Mortgage Myth Busters

Upcoming changes to the Wordpress core are at the heart of improvements you're going to be seeing over the next few month. The release of 3.0 brought a few major changes which made WP worthy of the dominate title gained over the years among bloggers but still left many issues and challenges dangling like a participle. In fact that was at the heart of the discussion for the Winter sequestration on Tybee Island in Georgia's Golden Isles.

2012's development cycle began officially yesterday (February 1st) with a communication to the development group from Andrew Nacin letting us know of some of the primary goals for the first segment of development effort. Included are some tasks that really won't mean much to you as an end user but are still crucial to the forward momentum of the overall project. 

Among the changes which will be highly visible to you being covered in the first part of the cycle is the way the rich text editor treats certain types of punctuation - primarily quotes. In times past you may have noticed if you cut and pasted certain text from say a Microsoft Word document the final output was munged beyond recognition. As a result of some localization process rethinking (and rebuilding) much if not all of this ill effect may be eliminated in the next minor update.

Header dimension, being fixed width and height, has long been an issue. Admittedly it has earned yours truly a fair penny over the years from being retained by a "Wordpress developer" or end user here and there to modify the the code or style to aloow the use of a different size header than out of the box. One of the primary goals is to introduce flexible header sizes thus allowing even a novice theme user to upload and utilize headers of various sizes rather than being required to use a single set of dimensions as required by the majority of themes. Currently a user or developer generally needs to know how to modify the header style and possibly other components either directly in the theme CSS or by creating a child theme. The latter is the appropriate method in most cases.

For those of you running sites getting thousands of hits per day (or more like per hour) you'll be happy to know, as Ryan Boren recapped recently to the development team, performance on busier sites is a target as is revisiting chron performance. Chron handles most of the automated "behind the scenes" work which fires on trigger events including the sever clock.

As a prospective home buyer or real estate agent it will pay you to be aware of the different credit scores and why language may matter. Over the years people have learned the term "FICO" and often use it interchangeably for "credit score". The two are not exclusively interchangeable.

There have been many times over the years I have heard a prospective borrower say something to the effect of, "I have a 750 FICO" or "my FICO is 681". The next couple of lines are the important ones and the rest is either setup or explanation.

In the mortgage industry the standard method of examining credit is called the "tri-merge". When a loan officer "pulls" an applicant's credit history they generally are requesting a report from three independent credit reporting bureaus. Typically these are Equifax, TransUnion and Experian. FICO is a risk model adapted by CRB's but sold under different names and each score is, nearly 100% of the time, different. What matters in the mortgage industry is that the applicant has all three scores and that the middle of the three, regardless of which bureau, meets the minimum requirement for the particular mortgage product being sought.

FICO is the Fair Isaac Company and they have, indeed, developed what is the de-facto standard for credit risk modelling. The reason that term is meaningless at the time of examing the applicants' credit is what is contained in the paragraph above. Whether the middle score is Experian's PLUS, TransUnion's EMPIRICA or Equifax's BEACON is irrelevant. Which ever score is the middle is the one used in determining credit risk based on score for the mortgage underwriting process.

Many argue that credit scoring models are cold and impersonal and often result in people with worthy credit being eliminated from qualifying simply because of a computer based decision. There may be some validity to this argument but I have not, in my years of examining credit, seen a valid example of this. Scores are based on payment history, available unused (or used) credit, length of time accounts have been open, the type of credit and a few other factors. We are not priviledged to see the actual algorithms used to determine credit score based on these factors. 

For more information see the article at "What is a credit score?"

Image: photostock / FreeDigitalPhotos.net

Realtors should know basics about Mortgages in New Jersey– Especially FHA Mortgages

When it comes to realtors giving in depth advice about mortgages, it does crawl under my skin. Some of you know this, and some of you disagree with me.  Some realtors think a realtor should go as far as to pre-qualify a buyer. One reason from a realtor was that he could do it better than many of the loan officers. Sure, there are bad loan officers and good loan officers. I can make the same statement in regards to realtors, and in most other professions. But lets put all of that aside, because that is not what this post is about.

So why do I bring this up then? I will say that a realtor needs to know the basics when it comes to mortgages. They are suppose to be knowledgeable when showing homes, right? How does one usually buy a home?  Usually with a mortgage. And in today’s mortgage arena, there are really only four types of mortgages.

