Emily Johnson found the perfect house for her family. Four bedrooms, three baths. The master suite had a garden Jacuzzi tub, just what she needed after a long, hard day of work. There was plenty of street appeal, too. After hours of looking on the Internet, she’d found The One.
Her next step was to contact the real estate agent who was listing the house and ask to see inside.
Emily fell in love.
That evening, she brought her husband out to see the house, and he agreed with her that it was just what they wanted. They asked the real estate agent how they could make an offer. And that’s when everything fell apart.
You see Emily, like so many other house shoppers, had done everything wrong — starting with her initial search.
What Went Wrong?
When you want to buy a house, your first step is not searching the Internet for what you want. Your first step is to find out how much house you can afford. That way, you can tailor your search to what is appropriate and realistic. What’s the point of falling in love with a house that is out of your price range? Why set yourself up for disappointment?
A pre-qual is a quick evaluation by phone. The loan officer will ask you a couple questions about your income, outgo and down payment, then give you an estimate for the loan amount and home price you can qualify for.
No credit check is needed. To make sure your credit report is not pulled without your authorization, do not give out your social security number.
Once you know your true price range, you can cruise the Internet to your heart’s delight. By looking at homes you can afford, you set yourself up for success and avoid heartbreak.
His lender, PHH Mortgage, made one bumbling error after another, and as a result, Linza, a resident in Sacramento, CA, almost lost his house.
Fed up, he sued in a court of law.
The jury, presumably also fed up with the ineptitude and shenanigans of big banks, decided to award Mr. Linza an unprecedented amount of money: $514,000 in compensatory damages plus $15.7 million in punitive damages.
PHH Mortgage, the sixth-largest mortgage loan originator and eighth-largest loan servicer, isn’t taking its punishment without a fight. Vice President Dico Akseraylian claims the verdict is not supported by facts or by applicable law. Furthermore, he says the amount of the award “is grossly disproportionate to any alleged damages.”
Perhaps the award is a wee bit high. A typical jury award for mortgage fraud would be in the $15,000 to $100,000 range. So I can see why $16 million would be a big pill to choke on. Plus, he does still have his home.
Now with a review and appeal as the logical next steps, one has to wonder if the home owner will ever see a dollar of that money.
Everything about this story seems over-the-top to me. What do you think?
* False liens and judgments. (This is common. Someone with a name similar to yours fails to pay a bill and next thing you know, it shows up as a lien on your property. Title insurance protects you and removes it.)
* False heirs claiming ownership. (As in, “My grandma used to live there and she willed the house to me.”)
* Mistakes and errors. (They happen.)
* Fraudulent claims. (Someone says you owe money when you don’t.)
It’s easy to see why title insurance is important: it protects your ownership in the property. But who chooses the title company?
If You Are the Buyer
For a purchase loan, your Purchase & Sale Contract states who the title company is. So, it is decided between the buyer and seller. In some states, it is seller choice. However, the buyer has the right to request a certain title company. If the seller is a private party, they will usually agree to the buyer’s request. If the seller is a bank, then the bank usually has a title company they work with for all their transactions, and they don’t want to switch.
If you are buying from a private party, chances are the seller (like most consumers) is not familiar with title companies; therefore, it ends up being the real estate agent who chooses.
Personally, I like to choose my own title company, because I want a company with a good reputation that doesn’t charge me a bucketful of junk fees. In recent years, some title companies and escrow companies have jumped on the junk fee bandwagon. In addition to their normal compensation, they have added on extra fees such as e-doc or email fee, doc prep. fee, wire fee, courier fee, archive fee, review fee, auxiliary fee, and whatever fee.
How annoyed would you be if you ordered a hamburger for $7.95 and then the restaurant charged you a pickle fee, ketchup fee, mayo fee, and mustard fee? You would say that is part of the hamburger and $7.95 should cover it all, right? The same goes for all the title and escrow add-on fees. It’s bogus, and this is why I like to choose my own title company.
