The Top 3 Mistakes Buyers Make when getting Pre-approved.

The very first thing that a buyer should do when considering  a new home purchase is contact their Mortgage Broker or Banker and get pre-approved. However, many times this is not the case. Many times buyers see a home that they like either by driving buy it or searching on-line. This home sparks the interest and they use on-line calculators to see if the home is affordable. The payment appears affordable and within their budget. The question is with tightening credit and underwriting criteria will the documentation support that theory…….

Mistake #1 – Test Driving Homes before Pre-approval – Looking at homes on your own or with a Realtor prior to have a clear understanding of your qualification, the cost and the payment is a recipe for let down. Two things commonly happen to the consumer when this approach occurs. They fall in love with the home and either buy it even though it was above their comfort level or get disappointed when they find out they do not qualify. Both are dangerous as one could lead to financial disaster and the other could lead to inaction that will cost you later.

Solution – Consult your Mortgage Broker or Banker on your qualification levels when you get the desire to buy. The consultation is free and can save you time, money and heartache. If you do not have a Mortgage Broker or Banker get a referral from someone you trust and respect or do thorough research and interview two or three. Generally your Realtor will know someone that you can trust.

Mistake #2 – Getting Pre-approved without providing your documentation – If the Mortgage Broker or Banker is willing to issue you a pre-approval in today’s credit market without reviewing all of your income and asset documentation and looking at the credit  RUN! Every dollar counts and without reviewing the tax returns and the income documentation we may qualify you using an income that will not stand when the loan is underwritten. Your Mortgage Consultant should take the conservative approach to your income to leave room for the unknown.

Solution – Find a Mortgage Professional that you feel comfortable with and invest in yourself by meeting with them face to face to get your pre-approval. This will allow you and the Mortgage Professional to talk in detail about the situation and make sure that you explore all options. If you are unable to meet in person the next best thing is to provide all the documentation necessary and have a phone appointment on speaker phone. (You could always do Webcam or Webinar meetings as well).

Mistake #3 – Assuming the Pre-Approval is good indefinitely – Pre-approvals are credit approvals. Credit is a snapshot in time and can change daily if you are an active user of credit. If you were borderline on your credit approval from the beginning say 623 Fico and you are going FHA and you go buy some 0% interest at Home Depot you may be at risk. A credit report is generally good for about 60 days. Since a Pre-approval is a credit and income approval any change in either make make it invalid. Another thing buyers are not aware of is programs and guidelines are frequently changing and if they are not being updated by their Mortgage Professional they may again be at risk.

Solution – Stay in constant contact with your Mortgage Professional (They should be in contact with you but it is a two way street). Make sure that there have not been any program changes that would affect your approval status. You also have to keep your Mortgage Professional aware of anything that you have done that may help or hurt your approval. An example would be a pay raise or a new credit purchase. Communication is the key to protecting your Pre-Approval.

The next time you are considering buying a home and you are in California, Oregon or Idaho go to http://capitolmortgage.com/officers-detail.aspx?LONum=161 for your pre-approval.

The Home Purchase Roller Coaster…………..

The word Process can make the home-buying experience sound like such a difficult painful task. By definition the word Process means a systematic series of actions directed to some end or a continuous action, operation, or series of changes taking place in a definite manner. (information taken from dictionary.com) The first of the definitions is the one that I think best represents the home purchase roller coaster.

Obviously the end is the day that you as the consumer would get the keys to your new home. The systematic series of actions that precede the glorious day are described herin as the Roller Coaster.  

Action 1 Boarding- Meet with your Loan Officer of choice and get Pre-approved for a home loan that will meet your budget. This is generally about a one hour meeting preferably face to face to discuss the payment that you feel is suitable, your three c’s (see my post on fannie mae/ Freddie mac costs) and the type of financing based on down payment and qualifications that we will secure. (I say that this is the first action but I receive the majority of my business, 70% from my Real Estate partners, so many times you have looked at a home that sparked your interest or at least started some sort of search). You are now pre-approved strapped into the seat and ready to take off.

Action 2 The Departure and Ascent-  You are now pre-approved and you are out with your Real Estate agent looking at homes. You have found a couple that you like and have decided to write some offers. You sit down with your Real Estate agent and strategize on the offer you want to write. Many times after you write that offer you are already mentally moving in the house. “This is where we will put the blue couch” etc. At the same time you are processing the payment in your mind and saying what have we done right as you begin to peer straight down the initial drop.

