In order to make the pre-approval process as smooth as possible as well as to prevent last minute surprises from occurring it is important that we take a thorough application and collect the proper income and asset documents at the outset of the application process.
MSN published this article this morning on how to WOW a mortgage lender. I must concur with their comments. The article also provides a nice summary of the “4 C’s” which I covered in this previous blog posting.
Fannie Mae released an announcement yesterday which indicated they are tightening some of their guidelines to qualify for a new mortgage. The reason this is important is because Fannie Mae dictates underwriting guidelines for virtually all mortgage lenders.
There is one guideline change within this announcement that we feel will be impactful and thought we should share it with you.
It involves a buyer who is buying a new primary residence but has yet to sell and close on their existing residence. In this circumstance the buyer is required to qualify for BOTH mortgage payments (BOTH= the proposed mortgage payment on the new house & the existing mortgage payment). However, currently we are able to offset a portion of their existing mortgage payment by giving them a credit for the market rent that their home would earn if they chose to rent it out (even if this is not their intention). This helps them qualify for the new house. However, Fannie Mae has changed that guideline to the following (bold and italicized copy represent the changes):
1) If current home is being retained as a 2nd home (basically no rental income needed to qualify, but home is not being sold) – qualify with the full PITI payment on both properties plus borrowers must have 6 months mortgage payments in reserves for both homes!
2) If the home is being retained for an investment property & rental income is needed to qualify, you need the following: a) Evidence that the borrower’s have at least 30% equity in their current home, b) a copy of the fully executed lease agreement & c) evidence of receipt of the security deposit & deposit into the borrower’s account. If the borrower’s lack 30% equity (as verified by appraisal, AVM or BPO (Broker Price Opinion), you will also need 6 months’ mortgage payments in reserve on both properties*!
With average market times increasing (Washington County currently around 70-80 days) this will delay buyer’s ability to purchase a new home.
What you need to do?
Be sure your client gets pre-approved EARLY AND OFTEN!
Closing costs can play an important role in deciding on a lender to work with. Many consumers elect to “shop around” to be sure that they are obtain mortgage services with competitive terms. I encourage consumers to educate themselves on their options and take pride in going over the costs of a mortgage/ home purchase during my initial consultation with my clients. Equally important to evaluating the costs various lenders are offering I believe it’s critical that consumers feel confident that the lenders they are shopping are fully disclosing the costs and various options available to them.
Quick note: If a lender does not voluntarily or refuses to provide to you a summary of their charges then you should be VERY skeptical of the services they are offering.
In a face-to-face consultation I typically always go over ALL the costs associated with buying a home and taking our a mortgage. I have put together this summary for instances where I’m unable to meet face-to-face or for a client to visit and refresh their memories.
Costs associated with the origination of a new mortgage (please note that all these fees may not apply to your situation)
It’s important to understand that a closing cost summary is a snapshot of the entire transaction and includes expected settlement charges not only from the lender but also all the other 3rd party servicers involved with your purchase ore refinance. These servicers include the appraiser, lender, escrow/ title company, county recorder’s office, etc.
It may also include pro-rated payments such as collections for your impound account so that you can have your real estate taxes and homeowner’s insurance collected with your monthly mortgage payment and/ or payment of property taxes that need to be reimbursed to the seller for time in which you will own the home.
In order for you to make the best possible decisions with regard to your loan it’s important to understand what all these charges mean and how they affect your loan. Here is a summary of the fees you can expect to incur:
Loan Origination Fee, Loan Discount, Mortgage Broker Fee: Points are disclosed in this section. A point is equal to 1% of the loan amount and is a fee that can be charged at closing in exchange for a lower interest rate over the life of the loan. The status quo in the mortgage industry is to charge a 1% origination fee although lenders should also offer 0% point options. There is an inverse relationship between the points you pay and the locked interest rate a lender will be able to provide.
Appraisal fee: The cost of your appraisal is disclosed in this section. A standard appraisal with an interior and exterior inspection runs $450-$550. Appraisals for newly constructed homes may also include a $75-$100 charge for a 442 final inspection. Some lenders will require a second review appraisal which can run another $450-$550. A consumer usually won’t know if they can expect to pay for a second appraisal until an underwriter has review the first report.
