Onions are not the only thing with Layers!

I was sitting on my couch the other day watching one of the most infamous movies of all time with my children. The movie I am certain that many of you remember. During the movie there is a point when they talk about how “Onions have layers” and it got me thinking. Yes, that movie was Shrek and no this is not a pitch for the upcoming Shrek 4.

Like onions, all mortgage loans have layers. The layers are risk layers. Every file that we touch or work on is evaluated by the amount of risk to the investor. Risk is evaluated on several different ways. An underwriter has to be comfortable with the level of risk in order to approve the file. These layers can be described the following way: 1) Credit 2) Collateral 3) Capacity and 4) Compensating Factors.

Credit – Credit is more than a score. The score does make up the first level of assessment. If you do not have a score that meets the minimum requirement for the program you are done before you begin. However, what if you do have a score that is high enough to qualify for the loan program. Does that mean it is a done deal at that point? Credit has several components that we must go over to make sure that a consumer not only meets the requirement for score but credit as well. Some of these factors are:

• # of trade lines open and rating current – A trade line is an open account such as a credit card, and auto loan, a mortgage note, and installment debt or even a lease. These trade lines must remain open and most be rated to the current date. Some people have old credit cards that they never actively closed that have not reported in months. This shows the lender that you have the ability to open and maintain credit and when you have done so for several different types of credit it will help establish a solid score. They do go hand and hand. However if you have a 700 score and only one open trade line that is a small credit card open for 5 months this will not qualify. Although the score is high there has been little time for you to make a mistake and the low limit is a low risk for the credit card company. This would be insufficient credit.
• Several Open Collections – FHA specifically looks at the last twelve months of credit to see how you are doing now. There are cases that the scores are qualifying scores but a client has many open collections for semi large amounts. If this is not in the last twelve months the underwriter might require them to be paid especially anything over $1000 or so. If they are in the last twelve months and there is more than one you most likely will not qualify for the loan. If it is only one then you will have to write a suitable explanation and it will be left to the underwriters judgment. The only exception to this rule is Medical collections.
• Open Tax Liens or Judgments – Any of these items will have to be paid no matter what. They will also be further evaluated to see when they occurred what it is and why. Remember they are trying to see if there is any recurring behavior patterns of unpaid debts without explanations that make sense or situations you could not have predicted.

Collateral – is based on how much you are putting down on the property you are buying or the amount of equity you have in your current home. The larger the down payment the lower the risk. Anything less than 20% down requires Mortgage Insurance. Mortgage Insurance is designed to cover the investor on their losses in the even that the consumer forecloses. FHA is a Government insured loan and is designed to have a limited down payment so generally the collateral portion for FHA borrowers is usually not considered a strength of the file as a whole.

Capacity – This is the consumers ability to repay the debt. This is largely based on your debt to income ratio. However, capacity can be broken down further and commonly is:

• Time on the Job – If you are in a new industry where you get tips, overtime, bonus, commission or any other special compensation that you did not receive at your previous job they may not include this income. This could have a dramatic impact on the qualifications.
• Work History – I have had situations where the borrower had many jobs and this spooked the investor. I had to make up for spotty job history but accenting the positive factors of the loan.
• Self Employed Income Decreasing Year over Year – many loan officers take a two year average and that is the way that we are taught if and only if the income is steady and or increasing. In the event the income is decreasing year over year we use the current year only and we must make sure that the decline is not severe.

There are other items on capacity that we may look at in the layering of the risk but for time and length purposes that is all that we will discuss here.

Compensating Factors -Any factors that decrease the layers or levels of risk in the file. Some compensating factors may include but are not limited to:

• Assets
• 401K
  
• Long time on same job
• Reserves after down payment (not an FHA Requirement but considered a compensating factor)
• Low Debt to Income
• own funds to close not gift

The following Illustration is one that I have always used to give myself a visual of all the information above. Then I would rate each section 1-10 and determine how to present the strengths and minimize the exposure of the weaknesses.

