How the Prepayment Penalty Works
Regardless of the day your FHA loan ends, you have to pay interest on the loan through the end of the month. This means if your refinance or sale closes on the 10th of the month, FHA keeps on charging you for the additional 20 to 21 days till month-end. This is considered to be a prepayment penalty.
Prepayment Penalties Have Been Hidden
Near the bottom of the Truth-in-Lending Disclosure, it says:
Prepayment: If you pay off early, you
may or will not have to pay a penalty
The lender checks the box next to may or will not. Most lenders check the box for will not, thinking that the FHA prepayment penalty is not like the sub-prime prepayment penalties. But the FHA does have a prepayment penalty, and the may box should be checked accordingly.
Thus, most home owners with a FHA loan have had their prepayment penalty hidden from them.
FHA Will Discontinue Prepayment Penalties
The good news is that for loans that close on January 21, 2015 or later, there will be no prepayment penalty, regardless of when you refinance or close on your sold property.
For everyone who already has an FHA loan, you’ll want to time the closing of your next loan to be on the last day of the month to avoid paying extra interest.
Before you agree to be a co-signer for a friend or family member, consider the hidden dangers. By co-signing, you are not simply vouching for that person’s integrity. You are legally taking on responsibility for the loan yourself.
As a result, the debt and payment are yours in the eyes of a mortgage lender. The mortgage underwriter will calculate that payment into your debt ratio. This could easily prevent you from being able to buy the house you want. But hold on, there’s more…
Five Reasons Why Co-Signing is a Dangerous Move
1) No one can predict the future. What if the primary borrower gets hit with an illness and is hospitalized? What if he/she needs surgery and cannot work? What if the company they work for is sold or undergoes a restructure so that they are laid off work? What if they are a victim of identify theft? What if natural disaster strikes? What if they die in a crash? I don’t mean to be negative, but no one can promise with 100% certainty that the loan won’t pass on to you.
2) If the primary borrower does not make payments for any reason whatsoever, you are legally responsible for the loan. No exceptions.
3) The debt goes on your credit report. This could lower your credit score due to high balance-to-limit ratio and/or to debt load.
4) The debt goes on your debt ratio. This could prevent you from being approved to buy a house or an automobile.
5) It has the potential to harm, and even completely ruin, a good relationship. It’s happened more often than you might think.
Never co-sign for your girlfriend or boyfriend, not even if you are engaged to be married. That might sound extreme, but I’ve seen too many tearful people with unpaid debt on their credit reports that are leftover from a relationship that didn’t work out. Not only did the string of late payments ruin their score, but they were prevented from moving on with their lives in buying a home for themselves.
I’ve seen co-signing situations turn into lawsuits among family members.
Co-signing is dangerous. If you value your relationship, say no. Often people don’t realize what they’re asking, and if they did, they would not put you in such an awkward and precarious position.
If you feel reticent to say no, then blame it on me. Say, “I’d be happy to write you a letter of recommendation, but Carolyn Warren — whose advice I follow — says co-signing is dangerous and must not be done, ever, no exceptions.”
Make your friend or family member feel good with a nice letter. But whatever you do, DO NOT SIGN a legal agreement, not even as a co-signer.
The one who holds the money makes the rules.
If the underwriter says your debt ratio is too high, you will be denied. (And be forewarned: the spreadsheet you made showing you can afford it means nothing. The underwriter will not give it a moment’s glance.)
As I mentioned in a previous post, your loan officer can calculate your debt-to-income (DTI) ratio for you. But what if you want to do it yourself? What if you want to double-check the loan officer? Here’s how it’s done.
1) Take your gross income (before taxes and other deductions). Use the highest figure on your W-2 forms. You must have been employed in the same line of work for the last two years in order to count the income. If you have a brand new part-time gig, it won’t count. If you have brand new bonus income, it won’t count.
For self-employed people, use the Adjusted Gross Income near the bottom of page one of your tax returns. Again, you must be self-employed for the last two years. If you have a new business, you cannot count your self-employment, even if it is in the same line of work as your previous W-2 job.