If You are Refinancing
When you refinance, there is no seller or Realtor involved, so the title company is your choice alone. If you do not tell your loan office which title company you would like to use, the loan officer will choose one for you. The same goes for the escrow or closing agent. You need to designate who that should be.
Why It is Important to Choose
By choosing wisely, you could save yourself several hundred dollars. Why pay hundreds more when you could keep that money and use it on something for your home instead?
To see a list of required fees and bogus fees used in mortgage loans, please see Mortgage Rip-Offs and Money Savers, because unfortunately, unnecessary costs are still being tacked on to loans today.
Thank you to Jason Caldwell for writing this review 14 days ago: “The book is exactly what I am going through, loved the book I also emailed her also she responded with very in depth email. I mean she really cares. but I am a first time home buyer and well going through the loan process of first time home buyer. Everything in the book she mention of how the loan officer will react to questions is true. Some of them wouldn’t show me a Good faith Estimate.
From my experience so far, Loan officers don’t depend and don’t want a return buyer. they want to sell you the loan make their high profits and be done.
The book not only tells you but show how they make their profits. how the today’s loan officers can bait and trick you at signing, yes you heard me right switch right at the signing table.
I recommend this book for anyone getting the a mortgage loan to read this book first. This should be a college text book. Ive read and i go back make my own notes. The book is that informed and that good.”
True Story, June 2014. Mr. Borrower asks his lender for a Good Faith Estimate or a cost estimate for a purchase loan. He wants to borrow $320,000, has excellent credit, and 20% to put as a down payment.
The loan officer chats him up, asking a lot of questions about his situation, building rapport, and making Mr. Borrower feel comfortable. No problem so far. But read on.
Then the loan officer tells Mr. Borrower he will need six pieces of information in order to provide a Good Faith Estimate: the property address, the estimated value of the property, the desired loan amount, his name, his income, and his social security number (to run a credit report).
That’s a lot to provide just to see the price tag on the loan. The loan officer could have given Mr. Borrower a general cost estimate (which would contain all the desired numbers and information) without collecting the six pieces of data. But he didn’t, because by collecting W2s, tax returns, pay stubs, and running a credit report, it deepened the obligation of Mr. Borrower to the loan officer. Not my favorite practice, but still legal. The bad part is coming next.
The loan officer then said, “We need to get started right away, so let’s order the appraisal report. I will need your credit card to pay for that.”
Mr. Borrower was immediately charged $450 for an appraisal. ILLEGAL!
According to Federal law, it is illegal for a lender to collect money for any reason, including an appraisal fee or an application fee, without first providing a Good Faith Estimate. The only exception is the lender may collect a small fee (like less than $50) for a credit report.
Three week later, the Good Faith Estimate and other loan disclosures finally arrive in Mr. Borrower’s email inbox. And right there in black and white, it says the appraisal fee would be $385. But wait, he was already charged $450 weeks ago! Not only that, but the Origination fee was higher than the verbal quote the loan officer gave initially as well.
Four violations of the law committed by the lender:
1) Collecting money before providing the GFE.
2) Collecting more money for the appraisal than what was disclosed on the GFE.
3) Charging a higher origination fee than promised without any reason to justify the increase.
4) Failing to provide the GFE within 3 business days of collecting the six pieces of information.
Yes, there are still shady, illegal scams going on today.
After our consultation, Mr. Borrower is now filing a complaint against the lender with the Consumer Financial Protection Bureau. Hopefully, there will be a good ending to this sad and disturbing story. For everyone else, you can avoid being ripped off by knowing ahead of time what your rights are.
Do not give out your credit card info until after you have reviewed and accepted the Good Faith Estimate.
And if you want to see the price of a loan without having your credit report pulled, do not give out your social security number; instead, ask for a general cost estimate (which is more detailed than the new official GFE anyway).
If you have any questions, please let me know and I’ll be happy to answer.
