What is the Pad Fee in My Closing Costs?

It looks suspicious. A $500 fee called Pad on your Closing Document. What’s that for and is it an outright rip-off? Several people have asked, so here is the answer.

The escrow agent (or attorney closing agent) cannot be short to close when it comes time to wire out funds. If they are even one dollar short, it will delay your closing, which could be disastrous for both the buyer and seller.

And in case you’re wondering if they’d really delay closing a home loan for a mere dollar, the answer is yes. I saw a loan fail to close because it was 17 cents short. (The home buyer’s  cashier’s check was missing 17 cents, so there were not funds to close. No one noticed it until after the signing. The escrow company would not kick in the pennies nor allow the loan officer to do so. The home buyer had to drive back out to the escrow company and write a check for 17 cents.)

To prevent that from happening, some closing agents build in a safety reserve amount, which they call a pad. Typically, it ranges from $300 to $500. Then after closing, what remains of the pad — hopefully all of it — is refunded to the borrower.

I’ve been in the mortgage business since 1998, and I have never witnessed nor heard of a rip-off or closing agent theft regarding the pad. Personally, I’d rather see a pad and refund than go through a short-to-close scenario.

Coming up next time I will reveal some big rip-offs. Yesterday, I saved one home owner who is refinancing $893 in needless junk fees (in our consultation). Details about that to come.

You are welcome to subscribe to this blog. I post once or twice a week on mortgage and credit.

I am licensed to do mortgage loans in CA and WA,
NMLS # 1284134.

 

Three Changes to FICO 8: Is it time for an upgrade?

My mortgage company has upgraded our operating system and our email system. I upgraded my smart phone. This got me to thinking about the new, upgraded credit scoring system, FICO 8, and how most companies are ignoring it. What’s the difference between FICO 8 and the old FICO 2 they’re using? And why aren’t they upgrading? Here are the answers.

The Fair Isaac Company (who creates the credit scoring models) made these  changes to FICO 8:

1) More severe punishment for keeping high credit card balances.

I’ve been telling folks to keep your credit card balances low. With FICO 8, a high balance-to-limit ratio will penalize you even more if you don’t pay heed. And for those who do? More points added for maintaining a low balance. I advocate keeping your balances below 30 percent of the limit.

2) More leniency for an uncharacteristic late payment.

If you have an isolated late payment that’s less than $100, you won’t get docked so many points. Why? You could be a good credit manager who forgot about that parking ticket or didn’t know you had a balance remaining with your old cell phone carrier who has now reported you to collections for $35.92.

On the other hand, if you have lots of late payments scattered over multiple accounts, your credit score will be hit harder with FICO 8.

3) Lower benefit of credit sharing.

A  parent may add their 18-year old to their credit account to boost the child’s credit. The same for a family member helping a new immigrant. Or scammers who rents out their credit cards to people with bad credit for a fee. To protect against the scam, FICO 8 substantially reduces any benefit of account sharing.

Is Your Lender Using FICO 8?

No, your broker, banker, or full service mortgage lender is not using FICO 8. Why? Because the only versions allowed by Fannie Mae and Freddie Mac are these:

Experian: FICO 2
Equifax: Beacon 5.0
TransUnion: Classic 04

Why Haven’t They Upgraded?

When I traded in my Galaxy 4 for the Galaxy 7, it wasn’t free. And after companies upgrade their computer systems, typically, IT Support is kept hopping fixing issues. Multiply the cost and incidents by a million and you have your answer as to why the lending giants aren’t upgrading. Besides, according to them, the current credit scoring models are working just fine, so why bother?

If you know someone who needs to improve his or her credit — or if you are a person who wants to become an expert on credit yourself — I’ve written Repair Your Credit Like the Pros for the layperson to learn how the attorneys and certified credit repair specialists fix their clients’ credit. (See it here.) I would like to thank all the good folks who have purchased this book, and for all those who have written to tell me how life-changing it has been for them.

I’d also like to give a shout-out to the Boise, Idaho Envoy Mortgage lending team who purchased multiple copies to use as giveaways for their clients. Thanks!!!

Available for Kindle and paperbackFeel free to share this post via the Facebook and Twitter, because not many people know about the FICO version differences, even if they are in the real estate or lending business.

Are You Set Up for Fun or Stress in Retirement?

Will you be enjoying your retirement years, secure in owning your own home? Or will you be sweeping the floor at a fast food joint just to get by? Please don’t make one of the biggest mistakes of your life by ignoring this issue.

A new survey* says 83 percent of respondents don’t want to leave their homes when they retire. They don’t want to be forced into a low income housing because they can no longer afford their mortgage. They’ve worked hard all their lives and they want to enjoy their home.

