Approved Advisor

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.

Don’t chase rates — find the right mortgage too

A look at the various scenarios and what might work best for you

(AP) NEW YORK — For those who can qualify, it’s one of the best times to get a mortgage.

Last week, rates for 30-year fixed-rate loans dropped to 4.57 percent, the lowest level on records dating back to 1971, Freddie Mac said.

And for some who missed out on the government’s homebuying tax credit, the rates may more than make up for that lost $8,000.

“A tax credit is immediate gratification,” said Leonard Baron, a professor of finance at San Diego State University, “but long-term, with rates this low, you can get much more value.”

But which loan is right for you? The mortgage game has changed since the housing bust and more rules have been and are being added. One factor is for sure now: Your credit score should be at least 620 or you’ll have a hard time finding a loan. What varies is how much you have for a downpayment.

Buyer No. 1: You have a 20-percent downpayment and expect to retire in the house.

Take out a 30-year fixed-rate loan, the most popular type of mortgage. The interest rate stays the same over the life of the loan and right now, that rate is at historical lows.

“This loan is for someone interested in stability and security,” said John Stearns, mortgage banker at American Fidelity Mortgage Services Inc. in Mequon, Wisc.

Buyer No. 2: You have a 20-percent downpayment, but plan to move into another home down the road.

Consider a five-, seven- or 10-year adjustable-rate loan, which has a fixed rate for a set period and then adjusts higher after that time. These loans carry a lower initial interest rate than the 30-year fixed-rate, so you save money over the fixed-rate period. After the fixed-rate period ends, borrowers typically refinance into another loan to avoid the adjustable rate.

Rates on five-year adjustable-rate mortgages averaged 3.75 percent this week. That was the lowest on Freddie Mac’s records, which date back to January 2005.

ARMs got a bad rap during the housing bust because most people who took out two- or three-year ARMs got caught with an unaffordable payment when their rates reset. They couldn’t refinance into a fixed-rate loan because home prices had tanked and credit tightened up.

That risk still exists, but starting in September, lenders will have to evaluate whether borrowers can make payments after the rate reset on adjustable-rate loans backed by Fannie Mae.

Buyer No. 3: You have at least a 20-percent downpayment for a house worth more than $729,500.

You need a so-called jumbo loan which is not backed by Fannie Mae and Freddie Mac. That means any lender who makes a mortgage above that amount will have to keep the loan on its books.

To compensate for that risk, lenders charge higher interest rates than a conventional mortgage. The average rate for a 30-year fixed-rate jumbo loan fell to 5.48 percent this week, the lowest level ever in Bankrate.com’s survey.

Buyer No. 4: You have more than a 20-percent downpayment.

Depending on how much you’re putting down, you might consider a 20-year fixed-rate mortgage. Rates are sometimes, but not always, lower than a 30-year fixed-rate by about a quarter-point. However, because the loan term is shorter on the 20-year loan, the monthly payment will be higher than a 30-year mortgage.

For example, the monthly payment for a 20-year fixed-rate loan for $300,000 is $1,898. It’s only $1,565 a month if the loan is 30 years. But over the life of the loan, you’ll save about $108,000 in interest.

“Most people are interested in a lower monthly payment,” Stearns said.

Buyer No. 5: You have less than a 20-percent downpayment.

Consider a mortgage insured by the Federal Housing Administration, or FHA. A borrower needs to put down only 3.5 percent of the purchase price.

After the housing market slumped, the FHA became the major source of funding for first-time homebuyers. It insured about 24 percent of new loans in the first quarter, according to Inside Mortgage Finance, a trade publication.

Or, consider a mortgage loan that isn’t backed by the FHA, which only requires 5 percent down. However, you will pay mortgage insurance each month, which can add an extra $25 to $50 to your monthly payment depending on your credit score. Private mortgage insurance protects a lender against losses when a borrower defaults. If you have very good credit, this option may be cheaper.

Buyer No. 6: You have a gift downpayment.

While one in five first-time homebuyers used a gift from a relative or friend for a downpayment last year, there are some rules to navigate.

