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Part of the published series entitled: “A Closer Look at Residential Real Estate Appraisals” by Shmuel Shayowitz

Residential Real Estate Appraisals in the current housing environment

Another common appraisal issue is where a borrower comes with their own appraisal in-hand from another broker or even an appraiser they hired directly. That appraiser may have come up with an appraised value, however when submitted to the bank for review, the underwriter may determine that the valuation is unjustifiable. As indicated above, during the different valuation methods an appraiser can use his/her own good judgment to make certain assumptions or adjustments as they attempt to support a specific value. A bank underwriter will always carefully evaluate the accuracy and discretion of an appraiser to be certain that the value is supported and within their comfort level thresholds.

This matter will be further exasperated as recent appraisal regulations have caused significant changes to the appraisal “request” process. Regulators have determined that certain brokers and loan officers were using force or influence to push appraisers to inflate home values. These new regulations will now restrict brokers and independent agents from being involved in the appraisal process and create a separation to ensure proper valuation methods are being utilized.

Unfortunately, this current marketplace is also seeing an increase in the number of homes that are being appraised for a lower value than what they are being purchased for. This is as a result of several factors. First and foremost home prices have dropped in the last few months and many sellers have not yet adjusted to the market accordingly. Furthermore, there just may not be the documentable sales to support the price, even if everyone agrees that the value is justified and warranted. Finally, many borrowers are now using national banks that may not have a local understanding of the marketplace. These national companies hire large appraisal firms that may not have the best hands-on information of the local area.

This is especially true in certain neighborhoods where because of a strong desire to live within a desired area, or the need to buy in close proximity to a certain Synagogue, Church, other type of religious, social, or educational need that homes are worth considerably more. In many cases it becomes a real matter of supply and demand where homes on one block may be worth significantly more than comparable homes that are literally one block away. It is imperative to work with local bank or mortgage bank that is cognizant of these unique distinctions, and is willing to include that in the overall consideration of the loan review.

Part in the published series entitled: “A Closer Look at Residential Real Estate Appraisals” by Shmuel Shayowitz

The Appraisal Process

The exact process and procedures of the real estate appraisal are beyond the scope of this article and should be left to the experts. I did however want to highlight some of the factors that are utilized by appraisers as they try to determine market value. The appraisal institute has created standards for the analysis for Federally regulated residential mortgage financing:

The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby: (1) buyer and seller are typically motivated; (2) both parties are well informed or well advised, and each acting in what he or she considers his or her own best interest; (3) a reasonable time is allowed for exposure in the open market; (4) payment is made in terms of cash in U. S. dollars or in terms of financial arrangements comparable thereto; and (5) the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.

Sales Comparison Approach

There are three main methodologies that are utilized by licensed appraisers to determine value, they are the Cost Approach, the Sales Comparison Approach, and the Income Approach. Specific to residential appraisals, the Sales Comparison Approach is typically the method used by appraisers to get the best indication of what a home is worth.

The sales comparison approach simply examines the price of similar properties that sold in the marketplace. These sales are analyzed and subsequently adjusted to account for differences in the comparables to the subject to best determine the value of the subject. While there is no exact science with this formula as appraisers can vary with their adjustments, this approach is generally considered the most reliable if adequate comparable sales exist.

Other Factors of Consideration

The appraiser will then present the report with the final market value to the lender. Photos will be taken of the homes exterior both from the front and back, as well as street scenes surrounding the home for a more broad perspective. In addition, if the house contains any enhanced improvements or notable upgrades inside the home, the appraiser will typically include such photographs as well. It is important to note that cleanliness of the home is usually not a factor of consideration at all. At the same time over-improvements in a home may not add too much to a homes value either. As an example, if a homeowner wants to spend $100,000 for a special imported custom kitchen that is turquoise colored, the appraiser will not give that full consideration, because a typical buyer may not appreciate or want such an obscure kitchen, and may even consider the need to replace it.

