Nevada Real Estate >> Las Vegas Real Estate Specialist: New Jersey: Cherry Hill

Mortgage 101 in New Jersey – Getting to know the borrower’s wants and needs

In today’s delicate world of mortgages in New Jersey and any where else, getting a mortgage not only takes understanding, but patience. I am still finding many loan officers trying to fit that round peg into that square hole. Let me explain….

I currently have a client whose realtor got him to talk to her loan officer. This loan officer has my borrower pre-qualifed for about $35,000 more than I do. How can there be such a difference?

Before I get into the differences, let’s try and establish a pattern of questions that should be talked about, when a loan officer interviews a borrower.

• What mortgage payment in New Jersey would you feel comfortable with, to include your property taxes and homeowners insurance. Please give me an honest and realistic amount that you would not want to exceed.
• Secondly, what areas would you prefer to live in. This is very important, because it comes down to the different property tax amounts. Depending on why you would want to live in that town or neighborhood, would help determine your monthly mortgage payment because of the property taxes.
• My next question would be the type of property that you would want to purchase. Whether it would be a single family dwelling, a townhouse, a condo, etc. This helps me determine your payment as well, because there could be association dues or PUD fees based on the type of property and location.

In my opinion, I consider these 3 questions to be the most important that should be asked in the beginning, besides their name, credit scores, credit history, and income information. I actually get to those sets of questions next.

So, with that addressed now, let’s get back to my story.

My borrower wants to live in one of two places, because one of his main focuses is to be in a good school system. Keep in mind, they have 1 child at 8, another at 1, and one on the way. How do I know all of this? I got to know my borrower.

Now, the areas that they are interested in, the property taxes run about $6,000 a year on $180,000 properties. This other loan officer has them pre-qualified at $200,000, but using property taxes of $5,200. To be realistic, if buying a $200,000 home, the property taxes average around $7,000 a year. As you can see, this could become a huge issue for the borrower when shopping for a home in their respective areas, to later find out that they don’t qualify based on higher taxes. But it gets better.

In my very first question, I asked what mortgage payment that he would feel comfortable with. If I used the $200,000 property, even at the unrealistic property taxes of $5,200, he would be about $117 over his comfort zone regarding the mortgage payment. With the correct property taxes, not only does he not qualify for a mortgage, but his monthly nut would now be about $267 more than what he would be comfortable with.

Conclusion : In my 18+ years in the mortgage business, even after the government tightening down on loan officers with their licensing requirements since the beginning of 2011, I keep seeing these basics get over-looked more than they should.  It shouldn’t be about who can pass a test, even though the test itself is only about 30% mortgages directly. But about asking the proper questions and preparing the borrower.

I have a borrower right now who has a 617 credit score and that their current loan officer is telling them that they need a 620. Once they get that 620, they can close. Settlement was suppose to be June 30th and he keeps saying it will be soon. yet when I reviewed their current credit, it doesn’t mean the credit guidelines. I wrote about this example that happens more than it should. Please read - Your credit score is more than just a number -

Hey, it’s a dog-eat-dog world out there. I know it’s easy to trust someone when they say such words as : “trust me”, “no problem”, I promise”, “I guarantee”, etc.  Who do you trust?  Get to know your loan officer, listen to how they talk, and how confident they sound. Not just the sales words that one might use. I call these words The Red Flags of mortgages.   If you listen close enough, you can sometimes hear someone contradict themselves. Just food for thought.

Shopping for Mortgages & Shopping for Interest Rates Smartly

You now want to buy a home and need a mortgage. You would think it would be easy to call around to mortgage companies and ask, “What is today’s interest rate”. Sounds simple, right?  Au contraire mon frere…. On the contrary.

There are a few misconceptions that many have when shopping for interest rates.

• That all lenders have one basic rate to offer

• That big lenders or big banks have better rates than smaller lenders and can give discounts

• That referrals will get you a better interest rate

All lenders have many different types of interest rates, which is dependent on many different factors. The end result, all rates should be relatively close, as long as you aren’t being deceived or that your rate will be baited and switched. Why should interest rates be the same or very close? Because we all get the rates from basically the same place, which are dictated by investors on Wall Street.

Larger Banks/lenders vs smaller lenders – I just heard from a potential client shopping for a mortgage that her realtor told her that BofA can give her discounts on the rates. First off, this coming from a realtor that is speculating. This is a blanket statement, because again, way too many factors involved when determining interest rates.  Food for thought… Just because a bank or lender might be servicing your loan from the get go, doesn’t mean that is how they can offer lower rates. In reality, even that bank or lender that is servicing your loan, has sold bits and pieces of it to other investors. Big Bank A might own 70 percent of your loan, even though they are servicing it, yet two other investors might own the rest of the loan. Hence why some foreclosures were becoming difficult at times, trying to determine who owned how much of the primary mortgage.

When it comes to getting a referral from a friend, co-worker, realtor, etc; one just can’t assume that all will go well and that you will get the best deal.  I have three new stories just from the last several weeks that would make you cringe. Story A – My sister referred me to a friend of hers after hearing of her most recent mortgage story. Back in December, this couple tried refinancing and was promised an interest rate of 4.5 percent. After about 2 months, they finally found out that this loan officer never locked in their interest rate. And this was a referral from a friend. Just recently, they got another referral from someone at their church. I happened to get the call 3 days later and after reviewing the different cost sheets, I was about $5,500 more in total costs. But wait, the other loan officer was very misleading in what they estimated. This person didn’t calculate their 30 days of interest in the pay off, was $100 lower per month on the property taxes, only escrowed 3 months worth of taxes when I estimated 5 months, and two other items. All of these items aren’t lender related, but 3rd party estimates. After it was all said and done, I was about $48 off. Yet this person had an interest rate that was 1/8 percent lower in me. And guess what, there was one important question that wasn’t asked by the other loan officer, in which carried a pricing penalty from any lender/bank for this particular loan.

Many different factors involved when shopping for a mortgage or shopping for an interest rate

Goals – What are your goals, for the next 3, 5, 7, and 10 years. This could help a good loan officer determine if you should pay points or not, or what mortgage program to put you into.

