Monthly Archive for August, 2008

FHA mortgages are hot. Everyone wants them. Everyone wants to sell them. Right now FHA is the only home loan that hasn't significantly tightened up guidelines. On the contrary, HUD has made these loans more accessible than ever as part of a refinance rescue effort designed to stop the foreclosure epidemic. And lenders, hurting for business on all fronts, are eager to join the party.

Not all mortgage lenders are approved to do FHA loans. But a disreputable loan officer (fortunately this isn't often the case but it does happen) may tell you his / her company can do an FHA mortgage even if it's not approved through HUD. He or she may take your application, then try to refer your loan elsewhere (for a fee!) or broker the loan through an approved lender--unbeknownst to you. This practice is icky and maybe illegal, depending on the circumstances. Unsuspecting borrowers have found themselves in nightmare transactions that never get done, either because the lender doesn't do enough FHA loans to be good at them or because the lender has no control over a brokered or referred application.

Don’t start an FHA loan application unless you are sure of your lender. Why? Because once you start an FHA loan it’s hard to switch it to another lender. You can't just shop around once your loan is in process and move your loan to whoever offers the best deal that day. This is because once you apply for an FHA loan, HUD assigns you an FHA case number. You only get one at a time, and if you want to move your loan, your first lender has to "release" the case number. And some of them (again this isn't common but it does happen) don't release case numbers easily.

This creates another reason to be sure your lender is really approved to do FHA loans before you apply–you don’t want someone who can't close your loan to have your case number. While your loan application is being shopped around, rates could be going up, your application could be going completely sideways in the hands of newbies, and your dream home might be falling out of escrow.

So check your lender out upfront to avoid nightmares down the road. First, go to HUD’s web site to verify that your lender has approval to do FHA loans in your state. Just put in the lender’s name and HUD will tell you. Be sure to ask loan officers how long they have been doing FHA loans and how many they have closed–everyone is jumping on the bandwagon now, and you don't want an FHA virgin handling your loan. FHA mortgages have their own rules and complications; get someone who does these extensively if you want yours to go without a hitch

Most lenders won't even consider a short sale until you are at least 60 days in arrears and dealing with the loss mitigation/remediation department (not customer service). And while not making your payments is a sure way to get their attention, it's a risky strategy that will destroy your credit and may not get you out of your mortgage jam.

And few lenders will even speak with you about a short sale unless you approach them with a contract. So it's kind of a chicken and egg thing--you can't guarantee the buyer that your lender will allow a short sale, and you can't discover the lender's position unless you have an offer??.

Which bring me to the real purpose of a short sale from the lender's point of view. It's not to relieve the owner of the burden of a bad investment decision. It's to minimize the loss to the lender. Period. So if you want to get a short sale approved, you have to show your lender that a short sale will produce the best outcome. This means proving that foreclosure is probably inevitable and that a short sale will save the lender the costs of maintaining and disposing of the property. Here are the factors that make a short sale more attractive to a lender:

?? The borrower has insufficient income to make the mortgage payment (job loss, health issues, or other catastrophe is a good reason--too much credit card debt or an expensive Ferrari habit isn't).
?? There isn't enough equity in the property, due to reduced values, negative amortization, or high loan-to-value ratios to be able to pay off mortgages by selling the property.
?? The homeowner lacks the assets to pay the lender in full if the property sells for less than the balance of the loan(s) against it.

To increase your chances of being approved for a short sale, you need to prove the above-mentioned points. Do this by furnishing the following:
?? Documentation of income (or lack of). Provide your tax returns, current pay stubs, unemployment compensation, etc. Include a medical diagnosis if applicable. If income reduction is permanent, obtain necessary documentation to prove your claim.
?? Document the property value. Get a market analysis (CMA) from a real estate agent, your property tax assessment from your county, even a new appraisal if you think it's needed to show a drop in your property's value. If you can get a settlement statement (form HUD-1) prepared to show the estimated expenses and proceeds from the sale it can speed up the process. Include a copy of an offer if you have one. Also, if working with a real estate agent or attorney, put a letter together authorizing them to work on your behalf and allowing the release of personal information between the lender and your representative.
?? Document assets. Provide copies of statements (all pages) for every account you have--checking, savings, investments, and business. Don't leave anything out; your lender will likely notice the omission (remember, you listed your assets when applying for a loan, so it's not like they can't check). If your assets are insufficient to offset your deficiency you have an excellent chance of having a short sale approved.