This is often the case with any over improvements that homeowners spend on bathrooms, tiling, or the like, which may not get the full benefit in an appraisal. Simply put, an appraiser is there to determine that if the bank needs to seize this property through a foreclosure, and then place it on the market for sale, what the going price would be for a typical buyer who will buy this home as-is.

How to Calculate Total Monthly Mortgage Payments

What is “PITI”?

PITI is an acronym lenders use to describe the different components that make up your monthly mortgage payment. It stands for: principal, interest, taxes and insurance. (It’s is important to note that the payments of taxes and insurance are also known as the “escrow” payment or portion)

Principal: This is the actual portion of the payment that goes to repay the principal balance of your loan. On a standard “self amortizing” loan, a portion of the principal is usually paid off with each mortgage payment thereby gradually reducing the outstanding balance you owe and increasing your home equity (the portion of the home you own). The principal component of each payment is typically very small in the first few months, but increases during the life of the mortgage as the mortgage balance drops. Some types of loans do not have principal payments, including interest-only mortgage, which does not include any principal repayment in the monthly calculation.

Interest: The interest is the amount a lender charges you for borrowing the money to buy the home. Initially, the largest part of your mortgage payment goes toward paying off the interest. However, as time goes by and you begin to pay off your mortgage, more of your monthly payment goes toward paying down the principal and less toward paying off the interest. (Your mortgage rate can change periodically if you have an adjustable-rate mortgage. It can also change if you renegotiate your mortgage or make a lump payment to lower the principal which will help save interest towards the end of your mortgage).

Taxes: Most homeowners also pay their real estate taxes as part of their mortgage payment. The lender passes these on to the local municipality to pay for community schools, roads, police and other municipal services. Depending on your actual Real Estate Tax amount, taxes can be a significant part of your total mortgage payment, and tax rates can vary significantly from area to area. So it’s wise to find out the EXACT local tax rate. The estimates we give are based on the estimates we obtain from you, the realtor, the appraiser, etc and are not 100% accurate until we get the title report and confirm it with your township.

Insurance: The fourth component of your payment is homeowner’s insurance, which gets collected by your lender and paid to your insurance company. Typical homeowner’s insurance protects your home and property against fire or other damage. You may need supplemental coverage for other risks. For example, you may need flood insurance if your home is in an area with a high risk of flooding. If you buy your home with less than a 20 percent down payment, you may also be required to have private mortgage insurance (PMI) to protect the lender from default.

To calculate your total PITI:

• Enter your current mortgage balance and the term or amortization period of your mortgage into the Approved Funding Mortgage Calculator to help you calculate the principal and interest components of your monthly payment.
  
• To calculate your property taxes, divide the estimated annual real estate taxes and divide your total by 12 (to be collected over per months)
  
• To calculate your monthly insurance payments, divide your total yearly premiums by 12 (to be collected over per months)
  

Just when you thought the banking business was tough enough and that banks would start to woo customers back any way possible…

________

For Immediate Release: B of A Charging Fees for Monthly Statements

Bank of America Corp. is charging some customers to receive their monthly statement in the mail.

The $8.95 monthly fee is only applied to one type of account for the moment, and only in Georgia, but the Charlotte bank is planning to introduce the product in other markets soon as a replacement for its popular student checking account, which has no monthly fees when opened online.

Though B of A would not be the first U.S. bank to take an aggressive stance against paper statements, it is the biggest to start charging for them. And at a time when overdraft fees and interchange from debit cards are both under fire, financial companies are eager to find new sources of recurring revenue.

Source: American Banker

Borrowers face new set of credit checkups

Initiative targets last-minute changes in finances

Mortgage giant Fannie Mae rolled out its Loan Quality Initiative (LQI) June 1, thereby forcing homebuyers to obtain mortgages based on “refreshed” credit reports or risk their closing being canceled and, in some states, their deposits forfeited.

In other words, the buyer is not officially approved for the mortgage until the results of second credit report are approved. There may be other last-minute verifications of undisclosed liabilities, such as job status, that may be “refreshed” as well.

Example:

Buyer A listed his three credit cards on his loan application. The lender approved Buyer A’s credit and approves the mortgage loan request, partially based on this information. Buyer A goes to Home Depot, applies for yet a fourth credit card.