Credit scores- Your credit scores are a huge factor when it comes to determining your interest rate and or the penalties because of your credit scores, aka fico scores. – Understanding credit scores – Read the series at the bottom

Interest Rate Lock-In Period- Such an important detail that is usually not mentioned to borrowers when shopping for that all almighty interest rate. How long is my interest rate good for and when can I lock it in should be talked about. I once lost a deal to another loan officer who was beating me out by 1/8% and $500, but found out that he couldn’t lock his rate in until the appraisal came back. This could be a difference of 3 to 7 days, and interest rates could get worse. Besides, the loan officer in a few days could just raise the rate an 1/8% and say that rates got worse, but did they? Key Point – You need to shop on the same day, because rates change daily, sometimes twice in one day.

Loan Amount – Believe it or not, the size of the loan amount will have some impact on your interest rate. All lenders have a basic profit margin that needs to be met on each loan. The lower the loan amount, the more points it may require or a higher rate that pays more premium back to the lender.

Size of down payment – This holds more true for conventional loans, because Fannie Mae and Freddie Mac have pricing hits depending on how much you put down and what your credit scores are. Please read : Conventional pricing hits

Conclusion – One size does not fit all. It might seem simple, like when buying a new television, as long as you know the model that you want. Then all you have to do is pick the 3 nearest stores and see who has the lowest price. As you can see, when shopping for an interest rate, there is a lot more involved. Something that I have witnessed 3 times in the last 2 weeks are borrowers that weren’t locked into their rate and then rates changed on them. The moral to this story is that any loan officer can bait you with a little better rate at first, if they aren’t going to lock you in at time of shopping or mortgage application. 

Lastly, just because one has advertised a low rate, doesn’t mean it’s true. All of the factors that I mentioned above need to be found out before offering any such rate.

On another note, I have included some very important articles below that should help you better understand the mortgage shopping process.

For more info regarding shopping for interest rates and shopping for mortgages, please read :

• I want the same interest rate my friend got

• Locking in interest rates – Knowing the facts

• Low interest rates published on the internet

• All Mortgages should cost the same – by : Ken Cook

• Finding the best interest rate

• Mortgage Advertising can be very deceptive

• The myths about Zero point mortgages vs paying points

• Shopping for mortgages

Mortgage Market Report - Interest Rates hit historic low for 2011

As of yesterday, mortgage interest rates were hitting historic lows for 2011. Today was the key focal point if rates were to continue to go lower based on non-farm payrolls and on unemployment.  As of this morning, the news is reporting that non-farm payrolls only increased by 54,000 in May, significantly less than 150,000 increase that the economists had been expecting. Regarding the private sector, private employers only added 83,000, instead of the 180,000 that was anticipated. And unemployment rose from 9.0% to 9.1% the month prior.

Depending on your credit scores, the type of mortgage, your down payment, and your loan amount, interest rates yesterday were from 4.375% to 4.875%. As of right now, the FNMA 30 year 4.0% coupon is up 41 bps at $101.22 and the US 10 y T-note is up 59 bps at $101.38.

Summary : What does this all mean for today?  That interest rates should be getting even better today. Another reason for the MBS’s and bonds getting better is because it looks more attractive for those countries overseas such as China, who look for good investments.

For those of us that keep track of this information, I had been advising clients to wait until today’s news, even though rates were the best that we had seen for 2011.  I will be locking in several borrowers today that will be closing in the next 10 to 30 days. Yes, there are a few indicators that could even drop rates a little more for next week. But in my experience, no matter how one might tend to read the markets and those indicators, just a small hiccup could reverse all of these gains. And what goes down, will go up, but ‘when‘ is the question. Some so-called experts will tell you to float cautiously, but with interest rates literally dropping about 3/8 of a percent just in the last two weeks, it’s my opinion that it would be a huge gamble to lose these excellent gains.

For more news like this, you can always go to the www.fhaloansfhamortgages.com 

Understanding Mortgage Insurance and the different types

The keys to home ownership can be tricky and confusing, unless handled by a true professional loan officer. You’ll sometimes hear loan officers and or realtors talk about one mortgage program over the other, telling you how great it is or that the monthly mortgage insurance is less than the other program. But wait, one main ingredient is still missing in this whole equation. What are the credit scores, aka fico scores. Why is this important?

When comparing a conventional loan to any other type of mortgage loan, many of the MI companies (mortgage insurance) will have certain restrictions when it comes to credit scores, the percentage of the down payment, and area restrictions.

Let’s quickly look at the four major types of mortgages.

Conventional Loans – If you have less than 20 percent down, you are required to have some sort of mortgage insurance. The standard mortgage insurance is called monthly mortgage insurance. There are such programs called LPMI (Lender Paid Mortgage Insurance) and BPMI (Borrower Paid Mortgage Insurance). ps.. Mortgage Insurance doesn't always fall off when you hit 78% LTV (loan-to-value). Specific guidelines must be met still.

FHA loans – You have upfront mortgage insurance and monthly mortgage insurance. No matter if you have 20 percent or more down, you are still required to have monthly mortgage insurance. Depending on your credit scores, even with 20 percent down, a FHA loan still might be your better option. FHA raised it’s mortgage insurance as of April 18th,2011. New FHA mortgage insurance   – Reminder – If you do put 20 percent down, the mortgage insurance falls off in 5 years.

USDA Loans – As it stands, there is no monthly mortgage insurance. But this will change come October 1st, 2011. New USDA monthly mortgage insurance.

VA Loans – There is no monthly mortgage insurance.

Summary of mortgage programs : Three of the major types of mortgages mentioned above, FHA loans, USDA loans, and VA loans, all have some sort of upfront mortgage insurance. Each one has a different name for it.

Here is a comment that I just heard the other day.

“The FHA Premium Rate Increase Makes conventional MI a Better Option for Many Borrowers.”

To me, this is a blanket statement, and a huge reason why so many people get put into the wrong types of mortgages. Sometimes the basic reason was because it was just easier for the loan officer and not what was better for the borrower. Mortgage Insurance guidelines change, but as of right now, you typically need a 680 credit score of better when putting 5 percent down. Many MI companies want a 700 credit score. When you hear about these special MI programs such as BPMI, you need a 700 or 720 credit score.