Not only that, but the survey showed almost no one wanted to rent!

If you are 40 years of age or older, now is the time to think about your mortgage. What do you need to do in order to set yourself up for a happy life later?

If you have 20 years or more remaining on your mortgage, consider refinancing into a 15-year loan, or even a 10-year loan. Some people can shorten their term and lower their payment at the same time, because interest rates are so low right now. Others might need to increase their payment somewhat, but as long as you can comfortably afford the new payment, it might make good financial sense and save you tens of thousands of dollars overall.

Is It Time For a Mortgage Check-Up?

If you are in California or Washington, I would be happy to provide you with a no-cost, no-obligation mortgage check-up. If you are in a state in which I am not yet licensed, check with your local full service mortgage loan officer. (I prefer a full service mortgage company over a bank for several important reasons.)

Whatever you do, please do not ignore your finances now. Your future self will thank you for taking good care now.

*Survey by the American College of Financial Services

Using Marijuana Money to Buy a House

Blog post1Several people have asked me if they can get a mortgage using income from the legal sale of marijuana.

One person owns a state licensed shop that sells cannabis and related products. His shop does not have the 24 months required for self-employment, but he owned another business previously, so he can claim self-employment for more than two years.

Anther person is a W2 employee who works tending the marijuana plants. Prior to his current position, he worked for a nursery tending many types of flowers and plants. He says he has a history doing the same type of work, and the company he works for is legal in Washington state.

Can the shop owner and the employee qualify for a mortgage based on their incomes?

To get the answer straight from the source that provides money to banks and mortgage lenders for conventional loans, I spoke directly with Fannie Mae representative Deborah DeGarmo on June 21. (A transcript of our conversation was recorded at Fannie Mae and is available for underwriters who call and request the information, she said.)

The W2 employee who works for a legal business that sells marijuana can qualify for a mortgage just like any other W2 employee.

The business owner of a shop that sells marijuana cannot qualify for a mortgage based on that income, because that type of business is not yet federally recognized as legal.

So there you have it, from Fannie Mae. To qualify for a conventional loan, you need a down payment of at least 3% (which can be from an acceptable down payment assistance program). If you are in WA or CA, I am licensed in those states.

 

Map source: psu.edu

HomeAdvantage versus FHA Loan

Which is better for you? The HomeAdvantage loan or the FHA loan? Here is a quick and easy comparison.

Good to know: You do not need to be a first-time home buyer to qualify for either of these programs. As long as you will occupy the house as your primary residence for at least one year, you can use either HomeAdvantage or FHA.

HomeAdvantage

  • Has an income limit to qualify. In WA, it is $97,000 household income. In CA, it varies by county.
  • Provides the cash for you to use as a down payment. (The down payment will be either 3% or 3.5%.)
  • The down payment is not a gift. It is an interest-free loan that you pay back when you pay off your mortgage — whether it’s by selling the house, refinancing, or paying it off in 30 years.
  • To receive the down payment from HomeAdvantage, you must use a HomeAdvantage mortgage. This mortgage will have a higher interest rate by about .25%. So yes, you get an interest free down payment, but you pay a little more for the mortgage.
  • The way to get a HomeAdvantage program is through a loan officer who has taken the training class and is authorized by the state to do the loan. (Such as myself. I am licensed in WA and CA. In CA, the program is CADAP and is similar to HomeAdvantage.)
  • Attending a home buyer education seminar is required. Your loan officer will direct you to an available class. In WA, the class is free. In CA, there is a nominal fee.

FHA (Federal Housing Administraion) Loan

  • No income limit.
  • Down payment is 3.5%. It can come from your own funds, a gift from family, or an acceptable down payment assistance program.
  • An Upfront Mortgage Insurance Premium (UPMIP) is required. It is 1.75% of the loan amount. Most people roll it into the loan, making the mortgage slightly higher. Because it is amortized over 30 years, it increases your monthly payment by only a small amount.
  • You might have a smaller monthly payment with the FHA loan, depending on credit score and what you qualify for.
  • No education class required.
  • Because you provided the down payment, you do not have anything to pay back when you sell the house or pay off the mortgage.

HomeAdvantage (and CADAP) is a great program if you can’t save money for a down payment as fast as home prices are rising. The FHA loan is a great program if you can provide your own down payment but don’t qualify for the conventional loan.

Thank you for stopping by my blog. If you are in WA or CA, I am happy to provide you with a free analysis and cost estimate worksheet for the best loan you qualify for. That might not be either HomeAdvantage or FHA. As a full-service mortgage loan officer, I have an entire “smorgasbord” of loan programs to choose from.

