I am not sure if I should ask for my Good Faith Estimate in the pre-approval process before finding the house to purchase or after the property is identified. I am about to make an offer. Can you clarify? ~ Chris
Yes Chris, here is the process you’ll want to follow for a smooth and secure mortgage experience:
1) Ask for a cost estimate or initial fees worksheet. This is the new upfront estimate that you can get without having your credit pulled or providing all your financial documentation.
2) Based on these estimate worksheets, choose your lender/loan officer.
3) Submit your financial documentation and have your credit checked by your chosen loan officer, so that you can obtain a solid pre-approval letter, in writing.
4) Go house shopping, with your pre-approval letter in hand, with your real estate agent. Your agent will need the letter when you submit an offer to buy a house.
5) After you’ve found a house and have a mutually signed purchase agreement, then you send that signed agreement to your loan officer, who will then adjust your loan amount, etc., accordingly and provide you with full loan disclosures. These loan disclosures include the 3-page Good Faith Estimate, Truth-in-Lending form, and other pertinent information about your loan.
If you need more personal help, please click on my webpage above that says, Review My Estimate.
Best wishes and happy house hunting!
A seller credit or seller contribution is money the seller gives you to pay for closing costs. Some or all of your closing costs, including your property taxes and personal hazard/fire insurance may be paid for by the seller. If the seller pays all your closing costs, you will pay only your down payment.
The seller cannot pay for any of your down payment, per law.
If there is extra money from the seller after all your closing costs are covered, the extra money stays in the seller’s pocket. Homebuyers cannot receive cash from the seller, not even one dollar.
If there is extra money from the seller credit after all your closing costs are covered, ask your loan officer about using that money to buy down your interest rate. If there is enough cash available, you could use it to pay for a point or even a half point (a point is a percentage point, and it is interest paid up front) to get a lower interest rate.
If the seller is paying for your lender fees, then the lender sees no reason to waive or lower any junk fees they may have, because you aren’t paying for them anyway.
How to Get a Seller Credit
In order to get a seller credit, you must have it included in your Purchase and Sale Agreement. Therefore, you ask your real estate agent to negotiate it for you. It is part of the price negotiation of the home. The lender does not handle the negotiation of a seller credit.
The seller credit should be stated as a dollar amount, such as “the seller will contribute $5,000 toward the buyer’s closing costs, including prepaids.” Or, the credit can say something like, “The seller will pay all of the buyer’s closing costs, including prepaids, up to $XX maximum.” The credit should not be stated as a percentage. If stated that way, the lender will require an addendum to the purchase contract that states it in an exact dollar amount, which causes more time and hassle later.
(Prepaids = your property taxes, homeowners/hazard/fire insurance, and days of prepaid interest.)
Interesting Strategy You Can Use
When the property inspection report comes in, there will be flaws and needed repairs exposed. This presents a second opportunity for a homebuyer to ask for a seller credit. If the seller doesn’t want to do the repair work, the seller can offer to credit you cash toward your closing costs instead. This preserves your own cash so you can use it to make the repairs after closing. If you are the handyman type who likes to do your own repairs, you might come out financially ahead this way.
The Take-Away: Discuss seller credit with both your real estate agent and your loan officer. Your agent will help you get it and your loan officer will help you use it to your best advantage. Remember, with a purchase loan, you cannot take cash out of the transaction (that is only allowed in a refinance when the borrower already owns the property).
When calculating debt-to-income ratio for the loan amount you desire, don’t use the wrong figure, or you might be in for a nasty surprise. It happens all the time…
Greg, self-employed in the construction business, reported his income to his loan officer as $95,000/year. With that, he figured he could easily qualify for a $400,000 loan. What he didn’t know was that the underwriter would subtract all the deductions he claimed with the IRS from his income. All construction materials, office expenses, wages paid out, the new truck he purchased–all deducted and all subtracted from his income. With this, his Adjusted Gross Income showed as $29,000, and that is the figure the underwriter used for qualification purposes. Much to his surprise and consternation, Greg’s request for the loan he wanted was denied.
The Adjusted Gross Income figure is the one you need to go by for self-employed income. Yes, depreciation and a few other things can be added back, but for simplicity, look at your Adjusted Gross Income.
Typically, self-employed folks hire good accountants to squeeze every legal deduction they can out of their income. That is fine. But realize you can’t have it both ways. You can’t get out of paying taxes on $95K and then turn around and claim $95K as your income when you want a mortgage.
The Take-Away here is to plan ahead. If you want to buy a house in the next year, speak with your tax preparer about making sure your income will qualify. And whatever you do, don’t go house shopping until you have a valid Pre-Approval Letter in hand that verifies the purchase price you qualify for.