 

Summary :

When it comes to conventional mortgage insurance, not only do you need specific credit scores that have to be higher, but the loan gets underwritten again by the MI company. When it comes to FHA loans, it’s a one time thing. Again, you need a professional loan officer that understands these differences and who will dissect the different types. It might seem easy to some, but if not done correctly, it can be a long and confusing process.

The bottom line, just be careful of what you hear out on the street. Blanket statements could be expensive.

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~ Credit Score Series ~

• Do I need 20% down and or 700 credit scores?

• Understanding your credit and your credit scores

• Your Credit Score is more than just a number

Do you feel that today's mortgage gudelines are hurting realtors from selling more homes?

Do you think it could be the buyer not being in a good position?

People, I get the fact that lending guidelines have become more strict over the last 12 months. I think I have seen it all in the 18 + years that I have been in the mortgage business. But in my honest opinion, I think the biggest hurdle has been the credit score requirements. But is it a challenge that can be over come in a short time period? Read more for my answer/opinion on this topic.

What prompted me to write about this was this article by Christine Ricciardi - Real Estate agents want subprime alternative for too-strict underwriting - Here are a few statements from the article.

I wish I could have interviewed all of these real estate agents. My question would be, "How are these down payment requirements too stringent?"  "Could you please give me examples."

Let's review some facts. You can still get a FHA loan with 3.5 percent down. You also have USDA loans and VA loans which allow for for 100% financing. Sure, there are restrictions for these two types, but it is available. In regards to conventional loans, you can still do 97 percent financing, but the credit score requirements are extremely higher, which is why FHA would work out for more if it was a down payment issue.

Don't get me wrong, I am not one of these "must have skin in the game" type of advocates. FHA loans have been around since 1934 and for the most part, the down payment requirements were 2.25 percent down. So it's up to 3.5 percent now. Yes, depending on the purchase price, that could be another $1,500 to $4,500. But we aren't talking about $10,000 to $20,000 more. People need to stop writing that now is a great time to buy. And buyers need to stop thinking that this is the best time. It's always a great time to buy, when you are in a good position to buy.  Read : When is it a good time to buy a house?

Ouch... I could write a whole book on this statement. "needing a High quality subprime mortgage program" Let's revisit history. In the late 90's, the government forced Fannie Mae and Freddie Mac to make housing more affordable. This is when they came out with 100 percent financing and better yet, when they allowed these same buyers to have back-end ratios of 55 percent. My common sense says that you are just looking for trouble with this equation. We are talking about 55 percent before taxes being taken out. The borrower's gross income. Then the subprime market grew leading into 2000 to 2005, to where these investors would allow 50 to 55 percent one-time ratios, which would be a part of your front-end.

Quick education. Your front-end ratio is your principal & interest, plus taxes and homeowners insurance divided by your gross monthly income. Your back end ratio is the same formula, but adding on all monthly reoccurring debt, such as car payments, credit cards, bank loans, student loans, etc, etc.

The end result was that many investors got greedy and loosened the subprime guidelines. I knew loan officers that would put a decent borrower into a subprime loan because it was easier and quicker than getting them a FHA loan. Yet the FHA loan would have been much cheaper.

My problem with this statement? People making blanket statements, but not offering up solutions. Give me a few good examples of what the "subprime mortgage" should allow.  I hated when people were calling FHA loans the new subprime after the demise of the subprime industry. But from what I know after 18 years, you really can't get much better than an FHA loan that still has decent guidelines than what a subprime mortgage would allow with less down. What could be the main argument? Credit scores....

The BAD Credit score argument

I don't want to point the finger at just realtors, because I think many loan officers are just to blame when it comes to credit scores. In my opinion, it's called, "setting your clients expectations to a certain level". We all want to help now. But many mislead or make it sound easy because they might have a 600 credit score program, but don't fully understand it. In my opinion, people should not be waking up one day and say, "I want to buy a house tomorrow". It should take some careful planning and consideration. In reality, people shouldn't be buying a home if their credit and finances are screwed up, especially in the last 12 months. Yes, I understand that things can happen unexpectedly.

Let's take a look at the credit scores. Many lenders want 640 or higher. Some of us can still do down to 620 or even 600. I get that there are some people with 590 credit scores who have decent credit, that would be in the category of 'less than perfect credit', but that they are still a good risk. I just closed on a VA loan in which the borrower had 592 credit scores in December of 2010. When they went to closing, I had their credit scores up to 638. I have another borrower who had a mid score of 598 in January of this year and as of now, their mid score is a 645.

Conclusion : I am hearing many complain that it's nearly impossible to sell homes because the mortgage guideliness are way too strict.  Yes, you have issues when it comes to conventional loans that will only allow for a 45 percent back-end ratio if the credit score is a 720 or above. Or a back-end ratio of 41 percent for those with a credit score from 680 to 719. All of this is because of the MI companies, the mortgage insurance companies. And yes, you can do lender paid MI and such. But with a FHA loan, you don't have to worry about all of these differences. But given a few of my examples above, you can easily see that if a buyer speaks to a very qualified loan officer, they should be able to buy in 6 months. Sorry, but the mentality with so many realtors and buyers is that they must buy NOW.... and that is not the case. Waiting 3 to 6 months to get their stuff in order is not going to kill anyone. Besides, as I mentioned, buying a home should not be a split second thought, that you get up and do it now. As a buyer, if you know you don't have the best credit now, get with a true professional to help you get to that point. Articles such as the one I mentioned above, makes it sound like it's nearly impossible and because of it, it's hurting the economy. Yes, the economy needs the housing market. But there are way too many tracks that lead to the main station. One needs to truly understand the ins and outs of mortgages, and not just what they hear from each other, aka, water cooler chit chat. Just think about it...

UPDATE as of 5-14-11 2:15 pm - I just did some more reading and apparently some of us seem to be on the same page or have some of the same thoughts. The bottom line, many people want it now, and not to work for it. Two excellent reads below... please take the time to read these.

George Souto wrote : I want it now!!

Lenn Harley wrote : Mortgage loan denied!!!  What???  I have excellent credit!! What's going on?

There comes some responsibility and understanding of the mortgage process when buying a new home. Some think that just because you are approved for a mortgage in New Jersey, you can sit back and wait for the closing to happen now. There are many things a buyer must be careful of, even after they have been approved for a mortgage.  This isn’t always explained by the loan officer, hence why I wanted to give a list of items.

