If you’re considering buying a home anytime in the near future, please think twice before purchasing your next car. I’ve had a couple different scenarios lately where the car payment has really impacted the home buyers. Don’t get me wrong, I love cars. Old and new alike. Here’s how it impacts your home purchasing power (based on a 6% mortgage interest rate amortized for 30 years):
That New Car Will Cost You
March 15, 2007 by 3 Comments
Part 2: Know Your Credit Score
March 14, 2007 by 4 Comments
EDITORS NOTE: What is considered a “good score” has changed quite a bit since the subprime era.
In Part 1 of the Subprime Series, you should have found your Note and contacted your Mortgage Planner. The next step is to review your credit report. I suggest having your Mortgage Planner pull a tri-merge report. They may or may not charge a fee for the cost of the report (around $20).
Whats your mid-score? Just last year, a score of 600 was an easy mortgage transaction (for subprime)…now the bar is raising due to all of the foreclosures. Typically, your “mid score” is going to be how you’re judged by the mortgage companies. With a tri-merge report, you should have 3 scores ranging from 350 – 850. Your mid score is literally the number between the highest and lowest score. 680 and above is considered to be a good credit score. 720 and higher is excellent.
My First Subprime Client
March 7, 2007 by 2 Comments
It happened quite on accident back in 2002. When I began my mortgage practice seven years ago, I was pretty much an "A Paper" lender. Conventional, FHA and VA loans were my bread and butter. The thought of doing a subprime loan made me shudder. I knew they were out there, but I was perfectly happy sticking to my 680 and higher credit score clientele and not diving into the subprime pool.
Then one day, a Realtor, Ima Agent, asked me if I would review her brother and sister-in-law’s good faith estimate since she felt the rate and fees were a bit high. Ima Agent told me that they had challenging credit in the past and were looking to buy "zero down". What could I say? I would at the very least talk with them to see if I could help. I reviewed their good faith estimate and was surprised at the cost of doing the mortgage. Most of our loans (to this day) are Correspondent and the closing costs are fairly low. Brokering to a subprime lender often has Broker Fees around $795 in addition to the regular closing costs. Of course the rates are higher too since the risk to the lender is greater.
Mr. and Mrs. Buyer are a very nice couple who were recently married and wanted to stop paying rent. She admitted that he had a troubled past with his credit and that they had been working on improving his (and their) finances. Their mid credit scores at the time were around 610. Back then, I would not have known where to go for an 80/20 with a credit score below 700…except the other loan originator they had met with previously had the name of the mortgage lender he was brokering to…BINGO! I called the lender and priced out their loan. I was able to provide my clients a much better rate so they elected to leave the other loan originator.
Here is what the basic guidelines were back in 2002:
- 600 minimum mid-credit score
- 100% total loan to value using an 80/20
- 50% Total Debt to Income Ratio
- First mortgage is a fixed for 2 years and amortized for 30.
- First mortgage has a 2 year prepayment penalty of 6 months interest.
- Second Mortgage is amortized for 30 years and due in 15.
- Reserves (taxes and insurance) were OPTIONAL.
- Funds for closing were not seasoned (no bank statements provided) or sourced.
- Seller can pay up to 6% of closing costs and prepaids (taxes and escrow).
I reviewed their credit history with them and we developed a plan on which debts they should focus on eliminating. They had all ready established a budget since they were working on reducing their credit card debt. I began to feel more comfortable with helping Mr. and Mrs. Buyer with their subprime financing since I could tell they understood the responsibility of having a mortgage and being a home owner. Ima Agent found Mr. and Mrs. Buyer their next home and we financed it with the subprime lender. They were extremely happy in their new home they purchased in March of 2002 in Seattle for $239,500.
Shortly before their prepayment penalty was over, Mr. and Mrs. Buyer contacted me to restructure their mortgage. They were excellent borrowers; they paid their mortgages on time as well as their other obligations and did not over extend themselves with credit. Mr. and Mrs. Buyer with having a mortgage (which helps improve credit score) their credit scores were now in the low 700s. I was able to provide them a long term mortgage (30 year fixed) for 5.75% and their home had appreciated to $310,000.
I’m thankful that I took the subprime plunge. I’ve since been able to help many home buyers who would not have qualified for an FHA or VA mortgage. Many first time home buyers lack the 3% down or are better off leaving the 3% down in their savings account as a cushion.