Credit report: A credit report costs between $20-$30 depending on the agency that it is pulled from. Depending on the length of your escrow we may need to pull multiple reports which could increase the cost on this line. Furthermore, if there are corrections that need to be made and supplemental work is required on your credit report then these charges can be much higher.
Processing fee: We have an in-house processing department. This means that documentation taken from you as the borrower, appraiser, credit reporting agency, title company, insurance agent, and realtors are packaged up and organized on-site. Our processing department then works in direct contact with our lender to make sure that your final approval and loan documents are ready for your closing in a timely manner. The processing fee is paid to compensate for their behind the scenes work.
Underwriting fee/ Wholesale Administration fee: All lenders have an underwriting department that is in charge of analyzing the loan and approving or denying it. Lenders will charge anywhere from $595-$1,100 to underwrite a loan package depending on the type and size of the loan.
Tax Related Service Fee: All lenders are required to order a tax service for each specific loan they originate. The tax service is responsible for checking in annually to make sure that a borrower is paying their taxes (i.e. federal, state, municipal, etc.). The reason this is important for a lender is because government agencies have the ability to place liens on a property ahead of their mortgage liens. The tax service fee is usually $75-$100 depending on the lender and can often be included in the Underwriting/ Wholesale Administration fee.
Wire Transfer Fee: Banking laws require that amounts of money greater than $10,000 be wired through the Federal Reserve Bank so that they can monitor the transfer and flow of money in the United States. Lenders incur fees every time they wire funds to the escrow company in order to fund your loan. Wire transfer fees range between $50-$150 and can also be included as a part of the Underwriting Fee/ Wholesale Administration Fee.
Document Preparation Fee: If you’ve ever signed loan documents before you know how many need to be signed. Many lenders charge a fee for drawing the set of loan documents which are then sent to escrow for your signatures. These fees can range between $50-$225 can also be included in the Underwriting Fee/ Wholesale Administration Fee.
Flood Certification Report: Lending laws require that lenders pull a flood report for every property they are lending against. These reports tell the lender whether or not the property is located in a flood zone and whether or not the borrower will need to purchase flood insurance in conjunction with their homeowner’s insurance. A flood certification report usually runs between $15-$30 and can also be included in with the Underwriting Fee/ Wholesale Administration Fee.
Title/ Escrow Charges
This section of the summary discloses the expected settlement charges that the title/ escrow company will charge. Please note: In evaluating a loans for a home purchase, these fees may vary widely from lender to lender but at the end of the day these fees will be the same no matter what your GFE says and what lender you go with.
Closing or Escrow Fee: This fee is paid to the escrow company and is their compensation for acting as the 3rd party facilitator for the transaction. In a nutshell, for a purchase they take the funds from the buyer (down payment + loan proceeds) and exchange it for a deed to the property from the seller. For a refinance they take the loan proceeds from a new loan and pay-off all the existing debts that need to be paid off. Escrow fees are dependent on the size of the transaction but usually range between $250-$800.
Document Preparation Fee/ E-Doc Fee: Some escrow companies charge a fee for the process of working up a set of escrow documents which legally give them permission to act as the 3rd party facilitator. This fee is usually around $100.
Title Insurance: Title insurance protects you and the lender in case the title to the subject property does not accurately represent the correct and indisputable ownership of the property. Essentially it insures against losses incurred because of defects to the title of the property. Title insurance premiums are paid to the title insurance company and depend on the size of the loan and whether or not it
is a refinance or a purchase.
Endorsements to Title Insurance: Like any kind of insurance policy (i.e. title, auto, home) insurance companies write very general policies that apply to the most amounts of people so they can create economies of scale. Everybody’s situation is different which means you will likely also have to purchase endorsements to your title insurance policy. Title insurance is no different. These endorsements will be specific to your loan, property, and location. Endorsements usually will cost an additional $50-$250.
Courier: On the day that your loan funds the escrow company will have to get the new deed down to the county recorder to record the document. They almost always hire a courier to do this which will cost between $50-$125.
Re-conveyance Fees: Re-conveyance fees only apply to refinance transactions. These are fees that are charged to release the previous lender’s interest in the property and convey the new lender as the lien holder. Re-conveyance fees usually run $120 per existing loan.
