Why Your Loan Originator Needs a Complete Application BEFORE Locking a Rate

May 19, 2008 by Leave a Comment

A home owner contacted me wanting to know how their rate could change so much from their original lock with his current lender for his refinance.   He thought this was his scenario:

15 Year Fixed Rate at 5.375% (I’m assuming that he was paying a point–I cannot tell from this lenders lock confirmation).  Here are the other factors this rate was based on for a $417,000 loan amount:

  • Rate Term Refinance (no cash out, he’s actually bringing cash to closing in order to bring his loan amount down to the conforming level).
  • 700 Mid Scores
  • 62% Loan to Value

The LO locked in the rate based on this information about two weeks ago and just provided a "lock confirmation".  It’s actually a lock request with the lender she’s brokering the loan to.   Two weeks later, the borrower finds out that his loan is being priced based on the following:

15 Year Fixed Rate at 5.75% or 15 Year Fixed Rate at 5.375% plus 1.50 additional points.  Why the change?  After 2 weeks, the LO lets the borrower know that the loan is repriced due to:

  • Cash Out Refinance = 0.75% Hit to Fee.  He has a second mortgage that is being paid off with the refinance that was not from when he purchased his home. Fannie/Freddie classify this (paying off a non-purchase money second) as a "cash out" refinance, even though he’s bringing cash to closing.
  • 627 Mid Credit Score with a 70% loan to value = 0.75% Hit to Fee.  This came to a surprise to the borrower who actually thought his scores were much higher.  With Fannie/Freddie’s credit score (risked based) pricing, this is another whammo to the borrower.

Cash out and the borrowers credit scores should have been known to the Loan Originator if not prior to locking the loan, then mere moments afterward.  The LO should have immediately notified their client of the differences between the information used to lock the mortgage and reality.

Loan to value can be tricky for a LO to know with certainty…especially these days.  We often have to rely on our clients to give us an honest estimate of what they feel their home is worth based on what other homes like theirs have sold for in their neighborhood.   Until we have the appraisal, we do not know how the home will be valued.    

I’m sharing this story because there are valuable lessons here for us to learn from.

Borrowers:

  1. If you’re serious about locking in a mortgage rate, complete a loan application for your Mortgage Professional and allow them to run your credit.
  2. Obtain a written Lock Confirmation within 48 hours of locking in your rate.
  3. If you smell something fishy…it’s probably shark.

Loan Originators:

  1. If you have bad news (lower credit score, repriced lock, low appraisal, etc.) deliver it right away.  Don’t wait…it’s not going to go away.  Let your client know in full detail what you’re having to deal with and what steps you’re going to take to remedy with.
  2. Whenever the terms or cost of the proposed mortgage change, contact your client and provide them with an updated Good Faith Estimate. 

Currently, this borrower feels the LO gambled his mortgage interest rate.  After reviewing the documentation I’ve been provided, I think it’s more likely that she was just really a really poor communicator.   Perhaps she was hoping rates would improve enough to absorb the significant 1.5% hit to fee…I can really only guess.

This is far more than a getting a "rate quote" and saying, "that sounds good, lock it".  When you’re locking in your interest rate, you are commiting to the Loan Originator and the Loan Originator is making a commitment to the lender that the loan will be funded.  Your lock is only as good as the information used when it was submitted to the lender. 

Filed Under: Mortgage, Predatory Lending, Refinance, Residential Purchase

I Love Checking Out ARMs: Reviewing An Existing Mortgage

April 15, 2008 by 1 Comment

Recently a friend approached me confessing to having one of those "awful adjustable mortgages"…she thinks she needs to refinance and take advantage of today’s lower rates.   Before assuming that someone "needs" to refinance, I like to review their current mortgage and what their financial goals are.  Sometimes, people do not need to refinance…they just need to understand their mortgage terms.

Current Mortgage:  P&I Payment $3,330 (original balance $520,000).

  • 7/1 Adjustable Rate Mortgage: Note Rate 6.625%
  • Caps: 2/2/5
  • Margin: 2.25
  • Index: 1 Year LIBOR (currently 2.637% as of this the date of this post).

There is approx. 65 months remaining with the fixed period rate of 6.625% before the mortgage adjusts.   When the mortgage adjusts, the new rate will be 2.25% plus the current 1 year LIBOR rate EXCEPT the rate will be no lower than 4.625% and no higher than 8.625% due to the 2% adjustment cap. 

Best case scenario at first adjustment date with current mortgage:

Rate: 4.625% with principal and interest payments for 12 months of $2,780.   Note: If the mortgage was adjusting today, the rate would be closer to the best case scenario at 4.875% (2.25% plus 2.637% = 4.887% rounded to the nearest 0.125%).  Alas…they have 65 more months before knowing what the going rate for the 1 Year LIBOR will be.