2) Add up your monthly outgo. Use all of the minimum payment obligations that show on your credit report. If you pay your entire credit card bill each month, you do not use that balance in your outgo; instead, use only the minimum payment required.
Do not count expenses that do not show on a credit report such as phone, utilities, cable, gas or bus, or grocery.
Add in the new proposed mortgage payment for the house you want to buy. Include principal, interest, taxes, insurance, and monthly mortgage insurance if putting less than 20% down. (You can use the easy calculator at MortgageHelper.com here.)
3) Divide your total outgo by your gross income. This is your DTI. Most mortgage lenders want to see a max of 38% DTI, but some will go higher if the rest of your application is strong. The highest I’ve seen is 49% DTI with a 800 credit score and significant cash reserves.
For example, if your gross income is $5,000/mo. and your outgo is $3,000/month:
5,000 divided by 3,000 = 60 DTI. That is too high and will be denied.
You would then need to pay down debts and/or choose a less pricey house.
By knowing your price range, you avoid the disappointment of being denied. And again, if it seems too complicated to calculate yourself, all loan officers at mortgage companies and banks are happy to do it for you. They love using their handy HP calculators, so don’t hesitate to ask.
Happy house hunting! It’s a good time to own your own home.
That’s an interesting question, but more important is how do you avoid paying those over-priced closing costs, no matter what state you are in?
It is my pleasure to tell you that I see Good Faith Estimates from all over the U.S., and from all types of lenders: banks, brokers, credit unions, and other direct mortgage lenders. None of my clients (and I expect that none of my book readers either) are paying the new higher fees stated in this report.
None! They’re too smart for that. They keep more of their cash in their own bank accounts and shell out less for inflated origination costs padded by junk fees.
Five Most Expensive States for Mortgage Fees
1) Texas: $2,280 average origination fee
2) Alaska: $2,195 origination fee
3) New York: $2,109 origination fee
4) Hawaii: $2,009 origination fee
5) Wisconsin: $2,035 origination fee
There is no reason to pay so much! This is approximately double what my clients are paying for origination in those states.
The most expensive states I see for origination are California and New York where my folks are paying about $1,200 on average. Who’s paying $2,280 in Texas? Some vulnerable folks who are being taken advantage of, that’s who. I know a good Texas lender that charges a flat fee of $900 and not a penny more.
Five Least Expensive States for Mortgage Fees
47) District of Columbia: $1,791
48) Ohio: $1,707
49) Missouri: $1,749
50) Tennessee: $1,746
51) Nevada: $1,570
Too high, all of them! I like to see the origination fee for these least expensive states at $800 or less.
How Do You Pay Less?
It’s not hard to pay less and keep more of your money in your own pocket. Simply use the loan shopping method in my books. It’s in Mortgage Rip-Offs and Money Savers and in Homebuyers Beware. Make three phone calls and ask one question. That’s it. The only change for 2014 is that instead of asking for a Good Faith Estimate, ask for a Cost Estimate, because lenders won’t give out a GFE unless they pull your credit report first, and you don’t want that.
Why Have Origination Fees Gone Up?
The report states that lender origination fees (including the admin. fee, application fee, processing fee, underwriting fee, doc prep fee, and miscellaneous junk fees) has increased by a 9% in the past year. Why?
There are two reasons.
1) New federal mortgage regulations are costing lenders more time, and time is money.
2) Borrowers have been lulled into a false sense of security, thinking that the government involvement in the mortgage industry has protected them from being ripped off (which is not true). Therefore, they neglect comparison shopping.
It’s not hard to save yourself $500 to $1,00 or even more. If you don’t want to or can’t take the time to read one of my books, then you can take advantage of my personal coaching service. If I don’t like your loan, I will find you a better one that I do like. Information is here. Watching the video testimonial is optional. Scroll down to read the details.
Only You Can Bring Down Lender Fees
When borrowers say no to the banks and mortgage companies with the high fees and choose to do their business with the good, reasonably priced lenders, they control the market. The over-priced lenders will be forced to lower their fees or starve. It’s that easy, and you have the power to do it.
If you know someone who is considering buying a home or refinancing, please do them a favor by passing along this information. Thank you.
To see my source for the annual Bankrate report, go here.
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.