Here are some tips I learned from a seasoned California mortgage banker who successfully funded over 100 loans during the tough transitional 2007 real estate market. These tales from the trenches can prevent your deal from the shrapnel of a loan decline or last minute tighter "prior to document or funding" conditions:
Most conventional (up to $417k) and non-conforming (Jumbo) loans above $417k require Desktop Underwriting approval
Conventional secondary financing is very difficult to obtain. A maximum of 90% loan-to-value (LTV) ratio should be relied upon from the buyer
Jumbo interest rates are currently at least 1.375% higher than conforming loan interest rates
Secondary "seller carry-back" financing is a great sales tool strategy. In some cases 100% total loan-to-value will be allowed with the first loan at 80% LTV or less
Beware of "declining market" underwriting guidelines -
A 5% reduction on the guideline is required by most lenders, so if the buyer is applying for an 80/10/10 loan, the underwriting guideline would have to meet or exceed 85/15/5 underwriting guidelines
Be sure to work out these important details in advance during the loan "pre-approval" stage instead of in the middle of a transaction!
All of California is now considered to be in a "declining market"- check with your lender to see how your local market is rated
Credit scores of less than 620 will not pass
Appraisal reports are submitted to underwriting
Underwriting runs an Automated Value (AVM) which almost always comes in low
Desk/Field appraisal review is then ordered
Make sure the appraisal is always signed off by the underwriter within a reasonable amount of time
One more thing...don't forget to wear your flack jacket in this ever changing lending environment.
4 Comments on How to Avoid the Most Deadly Lending Landmines...
I hear you loud and clear. I had three closings scheduled on my listings in the last 48 hours - none of them have come to the table yet. On two of them, I can not even get the broker to take my call. Tomorrow will be an interesting day. Flak jackets are a must.
"I hear you loud and clear. I had three closings scheduled on my listings in the last 48 hours - none of them have come to the table yet. On two of them, I can not even get the broker to take my call. Tomorrow will be an interesting day. Flak jackets are a must." - Kevin McGrath
Hi Kevin, its rough out there and sometimes the tried and true lending tools can save a deal.
The current credit crunch in the financial and real estate markets have significantly eliminated a vast pool of borrowers with a desire to purchase or refinance a home. This especially rings true in high cost markets like California and the San Francisco Bay Area.
FHA loan programs offer great terms compared to conventional loan programs affected by challenging qualifying standards that require a large down payment. Congress and the federal government are on the verge of raising conforming loan limits for Fannie Mae and Freddie Mac mortgages in high cost areas.
Those in the know believe it's a matter of when not if the conforming loan limit will be raised and when this happens, the FHA loan limit will be increase to match the higher conforming loan limit. Therefore, the revised FHA loan limit could be increased from $362,750 to $625,000 or higher.
The following are some of the attractive features of the FHA loan programs for owner-occupied properties:
Down payment is 2.85% of the purchase price
Down payment assistance / "Nehamiah" programs available *
No credit score required- good credit for the previous 12 months is OK
100% gift for down payment is allowed
Seller can credit the buyer up to 6% of the purchase price for Buyer's non-recurring and recurring closing costs
2/1 interest rate buy-down and straight 30 year interest rate buy-downs are available
Pest control recommended repairs- all section 1 items, all section 2 items (that could lead to further damage) and all recommended further inspections of inaccessible areas must be completed with a pest control certification at close of escrow
Allow 45 days to close escrow
Collection accounts on credit report do not automatically have to be paid in full
Bankruptcies OK if older than 2 years (in some cases, older than 1 year is allowed!)
Non-occupant co-borrowers are OK (blended debt-to-income ratios allowed)
Back-end qualifying ratios from 41% up to 50% in some cases
1 to 4 residential units OK - 2 to 4 units have higher loan limits
Condominiums do not require private mortgage insurance (PMI)
Single family dwelling (SFD) and planned unit developments (PUD's) require PMI at .5% of the purchase price (conforming loans require PMI at 1%)
Not previously approved and then removed from approval list
No pending litigation against the condo homeowner's association
No more than 10% of the units delinquent on HOA dues
51% owner occupancy ratio required
Up to 10 units maximum in complex under spot approval (some exceptions may apply)
* The Nehamiah down payment assistance program is a non-profit organization. The seller makes a charitable donation to Nehamiah then Nehamiah forwards the Buyer's down payment to the escrow account. Please note that some title companies may not facilitate this program and you should confirm prior to opening and escrow account.
Maybe you can save the day with a good old FHA loan. Hang in there...
I got hit with the declining market surprise at the beginning of the year. Now I know the right questions to ask. Fortunately I have two new construction closing coming up and those are both in "high" ticket areas where we won't see that ugly little red flag!
"I got hit with the declining market surprise at the beginning of the year. Now I know the right questions to ask. Fortunately I have two new construction closing coming up and those are both in "high" ticket areas where we won't see that ugly little red flag!" - Cindy Jones
Hi Cindy, knowing the right questions to ask in advance can save a lot of grief later. Thanks for commenting on my blog post.
Pete Sabine
Walnut Creek, CA
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I hear you loud and clear. I had three closings scheduled on my listings in the last 48 hours - none of them have come to the table yet. On two of them, I can not even get the broker to take my call. Tomorrow will be an interesting day. Flak jackets are a must.