How It Works, Loan Application

Government Shutdown

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Hello all,

I disappeared for a while, and it shows.  It’s October already!  Work took off and I lost sight of my blog. I’m 12 days late on this post but I thought I would share some of the issues we are seeing with the shutdown:

The IRS is working with only 9% staff. This effects the ability for us to pull tax transcripts. 

Since 2009, Fannie Mae ‘highly recommended’ that lenders pull transcripts from the IRS prior to closing a loan.

What’s a transcript? 

After you file your taxes the IRS turns your income information into an electronic record which can be requested with the borrower-signed form, 4506-T.

Why do we pull a transcript? 

When you complete a loan application, you typically give your loan originator a copy of your tax return by which she calculates your income for qualifying.  It would be possible to give them a fake, unfilled tax return with ’embellished’ income.  To prevent such fraud, we pull the IRS record and compare it with the return you provided.

It’s not required to do this, yet we know Fannie Mae will do it if they audit that loan. To avoid any issues, most lenders have adopted the policy of ordering and reviewing tax transcripts.

http://www.ctne.ws/archives/266

Several days into the shutdown our institution made a business decision to close loans without these transcripts as did a number of other investors.  There are some; however, that refuse to purchase a loan without transcripts and that’s their choice.

USDA is closed. 

The U.S. Department of Agriculture insures loans through their Rural Development program. These loans are currently suspended.

Why?

USDA issues a ‘conditional commitment’ once they receive certain pieces of information.  With no one to issue a conditional commitment, loans are unable to close.

Verification of Employment 

We’ve seen several instances were we have been unable to obtain a verification of employment for government workers. In come cases we can get around it.  There have been instances were getting this information was painfully slow and the closing was delayed.

Business as usual:

For the most part, we have been conducting business as usual with very few delays.  For those of you affected, as frustrating as it is, don’t blame your lender or financial institution.  We are as annoyed as you are with the situation. We are doing our best to work around the issues.

Photo credit: Nick Papakyriazis via photopin cc

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Quick Tips, Your Mortgage File

Quick Point #1 Co-Signer vs. Co-Borrower

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Mortgage Quick TIp

Co-signer and co-borrower are not synonymous.  There is a difference.

A co-signer is responsible for repayment of the mortgage note but otherwise has no ownership interest in the property.  While a  co-borrower is also responsible for the debt  they do have ownership interest in the property. This means they are on title to the home.

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How It Works, Your Mortgage File

Discount Points

When shopping for a mortgage, you run across the term ‘discount point’.

What is that?

What does it mean to you?

First off, a point is one percent. Typically, it’s one percent of the loan amount and refers to a charge. . So focus on the word preceding ‘point’.  In this case, it is discount.

 

A discount is a reference to interest. 

To fully understand this concept, you need to know that banks and credit unions earn a profit by selling your loan on the secondary market. This profit is based on the interest rate they give you. The higher the rate, the higher the profit.

On any given day, a specific rate is worth a specific premium.  That premium is tied closely to the bond market which is why it fluctuates constantly.

Competition among banks keeps them from charging you an outrageous rate. Your ability to shop keeps them in check.

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EXAMPLE

Let’s suppose a rate of 3.5% earns your bank 1% on a loan amount of $100,000, a profit of $1,000. But, you want 3.25%.  The premium on 3.25% only earns your bank half a percent (.5%), or $500.  Your bank must make a certain amount to pay the bills and, in this case, $500 doesn’t cut it. Ordinary, they wouldn’t offer you 3.25%.

Now, let’s suggest that your bank wants to lure you in by advertising a rate lower than the competition. While everyone is offering 3.5%, they will offer you 3.25%,.  Sounds great!

However, we know they can’t make enough money at 3.25%.  What to do?

They are going to charge you the difference — one half percent, or $500 — and they are going to call it a discount point

Make sense?

Don’t assume the lender with the lower rate has the better deal.

On the other hand, as a savvy consumer, you might understand this concept and approach your lender asking for 3.25% while expecting the discount point. You also have calculated the cost and it appears as though paying the extra money upfront will profit you in the long term.

