Every so often, someone will be interested in financing for a home they will not be living in 100% of the time…they want the best rate which is “owner occupied”. It’s crucial to know the difference in your lenders eyes and to be completely upfront so you avoid committing fraud. Bottom line, the property and situation needs to make sense to the underwriter. Here are some basic definitions:
The Current Value of a Preapproval Letter
April 1, 2008 by Leave a Comment
Fellow Rain City Guide Contributor, Tim Kane wrote an interesting post while I was on vacation asking if preapproval letters are worth their ink in our current market. Truth be told, this was a valid question prior to our current market conditions and has been for years. The true worth of the preapproval letter prior to the mortgage "melt down" was based on the merit of the loan originator who was preparing the letter. I’ve addressed this issue before here and here. Anyone can type a letter or issue a fancy certificate; has the borrower really submitted supporting documents verify their income, employment and assets required per underwriting (i.e. the borrower has been credit underwritten)?
The fact is, in today’s current mortgage climate, where loan programs are terminated, guidelines tightened, private mortgage insurance restricted and geographical areas are being deemed soft: a preapproval letter is not any sort of guarantee that a home buyer will be able to close on a proposed home purchase.
So why bother with preapproval letters? Here is the current value of a true preapproval letter:
- It demonstrates that the buyer has completed loan application and is preapproved at that moment for a specific product.
- There is a level of commitment that a buyer has if they have provided all of their documentation to a lender over one who has not taken the steps to become preapproved.
- You know who the loan originator and lender is that the buyer is working with. I’ve recommended before, and especially do now, that Selling and Listing Agents give the Loan Originator a friendly phone call to introduce yourself…allowing you to see if the LO passes "the smell test".
What can you do if preapproval letters are worth less than they were before?
- I recommend that all buyers with a credit score below 700 and/or using less than 20% down have a "Plan B" for their mortgage scenario. Consider "what if" the mortgage scenario they are current approved for is terminated with no notice from the lender or if the area they are buying a home in is considered soft? Is your Loan Originator able to offer FHA or VA financing? Note: FHA and VA jumbos are quite attractive.
- Home buyers should start even earlier in the home buying process (six months to a year is fine). A Mortgage Professional can help improve credit scores and provide advise on how work on where they may need more strength to be on the best position possible to buy a home.
- Allow more time for preapprovals from lenders. Underwriting (and appraisals) are taking more time in this climate. Everything is being reviewed under a microscope.
- Review your current preapproval with your Loan Originator. There have been recent pullbacks with private mortgage insurance (including LPMI, Fannie Flex and Freddie Mac higher LTV products).
- Home Buyers should discuss with their Real Estate Agent (not the Listing Agent) the "what ifs" of losing their financing and how it may impact their earnest money deposit.
- Listing Agents should have their preferred Mortgage Professional review the preapproval letter should their be any doubt regarding the letter in question. The preferred Mortgage Professional can at the very least provide some valid questions for the Listing Agent to ask the loan originator and Selling Agent.
This market demands that you select a Mortgage Professional based on ability, expertise, commitment and available products. Trying to get the lowest rate in a market where rates change up to 3 to 5 times per day is insanity. A true Mortgage Professional will provide you with the most competitve rate available considering your current mortgage plan.
Not a Friend of this Family: Part 2
March 31, 2008 by Leave a Comment
In part one of this story about Michael and Pam investigating a refinance with Woo Who, we uncovered how the bank Loan Officer was not willing to provide a copy of the Federal Truth in Lending to Michael and Pam. It was not until after Michael insisted that it was his right to receive this document, that it appeared disclosing a prepayment penalty that he was not informed of.
The story gets better. As I mentioned, Michael and Pam’s existing adjustable rate mortgage is scheduled to adjust this June. I reviewed the Note with Michael showing him that the index his mortgage rate is tied to is the Monthly Treasury Average (MTA). The Monthly Treasury Average is just that: a 12 month average of the monthly average yields of the US Treasury securities. The 12 month average is determined by adding together the Monthly Yields for the most recently available twelve months and dividing by 12. As it is based on a 12 month average, the rate does not move drastically. This could act as a benefit when rates are moving upwards and is less beneficially when rates are dropping. Here is the 411 on Michael and Pam’s current loan:
- 5/1 Adjustable Rate Mortgage current rate 5.125%. Principal and interest payment of $1154.31.
- 1st adjustment on June 1, 2008. Adjusting annually thereafter.
- Index: Monthly Treasury Average – projected value on June 2008: 2.948%
- Margin: 2.600%
- Lifetime Cap: 11.950%
Based on this information, their new rate is estimated at 5.548%. The new rate is rounded up to the nearest 0.125% = 5.625%. The new mortgage would reamortize at their balance at that time (estimated at $196,000) based on the remaining term providing Michael and Pam a principal and interest payment of $1218.29. This is without refinancing–no closing costs–no loan approval. Simple.
