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!

Too Much Rehab Brain Damage – I’ll Pass

How many times have you walked out of a property viewing promptly after seeing how much work was needed on the floors, kitchen, bathrooms or some other deferred maintenance? There is a good chance the Seller has way less interest in renovating than you do – especially because they are about to move out.

But Sellers know how much work is required. They probably already had quotes and were sick about what it would take to upgrade before listing their property. Therein lies the opportunity! Make an offer subject to obtaining two things:

1. An acceptable quote from a contractor to complete the work, and
2. A pre-qualification letter from a lender who has extensive FHA 203(k) loan experience.

FHA 203(k) Rehab Program

As a home-buyer or a real estate agent, you could save the deal and put money in your pocket by knowing the 203(k) rules. Buyers can acquire and renovate their new home without dipping into personal savings – because the costs for the purchase plus the required capital expenditures (to fully renovate the property) can be combined into one 30-year fixed rate mortgage. After purchasing the property using the loan, you simply tap into a loan reserve that is set aside by the lender at closing.

The mortgage amount is based on 96.5% of the lesser of: (i) the combined “as-is” value and cost of improvements, or (ii) 110% of the “after improved” market value. And, the 3.5% down payment can even be borrowed from a family member.

Really Bob? Are You Sure About That?!

I’m buying another property, but I plan to call it a second home so that I can get a better interest rate.

No You’re Not: Unless it has vacation/resort amenities and is 50+ miles away from your primary residence, it will be treated as an investment property and carry a higher interest rate].

• WHY? Because it’s not your vacation home

I have an FHA loan on my home, and I’m going to use FHA again to minimize the down payment on my second property.

No Sir: You can only have one FHA loan at a time and it must be on your primary residence (and besides, there are conventional financing programs that offer loans as high as 97% of value).

• WHY? Because FHA financing is meant to help consumers purchase their home

Unless I’ve had 24 months of self-employed earnings, I’ll never get a residential loan.

Not True: Depending on your ability-to-repay, Freddie Mac may only require one year of tax returns from your new business.

• WHY? Because Freddie takes compensating factors into consideration

I’ll still profit by selling one of my properties to my son – and he can get maximum FHA financing because I will co-sign and it will be his primary residence.

Incorrect Again: A parent/child profit-sharing relationship is deemed an “identity of interest” transaction, and the buyer is restricted to 75% loan-to-value when there is a non-occupying co-borrower.

• WHY? Because the borrower should solely benefit from primary home ownership

ARM’s Had A Bad Rap

Unlike “Fixed Rate Mortgages”, having an interest rate that remains the same for the entire loan term, rates on Adjustable Rate Mortgages (ARM’s) change periodically.  You would think in a rising interest rate environment that locking your interest rate would make the most sense – to avoid higher monthly mortgage payments.  Then why are ARM’s making a comeback?

To start, ARM’s have lower interest rates than 30-year fixed rate mortgages (so the monthly payment is lower, allowing borrowers to maximize their cash flow).  ARM’s therefore offer more payment flexibility (not only can borrowers use the resulting savings towards personal expenses, but they can elect to make additional principal payments on their mortgage).

Plus, people generally do not stay in the same home for more than about 7 years.  If you enter into a “7/1” ARM, this means that the interest rate is fixed for 7 years, and then the rate adjusts thereafter based upon prevailing rates at that time.  Sound risky?

In the past, ARM’s were much riskier loans.  Depending on the lender, ARM’s may have had:

• prepayment penalties
• more frequent rate adjustment periods
• less or no principal amortization
• high or no ceilings on the amount the rate could increase upon adjustment

All of these onerous terms changed with the onslaught of regulations after the housing crisis. Today, ARM’s “cap” the amount of rate increase at the time of the required adjustment – and the interest rate is prevented from increasing by more than 5% over the life of the loan.

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.

Sweet Loan Arrangement for Veterans (Mostly)

The Department of Veterans Affairs (“VA”) guarantees a portion of all VA mortgages. This makes the loan safer for lenders providing these loans. As a result, VA lenders generally charge about one half percent less than the fixed rate on a standard 30-year conventional mortgage. Unfortunately, many veterans are either unaware of these savings and other VA mortgage benefits, or they have forgotten about them.

