Would You Lend Money to Donald or Hillary?

You may have been conscientiously deliberating which candidate to vote for over the past several months. Your selection might become clearer if you contemplate this title question – as if you were a lender deciding whether to extend them a loan! Not voting is always an option, but not likely a decision that would sit well with you (even though reports suggest this option is seriously being considered by many voters).

When a client applies for a mortgage, the assignment is either accepted or declined – with concrete rationale behind either decision. But a lender electing to entirely avoid making the decision to either lend or not – may be compared to not voting. Imagine a lender choosing never to return your phone call to give you their credit decision. In this analogy, not voting (or not providing a credit decision) doesn’t help either candidate (or borrower) – nor would it likely help yourself.

There is no excuse for lender/voter unresponsiveness. Borrowers/candidates deserve prompt, reliable feedback which, from a lender’s perspective, is generally based on the following 5 “C’s” of credit:

1. Credit History (Repayment History & Credit Score)
2. Capacity (Ability to Repay & Earnings Stability)
3. Capital (Down Payment & Liquidity)
4. Collateral (Property Type & Value)
5. Conditions (Loan Terms & Purpose)

The first one above was formerly entitled “Character” – which arguably is still the most important factor. But by telling a client their loan was declined because of “Character” (or lack thereof), the decision could be judged as discriminatory.

 

Student Loans Matter

The Wall Street Journal recently reported that 43% of the 22 million people with federal and private student debt are not making their monthly loan payments.  This includes those who are in default (more than twelve months late), delinquent (more than one month late), or received permission to postpone their payment due to economic hardship.  It’s no wonder lenders have tightened their related underwriting requirements!

Some say the consequences of simply assessing a higher default rate of interest is not harsh enough.  Others say student borrowers are more apathetic now because they are in the same boat with 10 million others – and the problem is just too large to penalize everyone.

A lender cannot generally repossess a borrower’s car or other assets in the event of a student loan default.  But to recoup losses, the government is now garnishing wages and withholding tax refunds once students commence a job after graduation.

When seeking mortgage pre-qualification, applicants have not been required to include deferred student loan payments in their debt-to-income ratio calculation – provided the deferral was for more than 12 months beyond the proposed mortgage closing date.  Now, FHA lenders will generally use the known monthly payment or 2% of the student loan balance – versus conventional lenders using the greater of the actual monthly payment or 1%.  Assuming a $37,000 deferred loan (the average U.S. student loan balance today), suddenly having to include a 1% or $370 monthly projected payment would certainly have an adverse effect on a mortgage qualification ratio.

 

Free Money at the Closing Table

Free?  I think not!  But there are definitely “lender credits” available to you, depending on the interest rate you select.  The technical term for this credit is “yield spread premium”.  But is the lender passing this credit on to you, or are they keeping it – and therefore booking additional profit from your loan?  This profit would be in addition to their processing fee, and results from the earnings spread they generate between what you pay them versus what it costs them to fund your loan.

The higher the interest rate you pay, the higher the credit to which you should be entitled – all of which can be applied towards offsetting your closing costs.  In arriving at this credit, the lender factors in certain standard risk adjustments that are based on variables such as your credit score, loan amount, collateral type, and loan-to-value ratio.  The lesson to be learned is that your lender should always fully disclose the amount of this credit – even if it is in the form of a reduced interest rate.

Recently I had a client who was able to increase his lender credit by simply taking a few steps to improve his credit score.  After following a program of credit card debt reduction, his FICO score increased from 599 to 642.  This favorably resulted in an increase to his lender credit of 1.25% of his loan amount – a savings of $2,500 which he was able to apply towards the closing costs on his $200,000 residential mortgage.

 

Identity Theft: Curious Advice…

Imagine some guy by the name of “Greg” using your name and social security number to borrow three private loans totaling $10,000. Wouldn’t you feel violated? You would also be furious if this showed up on your credit report only 5 days before your new mortgage is scheduled to close!

The fraudster is not about to make principal and interest payments on the scam loans. So your credit score will immediately deteriorate because of late payments, which you likely won’t even know about – unless you frequently check your credit scores.

This happened to a client of mine last week. His attorney recommended that he: (i) request a fraud alert be placed on his credit report, and (ii) commence making the required monthly payments on the fraudulent loans…

PARDON??!

Imagine making payments on a fraudulent loan – and then trying to prove later that your payments should be recouped? I don’t actually blame the lawyer – because he was simply trying to stop the fraudster, and help the borrower get a mortgage by maintaining a decent credit score. What was missing, however, was that a new conventional or FHA mortgage lender will require evidence that an act of fraud had been committed – which will include the filing of a police report. The omission of or delay in filing this report gives the appearance of “hiding” the identity theft. It is very important to demonstrate to the lender that all the right steps have been taken to address the problem as quickly as possible.

 

Refinancing? The Grass Isn’t Always Greener

My client made the right decision last week. He decided not to refinance his mortgage – even though:
(i) he qualified for a better interest rate (because his credit score had improved),
(ii) the value of his primary residence was way up, and
(iii) he could have used some of the equity in his home to consolidate debt.

His credit score was 650 – lower than what he had hoped for, mainly because of some unavoidable late payments a while back. Keeping his loan-to-value ratio at 80% (to avoid mortgage insurance premiums), he was surprised to discover that, with his credit score, he would still be assessed 3.0% of the loan amount at closing. In addition, because he was looking to pull out some equity (i.e., obtain a new loan greater than his existing loan amount), the “cash-out refinance adjustment” would have been another 2.625%. Along with a couple of other incidental adjustments for loan size and overall risk profile, the cumulative risk adjustments would have been 5.85% of his requested loan amount – or $5,850 on a $100,000 loan.