We hear so much talk about buyers being pre-qualified or pre-approved, but what about pre-qualifying the house that is being sold.

I was inspired to write this post after reading a post and its comments that was written by Valerie Osterhoudt. ~ FHA guidelines are making it hard to keep deals together ~ She talks about a home that she is trying to sell and just came across another change to FHA loans because the buyer was qualified with a FHA loan. The key point in this conversation was that "everything was going smoothly until ...."  Until the loan was being processed after the appraisal was done. Read the article that Valerie wrote in order to get more details. (ps - The issue mentioned in the article is also an issue for USDA loans - Just food for thought)

What I wanted to bring up is that some of these issues can be addressed prior to a buyer accepting an offer. Not everyone can remember every detail when it comes to what is allowed and not allowed, no matter what type of financing the buyer is obtaining. Let's take a look :

Why can this be such a great idea?

You could get a true expert that would know many of the lending guidelines when it comes to appraisals. If one would suggest an appraisal, I would make sure that appraiser is approved to do FHA appraisals also. And have this person view the home from all angles. Some of you might think about just hiring a home inspector. My advice would be to hire an appraiser.

The second idea would be to list the issues regarding the home being sold and not hide them from prospective buyers. Hey, I have heard many types of stories. My main point, if you know about it, make it known to everyone.

Lastly, get your loan officer involved with the issues. Have them run it by their underwriter. I would suggest all things that aren't ordinary within the surrounding area. Valerie's story is a perfect example, because it was well water. Another is that Erica Ramus just listed a property and asked me if this property would be okay for specific types of financing.

Wait, I know many will harp because it would be another cost to the seller when trying to sell their home. Maybe $375 to $500. How could a realtor explain this cost to the seller?

•    The listing agent can sell it as the cost of selling the home.

•    Split the cost with the seller when trying to win that listing or pay for yourself.

•    Have the buyer pay for the cost within the sales price.

Reminder : Throwing caution to the wind. Some of you will think or sell the idea that the appraisal could be used by the new buyer. I would not recommend this at all. To many new appraisal rules on how appraisal should be ordered and or the time period in which an appraisal is good.

Summary :   The ending result, how about being pro active. Market yourself aas the problem solver prior to unexpected problems, and not just keeping the fingers crossed. If you get resistance from the seller, use Valerie's story as an example.

Times have changed. Be ahead of those changes before you find out the hard way. It's easy to criticize after the fact, asking why certain loans are tougher on certain issues. This is another reason why FHA loans sometimes get a bad name. But a few things to keep in mind. As I mentioned, Valerie's issue is also an issue on USDA loans. And do you truly know what is the better loan for that buyer? That a conventional loan could be more expensive than a FHA loan, even with decent credit scores?

• Comparing FHA loans & conventional loans with 10% down - 699 credit score - FHA wins

• FHA loans vs USDA loans - A true comparision
  

FHA announced over a month ago that the monthly mortgage insurance  is changing on some FHA loans and it goes into effect on April 18th, 2011. I wanted to put this important reminder out there because what you can purchase and or what you can afford could change a little.

I talked about such changes regarding the mortgage insurance changes in this article over a month ago. - FHA to increase the FHA monthly mortgage insurance -   Why would this news be so important?

• Many think about refinancing to reduce their monthly mortgage payment, but haven’t pulled the trigger. This new change could make the difference of not refinancing now. It all comes down to your goals. For every $100,000 in money borrowed, your payment will change about $20 a month for the worse. That amount alone could be your make it or break it point.
• If buying in a particular neighborhood that you love, has a great school system, and so much more, but let’s say the price range for that particular area is $250,000 or higher.  With this new change, in order to keep the payment the same or depending on your qualifications, the new change would drop your purchasing price power by $9,000. What if the homes in that area just won’t sell for anything less than $250,000.
• What if you had a specific mortgage payment that you just didn’t want to go over and beyond. This is something that I preach upon when first speaking to a borrower about their financing options.  How much of a mortgage can I afford?I feel that the borrowers goals are very important when making this kind of financing decision. And most of all, that the borrower should have a mortgage payment in their mind that they feel comfortable with. What if you just didn’t want to go over your mortgage payment of $1,800. On a $250,000 mortgage, your payment would increase $50 more a month. I know there are some of us that say, hey, it’s just $50 more. But did you already push the $1,800 a payment the first time around when thinking about this?  Should it have been like $1,700. My point? Just be careful of living beyond your means.

Summary : These new change regarding FHA loans and the monthly mortgage insurance on FHA loans are coming up soon and I just wanted people to be aware. Just keep in mind that you must have a full application in place and then the lender assigns your loan a FHA case number. This has to be done prior to April 18th, 2011 before you are subject to the new FHA monthly mortgage insurance change. If you are sitting on the fence, deciding between two houses, you might want to think a little harder. Just don’t wait until the last minute.

Getting pre-approved over being pre-qualified, what does it all mean.

I have been doing mortgages for 18 + years and I have a very strong opinion on the difference between pre-qualification letters and pre-approval letters.

What do we keep hearing on the streets?  Pre-qualification letters aren't worth the paper they are written on. So, pre-approvals are written on gold bars then? The comments below is the reason why I wanted to give more insight to this argument.

Comments from realtors in past discussions :

"A pre qualification is of absolutely no use in my market. If it is not a pre-approval letter...you have NOTHING!"

"The loads of 'preapproval' letters flying around that aren't worth didley really irk me. A good loan officer doesn't run around flying around pre-approvals unless they've done the work."

Is there any real true definition that the mortgage bankers association or National Association of Realtors adheres to?  No, not really. It's all based on different definitions by different professionals. So I wanted to break it down using my knowledge and common sense. Keeping in mind that I have discussed this topic with a dozen or so mortgage loan originators who are very knowledgeable, who understand this business, and a few who have underwriting experience.  For the most part, they agree with my stance.