Conventional Loans – easiest of all appraisals and what is required.

FHA Loans – appraisal issues are not as strict as the rumors that say FHA is harsh. Maybe back in the day, prior to 2002. The VC sheet was even dropped from the appraisal almost a decade ago. Broken doors, cracked windows, cracks in the foundation,  chipping and pealing paint, and mold are usually the biggies.

USDA Loans – people need to be aware that not only does the lender underwrite the appraisal, but that the USDA needs to review the appraisal.

VA Loans – in between conventional and FHA requirements.

Each mortgage is different, and some are more lenient than others when it comes to appraisals. But here is the part that a realtor should focus on. Many sellers and listing agents want at least a pre-qualification letter from the buyers mortgage company. It makes total sense and is not unreasonable. The pre-qual letter should state what kind of mortgage it is, right? Well, if my pre-qualification letter says that the buyer has been pre-qualified up to x,y,z; with a FHA mortgage, then that means that buyer is getting a FHA mortgage.

Here is the dilemma or issue at hand. I know of a buyer getting a home with a FHA mortgage and the sales agreement was written as an ”as is” purchase. Which means that the seller will do no repairs. Well, the house is not only a mess, but several things are wrong with it. The main issue is that it has mold, and they knew about this because there was a previous buyer, in which that transaction fell a part. Secondly, there are like eight electrical outlets that needs covering and an electrical box. Anyone with little experience regarding FHA mortgages would know that this would need to be addressed and fixed prior to settlement. Regarding the mold issue, the realtor said FHA doesn’t get worried about mold issues. The other issue is that the buyer is using a friend as their realtor who really only does commercial deals. So you can see why that realtor didn’t even pick up on these “red flags”, even though the house is being sold “as is”.

Here is a picture showing you one of the outlets. You tell me what you think.

As you can see, not only does the box have to be covered, but that the wires are exposed.

Conclusion : Realtors should know the basics about mortgages, especially FHA mortgages, since this is about 40% of all mortgages in today’s real estate transactions. In some areas, FHA mortgages are even 50% or higher in specific markets.

Let’s try to look at this another way. Would a buyer really want to buy the property if it has some major issues? Shouldn’t a realtor be focused on the condition of the property prior to listing it? If the realtor sees some potential “red flags”, and they aren’t sure, wouldn’t it be wise to call a few lenders to find out. As a sales person, shouldn’t that person know his or her product? If selling a home, not only knowing the condition of the home, but understanding the basic appraisal requirements for the basic mortgages?  Just some food for thought. Because I have always said, “the stupid question is the question not asked if it has been thought about.”

So in my honest opinion, realtors should know the prime basics of mortgages in New Jersey. The primary focus should be on appraisal issues.

Yesterday I was at an event with a group of my favorite REALTOR organizations and, as always, the chat eventually turned to how crappy some other lender is. I was listening, politely, and understanding some things the agent may not have understood about how loans can get askew during the process until they said, "You know, these underwriters think they can just ask for anything from us!"

Right on. They can.

Underwriting guidelines are there for a purpose - to serve as a guideline for making wise lending decisions. Underwriters do have the "right" to ask for additional supporting documentation in many instances especially if other guidelines are only marginally met.

If you knew an underwriter personally you would know they have a responsibility to the originating lender and ownership of that loan for the remainder of its life. If they make too many lending decisions which result in loan defaults, especially early payment defaults (EPD) not only can they lose their job but they can lose their Designated Underwriter (DE) approval to underwrite FHA loans.

Undewriting is not a joke.

Underwriting is one of the most crucial components of loan issuance or denials. Certainly you, your buyer, your seller, the loan officer, and others have the right to question or dispute an underwriter but ultimately not only can they require additional supporting documentation but they should and must.

Can an underwriter be wrong? Yes! The best way to overcome the opportunity for an underwriter to be wrong is by working with an experience, licensed, Mortgage Loan Originator who works for a recognized and respected mortgage lenders.

Mortgage 101 in New Jersey – Getting to know the borrower’s wants and needs

In today’s delicate world of mortgages in New Jersey and any where else, getting a mortgage not only takes understanding, but patience. I am still finding many loan officers trying to fit that round peg into that square hole. Let me explain….

