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Loan Officers: The Bad and the Ugly

Published
by
Gina Pogol
on November 14, 2008
in New Home Loan
. 2 Comments

Because the success of your home loan depends so much on the skill and character of your loan officer, it’s critical to avoid bad ones. Bad loan agents are more than just an annoyance–they can cost you serious money, give you ulcers, and ruin your skin. So look for these red flags when shopping for a loan, and avoid the turkeys:

BAD Loan Officers

* Are invisible and unavailable. They’re playing racquetball whenever you call. But no one in their office knows where they are. And of course they don’t call you back.

* Push the same loan on every client. Probably the one that pays the highest commission. Or the only one they’ve bothered to learn about. If you tell your agent you have 20% down, want the lowest rate, and you’re selling your home in five years, she should have a very good explanation for trying to shove you into a 30 year fixed FHA loan.

* Don’t care about your comfort zone. They encourage you to take the highest loan amount you can qualify for, or push you into riskier loans than you want. If you get the feeling that your loan officer and your real estate agent are tag-teaming you, they probably are. Replace them BOTH and find someone you can trust.

* Are lazy. They hand you a stack of paperwork and expect you to be their secretaries. They make weird requests–for the details of your messy divorce, a letter from your CPA about your lingerie parties, or they order you to get your septic tank drained and inspected–all of these can be legitimate underwriting requirements–but don’t bother to explain why.

* Don’t communicate. They change your program or rate without consulting you. They don’t explain the disclosures, instead saying, “It’s all right there on the form.” Or they hide behind jargon, explaining, “Well your rate is higher because the loan is a NINA program and your LTV requires an underwriting exception and the doc draw was delayed so we blew the lock.” Right. Get out of there fast, clean the BS off your shoes and find a lender who will be straight with you.

* Don’t know. When the lending boom was in full swing, suddenly everyone wanted to be a loan officer. The guy on the other side of the table may have been selling used cars or timeshares the week before. And if they don’t know the intricacies of lending–the many products, underwriting guidelines, and required legal disclosures–they can’t do a good job for you, however motivated or nice they may be. Becoming a good loan officer takes time and effort.

Bad loan officers lack the work ethic, experience, or motivation needed to be good loan officers. And while some may learn from their mistakes, get more experience and knowledge, and eventually become good loan officers, you don’t want to be the mistake they learn from, do you?

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Fannie Is Getting Smart: Listen to Her

Published
by
Gina Pogol
on October 29, 2008
in New Home Loan
. 0 Comments

Fannie Mae will require homeownership counseling for first-time buyers without solid credit histories or strong loan applications. This is expected to lower the risk of borrowers getting into trouble and ending up in foreclosure. Now, while sub-prime borrowers don’t have to comply with Fannie Mae’s requirements, why wouldn’t you want to do something that could reduce your own risk of mortgage problems?

You can’t just use any old counselor to make it good with Fannie–they have to be accredited. But even if you just do this for yourself, wouldn’t you want a certified expert? You’ll learn things like credit, budgeting for and selecting a home, and getting a mortgage. You also get a personalized evaluation of your financial position and readiness for homeownership, and an analysis of your credit history and current financial situation.

Even if you can’t do it in person. you can get your counseling ove the phone or online.  Click here to use Fannie’s Find a Counselor” search tool, on its Web site. the information can help you make home ownership a success, whether you get a Fannie Mae, FHA, or subprime or alternative mortgage loan.

***

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Are You Up for a Fixer-Upper?

Published
by
Gina Pogol
on October 15, 2008
in New Home Loan
. 5 Comments

One result of the increase in foreclosure sales is a surge in “distressed” properties on the market. So maybe this creates an opportunity for those shut out of the market before. There are discounts out there, but what’s involved with getting a fixer-upper? You’re willing to do some work–is anyone willing to lend you the money? 

The FHA Streamline K program may be just the ticket. You get a single loan to purchase and rehabilitate your property. Here’s what you need to do:

* Find a property. Your purchase offer must state that you will need a 203(k) loan to complete the purchase.

* Find a contractor to write an estimate of work needed and materials required. You aren’t allowed to do the work yourself unless that’s your line of work. Even then, you won’t be allowed to pay yourself. But you may be allowed to save money by doing cleanup and hauling.

* Find a lender approved to do 203(k) loans. Get your mortgage application approved. Get your project appraised (there will be two–before and after–and your loan will be based on the cost of buying and fixing, not the home’s eventual value.