If you’re having difficulty getting your loan approved, you might think talking with the underwriter is a good idea. That way, you can explain your self-employment income, your tax deductions, your true rental income, your defaulted student loan, or the bad credit account.
If the loan officer gets paid only when a loan closes, why won’t she/he put you through to the underwriter? It seems logical that letting you explain things to the underwriter would be in the best interest of the loan officer as well, right?
But no. Underwriters — the final decision-makers on whether a loan is approved or denied — do not and will not speak with borrowers. Here are three reasons why.
1) The underwriter must follow the rules in the lender’s underwriting guide. These rules include exactly how to calculate income and how to handle credit. For example…
… Only 75% of rental income can be included. (25% is set aside for repairs and possible future vacancies.)
… For self-employed income, there is a complex worksheet that must be filled out. Part of that dictates that the Adjusted Gross Income is the main figure used. So if you have a clever accountant and write off tens of thousands of dollars worth of income, that lowers the income you get to count accordingly.
Therefore, you cannot call the underwriter to inform her that she has calculated your income incorrectly. Her calculations are correct and yours are wrong, according to the lender’s rules.
2) Verbal Explanations Do Not Count
If you have an explanation that needs to be included in the decision-making, put it in writing. Create a short and to-the-point Letter of Explanation that can be added to your application and loan file. Then and only then will the underwriter consider your explanation. This is because the underwriter is required to have documentation in your file to support any exception to a rule.
3) Your Loan Officer is Your Advocate
Your loan officer has a vested interest in getting your loan closed, but she/he also knows the underwriting guidelines. If a question or argument needs to be made to the underwriter, your loan officer does that for you. Thus, the loan officer serves as a gate-keeper and screen for the underwriter. Underwriters are under pressure to get loans approved and on to the Doc Draw Dept. They can’t spend half their day chatting or arguing with borrowers. It’s not in their job description. But, it is in your loan officer’s job description.
Underwriters will speak with loan officers, so if there is a valid question or argument to be made, you do that through your loan officer. That is part of what your loan officer is paid to do: be the bridge between you and everyone else in the complex process.
Remember this overriding principle: “He who holds the money makes the rules.”
If you disagree with the rules about how income is calculated or how credit is considered, that makes no difference. In Mortgage Land, the customer is not right; the underwriter is right. The underwriter must look out for the lender’s risk in lending money.
The one with the money decides on who gets it. What’s more, they don’t “owe you” to give you a loan.
Understanding this perspective will help you get approved. Ask your loan officer to explain the rules to you so you understand why the underwriter made that determination. Then, if warranted, put your explanations in a letter. Use bullet points, not long wordy sentences. A good letter can work magic. People are sometimes surprised at the loans I’ve been able to get approved by adding a succinct, logical Letter of Explanation to the loan application.
One last thing. In Mortgage Land, getting mad and yelling at people or sending upset emails does not help your cause. Underwriters do not give in because someone throws a fit. So keep your cool and your dignity, and do what needs to be done to make the underwriter happy with your application and documentation.
I’m talking about people using their homes like a piggy bank. Like children in a candy store, they can’t wait to spend their property value on pretty new kitchens, hardwood floors, sunken tubs, sun rooms, and other desires.
This is exactly what happened in the boom years of 2004 to 2006. Home owners were doing cash-out refinances and taking second mortgages called a Home Equity Line of Credit (HELOC) in order to fund wants. Then to their shock and dismay, when values declined, they had no equity left. Their piggy banks were empty. What’s more, when their incomes declined, they could no longer afford the extra payment on the second mortgage.
Now that values have risen in many parts of the country, new stats show that taking cash out is hot again. Home owners are signing for HELOCs and spending their equity on home improvements.
They justify their desires by saying the improvements will increase the value of their homes. That’s a good line that loan officers use in order to sell loans. Unfortunately, the facts don’t support it. Real figures show that what people spend remodeling their kitchen is more than the increased value of their home. The same goes for the other home improvements.