Although overly simplified the graph shows that Credit, Collateral and Capacity are the focal points or base of the triangle. If any one of them are not very strong it is up to the supporting arms or Compensating factors to make up the difference. In order to do so the compensating factors have to make sense and be supportive to the overall structure of the file.

Ultimately the layers of risk will make or break your file. The goal of a loan officer should be to package the file in the best manner possible to make sure the underwriter sees why this is a good file. If someone has a high debt to income (Capacity) then it is essential that they are strong in credit and collateral and it is a bonus if they have compensating factors such as reserves. When borrowers want to do down payment assistance programs they are adding layers to the file. When you increase the layers or levels of risk you create a greater chance for error or decline. It is imperative that as you increase the risk you have supporting compensating factors that help to justify the risk an investor may take on you. As a consumer you can work toward this. Set yourself up for success. Decrease the layers that your file has and maximize your three C’s. This will help you to get a loan in today’s economy.

In conclusion, it is all about risk or layers. You want to give as many reasons to the investor to buy your loan as you can. I understand that it is hard to fire on all cylinders all the time and that is why Compensating factors play a huge roll. If you know that you have lower credit, don’t make a ton of money, and have limited down payment then you have to understand that you may be asked for several items. If you want to ask for down payment assistance you have to take a step back and be the investor. The question is why do I want to give my money to this person? Our job is to assist you in answering that question for the investor.

As always thank you for reading.

First Time Homebuyer Tax Credit Extended Pending Obama’s Signature.

The First time Home Buyer Credit was extended through 2010. We are just waiting for the President to sign it. I still do not know how I feel about it as a whole but it is very good news for my clients!!!!

Thank you for visiting California Home Strategies…………… I am humbled by all the visitors each day. Your readership is very much appreciated and I am glad that you find value in the content.

First Time Home Buyer Tax Credit: What is going on?

I was sitting in the office thinking what do we know now about the tax credit. I came to the conclusion that all we know is the tax credit deadline is November 30th and there are 6 bills or so that we are trying to pass that would extend and/or revise the credit. Check out those thoughts here!

As Always Thank you for Reading.

Appraisal Review: Is it a Blessing or a Curse?

If you are in the Real Estate Industry you have been involved in a transaction that has required an appraisal review. Appraisal reviews come in several different sizes and shapes. I think that it is important to know a few key terms before I go on. The following terms AVM, Desk Review, and Field Review are a few of the terms that you will most likely come across in the coming months.

AVM – Automated valuation of a property. This is derived from the best available data at the time the AVM is ran and does not take into account distressed sales or condition of the property.

Desk Review – The original appraisal is reviewed by another appraiser. They critique the original appraisal pull new data and much like the AVM do not take into account many of the items that may make a property unique or valuable. Many times the reviewer is not even native to the area that they are reviewing.From the information they gather they Agree or Disagree with the original value. If they disagree a new value in their best opinion is derived. This will be the value that the Lenders now based they decision off. (I must note I have never had a desk review come in higher than the original appraisal so my example assumes the value was less.)

Field Review – The highest form of a  review. A new appraiser actually goes out to the property and inspects it. They take the original appraisal, new data and information that they obtain from the inspection and come to a conclusion of value. Like a desk review they will agree or disagree and the value that they come up with supersedes any previous value given.

How and Why?

At this point you may be asking yourself if there is an appraisal in the file and the value is in line with the purchase price why then would we need a review? That is a very valuable question. First, HVCC (see previous post) changed the way that the world of appraisal operated. This was brought into play to reduce the risk of overvalued appraisals to protect both the Lender and the Consumer. Brokers had “undue influence” on the value based on a relationship with the appraiser. FHA is not part of the HVCC regulations at this point so Brokers can still order through an appraiser that they have a relationship with.Important update: FHA is now subject to HVCC. So when a loan is submitted and the underwriter is underwriting the loan they almost always (always in my book) run an AVM. If that AVM does not support the value of the appraisal that we have submitted they will ask for either a desk or a field review. The cost of a desk review is much less so many times this is what we opt for. Important Suggestion: If you have a property that is unique in nature, lacks comps, has to be seen to be appreciated skip the desk review and go straight for the Field Review. Yes it will cost more money but a low desk review plus a field review is both more expensive and time consuming. After all time is money. Another Option: In some cases the lender will allow you to order a second full appraisal which at least you could choose the appraiser and cut down on time. This is not always the case so ask first before assuming this can be done.

