How Returning an Overdue Library Book Declined a Mortgage Loan

July 10, 2007 by 5 Comments

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.
Filed Under: Credit Scores and Reporting, First Time Home Buyer, Mortgage, Residential Purchase Tagged With: ,

When will I know how much money I’ll need for closing?

July 2, 2007 by Leave a Comment

This is a common question from home buyers.  The Good Faith Estimate, when done properly is a good indicator of what money is due at closing, however it typically just includes the fees associated with the mortgage.   If there are other fees included with your transaction, such as an inspection or condo fees, they may not be reflected on the GFE.   The escrow company prepares an Estimated HUD-1 Settlement Statement that you review at closing.   

The HUD-1 Settlement Statement is essentially a balance sheet the Escrow Company prepares between both buyer and seller.  They gather all the fees and credits between all parties (buyers, sellers, agents, mortgage, etc.) and creates the amount due from the buyer and amount to be credited towards the seller.

The lender fees on the Good Faith Estimate should ideally correlate with the Estimated HUD-1.   For example, the fees shown on the GFE on line 801 (Origination) should be the same as line 801 on your Estimated HUD-1.   If there is a significant difference from your last GFE to the HUD-1, you should contact your Loan Originator to discuss it.

When does the buyer receive this document containing so much information?  Typically what happens is the escrow company waits until they receive the loan documents and escrow instructions from the mortgage company.   Escrow Officers often times won’t even make an appointment for signing until they have this information (loan docs) from the lender (they’ve been burned too many times setting up tentative appointments).   Sometimes, they will make exceptions if they know and trust the mortgage company.   So unfortunately, it’s usually close to signing when this document is prepared.   In most cases, someone from the escrow company will call you to schedule your appointment and will casually add, "you will need to bring a cashiers check in the amount of $$$". 

Did you know you can request a copy of the Estimated HUD-1 Settlement Statement prior to your signing appointment?   This is not standard practice, although it is totally acceptable.   Your lender needs to be on the ball enough to have provided escrow enough time to do this for you.  And you need to request it from the escrow company. 

I like to review the estimated HUD-1 before my clients ever see it (unless I’m unaware an appointment has been made…which can happen when it’s an escrow company we don’t normally work with).   Let’s face it, there can be errors made on the Estimated HUD-1 Settlement Statement…that’s why it’s called an estimate! 

After closing, you will receive a Final HUD-1 Settlement Statement which has, much as sounds, the final figures relating to your transaction prorated down to the day of closing.   You will want to hang on to this document for when you file your income taxes the following year.

Filed Under: Escrow and closing, Residential Purchase

My Community is now more expensive

June 28, 2007 by 2 Comments

Earlier this month, Fannie Mae changed the pricing on their My Community program across the board to all lenders by 1% increase to fee.    If you’re using a My Community program and you’re transaction is not yet closed, you may want to check with your Loan Originator to make sure your lock is still valid.

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Filed Under: Adjustable Rate Mortgage (ARM), Mortgage, Residential Purchase

Buying a house when you have a lot of debt

June 27, 2007 by Leave a Comment

A reader who recently moved to Seattle contacted with a question that I think many will relate to.   He contacted me offering his story:

"One idea you may be interested in writing about are house buying options when you have good credit and income – but a lot of credit card debt. We’re paying off the credit card debt slowly — very slowly, and seeing housing prices rise 15% or more annually. It’s frustrating because as time goes by — the dream house only gets further out of reach. We will be able to buy a nice house — but not the dream house we could if not saddled with the credit card debt. The credit card debt also isn’t tax deductible!"

I work with many families who have visions of their "dream home" while they’re trying to manage monthly debts.   And as if buying a home wasn’t stressful enough on it’s own, many home buyers seem to feel panicked over our local appreciation with home prices.   It’s a definite balancing act of buying as much home you can afford without "betting the ranch".   If you’re over burdened with credit cards AND you take on a hefty new mortgage payment, you could be setting yourself up for financial (and emotional) disaster.   

I do not encourage using a mortgage such as an Option ARM for sole purposes of stretching into your dream home.   If you make the minimum payments (which most will opt for) the deferred interest will reach it’s cap and you will be faced with a much higher mortgage payment.  If you cannot afford the mortgage payment using a fixed period ARM or fixed rate product, you probably cannot afford the home.   

