credit

Mortgage Support Services — Thu, 16 Jul 2009 19:39:17 -0500

The $8,000 income tax credit for first-time home buyers expires on December 1, 2009. If the buyers do not close by November 30, they will not be eligible for the credit.

We are anticipating that underwriting turn times for every lender in the nation will be a bit longer during the weeks leading up to that date because many buyers will probably wait until the last minute to take advantage of the free money. It would be wise to advise your buyers to plan on having a signed contract in hand at least 6 weeks prior to November 30. That should give them enough time to close.

There is much talk about an extension to the tax credit. At the moment, it is just talk. Until a bill is passed by the House and the Senate, and then signed by the President, it is not a law. There is no indication from anyone other than the special interest groups (Realtors, mortgage brokers and bankers, builders, etc.) and the members of Congress they support financially, that an extension is being planned. Please don't counsel your buyers to expect an extension. If it happens, that's great for everyone, but every time the credit is issued by the IRS, that's $8,000 less the Treasury has to spend on other things, and they are running mighty low on cash these days.

New Fannie Mae Qualification Guidelines

Mortgage Support Services — Wed, 15 Jul 2009 09:34:54 -0500

New qualifications rules go into effect for certain types of Fannie Mae loans on October 1, 2009. For 5-year ARMs and loans with temporary interest rate buydowns, the borrower will need to qualify for the loan based on the greater of the note rate or the fully-indexed rate. Here's what that means:

A 5-year ARM (adjustable rate mortgage) has a fixed rate for the first 5 years, and then the rate can go up or down (it is designed to go up, so don't pay attention to anyone who tells you it will go down). The interest rate for the first 5 years is generally a little bit cheaper than it would be if you got a 30-year fixed rate mortgage. In the past, you could qualify for the 5-year ARM based on the lower, starting interest rate. The assumption was that when the rate went up in five years, the house would be worth more money and you could just refinance into a new mortgage, rather than paying the higher rate. Now, you must qualify based on the fully-indexed rate, which means you have to qualify based on the higher rate.
A mortgage with a temporary interest rate buydown is a loan that has a lower rate for the first 1, 2, or 3 years. It works like this: if the rate for a 30-year fixed rate loan is 6%, you can buy the rate down to 3% for the first year, 4% for the second year, and 5% for the third year. After that, the rate would be the normal 6% for the life of the loan. It is expensive to buy the rate down, so not many people use this type of loan, with the exception of builders. Because builders have so much profit potential, they are able to pay for the buydown, allowing them to advertise those low interest rates you see for new construction. Many people ran into trouble with these loans because they qualified for the loans based on the lower, initial interest rate. When the rate kept getting higher every year, they couldn't afford the new payments. To prevent this from happening in the future, you now have to qualify based on the higher, long-term rate.

Both of these changes make a lot of sense, even though they may prevent some people from qualifying for as large a loan as they would like. Ignoring the fact that rates can go up and values can go down is still the standard way of thinking. Fannie Mae seems determined to change that way of thinking. Ask anyone who is stuck in an ARM they can't refinance out of, and I'm sure they would agree.

How Does the Property Tax Credit Affect Closing Costs?

Mortgage Support Services — Tue, 07 Jul 2009 10:35:36 -0500

One of the most common questions we get asked is "What is the property tax credit and how is it calculated?"

Property taxes are paid in arrears, meaning the property taxes for this year are paid to the county next year. If you bought a house on July 15, 2009, then the property taxes for all of 2009 will be due in 2010. But wait! You only lived in the house from July 15, 2009 until the end of the year - why should you have to pay the taxes for all of 2009? Well, you don't. That's where the property tax credit comes in.

At the closing, the seller will pay you one day's worth of property taxes from January 1 until the last day that he owned it - July 14. That's 6 1/2 months of taxes that get moved from the seller's account into the buyer's account.

It doesn't matter when you close on your house - you will only pay property taxes for the time you owned it. As the year goes on, the property tax credit gets larger. For example, if you close on a house on January 2, you will only get 1 day of taxes from the seller. If you close on December 31, you will get an entire year of taxes from the seller (less the one day you lived in it - December 31). This is important to know because the most money you are allowed to get back at closing is the amount of money you paid as an earnest money deposit. If you paid only $1,000 in earnest money, but you are owed $3,000 for the property tax credit, the most you could get back as cash at the closing is $1,000. The remaining $2,000 would be taken off the closing costs you owe. However, if the seller is paying all your closing costs for you, then the seller would get to keep that $2,000. To take full advantage of the property tax credit, you would need to ask for $2,000 less in seller-paid closing costs. Just one more reason why you should always use a mortgage broker who knows what they're doing before signing a sales contract for a house.