I currently have a client whose realtor got him to talk to her loan officer. This loan officer has my borrower pre-qualifed for about $35,000 more than I do. How can there be such a difference?

Before I get into the differences, let’s try and establish a pattern of questions that should be talked about, when a loan officer interviews a borrower.

• What mortgage payment in New Jersey would you feel comfortable with, to include your property taxes and homeowners insurance. Please give me an honest and realistic amount that you would not want to exceed.
• Secondly, what areas would you prefer to live in. This is very important, because it comes down to the different property tax amounts. Depending on why you would want to live in that town or neighborhood, would help determine your monthly mortgage payment because of the property taxes.
• My next question would be the type of property that you would want to purchase. Whether it would be a single family dwelling, a townhouse, a condo, etc. This helps me determine your payment as well, because there could be association dues or PUD fees based on the type of property and location.

In my opinion, I consider these 3 questions to be the most important that should be asked in the beginning, besides their name, credit scores, credit history, and income information. I actually get to those sets of questions next.

So, with that addressed now, let’s get back to my story.

My borrower wants to live in one of two places, because one of his main focuses is to be in a good school system. Keep in mind, they have 1 child at 8, another at 1, and one on the way. How do I know all of this? I got to know my borrower.

Now, the areas that they are interested in, the property taxes run about $6,000 a year on $180,000 properties. This other loan officer has them pre-qualified at $200,000, but using property taxes of $5,200. To be realistic, if buying a $200,000 home, the property taxes average around $7,000 a year. As you can see, this could become a huge issue for the borrower when shopping for a home in their respective areas, to later find out that they don’t qualify based on higher taxes. But it gets better.

In my very first question, I asked what mortgage payment that he would feel comfortable with. If I used the $200,000 property, even at the unrealistic property taxes of $5,200, he would be about $117 over his comfort zone regarding the mortgage payment. With the correct property taxes, not only does he not qualify for a mortgage, but his monthly nut would now be about $267 more than what he would be comfortable with.

Conclusion : In my 18+ years in the mortgage business, even after the government tightening down on loan officers with their licensing requirements since the beginning of 2011, I keep seeing these basics get over-looked more than they should.  It shouldn’t be about who can pass a test, even though the test itself is only about 30% mortgages directly. But about asking the proper questions and preparing the borrower.

I have a borrower right now who has a 617 credit score and that their current loan officer is telling them that they need a 620. Once they get that 620, they can close. Settlement was suppose to be June 30th and he keeps saying it will be soon. yet when I reviewed their current credit, it doesn’t mean the credit guidelines. I wrote about this example that happens more than it should. Please read - Your credit score is more than just a number -

Hey, it’s a dog-eat-dog world out there. I know it’s easy to trust someone when they say such words as : “trust me”, “no problem”, I promise”, “I guarantee”, etc.  Who do you trust?  Get to know your loan officer, listen to how they talk, and how confident they sound. Not just the sales words that one might use. I call these words The Red Flags of mortgages.   If you listen close enough, you can sometimes hear someone contradict themselves. Just food for thought.

Hey buyers out there.... window shopping is okay in a way, but not when wasting someone's precious time. You are either serious or not, and most people know. You just don't wake up one day and say, "Let's go look at houses". Buying a home should take thoughtful planning and consideration. Phil Faranda does a great job explaining some specifics, especially when it comes to market value. Trying for that good deal is okay, but low balling an offer in my opinion is not a serious buyer for that property. Not if you have a realtor explaining to you that it's priced in the right market. My advice? I wrote, "When is it a good time to buy a home?" -

Shopping for Mortgages & Shopping for Interest Rates Smartly

You now want to buy a home and need a mortgage. You would think it would be easy to call around to mortgage companies and ask, “What is today’s interest rate”. Sounds simple, right?  Au contraire mon frere…. On the contrary.

There are a few misconceptions that many have when shopping for interest rates.

• That all lenders have one basic rate to offer

• That big lenders or big banks have better rates than smaller lenders and can give discounts

• That referrals will get you a better interest rate

All lenders have many different types of interest rates, which is dependent on many different factors. The end result, all rates should be relatively close, as long as you aren’t being deceived or that your rate will be baited and switched. Why should interest rates be the same or very close? Because we all get the rates from basically the same place, which are dictated by investors on Wall Street.

