Tag: mortgage

“When Should I Get My Good Faith Estimate?”

~ Carolyn Warren ~ 2 Comments

?????????????????????????????????????????????????Dear Carolyn,

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!
Carolyn Warren

Beware of Bait-and-Switch Mortgage Fees

~ Carolyn Warren ~ Leave a comment

loan sharkLoan sharks are still in business, lurking inside of what are supposed to be reputable banks and mortgage lenders. These are the liars who bait you with an Initial Fees Worksheet or Cost Estimate that looks like a good loan. When doing your comparison shopping, they appear to be the cheapest and best. The icing on the cake is their personal charm; loan sharks are famous for being good communicators.

A home owner refinancing in Southern California asked me to review the three cost estimates she received. The one from a direct lender in San Diego appeared to be the best, so she proceeded with her refinance. But two days later when she received her official Good Faith Estimate, she saw that every one of the fees had been raised.

The lender underwriting and processing fee? Higher by about $400!

The appraiser fee? Higher!

The credit report fee? Higher!

The flood certification fee? Higher!

The tax service fee? Higher!

I advised her not to sign the paperwork until all the fees were corrected. The loan officer quickly apologized and blamed his loan processor. But guess what? The next day when he came out to her home to get the loan disclosure package signed, the fees on the new documents were still higher than initially disclosed. He mumbled some excuses and explanations and told her to sign.

She refused to be a victim of bait-and-switch and sent him packing. She then chose to go with a different, more honest lender.

This was the right choice. A one-time mistake can be fixed, but try to raise fees a second time, and it’s time to move on to a better loan officer. In this case, I don’t blame the lender, but the individual loan officer. He quoted fees that were lower than the company allowed, presumably thinking once he baited in the customer, she would stay no matter what.

A home buyer in Seattle last week had better luck. He also used my review and consultation service, because he didn’t want to spend the time and hassle of shopping around.

“I figured I would get one estimate and if it looked okay to me, get your expert opinion,” he said.

The initial estimate looked just fine. The interest rate was at the best available rate for the day and there were no unnecessary junk fees. The lender’s fee was competitive. I told him to proceed with confidence, and if he had any questions when he received his loan disclosures, to let me know.

The next day he emailed me his official Good Faith Estimate, and right away, I spotted a problem. The appraisal fee had been raised from $450 to $500. I pointed this out to him and suggested he ask the loan officer to correct it. Happily, the loan officer fixed the “error” right away, and all was good going forward. Using my service saved him $50 (he hadn’t noticed the increase) and gave him peace of mind.

If you’d like an expert opinion on your own loan offer, Initial Fees Worksheet, or Good Faith Estimate, please see here. One of my clients called me “The Mother Theresa of Mortgages.” Needless to say, I was flattered. It’s good people who are trying to get good loans that motivate me to do what I do.

Thank you!

What Homebuyers Need to Know About “Seller Credit”

~ Carolyn Warren ~ 9 Comments

house lovelyHomebuyers: You can use a seller credit to your advantage. Here are the rules and requirements in short, quick form.

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).

Using Gift Money For Your Down Payment

~ Carolyn Warren ~ 6 Comments

kitchen counter top view No money for a down payment? If you have a family member who is willing and able to give you the funds for a down payment, you may be in luck! Here’s how it works.

Who Is Allowed to Gift Money

Gift money may come from a family member. Some lenders will stretch that to include a fiance/fiancee. Friends are not allowed to gift the down payment. Why? Because lenders believe that your parents, a grandparent, or even a brother or sister would give you cash without expecting it to be returned. But a friend? No, lenders don’t think friendship stretches that far, and that it would actually be a secret loan. Remember, borrowed money cannot be used for a down payment.

What the Gifter Has to Prove

Lenders have a form Gift Letter that the person donating the funds must fill out and sign. In addition, they have to prove “ability to give.” This is done by providing two months’ bank statements showing where the gift money is coming from. Why? So the lender knows the person gifting the money isn’t taking a cash advance from a credit card or some other type of loan. Again, no borrowed money allowed for down payments.