Action 3 The first drop- You are peering right over the top of the drop waiting for your Realtor to call you back with the news. You have told everybody about the home that you made an offer on and how you don’t have your hopes up but you do and that is natural. You are no different than the rest. The phone rings and the stomach drops, You are on your way down. Your Realtor says I am sorry they have countered and the bank say do not even respond if you do not at least offer 15K more. This is out of your limit and you know it. The rush and the thrill of the ascent and the short drop are over. You are about to begin another ascent.

Action 4 The second ascent- After a little frustration you are on your way up again and have found a few houses that you want to write on. You write offers much quicker this time because it is not so foreign and your expectation is less and you realize it was not that bad. You can do this. You submit two offers this time hoping that you will get one of them. Again you are starting to peer over the next sequence of the roller coaster.

Action 5 The Tight Turn and The Corkscrew- You begin to descend into the tight turn. This is when the Real Estate agent calls you and lets you know that one of the properties has made a small counter and they would like to talk to you about it. You meet with them and while you are meeting you come out of the tight turn and you are turned upside down briefly when they answer their phone and the other home has countered. Which do we like better? What is the better investment? What one will we get we don’t want to be disappointed? This is is a lot to handle. You choose the one that you like the most and  submit the counter.  You have made it through the corkscrew and are being thrown into another tight turn. Then your offer is accepted right as you look down another huge drop.

Action 6 The big drop- Now that you are in contract it seems like things are moving fast. The nerves set in as your agent sends in the earnest money deposit, the loan officer asking for the appraisal check, the checks for home inspection and pest if you want it. Money is pouring out and you are saying what did we get ourselves into for real this time. A million different payment scenarios, excitement, fear, second guessing, excitement, nerves you get the picture are all shooting through you as you are speeding down the face of the coaster.

Action 7 another ascent or straight track- Things calm down for minute. The rate is locked the inspections are done and you are waiting for final underwriting approval. The loan is being Processed. That process is gather all pertinent info and updated financial statements if it has been greater than a month, submit the loan to underwriting and wait(average underwriting 5 days right now)., the approval is in 5 days later and there are conditions that we must meet. Many times the conditions are simple but other times the wholesaler asks for things like birth certificates now a days.

Action 8 The loop da loop- This is the point that you are asked to gather some documentation that may seem hard to obtain. Sometimes the giftor does not want to give a bank statement, you are asked to release financial contingencies and have your deposit at risk and you are not certain you can provide exactly what the underwriter has asked for. This is the time that you must remember that both your Real Estate agent and I are on this coaster with you. We want to get to the end safely and successfully as well. We made it through both the loops. Awesome.

Action 9 the last death drop- This would be the signing of the loan documents. You are prepared and you know what is coming but it is a large commitment. No time to turn back now. You sit in front of the notary and begin to sign your life over to the new mortgage payment. This is a long drop but it goes by very quickly. We have made it to the bottom. Yes we are done! Not Quite.

Action 10 The final turn and the end- We still have to fund the loan and based on how well a Loan Officer has done their job there is nothing you should have to do but wait out the steps. You take that last turn and they ask for something else to fund your loan. You are throuwn for a second but we are through it before you know it. We have made it to the end and the Roller coaster comes to a stop. You realize that it was not that bad at all as you get out but you are clearly trying to get your bearings on why you just put yourself through it.

Action 11 The conclusion- You went through it because it is the cornerstone to an amusement park and the reason that you go. We all dream of home-ownership and none of us are quite prepared for the Process. The reason that you go on the Roller coaster with friends is that it makes it that much easier. We as professionals are trained to warn you of the layout of the coaster so that it is manageable and in the end you say Let’s do it again!

That will come in due time. For now I say go get something to eat and re-energize as it is time to get on another ride…………..The Move!

The Pain of Discipline or the Pain of Regret

We are taking a moment today to step outside of the normal content of this blog to discuss something that we think is very relevant to your mortgage needs.

The pain of discipline or the pain of regret is a choice that we face every day. We are giving the choice to get out of bed or to hit the snooze button. Hitting the snooze button can make us late to one of our many obligations. Our lives today are filled with obligations that we Must attend. We are constantly running from one event to another and we are barely taking the time to be present in the moment. The day is over now and we hear that alarm again: Do we give into the pain of discipline or the pain of regret?

