Mortgage Philosophy, Your Mortgage File

Bank or Borrower . . . . or?

Our economy continues to stumble through a storm of uncertainty and hesitation, unable to take a confident step in any direction. We can trace the tailings back to the mortgage crisis which began a crescendo in 2008, climaxed in 2010, and now, what we hope is the diminuendo going into 2014.  I’ve been in the industry for over ten years and I’ve watched and read as the media attempted to find a scapegoat. Since personal accountability flew out the window years ago, let’s blame the cold, heartless banks, right?  After all, they were just in it for the buck and obviously willing to screw the poor, unfortunate American out of a home.

Really? You think a bank wants a foreclosure? Do you know how much that costs them?! Check it out here.

So while the borrower is busy blaming the bank, and the bank is busy dealing with the hemorrhaging associated with the foreclosure trauma, the real culprit is busy baking up that red herring they love so much.

In this NY Times article we get a glimpse into the events that started it all. In 1999, the Clinton administration pressured Fannie Mae and Freddie Mac to loosen the belt on lending in an effort to accommodate minorities and low income consumers. This idea –regardless of best intentions– had unintended consequence and the reality was far opposite the plan

The payment for this government debacle will cost our country billions, if not trillions in the long term. Since no one feels responsible we have been shrugging off the financial burden of this catastrophe in every way imaginable: TARP, Government MBS Program, no budget, etc. The bill is due, and if we fail as a country to handle it as adults, it will be handled for us.  The latter, as I’ve discovered in my life, is not as pleasant as when you willfully resolve the problem yourself.

Good luck, America.

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Assets, Your Mortgage File

Large Deposits

One of the things a processor/underwriter is looking for on a bank statement is the presence of large, non-payroll deposits.

Why?  What business is that of theirs?

I’ve had that question shot at me a million times when I attempt to address a deposit on a bank statement. But seriously, why do they care?

That money came from someplace, and underwriters want to make sure it came from an acceptable source.

What does it matter, acceptable or unacceptable?

There are regulations that dictate which types of funds are acceptable for down payment and closing costs. Here are some acceptable funds:

  • Gift from a relative
  • Payroll or funds saved from payroll
  • Secured borrowed funds ( a loan against an auto, or 401K)
  • Funds derived from a sold asset
  • Funds from stocks, or bonds

Here are unacceptable funds:

  • Unsecured borrowed funds. (from a credit card or unsecured loan)
  • Gift from a non-relative
  • Cash saved at home or outside a financial institution

You get the picture. So as you prepare to refinance or purchase a home, remember to watch what goes in or our of your account and speak with your loan originator about the details.bottom

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Loan Application, Your Mortgage File

FHA, VA, Conventional . . .oh my!

There are many options when it comes to a mortgage. They can be confusing so I’m going to clarify them for you. Let’s start with an important concept. When a bank grants a loan there is a chance they will loose a great deal of money which is known as risk (if you want to know more about this, let me know and I’ll explain the losses incurred by foreclosures).  The majority of us are wary of taking risks. We insure our automobiles, health, life and more to avoid loosing thousands of dollars in case of an event. Banks do the same thing.

We choose large insurance companies like Progressive, American Family, etc — which are private companies– to do the job for us. Or, if your situation allows, there are government insurance programs available. New York 137

Banks insure loans in the same manner. They can employ a private company (MGIC, Radian and Genworth to name a few). Or, they can have the government do it (FHA, VA, and USDA).

Like your insurance company, there are rules that must be followed in order for these companies (or the government) to insure your mortgage. Some are stringent but offer better terms. Others are lenient but the terms more expensive.

The take away? FHA, VA and USDA  are all government programs that insure your mortgage if you can comply with the rules.  Conventional loans are typically privately insured or even uninsured (depending on your loan profile).

What determines which product you take? You should discuss your credit profile in length with your loan officer. He/she knows the benefit of each program and will be able to guide you into the right program. So remember, each type of program has different rules. Contrary to what you might think, it is not your lender just making things up as they go. I promise.

 

And for those interested, I took this tiger picture on my trip to NYC last spring.  Can anyone guess where it’s at?

 

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Disclosures

What is APR?

The topic of APR is broad. So, I’m going to give you the explanation I use with my borrowers. To start with, APR stands for Annual Percentage Rate and for clarification, it is NOT an interest rate, it’s the total cost of the loan expressed as a rate.  Many people confuse APR for the interest rate and mistakenly believe they are going to be charged interest based on the APR.

Let’s do an example:

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If I lent you $100,000 and the only thing I charged was interest at a rate of 4% then the cost of the loan would be $71,869 (over a 30 year term). In this case, the APR would also be 4%.  Again, the only thing charged was interest so the APR would equal the interest rate.

Now, let’s say I charged you 4% interest plus an origination fee of $1,000. Now the total cost of the loan is $72,869 (71,869 interest + 1,000 origination fee).  Now the APR would higher at 4.083% because it’s the cost of interest (4%) plus the origination fee.

So when you are shopping for a loan, remember that APR is not your interest rate, it’s a rate that is designed to help you see the total cost of the loan.  So as you shop for your mortgage, remember to compare the interest rate to the APR.  The greater the difference between the interest rate and APR, the greater the potential cost.