It’s very possible that home buyers may need to redefine what their dream home is.  Buying a home that needs a little TLC or is a little further out from the city may afford you more comfort when it comes to your monthly cash flow.   Plus, you may receive a better return on this type of property should you decide to sell it in 5 or so years, using the net proceeds (profit) to purchase your "dream home". 

Modo3530For example, this 1800 sq. ft. completely remodeled rambler (now subject to inspection) was recently listed in Kent for $349,950.   It’s on a corner lot, in a popular neighborhood with four bedrooms and 1.75 bathrooms.   I’m not a Real Estate Agent, but I would bet that similar homes in Seattle would sell for closer to $500,000.   Having the lower payment and more funds in the bank from a reduced down payment can translate into a higher quality of life.   I know…I know…you do have to factor in commute times with our traffic.   But once you’re home, you are HOME.

I will go into more details about this families information in future posts.   They were gracious to share their information with me and their story is certainly not unique.

Filed Under: Debt Restructuring, Financial Planning, Residential Purchase

When an appraisal comes in low

June 20, 2007 by 5 Comments

Luckily this hasn’t happened often to me…last week we closed a transaction where the appraised value came in lower than the agreed sales price on the purchase and sale agreement.   Ugh!

The property is a nice home in south King County that was originally listed for $275,000. Shortly after going on the market, a bidding war commences and my client “wins” the home after it is bid up to $300,000 which includes building in $6,000 of closing costs to be paid from the seller.  My client is putting zero down into the transaction (100% loan to value).

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Filed Under: Appraisals, Real Estate Agents, Residential Purchase Tagged With: , ,

Buying a home contingent

June 11, 2007 by 2 Comments

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I’m noticing more contingent offers lately.  This is when someone makes an offer to purchase their next home and the offer is contingent on the successful closing of their current residence.   Contingent transactions may occur for several reasons:

  • The net proceeds (equity) of the former house may be needed for the down payment on the new home.
  • The buyer may not qualify (or want) to risk having two mortgage payments while waiting for the former house to sell and close.
  • The equity in the former house may not be enough to facilitate a bridge loan.

In fact, I just had an excellent question from one of my clients that is worthy of sharing with you:

“Since our purchase is contingent on sale of existing property, when does the loan actually close and what are our liabilities in the event our home fails to sell?  The only other time I bought a house there wasn’t the issue of selling one so it never came up for me.”

With this scenario, without a bridge loan to tap into the equity of the former home, the loan on the new home will not be able to close until the old home is closed. This is because the proceeds of the old home are needed for the down payment on the new home.   This typically takes place the same day, however, I recommend having the closing take place the day after the day after the old home closes, if possible, to allow for transfer of funds.   This is referred to as a simultaneous closing.   

A bridge loan allows you to close on your new home quicker, without waiting for the old property to sell and close.   Knowing your closing date, also enables you to secure your interest rate by being able to lock your loan.   A home equity loan on the current residence is also a possibility.   However, the advantage with the bridge loan is that there are no monthly payments due (interest is deferred until the home is sold).

Check with your Real Estate Agent to see what your liabilities may be if your home does not sell.   There should be an addendum to the purchase and sale agreement addressing what happens if your home does not sell.    The purchase and sale agreement may also address when the closing date will be on your new home (for example, “x” days after the closing of your old home) and what happens if someone else makes an offer on the home you’re buying “non-contingent” (without having to sell their home to close on the new home)…also referred to as being “bumped”.

People buy homes contingent all the time.   It’s important to have an understanding of the process, what your options are and to have a game plan in the event of a “bump” so you can be ready with your ducks in a row!

UPDATE 2012: We currently do not have bridge loans available as of 4/20/2012.  

If you would like me to review your current scenario to help you be preapproved for your home purchase anywhere in Washington state, please contact me.

Filed Under: Mortgage, Residential Purchase Tagged With: ,

Down Payments…Why less may be more

June 6, 2007 by 2 Comments

It pays to have a plan when you’re determining how much down payment you should use when you’re buying a home.   Often times, when families have sold a home and they have benefited from our local appreciation, they may have a significant amount of funds available (proceeds).   A typical reaction is to invest all of the funds from the house they’ve sold into their new home.   What’s wrong with this?  Nothing really…except if you want or need the cash back out, there’s now a cost and process to extract it (refinance or equity loan).