Worse case scenario at first adjustment date with current mortgage:

Rate:  8.625% with principal and interest payments for 12 months of $3,937.

Possible scenarios that I suggested:

Refinancing into a conforming-jumbo mortgage 30 year fixed at 6.375%.  This would provide a principal and interest payment of $3,232.   With closing costs at $2900, they will break even on this scenario in 30 months.  From 30 months (the break even point) to when the fixed period of the ARM is over, the savings based on the monthly payment would be $3430.

Restructuring the existing mortgage into two mortgages with a conforming first at $417,000 at 5.875% and second mortgage paying off the balance (they can opt for a fixed second or a HELOC).   With a principal and interest payments of $3,194 and closing costs of $3,200; it will take 24 months to break even on this scenario.   From 24 months to when the fixed period of the ARM is over, the savings based on the difference between the monthly payments would be $5,576. 

LiborcompThis chart, which I created utilizing The Mortgage Coach, is factoring in the 2.25% margin to the LIBOR rate back to January 1999.  You can see there is a significant range with the rate.   Home owners with ARMs based on the LIBOR rate from 2002 to 2004 were probably grinning from ear to ear (depending on what their margin was) when you see what their rate was compared to the 30 year fixed.  Timing is everything with an adjustable rate mortgage.

What ever the home owner decides to do is completely up to them.  Of course one of their options is to not refinance and wait to see what the new rate (LIBOR) will be in 65 months.   If they wound up with a "best case scenario" new payment, it would be pretty sweet however the cost of paying the higher payment for 65 month and we don’t know what the index will be at the date of adjustment.    Understanding your mortgage and knowing your available options just starts with contacting your local Mortgage Professional. 

By the way, if you are a Washington State  home owner who has not heard from your loan originator lately or if you would like me to adopt your mortgage, please contact me.   Many LO’s have left the industry or do not provide service once the loan has closed.  I’m happy to review your ARM (or fixed rate mortgage) without any obligation to refinance. 

Filed Under: Adjustable Rate Mortgage (ARM), Jumbo/Non-Conforming, Refinance

When an Appraisal Comes in Low for a Refi

April 13, 2008 by 1 Comment

Appraisals are being scrutinized more than ever with our current mortgage climate.  And I am seeing a few coming in lower than what the home owner anticipated.    If you have plenty of equity, a lower appraisal may not impact you.   However, mortgages are often priced based on loan to values and depending on the type of mortgage and property.  Different scenarios have different pricing based on "risk".  A higher loan to value over a certain price point can increase the cost of the loan.

For example, I recently had a refinance for an investment property where the home was appraised for slightly less than the home owner expected.  He estimated $200,000 for the value of the property and the appraiser (with supporting comparable sales a.k.a. comps) valued the property at $180,000.  The difference between 75.01-80% loan to value and 80.01% LTV is 0.5% to fee (that’s 0.5% of the loan amount or repricing the mortgage interest rate to absorb the 0.5% in fee).    

What are the options with this scenario?

  • The property owner could pay the additional 0.5% in fee ($900 based on the above scenario) to keep the same rate or have the rate bumped up to absorb the fee.   Plus they would pay private mortgage insurance since the LTV is over 80%.
  • The loan amount can be reduced back to 80% of the appraised value, keeping the current rate.  The property owner may have to bring cash in to closing if there is not enough equity to absorb the difference.
  • The loan may be re-priced to absorb closing costs and thus reduce cash needed for closing.

Many appraisals now require interior photos (including kitchen, main living area and bathroom).  Since the underwriter is reviewing the photos, you may want to make sure that your home and yard are tidy.  They are reviewing photos for clues of "pre-foreclosure" or fraud.  I recently even had an underwriter question why a room was vacant on an owner occupied refinance, the home owner had just finished a remodel and had not moved his furniture back when the appraiser was there for the photos.  His house appeared too clean!  Appraisers and underwriters are questioning everything and are being very cautious during these historic times.  What it boils down to is that nobody wants the lender pointing a finger back at them should the loan not perform (become a foreclosure). 

Filed Under: Appraisals, Refinance

Fannie Mae Clarifies Conforming Jumbo Guideline for Refi’s

April 7, 2008 by Leave a Comment

Great news!  I just received a memo from Fannie Mae clarifying that they will now allow purchase money second mortgages to be included in a conforming-jumbo refinance and to be treated as "limited cash out".   Previously, purchase money second mortgages (piggy back mortgages used for financing when you purchased your home) were going to be considered "cash out" and not allowed with the temporary conforming jumbos. 