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7 Facts You Should Know About Home Appraisals

This unique house made with retired shipping containers would be difficult to appraise.

This unique house made with retired shipping containers would be difficult to appraise. Photo from http://www.OffGridWorld.com.

The main purpose of the home appraisal is to determine fair market value. Thus, it is a vital and necessary part of the home buying process. Here are seven facts you should know.

1) The appraisal report must be ordered by the mortgage company, never the home owner or the home buyer. Why? Because you might have a cousin or friend in the business who will not be impartial in determining the value.

2) The loan officer at the mortgage company cannot choose the appraiser.

Unique cottage.

Unique cottage home.

This has been law since 2009 after a lawsuit against Washington Mutual Bank about coercing values. Prior to that, loan officers chose the appraiser and often had a conversation about the property. No more! Many lenders use an appraisal management company as a neutral party. This, of course, creates another fee for the home owner. The fee can range from $19 to $200.

3) The appraised value is based on other home sales. The appraiser finds five to six similar homes that have sold in the past three months. The appraiser makes adjustments for size, age, and quality, then determines the value. The idea is that the true value of a home is “where buyer and seller meet.” (If it’s a refinance, the value is also determined by the comps.

4) Unusual homes are difficult to appraise. If you home is a geodome-style, a log home, isolated in the country, or other unique property, it is not easy for the appraiser to find comps and determine value. In this case, many appraisers err on the side of a conservative value.

5) With a purchase loan, the appraiser receives a copy of your purchase contract. The big complaint here is that the appraiser knows the purchase price; therefore, is the appraiser biased in the value determination? Appraisers will argue no, but some home buyers are skeptical. The appraisers are not going in “blind” as they are with a refinance.

6) You have the right to dispute the value. If you feel strongly that the

This house was built in the 1980s. The neighbor threatened to buy it just so he could bulldoze it.

This house was built in the 1980s. The neighbor threatened to buy it just so he could bulldoze it.

appraised value is inaccurate, you may provide other comps with a statement to your loan officer. The loan officer will then submit it to the appraisal management company who passes it on to the appraiser. The appraiser’s response will be the final answer. (Personally, I have seen only one instance in which an appraiser raised the value based on the borrower’s dispute.)

7) It is your legal right to receive a copy of the appraisal report before you sign loan documents. Federal lending law gives you three-days to review the report (unless you sign a waiver). In all cases, the lender must provide the report to you before you sign final documents.

I hope this information is helpful. Feel free to share it on Facebook and Twitter. Any questions, let me know.

New Rules for Home Buyers from Fannie Mae’s DU 10.0

Last Wednesday, I got to speak face-to-face with Steve Lojan, an executive at Fannie Mae, which gave me the opportunity to ask about the new DU10.0 underwriting program that has caused some confusion.Credit card balance

The main controversy has to do with carrying a balance on your credit card. Will consumers be penalized for paying the amount owned in full, or for not paying in full? This is important information to know, because it affects all our credit scores.

Which Type of Credit Card User are You–a Revolver or a Transactor?

A revolver is a person who carries a balance on his or her credit card from month to month. A revolver might pay only the minimum balance due or more, but not the entire balance.

A transactor is a person who pays off the entire transaction or entire balance each month. A transactor never pays credit card interest, because no balance is carried over.

The credit bureaus consider transactors to be less risky, because by paying for everything they purchased when the bill comes due shows that they are living within their means.

The new DU10.0 will also differentiate, but this is where the confusion comes in. Revolvers will not be penalized by Fannie Mae’s new program. As long as the revolver pays the minimum due (which is their contractual right), then they will receive the same mortgage approval as the transactor.

“We are making it easier, not harder, for people to get approved for a mortgage,” Mr. Lojan said.

Impeccably remodeled Old Town home in Fort Collins, CO. Call Debra Kemis, Equity Colorado, (720) 323-6127.

Impeccably remodeled home in Fort Collins, CO. Call Debra Kemis, Equity Colorado, (720) 323-6127.

Please note: This is regarding the automated underwriting system for a home loan, not the credit score. To save money and get the highest credit score, you must be a transactor who keeps a low balance-to-limit ratio.
The credit bureau does not keep a running daily tab on your credit card balance. The bureaus only know what the creditor reports (monthly).
An emerging type of data gathering called trended data or “time series payment data” is changing this. Equifax and TransUnion now have the ability to collect payment information from data furnishers even if there is no balance on the card at the time of reporting. The amount paid monthly on a card can now be collected and furnished to DU to be used in its decision making process.*

More Leniency for Mortgage Lates

Fannie Mae’s new program will no longer penalize a late payment on a mortgage more heavily than a late payment on a car or other installment loan.