Reality Check: A remodeled bathroom or kitchen is not “an investment.” You don’t get back more money than you put in.
When you can afford to pay cash for an upgrade, then go for it. By all means, enjoy the luxury. But be smart. Don’t repeat the regrettable mistakes of the past. Don’t take out a loan to buy something that is a want and not a need.
Greed has been defined as having an unrealistic expectation. It is unrealistic to think you can take your equity, spend it, then pay interest to the bank that enabled you to take the loan, and come out ahead.
Better to be patient and prudent by saving up cash until you can truly afford that pretty new upgrade you want.
Who do you think are the ten richest CEOs in banking? Hint: They are all men.
The figures for 2013 are out and here is the list of the top money earners.
1. Wells Fargo’s John Stumpf – $19,320,409
2. Capital One’s Richard Fairbank – $18,294,525
3. Citigroup’s Michael Corbat – $17,558,119
4. FirstMerit’s Paul Greig – $16,411,240
5. State Street’s Joseph Hooley – $15,841,234
6. Bank of America’s Brian Moynihan – $13,139,357
7. BB&T’s Kelly King – $11,993,625
8. PacWest’s Matthew Wagner – $11,895,271
9. JPMorgan Chase’s Jamie Dimon – $11,791,833
10. US Bancorp’s Richard Davis – $10,793,663
Source: SNL: Data Dispatch
The Annual Percentage Rate (APR) is the interest rate you are charged on your actual Loan Note plus some of the closing costs rolled in.
Therefore, the interest rate you actually pay on the money you borrow (which you see on the Loan Note and on your Rate Lock Confirmation) is different than the APR. This explains why the APR can be higher than the interest rate the loan officer quoted.
Lenders Disagree on How the APR Should Be Calculated
That is a polite way of saying that the sneaky lenders — which are often the more expensive lenders — choose not to roll as many fees into the APR calculation as the upfront, ethical lenders. And you might be surprised who that is!
For example, recently I saw a Truth-in-Lending Form provided by a credit union that did not include all of their lender fees in the APR. That might shock some people who think credit unions are the good guys. If you’ve read Homebuyers Beware, you know you cannot categorize good and bad lenders by the type of institution. There are good and bad credit unions just as there are good and bad banks and brokers.
Online APR Calculators Don’t Give You an Accurate Figure
“Garbage in, garbage out.” If you input the interest rate and APR into an online calculator to try to determine which loan is better, you’re not going to get an accurate conclusion — unless both lenders calculate their own APRs in exactly the same way. And I would not count on that!
There’s a company that has announced their new calculator that determines which loan is best. I could rent it for my website for about $39/month, as could others. But I would never do that, not even if it would attract more visitors. Why? Because it can be deceptive and inaccurate.
My guess is that the creators never considered that lenders do not calculate APR in the same way. They assume all lenders are honest and eager to fully disclose all their made-up, phony, nonsense, double-charges and junk fees. Not only that, but some lenders include certain third party fees in the APR and some do not. You can see the problem.
The Only Sure, Accurate Way to Compare Mortgage Loans
In my professional opinion, the best way to compare loans is to set out your printed estimates on a table next to one another, and then look at the following figures:
1) Loan amount (If lenders use different loan amounts, you must compensate for that in your comparison.)
2) Interest rate
3) Any possible points and/or discount points
4) Lender fees, such as administration fee, underwriting fee, processing fee, origination fee, doc draw fee (which is often hidden near the bottom away from their other fees), etc.
5) Third party fees that the lender controls: credit report, appraisal, flood certification, tax service, lender’s attorney if in an attorney state
6) Any possible lender credit
There is no shortcut for doing a thorough analysis. You can’t turn off your brain and punch two numbers into an online calculator and expect to get the right answer.