I once had a home buyer tell me her dad said, “I am not showing them how much money I have in my account. You tell them I am not giving my bank statement! The letter is sufficient.” Well guess what? The loan was suspended by the underwriter until the dad decided to cough up the bank statements.  You can’t bully an underwriter into changing the rules, so you’ll want to let your donor know up front you will need copies of the bank statement later.

How to Execute the Gift for the Smoothest Closing

Do not have your donor transfer their funds into your bank account. This will cause a big, complicated paperwork mess that you don’t want to deal with. Instead, have them sign the letter that your loan officer provides and have the statements ready. Your loan officer will instruct you how and when your donor should transfer the funds and where. Typically, the donor can have the money wired directly to the escrow closing agent or closing attorney–the neutral third party who handles all disbursement of funds.

How Much Money You Need

For an FHA loan, the down payment is 3.5% of the purchase price. Gift money may cover all or some of that. If you have some money of your own but not enough, you can receive a partial gift.

If gift money will cover all of your down payment and if the seller will pay all of your closing costs, then you, the home buyer, will need only the appraisal fee (about $450) and two months’ total house payment (including principal, interest, taxes, insurance, and mortgage insurance) in reserves. This means you need to show that you will have two months’ payment left in your own bank account after your loan closes. Lenders will not fund your loan if you will be left with only a few dollars in your account afterward. That would be too risky for them and unwise for you.

Why APR Doesn’t Match Your Interest Rate

~ Carolyn Warren ~ Leave a comment

mortgage calculator“Why is the APR higher than the interest rate? Is this a rip-off?” This is a question I’m frequently asked, and one that is important to understand.

APR stands for Annual Percentage Rate. The APR is not the same as the interest rate you pay on your monthly mortgage payment.

The APR is the interest rate plus some of the fees. Fees that should be included in the APR are the following:

* Mortgage insurance

* Discount points, if you are buying down the interest rate

* Origination fees, lender fees (some but not all)

* Most other closing costs (some but not all)

And there is the problem: “some but not all”

Lenders disagree on exactly which closing costs should be included in the APR calculation. For example, most lenders will not include the Document Preparation Fee–a bogus, unnecessary, double-charge junk fee. This throws off the accuracy of the APR.

When I worked as a mortgage broker, one of my clients called to say he was dropping the loan and switching to Bank of America midway through the process. When I asked why, he said, “Their APR is lower.” I didn’t believe it and asked him to bring in the Good Faith Estimate and Truth-in-Lending from BOA so we could do a side-by-side comparison.

Sure enough, even though we both had the same interest rate, BOA was charging more in fees and yet showed a lower APR. I pointed this out and showed him the check-boxes that indicated which fees were included in their APR calculation.

That was his “aha moment.” He saw that they were sneakily not included all their lender fees in the APR.

I read a quote–INACCURATE AND FALSE–by an economics professor at Westmont College in Santa Barbara, CA. David Newton said about APR, “It’s the one common denominator by which you can compare loans side by side, comparing apples to apples to apples.” But that is not true. The problem is that Newton has never worked as a loan officer, so although he understands the mathematics of how APR is supposed to work, he doesn’t know that plenty of banks and mortgage lenders have their own tricky and deceptive ways of showing their APR. (This is why I wrote in a blog post a few weeks back that you need to be careful who you take mortgage advice from. Being smart doesn’t mean you understand what’s going on in the mortgage business.)

You do not compare APR in order to figure out the cheapest loan. Instead, you look at the interest rate and all of the lender fees and the fees the lender controls. Lender controlled fees are the third party costs charged by vendors chosen by the lender. These are four: credit report, appraisal report, flood cert., and tax service.

One lender will charge $15 for a credit report, and another lender will charge $75 for a credit report (as I saw last week). Clearly, the lender charging $75 is padding the cost. You want to include this third party cost when comparing costs and choosing your lender.