Early-Issue Title Insurance (EITI): Early-Issue Title Insurance is an additional title insurance premium required by lenders for borrowers who are taking out a new loan secured by a newly constructed home. It is an insurance policy that protects you and the lender from any mechanics liens filed against the property after you close. The cost of the insurance is usually $2.00-$2.50 per $1,000 in the loan amount. If you are using Continental Home Mortgage in conjunction with buying a JLS Custom Home often time we can have this cost waived.
Government Recording & Transfer Charges
The 1200 section of the GFE are charges collected by the government to cover recording charges and any taxes that need to be collected in connection with the transfer of real estate. Please note: As it was with the Title/ Escrow charges, at the end of the day no matter what lender you end up working with these charges will end up being the same even if they aren’t disclosed on the GFE.
Recording Fees: Each county recorder charges a slightly different amount to record the deed. The charges are based on a per page basis. Typically the cost to record the Deed is $110-$175.
City/ County Tax/ Stamps: Some counties collect a tax for any real estate sale that occurs inside the borders of the county. Most notably, Washington County, OR charges .10% of the purchase price to be split evenly between the buyer and seller.
Additional Settlement Charges
In unique circumstances there may be other charges that arise. For example,
sometimes Condominium Associations will charge set-up or pro-rated assessments to borrowers at closing. These fees may be itemized in this
section.
Items Required By Lender to Be Paid in Advance
Charges in this section may vary depending entirely on the time of month you close and the amount of your homeowner’s insurance premium. Please note: Charges disclosed in this section are NOT dependent on the lender you choose to work with.
Per Diem Interest: This charge is representative of the interest that the lender will collect at closing to pay for the interest on the loan from the date of funding to the end of the month. For example, if the loan closes on the 16th of the month then the lender will collect 15 days worth of interest at closing to pay for the rest of that month. Lenders have to collect interest at closing because mortgages are paid in arrears which means when you make a mortgage payment you are actually paying the interest for the previous 30 days. This differs from rents which is typically paid in advance (a tenant pays on the 1st of the month to live in the property for the next 30 days).
Hazard Insurance Premium: Hazard insurance and homeowner’s insurance are one in the same when it comes to your mortgage disclosures. You are obligated to select your homeowner’s insurance coverage and premium. Ultimately the premium you agree to is what will be paid at closing. However, at the disclosure stages your mortgage professional will estimate this amount on your behalf.
Reserves Deposited With Lender
This is only applicable if you intend on having real estate taxes and homeowner’s insurance included with your monthly mortgage payment. If you elect to pay these items separately then there will not be any amounts listed in this section.
If you choose to have your real estate taxes and homeowner’s insurance impounded then the collections in this section will depend entirely on the amount of property taxes for the subject property, the timing of your scheduled close date, and the amount of your homeowner’s insurance. Your mortgage professional should be able to explain why the lender is collecting what they are collecting.
Comparing two GFE’s from two separate lenders can often be a confusing and overwhelming task. It can be very difficult to differentiate between costs and fees that are connected to the lender and costs which are independent of the lender.
Here are some common tips in evaluating a GFE that will help you best understand what you’re evaluating.
* The 800 section is the only section that should vary between lender- It states very clearly on the GFE that the charges itemized in the 800 section are “ITEMS PAYABLE IN CONNECTION WITH THE LOAN.” It stands to reason then when comparing two lenders with two different loan offerings that this is the section which can vary between them. The rest of the sections in a GFE (1100, 1200, 1300, 900, & 1000) disclose charges form 3rd party-service providers or pre-paid interest, taxes, & insurance which are all independent of your lender. Although there may be discrepancies between two competing GFE’s in the non-800 sections these should not be taken into account because in the end these charges should end up being the same (some minor exceptions may apply).
*Differences in title and escrow fees do not necessarily represent a cheaper option- Many times clients will share GFE’s with us from another lender which at first glance appear to offer lower settlement charges. But, after carefully reviewing how the charges are broken out they find that it is not the case after all.