A loan officer will usually just ask a borrower the basic information. Such as :

• Social Security number to verify/check credit and credit scores

• Job related questions and income earned for the year
  

• Assets, trying to figure out how much they have to spend and how much they would have in reserves
  

The loan officer would then compute the qualifying ratios and if everything else looked good, would then give out a pre-qualification letter. When I do a pre-qualification, I go into more specific questions. ~ Jeff Belonger's mortgage questions ~ I go one step further and talk about your goals and budget. ~ Knowing how much of a mortgage you can afford ~

The pre-approval will go a step further. The items mentioned above would be collected by the loan officer and reviewed. The loan officer would then compute such figures and run the loan through DU or LP or DO.  (delegated underwriter/loan prospector/desktop originator) These are names of automated underwriting systems used by lenders. And if the system says approved, a pre-approval letter is issued.

Let's say the loan officer doesn't properly know how to compute income. A borrower gets paid twice a month and not every 2 weeks, which could change the qualifying ratios. Or if the borrower just changed jobs 10 months ago and gets overtime with the new job. It can't be used properly when computing income ratios. What about a large deposit that was just dumped into the savings account, yet the loan officer didn't catch this and it can't be verified.

In my opinion, a real bonafide pre-approval is one that is underwritten by a qualified underwritten or reviewed my a manager in some cases. Anyone can input data into the system and hit the button to get an approval. But if the wrong information is entered, then what?  A denial? 

Food for thought - I get about 2 e-mails a month from buyers that were pre-approved, after giving their pay stubs, bank statements, and W-2's to the loan officer. Two months later, these same people are denied the day prior or the day of settlement. It happens people and you just need to be careful, no matter what letter you receive. Anyone can fling around the terms, "no problem", "I guarantee", etc. Get to know certain red flags : Mortgage & Real Estate Red Flags

A pre-approval letter not only is different than a pre-qualification letter, but could have different meanings from different loan officers. There are some loan officers that say they can't underwrite a loan unless you have an agreement of sale. Some who are brokers say they can't do pre-approvals because the lender buying the loan from them won't underwrite it unless it's a full package with an appraisal. But these same loan officers give out pre-approval letters, because they reviewed the information themselves.  Key reminder : Lenders have their own lender-overlays and definitions.

In my opinion, stop listening to which piece of paper is valid and learn the details. Education on this topic in my opinion is very critical. And if you want to get technical, a commitment letter would be the best letter out there, because with most companies, this is issued by the underwriter. Another term would be conditional commitment letter.

**** This article is of my own opinion and how I view the differences mentioned above****

The mortgage industry keeps changing and just recently there have been new changes regarding both FHA loans and USDA loans. USDA loans were great because they had no monthly mortgage insurance, but that will be changing soon. The comparisons that I will be showing will be using the new changes for both FHA loans and USDA loans, even though these changes haven’t taken place as of yet. Here are those new changes and when they take place.

FHA loans will be increasing their monthly mortgage insurance as of April 18th, 2011

USDA loans adds monthly mortgage insurance starting October 1st, 2011

***In the examples above, assume that both programs are creating the same profit margin for both the USDA loan and the FHA loan. And that all points and or fees are the same, with the same credit scores, but interest rates could be different.***

Now, this comparison is not truly apples to apples, because on a FHA loan, you need 3.5 percent down, as opposed to no money down on a USDA loan. In many cases, the USDA loan is about 1/8 to a 1/4 percent more in rate (each lender varies), but this would only add about $15 to $30 more to your monthly mortgage payment. As you can see, you would still be about $50 cheaper a month on the USDA loan.

Keep in mind, the figures I used in my example for the USDA loan is not 100% accurate, because of the USDA calculations for both the monthly mortgage insurance and for the USDA guarantee fee.  It gets a little complicated and the end result is off by less than $1.50. And remember, as I stated in part 1, the monthly mortgage insurance on the USDA loans decreases a little every 12 months.

Conclusion : One thing that needs to be mentioned is that USDA loans are area specific and that there are income restrictions. Regarding a FHA loan, they can be used any where and have no income limits or restrictions. But as you can see, with a FHA loan, it would cost you more money at closing and that your monthly mortgage payment would be higher. The end result, based on the figures above, USDA loans would be better, if you can be approved for one. There are still goals to consider, meaning, how long one might stay in their home, which could change the outcome. But regarding money upfront and the total mortgage payment as of now, USDA loans are cheaper.

Key point : I had a loan officer tell me yesterday that FHA loans would be better after 7 years. One thing he failed to think about... On the USDA loan scenario, I am saving $7,000 upfront. To compare apples to apples, if I invested that money, I could make more than $1,500 in his scenario in 7 years. These are the things that are needed to be taken into consideration when showing a borrower their break even point.

• USDA loans becoming like FHA loans? Important changes – Part 1 of 2

• USDA loans vs FHA loans – A true comparison – Part 2 of 2

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There will be a major change regarding USDA loans in New Jersey and for all other states come the fall of 2011.

USDA loans will now have annual mortgage insurance, which is also known as monthly mortgage insurance, which begins October 1st, 2011. This move was approved through Congress last year.

What will be collected and how much?  The charge will be .30 basis points.

Example:

As it stands, there is no monthly mortgage insurance right now.  The monthly fee will be based on the guaranteed loan amount. You can use simple math and say for every $50,000, the monthly mortgage insurance will be $12.50.  So for a $100,000 loan amount, your monthly mortgage insurance will be $25.00 a month. Keep in mind that my examples above won’t be this exact when doing a USDA loan, because of the formula that is used. But it will be very close.

Reminder :  The USDA monthly mortgage insurance will always be there, that it will never fall off as long as you have the USDA loan. This is unlike FHA loans, that it could fall off when you hit the 78% LTV. (fyi – There are reasons why your FHA or conventional mortgage insurance could fall off at 80% or not fall off even if you hit 78%)

Another change on USDA loans

The upfront guarantee fee for purchase loans will decrease from 3.5 percent to 2.0 percent of the loan amount. This change will also take place on October 1st, 2011.

As you can see, the Guarantee Fee will lower the payment by $12/month, but the overall payment will be higher by $24.50 because of the monthly mortgage insurance on USDA loans that will go into effect on October 1st, 2011. The figures I used in my examples are not 100% accurate, because of the USDA calculations. Example : On a $100,000 purchase with zero percent down and with the USDA guarantee upfront fee of 3.5%, your loan amount would be $103,626, not $103,500. It gets a little complicated and it only changes the payments in these scenarios by less than a dollar.