* Complete repairs. When the loan closes, the seller will be paid and the remaining funds will be held in escrow for the contractor.

* Move in! Once the repairs are complete and approved, the builder receives final payment. You owned a “fixed up” house that may already be worth more than you paid. Those willing to make a little extra effort can benefit. It’s true that hard circumstances can create opportunities for those willing to look.

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Living in the Boonies? 100% Home Loans Still Available Through USDA

Published
by
Gina Pogol
on October 3, 2008
in New Home Loan
. 3 Comments

100% mortgages have not gone completely by the wayside. While layering risk by lending to borrowers with low credit scores + no down payment + no income documentation will no longer fly (good!), there are programs out there for those who don’t face all of those challenges. The USDA Rural Development home loan is one such option. What is rural? The USDA has defined rural as anything not ”places of 50,000 or more people and their adjacent and contiguous urbanized areas.”

USDA Rural Development administers a couple of  programs: Guarantee and Direct. Their Direct program is funded directly (hence the name “direct,” duh) through the rural development office. To be eligible, your income can be only 80% of the median income for the area.

The Guarantee program is funded thorugh USDA-approved lenders and brokers. It is a guarantee program (duh, again!)with no subsidies, and the income guidelines allow up to 115% of the median income after certain adjustments. A good loan officer who specializes in these products should be able to help you determine how your income would be considered.

The 100% LTV mortgage amount is determined by the appraised value instead of the purchase price. Credit underwriting is flexible and the guidelines have no minimum buyer out-of-pocket expense and no maximum for seller concessions. Note: some lender policies may be more restrictive, so if it’s the lender guidelines shooting down your application and not the USDA’s,  another lender may be able to approve you.

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Rate Shopping: Bait and Switch?

Published
by
Gina Pogol
on October 1, 2008
in New Home Loan
. 3 Comments

Increasingly common scenario: you call a couple of mortgage lenders, tell them what you need, and get two interest rate quotes. The next day you might contact another one, and the guys you emailed for quotes on day three get back to you later that day or the next morning. On day four, you consider the terms of all the loans, just like you’re supposed to. You look at APRs, rates, and fees. You comb through the Good Faith Estimate (GFE) and your Truth-in-Lending (TIL) disclosures like the smart shopper you are. Then you call the lender with the best deal.

Except that deal went away three days ago. The new quote is half a point more! Is your agent a scum-sucking scammer? Maybe….but probably not. See, rate quotes are based on pricing in bond markets, which are driven by the same things that cause changes in the stock markets. And you know how quickly prices change there. While lenders used to be able to offer the same rates for several days, increasingly they rarely go a full day without having to reprice to accommodate market movements. Today’s lenders also operate on slimmer profit margins and a market-based price increase can’t be absorbed as easily. The upside is that pricing improvements are also quickly passed on in the interest of remaining competitive. But a quote obtained one day probably can’t be compared realistically to one picked up a couple of days later. And until you actually lock in your loan you still can’t be guaranteed a rate.

So how do you become a savvy shopper? 

First, get your information quickly. Try to get all your quotes within a short time period so that comparing them has some relevence. 

Then don’t let the pricing be your only guide. Interview lenders until you find one you are comfortable discussing your finances with, asking questions of, and (yes) negotiating interest rates with. A trustworthy and reputable loan officer will want your business again and again and will be less likely to jerk you around. When you work with someone you trust, you can stop frantically checking bond market movements sixteen times a day and relax, knowing that you will be treated fairly regardless of where rates have moved when you are ready to lock your loan.

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Ready, Willing, Able? Can You Qualify for a Mortgage?

Published
by
Gina Pogol
on September 26, 2008
in New Home Loan
. 2 Comments

You were turned down for a home loan. Or haven’t applied because you don’t think you’d be approved. Well, no need to go into a bank’s office, fill out a hundred forms, and get embarrassed when the dude in the blue suit says “No.” You can see where you stand by doing a little investigative work online.

Beginning at the top, know that even A-grade credit is no longer enough to get you a mortgage. You need sufficient, stable income, and you need to document how much it is and how often you get it.

Step 1: Prequalify Your Income Before even looking at your credit, try checking out a mortgage prequalification calculator to see if you can afford the payments on a home in your neighborhood. If your income is sufficient, go to step 2. If it isn’t, improve your debt to income ratio by putting a plan in place to pay off debt and get where you need to be income-wise. Other solutions people have tried include buying a home with someone else–the two incomes make home ownership possible.