I am an entrepreneur starting a new company (my third) and have been told by a mortgage lender that despite my successful background and ability to put 20% down, that I will have to wait two years before I can apply for a mortgage to show steady income. Are there any alternatives? I am buying in a highly sought-after neighborhood where the risk of the real estate market is considerably lower than most places in America.
My Answer For Self-Employed Home Buyers
Justin, the two-year self-employment rule comes from Fannie Mae and Freddie Mac, the two government-backed organizations (GSE) that provide money for mortgage lenders. The majority of banks and other mortgage lenders use this money; therefore, they must comply with their rules. So even if you have been making $2million/year for an entire year, are putting 35% down, and are buying in the best neighborhood in America, you will not be able to qualify for a mortgage that is backed by Fannie or Freddie money until you have a full 24 months self-employment history.
But, if you can find a lender that has their own, non-GSE money, then you have a shot at getting approved–with a good Letter of Explanation to accompany your loan application.
Another option would be to find a private seller who is willing to carry the contract (act like the bank) himself until you have the two-years. Some sellers don’t need all their cash up front and would like to make 5% to 8% on a short-term loan.
With this information, you will know what to ask right upfront. That way, you’ll save yourself and the loan officer time and emotional stress. The last thing you want to do is to apply all over the Internet, letting lender after lender, pull your credit report, because too many credit report pulls does not look good and present a red flag, in spite of the credit bureaus’ rule that multiple pulls over 30 days won’t hurt your score.
Interest rates have gone nowhere but UP for the past 3+ weeks. For home buyers still shopping around for the best deal, it’s like watching a nightmare unfold. Remember those 3.5% 30-year fixed rates? They’re gone!
Rates went to 3.625%, then 3.75%, then skipped right over 3.875% and landed on 4%, now up to 4.125%.
In some scenarios, it makes sense to buy down your rate to 3.75%, but you must do the math first. If the buy down is too expensive, reject it and take the 4.125%.
How to Check Your Buy Down Option
Look at the principal-and-interest payment using both interest rates.
Subtract to get the monthly savings.
Divide the monthly savings into the cost of the buy down.
This is the number of months it will take to break even. If you’ll break even in two years or less, I think it makes sense. If it’s taking five years or more to break even, I would not even consider it.
Get Your Written Rate Lock Confirmation!
You cannot lock in an interest rate until you have a mutually signed Purchase & Sale Agreement. This is because rate locks are tied to a specific property address. But once you have one, speak with your loan officer about locking in. If you are floating your rate (not locked), then you need to communicate with your loan officer every morning on where rates are at.
When locked, get it in writing. No exceptions.
I just heard from a home buyer, closing in 20 days, who believed his rate was locked in at 3.5%. Then he got a call from his loan officer…
“The bond market is going crazy. I suggest locking in. I can get you at 4% today,” he said.
“WHAT?!!! I thought I was locked at 3.5%.”
“No, you were floating,” he said.
My question is, what was the loan officer doing while the 3.5% rate was going to 3.625% and then to 3.75%? Why did he wait until rates went all the way to 4% to call his client? That is gross neglect, in my book. I suggested to the home owner that he call the manager and speak about this situation. Problem was, the loan officer was the manager!
Assume nothing. That is rule #1 in the mortgage game. You must get your rate lock confirmation in writing.
Where Do Rates Go From Here?
No one knows. No one was predicting the volatility we’re in now. Experts were saying, “The Feds are keeping rates low for the rest of the year.” It made sense. We need low rates to continue to support economic growth. Everyone thought rates would continue on at about the 3.5% level…right up until the sharpest rise in over 10 years. No one has a crystal ball that says where rates will go.
I’ve said it before, and I’ll say it again: If you see a rate you like, lock in and be happy.
Note to esteemed real estate agents: If your clients are taking their time house shopping, pass on this information to them. They need to know that the longer they wait, the higher the risk they’re taking of getting that cheaper monthly payment with a low-low rate.
According to a study by Campbell Surveys and Inside Mortgage Finance, real estate agents controlled or influenced 45% of homebuyers’ choice of lender.* Is this a good or bad thing? Let’s look at both sides, and then you can draw your own conclusion.
In Favor of Using Your Realtor’s Preferred Lender
A Realtor’s #1 concern is that the transaction gets closed–and on time. There’s nothing worse than having the lender mess up the process so a lose/lose/lose situation is created. If a bank has inept, inefficient, or crazy processing and underwriting so that your loan doesn’t close on time, it can create havoc with your moving schedule and purchase contract. The seller might not agree to extend your contract if there is a higher back-up offer. You could lose out on the house of your dreams; or if the seller agrees to an extension, your moving schedule gets messed up. The real estate agent doesn’t get paid on time, or perhaps not at all if the deal is lost.