Summary :  The new USDA loans changes for New Jersey starting October 1st, 2011 will reduce a borrower’s buying power by about $1,400 for every $50,000.  There is also a hidden secret in the formula regarding the monthly mortgage insurance.  The monthly mortgage insurance payment will decrease every 12 months for as long as you have the USDA loan or until it’s paid off. This reduction is based on the remaining principal balance after each 12 months. As mentioned above, the USDA monthly mortgage insurance never falls off, no matter what LTV (loan-to-value) is established while having the USDA loan. Lastly, one needs to remember that USDA loans are area specific and have income restrictions. USDA loans can’t be used by everyone unlike FHA loans, that can typically be used by anyone buying a primary home. The end result is if you compare USDA loans to FHA loans, and if you can obtain a USDA loan, they are cheaper all around with both the total mortgage payment and less cash required at closing. This based on monies upfront, not how long one would hold onto either loan, which is a different comparison.

• USDA loans becoming like FHA loans? Important changes – Part 1 of 2

• USDA loans vs FHA loans – A true comparison – Part 2 of 2

There are statistics that say 80% or more looking for a home first shop online. This doesn't say that these same people actually buy a home online, but they start their research. And I am finding that many more are shopping for mortgages online once they have a problem with their current lender or have been denied. So I can safely assume that the internet is being used a lot when shopping for a home or when shopping for a mortgage.

My question and thought process is, how far does one take their shopping. Do they stop at the first person? After talking to three and then deciding?

I read an article in the Philadelphia Inquirer's business section written by Alan J. Heavens from December 19th, 2010.

Survey says borrower seldom shop for a mortgage

There has been a lot of talk about Reputation Architecture... well, it's starting to brew, if you haven't been paying attention. I mentioned Jonathan Washburn's article in Part 1 & 2. Read it if you haven't yet, don't get left in the dust.

What I wanted to talk about today, was what was mentioned in the article above. It has to do with shopping for mortgages, which can also be said the same when shopping for a realtor. Here are a few excerpts from the article.

Wow, just 40 percent stop with the first quote? So the first loan officer that sounds good, has a good rate, and that's it? Getting there, be patient....

Okay, so how can one feel confident after just one quote? Are some of these loan officers and or realtors just talking a good talk.  Telling the buyer or seller what they want to hear and not what they should be hearing. Inquiring minds would like to know. At least this fly on the wall.

Ah, the consumer wants someone that says that they will get the job done, which holds more weight now on price or rate. hhhhmmm...  Does this sound like gasoline being dumped on a steady fire? I would say so..

Elizabeth Cooper-Golden wrote :

How are WE going to fix THIS?

In Elizabeth's post, she talked about 1 specific person that had dealt with 6 realtors in her moving career, yet had 5 bad experiences. Think about this...

Summary :  Let me first say that I don't always like being shopped, for various reasons. When it comes to shopping for a mortgage, there is more than just shopping for an interest rate. But the same can be said when shopping for a realtor to help you sell or buy a home. Yes, there will be people with bad experiences, it's a given. But what about those with bad experiences when working with a very good realtor or loan officer, as I mentioned in Part 2. What about those that place shopping over someone that they think will do good for them. The title of my post, How well do you shop before you Eat.  This could be said for any kind of shopping. But if online rating services start to make it to the top, when it comes to shopping, will the personal element be taken out of the equation? Could it be the luck of the draw for some? Others that aren't deserving, still with good ratings?  Can this type of system be manipulated?  Will online rating systems replace expertise and knowledge? Just food for thought... will it be like putting 50k down on red? Wait, black? Will it be a toss up now?

People.. we need to start thinking and preparing for this now. It will happen... especially since others will be able to make a profit off such a system. What do you say? Thoughts?

ps.. Active Rain's theme for 2011 for the RainCamps is Reputation Architecture - are you going?

Don't be that Dust in the Wind - Don't get left out

• Stop Eating With Your Fingers.... Use Your Silverware - Part 1 of 3

• Reputation Architecture & Rating Systems - The Main Course - Part 2 of 3

• How well do you shop before you eat - Shopping for services vs online rating systems - Part 3 of 3

Repuation Architecture has been floating around the internet in recent months. Jonathan Washburn talked about it here. Reputation Architecture : How to multiply the effects of "Remarkable Service".  Yet there is no true definition for this phrase, but we can define reputation.  Reputation defined by Merriam is the overall quality or character as seen or judged by people in general, a good name.

I wrote this post yesterday, Stop eating with your fingers - use your silverware - There are some good articles listed in my post that you should catch up on. Which will lead us into more details in the post below.

So, what's at stake?  Your reputation, right?  Will one be able to hide behind a mask anymore? Be able to hide behind false ads that tell others how great they are? False testimonials on specific web sites?

As stated in previous articles, we have already seen reviews for such things as cars, movies, travel destinations, consumer products and now local restaurants. What will be next? Your local dentist, cleaners, barber, Real Estate Agent, Loan Officer, local lenders?

The 1 million dollar question - Can this kind of system actually hurt others?  Be abused? Will the good out weigh the bad?

One of the main themes that I see repeated over and over is that we talk about educating the consumer so they can make better choices. But how and where can this be done? Who gets chosen as the true expert in real estate or regarding mortgages. Through blogging? Word of mouth? What information is right? Wrong? Misleading?

The Present - So let's jump to the next level. The consumer has found that person or company that they want to work with through today's channels. They have a bad experience. They can usually complain to friends, family, or the internet by using such sites as Facebook or Twitter.

The Future - That same person has a bad experience and now can report it to specific sites that will be tracking such services of a realtor or loan officer.

The Online services (to report bad experiences) - Can they be manipulated? What will make these sites to be the authoritative expert? What happens if you are dealing with someone in a bad mood or that it was just bad timing. Or that this person carries a chip on their shoulder, or a person that is just never ever happy.

What happens if you are just terrible or have bad luck picking such services or individuals. Carla Muss wrote - Don't blame me if your picker is broken.