Just stop for a second and think of all the things that we as human beings like to do. Working out (OK that is an opinion), networking, blogging, working, eating, vacationing, attending Church, reading or watching TV. Each and every one of those items asks the question of pain or regret just before we engage. Example: Yesterday I opened the freezer and for the first time in a long time there were Dibs in there. I looked at them and I thought to myself do I really want to eat those? I did and initially there was no regret but when I stepped on the scale to maintain my health I felt the regret of indulgence.

Many of us are simply living life to fast! Many times we are not focused and the lack of focus has us off in so many directions we do not know which way is up. We must focus on what will bring us balance, joy, harmony and happiness in our life. To do so we must do the following which is the very hardest thing to do. We must say “no” to the good things so that we may say “yes”  to the best things! This practice will lead us to regretfully tell some of our friends no I am sorry we cannot, cut out the dinner splurge at Round Table Pizza and cook as a family etc. In Business, this can be very hard to do because we are always looking to develop relationships. We commit to a million different events and in the end we cannot be present for them all.

The term that I heard from Jim Burns (Author) that best summarizes everything above is that many of us are in “Crisis mode living.” The Economy is in shambles, job loss, divorce, sickness, retirements being lost overnight, banks dropping like flies, and of course the Real Estate Market is facing some challenges. People are switching to survival mode and when that happens we tend to speed up and lose focus. The loss of focus leads to experiencing the pain of regret more frequently as we are unable to remain disciplined.  “Crisis Mode Living” simply wipes us out.

So how does all of this relate in the least bit to Real Estate. We have right now one of the greatest opportunties to buy or invest in Real Estate. See a great article written by Kevin Nakano of Nakano Real Estate http://www.nakanorealty.com/articles/realestate/great-time-to-invest-in-real-estate.htm. We  have the chance to get in while the market prices are low as well as the rates. The perfect storm if you will. In order to take advantage of that we have to step out of the “Crisis Mode Living” economy and focus on what the “Best” choices for our families are. Do not listen to all the others that are telling you to wait because interest rates and prices will continue to fall. If they are not in the industry and they are offering advice to you be aware of the source. Don’t get me wrong it may not be the time for you to buy. You may need to work on some things to be in the appropriate position to do so. That is why it is so important to ask yourself the following:

Will this decision lead to “The pain of discipline or the pain of regret?” What can you do without and how can you go deeper with what you do need in your life. Whether you are a business owner, a homemaker, a first time home buyer, a move up buyer, investor or simply someone looking to grow yourself it is important to know that discipline can be painful. It can hurt to do things or not to do things. The question is: What hurts worse Discipline or Regret?

Oh Where Oh Where will interest rates go?

Seems to me the big talk on the town is what are the rates today and when are the 4% rates coming to town? The answer is I don’t know when the low rates may come or if they even will. The Stimulus Bill has been passed and many expect that to push rates to the all time low 4%. I am not saying that it could not happen but rates today were 5%. What we are waiting on is a 1% drop in rates. That is a big drop.

For rates to drop to this level several things have to occur. Not only does the FED have to buy Mortgage Backed Securities in Bulk but they would also have to deliver verbiage that would make the investor happy. Yes, I have seen the FED control monetary policy verbally. There is a lot of power in the statements the government makes and they have a large affect on the appetite of our investors.

The one thing that I would like to impress upon my buyers the most is that rates trade within a range. There is a high and a low end of this range. Frequently throughout the day or the weeks the rates will trend up and down inside this range until something significant moves the range. Of late the range has been the low to mid fives. These are awesome rates and one should be happy to have a mortgage in the fives. Briefly, I saw the range drop to 4.5-5% but that was very short -lived.

As a buyer you must be aware that the locked rate is attached to the collateral or in your case the property that you would like to purchase. While you are looking interest rates can change several times within a range or even have a range change. Please be in contact with your loan officer to make sure that you know this range and that you  are comfortable at the high end of the range. By doing this you are insuring against a rate moving causing the home you want to be pushed out of your price range. Plan for the worst of the range and your home buying experience will be pleasurable.

No one really knows where rates are headed as “noone” has a true grasp of what is going on right now. The best one can do for themselves is prepare. If you like the home and you are comfortable with the rate and the payment then the time is right for you. Trying to time the market is a guaranteed disappointment. There will always be something that could cause you to say ”Iwish I had………”

Timing the market is buying when the time is right for you.