Larger Banks/lenders vs smaller lenders – I just heard from a potential client shopping for a mortgage that her realtor told her that BofA can give her discounts on the rates. First off, this coming from a realtor that is speculating. This is a blanket statement, because again, way too many factors involved when determining interest rates.  Food for thought… Just because a bank or lender might be servicing your loan from the get go, doesn’t mean that is how they can offer lower rates. In reality, even that bank or lender that is servicing your loan, has sold bits and pieces of it to other investors. Big Bank A might own 70 percent of your loan, even though they are servicing it, yet two other investors might own the rest of the loan. Hence why some foreclosures were becoming difficult at times, trying to determine who owned how much of the primary mortgage.

When it comes to getting a referral from a friend, co-worker, realtor, etc; one just can’t assume that all will go well and that you will get the best deal.  I have three new stories just from the last several weeks that would make you cringe. Story A – My sister referred me to a friend of hers after hearing of her most recent mortgage story. Back in December, this couple tried refinancing and was promised an interest rate of 4.5 percent. After about 2 months, they finally found out that this loan officer never locked in their interest rate. And this was a referral from a friend. Just recently, they got another referral from someone at their church. I happened to get the call 3 days later and after reviewing the different cost sheets, I was about $5,500 more in total costs. But wait, the other loan officer was very misleading in what they estimated. This person didn’t calculate their 30 days of interest in the pay off, was $100 lower per month on the property taxes, only escrowed 3 months worth of taxes when I estimated 5 months, and two other items. All of these items aren’t lender related, but 3rd party estimates. After it was all said and done, I was about $48 off. Yet this person had an interest rate that was 1/8 percent lower in me. And guess what, there was one important question that wasn’t asked by the other loan officer, in which carried a pricing penalty from any lender/bank for this particular loan.

Many different factors involved when shopping for a mortgage or shopping for an interest rate

Goals – What are your goals, for the next 3, 5, 7, and 10 years. This could help a good loan officer determine if you should pay points or not, or what mortgage program to put you into.

Credit scores- Your credit scores are a huge factor when it comes to determining your interest rate and or the penalties because of your credit scores, aka fico scores. – Understanding credit scores – Read the series at the bottom

Interest Rate Lock-In Period- Such an important detail that is usually not mentioned to borrowers when shopping for that all almighty interest rate. How long is my interest rate good for and when can I lock it in should be talked about. I once lost a deal to another loan officer who was beating me out by 1/8% and $500, but found out that he couldn’t lock his rate in until the appraisal came back. This could be a difference of 3 to 7 days, and interest rates could get worse. Besides, the loan officer in a few days could just raise the rate an 1/8% and say that rates got worse, but did they? Key Point – You need to shop on the same day, because rates change daily, sometimes twice in one day.

Loan Amount – Believe it or not, the size of the loan amount will have some impact on your interest rate. All lenders have a basic profit margin that needs to be met on each loan. The lower the loan amount, the more points it may require or a higher rate that pays more premium back to the lender.

Size of down payment – This holds more true for conventional loans, because Fannie Mae and Freddie Mac have pricing hits depending on how much you put down and what your credit scores are. Please read : Conventional pricing hits

Conclusion – One size does not fit all. It might seem simple, like when buying a new television, as long as you know the model that you want. Then all you have to do is pick the 3 nearest stores and see who has the lowest price. As you can see, when shopping for an interest rate, there is a lot more involved. Something that I have witnessed 3 times in the last 2 weeks are borrowers that weren’t locked into their rate and then rates changed on them. The moral to this story is that any loan officer can bait you with a little better rate at first, if they aren’t going to lock you in at time of shopping or mortgage application. 

Lastly, just because one has advertised a low rate, doesn’t mean it’s true. All of the factors that I mentioned above need to be found out before offering any such rate.

On another note, I have included some very important articles below that should help you better understand the mortgage shopping process.

For more info regarding shopping for interest rates and shopping for mortgages, please read :

• I want the same interest rate my friend got

• Locking in interest rates – Knowing the facts

• Low interest rates published on the internet

• All Mortgages should cost the same – by : Ken Cook

• Finding the best interest rate

• Mortgage Advertising can be very deceptive

• The myths about Zero point mortgages vs paying points

• Shopping for mortgages