Side Note: Collateral is the most valuable asset to the lender so this will always be scrutinized the most.

Now that we have an idea of how the review process is triggered let’s take a look at an example:

Purchase Price: $200,000

Original Appraised Value: $200,000

Desk Review: 150,000

Field Review: $195,000

If the buyer is doing a standard FHA purchase they are putting 3.5% down. The value in this case is going to be based on the Field Review as it superseded both of the previous values. The new loan will then be based on $195,000.

Buyer Options:

1. Ask for a price Reduction to 195K based on the field review and send the review with it.
   
2. Pay the difference in Value and Original Purchase Price out of pocket; 5K
   

Given the two options I ask the question is Appraisal Review a Blessing or a Curse?

In my opinion, if the buyer gets the reduction in price and pays a Fair Market Value for the house then it is a blessing. Anytime you get something you want for less money it is a blessing. However, if the reduction is not granted then is my buyer overpaying for the property? Do they have the money to pay the difference? Are they in danger of losing the home?

These are only my thoughts.

What are your thoughts on Appraisal Review? If you have had an experience with it please feel free to share the experience.

Matt Freeman, an accomplished Mortgage Broker, is the author of this article. If you are interested in more information like this please take the time to opt in to receive updates. You can do this now California Home Strategies by simply entering your name and email. Thank you again for taking the time to read through this today.

Where does your Professional go when the deal hits a snag? You Deserve to Know!

In today’s market even the cleanest deal will have some hurdle or obstacle that will have to be explained. The question is when the going gets tough who is there to answer the questions and help you through the hurdle. Is it the Realtor? Is it the Loan Officer? Is it Both? Neither? Who is there by your side as a buyer and/or a seller when the road is bumpy?

I mention this because it gets to me a little bit. I think that as an industry we have to rally together to deliver the news. All too often professionals go into hibernation when the deal hits a bump. They do not answer their phone or they wait until they have it solved and call as if they did not ignore the previous 100 calls. Let’s look at this from a different angle for one minute:

I am a doctor and I just looked at X-rays for my client. I have found a mass that I have not quite determined what or how I will take care of it. I have a few ideas based on my expertise but want to do further research before providing the solution. In this case do I:

1. Inform the patient of my findings and let them know what I think may be the solutions
2. Send the patient home without any knowledge of the findings hoping that I will have the solution in a few days
3. Ignore all the inquiries I am getting from the curious nurse, patient, family members, etc.
   

I think that we all know the answer to this. It is our duty as a professional to let others know. If we do not have the answer and we have to consult other “doctors” as sometimes is the case we should let the parties know this. “Uncertainty” is one thing that every human I have ever met is inclined to dislike. We like to know what is going on and what we have to do to help the situation. Sometimes that will be nothing but knowing that we can do nothing but wait is better than not knowing what is going on at all.

I will be the first to admit that when I was first in the industry I did not like making the bad call. I still don’t but the difference between now and then is “I have been on both sides of the fence.” Solutions are derived from brainstorm and I still believe in the old saying “Two heads are better than one.”

Please feel free to let me know if you agree or disagree with this?

Mumbo Jumbo Money Game! Where is the money?

I am trying to buy a home for 1.2 million. I have great credit and I make awesome money. I can put 20% down and I will need a loan for 960K. Can anyone out there help me?

Buyers in the mumbo jumbo arena are finding it very difficult to get financing. There are a few lenders out there that are willing to give out the money but there are a ton of strings attached. The losses that the investors have taken over the last few years has everyone gun shy. An investor does not want to tie up a million dollars in an economy where job loss, dividend cuts, and bonuses are being stripped.

Check this out directly from one of our sources today regarding what they will do for the Jumbo Market:

Max LTV is now 70% for Purchase or Cash Out.