And consider this…your home equity does not earn any interest.  Zero.  Instead, you could invest the funds that have gone towards your home equity into an interest bearing vehicle advised to you from your qualified financial planner.   

The more money you use for down payment, the more you’re reducing your tax deduction benefit of the acquisition mortgage as you are reducing your mortgage amount.  Your tax deduction on your mortgage is based on when you purchased your home, and obtained your "acquisition mortgage" to finance the purchase.   As you pay the mortgage down, this amount is reduced.   When you refinance, the balance just prior to the refinance is treated as the "acquisition debt" that is allowed to be deduct the interest from.   You are also currently allowed an additional $100,000 in home equity mortgage interest deductions.   You may want to consider having a larger mortgage balance when you purchase to establish a larger tax benefit.

Example, when you purchased your home 10 years ago, your mortgage was $180,000.   You’ve been making on time payments and the balance is now $150,000.  You refinance and have a new mortgage balance of $300,000.   The amount of interest you can deduct is based on a mortgage amount of $250,000 ($150,000 plus the $100,000 home equity allowance).  There may be other compensating factors and I am not a CPA, tax or financial planner.  Always consult with your trusted financial advisers.

Do you have debts (with no tax deduction benefit) that can be eliminated with proceeds?   Often times, the monthly money you free from eliminating a debt (such as credit or car payments) that once went to a payment is more than what the increase in the mortgage payment would be from trading the debt to a mortgage.

Example, if you have a car loan with a balance of $11,000 and a payment of $350, increasing your mortgage amount by $11,000 would provide an increase in your payment $67.73 per month (based on a 30 year fixed payment with a rate of 6.25%).   This frees up $282.27 a month, plus the interest on the mortgage is tax deductible, the auto loan is not.

Is your retirement or the kid’s college tuition funded?   How about the vacation home or investment property you’ve been contemplating?   Will you need some extra dough to make improvements to your new home?

My only point is for you to consider a strategy for your down payment before you automatically roll 100% of it over to your next home.   Plan up front so you don’t need me for a refinance too soon in the future…wait!!  I take it back. 

Filed Under: Mortgage, Residential Purchase

Funds for closing when you’re buying a home

May 23, 2007 by 1 Comment

Mpj030576000001Whenever you are buying a home utilizing a mortgage, your lender is going to need to know where your funds that will be used for the down payment and closing costs are coming from.   And in most cases, they will want the funds to be “seasoned” (statements showing the funds have been in  your account for a two month minimum).

A lender wants assurance that the borrower has enough funds for closing and ideally, enough savings when all is said and done after closing, to have a cushion (2-6 months of your proposed mortgage payment aka “reserves”).  Typically a lender is looking for 2 months of asset account statements.   If large deposits are shown on the statements, the lender (or underwriter) may will require to have the large deposits explained and possibly documented.    Many people have their paychecks go into their bank account and, like the tide, out goes the money.  What ever is shown as ending balance is what the lender will use for your loan application and approval purposes.

Depending on the mortgage program you’re utilizing for your financing, different types of funds for closing may or may not be acceptable.   Here is an example of some traditional funds allowable for closing:

  • Checking and savings accounts
  • 401(k)s and other retirement accounts
  • Stocks, Bonds, Mutual Funds, etc.
  • Income Tax Refund
  • Seller closing cost credit (varies depending on program and loan to value)
  • Gifts from family (depending on loan program)
  • Proceeds from the sale of property (real estate or other)
  • Inheritance
  • Sale of personal property

Cash on hand (also referred to as “mattress money”) is a no-no.   If you’re planning on buying a home in the next 3-6 months, you’ll want to get your dough into a bank account where a “paper trail” can be established of your funds.

With today’s automated underwriting and all of the available mortgage programs, more or less documentation may be required from the lender.   The above list is only a sample.  The requirements for your personal financing may be different.    It’s important that regardless of what funds you’re planning on using for your down payment and closing costs, that you discuss it with your Mortgage Professional.

If you are considering buying a home located anywhere in the State of Washington, I’m happy to help you with your mortgage needs, including reviewing your down payment options.

Related Post:  Qualifying for a mortgage: Funds for Closing

EDITORS NOTE:  This post was last updated on April 11, 2011.  

Filed Under: Residential Purchase, Underwriting and Qualifying Tagged With: , ,
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