And finally, any request for short sale should include a "hardship letter" which explains why you need to do a short sale. Don't make it a sob story, but explain what happened and why you are unable to fulfill your obligation as a borrower. Spell out what selling price you are asking the lender to approve and what closing costs and real estate commissions will be involved. Ask the lender to forgive the difference between what is owed and the proceeds of the sale. If the lender doesn't forgive the balance you could be sued for it in most states. In other cases, the lender may approve the sale but only if you agree to repay part or all of the deficiency over time.

Short sales can work but they take time, effort, and more than a little luck.

Frustration mounts on all sides. The desperate homeowner wants to sell a home and dump a mortgage he can't afford. The lender wants out with its skin on. The buyer and her agent want to proceed as soon as possible (and they want a good deal to compensate them for the hassle of entering the transaction). And yet the deal doesn't get done, the home goes into foreclosure, and everyone is disappointed (and a little poorer). Why can't short sales work even when they are clearly in everyone's best interest?

One problem is the number of parties involved. To unload your home in a short sale, you have of course the primary lender to placate. But you can also involve a second mortgage holder, a mortgage insurance company, a title company, a secondary investor (like Fannie Mae or Freddie Mac), or a government agency like HUD. And every one of these parties is likely to be swamped with inquiries and understaffed to deal with them.

So first everyone needs a chance to look at and approve the deal. And there are conflicts of interest to deal with--for example, a first lienholder who will be repaid in full will be more enthusiastic about a short sale than the second lienholder or mortgage insurer who will end up writing off the deficiency.

Then, there is the amount of information needed, and the scrutiny required. Lenders won't consider a short sale for borrowers who are making their payments successfully; those 90-120 days in arrears are likely to get their attention first. Ditto for homeowners with assets who could bring in the difference when their home is sold. Much of the initial approval process is devoted to making sure that a short sale is the lender's best chance for minimizing loss. The advantage for the lender is in reduced costs--no attorney fees, no having to put the property on its books, maintain it, and arrange for its sale. But short sales aren't the first resort when there is a chance of collecting the full amount from the borrower.

Then, there is the issue of mortgage insurance. In some cases, the mortgage insurer has to approve the short sale--one more group to check out the offer, verify the homeowner's hardship, and negotiate a better deal for itself. And sometimes, the obstacle is the primary lender--if it can get more by foreclosing and collecting mortgage insurance proceeds than by allowing a short sale, you won't get your short sale. And if you are a borrower relying on a short sale to save you from foreclosure, and the deal doesn't close, you could be really stuck--trashed credit, evicted, and perhaps a deficiency judgment against you.

So a short sale isn't the great solution it's cracked up to be. Even the ones that fly through smoothly take at least 120 days. So how can you, as a borrower / seller or as a potential buyer move the proceses along more quickly? That's the topic for the rest of the week. Feel free to add your questions any time.

Yes, it's true. Loan fraud is still going on, even after the subprime crisis and other problems supposedly opened everyone's eyes. According to CNNMoney, the first part of 2008 was plagued by even more loan fraud than early 2007! And while the FBI's Web site indicates that the vast majority of fraud was perpetrated by borrowers against lenders, it turns out it's not that simple.

A study by the Mortgage Asset Research Institute (MARI) determined that most fraud involved home buyers whose loan officers or brokers "tweaked" their applications to get the borrowers approved in the face of increasingly tight underwriting standards. And while studies by Bank of America and other lenders have concluded that loans originated by their own employees held up, those brought in by outside brokers were far more likely to go sideways.