Woo Whoo’s proposal is a 5/1 ARM with a prepayment penalty at 5.375% with a principal and interest payment of $1108.74 and closing costs of $2283.74 (not calculating how many years and what the penalty is for the prepay).
When Michael and Pam understood their options, they elected to stick it through with their existing ARM. Their rate should drop lower when it adjusts again next June. Michael was puzzled (to put it mildly) as to why the representative from Woo Whoo Bank didn’t explain this to them. Especially since the loan that would be refinanced was with Woo Whoo.
It’s painfully simple. The Loan Originator would not be paid for giving free advice. It’s real easy for LO’s and mortgage companies to target those with adjustable rate mortgages and plant fear of the adjustment. Or perhaps the Whoo Who Loan Originator didn’t even consider how Michael and Pam would fair not refinancing.
This is why it’s so important to review your mortgage Note and understand how and when it adjusts (if you have an ARM). If it all seems like too much to figure out, contact your Mortgage Professional to help you. If your loan originator is neglecting you (perhaps they’ve left the industry or do not care for clients after the transaction is closed), I’m happy to adopt your Washington State mortgage…no refinance required.
It’s all about understanding all of your options and sometimes, that option is: do nothing.
? of the Day: Could you tell me when the increase in conforming loan limits will go into effect?
March 19, 2008 by Leave a Comment
I was emailed this question today:
Could you tell me when the increase in conforming loan limits will go into effect?
Believe it or not, the temporary increase in conforming loan limits is in effect. In fact, it’s retro-active to July 2007. Why? This is so that Fannie and Freddie can provide some relief to Wall Street by being able to purchase loans over the true conforming limit of $417,000. Investors have lost their appetite for jumbo mortgages, regardless of how great the borrower is, these loans did not have Fannie or Freddie’s backing. Now that they will, we should hopefully see some relief as far as lower rates from lenders for jumbo mortgages. The higher rates we have been seeing lately with non-conforming (jumbo) mortgages was to try to sweeten the pot on Wall Street.
Lenders are being slow coming out with their pricing. The first one I wrote about came out swinging with some very high "hits" to price. I’m now beginning to see others just starting to appear with better pricing. As more lenders enter the conforming-jumbo and fha-jumbo markets (i.e. competition), we may see rates improve.
Stay tuned! I’ll be posting rates tomorrow.
A Good Faith Estimate is Not a Commitment
March 18, 2008 by 2 Comments
It’s very important to know that when you receive a Good Faith Estimate from any loan originator, it is not an offer nor is it a commitment to lend. It concerns me when I’m dealing with a rate shopper (especially in a volatile market where rates may drastically change 3-5 times a day) and they are going to select who handles their mortgage transaction by the good faith estimate. Here’s a quote from an email I recently received that prompted me to write this post:
"We do appreciate all your kind attention and the fine offer you made to us."
This couple had contacted for the past few months while shopping for homes requesting good faith estimates. I appreciate that they were upfront with me by letting me know they were receiving quotes from someone else as well. Depending on the day (actually the time of the day) the quote was prepared, they may have actually selected a lender who is quoting a higher rate than I would have. Fact is, I only provided them good faith estimates when they requested them; I never provided them any "offers" or "commitments".
A Good Faith Estimate is a detailed interest rate quote for that moment (unless the LO doesn’t track the markets and is simply going off the morning "rate sheets") with the closing costs associated with that rate. I’m actually considering adding a time/stamp to my GFE’s when I send them just because rates are changing that often (for better or worse) in this climate.
A Good Faith Estimate is not a guarantee of interest rate or closing costs. In fact, the rate may all ready be different, or the cost to obtain the rate (higher or lower) by the time it’s been created and delivered to the borrower. Make sure you receive a Lock Commitment from your lender and ask them to guarantee their closing costs. As a matter of fact, certain situations may cause your rate or closing costs to change from the lock and/or good faith estimate, such as:
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Appraised value – LTV (higher or lower than estimated)
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Change in employment
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Credit scores not what estimated prior to quote.
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Closing time extended beyond the lock period.
If we have a change to cost (perhaps the appraisal cost less or the LTV is lower than expected changing the loan amount or cost for the rate) I will provide an updated Good Faith Estimate.
My last little bit of advise for you is (if you’re still insisting on shopping lenders by rate) to see if your lender offers a one time interest rate "float down" should the rate improve by more than 0.125%. This provides you with a ceiling that your rate will never go higher than "x" and allows you to receive the benefit of a lower rate should they improve more than 0.125%.
Just because you have received a GFE from a lender, does not mean that you are qualifed for the mortgage. It really just means that the lender is quoting this rate with those closing costs on that moment of the day. Rates are a moving target, and without a lock–it’s just a quote.
The Mortgage Porter Quarterly
March 9, 2008 by Leave a Comment
The first issue for 2008 of The Mortgage Porter Quarterly is being mailed starting this weekend.