Gift money can be used for a downpayment on a conventional loan only after the borrowers use their own money to make the 5-percent minimum. Gift money can pay for closing costs or prepaid expenses like property taxes and insurance that are put into an escrow account. Banks typically check two months’ worth of bank statements for unusually odd deposits that could be considered gifts. However, if the gift was deposited six months before, a bank might not notice.

However, FHA mortgages allow borrowers to use a gift to make the 3.5-percent minimum downpayment. The gift must be documented in writing and the lender may ask for proof of deposit.

Buyer No. 7: You don’t have a downpayment.

Your options are limited.

If you are a veteran or the surviving spouse of one, consider a mortgage backed by the Department of Veteran Affairs. These loans offer 100 percent financing without private mortgage insurance at competitive mortgage rates.

If the home you’re buying is in a rural area as defined by the U.S. Department of Agriculture, you may qualify for a USDA home loan, which offers 100 percent financing without adding on private mortgage insurance. The USDA aims to help lower-income households get home loans at reasonable rates.

Source: Associated Press

Post: Shmuel Shayowitz, Approved Funding

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.

 Mortgage Turmoil Video

What to look for in a Home Equity Lines of Credit (HELOC)

By: Shmuel Shayowitz, President, Approved Funding

Here is a quick list so that you can better “shop” and compare different Home Equity offers.

Here’s what to look for:

• What is the Rate?   Is it fixed or ‘variable’? Assuming it is variable most likely it will be tied to the Prime Rate. (Click here for a link to current Prime Rates) Also – Is there a “Teaser Rate”? (That’s a temporary period where they give you discount below the rate it would normally be)
  

  
  

• Closing Costs: Do you pay? They pay? Appraisal Fee? Anything out of pocket from you whatsoever?
  

• Annual fee: Is there an annual fee? Many banks don’t charge year #1, but they charge every year thereafter.
  

• Initial draw requirement? Do you HAVE TO draw on the line in order to get that deal they are offering? Do you have to maintain any outstanding balance before they hit you with a penalty?
  

• Term: How long is the draw period? How does the loan get paid back? Many have a 10year draw, and then it converts to a 20year loan. That payment can be very costly.
  

• Termination Fee. Some banks charge if the line is CLOSED within year 1, or 2, or 3. Find out for sure.
  

• Convertible Option. Can a “variable” rate be “converted” to a fixed rate? How does it work?
  

   

• Do they make you open an account with their bank? Do they force you to automatically deduct the payment out of your account?
  

   

Other, and more specific questions might arise as you compare one HELOC offer to another. If we can be of further assistance as you narrow the list down, please do not hesitate to contact us!

Mortgages take priority by the order in which they are recorded in the county records. This priority is basically the order in which they would be repaid in case of a problem – ie: in the case of a foreclosure, collection, judgments, etc.

When you refinance and pay off the 1st mortgage, the current 2nd mortgage shifts into “1st position”, and any new mortgage would become a secondary lien. In order for this not to happen, permission is needed from the 2nd mortgagee to allow a 1st mortgage to get replaced through a refinance, and for them to remain in second position, where it is now.

The act or request for which we go through this process is called a Request for “Subordination of Mortgage”.

Does it affect them in anyway? Not really.

Are they obligated to do it? Absolutely not. 

Why would they subordinate? Because they are really loosing nothing. They may try to contact you to convince you to refinance the 1st mortgage with them, but ultimately if you are lowering the payment on the 1st mortgage, their mortgage is still safe, and you are only in a better financial position because your payments are lower. 

Why wouldn’t they subordinate? Frankly because they don’t have to, they might not want to. More so, because 2nd mortgages in the marketplace have lost so much value because home prices have gone down, and more people are delinquent on second mortgages, some banks are using this as leverage to say “no” to subordinations, in the hopes that you are forced to pay them off in full through a cash-out refinance.

What are the issues with subordinations?  It takes time to get a response from these banks as everyone is backed up for weeks. This will likely affect the interest rate lock-in or the ability to lock for a short period of time.