You do not include the title insurance, attorney fee, escrow settlement fee, or county recording fee when comparing loan offers, because the lender has nothing to do with those fees. They set their own fees. In addition, you choose your own title company and attorney or escrow agent. So that is up to you, not the lender.

How I View APR When Comparing Loans

If I see an APR on a conventional loan that is significantly higher than the interest rate, that is a red flag that tells me the lender fees are probably high and might include unnecessary junk fees. But if it is an FHA loan, I know the APR is going to be significantly higher due to FHA’s upfront mortgage insurance premium.

So overall, I don’t pay much attention to the APR. It is more accurate to compare loans by looking at the actual interest rate and all of the lender fees and lender-controlled fees instead.

As always, your comments are welcome. The comment tab is at the right top of the blog post.

#1 Mistake Self-Employed Home Buyers Make

~ Carolyn Warren ~ Leave a comment

realtor4 For self-employed people seeking a mortgage, either a purchase loan or a refinance: don’t make this common mistake!

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.

Self-employed? How to Get Approved for a Mortgage

~ Carolyn Warren ~ Leave a comment

realtorAre you having trouble getting approved for a mortgage because of your self-employment? Here is a question asked by Justin on Directly.com (where I am a member):

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.

Watch Out for BAD Mortgage Advice & False Information

~ Carolyn Warren ~ Leave a comment

Heads up! There are books and blogs with false information and bad advice about getting a mortgage or home loan. Here are three examples:

1) The book Home Buying Kit for Dummies tells you that if you close your loan on a Monday, you will  have to pay interest starting on Friday, thus wasting your money on three extra days of interest. After giving you this bogus tip, the authors brag that they’ve just saved you the price of the book. But, IT IS FALSE! If you close on a Monday, your interest payments start on that Monday. You are never charged earlier than the exact and actual day of your closing.

How could such a book print incorrect information? Looking at the authors’ biographical information, neither one has ever worked as a loan officer, loan processor, escrow closing agent, real estate attorney, or loan funder. So it appears that they are writing about an industry in which they’ve never worked. The fact that one of them worked in finance does not make him a credible authority on mortgages, just as someone who has “worked in sports” is not necessarily make him an expert in karate, and someone who has worked as “a cook” is not necessarily an expert in French pastry.

2) A high-ranking website offers a free 38-page e-book, How to Buy a House, A Guide for First Time Buyers. Again, false information is given. The author states that it’s a good strategy to include your closing costs in with the loan. BUT THAT IS NOT ALLOWED! With a purchase loan, the closing costs cannot be rolled into the loan; only in a refinance is that option available. So although the e-book is free, is it worth taking the time to read a guide that contains inaccurate information? The website says he is an “award winning writer,” which does not qualify him to dish out home buying or mortgage advice.

3) An Amazon book reviewer posted that Yield Spread Premius (YSP) is now illegal. THAT IS NOT TRUE! A lender has two options for collecting YSP (money for charging a higher interest rate than par rate). First, they can keep it for their own profit if they do not also have an origination fee. Second, they can credit it to you to help pay for your closing costs.

The Take-Away

Be aware of the credentials of the person offering mortgage information and advice. Just because something is printed in a book or published on the Internet, it does not guarantee you that it is factual. Speaking for those of us who have spent careers working in multiple areas of the mortgage industry, there is no substitute for experience in the field.

Important: Get Your Loan Disclosures

~ Carolyn Warren ~ Leave a comment

mortgage signingI am appalled to learn some home buyers are not receiving their loan disclosures. These are important documents required by federal banking law and must not be overlooked. I’ll explain.

What Are Disclosures?

Loan disclosures are a packet of papers that provide you with important information. Included is your three-page Good Faith Estimate (updated), Truth-in-Lending form, Rate Lock Confirmation that tells you what interest rate you’re locked in at or if you are not locked and still floating your rate, your credit scores, whether or not the lender sells your loan after closing, and other pertinent information. The purpose of the disclosures is to inform you about your financing. They are not a contract.