I hope this information will allow you to cut through marketing campaigns as well as allow you to make the best choice for you!

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Loan Application, Your Mortgage File

To Lock or Not To Lock . . .perhaps float?

Undoubtedly, the interest rate is the single most important factor associated with shopping for a mortgage.  Even more important than closing costs, the interest rate can cost you hundreds of thousands of dollars over the term of the loan.  It will also determines how much your monthly payment will be.

So, it’s important to understand the terminology associated with interest rates.  To start with, asking for an interest rate quote from your bank does not guarantee you that rate.  Rates change daily, if not hourly because they are subject to the jitters of the broader economy. Also, there are no guarantees.

Rates are not fixed by your lender!

Most quotes are generic and are rates published by the banks marketing department so it stands to reason it will be the lowest rate they offer. In order to get an accurate rate, you will have to formally apply for a mortgage.

Why?

Rates are subject to the factors of your personal financial situation such as credit score, the value of your home, your loan term and many other factors.  Your lender will be unable to determine the rate until you give them those facts.

Just because you’ve taken your application and given the lender your financial information, you still might not have a commitment from them.

Locking in a rate

Getting a commitment from your lender means you must ‘lock’ in your rate. Locking in your rate has broad implications to your bank and so they are cautious until they have a good idea that you can and will go through with the loan.

When you agree to lock in a rate you are commonly agreeing to a few other things.

  • The length of time the rate is locked for
  • Any discount points involved.

The topic of discount points is one for another blog.  In short, a discount point is an additional charge (above the origination charge) associated with securing that rate.

Beware! Your loan is not locked indefinitely . 

As I’ve said above, rates are chaining constantly so your lender is unable to lock in your rate indefinitely. Typically, your rate is locked in for 30, 45, or 60 days.  They can be locked in for other periods but these are standard. Make sure you know how long your rate is locked for.  If you do not close on your loan before the rate expires, you may be subject to a higher rate or additional charges. 

Locking is not the only option.  If you have a higher appetite for risk, you can ‘float’ your rate. Floating means your rate is subject to change with the financial markets. You are ultimately responsible in this scenario (although a good loan officer will help you determine when it’s best to lock). If rates decrease, you will be able to take advantage of the lower rate.  If rates increase, you may end up with a higher rate. Consult with your loan officer about the best strategy.

With a better understand of the rate locking process, you will be better able to ensure you get the rate you want. This knowledge will enable you to make the best choice for you.

Good luck!

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Income, Your Mortgage File

Income, Stable and Dependable

Quality-Risk-ManagementRecently, I had a situation where a young borrower applied for a mortgage. Less than a month ago she started a new job but before that she had less than one year of work history. She had good credit but it was recent due to her young age. The underwriter came to me, unsettled.

Why?

In our industry, underwriters are taught to determine if the income is stable and dependable. After all, if you were going to lend your own funds, wouldn’t you want to determine if that person could pay you back?

There is little guarantee when it comes to income. You can be fired, quit or be laid off in a heartbeat.

So, to give us some insight, we look at the history of employment and income. We typically go back two years.  If the borrower hops from job to job, it might be a sign of instability. But, we won’t give up, and we will dig deeper by looking at the borrower profession, and their historical wages. Some jobs are seasonal, and others require people to drift from one employer to another and we won’t penalize someone for this.  Instead, we’ll look back at several years of wages to see what they have historically earned. We will base our decision instead on the continuity of income.

In the above example, does our borrower have a job history worthy of dependability?  If no, then has she demonstrated a continuity of income?  If no, then my underwriter has a right to feel unsettled.  

What if our borrower decides she dislikes her new job and quits?

What if her employer lets her go because she can’t cut the mustard?

What if she has to take a job of lesser pay?

There are all sorts of questions we ask when it comes to income. I realize history can mean little in the way of the future but it’s the only way we can see how that individual handles responsibility. And handling a mortgage is a large responsibility.  So, don’t be discouraged if an underwriter determines your income is not stable or dependable and instead, use it as a learning experience to better your situation. You will be better for it.

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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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