Who then could blame a Realtor for recommending a lender he or she knows is efficient and has a history of closing on time?
Against Using Your Realtor’s Preferred Lender
Do you care if you pay hundreds–or perhaps a couple thousand–dollars more for your loan? Do you care if you get the lowest interest rate and lowest monthly payment? Do you care if you pay a boatload of junk fees, thereby perpetuating the problem of lenders taking advantage of unsuspecting and uneducated borrowers?
Just because the subprime era is over, it doesn’t mean there aren’t plenty of rip-offs and over-charges going on, because there are!
Yesterday, I heard from a homebuyer who said he got his mortgage broker to delete $1,558 in stupid junk fees, because he was aware and knew better, thanks to reading Mortgage Rip-Offs and Money Savers. Now he has that much more cash in his wallet he can spend on something new for his house.
Ultimately, It Is On YOU
No one cares about your loan more than YOU. It is your right and your responsibility to know what is fair, what is an over-charge, and what is easily negotiated. It is up to you who you choose to give your business to, so you need to make an informed and responsible decision.
Maybe your real estate agent’s preferred lender is a great choice. On the other hand, maybe it is an expensive choice. Get a load of this…
In a large training session for multiple lenders, the so-called mortgage guru told the packed-out audience: “Try to get referrals, because you can charge them more. When a friend or agent refers a borrower to you, they don’t shop and they don’t look at price.”
Having worked in both retail and wholesale lending, having been behind closed doors in sales, underwriting, doc draw, rate lock, and all the rest, I can tell you there are both Mortgage Stars and Loan Sharks out there. It’s a situation of Homebuyers Beware. Choose with your eyes wide open.
As always, I welcome your opinion–whether or not you agree with me. And thank you for stopping by.
* Source: Housing Wire
I was listening to my radio when on came yet another ad by a local mortgage company. Maybe you’ve heard a similar ad and wondered if it was a great company to get a loan from. Or maybe you’re a real estate agent and wondered if this company could get your buyers good financing.
In this ad, the owner of the mortgage company was telling listeners about his fantastic, historically low interest rates and APRs (Annual Percentage Rates). Fine, no problem. But then he capped off the ad by saying, “With us, you never pay an upfront fee!” Like it some kind of unique, special deal: no up front fee.
THE TRUTH: Federal banking law forbids any mortgage lender–including banks, direct lenders, credit unions, or brokers–from collecting any money up front, unless you want them to pull your credit report; and in that case, they can ask for payment for the credit report only (which is normally less than $30).
It is illegal to ask you to pay a few hundred dollars, for any amount whatsoever, for an application fee, processing fee, acceptance fee, or any other type of fee. Other than paying for the credit report, a lender must not ask for any money without first providing you with a Good Faith Estimate.
If you already know your credit score or know that you have excellent credit with at least three accounts on record, then there is no need to have your credit report pulled before you are ready to commit to that lender. If you are shopping for a good loan, do not disclose your social security number or let the loan officer pull your credit.
Ask the loan officer for a Cost Estimate or a Fees Worksheet. It doesn’t matter what they call it, the up front estimate does not require a credit report pull. Before 2010, it was the Good Faith Estimate that was given up front; now it is the Cost Estimate. It’s the same thing, different title at the top of the page. Due to (insipid) federal regulations, lenders were forced to change the title of the upfront estimate. You have the right to receive this without cost, obligation, or credit pull.
The radio ad I heard, the one bragging about “we have no upfront fee” was on Christian radio. So listener beware: just because an ad is on your favorite station, it doesn’t make it 100 percent honest. No upfront fee is the law. Touting it as unique to your company is a marketing ploy. So if you don’t like shady ploys, ignore those ads.
For home buyers who are waiting to hear back on an offer to buy a short sale property, it’s been a lot like waiting for a personal letter from Santa. Many folks lose faith long before it happens. I know buyers who made offers on more than 20 homes and still were not home owners. That’s a lot of time and effort, for both them and their real estate agents. Now Freddie Mac (the Federal Home Loan Mortgage Corp, a government sponsored enterprise) aims to improve this situation by shortening the time.
The company that handles the current home owner’s loan (the servicer) now has 30 days to make a decision on your offer — if they have the authority to do so. However, if a different bank actually holds the loan note so that the servicer is required to pass it along, they have 60 days to respond.
Yes, waiting two months is better than waiting six to twelve months, as happened so often last year, but it’s still a long time to put your life on hold while you wait in suspense. By contrast, a private party selling a home will typically respond to your offer within one to three days.
Servicers are required to acknowledge receipt of your offer within three days, so at least you know your offer didn’t fall into a black hole or get eaten by a dog.
If the servicer ends up needing more time than 30 days to review your offer, they must provide you with a weekly status update.