Less Leniency for Short Sales

DU10.0 will count short sales and mortgage charge-offs the same as foreclosures (the worst/most serious derogatory credit).

Change to Inquiries

Too many mortgage inquiries (over three for some lenders, over six for others) triggers a red flag for the underwriter. The underwriter begins asking suspicious questions, such as: Why is this person applying for so many loans? Have our competitors been turning them down? And if so, what do they know that we don’t? The borrower is required to explain all the inquiries.

The new DU10.0 will treat all mortgage inquiries made within 30 days the same as one inquiry — just as the credit bureaus have been doing. Hopefully, this will eliminate the need for a Letter of Explanation to be signed and placed in the loan file; although, I don’t expect many underwriters to change their habit quickly.

If you have any questions, please let me know and I will do my best to get answers.

Many thanks to Jared Kluver for suggesting this topic.

*Thanks to Chad Kusner at Credit Repair Resources for the information about trended data.

Mortgage Junk Fee or Legitimate Cost?

Reading through some lenders’ cost estimates is like going dumpster diving. They are full of unnecessary garbage — and by that, I mean fees that are either redundant or make no sense at all.

The sad thing is that some of these over-priced lenders have high ratings on social media sites. Some even win so-called awards.

How can that be? you may ask.

How Bad Lenders Get Good Feedback and Win Awards

Charm is one way. A loan officer might be one sweet-talking sales person who is available to receive your texts and emails up past midnight. But do you really want to pay hundreds or even thousands of dollars extra for 24/7 service? I am not exaggerating.

I reviewed one lender’s cost estimate that was $3,000 more than the competing lender. This expensive lender had “great” reviews online. The reviewers had no basis from which to make a judgment. They were  not in the mortgage business. They had not done a proper job of educating themselves about home loans. They were duped.

Another way some lenders get an award is that they purchase them. For example, one shady lender down the road from me “won” a Better Business Bureau Award because they donated the most money toward a BBB fundraising effort.

What is a Junk Fee?

Junk fee is a term commonly used to describe an extra fee that has little purpose other than to pad the profits of the lender. A junk fee might be an uncommon fee or a redundant fee. Here are some examples:

  • Application fee: It should not cost you anything to make an application for a loan. In fact, it is illegal to collect an application fee up front before providing you with a Loan Estimate and receiving your intent to proceed.
  • Ancillary fee: A nonsense fee used to pad someone’s profit.
  • Automated underwriting fee: Fannie Mae no longer charges lenders to use their AU software, but some lenders are still charging customers this fee.
  • Email fee: Seriously? You should not pay for your lender to send an email. The same goes for the E-doc fee. Sending documents by email is part of the normal process and should not cost extra.
  • Funding fee: I cannot think of one good reason why a lender should charge you extra to fund and close your loan.
  • Photo review fee: What a laugh! You do not need to pay the underwriter extra to look at the photographs on the appraisal report.
  • Satisfaction fee: One lender has the gall to charge a $125 satisfaction fee. I have to ask whose satisfaction does that buy? Certainly not yours.
  • Verification of Employment fee: This is part of processing the loan. They should not charge extra to verify that you are employed.
  • Warehouse fee: Nonsense.

Every fee should have a legitimate purpose.

It is normal for a lender to charge an origination fee. I don’t care if they call it Administration fee, Processing fee,or Underwriting fee — just as long as they don’t charge all three.

Most lenders nowadays use an e-sign system for the loan disclosures. For example, a company called Doc Magic provides disclosures, rate lock confirmation, and other legal documents to lenders. They charge the lender, so a document processing fee might be charged to cover this service.

Appraisers must be paid.

Title companies must be paid.

Escrow officers or attorneys who close loans must be paid.

Flood certification is required by federal law.

There is a lot of work by a lot of different professionals that go into a mortgage loan. Everyone is be paid for work performed. You will pay for this one way or the other. Don’t be duped by a “no cost” or “no fee” mortgage loan. If you aren’t paying the fees in a manner that is transparent, then you are paying for them month after month over the life of the loan through taking a higher interest rate.

Mortgage fees are a big topic. I have an entire chapter devoted to legitimate and junk fees in my books. And, another chapter on paying fees through the interest rate (and when it makes sense to do so).

It is my intention to educate and inform, because frankly, I am fed up with the garbage and nonsense! I annoy a lot of people in the industry by taking a public stand against over-pricing and non-transparency — and that is okay by me.

