Chris Thomas

Here's a question we get asked at just about every real estate training seminar we teach:

Q: How much money can a buyer get back at closing?

A: The most a buyer can get back is the amount of their earnest money, less any amount (if any) that they are required to contribute towards the purchase by the loan program guidelines. For example, if the borrower has paid $3,000 in earnest money and the loan program they are using requires a minimum contribution of $1,000, then the most they can receive back at closing is $2,000. If they get any more than that, it would be the same as if the seller was writing them a check for that extra amount. That's considered a seller inducement to purchase (a fancy term for kickback), and that is against the rules.

Q: When a mortgage broker says they are trying to "get an exception" from an underwriter, what does that mean?

A: Underwriters follow underwriting guidelines to determine whether a loan application falls within the risk parameters for a particular loan program. If a loan is not approved because it does not meet all of the guidelines (debt-to-income ratio is too high, reserves - or money in the bank - are too low, the borrower has not been self-employed for long enough, etc.), then the underwriter can still approve the loan if there are "compensating factors". Compensating factors are things that reduce the risk level of the loan. Some examples would be very high credit scores, very low debt-to-income ratios, etc. If the underwriter thinks there are sufficient compensating factors, they may issue an "exception" to the guidelines and approve the loan, even though it does not meet all of the underwriting guidelines.

Here's another question we were asked at a class we taught recently:

Q: Should a buyer ever pay a pre-payment penalty?

A: No, a buyer should never have to pay a pre-payment penalty (PPP). PPP's are added onto loans so the lender and the mortgage broker can make more money. The lender makes more because the borrower is locked into a loan that they are much less likely to refinance. The mortgage broker makes more because the lender pays the broker a rebate for adding the PPP onto the loan.

Some mortgage brokers will argue that they will use the rebate they get to pay some of the borrower's closing costs, but that is rarely what actually happens to the money. Typically, the mortgage broker just keeps it for himself.

Here's another question we were asked at a class we taught recently:

Q: If someone owns a house and is buying another one, why does a lender sometimes want to see the mortgage statement for the buyer's current property? I thought the mortgage payments would be listed on the credit report.

A: The underwriter is looking to see if the homeowner's insurance and property taxes are included in the monthly payment. There is no way to tell from a credit report if the taxes and insurance are included in the amount reported to the credit agencies. If they are not, then they have to be added to the monthly payment to get the correct debt-to-income (DTI) ratio.

Fannie Mae just announced that there are some new appraisal requirements going into effect, in order to make sure that properties are valued correctly. The main change is the addition of the Market Conditions Addendum, which requires the appraiser to go into great detail to support the claim that a market has declining, stable, or increasing property values. This is something that everyone should be familiar with - sales will depend on it. The announcement from Fannie is 9 pages long, so we're supplying the link to the document, rather than pasting the entire thing in this email. Here is the link:

https://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2008/0830.pdf

The new addendum must be used for all appraisals dated after April 1, 2009.

There are other changes as well.

- Supervisory appraisers can no longer just sign off on an appraisal - they must inspect the property themselves.

- The sales contract and all addenda must be given to the appraiser. If the contract is updated, the updated contract must be given to the appraiser.

- If the appraiser uses comparable sales from outside the neighborhood where the property is located, they must now explain why they are doing it.

Fannie also clarified some appraisal issues:

- Repair escrows can be used for minor problems with the property (worn carpet, minor plumbing leaks, holes in screens, cracked window glass, etc.).

- The appraiser must comment on each time the property has been listed for sale in the previous 12 months.

- The appraisal must be for the entire property, not just for a part of it (all acreage must be counted).

- If an adjustment for the effective age of the property is used in the appraisal, it must be explained.

- When anyone with a financial interest in the transaction (real estate agents, buyer, seller, mortgage broker, etc.) provides the appraiser with comps, the appraiser must verify them.

- Neighborhood boundaries cannot be expanded to encompass comps.

- Time adjustments must reflect the difference in market conditions between the date of sale of the comp and the date of the appraisal.

Everything other than the use of the new addendum goes into effect on January 1, 2009.

Again, these are big changes and they will have an impact on listing prices and sales prices (probably to lower them - that's the whole point of all of these changes). Make sure you read the Fannie Mae announcement and pass the word on to everyone you work with.