It has yet to be determined if in fact banks are lending, and for those that are, is it truly “business as usual”?? One thing is for certain, and that is rates are dropping fast and potential mortgage applicants are flooding the phone lines searching for the best loan in history.

As congress continues its quest for the second half of the $300+ Billion dollar “TARP” money, and as mortgage rates continue to shatter historic low levels, the question remains:

“WHO IS GETTING THESE RECORD LOW INTEREST RATES AND HOW”??

“The bottom line is, unless you are in the top tier of loan-quality, you are not seeing the best rates in the marketplace”, says Shmuel Shayowitz, President of Approved Funding. Approved Funding is a quarter of a century old mortgage bank headquartered in Bergen County, New Jersey.

Today, the top tier “loan quality” is no longer just described as someone with full income verification or someone with merely an exceptional credit rating. In order to get THE ABSOLUTE BEST mortgage rates in the market, each and every applicant must meet several key factors including credit score, property equity, debt-to-income ratios, and cash reserves.

In March 2008, Fannie Mae and Freddie Mac released a “risked based pricing” tiered system which would add on penalties (“pricing adjustments”) depending on the specifics of a loan profile. According to Shayowitz, “The best rate available in the marketplace today would represent a borrower who has at least 40% equity in their home, and has a FICO credit score of greater than 740.” In addition, the transaction must be for a Single Family primary residence, and must be a purchase mortgage or non cash-out refinance.

Candidates meeting all of those criteria, and qualifying with full income verification, can truly benefit from these historically low rates. That’s not to say that others who fall just shy on some of these items will get a much higher rate, but it will certainly cost “someone” more money to originate that loan.

So as you speak with your family, friends and colleagues and swap stories about what rate their broker or banker was able to obtain for them, be certain that all of these factors of consideration are taken into account in order to truly make an apples-to-apples comparison.

To recap – a “AAA Borrower” must meet the following criteria, in order to get the absolute best rate on a mortgage:

• >=740 FICO credit score
  
• Single Family home
  
• Primary Residence (Owner Occupied)
  
• Loan-to-value of <=60% (ie: 40% equity in your home)
  
• Purchase or Non Cash-out transaction
  

BREAKING NEWS: Fannie Mae has released yet another adjustment schedule with signifigantly higher price add-ons for lower tiered FICO and Loan-to-Value borrowers… Although the official effective date is not until April 1, 2009, many banks and lenders have already changed their rate sheets to reflect these increased pricing adjustments. So inspite of lower rate in the marketplace because of Fed mortgage backed security purchasing, some banks may in fact reflect higher rates starting Monday morning!

With rates dropping to historical lows, Home buyers who are starting to get the buyers “itch”, are quickly getting the loan officer “ditch”!!

Simply put, as the number of loan applications sky rocket to levels not seen in almost a decade, loan officers are starting to prioritize the quick “low hanging” refinance loans, versus that of a long drawn out purchase transaction.

If that weren’t enough, it is reported that even the level of mortgage refinancing is struggling as brokers, lenders, and mortgage banks are ill equipped to handle the volume due to past layoffs and company consolidations.

In a recent conference call with our company mortgage consultants, I reminded them about “biting off more than we can chew” and about the importance of customer service.  It’s OK to not to work with EVERY single borrower that calls.  Our first and foremost priority should be with past clients and referral sources who have always been the cornerstone of our business. 

When I speak to fellow mortgage originators in the industry, I get a feeling that they are tripping over loan applications, very similar to Lucy and Ethel are handling their volume in this classic I LOVE LUCY skit below. (comments continue after video) 

I love Lucy Chocolate Candy Assembly Line 

I am confident that the manner in which a pending loan application is being handled, or mishandled, is a direct result of the current refinance “boom”.  It is critical to sense these inefficiencies early, and work with consultants and companies that are committed to handling YOUR business in the manner and professionalism that it deserves.  

It’s important to not to settle for quick talking, penny pinching salesman, versus qualified and experienced loan consultants that will give you the BEST ADVICE AND THE BEST PRICE.