For example, let’s evaluate a situation where an applicant is comparing 2 GFE’s for a $250,000 loan they are taking out to buy a $350,000 home. Here is a summary of 2 GFE’s from two different lenders:
Lender 1-Total Estimated Settlement Charges – $7,103
Lender 2- Total Estimated Settlement Charges- $5,242
After closer evaluation the applicant realizes that despite the higher figure for Total Settlement Charges that lender is actually offering a lower closing cost option. Here is how the GFE’s broke down by section:
Sec. 800 charges (loan closing costs)
Lender 1= $1,608
Lender 2= $3,958
Sec. 900 (Prepaid Interest & Insurance)
Lender 1= $1,728 (cumulative= $3,336)
Lender 2= $467 (cumulative= $4,425)
Sec. 1000 (Prepaid Insurance & Taxes for reserves)
Lender 1= $2,650 (cumulative= $5,986)
Lender 2= $0 (cumulative= $4,425)
Sec. 1100 (Title & Escrow closing costs)
Lender 1= $975 (cumulative= $6,961)
Lender 2= $675 (cumulative= $5,100)
Sec. 1200 (County recording)
Lender 1= $142 (cumulative= $7,103)
Lender 2= $142 (cumulative= $5,242)
In taking a closer look at the GFE the applicant realizes that lender 2 is actually charging $2,350 more in lender fees than is lender 1. However, by “low-balling” the expected closing costs for title & escrow charges & by showing a loan with no impounds (versus Lender 1 who included prepaid taxes and insurance) Lender 2 was able to make their loan look cheaper. In fact, in this example it is not the case.
*Closing costs are not the only story- Just because a lender has presented to you a GFE with the lowest closing costs doesn’t make it the best option for you. Keep in mind that a GFE may not accurately disclose all the important terms of a mortgage. Therefore, in determining what loan option is best the applicant should also consider the type of loan, payment, prepayment penalty, and reliability of the lender.
Generally speaking there is an inverse relationship between closing costs and interest rate. Therefore, if an application intends on being in a home for the long-term it may make sense to incur more costs at closing by paying additional points in exchange for a lower interest rate.
*Trust your intuition- Although the GFE is meant to help consumer’s easily compare loan options from different lenders we often find that the average consumer has difficulty clearly comparing multiple GFE’s. Ultimately, it is usually a good decision to work with a lender that your intuition says you can trust. Give each lender an opportunity to walk you through their GFE and explain each of the charges. If a lender is not willing to give you a GFE or is not willing to take the time to explain it to you then often times this lender is not going to perform as promised.
Has your home recently been listed for sale? If so, did you know that by having your home listed for sale your ability to refinance your mortgage is severely limited?
95% of banks will not lend on homes that have been recently listed for sale because they are concerned that the home might go back up for sale as soon as the loan is funded or that the borrowers are in dire financial straights. Lenders make their money by putting a mortgage in place and collecting interest over long periods of time. Therefore, anything that threatens the length the mortgage is typically a roadblock for loan approval.
That said, because we have the ability broker loans we have targeted a couple investors who will allow us to refinance a home that has been recently listed so as long as the home is off the market at the time when the formal application is made.
These lenders are limited to owner-occupied homes only and will only allow us to provide a rate/ term refinance (meaning that we cannot pull-cash out). Extenuating circumstances such as a job transfer that fell through may override this restriction.
So, if your plan is to put your home up for sale and there is a chance that you may instead decide to stay in the home and refinance it’s best to have a conversation with us first.
In evaluating a loan application to determine whether or not an applicant qualifies for a mortgage lenders look at four areas. These four areas are known as the “Four C’s” and stand for:
1) Credit
2) Capacity
3) Capital
4) Collateral
Here is a summary of each “C” and how they impact the loan approval process:
Credit:
Credit is arguably the most important factor of the 4 C’s. An applicant’s credit score taken from the credit report is the simplest measure of their credit strength. In determining an applicant’s credit score lenders will simply use the middle of the three credit scores reported by the three credit repositories (Transunion, Equifax, & Experian).
Credit scores are heavily influenced by a person’s payment history over the preceding 24 months. Other factors may include the proportion of revolving debt relative to the high credit limits, number of accounts, lack of credit depth, and many more.
Another factor that lenders may pay attention to in an applicant’s credit profile is their housing payment history over the preceding 12 months. This may be reflective in a previous mortgage on the credit report or by verifying rent payments if the applicant does not currently own a home.
Finally, bankruptcies, judgments, and foreclosures can all negatively impact the credit analysis for an applicant. Just because an applicant has these negative marks on their credit report doesn’t mean they cannot get approved for a mortgage. It simply means that they would have to show other compensating factors and/ or may have to accept higher rates and terms.