Sure – I found a lender who would offset all of these costs. The problem was his interest rate would be no different than the rate he already had on his existing loan. Also, his principal amortization schedule would reset upon the commencement of his new 30-year mortgage. Therefore, the portion of his new monthly mortgage payment attributed to principal reduction would be less than what his principal payment was under his existing loan.

 

Christmas Without a Mortgage

My lender declined my client’s mortgage today, four days before Christmas. His existing loan expires on December 31, and this was his last chance to refinance before the lender could commence foreclosure proceedings.

This 70-year old gentleman has no late payments on his credit report. However, a credit card company entered a judgment against him six years ago, and conventional lenders require this to be removed before extending new credit. Unfortunately, he lacks the liquidity to eliminate the judgment, and his age has been an obstacle to finding a job to augment his social security income. Although the private lender liked his story, they would not accept a Debt-To-Income (DTI) ratio over 50%.

Many people rent the other side of their duplex – but the key issue is whether the lender will classify the rent as “boarder” income (100% of which may be used for qualification purposes) or “investment” income (only 75% of which is allowable – to factor in the potential loss of the tenant). The boarder income argument was valid because the building has only one tax parcel number and is still technically his primary residence. But the Underwriter disagreed, and the resulting lower income caused his DTI ratio to exceed the maximum threshold.

In the end, the proposed structure was declined at a lousy time of year. Fortunately, the lender agreed to approve a lower loan amount – and at a better interest rate. My client also has the ability to raise rent, which the tenant knows is below market.

 

 

Excuse Me? Who are the “Entitled” Ones?

There are lots of articles written about Millennials – you’ve read them (e.g., the notion that they are lazy, filled with too much self-regard, have unrealistic monetary expectations, etc.). The ages of Millennials varies depending on the author, but seems to focus on the era between 1982 and 2004 – or, said another way, their average age today is about 22.

What does this have to do with mortgages you ask?!

For all the perceived negatives, these “kids” (I can call them that because they are younger than my children) are the most adaptable and cooperative of all my clients. EVERYONE (note the emphasis) must open their books to get a mortgage done today – regardless of age or socioeconomic status.  This is mainly thanks to the Consumer Finance Protection Bureau (CFPB), which significantly tightened the regulations for mortgage qualification purposes after the 2007 U.S. Housing Crisis. Sure, I complain about the paperwork all the time, but welcome to the new reality – which, by the way, is here to stay.

For the most part, I don’t have a problem with the requirements – and I deal with them every day.  Consumers get more sensible mortgages and banks have stronger balance sheets to return dividends.  From my experience, the people who have the biggest problem with regulations are the affluent Baby Boomers (1946-1964).  Is it because many of them have never had a mortgage?  Regardless, they have the perceived notion that: The higher the net worth, the less paperwork that should be required.  Wrong.

 

Rent: Still Paying Cash?

If you need a mortgage, but you do not have established credit – i.e., at least two active credit cards or a car loan/lease, then all you can do is demonstrate that you are honoring your rent obligations. Sign a lease, pay rent via check each month, and retain your bank statements and cancelled rent checks for at least 12 months. Without these items, you better have a good relationship with your landlord – because you’ll need a letter confirming you consistently pay rent on time.

Here are some statements which will fall on deaf ears at the bank:

“I’m sharing an apartment with a friend and I pay him cash for my share. He then sends the full amount of rent by check to the landlord on time every month.”

⇒That’s nice, but you need to show consistent cash withdrawals from your bank account every month in the exact amount of your share.

“I live at my daughter’s place and I cook, clean, and I timely pay for most utilities every month. And lately I have covered all of the capital improvement and repair costs.”

⇒That’s nice, but you need consistent outflow of your contributions, and to show that the utility receipts match the corresponding withdrawals from your bank account.

“I’m renting from my aunt. She trusts me so there has been little point in drawing up a lease contract.”

⇒That’s nice, but without a contract you can neither demonstrate that you have any obligations nor lived up to them!

 

Cost To Pull Your Credit Report: 5 Points*

When a third party looks at your credit score, this is called an “inquiry”.  A “soft inquiry” does not affect your credit score, but a “hard pull” does. Limiting your hard pulls will qualify you for the best interest rate available when you apply for a loan.

Here are some soft inquiry examples:

• By credit card companies before they send you a solicitation in the mail to see if you qualify
• By prospective employers as a part of their background checks
• By banks to verify that you are who you say you are when opening an account

Your credit score will not be affected if you check your own credit report. You should confirm the accuracy of what is being reported about you, and you can do so for free once per year from each of the three credit bureaus at: https://www.annualcreditreport.com (there is a nominal charge if you want to see your score).

 When you apply for a loan or a new credit card, however, the lender or mortgage broker will conduct a hard pull on your credit report. A hard pull stays on your record and it lowers your credit score by about 5 points for six months. For these reasons, it is important to guard your credit report from too many hard pulls. So if you get a store credit card just to save 10% on a single purchase, know that you have hurt your credit score – and it is probably not worth the savings.

*Source: Credit Plus, an unaffiliated company that provides third party pre-loan application and post-loan closing verification services – such as tri-merge credit reports.