If it all seems too mind-boggling or if the various lenders’ cost estimates are so different that it’s confusing (which often happens), then you are welcome to use my consultation service. Simply email me your cost estimates or Good Faith Estimates. I will do a thorough line-by-line analysis and then we’ll have a telephone consultation where I explain everything and and answer all your questions. For more information, see the Review My Estimate page.
Who can blame a home owner for thinking his or her house has been foreclosed upon after receiving more than 200 letters from the bank stating it is taking over the property for nonpayment? But here’s the surprise: many of those homes were never actually foreclosed upon. The bank, after reviewing the value and equity, decided it was not worth their time or effort to complete the foreclosure. In the meantime, the home owner moved out and into a rental.
These zombie foreclosures — vacant homes — are a “growing problem,” according to Consumer Financial Protection Bureau (CFPB). The government committee is now (finally) planning to have a little chat about this issue.
Some investors have already taken action. They’ve contacted the homeowners and have paid them cash to be added to the title. Armed with this status, they’ve done the clean-up work on the property and have turned the houses into rentals. So while the bank has been snoozing, the investors have been collecting rental income.
Of course, none of this would have happened if the home owners would have executed a smart strategy on their own: stay in the house and live free until they were officially evicted. Before you cry, “That’s not fair!” let me remind you that it is better for everyone in the neighborhood to have people living in a house and keeping up the property, including the yard. No one wins when zombie foreclosures turn into ugly, unsightly, broken-down blights on the street.
Are More Zombie Foreclosures Set to Flood the Market?
Two million home owners who received a loan modification (a temporary reduction in interest rate in order to prevent a foreclosure) are set to have their mortgages recast. This means their temporary low interest rate period is coming to an end, and they are about to get an increase in their payments.
40% of these home owners are still underwater and will not be able to refinance or sell. That is 800,000 properties that could come flooding onto the market at bargain prices (as in a short sale) or turn into abandoned houses (if the home owners flee).
But the numbers don’t stop there. Another 18% of these modified home owners have only 9% or less equity in their homes. Since it costs approximately 8% to 9% to sell a home, they would walk away with nothing in their pockets for the effort of selling. What will they do in this situation?
What Happens Next?
Will the CFPB force lenders to extend the loan modifications, thus kicking the can down into the future?
Will another wave of foreclosures hit the market?
Will a solution to found for the problematic zombies already setting in neighborhoods like haunted houses?
What do you think?
Statistical sources: Housing Wire, OriginationPro
That’s what happened to a home buyer named Nicole recently. She and her husband wanted to buy a house in the country, so she called a local lender and asked for an upfront cost estimate for a USDA loan.
Much to her surprise, the loan officer tried to dissuade her from looking at the price tag. The loan officer wanted her to proceed sight unseen — without seeing the lender fees, possible junk fees, appraisal cost, credit report fee, escrow closing fee, title insurance fee, recording fee, or interest rate and monthly payment.
“The lender doesn’t control the fees, so there’s not much to compare,” crooned the loan officer.
Wisely, Nicole sent me an email and asked, “Is this true?”
My answer was a big NO, it is not true. It is the home owner’s right and responsibility to look at the fees before deciding whether or not to make a full application, including getting the credit report pulled and sending in all your financial documents.
Never fall prey to a loan officer who refuses to disclose their fees upfront.
Ask for a cost estimate or estimate worksheet. This is the new upfront Good Faith Estimate, thanks to lending laws passed by federal government. What used to be a GFE is now called a cost estimate, initial fees worksheet, or estimate worksheet. It contains all the figures you need to compare loans and decide which lender offers the best pricing.
Never commit to a bank, direct lender, broker, or credit union without comparing two or three cost estimates first. No exceptions.
For more information on this topic, including the mortgage industry’s dirty little secrets on getting rich at your expense, please see Mortgage Rip-Offs and Money Savers. Find out what lenders don’t want you to know, how to shop and compare, what to say and how to say it. Save yourself stress, regret, and thousands of dollars on your home financing.