Step 2: Determine Your Credit Grade Your down payment requirement can range from almost nothing to 30% or more, depending on your credit rating. So your credit grade is crucial in determining what else you will need to buy your home. If you have Grade-A credit you probably know it. A score in the 700s, several longstanding accounts with no late payments, and relatively low balances on your accounts are signs of a high-grade borrower.

Once you get out of Grade-A range, your credit may be assigned a subprime grade of A- to D. Those with grades C or higher are most likely to be able to qualify for a mortgage within the next year, so let’s address these here.

A- starts at FICOs in the 660 range, a debt-to-income ratio of 38% max, no mortgage lates, and no more than 1 or 2 other slightly late payments. No recent bankruptcy. You can borrow up to 95% of the purchase price with A- credit. You may also be able to get an FHA loan with A- credit.

B to B- means a score of about 620, several late payments over the last 12 months, and maybe a couple of mortgage lates (but no 60 day late mortgage payments). You can have a debt-to-income ratio of up to 50% and finance 75-85% of the purchase price. You may be eligible for FHA financing if you have plausable reasons for the late payments and have done something about the situation that caused them. You may have had a bankruptcy within 24-48 months.

C+ to C- means a score of about 580, a debt ratio of 55%, and you may finance 75% of the value of the home. You become a grade C by being 30 days late on several bills and perhaps 60 days late on some payments. You may have had a bankruptcy within 12 months. You cannot qualify for FHA financing with C rated credit.

So, if you are an A-, B+, B, or B- borrower, your first stop should be FHA. See if you can avoid the bad credit mortgage market altogether with a government-backed mortgage.

If you can’t go FHA or your grade is lower than B-, and you don’t have a huge down payment (you probably don’t because if you had that kind of money you’d be paying your bills, right?!), you need a plan to pay your bills and pay them on time. Notice that these credit grades are drawn mostly from your most recent credit experience, the last 12 to 24 months. And on a $300,000 home, the difference in down payment requirement for a C- borrower and an A- borrower is about $60,000! Not to mention the difference in interest rate you will be charged as a C-grade borrower. The good news is that within a year you could be an A- borrower. So if you are serious about buying a home, get serious about paying your bills on time. Trashed credit today does not doom you for life–unless you let it.

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Renters Need Love Too…How to Get a Credit Score by Renting

Published
by
Gina Pogol
on September 18, 2008
in New Home Loan
. 2 Comments

Life is harder for those with no credit–and more expensive too. Talk about being kicked when you’re already down–you’re already young and broke–now you can’t buy a house, rent a car, or even reserve a hotel room. You’ve got to have credit to get credit, and it’s harder to earn a nice credit rating when you have less money but everything costs more.

Fair, Isaac, the company that compiles our FICO scores, has created an expansion score, which is derived from non-traditional credit, including utility payments, layaway charges, and bank deposit records. However, this doesn’t completely solve the problem because in many places it’s illegal to report utility records and it can be difficult getting nontraditional creditors to bother reporting credit data (there isn’t anything in it for them and it does entail an expense).

Today the system has been improved further, allowing you to get your rental history included in your credit rating. By paying a small fee and registering with Payment Reporting Builds Credit, you can get credit for your payment history including daycare, cell phone, rent, and insurance payments. Fair Isaac promised that it will include data from RentBureau and PBRC when compiling your score.

Registering with PBRC, opening a secured credit card, and piggybacking as an authorized user on a relative’s account are all strategies that can accelerate the acquisition of a usable credit history for a young borrower. Of course, all this reporting doesn’t do you any good if what’s being reported isn’t favorable. So if you go through the trouble of getting your payment history recorded for posterity, make sure it’s worth recording.

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Declined for a Home Loan? What’s Next?

Published
by
Gina Pogol
on September 3, 2008
in New Home Loan
. 6 Comments

You’ve probably heard; it’s harder to get approval for a home loan than it used to be. And if you’re a first-timer, chances are you have the deck stacked against you–a short or spotty credit history, less time at your job, and a smaller bank account. But you have options if you didn’t get an approval right away.