The day before the closing, while Buyer A’s excitement is peaking, the lender refreshes his credit to make sure his credit score is still as good as it was when it was pulled the first time.

The lender discovers that Buyer A’s credit score has been lowered because Buyer A applied for a fourth credit card. It’s called finding an “undisclosed liability,” and it is not going to end well for the buyer.

Under the LQI, the lender could delay the closing, increase the interest rate, ask for a larger downpayment, or cancel the closing. In some states, Buyer A could lose his deposit.

“The impact on closings is too early to measure,” according to Gail Stanley, an Orlando mortgage lender, “but my guess is that homebuyers will be well coached.

“What lender, mortgage broker or real estate broker isn’t going to use every communications tool available to make sure the buyer does not even think about using available credit, much less apply for more during the ‘refreshing’ period?” Stanley asked.

“The mortgage lending business as we have known it is over,” according to Boston’s MetLife Home Loans’ senior mortgage consultant, Brian Cavanaugh. “Quality loan service and counseling will replace rate shopping because mortgage pricing is so competitive.

“Homebuyers need to work with loan officers who clearly understand the new guidelines and can help the buyer understand the importance of complying with them. Mortgage financing is incredibly important in personal financing now and it needs to be understood and protected,” Cavanaugh said. Stanley said that pulling the second credit report is not new, and that the LQI will be a welcome new tool for lenders who practice responsible lending.

“We all realize that buyer qualifications need to be tightened and that the lender needs to be protected. Consumer education is the challenge,” Stanley said. “Realtors need to encourage their buyers to be as complete as possible in the original application and to be careful not to do anything that will negatively impact their credit score before the escrow closes.”

Depending on the state and the standard purchase and sale agreement used, borrowers could lose their deposits, according to Boston attorney Richard D. Vetstein. He recommends that real estate attorneys review standard purchase agreements.

Vetstein posted some advice about Fannie Mae’s LQI on his Massachusetts Law Blog. “If you’ve taken out new loans that are sizable enough to affect the debt-to-income-ratio calculations used in your original mortgage approval, the deal could fall through. The added debt load could render you ineligible for the mortgage because you suddenly appear unable to handle the payments without a strain on your household budget,” he notes.

Also, “Many lenders already pull second credit reports right before the closing, but the Fannie Mae mandate will likely result in a markedly increased number of lenders pulling second credit reports and performing other last-minute verifications.” And Vetstein states that a surge in new use of existing credit sources could also impact consumers’ ability to secure a home loan.

But holding the buyer accountable pales in comparison to the stringent accountability now in place to prevent lenders from submitting contract products for sale to Fannie Mae with “undisclosed” liabilities. (See www.efanniemae.com, keyword: Loan Quality.)

Just as lenders are calling for refreshed truth from buyers, Fannie Mae is not asking — it is forcing lenders to upgrade the quality of their underwriting and to get used to the new system and embedded, stringent accountability tools for meeting clear, detailed and tougher underwriting standards.

Fannie Mae’s ultimate goal is not to punish the lender or homebuyer. It is to be repaid. Not only will profits start flowing again, but investors will return. And when that happens, loans will become easier to obtain.

There will no doubt be faults found with Fannie Mae’s Loan Quality Initiative, but “lack of accountability” will not be one of them. It is a welcomed and refreshing thought.

http://www.inman.com/news/2010/06/23/borrowers-face-new-set-credit-checkups

By Dave Fletcher/Inman News, Wednesday, June 23, 2010

Rules for Dropping Mortgage Insurance

What do the PMI termination rules really mean to the average person?