Capacity:
In addition to reviewing an applicant’s credit banks want to analyze their ability to repay the mortgage over time. The primary tool they use for this analysis is a debt-to-income ratio. Simply put, the debt-to-income ratio is the sum of all monthly payment obligations an applicant has (including the proposed housing payment) divided by their gross monthly income.
For example, here is a hypothetical debt-to-income calculation for John & Jane Doe
In this case the debt-to-income ratio of 24.75% would likely be viewed upon favorably by the lender. In most cases banks will accept DTI’s as high as 45% and in some cases up to 50-65%.
Obligations:
*Proposed housing payment (including real estate taxes and homeowner’s insurance): $2,000
*Car payments: $250
*Student loans: $150
*Minimum monthly payments on credit cards: $75
Income:
John’s monthly gross income: $5,000
Jane’s monthly gross income: $5,000
Debt-to-income calculation:
Total obligations: $2,000+$250+$150+$75= $2,475
Total income: $5,000+$5,000= $10,000
DTI=24.75%
Capital:
Does an applicant have a financial cushion to fall back on if their income is unexpectedly interrupted for a period of time? Has the applicant shown a pattern and habit of saving money over time? These are important questions to a lender and can be answered by reviewing an applicant’s capital accounts.
Capital accounts are any account with liquid assets that a borrower could access if need be. The most common forms of capital accounts on a loan application are checking, savings, money market, brokerage, IRA, and 401K accounts.
In most cases the bank will want to verify that an applicant has an amount equal to 2 months worth of their total housing payment (including real estate taxes and homeowner’s insurance) saved up in a capital account after they subtract any cash required for down-payment & settlement charges. If the mortgage is going to be secured by an investment property or second home the bank may want to see more capital for the applicant.
There are loan programs and lenders that do not require any capital or will allow capital to be gifted from family members.
Collateral:
The final piece of the mortgage application that the bank is interested in reviewing is the property itself. After all, if a borrower fails to make their monthly payments then the bank will take the house back and sell it in order to recoup the money that they loaned against it.
The value of a home will generally be determined by a professional appraiser’s appraisal report. Although, over the past few years automated and data base driven appraisals have become more common.
In reviewing the collateral for a property the bank will review two basic questions:
a) Does the appraiser’s determination of value for the subject property support the value that the applicant is buying (or refinancing) it for?
There are multiple methodologies for determining the value of a home. The two that show up in an appraisal report are the “cost approach” and the “sales comparison approach”.
The “cost approach” determines the value of a home based on the value to rebuild or replicate the property from scratch. This analysis will take into consideration the value of the land that the home is built on and add the cost to rebuild the improvements based on the square footage and amenities (i.e. basements, garages, etc.). The “cost approach” is less relevant to a bank because they never intend on rebuilding the property. However, they may review this in determining if the homeowner’s insurance policy provides enough coverage.
The “sales analysis approach” is the most relevant to lenders in determining the value of the collateral property. With this approach an appraiser will find what they consider to be the 3-6 most comparable properties that have sold near (usually within 1 mile) the subject property within the past 12 months.
The appraiser will then make adjustments to the value of the subject property by comparing various features of the home. Among the factors that can impact the adjustments are square footage, view, quality of construction, built in amenities/ upgrades, number of bedroom and bathrooms, heating cooling systems, etc.
The value as determined by the sales analysis approach is the most important in determining the value for the home in the lender’s perspective.
b) What is the ratio of the loan amount to the value of the property (LTV)?
The loan-to-value (LTV) ratio is also an important consideration for the bank. The LTV measures the amount of money the lender is lending against the value of the collateral.
All else being equal a greater LTV is riskier for the bank than the same loan application with a lower LTV. This is because in the event of foreclosure it is less probable that the lender will recoup the entire loan versus a loan with a higher LTV.
Important Thresholds
There are important thresholds in the underwriting guidelines of most banks which make it more or less likely that a loan will get approved or that a loan will be approved with more favorable or less favorable terms.
These are:
-LTV=
<70%- with an LTV of less than 70% the lender will generally feel very comfortable with the loan. This is because the borrower has a significant of “skin in the game” such that if they should fall behind on their payments they will likely do whatever they can to pay the loan current before foreclosures sets in. Lenders know this and therefore are less concerned about the other 3 C’s with these applications.