California follows Fed with Tax Credit of their own.

See Information below and follow the link for more Information.

CALIFORNIA

The California budget bill just signed into law includes a $10K California state tax credit for all NEW homebuyers who purchase a home between March 1, 2009 and March 2010 (or until the $100 million credit allocation is used up).  The credit is in addition to the Federal tax credit and can be used $3,333 per year in 2009, 2010 and 2011 for ANY new home buyer who stays in the home at least 2 years.  This is not available to the resale market and was not even introduced in the legislation until the final vote (Senator Ashburn from Bakersfield) agreed to vote for the budget package only if the credit were included.  More information is available here: http://www.cbia.org/go/cbia/newsroom/cbia-in-the-news/homebuyer-tax-credit-passed-by-legislature/

 

Fannie Mae/ Freddie Mac Costs

Fannie MAE and Freddie Mac have gone to risk based pricing. This is not new news as loans have always been priced and approved based on levels of risk. When you as a consumer are looking to be financed the lender is evaluating three things. We refer to them as the three c’s.

Credit – this is your history of repayment of other loans such as auto, note loans, installment, student loans and revolving debts such as credit cards. Your mid fico score is seen to be a fair reflection of your repayment history. Experian, transunion and equifax are the three bureaus who produce these snapshots in time that generate your scores.

Collateral – this refers to the property and the down payment or equity position you are in. Having 20% equity in a home is considered the breakeven point for a lender in the event they have to foreclose. Naturally the greater the equity the lower the risk. Someone with 40% plus is not likely to let a home slip away and has the ability to price to sell if they get into a dangerous position.

Capacity – this is your ability to repay the debt. Your income, more importantly claimed documentable income is what they are looking for. This is the arena that was most widely abused in recent years and as a result has become the most scrutinized and most important. Income is only part of capacity as length on the job, type of job and how you are paid are additional factors that are very important. Your debt to income ratio is your housing and other credit related minimums divided by your gross monthly income. The goal is to not have this exceed 43%. that means that the house and all the debt represent 43% of your GROSS income.

Traditionally, if you he a 620 fico score, 20% equity position and documented your income on a purchase you would qualify for the lowest wholesale rates we have to offer. However, this has changed drastically and it is undergoing another set of revisions.

Today you have to have a 740 fico to be in the top tier and from there it drops off fast. Those who want to refinance and take no cash out of their home with a 695 fico and 20-25% equity have to pay a 1.5% risk adjusment. This means that their par wholesale rate will be much higher than those with 740. Yield spread premiums are paid to brokers by wholesalers for selling higher rates or to absorb these costs. (another blog entirely) today the Ysps are not large enough to cover that 1.5% so the costs are passed on to the client making loans more expensive.

This one example is a cheaper example of the pricing adjustments that have been passed onto us all. So although rates are low it does not mean that you will get a low rate or if you do you may have to pay for it. Raising costs and adjustments is just one way for these companies to make up for losses.

The end result is that government loans such as FHA, VA and USDA do not impose such adjustments. Do not he suprised if your broker or loan officer tells you that FHA may be a more cost effective approach to financing your home. As always consult your professional and ask them to explain or show this to you in a manner that makes sense.

Good luck and until next time.

Hot off the Press Stimulus Package!

The following information has been provided to me from one of our top Wholesalers Franklin American.

Economic Stimulus Plan Benefits the Housing and Mortgage Industries

Revised February 17, 2009

Just signed and sealed…a $787 Billion Stimulus Plan made up of tax cuts and spending programs aims at reviving the US economy. Although the package was scaled down from nearly $1 Trillion, it still stands as the largest anti-recession effort since World War II.

Home owners and potential homebuyers stand to gain from key provisions in this stimulus plan. Here is what we know as of today…

Tax Credit for Homebuyers

First-time homebuyers who purchase homes from the start of the year until the end of November 2009 may be eligible for the lower of an $8,000 or 10% of the value of the home tax credit.  Remember a tax credit is very different than a tax deduction – a tax credit is equivalent to money in your hand, as opposed to a tax deduction which only reduces your taxable income.

The tax credit starts phasing out for couples with incomes above $150,000 and single filers with incomes above $75,000.  Buyers will have to repay the credit if they sell their homes within three years.

