Fear of Lender Buy Backs

If you're in the process of a purchase or refinance mortgage, here's a great explanation of what you might be attempting to overcome.

CNBC Video on Fear of Mortgage Buy Backs

When refinancing, consider lowering the term as well

Many borrowers are taking advantage of today’s record low rates to refinance and reduce their mortgage payments, but have you ever considered reducing your term as well?  Applying for a new, lower rate AND dropping the number of years on your mortgage can and will reduce the overall amount you pay for the life of the mortgage.

Consider this.  A homeowner who bought their house 2 years ago and financed $200,000 over 30 years at a rate of 5% has a principal and interest payment of $1073.64.  If they were to refinance to a new 30 year mortgage at 3.5%, their new payment would be about $898.09, depending on pay-off and new closing costs rolled in.  That’s a savings of $175.55 per month.  Not bad.  But now consider the same refinance, but for 25 years.  The same rate would result in a payment of $1001.25 for a savings of $72.39 per month.  Doesn’t sound like much until you look at the fact that the new 25 year mortgage also got rid of 3 years of the mortgage payment.

If that borrower kept the original mortgage they had, they would pay over $360,000 over the course of the remaining 28 years.  By refinancing to a new 25 year mortgage, they not only save the $72 per month, the overall payment over the life of the new loan is $300,375.  That’s a savings of over $60,000.

So, when considering a refinance, consider the lower term as well.  Many are utilizing this option and will be greatly rewarded for it in the years to come.

Want a lower rate? Better act fast!!

Even with the last week’s weaker than expected job report, which would generally lead to rates staying as is, if not moving slightly lower, you can expect rates to tick up a bit starting this week.  The reason is a bit complicated and technical, but here’s the long and short of it.  While factors such as credit score, down payment (for purchases), equity position (for refinances), and term (30 year, 15 year, etc.) will affect your rate, there are other factors from the investor’s standpoint, that will affect it as well.  One such factor is called the guarantee fee, otherwise known as the “g-fee.”

A guarantee fee is a fee charged by entities such as Fannie Mae and Freddie Mac.  They help pay for things that happen behind the scenes of a mortgage transaction.  Mortgage lenders “pool” loans together and sell them in blocks.  They will also sell the servicing of a loan to another entity.  This simply means that just because Bank A collects your payments, Lender B still owns your mortgage.  Things like this are a cost to lenders and they pass this off in the form of an adjustment to interest rates.  Hence, the g-fee.

The FHFA (Federal Housing Finance Agency) is increasing this fee, partly in hopes of making Fannie Mae and Freddie Mac a less attractive option for those in the market for a home loan.  The FHFA’s adjustment to the g-fee goes into effect on November 1, 2012, but lenders are preparing for that by adjusting rates starting this week.  The reason for this is that if you start a new mortgage application today, by the time you loan closes and funds, the lender will be trying to securitize your loan with Fannie or Freddie at the time the new fee is in place.  Rates could look as much as .25% higher this week, although the jobs report of last Friday is keeping things tame at the week’s open.

How do you combat this?  Apply now if you’re in the market for a refinance.  If you’re purchasing, shop around with a few lenders.  Know you credit score when you call to avoid too many credit inquiries.  This will keep you in a position of being an educated and qualified borrower.

Don't go buy that new furniture just yet!

When soon to be new home owners find out that their mortgage application is not only approved, but clear to close, they think they’re in the clear for having inquiries on their credit report and/or obtaining new accounts.  Often, a new account will be something like a large furniture or appliance store, or worse, that new car you wanted to buy prior to applying for a mortgage.  What you may not be aware of is, the lender will be pulling your credit report again, just before closing.  It’s part of a process called the “Loan Quality Initiative”  so the report is commonly referred to as an “LQ” in the industry.

The initiative was designed to ensure that loans that go to closing are of the highest quality.  Higher quality loans means less bad loans down the road and less burden on the tax payers.  It also helps to keep interest rates lower, since there is a lesser need to recoup lost revenue on the part of Fannie Mae or Freddie Mac, who are securitizing these loans.

So what do you, as a consumer, need to be aware of and practice as a mortgage applicant? Easy, don’t run up any new debt or even inquire into it until you’ve closed your loan.  A credit inquiry on your LQ will result in your lender asking for a letter stating why your credit was pulled and that you haven’t actually been granted new credit.  You also want to make sure that you don’t actively use your existing credit and increase the balances, or more importantly, the minimum monthly payment.  Significant changes to your credit profile or amount of your monthly liabilities can turn an approval into a denial.  The LQ will provide information on any changes in your budget and when the numbers are recalculated by an underwriter, if there is new or increased liability on the part of the borrower, the debt ratios will increase and if they go over the maximum allowed by the guidelines of the loan you’ve applied for, your approval will be switched to a denial.

The best thing to do is simply be extra careful with your credit during the loan process.  Waiting just a few days to make that big purchase will only ensure that your loan stays approved, and this goes for a refinance as well.

Why can’t we close our mortgage in 30 days?!!

With rates under 4% for quite some time now, the amount of activity in the mortgage world has been vigorous, to say the least.  Home prices coupled with these rates have dramatically increased the number of purchase mortgage applications.  Add in the economic programs of HARP 2.0 and FHA Streamline Refinances and the number elevates to tremendous numbers.