Minimum score is now 680 to 700 depending on loan amount.

Reserves required are now from 6-12 months depending on DTI. Max DTI is 45%.

This is only for loans to 1 million. Imagine those that are trying to buy over this. Inman News posted a great article on how Bank of America is trying to buy the jumbo market. Check out the article: http://www.inman.com/news/2009/03/20/bofa-out-make-jumbo-loans

There criteria is no different than the rest but they do not have to have Fannie Mae or Freddie Mac buy their loans. They have the ability to keep the loan in their portfolio and service the debt. The ability to service the debt as well as keep it in the portfolio gives Bank of America the option to pick and choose who they do business with and whether or not they feel comfortable with the risk.

Another Great article tackling this issue is from the Washington Post check it out:  http://www.washingtonpost.com/wp-dyn/content/article/2009/03/20/AR2009032001447.html

One may ask why are you showing information that limits your ability to do Jumbo loans? The reason is simple I specialize in Purchase money for buyers in the market to purchase a home. As you will start to see as soon as I launch Cahomestrategies.com in the middle of April, I am all about educating my buyers. To be a great educator you have to have a limited number of subjects that you know well. I know Government Purchase money and I know conventional purchase money up to the Revised temporary loan limits. I do not know Jumbo but I can point you in the right direction. The goal is to make sure that you get the highest level of service and that you end up with the right mortgage.

Your mortgage success is my commitment!

As Always thank you for reading,

House Hunting! 6 survival tips to help avoid house hunting blues.

Early this morning I got up just like I do every day and went through the morning routine. Coffee, reading, breakfast with the kids etc. You know the routine. Then I left to go to work for the day. While I was leaving the house the wierdest thhing happen to me. As I walked to the car my neigh bor was walking back to his house from the mailbox. I don’t talk to this neighbor very often. He is an older retired guy. As I was getting in the car he said to me: “Go Get Em! Don’t Stop Now.” Many of you may be asking the following question; What does this have to do with House Hunting?

Survival Tips

1) Accept the support around you – Talking only to your spouse or your colleagues about the frustrations of the offer righting stagge of the game can lead to more frustration. Talk to your professionals and ask them to explain to you why responses are so slow. Why the bank does not seem to care that you are trying to do the right thing by only submitting one offer at a time. Ask your professional to explain what may be an effective offer and why is it so hard to get in contract if it is a buyers market. Your professional should be able to help you at least understand the why of the above which will releive some of the frustration.

2) – Enjoy the Hunt – Make the house hunt a game. Enjoy the process of the whole thing. Write down items that you like from each of the houses on paper. Write down the qualities you must have and the items that you would like. Talk to your partner about how to work on the projects together and what colors you would do etc. It could very well be a long hunt. You have waited 20 plus years in most cases so dont get so excited that you forget to enjoy the process.

3) – Plan for It – If you have a written plan for the process that you fit into your normal calender then it does not disrupt ytour life so much. Schedule a time that you have specifically set aside for the viewing of homes. Schedule it like you schedule the gym or work or playdates for the kids. By doing this you avoid the feeling that the hunt has taken over your life. It helps to keep you from having the feeling that your life is off track and you are unorganized.

4) Know that you will be rejected – One of the hardest things to cope with is the rejection of an offer that you thought was a winning offer and the house was “EXACTLY” what you were looking for. Just like finding your life partner it will take work. It will take practice. It will take time. You have to lose some to learn what you don’t want and what you do want. When you do find the right partner or house in this case it is a constant work in progress. There will always be something that you would like to change or work on. You have to grow with the house and as you change you will want some things to change about the house. Don’t get discouraged by rejection get Encouraged. You are one step closer to your goal.

5) – Do not be in a hurry - You cannot rush such a major decision. You will be setting yourself up for disappointment. Just think about how often you hear a person say that they rushed into marriage and it was the wrong choice so they got divorced. Divorce is painful and can change someones life. Same with your house choice. Do not rush to get a tax credit or the interest rate that you have to have. All that will be there when the house you find comes around. whether you are 30 or 50 you did not miss the boat.