Example : The new licensing requirements for loan officers. In a way, this can be like a rating system, because the loan officer is officially licensed. (leaving realtors out of this, because they already needed to be licensed.)  I have seen loan officers in their comments on Trulia or in blog posts thump their chests and tell others that they must deal with a licensed loan officer. One who has been tested nationally and state wide and who has been finger printed. Okay, the finger print thing is a good thing and just means that you have not been charged with a federal crime relating to finances. But the mortgage tests itself? 60% of the tests are based on ethical questions and mortgage related laws. Only 40% of the tests are about general mortgage knowledge or mortgage loan activities, which is mortgage 101 to me. Anyone can fake being ethical and most should know what a mortgage application is and how to collect pay stubs, W-2's, and bank statements.

My main point, I am still seeing the same number of buyers being denied last minute because of incompetence. Maybe a loan officer doesn't know how to properly compute income or read a pay stub, missing a specific loan that appears on the pay stub. Or that they just look at the credit score, but don't properly read the credit report. Or when there are problems, can't be found. The SAFE Act was designed to enhance consumer protection and fraud. Or was it more of a money scam? And many of these loan officers that I have seen sell the new licensing laws are the same ones putting out the wrong information.

I think there are just some basic and common sense things that we all should be doing to begin with.

• Transparency - just be honest, upfront, sincere, and genuine.

• Don't over promise and under deliver

• Good follow up, keeping in touch with your clients, good or bad
  

• Provide good and knowledgeable information & services

• Be seen and heard - Through blogging, on facebook, Twitter, Zillow, Trulia

• Know your reputation online now, who is talking about you and why - Google Alerts & Twitter Alerts
  

My opinion?  There will be an opportunity for us all to shine based on the 'quality of service', if the system is used correctly. But how many systems are put in place more so as a money maker, and that the consumer comes second. What do you say? Thoughts? How can we get around these issues mentioned?

KEEP THIS IN MIND : "If you haven't figured it out by now, there are people with bad experiences within the real estate and mortgage industry who tend to pick bad agents or loan officers. If you are next in line when picked after a bad experience, and because that person already has a bad taste in their mouth, you need to be better than just good. Why? You might already be starting in the basement."

ps.. Active Rain's theme for 2011 for the RainCamps is Reputation Architecture - are you going?

• Stop Eating With Your Fingers.... Use Your Silverware - Part 1 of 3

• Reputation Architecture & Rating Systems - The Main Course - Part 2 of 3

• How well do you shop before you eat - Shopping for services vs online rating systems - Part 3 of 3

News travels fast, especially bad news, and all because of the internet. We have Twitter, Facebook, Yelp, and other online sources where people can report negative issues.

Consumers sometimes think they do a good job at shopping for specific services when they actually don't. Because information is so readily at our finger tips, they just dive into the main course, almost like if you were to eat with your fingers, but not use your silverware.  Same issue with using the internet. There are so many tools that can be used, or one to be properly educated, but the consumer is so hungry and starved for good information, if they think they have found it, they stop. The same can be said when just shopping for a real estate agent or a loan officer, no matter if it's done online, through word of mouth, etc, etc.

Jonathan Washburn had written this a few months ago :

Reputation Architecture: How to multiply the effects of 'Remarkable Service'

This is a must read to understand what I am talking about and where we could be heading.

If you haven't figured it out by now, there are people with bad experiences within the real estate and mortgage industry who tend to pick bad agents or loan officers. If you are next in line when picked after a bad experience, and because that person already has a bad taste in their mouth, you need to be better than just good. Why? You might already be starting in the basement.

Below are 3 articles that give examples and or talk about the problems that consumers are facing and what realtors are facing. How does one define a great realtor? A great loan officer? Is it done by your production numbers? How much money you made? Because the person seems really really nice?

Many talk about educating the consumer. Okay, sounds great... sounds easy. But what if that consumer is getting the wrong information? How do we put an end to this, as Elizabeth Cooper stated in her post. I know this is a lot of reading, but you need to read all 3 posts.

Elizabeth Cooper-Golden wrote :

How are WE going to fix THIS?

Carla Muss wrote :

Don't Blame Me if Your Picker is Broken

Leslie Ebersole wrote :

How Do You Rate?

Conclusion : So Jeff, where are you going with all of this??? I read an article in the Philadelphia Inquirer's business section written by Alan J. Heavens from December 19th, 2010.

We talk about educating the consumer so they can make better choices. But how and where can this be done? Who gets chosen as the true expert in real estate or regarding mortgages.

With this post, I wanted to set the table, put this out there so we have a starting place at the table. In part 2, I will be diving into the main course with some thought and facts pertaining to the said referenced articles above. What are your thoughts now? What could you add to any of this, as we move forward. Do you see any of this as a growing problem? Do you see some sort of rating system? For realtors and loan officers?

Check this out... Angie's List - An online referral system, that vouches for specific companies. Is this list the next BBB, Better Business Bureau? Are there holes in lists or companies like this? I would think so, but what do you think? 

Is Angie's list the next wave of online services that will dictate your business online? 

Is this a wake up call to what lies ahead?

The end result... are you one to dive into the information society with your fingers, just grabbing at anything that sounds or looks good, or do you properly research? This will be talked about in part 2.

• Stop Eating With Your Fingers.... Use Your Silverware - Part 1 of 3

• Reputation Architecture & Rating Systems - The Main Course - Part 2 of 3

• How well do you shop before you eat - Shopping for services vs online rating systems - Part 3 of 3

In many cases, don't we want the best deals?  I think when most people begin to shop for a home or shop for a mortgage, wanting a good deal or the best deal is on many buyer's or seller's minds. And when getting a great rate, some people like to brag about it. But are the details distorted? Not known?

One key point to remember through this whole post, Not one borrower is the same. One needs to compare apples to apples. Just a lower credit score could change the whole scope of someones interest rate. And just because two apples may look the same, doesn't mean they taste the same or feel the same.

How many times did someone say these key phrases when it came to mortgages and or real estate……….

“Well, my neighbor sold their house for $325,000 and I should be able to get the same since we have a similar house.”

Okay, so let’s look at the differences.

• Does your house have upgrades?
• Is one lot larger than the other?
• Is one house in average condition and the other in excellent condition?
• Does one have a superior view than the other?
• How long ago was that sale? 3 months ago? Values can change…

“My co-worker just got a 4.50% interest rate with no points and I know it’s still out there, so I want that.”