Additional Housing-Related Provisions

Tax Incentives to Spur Energy Savings and Green Jobs — This provision is designed to help promote energy-efficient investments in homes by extending and expanding tax credits through 2010 for purchases such as new furnaces, energy-efficient windows and doors, or insulation.

Landmark Energy Savings — This provision provides $5 Billion for energy efficient improvements for more than one million modest-income homes through weatherization.  According to some estimates, this can help modest-income families save an average of $350 a year on heating and air conditioning bills.

Repairing Public Housing and Making Key Energy Efficiency Retrofits To HUD-Assisted Housing—This provision provides a total of $6.3 Billion for increasing energy efficiency in federally supported housing programs.Specifically, it establishes a new program to upgrade HUD-sponsored low-income housing (for elderly, disabled, and Section to increase energy efficiency, including new insulation, windows, and frames.

Expanding Housing Assistance—This provision increases support for several critical housing programs. It includes $2 Billion for the Neighborhood Stabilization Program to help communities purchase and rehabilitate foreclosed, vacant properties.

More Help for Homeowners in the Future

Another thing to keep an eye on in the coming weeks is President Obama’s plan to help struggling borrowers before they are faced with a default on their mortgage.

According to reports, the Obama administration is discussing plans to help borrowers who are struggling to stay afloat, but who have not yet fallen behind on their payments. At this point, details are scarce; however, reports indicate that President Obama is looking to spend approximately $50 Billion to directly help homeowners before they face foreclosure and financial disaster.

While this is good news for individual homeowners, it will likely be good for the housing industry as a whole. That’s because, assisting struggling borrowers before they default should help stop the wave of foreclosures, which are estimated to top two million this year. That, in turn, will help stabilize home prices.

 

Tax Credit? Will it Stimulate the Economy or is it a Temporary Fix?

The new version of the Tax Credit has been released and is expected to be signed into law as soon as today. This tax credit will give first time home-buyers up to $8,000 as  credit when they file their taxes. The newest version does not require the credit to be repaid. The first time home-buyer would have to purchase the home prior to December 1st of 2009.  If the buyer sells the home within the first three years they would be required to repay it.

Here are the  list of my concerns:

1) The goal is too give a credit to those who get off the fence and jump into a hurting housing market.  So, we put a time limit on the consumer forcing them to make the largest financial decision some may make before they are truly ready so that they can get free money?

2) The credit is designed to give the consumer money they will turnaround and spend in the struggling retail industry to help Stimulate the Economy.  Like a well designed gift card consumers rarely spend only the amount they are given. So what account pays the overage. A credit card? 0% interest for a year at Home Depot?

3) Once the time-line is over and the government sees that the overall effect was very little and all they did was help to add debt to a debt driven society what will they do extend the time-line. There are several homeowners who will make it in the time that is allotted for the tax credit but there will be several who won’t. Many of those that make it in time will have rushed just for the free money and may put themselves at financial risk (have it now society). Then we will extend the time-line for those that just did not make it so we can capture the others that felt like they missed their opportunity restarting the cycle.

4) If the debt does not have to be repaid then where is the money coming from and who is going to pay for it? There is no telling on this. The money will come from somewhere and the repayment is spending this money in the retail market and acquiring more debt hoping to stabilize companies that are on the verge of bankruptcy. The question is once the money is spent and we return to reality where many are struggling to make it spending will decrease and the companies will return quickly to where they were.

Overall, I like that there are plans out there to help jump-start our economy. As a Mortgage Broker I am excited that my home-buyers may have funds to reestablish reserves post purchase. If that is where they place the funds and they do not spend them in the retail market then the plan is a failure? If they save the funds then we gave them free money to sit on. This would not accomplish the goal but would be wise for the buyer. The Tax Credit reminds me of a heart being restarted by a defibrillator. The heart is jump-started back into action but only temporarily if the actual problem is not found and treated. The Stimulus Bill is a temporary fix or a delay while we dig for a cure. If the liver is the problem we can jump-start the heart all we want but in the end when the liver fails our body shuts down. In the end we are providing a stimulus package that is leading to impulse purchase, rush decisions and poor fiscal responsibility. Sound Familiar. Isn’t that what got us where we are at?

Solution: Come back for the next blog entry on the solution. Why teaching fiscal responsibility is a bad thing for the economy!