In a nutshell, this means that if you have combined loan amounts up to $567,500 for King, Pierce or Snohomish counties, and the mortgages being paid off are from when you purchased your home, this is now a doable refinance utilizing a conforming jumbo mortgage (subject to credit scores, loan to value, documentation…etc.).   

A little easing will help many home owners who were hoping to consolidate their mortgages.

Filed Under: Jumbo/Non-Conforming, Refinance

Recently Listed Homes Cause Challenges for Refinancing

April 6, 2008 by Leave a Comment

UPDATE 5/2/17: Fannie Mae has changed guidelines for refinances of recently listed homes.

So you tried selling your home in this market and were not able to find a buyer.  Now, you want to take advantage of our current low mortgage rates and refinance to reduce your payments or perhaps take some equity out to improve your home now that you’re not moving anywhere.   Not so fast!  Most lenders will not refinance a recently listed property.   [Read more…]

Filed Under: Refinance

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.

Filed Under: Adjustable Rate Mortgage (ARM), Mortgage, Refinance

Not a Friend to this Family: Part 1

March 28, 2008 by Leave a Comment

When I helped Micheal and Pam with the financing of their home almost five years ago, it was a challenging transaction.  They were excellent borrowers, except for the particular type of Visa he had (they’re Canadian).   Long story short, we wound up doing a 5/1 ARM through Woo Whoo Bank as they were only planning on staying here for about 5 years.  About four months ago, Micheal met with me to review his Note and to see about refinancing.  They may be staying a few years longer if they have their choice…Michael is having a challenge extending his Visa.  Michael wanted to refinance and was concerned about his ARM adjusting.  With our current mortgage climate and his current situation with his Visa, I could not refinance him.   We reviewed how his ARM and discussed how it functions and at that time, I told him that he has time–he did not to refinance yet.  He was still feeling pressured to do something–letting his ARM adjust was not sinking in.  He went directly to Woo Whoo to investigate a refinance.  Michael forwarded me the first good faith estimate from Big Bank.  The rate seemed too high to me; especially compared to his current mortgage.   I again encouraged him to wait out a few more months to see what rates do and that by that time,he would have more information on the status of his Visa.  Fast forward to the present.

[Read more…]

Filed Under: Adjustable Rate Mortgage (ARM), Interest Rates, Rant, Refinance

New Conforming Loan Limit Won’t Help Refi’s w/2nds…FHA May Save the Day

March 13, 2008 by 2 Comments

Fannie Mae’s underwriting guidelines for the temporary conforming loan limits have been released and it looks like the new loan amounts are not going to be as helpful as many had hoped.   The new guidelines for loan amounts between $417,001 – $567,500 in King, Snohomish and Pierce Counties are far more strict.

The biggest whammy is that if you were hoping to combine your first and second mortgage (or heloc) into one new conforming-jumbo mortgage, you’re out of luck.  Fannie is not allowing any "cash out" refinances.  This means that even if you were just paying off the two mortgages and not receiving a nickle back at closing–it’s not going to fly. 

You must have a minimum of 660 credit scores for a fixed rate purchase for a LTV of 80% or less for a purchase using a fixed or adjustable rate.

Limited cash out refinances are allowed up to 75% loan to value with a minimum 660 credit score.  Limited cash-out means that you are allowed to roll in the closing costs to the refinance and receive no more than $2000 cash back at closing (no second mortgages/helocs can be included in the refinance).

Update:  it appears that Freddie Mac will allow cash out refinances up to a 75% loan to value with a 720 minimum credit score.

Adjustable rate mortgages are qualified at the fully amortized PITI at the higher of the note rate or fully indexed rate (worse case rate). 

Be prepared for a "full doc" mortgage.  There is no "stated income" allowed.   You will also need two months of reserves (PITI) and are limited to a 45% DTI (debt to income) ratio.

You can only have four financed properties, including your principal residence.

On Monday, I believe lenders will finally unveil pricing…which again is said to not be as exciting as consumers had hoped.  I’m hearing that the rates will fall between current Jumbo and conforming.   

Rumor has it that the FHA-jumbo will be more friendly to "jumbo" homeowners…if they can get over paying the upfront MIP (1.5% of your loan amount) and monthly mortgage insurance (0.5% of your loan amount/12 months).   For example, on a $500,000 loan amount, the upfront MIP would be $7500 (typically financed into the loan) plus monthly mortgage insurance in the amount of $208.33…even if you have an 80% loan to value.  We’ll just have to wait and see a couple more days.

Remember, these loan limits only last through December 31, 2008.

More to follow. 

Filed Under: Home Equity Loans & Second Mortgages, Jumbo/Non-Conforming, Refinance, Residential Purchase
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