When Should You Receive Your Loan Disclosures?

You should receive your loan disclosures within three business days of giving your signed Purchase & Sale Agreement to your loan officer. As soon as you and a seller have a mutually signed contract, it is time to go full steam ahead with your loan processing. Your loan officer now has the address, closing date, and exact purchase price. This is the time for your disclosures to be prepared, and federal law states a lender must do so within 3 business days (whether or not your interest rate is locked.

You do not receive disclosures before you have a fully executed Purchase & Sale Agreement. There would be no point, because you don’t have an exact price or even a property before that time. What you ask for upfront is a Cost Estimate (the new name for the upfront Good Faith Estimate, due to the badly written Dodd-Frank law).

Signing Your Disclosures

Immediately upon receiving your paperwork, read through it and ask your loan officer about anything you don’t understand. It is your right and responsibility to understand your financing, and it is your loan officer’s job to explain it to you. Good loan officers love explaining loans, so don’t be reticent about asking. Then sign the paperwork and return to your loan officer asap–within a couple days. Don’t ignore them! Don’t leave them gathering dust for a week, because doing so could delay your loan processing and cause you to miss your closing date.

Loan disclosures are most often sent by email now. You print them out, sign and date, and return. If you cannot receive them by email and print them for signing, let your loan officer know so that he/she can mail them to you.

If–God forbid–your lender tries to sneak in additional lender fees that are above what was on your upfront Cost Estimate, do not sign any of the disclosures until this is corrected. Also, make sure the third party costs that are controlled by the lender are the same: appraisal fee, credit report fee, tax servicing fee, and flood certification. Just last week, one of my coaching clients noticed her disclosures had all fees increased from the initial cost estimate. This would have cost her an additional $350 had she not been aware. No bait-and-switch allowed!

When my client called the loan officer on it, he apologized and scurried to get her corrected disclosures. If he had not, she was prepared to walk away and go to a more ethical lender. If she had signed and returned the paperwork, she would have ended up paying more, because signing is acceptance of the terms. Once you sign, it is too late to negotiate.

Whatever you do, don’t neglect this important step in getting your mortgage–and don’t let your lender go weeks without providing you with this vital information: your loan disclosures.

Sneaky Prepay Penalty Snares First Time Home Buyers

~ Carolyn Warren ~ 5 Comments

money walletCan you imagine?! You pay off your mortgage (either by refinancing or selling the property), and even though you have a $0 balance, the lender keeps on charging you interest every day for the rest of the month.

“Can they do that?” you ask.

Yes, FHA (Federal Housing Admin) is and has been doing that to all their first time buyers who used their 3.5% down FHA loan.

This sneaky practice netted FHA an extra $587,000,000 in revenue–in one year alone, according to an article in the Washington Post by Kenneth R. Harney. Over the years, it’s added billions to their coffers.

What this amounts to is a prepayment penalty. If a home owner pays off their balance before the end of the month, they are penalized for the “early payment” and still have to pay their entire month’s payment. However, this is not disclosed to people up front. In fact, most of the time it is a BOLDFACE LIE. On the Truth-in-Lending form (TIL) near the bottom where there is a box to check yes or no for a prepayment penalty, the majority of banks and lenders check no prepayment penalty.

By contrast, conventional loans and VA loans stop charging their borrowers on the day the loan is paid off.

The National Association of Realtors has been complaining about FHA’s prepay penalty for years — to no avail. But now the Consumer Financial Protection Bureau has added its muscle to the fight, and it looks like the FHA might be forced to stop grabbing extra dollars out of their customers’ wallets. However, the CFPB has given FHA a year to comply with their request, so we’ll have to wait to see how it all plays out.

In the meantime, if you are paying off an FHA loan, plan your closing for the end of the month so you don’t pay any (or many) extra days of interest payments.