But who ultimately gets the blame? The loan officer might be the one who engaged in "tweaking," but whose signature is on that application with the fraudulent information? And who signs off on the final documents? That's right, the buyer. Front and center. Open and shut.

So don't be a fall guy. Or girl. When you complete a loan application, keep a copy of what you originally give to the broker or loan officer. When he or she presents a final application for you to sign, chances are the information will be different. There might be debts that are on your credit report that don't need to be counted because they are included in your business. Your rental income might be recalculated based on underwriting guidelines that say you get credit for 75% of the income. Your salary might have schedule 2106 expenses deducted from it. These differences are fine, as long as your loan officer can explain them. But don't sign anything you don't agree with or feel comfortable signing.

Red flags to watch for are:

* income much higher than what you indicate on your initial application

* a large expense disappears from the loan application, especially if it's one that doesn't show on your credit report

* significantly overstated assets like bank and brokerage accounts

So don't just flick through your paperwork and sign where highlighted. Make sure every part of your paperwork reflects what you told your loan officer and shows your true financial position. And be sure that the program, rate and terms are what you agreed on with no surprises. Because signing incorrect documents, especially at closing, makes you responsible. You don't want to find that not only have you inadvertantly committed loan fraud but that you have agreed to make loan payments you can't possibly afford. And you don't want your next home to have bars on the windows.

Some of those studying the mortgage crisis have concluded that unscrupulous lenders often put borrowers with fair or good credit into expensive subprime products, jeopardizing their homes and costing them money. Undoubtedly this happened, but probably not for the reasons that you think.

Consider that a mortgage broker, who has access to many lenders and many programs, has to offer a competitive bid or the borrower will probably go somewhere else. So if you were a broker, you wouldn't quote 13% at 2 points if you could get a borrower 7% and charge the same price. You would find your borrowers the best-priced programs that they qualified for that you had access to. That's the key; not every broker or lender has access to every kind of program. For example, many lenders don't offer FHA loans and won't be in a position to see if you qualify for one. Ditto Freddie Mac and Fannie Mae. Lenders that tend to specialize in subprime or bad credit mortgages often don't provide any other kind of financing. Sometimes, borrowers make the mistake of assuming that they need bad credit loans when maybe they don't. They go directly to subprime lenders when perhaps they could start a little higher up the food chain and get a better loan.

So here, in order of rates / costs, are the types of loans that **may** be available to you, assuming that you are not looking for large (jumbo) or exceptionally large (super-jumbo) loan amounts.

* Fannie Mae or Freddie Mac conventional mortgages. These are almost all underwitten electronically, so you can get a decision very quickly most of the time. It makes sense to see if you can squeak out an approval before trying elsewhere. Pricing depends on your risk factors, including property type, the size of your down payment, and your credit score.

* FHA financing. May be underwritten electronically or by hand. FHA guidelines are less strict than traditional conforming mortgages and feature low down payment requirements.

* Expanded Approval (Fannie Mae) and A- (Freddie Mac). These are loans that "just miss" getting approved with conforming guidelines but can still be underwritten. Extra fees make these loans more expensive than prime grade loans but lower-cost than subprime loans.

* Subprime mortgages. These loans can be graded from B to D, depending on your credit and the lender's criteria. Credit scores below 600 will probably (but not necessarily) land you in this category. However, just because you are subprime doesn't mean you can't comparison shop and make choices.

So before committing to financing, check your options at several levels. And keep in mind that a lender who doesn't have access to a particular product may not know about it or recommend it, even if it's a better fit for you. So even if you expect to hear "NO," suck it up and reach higher anyway. You might be pleasantly surprised.

Most tax breaks for homeowners go out the window if you don't itemize your deductions on a Schedule A. And 63% of Americans don't itemize deductions. The tax benefits of home ownership accrue primarily to the affluent, who are more likely to have mortgage interest and other expenses that exceed the standard deduction of $5,450 ...