How could this be so different for so many?  I’ll name just a few reasons why.

• Did you see the good faith estimate?  It could have many fees on it. You need to compare apples to apples.
• What was your co-worker’s credit scores? Right now, the biggest reason why your interest rate would be different from someone else.
• How much money are they putting down?
• What kind of mortgage are they getting? FHA loan, conventional loan, VA loan, or a USDA loan?
• What was their debt-to-income ratios for qualifying with income?

Another key point?  "interest rates change daily" and "home values can change".

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Borrower : I would like to see this specific home...

Realtor : Have you spoken to a loan officer?

Borrower : No, not yet.

Realtor : Do you know your credit scores?

Borrower : Yes, I pulled my credit online and I have a  680, 705, and a 695, so I should be good to go, right?

Realtor : Those are very strong scores, so let's look at a few houses and then I can get you qualified.

People, it's not that simple. I have seen buyers pre-qualified primarily based on their credit scores, yet the loan officer or realtor didn't review the credit properly, which can still kill a deal at times. But the reason I am bringing this up is because I have seen a few blog posts written with many comments, all stating that they ask the borrower their credit scores. And if these scores are high enough, that they feel comfortable with this buyer and will take them out first, even before they speak to a loan officer. And I know some of you will disagree with me on this topic, because you all have your own way of doing things. But many forget, real estate is local and maybe in some high end markets, you can get away with this and get lucky. But I need to point out one harsh fact to those that think credit scores from online sources are reliable.

Reality : When you go online and use a credit company that is not pulling your credit for a mortgage company or a bank, it's considered a 'generic' credit pull. Meaning that it follows no rules, guidelines, or input regarding mortgages. When you go to a lender for a mortgage or a car company to purchase a car, they have credit agencies that use certain algorithms that are different from those credit repositories. These credit repositories are the 3 major credit bureaus; Experian, Equifax, and Trans Union. The credit scores from these three major credit repositories will differ from those when pulled my a mortgage company and bank when applying for your mortgage. Yes, there are other reasons that just the algorithm, such as how information is reported and or received. But the main point is that they can be very different, confusing, and frustrating.

Example : I have been working with a buyer for the last 5 months now who started off with 574, 595, and 581 credit scores when I pulled them internally. He was upset because he pulled his scores from online and they were 666, 697, and 683. WOW... huge difference, right?  I had another client that was about 45 points higher than what my scores showed. And no, it's not the credit agency that we use internally, because this same person had another lender pull them and the scores were the same as mine. Hence the specific algorithm that is used when it comes to credit reports for mortgages.

Disclosure : I don't work for a credit agency nor am I a credit export. I do have extensive knowledge of credit and credit scores aka fico scores. And I am sure this is not as detailed as it could be with more specifics, but I did want to educate people on the basics. And I did interview several different people from different credit agencies and the main ingredient is that mortgage credit reports will give a different result in credit scores than if you just went online and pulled your credit yourself. The online services are mostly for individuals to check their credit, to make sure it's correct, and to help stop identity theft. One problem is that you see/hear commercials from credit agencies telling you that you can check your credit for free, to know your credit scores for when buying a home, etc, etc. But they don't explain the differences, because it's a service that they want you to pay for, even though they mention the word 'free'. Just beware, be careful, and educate yourself properly.

Good enclopedia of terms regarding credit - The Credit Report Enclopedia -

~ Credit Score Series ~

• Do I need 20% down and or 700 credit scores?

• Understanding your credit and your credit scores

• Good Credit Scores could equal ticking time bomb - BAM

Good Faith Estimates are suppose to give you a very good indication of what it will cost you when applying for your mortgage.  The new Good faith estimates, also known as GFE’s, went into effect on January 1st, 2010 and are less complicated than the old good faith estimates. In my opinion, the problem with the new good faith estimates is that they are misleading and don’t share enough pertinent information. I truly think that the government over-steps the boundaries when it comes to protecting the consumer. But let’s explore in detail.

The good faith estimate is comprised of 3 pages.  The example below appears on page two.

As you can see, this part of the good faith estimate doesn’t break down the total costs, but lumps all the costs into the origination charges. You don’t know if you are paying points, lender fees, or anything else that could be part of this total charge.

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Here is an example of a specific section from the ‘itemized fee worksheet“.

Here is a breakdown of any types of charges that you would get from the lender. These charges could be anything to include origination points, underwriting fees, doc prep fees, commitment fees, and so on. Each state is different in regards to what is allowed to be charge and on FHA loans, HUD has restrictions on what can be charged. This is not to say that FHA loans are more expensive, because that is a rumor. Or to say that there is a FHA good faith estimate compared to a conventional good faith estimate. The good faith estimate is universal, is the same for any mortgage program and should be the same from any lender, by law.

As you notice, the fees are broken down into different types of lender fees and then added back up as your origination charge. If you go back to the first example, you will see that the total number matches what is in Box A, which is the same as line 801 on the second example. The worst part about this whole process is that these same charges will be broken down again on your HUD-1 Settlement statement when you go to closing.

Another issue that I have with the new good faith estimate is that you don’t see your total monthly mortgage payment; to include the principal & interest, your property taxes, and homeowners insurance (depending on the type of property). One page one, it will show the total of your principal, interest, and if mortgage insurance is applicable.

Conclusion : The good faith estimate by law, is suppose to be given to the borrower by the loan officer or the lender within three business days after an application is taken. There is a set of items that need to take place that enforce what a true mortgage application is. There are a few problems with this though. When you do a mortgage application, you are shown the good faith estimate, but not always given a copy. It’s the borrower’s duty to ask for one, because not all loan officers will voluntarily give you one. Secondly, when you are actually shopping for a mortgage, you should be given some sort of break down that should resemble what the old good faith estimate looked like. Many of us call the new form the ‘itemized fee worksheet.’  This will allow you to compare all charges properly. It's not required that a lender give you the itemized fee worksheet, so ask for this when you get the good faith estimate. And I highly recommended that when shopping for a mortgage, that it’s all done on the same day. I have gone into details on how to shop for a mortgage.

• ~ Shopping for Mortgages ~
• ~ Shopping for interest rates and what to know about rate locks ~