APR can be confusing so if you have questions, let me know. 

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Credit

Judgements

Negative marks on your credit report can happen. Unfortunately, since your credit history is one of the few ways a lender can judge how you manage your finances, any blemishes can cause a great deal of grief. These issues can be embarrassing and so the first response is to gloss over or maybe even try to explain it away. The best thing you can do is to own the issue. It’s a judgement and it’s on your credit report.

The judgement can be pending, open, or satisfied (or some verbiage to that effect).  A pending judgement probably won’t report to your credit report; however, you are obligated to disclose this to your lender when you take application (if you want to know more about this, comment and I’ll blog more about the loan application). An open and satisfied judgement typically will report on your credit report.

A pending and open judgement raise the most concern. A satisfied judgement means you have dealt with the issue although it probably will continue to affect your credit score for a period of time.  Other than the negative affects on your credit score, the lender won’t typically bother you about it.

What’s the harm in a pending or open judgement? A judgement can attach itself to real property. In other words, the judgement will become a lien against your home. Because your home is collateral for the bank the last thing they want is something jeopardizing their position. Among other things, a large collection has the potential to turn into a judgement which is why a lender might ask you to pay it off before you can close.

Regardless of who or why the judgement is in place, it MUST be satisfied prior to or at the time of closing.  Your lender won’t take the risk if it’s not.

My advice?

Pay off the judgement at closing if your lender will allow.

 The reason? 

The mortgage process can take a while, and sometimes they have to re-run your credit report.  If you pay off the judgement before you close and the lender has to re-pull credit your score might actually drop and could jeopardize your approval.  It’s a credit bureau thing so don’t ask me to explain (although I can if you want me to).

How do you satisfy a judgement?

As suggested above, you must pay it off.  That typically means working with the law firm, municipality or individual who placed it there in the first place. You may be able to negotiate a smaller payoff if you work at it but regardless, you must obtain a release of judgement.  Make sure that the release of judgement gets recorded at your local court-house because, once filed publicly, the credit bureaus can pick it up as satisfied for the future.

Now that you’ve taken these measures to satisfy it, all you have to do is sit back and watch your credit heal!

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Assets

Gifts

If you are like me, I’m more than happy to take money you are just going to give away, no questions asked. If you are my underwriter, that wouldn’t be the case. You see, assets are a crucial element in analyzing risk so the source of the money used towards a down payment is carefully considered (If you want to know the reason behind this, leave a comment and I’d be happy to blog more about it).

If you are fortunate enough to have a family member provide you with a money, the first thing we are going to question is whether it’s a gift or a loan. A loan would imply that there is a payment.  And a payment would need to be considered in the borrowers debt-to-income.  A gift, however, suggests no repayment and has no strings attached. Our guidelines tell us that gifts can only come from family members since a gift from a non-family member smells

Gift Letter

more like a loan. It may not make sense but again, I just follow the guidelines, I don’t make them.

If the funds are truly a gift, you must produce a letter signed by all parties that details the following:

  • The name and relationship the donor (family member)
  • The donor’s address and phone number
  • The amount of gift
  • Verbiage that clearly states the money is a gift where not repayment is expected

Now, be careful on how you receive the gift. Since everything has to be documented, you can avoid a paper trail by following this advice. Ask your donor to have their bank prepare a certified cashiers check with their name clearly identified as the remiter. Give a copy of this check to your lender and then hold it for safekeeping until your closing date.

Otherwise, if they write you personal check you will need a copy of that cleared check,and  proof it was deposited into your bank account (bank statements).  In some cases, the bank may even want pro of the donor had the funds available to give.

Avoid receiving a gift in cash!  Cash is not document-able and as far as the lender is concerned, unacceptable assets.

*Again, speak with your lender about this subject and get their opinion on the best way to handle a gift. It can vary depending on loan product and more information might be required.  This will at least give you some insight on what the industry typically wants.

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Income, Your Mortgage File

Writing It All Off

A frequent issue I encounter in working with self employed borrowers is the difference between gross and net income.  Here is a loose definition of gross income:

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Basically, gross income is the difference between all the sources of income and the cost of goods sold.  A solid business has a healthy gross income.

However, net income (or loss) is the gross income minus all expenses. A business has many expenses including wages, marketing costs, and costs they incur to run the operations. In the mortgage industry, we use the net income(loss) with a few exceptions.

Basically, we want to know what income is left over after all the bills have been paid. Many self employed borrowers want us to use the gross income and get quite upset when we are unable. To help rationalize this, let’s consider an example:

A business owner has a gross annual income of $50,000. However, they spend $5,000 in marketing, $2,000 on meals and entertainment, and $3,000 on office products. These are actual expenses where money left the business and paid for expenses the company needed in order to operate. Can that $10,000 in expenses be used to repay the mortgage? No. It was actual money spent on certain costs.

Hopefully you can understand that money that was actually used to pay bills or expenses can in no way be used to repay the mortgage debt and therefore can not be used as income. Tough, I know but lenders want to know what income is actually available to repay the debt.

I am not an accountant so I won’t be able to tell you how to complete your business return to the benefit of obtaining a mortgage loan. I would seek the advice of a CPA or the IRS at www.irs.gov.

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