Dropping Conventional Mortgage Insurance Rules

• Automatic Termination
  
  • Fixed Rate & Adjustable – Removed when reduced to 78% LTV
    
  • LTV based upon ORIGINAL VALUE
    
  • Based SOLEY on regular amortization (not prepayment of principal)
    

Additional Requirement:

• Mortgage payment must be current
  
• Borrower Requests Termination
  
  • Fixed & Adjustable – Removed when reduced to 78% LTV
    

Additional Requirements:

• Submit cancellation request in writing
  
• Good payment history
  
• Current on mortgage payments
  
• Appraisal or Certification that property value has not decreased BELOW the original value
  
• No 2^nd liens or subordinated loans on property
  

Dropping FHA Mortgage Insurance Premium Rules

Loans closed PRIOR to January 1, 2001 are NOT eligible for termination of MIP (monthly insurance premium) if closed on January 1, 2001 and after, MIP will be automatically terminated under the following conditions.

• More than 15-year term
  
  • Must pay for 5 years AND
    
  • 78% LTV based on original LTV
    
• 15-Year Term or less
  
  • If original loan amount is 90.01% or more, of the original appraisal value, MIP will be terminated at 78%
    
  • 5-year minimum payment waived
    
  • If original loan amount is 90% or less, of the original appraisal value, NO monthly MIP will be charged.
    

NOTE: Loan-to-Value for purchases based on the sales price or appraisal value, whichever is lower

• Loan-to-Value for refinances based on appraisal value
  
• Loan-to-value figured on base loan amount WITHOUT UFMIP
  

Estimated Number of Years To Drop Mortgage Insurance Chart

At application, do the math and let your clients know the estimated number of years that the PMI or MIP will be eliminated.

The interest rate makes a difference, but here’s an example of a sales price/appraisal value of $250,000 at 6% interest rate, and based on making regular monthly payments (no principal prepayment).

Down Payment Loan Amount Term Years PMI/MIP Eliminated

5%         237,500     30 yr         11 yrs

10%     225,000     30 yr         9 yrs

15%     212,500     30 yr         6 yrs

5%         237,500     20 yr         6 yrs

10%     225,000     20 yr         4.5 yrs

15%     212,500     20 yr         3 yrs

5%         237,500     15 yr         4 yrs

10%     225,000     15 yr         3 yrs

15%     212,500     15 yr         2 yrs

If the interest rate is 1% lower than 6%, subtract one year If the interest is 1% higher than 6%, add one year

Update: The Home Buyer Tax Credit Has NOT Been Extended… as of yet

The June 30 closing deadline has not been extended…but it was accepted as an amendment to the Tax Extenders Bill. Under the amendment, borrowers who signed purchase contracts by April 30 would be given three extra months to close their loan and still qualify for the homebuyer tax credit. The new deadline would be September 30, 2010.

Tax Credit Revisited – November 2009

When the tax credit was last modified in November 2009, Congress modified its language to read that, in order to be eligible, a homeowner must be under mutual contract for a home on or before April 30, 2010, and must be closed on said home on or before June 30, 2010. At that point in time they assumed 60 days between contract and close would be ample time to execute docs.

At this point in time it seems as though the 60 days is not adequate and Lenders, Realtors, Attorneys, Sellers and HomeBuyers are scrambling to do what they can to Close prior to the current deadline.

Fortunately, or unfortunately for some, a surge in April purchase activity created back-office back logs at the nation’s biggest banks and an estimated 180,000 home buyers are finding out the hard way that lenders don’t always clear conditions as quickly as you’d like.  The National Association of Realtors estimated that 1/3 (and maybe even half) of those contracts will not close in a timely manner.

Reminder: How A Tax Credit Extension Bill Becomes The Law

First things first — the tax credit date change is not its own bill. The extension proposal is tagged onto a broader bill of tax policy extensions and federal program renewals.  This means that the fate of the home buyer credit won’t be on the merit of the credit alone.

It also means that the bill may not become law in time for June 30, 2010.  The extension has passed the Senate but there’s still two steps to go (and loads of debate).

It takes more than a Senate passage to extend the home buyer tax credit.  It takes a vote in the House of Representatives plus a signature from the White House, too.  So far, we’re not there.

What If You Miss The June 30, 2010 Tax Credit Deadline?

