How Returning an Overdue Library Book Declined a Mortgage Loan

Librarian

Okay…it’s not just the overdue library book…we have a few other factors involved with this scenario.   In February I began working with buyer who was contemplating buying his first home, a condo to be exact.   We were able to offer a preapproval based on:

  • mid-credit score of 705
  • 100% LTV Fannie Mae My Community with LPMI (Lender Paid Mortgage Insurance)
  • 5 year fixed 10 year interest only payments (he qualified for fully amortized but opted to have flexibility with his payments)

The buyer, we’ll call him “Joe”, makes an offer on a condo that is in the process of going through a conversion.   The builder also has a “preferred lender” and will only provide a seller credit to the buyer if the buyer uses their lender.   Joe elects to stay with me because the builder’s lender cannot offer the same product and payment options, even though the seller credit was significant. 

Here’s all the scoop:

Joe had an old collection on his credit report from a library book that was overdue.  We had loan approval so I advised Joe to not pay it off until after closing.   Paying off collections lowers your credit score: the credit scoring system recognizes it as new activity on a collection.    Joe finds the book a few months into the transaction and returns it to the public library and paid his overdue collection.   It’s a noble action and would have been perfectly fine…had he done it after closing.

Joe also wanted to make sure he was getting the best deal and decided to continue shopping lenders even though we were locked and approved with his mortgage.  Shop, shop, shop…he did…and the lenders ran his credit report over and over again.   30 inquires over a couple of months HURTS your credit scores.

The condo conversion took months to complete (it was suppose to be done in early May and it won’t be finished until later this month)…so Joe’s credit report expired.   Typically, credit reports are valid for 120 days.   This is when we made the discovery that Joe’s credit score had dropped 40 points.   Forty points may not sound like a lot to you, however…zero down financing is very sensative to credit scores.  There is a tremendous difference between 660 and 700 with regards to your credit score…especially when you’re looking at 100% financing (zero down).   

Joe is a great candidate for FHA financing, however the condo (being a conversion) is not.   Zero down financing with a 660 mid score is not a pretty option.

Lessons (if you’re getting ready to buy or refinance a home…if you’re not, a different strategy may better suit you):

  1. Don’t pay off collections prior to closing UNLESS it is required by the underwriter.   (Pay them off after closing and be sure to get a documentation that they are paid).
  2. To have the best credit score, try to have 3 established accounts that you use at least every 30 days.  This could just be charging a tank of gas and then paying it off every month.   When revolving accounts go “unactive” for a couple months, they are considered “closed” by the scoring system which does not help your score. 
  3. Keep your credit balances below 30% of the available credit line.
  4. If you’re going to shop your Mortgage Professional, don’t let other LOs pull your credit.   You all ready have your scores and that is all the information a LO needs for a rate quote.
  5. Your documentation (such as credit reports, paystubs, etc.) are only valid for a certain time period.   With longer transactions,  be aware that your credit report may be re-pulled and/or employment may be re-verified.
  6. Return your library books before they become overdue.

Borrower Beware

I wasn’t planning this post to be part of my debt series but when I saw the front page of the Seattle Times this morning…the timing is uncanny.   Borrower, beware:  debt disaster looms as rates rise on easy-money.   

This is a tale of a couple who was turned down my many mortgage lenders for zero down financing because they had no savings and $20,000 in credit card debt.  They are a common portrait of a subprime home buyer over the past 2-3 years.

I have issues with both their loan originator AND the subprime borrowers in this report.   

"The couple signed two mortgages to buy their $246,800 house in July. The first loan, a so-called pick-a-payment loan for 80 percent of the deal, had a variable interest rate. The second mortgage, at 12.5 percent interest, covered the rest. The deal included a pre-payment penalty on the first mortgage, and a balloon payment on the second.

Not long after they signed the loan, [the home buyer] decided to dump her sedentary office job to become a personal fitness trainer. The new job paid less, $7.89 an hour, but she had the opportunity to earn commissions as she brought in clients."

There is nothing wrong with an 80/20 subprime mortgage when it’s structured correctly and the clients understand that they have 2-3 years to prepare for refinancing.   This means they need to improve their credit scores (having a mortgage paid on time helps credit scores) and to reduce frivolous spending.   They need to be accountable and take a hard look at themselves and their finances.   Switching from a fixed income, even if it’s a boring job, to a new career that pays commission is irresponsible as a brand new home owner.

The pick a payment program is negative amortization and is not the best program for anyone with 100% financing, let alone a subprime borrower.    In fact, it’s probably the worse program a first time home buyer (subprime or not) could have.    They will 9 times out of 10 opt for the lower (deferred interest) payment and not fully grasp what the consequence are when their mortgage recasts at the higher rate and fully amortized payment.

"I had no idea the interest was going to climb like it is — they didn’t tell us that at all," Fultz insisted. "Maybe I wasn’t listening. Maybe I’m not good at words. Negative amortization? I never even heard of that."

Their Loan Originator’s response to this (you might to sit down and put away any sharp objects before you read this): 

"I agree, it isn’t explaining it in full… But…it’s explained to the client 47,000 freaking times."

And to top it all off, the Loan Originator, who’s business primarily consist of feasting on subprime buyers says she can’t make her mortgage payments now due to the decline in the subprime market.

The pullback has cratered the business model for brokers like Mills. She used to write 10 to 15 loans a month. In March, she wrote two. In February? None.

"I didn’t make my own mortgage payment this month," [the LO] said in April. "But nobody feels sorry for me."

Oh boy…someone pass me a hanky!  This Loan Originator closes 10-15 deals typically a month and I’ll eat a shoe if she’s not making more than 1.5% on each transaction.   And a few tight months SHE’s missing her mortgage payment?   

Please work with a professional Mortgage Planner.   And not the first person who tells you "yes".    That type of LO smells your desire to own a home and will take you to the bank.   And they will not be there for you after closing…unless you want a new mortgage! 

Buyer beware, indeed.

Related post:  The Debt Disease:  Dollar Buy Dollar

Book Review: It’s Not About Rate

Bookimage Richard Cohen, author of "It’s Not About Rate–The Right Way To Get a Mortgage", was kind enough to send me his book to review.  For a short book (we’re talking 76 pages) it covers a great deal of mortgage material without being overwhelming to a first time home buyer.  I appreciate how Richard injected bits of humor along with solid information about mortgages.  This is very readable and I highly recommend this book for consumers considering buying or refinancing their first home.

Is it better to buy or rent?

An article in the New York Times was brought to my attention from Tim at Seattle Bubble on whether or not you should buy or rent.    The article is very slanted towards renting and considering the part of the country it’s originating from, they are right.   Our local economy and housing market remains strong and is not experiencing any sort of a slump.   

What I really liked about the article is the on-line calculator to help you determine if you should rent or buy.  The calculator is flexible and friendly with adjusting appreciation, down payment, rent increases and the costs associated with owning a home (funny how many potential home buyers forget about that).   If you’re considering buying a home, I encourage you to check it out.

Tim, where was this calculator when I did my post at Rain City Guide and Seattle Bubble Blog countered it? 

Getting on Track to Buy Your First Home

Last fall, a Mom made an appointment with me to meet with her childreImg_3528n about buying a home.  It was so cool.   First off, she was very proud of her 18 and 20 year olds.   Both were hard working individuals…being responsible young adults.  Mom thought they should look at buying a house together instead of renting.   It was a very interesting consultatation.   I was happy to meet with this family to help make sure her young adults are on the right track of becoming home owners and mortgage payers.

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