 6) – Be Emotionless – Yes, I know that this is much easier said than done. A better thing to say may be “don’t have unrealistic expectations.” Many times when you write your first offer you mentally move in. This means that when it is not accepted you have to move out or breakup. The song says “breaking up is hard to do.” If you leave out the emotion of the purchase and keep your furniture in your current residence until the loan is on record the process will feel better. I am not saying to not be excited I am simply saying to control the excitement. Contain to an acceptable level for you to handle. Try not to be too high or too low as each has its drawbacks.

Now that you know what to do in order to stay away from the House Hunting Blues I will leave you with the same words that my neighbor uttered to me this morning in the 36 degree weather “Go get em! Don’t Stop Now.”

Home Purchase:How to Survive your 30 day escrow

The market is phenomenal and the opportunity to buy a home is now. Many of you are taking advantage of the opportunity and that is amazing. Warren Buffet said, “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.“  Many of you are listening.

The time-line for an escrow to close is 30 days in most cases. In the thirty calendar day period we need to get our inspections done, appraisals done, have the loan underwritten, satisfy any conditions of the loan and be understanding of the turn-times of the third party services we employ. It is a cooperative group effort. I have given you below a few tips to help you survive the 30 day escrow and sneak out a winner.

Tip #1 – Be responsive to the requests from the professionals you hired- Before you began the process of buying a home you found a few professionals that you felt would best help you through the process. Many times these professionals (Real Estate Agent and Loan Officer) do not make the rules of the game. They are there to facilitate the process. If one of these professionals request documentation or a check for a service be quick to get them what they need. Your process will stop without it.

Tip #2 – Provide the documentation requested – It is imperative to provide all of the documentation requested. Do not try to find a way around it or think that something will be sufficient if that something is not what was requested. If you do not have what was requested get with your affiliate or loan officer and come up with an alternative. Holding back information from professionals that are on your team can cost you in the long run.

Tip #3 – Remember that we are on your side – All too often we forget that we are all on the same team. A victory is represented by a closed transaction. Communication is the key to that transaction. It stems from all parties who all have a lot riding on a transaction. Small details excluded can lead to a disaster that was avoidable upfront. Tell me the property is zoned service commercial and grandfathered in so I may come up with a solution prior to the problem.

Tip #4 – Be Prepared to fight for the home you want – It is not 2003, 04, 05 and obtaining a mortgage is a little more invasive than the past. If you could fog a mirror we gave you money in the past. Now we are asking for Birth Certificates to show the child support will continue for three years. The age on the application is no longer significant. This starts with the investors and trickles down to the buyer. Nothing good comes easy in life. It will pay off to be diligent and fight for the property.

Tip #5 – Everything is time sensitive – The purchase time-line is as follows. You go into contract and the clock starts. Your loan officer orders the appraisal, gets all the signed disclosures for the property, requests the preliminary title report and a copy of the fully executed purchase contract. Our wholesalers want a complete package to look at your file. The appraisal can be anywhere from 3-5 days, preliminary title report depends solely on the title company (I have dealt with companies in Philadelphia), Fully Executed Contract which can take time if the property is bank owned 3-15 days I have waited and all of this prior to submitting the loan to underwriting. Once we have all the documentation we can submit to underwriting which can be 3-9 days to underwrite. Business Days but the weekends count on the escrow. Once the file is approved there are generally a few conditions to meet and to be reviewed once they are obtained can be 2-4 days. When they are cleared and we are able to order your loan documents this is a 2-3 day job. Then we sign and the package is returned to be reviewed for funding. The funding process is 2-3 days. So if you add up the days on the short end a perfect process can take up to 12 business days with no hold up at all. This would include 2-3 weekends at 6days and we close the escrow in 20 calender days. On the long end 34 business days and 4 weekends would be a 42 day escrow.

In summary, it would require a group effort to survive your 30 day escrow. Note that we all have the same goal in mind. Home-ownership for you as the client is our goal and what we do best. I look forward to working with all of you in the years to come.

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/