70-80%- In general lenders are also very comfortable with an LTV between 70% & 80%. This is because they know that if they had to foreclose on a property it is likely that they could recoup the loan with little risk.
80.01-90%- At 80-90% LTVs bank begin to look for other compensating factors in the file. They may begin looking closer at an applicant’s reserves, income, or source of down payment. It is likely that the bank may charge a premium to the interest rate of anywhere from 0%-.50% depending on the loan file.
Furthermore, if the applicant elects to do 1 loan they will require some form of mortgage insurance. Mortgage insurance is an insurance policy that the borrower usually pays for. The insurance would cover a portion of the lenders losses in the event that they had to foreclose on the property and they did not recoup the entire loan.
90.01%-95%- With less and less equity in the transaction a lender will certainly want to see other compensating factors at higher LTVs. This would include higher credit scores, greater reserves, employment stability, etc. The lender may impose a risk premium to the interest rate of .125%-1.00% Again, with one loan the lender will require the borrower purchase mortgage insurance in the event that they default on their payments.
95.01%-100%- With less than 5% equity into the transaction the lender will make sure that the borrower has ample reserves and solid credit. At these levels the lender is at the most amount of risk because in the event that the borrower defaults and forecloses on the home in the initial couple years it is almost guaranteed that the lender will incur a loss. Borrowers will typically pay a .25%-2.00% premium to their interest rate for this type of approach.
Our compensation typically ranges from 1-2% of the loan amount depending on the interest rate environment and type of loan we’re providing.
With a 0% point loan structure the lender that we assign the servicing rights of your loan to will compensate us by paying us a fee for the right to collect the future mortgage payments. In this instance our client is not paying us our fee for originating the loan because the lender is.
Choosing a loan option with points is a little bit different. In this instance the borrower is paying us a fee of 0-2% that is paid at closing and is included in the closing costs. It is also possible that our compensation is paid as a combination between points charged to the borrower and fees collected from our lender. We are always happy to be transparent about our compensation so please feel free to ask us questions.
Our firm also charges a processing fee of $395 that will go towards the in-house processing of your mortgage paperwork. This insures that your loan closing will happen in a timely manner. If, for any reason your loan closes late because of an issue within our control we will absolutely refund this processing fee.
If we originate the loan using our in-house banking line we will charge a $650 underwriting fee and a $19 4506T processing fee. These fees cover the standard costs associated with the underwriting, document preperation, funding, wire transfer, and flood certifcation charges that go along with the origination of a new loan.
In the event that we broker the loan to a wholesale lender they will typically charge similar fees which will range between $595-$995.
What is a point? A point is equal to 1% of the loan amount and is a fee that can be paid at closing in exchange for a lower interest rate for the life of the loan (in most cases the discount for paying a point is .125%-.375%). A point is disclosed on the Good Faith Estimate as an origination fee or loan discount. At the end of the day it doesn’t matter to you what the point is called. The bottom line is you need to decide whether or not you feel the upfront investment of paying 1% point is worth the discount in interest rate that you will receive. If you intend on having this loan for the long-term (i.e. > 5 years) then paying upfront points may be a good idea. However, for shorter term outlooks it generally does not make sense.
We typically recommend to our clients NOT TO PAY POINTS (adjustable rate mortgages are an exception)because in our experience the upfront cost of 1% point does not justify the long term savings. This is because we’ve found that most of our clients DO NOT keep their loans long enough to benefit from the modest interest rate discount that paying a point provides. Empirical data also supports our philosophy as the article below from the Seattle Times suggests.
Seattle Times Article about Points:
Report: Buying points rarely pays off
CHICAGO — A new report claims that borrowers tend to purchase too many points when selecting a mortgage and end up paying more than they would have with no points and a higher interest rate.
The study was co-authored by Abdullah Yavas, Elliott professor of business administration at Pennsylvania State’s University’s Smeal College of Business, and Yan Chang, of Freddie Mac. The two considered 3,785 individual mortgages originated from 1996 to 2003, looking at the points paid, interest rates and loan length.
Data showed that, on average, those who buy points are overestimating the amount of time they will hold their loans. They tended to pay off their mortgages about 37.5 months too early for the purchase of points to pay off,
defaulting, moving or refinancing before hitting a break-even point so the strategy made financial sense.