Find out what you’re missing. Then get creative. For example, if your lender said you don’t make enough money, don’t think you’re going to have to go to medical school before you can afford a home. What the underwriter is really telling you is that your income isn’t high enough to support your new house payment and your debts. So one way to get approved for more house is to cut your debts. And many lenders stop counting a debt against you if it will be paid off in less than ten months. By paying the balances down until there are less than ten months’ payments left, you can free up a lot of income for housing expense.

Another way to offset inadequate income is to lower your mortgage payment by getting a loan with a lower rate. How do you accomplish that? By paying the lender for a lower rate, or rather, getting a motivated seller to pay it for you, you might be able to get your ratios down to an approvable level.

Finally, get some “compensating factors.” Many programs including FHA loans allow underwriters to stretch your ratios a bit if you can give them a compelling reason to do so. For example, if your current housing expense is more than your new mortgage payment would be, it’s obvious that you are capable of making it even if the ratios are a little high. Similarly, having at least three months’ expenses in the bank after you close your loan (called reserves) makes you a better investment because you could weather a financial hiccup with your savings. A seller can help you here too–by paying all your closing costs, leaving you with more money in the bank and a better-looking application. Another compensating factor is having a job with bright prospects for increased earnings, or a demonstrated history of saving money and being conservative with debt.

Finally, if credit is the issue, look at several lenders to see what grade you are and see what you have to do to move up a notch. Your most recent history is most heavily weighted, so it behooves you to start paying your bills on time right away. In a matter of months the bad stuff will begin to fade and you can move up. A good loan agent should be able to help you.

Your lender owes you more than just a letter declining your application and a smile. Find out what is needed for approval and what you need to do to get there. Then take action and get your home.

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You Could Commit Loan Fraud Without Knowing It

Published
by
Gina Pogol
on August 26, 2008
in New Home Loan
. 4 Comments

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.

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Finding an Honest Mortgage Lender

Published
by
Gina Pogol
on July 21, 2008
in New Home Loan
. 4 Comments

Today’s big mortgage news is from Florida (what else is new!?). The Miami Herald discovered that not only are the majority of the state’s mortgage professionals unlicensed, but over 5,000 of them were convicted felons! Even worse, this practice is perfectly legal. How can this be?

The devil is in the details, and while it’s illegal in Florida and most other states for mortgage brokers to have a criminal record, their subordinates (generally referred to as loan officers, loan originators, account executives, or mortgage finance officers) are allowed to. The idea is that the broker is held responsible for the ethics and practices of his / her employees. Unfortunately, this provides a nice little loophole for those who were stripped of broker’s licenses because of their shady lending practices. They just become loan originators and work for another broker. And there are brokers out there who don’t check the backgrounds of their employees and don’t police their lending sufficiently.

So, how does a borrower make sure a lender is reputable? First, know that the odds of getting a fair deal are in your favor. Real estate expert Robert Bruss, in an article about mortgage lending practices, acknowledges that “most mortgage lenders are honest.” So does Realty Times, stating that while there are a few “bad apples” the “vast majority” of lenders are honest.

Second, learn what your state’s requirements are. Some are quite stringent, requiring background checks, education minimums, and passing exams before a loan officer can be licensed. Other states have no requirements at all. Here is a link to state requirements for loan officers.

Third, check your lender’s status in your state. Here is a link for states which have lender databases online. You can generally find out if its licensing requirements are in order and if there are pending actions or investigations.

Fourth, check out several lenders before committing to one. Especially for subprime or bad credit borrowers, getting quotes from several mortgage loan companies is the best way to make sure you are being offered a fair deal.

Finally, really read your disclosures and remember that whatever is in writing trumps anything you are told by a loan officer or broker. The most often reported abuse of borrowers occurs when the terms disclosed upfront are changed at closing. If the interest rate, fees, or terms such as the addition of a prepayment penalty have changed at closing and weren’t discussed with you beforehand, don’t sign the documents until the misunderstanding is cleared up and you either receive a satisfactory explanation or get the loan you expected.

When you refinance your primary residence, you have three days to rescind or back out of the loan–use that time to make sure your loan is what you expected. When purchasing property, insist on getting copies of your documents a day or two before closing. That way you can really go through them and resolve any questions in a less pressure-filled atmosphere.

A lender you trust and work well with is as priceless as a good mechanic or hair stylist. And the amount of money involved makes it serious business. A little legwork (or mouse-work) upfront can save you money, smooth out the mortgage financing process, and ease your mind.

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