Unfortunately, Some people will miss the deadline.  Technically, Congress could pass the law prior to June 30 and everyone will be fine, or it could pass the law after June 30 and make the credit retroactive for everyone that missed it.  Our expectation is that the law will pass in a timely manner, but if not, it will be retroactive thus protecting anyone who closes after the initial deadline, but before the extension. 

For those of you stuck in the middle of a contract, that are not getting  a timely response from your lender or broker, feel free to contact us if/when the Tax Credit is extended and we will expedite your loan for you so you are sure not to miss the final deadline.

As always – feel free to check out our site and sign up for the latest news and updates: http://approvedfunding.com/freereports.

The new 2010 Good Faith Estimate. This brief video does a great job highlighting the issues and frustrations new borrowers are seeing with the new “GFE”.

THE TOP 10 CREDIT DON’TS DURING THE LOAN PROCESS

1. DON’T DO ANYTHING THAT WILL CAUSE A RED FLAG TO BE RAISED BY THE SCORING SYSTEM.  This would include adding new accounts, co-signing on a loan, changing your name or address with the bureaus.  The less activity on your reports during the loan process, the better.
   
2. DON’T APPLY FOR NEW CREDIT OF ANY KIND.  Including those “You have been pre-approved” credit card invitations that you receive in the mail or online.  Every time that you have your credit pulled by a potential creditor or lender, you lose points from your credit score immediately.  Depending on the elements in your current credit report, you could lose anywhere from one to 20 points for one hard inquiry.
   
3. DON’T PAY OFF COLLECTIONS OR CHARGE OFFS during the loan process.  Unless you can negotiate a delete letter, paying collections will decrease the credit score immediately due to the date of last activity becoming recent.  If you want to pay off old accounts, do it through escrow – at closing.
   
4. DON’T MAX OUT OR OVER CHARGE ON YOUR CREDIT CARD ACCOUNTS.  This is the fastest way to bring your scores down 50-100 points immediately.  Try to keep your credit card balances below 30% of their available limit at ALL times during the loan process.  If you decide to pay down balances, do it across the board.  Meaning, pay balances to bring your balance to limit ratio to the same level on each card (i.e. all to 30% of the limit, or all to 40% etc.)
   
5. DON’T CONSOLIDATE YOUR DEBT ONTO 1 OR 2 CREDIT CARDS.  It seems like it would be the smart thing to do, however, when you consolidate all of your debt onto one card, it appears that you are maxed out on that card, and the system will penalize you as mentioned above in 4.  If you want to save money on credit card interest rates, wait until after closing. 
   
6. DON’T CLOSE CREDIT CARD ACCOUNTS.  If you close a credit card account, you will lose available credit, and it will appear to the FICO that your debt ratio has gone up.  Also, closing a card will affect other factors in the score such as length of credit history.  If you HAVE to close a credit card account, do it after closing.
   
7. DON’T PAY LATE.   Stay current on existing accounts.  Under the new FICO scoring model, one 30-day late can cost you anywhere from 50-100 points, and points lost for late pays take several months if not years to recover. 
   
8. DON’T ALLOW ANY ACCOUNTS TO RUN PAST DUE –EVEN 1 DAY!  Most cards offer a grace period, however, what they don’t tell you is that once the due date passes, that account will show a past due amount on your credit report.  Past due balances can also drop scores by 50+ points.
   
9. DON’T DISPUTE ANYTHING ON YOUR CREDIT REPORT once the loan process has started.  When you send a letter of dispute to the credit reporting agencies, a note is put onto your credit report, and when the underwriter notices items in dispute, in many instances, they will not process the loan until the note is removed and new credit scores are pulled.  Why? Because in some instances, credit scoring software will not consider items in dispute in the credit score – giving false data to the lender.
   
10. DON’T LOSE CONTACT WITH YOUR MORTGAGE & REAL ESTATE PROFESSIONALS.  If you have a question about whether or not you should take a specific action that you believe may affect your credit reports or scores during the loan process, your mortgage or real estate professional may be able to supply you with the resources you need to avoid making mistakes that could drop your credit scores or possibly, cause you to lose the loan.
    

Post: Shmuel Shayowitz, Approved Funding