This influx of activity not only has lenders at capacity, but title companies, appraisers and closing attorneys as well.  Closing a mortgage in 30 days isn’t impossible, but it’s rare.  You almost need a “perfect storm.”  You need to be, what I like to call, a “submission friendly” borrower.  The amount of documentation needed to get a mortgage processed is cumbersome, to say the least, both on the part of the borrower AND the lender.  In recent years, the amount of disclosures required for a mortgage application has practically doubled.

A couple of the new disclosures create delays in the process due to their time sensitivity.  A lender is not allowed to order an appraisal until the borrower has provided an intent to move forward with the loan.  This is a disclosure within the application package.  Once this item is signed, then and only then, can the lender order the appraisal though an appraisal management company.   The processing of the payment for this appraisal cannot take place for three days after the intent is signed and the appraiser isn’t going to perform the appraisal until he or she knows they’re getting paid.  Once the appraisal is done, if there are no issues, you’re looking at a 7-10 day window to get the report.  So we’re already into the process by about two weeks.

The “submission friendly” borrower will provide all of the items asked for, such as W-2’s, pay stubs, bank statements, etc.  Anything missing will delay the file from even being looked at by an underwriter.  If there are complete files in line for the underwriter, those will be looked at first.  With the current influx of files coming in, an incomplete file will never be “next.”

Once the file does reach the status of “Clear to Close”, about 15 to 20 days later, the closing department still needs to do their checks and balances.  They need to verify that the APR from the initial application has not changed and that the loan complies with all federal laws to protect the borrower as well as the company.  If any changes are necessary, the file needs to be redisclosed and there is a mandatory three day waiting period.  Preparing the loan for closing generally takes 48 hours.

While it is still possible to close a loan in 30 days, it’s better not to get your hopes up and consider the fact that 30-45 days is the expectation.  It’s a small price to pay for a smoother transaction to secure something that will last 30 years.

You’re pre-approved! Now, go buy a house, but don’t do it alone!

You’ve sought the knowledge and professionalism of a mortgage originator to get pre-approved for a mortgage.  You now know what the current rate is, you know how much you need for a down payment and closing costs, and you’ve got a letter in your hand that says you can buy a house for $XXX,XXX.  Now you’re ready to go “house shopping.”  But you’re not working with a realtor.  WHY NOT?!!

Many home buyers, especially first time buyers, don’t realize that the seller of a home pays the realtor’s commission.  That means that if realtor Joe Smith has a house listed with a 6% sales commission, he is willing to split that commission with any realtor that brings a buyer to the home.  So if you’re working with realtor Mary Jones, she brings you to Joe’s listing and you buy it, Joe splits the commission with Mary.  Mary will assist you with negotiating the price, filling out the proper forms, recommending an inspector, and most importantly, Mary knows the laws necessary to make sure you are legally protected as a home buyer.  Joe does know them as well, but Joe’s responsibility and first obligation is to his seller, so while you may think it’s ok to just call the agent whose name is on the sign in front of a house, you still want someone working on your behalf and yours alone.

If it turns out you don’t like the house that Joe has listed, you can have Mary do a search on the MLS for the specifics of a house you have in mind and in your price range.  If you want three bedrooms, two bathrooms, fireplace, swimming pool, finished basement, etc., Mary can look that up in the MLS and get you a list of houses that meet your wants and needs.  You may think that you can do that yourself with the internet, but if a house goes on the market today, it may not hit the internet for a day or two.  In the meantime, another buyer who is working with a realtor will get to see it before you and might beat you out on the home of your dreams.

Summing up, you wouldn’t try to get your mortgage without seeking the help of a qualified professional, don’t do it when you’re ready to buy your home.  The service is literally free and priceless!

Are today's guidelines tighter?

There are some who would argue that today's mortgage guidelines are too tight to allow the average person to buy a home.  Are they?  When compared to the guidelines of 2006, one could argue that to be the case, while others would use the rebuttal that the guidelines of 2006 were too loose.  Either way, there’s no denying that houses are selling.  From time to time, I like to pass on this statistic and the slide below shows that, in fact, homes are selling and at an average of 12,466 per day across the country, according to the National Association of Realtors (NAR).  And of those, just under 9000 were buyers who obtained a mortgage.  That’s and average of  nearly 9000 people getting a mortgage every day in this country.

Yes, it is not as easy as it once was to purchase a home, but there should be some level of work involved in accomplishing the American Dream.  Having good credit vs. marginal credit, having a down payment vs. no money down, proving you have a job vs. fogging a mirror, etc.  This is the old “skin in the game” theory.

The real estate market is such that the environment is creating an opportunity for first time home buyers to realize home ownership at a lesser monthly payment than renting.  With today’s prices and interest rates, the monthly payment on a mortgage can be less expensive than a rental.  Take into account the tax write off and you’ve got an even better scenario.  Surveys being done by experts are proving that the opportunity is now.

In any event, if you're considering a purchase in the near future and haven't spoken with a mortgage expert, it's never too early to do that.  It's also a great way to test them.  If you let them know you are looking to buy somewhere down the road and they don't give you the time of day because you're not buying now, that's a good indication of the service you'd get down the road.  I hear that all the time.  "You're the first person who would talk to us about this."  You also want accurate information about the process.  I can't tell you how many times I've heard someone say "My uncle told me I should do this" or "My cousin told me it was supposed to be this way."  Mortgage guidelines have changed a lot over the last couple of years and probably since your uncle or cousin went through the process.  Get the facts now and maybe even see what your credit report looks like.  You may need to "tidy up" in that department before being able to buy.  An educated consumer is the best defense against those "tighter guidelines."