By purchasing points, borrowers lower the interest rate on the mortgage. One point is equal to 1 percent of the mortgage, charged as prepaid interest. Points paid to purchase a primary residence are deductible in the year they are paid on federal income-tax returns; points paid to refinance must be written off over the life of the mortgage.
“We underestimate the possibility that we may refinance in the near future — or refinance again in the near future — and we underestimate the possibility that we may have to move, either for job relocation or other
reasons,” Yavas said.
Only 1.4 percent of borrowers who purchased points held their loans long enough to make it pay off; of those who didn’t buy points, only 1.5 percent would have been better off purchasing them, according to the study.
However, Yavas pointed out that the data cover a time of decreasing interest rates and increasing property values, which led to a lot of refinancing.
The report also found that borrowers who buy points often don’t treat them as costs they can never recover and so are less likely to refinance. When they do refinance, they often do it late, perhaps hoping to compensate for
the points paid.
If a borrower “paid too many points and the interest rates come down quickly, refinancing right away would be the same as accepting the fact that you shouldn’t have paid those points,” Yavas said.
Yavas took an interest in the topic after he decided to refinance his own home a few years back and considered the trade-off between points and interest rates.
Wells Fargo announced today that after March 28, 2008 they would no longer accept “stated income” applications. “Stated Income” loans grew popular over the past few years especially for applicants who were self-employed and reported large deductions on their tax returns. The program allowed applicants such as this to “state” their income on their application without documenting or proving this for the underwriter.
Wells Fargo was one of the last investors out there who was approving these loans but now it looks like this flexibility will be lost at least for the foreseeable future.
For those of us familiar with the real estate sales process we know that it is very common for buyers to request that the seller pay all or a portion of their settlement charges. This reduces the amount of cash they have to bring to closing. Especially for first-time homebuyers who often do not have a lot of cash this is an important flexibility to make deals work.
Countrywide, one of the nation’s largest mortgage lenders announced today that they would no longer accept addendums to sales contracts where the buyer and seller are increasing the sales price in order to include seller paid settlement charges. Their concern is that the increase in price & loan amount are not dully backed by the market value of the property and therefore leaves them exposed to equity that does not actually exist.
Here is an excerpt from their announcement on what is acceptable and unacceptable:
SELLER CONCESSIONS (Question & Answer ): For now this guideline only exists with Countrywide. However, love them or hate them they are a bellwether in the mortgage industry and are probably only following the guidance that Wall Street is giving them. It is reasonable to assume that other lenders will likely follow in their lead over the next weeks/ months.
Q – Buyer and Seller are going back and forth counter-offering the purchase agreement. Initially the sales price offered was $300,000 w/no seller paid closing costs or prepaids. This amount was never agreed upon, but a counteroffer was made to a sales price of $303,000 w/the sellers paying $3000 in closing costs and prepaid. This is accepted by the seller and set as the terms of the transaction. I believe that this is an acceptable transaction.
A – Correct. And the closing costs paid by the seller must meet the 3, 6, or 9 percent limitations as usual.
Q – Buyer and Seller are going back and forth counter-offering the purchase agreement. Initially the sales price offered was $300,000 w/no seller paid closing costs or prepaids. This price is accepted by the sellers. Later the transaction is amended to request a change in the terms to a sales price of $303,000 w/the sellers paying $3000 in closing costs and prepaids which. This is accepted by the seller and set as the terms of the transaction. I believe under the CW policy this is NOT an acceptable transaction.
A – Generally correct. There may be times when the contract is final and then re-negotiated, e.g., a new home and additional upgrades being added, so that an increase in the price actually makes sense, there is a value add on both sides. In your example above, there doesn’t appear to be a reason for the seller to raise the price other than to cover the costs, so the borrower is technically paying his own costs and potentially increasing his property tax liability for no apparent reason. This is particularly a problem if the contract is final, the appraisal comes in high and then there is a subsequent increase in the purchase price and agreement for the seller to pay closing costs or to pay more…it would appear they were gaming a bit and this is unacceptable.
The lesson for guiding buyers and sellers through this is to ask buyers UPFRONT if they will need any seller paid settlement charges. This is another reason why we think it is important that your buyers meet with us PRIOR to going out and writing an offer on a home. We can sniff these needs out before it becomes an issue. Let us know if you have any scenarios or questions you’d like us to review.