Since my first subprime loan 5 years ago, the guidelines have gone through dramatic changes. Soon Subprime lenders were promoting 80/20 programs with interest only payments, stated income and credit scores down to 580…yikes! With these loose guidelines, lenders are now facing record foreclosures and are now tightening their requirements for a subprime loan. Every day I’m receiving updates from various stating that the minimum credit score for 80/20 financing is now 620 and stated income is disappearing.
I have just added a new category to Mortgage Porter: the market toughening up, these home owners really need to minding their credit and budget so they don’t wind up in the deep end with no way out of their subprime mortgage after the rate adjust.
Will someone please change the channel?
February 28, 2007 by 1 Comment
I’m watching CNN this morning while I’m getting ready to head into the office (it snowed a few flakes this morning, so being the chicken I am, I’m taking my time before I venture onto the roads)…when I see three commercials within 10 minutes that I found somewhat disturbing.
First commercial: Ditech…cash out refinance your home with a fixed rate up to 125% of the value! Well, thank God it’s not an interest only negative amortized ARM! In light of the increased foreclosures and troubles with subprime lending, I cannot believe I just saw this commercial. What happens to the borrower who has overextended their home equity and then they lose their job or they need to sale? Guess what, they can’t. There’s not ANY equity to pay for closing costs. Welcome to Foreclosure City.
Next: Countrywide…offering a no cost loan. No origination fee, no credit or appraisal fee and no third party (title, escrow, etc.) fees. This isn’t so upsetting to me (especially after following the Ditech ad). Anyone can provide a no-cost mortgage. What the commercial does not tell you is that no cost mortgages do cost a borrower in the monthly mortgage payment by a higher interest rate. Nothing is free. Typically, 1% of your loan amount equals 0.25% to interest rate. If your closing costs amount to $2000 and your loan amount is $200,000, you can increase your rate by 0.25% and have "no closing costs" from any loan originator. Please always compare good faith estimates by different lenders. Their commercial was the least offensive–they just happened to be sandwiched between two commercials that got my goat!
Last: Freecreditreport.com. You know the commercial…the friendly redhead young man challenges you to guess his credit score and encourages you to find yours. This is great advice. Where this one slips up for me is that it’s URL sounds just like www.annualcreditreport.com in fact, I think freecreditreport.com is a better marketing name than the one created by the big three credit bureaus by order of our government. Should you not read the disclaimer on freecreditreport.com’s site, you might believe this is the web site the Fed had created for consumers. However, this is Experian’s site and should you obtain your "free" report, you’ll be signing up for a credit watch service at $12.95 per month. Not so free after all, is it?
I just had to vent a bit. It’s no wonder people get confused about their mortgages and finances with all of the misleading and deceptive advertisements on television, the internet, and coming to our mail boxes at home.
Bottom line: Do your research. Ask questions. Be responsible.
Your ARM May Not Be Broken
February 26, 2007 by Leave a Comment
You may have noticed on the evening news and the local papers all the bad press about mortgages lately. Specifically sub-prime, negative amortized ARMs a.k.a. payment option plans (which I am opposed to for 99% of the population), 100% financing and interest-only ARMs…to name a few. Many sub prime lenders are restating their earnings and are suffering losses. Some are closing their doors and the remaining are changing their underwriting guidelines. It use to be very easy to obtain 100% financing with a credit score of 600…some lenders would even consider 580. Now, the benchmark is 620. Throughout history, lenders change underwriting guidelines based on market conditions.
How Strong Are Your Legs?
February 25, 2007 by 1 Comment
A borrower in a mortgage transaction is kind of viewed like a chair with four legs. The legs on the chair provide strength to the base or seat of the chair. If one leg is shorter than the others, the chair is still strong, but may wobble a bit. Shorten two legs and the chair becomes less stable. Three week legs and the chair is just waiting to tip over on you.
So how strong are the legs of your chair?
Consider each of these items as one leg in your chair.
- Employment. Having a minimum 2 year history in your line of work (this can include education). Employment gaps that don’t make sense to an underwriter, may cause issues with getting your mortgage approved. A lender wants to know that you are going to be able to keep your job and therefore, make your mortgage payments on time.
- Income. If paid salary and regular hours, this can be pretty easy to compute. When your hours vary, the income needs to be averaged. Also, if you’re paid bonuses or commission and going for the best interest rate (not stated income or no income verified), then your bonuses and commissions are typically averaged for the past two years. Debt-to-income ratios are crucial for qualifying for mortgages. A $500 car payment equals $50,000 less home that you can purchase.