Why should it take a month or more to decide whether or not they’re willing to sell for the price and terms of your offer? One scenario is when they want to wait to see what other offers might come in. Another scenario is that it takes a committee of bankers to approve a short sale; and frankly, getting that one property off their books is not a priority for them.
If your dream home is a short sale situation and you don’t mind waiting a month or more with the understanding that your offer might not be accepted, then proceed with patience. But if you don’t have the time or emotional endurance for a long haul to close, then speak with your Realtor about limiting the homes you preview to ones that are owned by private parties.
• Don’t consolidate bank accounts.
• Don’t close a bank account.
• Don’t open a new account at a new bank.
If you want an easier, smoother loan closing, just leave your money as it is. Here’s why.
Right now, underwriting guidelines are super strict. Underwriters are expected to triple-verify everything. They want ironclad proof that down payment money and reserves (money in savings) are your own, not borrowed. In the past, borrowers who did not have enough cash to qualify for the home they wanted, used trickery to get qualified. They borrowed money from friends, took out cash advances on credit cards, or magically made cash appear from God-knows-where. There are tales of cash coming from drug sales, lap dances, and dumpster diving. I even heard a story from a loan officer friend about cash for the down payment coming from a giant garbage bag hidden in the kitchen. (He was visiting the home to take a loan application when the client showed him a hundred grand in bills in a big, black bag that was under the sink.)
Underwriters do not like what’s called “mattress money.” Why? Because money you pulled out from under your mattress might have actually been a secret side loan that has now pushed your debt-to-income ratio too high.
All down payment money must have a clear, proven, verified paper trail showing the money is and has been your own. Therefore, you are required to submit two months’ bank statements verifying the funds. If the bank statement shows a large deposit coming from a different bank account, that is a problem. Now you have to provide two months’ bank statements for that account. If you have shut down or opened new accounts, this gets complicated.
The last thing you want is complicated! Complications add more paperwork, more letters of explanation, more underwriting supervisors getting involved, more time to get your final approval, more time to close, and more headaches for you.
I’ve had clients who thought they were simplifying things by consolidating their accounts right before applying for a mortgage, but they ended up doing just the opposite. I’ve also had clients move large sums from investments to checking accounts in order to “get ready” to buy a house. Don’t do that. Leave your funds where they are and then ask your loan officer how to best transfer your down payment to the closing agent.
You might have a bank account in another state that requires three-days’ notice to move the money. This is okay. You will move the money and paper trail it, according to your loan officer’s instructions, at the appropriate time — not right before getting your pre-approval.
The exception to the above is if you will not be buying a house for at least four months. In that case, you have time to move your money, because you don’t have to show bank statements from that far back.
If you have any questions about this, please let me know. My goal is to help you have a pleasant, stress-free loan experience. When you are well-qualified and do everything according to the (underwriting) book, then it is possible to have a good finance experience–even now.
The SAFE Act (Secure and Fair Enforcement for Mortgage Licensing Act of 2008) mandates nationwide licensing and registration for residential mortgage loan originators. The law was enacted with the idea of making borrowers safer from loan fraud, fee scams, lies, and hidden tricks.
While that sounds good, there is a loophole you might not be aware of (but should).
Namely, the SAFE Act supposedly ensures that all loan salespeople, brokers or bankers, receive an adequate base of training in order to get licensed. However, only non-supervised institutions have to pass the NMLS testing process. This means that bank employees are except from this training and testing.
Yes, you got that right! Loan officers at Bank of America, Wells Fargo, Chase, and other registered banks only have to register–not pass a test.
Listen to what one insider says:
I have files of cases of loan originators who failed the test and ended up working for a bank.
Here’s what another insider said:
For the past year I have been helping loan officers prepare to pass the federal and state test. The potential mortgage loan originators are new, and a large percentage are from the banking side of the industry. The 80 loan officers I have worked with shows me that the loan officer coming from the banking side are not understanding of the laws and are having a very difficult time passing the test. In some cases, it is like deer in the headlights.
This is one of the reasons why I say you do not choose your lender according to the institution. You are not assured of working with a higher level of expertise with a banker than you are with a broker. More often, it’s the other way around. It is truly an individual consideration. You must not execute blind trust in a loan officer simply because he or she works for a Big Bank.
Please don’t misunderstand. I know expert, experienced, ethical loan officers who work at Chase and Wells Fargo. But I consider them to be above the norm: the Mortgage Stars. I am not against getting a loan at a bank, but I am against having more faith in a bank than in a mortgage broker, because that is not the reality.
At present time, the law favors the bank employees with an advantage, so when you’re loan shopping, keep that in mind. Choose your lender by the individual loan officer, not by the type of lending institution or by the name on the building.