If you want an advocate who looks out for the best interests of the everyday good person who wants a good deal and is not interested in making rich banks get richer, then I am your gal.

I am state licensed to do loans in California and Washington. If you happen to be elsewhere, one of my books might save you tens of thousands of dollars and a whole lot of stress.

Thank you for reading and God bless.

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How to Buy a House with Little to No Down Payment

Light-filled home in Seattle. 2650 sq ft. Master suite upstairs + two bedrooms on main. For more info contact Teri Barry, Keller Williams, 206-632-2636

Light-filled home in Seattle. 2650 sq ft. Master suite upstairs + two bedrooms on main. For more info contact Teri Barry, Keller Williams,
206-632-2636

Do you know someone who would love to stop renting and buy their own home? A new study says 79% of Millenials want to buy a house. This study, by Bloomberg, goes on to tell them they can’t save fast enough for a down payment. I am here to tell you that I disagree! Why?

Bloomberg’s chart shows how many years it takes to save 20 percent down.
But who says you have to make a large down payment? It is not required.

Renters, take kitchenheart!

Here are tips for buying a house when you can’t save fast enough for Bloomberg.

  • If your credit score is 720+, take a 3% down conventional loan.
  • If your credit score is 580 – 719, take a 3.5% down FHA loan.
  • If your family is able to give you gift money for a down payment, you’re ready to go.
  • If you are a U.S. Veteran, you may qualify for zero down.
  • Use one of the many down payment assistant programs offered by your state. For example, I have a program in WA that will cover your down payment plus kick in a little for closing costs. You can earn up to $97,000/year to qualify. When you sell the house (or refinance), you pay back the down payment out of the proceeds. This is an interest-free loan to help more people enjoy home ownership.

If home values continue to increase next year as fast (or nearly as fast) as they did in 2015, you are better off buying now than waiting until you can save for a larger down payment.

Also consider that home owners receive the best and biggest tax deduction available. Typically, a home owner can deduct the interest portion of their payment plus property taxes. This lowers their tax bracket, potentially saving significant taxes. (Speak with your CPA for tax advice.)

If credit score is your barrier, then pick up a copy of Repair Your Credit Like the Pros here and get to work. Earlier today, I heard from a lovely young woman in Ohio who followed the book’s directions and is now applying for a home loan. Yes, credit repair works! But you must do it properly, like the credit attorneys and certified credit professionals.

What barrier is keeping you from the American Dream? Post a comment (see top of this article) or send me an email here. I promise to reply.

Is Buying a Home a Good Investment?

Listed at $202,400 5 bedrooms, 3 baths Contact Chris Samuels, 706-564-5855

Listed at $202,400. Brand new home.
5 bedrooms, 3 baths
Chris Samuels, Roman Realty,  706-564-5855

How much have home values increased in the past year? Has real estate been a good investment?

If you are in Colorado, your home value has increased by 12.28% (on average).

If you purchased a $400,000 home with 5 percent down, your $20,000 investment has grown to an equity of $49,120. You have more than doubled your money in only one year! (Not cash in hand, but by wealth in real estate.)

$400,000 x 12.28% = $449,120 value

The Federal Housing Finance Agency has released this annual appreciate by state for 2015:

AK 4.23%
AL 2.67%
AR 2.88%
AZ 7.14%

CA 7.9%
CO 12.28%
CT 0.78%

DC 7.14%
DE 3.32%
FL 9.67%
GA 6.29%

HI 6.34%
IA 3.79%
ID 7.9%
IL 3.4%
IN 3.42%

KS 4.09%
KY 4.13%
LA 4.12%

MA 4.85%
MI 5.47%
MN 4.75%
MO 4.28%
MS 3.10%
MT 4.25%

NC 4.64%
ND 4.8%
NE 4.72%
NH 3.6%
NJ 2.67%
NM 1.76%
NY 2.92%

OH 4.27%
OK 4.89%
OR 10.95%
PA 2.66%
RI 4.63%

SC 5.69%
SD 5.18%
TN 5.07%
TX 8.18%

UT 6.4%
VA 2.24%
VT 1.14%
WA 9.38%
WI 3.45%
WV 2.28%
WY 3.62%

No one can predict what 2016 will bring. The best reason to buy a home is simply because you want to own the space where you live and sleep. You want to stop paying your landlord’s mortgage and pay your own. You want the joy of home ownership! In the meantime, if owning real estate also increases your personal wealth, then that is great, too.

If you are a real estate agent who would like to be on my Recommended list, send me an email here.
If you’re buying a home in California or Washington state, I would love to provide you with excellent pricing, no junk fees, and stellar service.
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