Archive for September, 2010

Back to Fundamentals: Key Components of Full Mortgage Approval

Thursday, September 30th, 2010

I generally go through this with every buyer I meet just to make sure that folks understand the big picture. In every lending situation, we need to talk about four things – Income, Cash, Credit, and Property.

Income must be stable and sufficient for the proposed payment on the home. By stable we mean that it is likely to continue. Two years is a comfortable amount of time for underwriters to look back and see that a person has the ability to earn income. The borrower may have changed jobs so long as the income is steady and the new employment is as stable as before and consistent with what the borrower did before. If the income is a guaranteed or settlement payment, like child support or disability income, then it must be proven that the income will continue for at least three more years.

Cash is next. Not every program requires a borrower to make a down payment – but most do. We will go into the program specifics as it pertains to down payment in the next post. For now, I just want to go through the main headings that require cash from a home buyer. These are: earnest money deposit, down payment, closing costs, prepaid items, inspections, and repairs. The earnest money deposit is simply a prepayment toward the other and is not a separate fee. Inspections and repairs are not always required – theses are negotiable or paid at the decision of the buyer. Closing costs and prepaid items (up to a maximum percentage allowed based on the loan program [3 – 6%]) are able to be negotiated into the sale price and paid by the seller.

Credit history and credit score is next. Some say that this is the most important. I think a better way to put it is that credit is the most influential. Borrowers with a lot of income and a lot of cash but have a low credit score will not like the options available to them. Dave Ramsey always makes the joke that he could walk into an apartment rental office today and be declined to rent an apartment for $600 per month, yet if he wanted to he could write a seven million dollar check and buy the entire complex – doesn’t matter, the credit score is important. A 620 score will get you into an FHA, VA, or Rural Development Loan. You need 680 or above to go conventional. If you are over 720, then you will get the for putting less money down. Over 740 and you may even see some slight benefits beyond the average.

Lastly we look at the property. We deal with the above first so that we can confidently send a buyer out to look for a home, but when all of that is dealt with, the house is next. Essentially the home has to be in good condition and worth what you are paying for it. We rely on the appraiser for both of these issues. These days, some homes are being sold for more than any homes around them. That makes it difficult to appraise because no comparable homes have sold for the same price. Many other homes are being sold at a discount, but are in rough condition causing appraisers to require some repairs. FHA, VA, and RD will generally be more intense about the home’s condition. While a conventional loan appraiser is looking to see if the home passes basic livability standards.

There are MANY details that I will uncover in the posts that will follow, but this is a good overview.

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The Mortgage Process? – Some Things May Just Be A Crap Shoot

Thursday, September 30th, 2010

A scenario came up recently that has been reoccurring since the inception of the new appraisal guidelines (). Even though I have experienced this situation many times over, it’s still an uneasy feeling as a loan originator to address. What do I do? I handle it as any surviving loan officer would and tackle the situation head on, explaining both good and bad.

Allow me to address the value part of the loan process:

The background -

I had a past client who happens to be a personal friend call me up last week interested in refinancing. I updated his application, ran his credit and everything looked great so far. Then I addressed the value of his home, which appraised for 380K in 2007. I did my due diligence as a loan officer, checked home values on and other online engines and finally ordered a range of value from my appraisal management group. The range of values were huge. A recent foreclosure at 200K up to a similar comp at 450K.

My client lives in a water privileged community that is made up of small bungalows, huge houses and a whole lot of everything in between. In a great housing market this property is difficult to appraise as water view, water front and water privileged. All must be taken into account along with attempting to find a similar sized home that was a recent sale. I structure the deal to be an 80% rate/term conventional refinance. The value needs to come in at 325K to meet the 80% loan to value threshold. Understanding the Washington/Baltimore real estate market I believe the 325K number should be spot on. My client is certain that should be no problem.

The prognosis -

I have such a great loan for my client. I will be lowering their interest rate significantly and even more importantly saving them almost $300 per month. I continue to remind my client that there are three key parts to a loan: Credit, Income and Value. If the house does not appraise for 325K we are going to have a value problem. Not only will the payment and rate increase but with a high and the LTV now over 80% there is a strong possibility the loan gets denied.

The dilemma -

The cost of the appraisal is $375. Yes – acting as the loan officer I can guarantee the bill will be paid and roll it into the closing costs of the loan or even elect to issue a lender credit and pay for it myself. BUT – What If the and the deal sours? Do you think my client will offer up to pay for the appraisal then?

I handle as most loan officers would and get my client’s credit card and pay for the appraisal upfront. After all, that is how we are supposed to conduct business these days. In addition, my client is certain the house will appraise.

The point of this story -

Your takeaway?…When a loan officer proposes a deal these days it’s based on their best beliefs in the value of the property. This value is not determined until an appraisal has been completed. Someone has to pay for the appraisal. Deal with an experienced mortgage banker that will clearly explain when applying for a loan and remember, in today’s real estate landscape some things may just be a crap shoot.

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