- Savings and assets. There are many zero down loans, even if you are considering that route, it is in your best interest to have at least three months of your future mortgage payments in savings after all closing costs are paid. The more money you can put down towards a home, the better your interest rate will be.
- Credit Scores. Having scores above 680 are a worthy goal. A score 700 or more is even better! Pay your accounts on time. Keep your balances below 30% of the credit limit for the best scores. Take care of your credit and it will take care of you. Credit is reflective. If your credit score is on the low end, meet with a Mortgage Planner to help you develop a plan to improve your score.
All of these factors impact how a borrower qualifies for a mortgage. The more strong legs you have reduces the risk to the lender, which in turn means a better interest rate for you!
Week in Review on Rain City Guide
January 26, 2007 by Leave a Comment
I am an Active Contributor on Seattle’s Rain City Guide blog. This site is packed full of information about real estate, homes, our local area, finance as well as industry and blogging tips and great interviews with fellow professionals. Here are a few recent post that may be of interest to you, the consumer.
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Your Private Information Is For Sale. I have mentioned this before on The Mortgage Porter and I feel it’s worth reposting. Credit bureaus are reselling your information when you have your credit report pulled.
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Who’s Client Is It Anyway is a post from Eileen Tefft regarding what can happen with site agents when a buyer looks at new constuction.
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Reba Haas posted the article: Copper thefts on the rise – a new threat to vacant homes for sale or rent.
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Don’t miss Dustin Luther’s 10 Great Interview Questions for Agents.
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Too Close to Home is another post by yours truly about borrowers trying to buy investment property as owner occupied to get a better interest rate.
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Buyer’s Remorse by real estate attorney Craig Blackmon addresses when a buyer may need the help of legal council.
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Last, but certainly not least…Agent FIRED! – Lender Fraud by Ardell DellaLoggia and all 84 post that follow is an absolute must read.
As I said…there are many other great post…these are just a few of the highlights!
Preapproval Letters Defined
January 19, 2007 by 10 Comments
The preapproval letter is a tool typically drafted by a loan originator to be used by a buyer’s real estate agent when presenting an offer on a property. The letter may be in the form of a certificate or be an actual letter on the lender’s letterhead. The preapproval letter is intended to assure the seller and the listing agent that the buyer has been buyer has been approved by the lender and therefore accepting an offer from this buyer, there should ideally not be any financing issues with the buyer.
When I prepare a preapproval letter, it usually contains the following (depending on the program):
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Effective date.
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The borrower’s names (who is approved for financing).
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The sales price and loan amounts they are approved for.
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The type of financing is confirmed (ex. Conventional, FHA, etc.)
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Credit has been reviewed.
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Employment and income has been confirmed.
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Down payment and closing cost have been verified.
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Any closing costs that are being requested to be paid for from the seller.
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Any item the preapproval is subject to (such as satisfactory appraisal, title, complete purchase and sale agreement, etc.).
If these items have not been actually verified with proper documentation, then a buyer has been prequalified—not preapproved. BIG DIFFERENCE. Being prequalified essentially means that a verbal interview has been conducted without providing all of the necessary supporting documents (pay stubs, W2s, bank statements—again, depending on the type documentation required for the specific loan “full doc” to “no doc”). In addition, a Good Faith Estimate does not constitute a preapproval, it does detail the proposed loan scenario.
The preapproval letter does not contain private information such as a buyer’s credit score or their additional assets. It is a sales tool for the buyer’s agent and if there are multiple offers presented on a home, having a strong preapproval letter is an advantage. This is one reason why it is crucial for buyers to become preapproved before they begin shopping for their next home. Many listings agents will not even consider an offer unless the buyer has been preapproved.
The preapproval letter is generally effective for 90 days a specific amount of days, typically when most lenders consider the credit report “expired”. Updating a preapproval letter is simply re-running the credit and possibly obtaining most recent income and asset documentation (paystubs and bank statements). On occasion, the buyer’s agent may request a revised preapproval letter if they are presenting an offer on a home that is priced for less than what the buyer is approved for and if they are asking for closing costs.
Real estate agents may also consider who the preapproval letter is from, and they may contact the lender to confirm the buyer is indeed prepproved and not just prequalified. Many agents will tell you that the preapproval letter is only worth the paper it’s printed on. This is also why it’s very important to be selective with lender you work with…it could possibly impact whether or not your offer is accepted on your next home.
If you’re considering purchasing a home located anywhere in Washington state and need a preapproval letter, I’m happy to help you!
EDITORS NOTE: This post has been updated since credit reports are no longer “valid” for 90 days with most lenders.
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