Since veterans can finance 100% of the purchase price of their primary residence, one might think the loan may be risky. Yet historically, veterans have the best track record for timely repayment – which is not surprising given their unwavering commitment to our country. Most veterans are required to pay a pre-closing VA Funding Fee (an insurance policy to the VA in case of a default), but there is no ongoing monthly mortgage insurance premium requirement – as is the case for conventional or FHA mortgages when the down payment is less than 20%.

But there is one key problem with the program when financing a condo: VA must approve the building and all condo association documents. While this would seem reasonable, most associations reserve the right to approve the buyer. VA views this as an ability to “screen” a prospective purchaser, and therefore discriminatory. Association documents must be revised to delete this approval right, and most condo boards are reluctant to do so (not because of veterans, but because they do not wish to allow the sale of a unit to individuals of ill repute).

Private Non-QM Lenders Have Dropped Their Rates

Most lenders will only extend Qualified Mortgages. A Qualified Mortgage (“QM”) is a kind of loan having more stringent pre-qualification requirements. QM lenders must show the regulators that they have determined, prior to closing, that you, as a borrower, have the ability to repay your mortgage. This is logical, and will continue to be the norm for conservative lenders. Since these conservative lenders in turn have conservative investors who ultimately purchase your mortgage, their investors also want nothing to do with non-QM loans.

But if I lend you money at 6% (say 2% higher than conventional rates because of some additional risk) – there is no doubt that I already have an investor for the loan I just gave you who is willing to pay me, say, 6.5% for the same loan. Why would an investor do that? Because in a large financial market, he too has someone else on the line willing to pay him something more – and so on, and the business is profitable all around.

The old 12-13% “hard money” loans were being advanced to people having unfavorable credit when standard mortgage interest rates were at 5-6%. Now these non-QM lenders have lowered their rates to 6-8%, when today’s 30-year conventional rates have only dropped to about 4%. It’s not a bad deal to pay slightly higher non-QM rates for a brief period until you have satisfied your lender’s seasoning period requirement – and then you can refinance with a conventional mortgage without a prepayment penalty.

Want a Mortgage? It’s Not Enough to Just Confess Your Sins!

Lenders will discover that you had a foreclosure – that you had student loan late fees – that you defaulted on your car loan – that you already sold the asset claimed on your loan application – that you were arrested several years ago – that you neglected to meet your child support obligations, etc.

It either comes out on your credit report or through the lender’s use of fraudguard security checks – or even when they just Google your name. Lenders have these and several other extensive background checks and “Know Your Customer (KYC)” procedures that they carefully follow.

If you don’t immediately disclose your Deed-in-Lieu of Foreclosure, do you really think they will believe you are providing them with all details on everything else for which they ask?

You will generally always need to write a Letter of Explanation (“LOX”) to address collection accounts and disputes/inquiries on your credit report. And what if your explanation is solely factual and not remorseful?

As useless as sentimentality might appear in the finance world, lenders want to look into your consciousness – otherwise they have nothing to support the notion that you will do everything you can to prevent another late mortgage payment or foreclosure. The parties recommending your loan need your cooperation in order to support you – because they only have their reputations if something goes wrong with your loan. If they have to work hard for someone who has been concealing the facts (intentionally or unintentionally), they are likely to move on to the next file.

A Key Question For Your Real Estate Agent

Does the Seller truly have the authority to sell the property to me?

Sounds pretty basic, but your real estate agent may not have asked the question. If they have, they probably took the word of the listing agent that there “shouldn’t be a problem”.

One of the biggest red flags is having a Seller who is a trustee. Not only should you quickly confirm that the declaration of trust, or trust agreement, exists and is fully executed (by all appropriate parties), but that the agreement hasn’t expired or been revoked. Without such confirmation, a whole host of issues could arise that might cast a shadow on whether you or your lender will receive clean title. And, by the way, the Seller’s name on the title report needs to match the owner of record on both the chain of title and appraisal.

Worst Case? Your lender will decline the loan based on an unacceptable title report, and you will have wasted untold amounts of time and money on a property that was just never going to close.

Best Case? Your closing will be delayed until the title company, escrow agent, attorneys, and lender can sort things out.

Finally, you might be surprised to find out later that your Seller would have been happy to provide you with certain documents you needed to satisfy yourself or your lender. All you needed to do was ask for a:

• Survey
• Owners policy of title insurance
• Statement showing annual premiums for homeowners or flood insurance
• Recent roof or wind mitigation report