This snail-mail newsletter features:
- Your Credit: Tips to Score Big
- Last Minute Tax Changes for 2007
- What’s New with Rhonda (a true read if you’re having troubles falling asleep)
- My (and my hubby’s) favorite recipe for Huevos Rancheros (pictured above). YES…I made that.
- My Mortgage Adoption Campaign
- Credit Check Up (this issue, I recommend visiting www.annualcreditreport.com and pulling your free copy from Experian. (You’re allowed 1 free copy from each bureau annually).
- And much, much more.
Would you like to be on my snail-mail list and receive The Mortgage Porter Quarterly?
Confession: it’s really not a quarterly. I only mail this out three times a year (currently). I didn’t want to call my newsletter "The Mortgage Porter Thirdly".
Shiney New and Temporary Conforming Limits…Not So Fast!
March 7, 2008 by Leave a Comment
I feverishly posted the new FHA and conforming loan limits for Washington State. It was pretty darn exciting since many of us in the industry were hearing whisper figures of $493k or so and voila, our new FHA and conforming limit for a single family dwelling is $567,500 for King, Snohomish and Pierce Counties. This could be a nice bump through the end of this year.
The word is out! Many Seattle, Bellevue, Everett and Tacoma area homeowners are VERY interested and want to take advantage of "conforming rates" now. Not so fast….sorry. (Hey…I’m really hoping that on Monday, I’m eating my words…the proof is in the pudding). So far all that’s happened is that the loan limits have been announced. This whole process needs to trickle from Fannie Mae and Freddie Mac and through all the wholesale lenders before those of us on "the streets" can offer you any benefits.
Be prepared. I fully expect an "add to rate" on loans from $417,000 – $567,500 (or what ever your area conforming limit is). This will be to compensate Freddie/Fannie for the additional volumes and risk they are taking on. The big question is: how much will it be? My best guess is anywhere from 0.25% to 1.00% to what you currently see for conforming.
"WHAT?" You say… "You’re telling me that you just quoted 6.00% for conforming today…and 7.00% for JUMBO…yet the new conforming rate for loans over $417,000 may still be 7.00% if I were locking today?"
Yes…that’s what I’m saying. Again, PURE speculation on my part.
The "new conforming limit" goes back to July of 2007. It’s retroactive for jumbo mortgages still not bought on Wall Street clogging credit lines. I think that’s where we may see the most action: rescuing the Thornburg Mortgages of the world (or at least Wall Street). This from Bloomberg:
Thornburg specialized in so-called jumbo mortgages of more than $417,000, which typically were used to buy more expensive homes. Until recently, such loans were too big to qualify for purchase by government-sponsored entities such as Fannie Mae. Trading for such “non-conforming loans has come to a standstill, cutting off a source of funds for mortgage companies and pushing down the value of their holdings. More than 100 halted operations or sought buyers last year.
The company’s demise would reduce liquidity even more, said Keith Gumbinger, vice president of HSH Associates, a mortgage- market research firm based in Pompton Plains, New Jersey.
“No one has had anything bad to say about Thornburg; they have served the good-quality, high end of the market,” Gumbinger said. “It’s been a good, well-run business that is taking a beating because of market conditions.”
Thornburg is not a part of the subprime melt down they are being sucked into. My best guess is that due to the volume and risk of loans that Fannie and Freddie will take on through the end of this year, consumers will see a benefit in pricing when the credit lines have been relieved.
This may not be the band-aid we’re hoping for. I don’t want to be a "bummer"…I do want to be practical.
My best advise to those in the "new (temporary) conforming market" is to not wait for the new limits to be in effect. Check with your Mortgage Professional to see if they can switch your program to "new conforming" IF it’s a better rate/scenario for you if you’ve all ready began the process under the current guidelines. This is something that I can offer and I would assume most Mortgage Professionals are able to as well.
New Conforming Loan Limits
March 6, 2008 by Leave a Comment
OFHEO just released the temporary conforming loan limits (through 2008). It does not appear as though that every county that received an increase in FHA limits received one with conforming. Here is what I show for Washington State:
King, Pierce and Snohomish Counties
1 Family – $567,500
2 Family – $726,500
3 Family – $878,150
4 Family – $1,091,350
Kitsap County
1 Family – $475,000
2 Family – $608,100
3 Family – $735,050
4 Family – $913,450
Clark and Skamania Counties
1 Family – $418,750
2 Family – $536,050
3 Family – $648,000
4 Family – $805,300
San Juan County
1 Family – $593,750
2 Family – $760,100
3 Family – $918,800
4 Family – $1,141,850
Jefferson County
1 Family – $437,500
2 Family – $560,050
3 Family – $677,000
4 Family – $841,350
This data is still very new and I’m just making it available to you as soon as I receive it. More information will follow.
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