The lending industry has suffered dozens of small and large regulatory changes over the last twelve months. The new rules were intended to save consumers money by creating a more transparent process or by closely mandating the way lenders handle certain parts of the process.
Of course these changes were mandated by our friends in WA D.C., none of whom (as far as I can tell) have any actual knowledge of how the lending industry works. Although two of them, Senators Christopher Dodd and Kent Conrad know enough to get sweetheart loans via Countrywide’s now infamous “V.I.P” program. The program waived “normal” fees, points, and lending rules for friends of Countrywide.
Two of the largest changes this year were the Home Value Code of Conduct (HVCC) and the Mortgage Disclosure Improvement Act of 2008 (MDIA). Both were concocted to “protect” consumers but I can tell you from experience that both are actually costing consumers more money and jeopardizing their entire transaction. I'm a strong supporter of consumer education throughout the process but the execution needs to be done in a lest costly manner.
Following is my very non-technical and non-legal review of both.
HVCC was implemented by lenders “voluntarily” to settle a pending lawsuit. The suit claimed that lenders were forcing appraisers to overvalue your home so we could make more loans. Supposedly we threatened to withhold future business from our appraisers if they didn’t cooperate. The only specific case of wrong doing prior to the settlement was a lawsuit by New York Attorney General Andrew Cuomo against an appraisal subsidiary of First American Corporation. Cuomo maintained that Washington Mutual threatened to take future business away from First American’s appraisal company if they didn’t raise the value on already prepared appraisals. Why didn’t Cuomo sue WAMU at the same time as First American? WAMU couldn’t be named in the suit because Federally Chartered banks are exempt from oversight by state Attorneys General. Boy, there’s topic for another day! The rules now require that lenders order your appraisal from a blind pool called an Appraisal Management Company.
What does an AMC do? They farm out the report to whatever local appraisal will do the report for the lowest cost – and the AMC takes a huge chunk of that. Because it’s a blind pool I can no longer communicate with the appraiser ahead of time and make sure we’re not wasting your money on an appraisal that won’t work. In addition, I can no longer expedite your report by utilizing whichever of my professional appraisers is available tomorrow. You are at the mercy of whomever the AMC assigns to your report.
The Mortgage Disclosure Improvement Act of 2008 is well intended but can easily delay your transaction if your lender is not very careful. The rule details when a specific disclosure form – the Truth In Lending (TIL) form – must be delivered to you. The Act further defines what “delivered” means and has been interpreted to mean 3 days after said form has been mailed to you. Lenders are not allowed to spend your money ordering an appraisal until you’ve received the initial TIL form – hence your transaction is now delayed right at the beginning of the transaction. Rebecca and I have adapted our business to handle these new regulations without a problem for the customer, as have other professional lenders. However, we have heard horror stories of consumers losing their rate locks or not moving into their new home on time as a result of these new regulations.
This post was inspired by a discussion amongst real estate agents on a web forum I read recently. Contributions came from agents all over the country. These agents represent both national franchises (Keller Williams, Century 21, Coldwell Banker, etc.) and independent firms.
The discussion was about whether it was acceptable to force prospective home buyers to register on an agent’s property web search page or whether to make the information viewable without. There are thousands of web based home search sites and most (virtually all) are funneling data from the same source - the local multiple listing service (MLS). The unspoken secret is that these property search sites are great for the consumer but can also be incredible lead generation tools for an agent at the same time – if they force you to register to see the information. If you do register on a site just be prepared for some sort of follow up from whoever is hosting the site you used.
The forum posts got me thinking about what really is the most effective way for a consumer to search for and ultimately buy their next home.
Your best opportunity to locate and buy the perfect home is a simple three step process – loan preapproval, utilizing a web based property search, and employment of a professional Realtor. I’ve listed them in order of importance as each builds on the previous step.
There is absolutely no sense in even dreaming about a new home until you’ve had your loan preapproved. I worked with dozens of clients over the years who were heartbroken when they came to me with the home already picked out and I had to tell them they did not qualify.
It doesn’t matter how high your credit score is or how much money you make, I guarantee you that “good” borrowers are having their loans denied all the time for one reason or another. There are just too many potential skeletons in the closet that lenders are trained to look for. A preapproval will make the process much less stressful, allow you to shop with full knowledge of exactly what your payments and closing costs will be, and place you in a much stronger negotiating position with the seller of the home you chose.
Expect the preapproval process to take anywhere from a couple of days to a couple of weeks depending upon how many and what kind of skeletons you have! It should not cost you more than $15 for the credit report the lender will need to order on your behalf.
After your lender has assured you that you are fine to move forward you’ll want to begin using the web to search for homes. I wrote “homes” plural because I believe your mindset at this point needs to be that you are just trying to zero in on a particular neighborhood or two and to get an idea of how much your dream home is really going to cost.
Once you’ve done your preliminary home search on the web it’s time to partner up with an awesome agent. Why? Three reasons – an agent costs you (the buyer) nothing, an agent will have information about specific homes and neighborhoods that just aren’t available on the web search pages, and the agent will help you negotiate the deal with the seller.
Your real estate agent should be someone you like and trust as they will be handling a very expensive transaction on your behalf. It’s best if you can be referred to an agent by someone who can personally vouch for their past performance. If not you certainly want to interview a couple until you find one you are comfortable with.
To get pre-approved for a loan or to get a Realtor referral, please send Rebecca or me an email at MMullin@TheLoanConsultant.com, or give us a call at 509-252-9151. We’d love to share our knowledge with you!
One of the most popular first time home buyer programs is the HUD FHA loan. The best part is you don't have to be a first time home buyer - anyone that qualifies can use this program.
The only limitation is that the base loan amount can’t exceed $271,050 (at least in the Spokane area – higher limits apply in higher cost areas like Seattle and the Western part of our state) which equate to a home price of about $280,000. That does not mean you can’t use the program to purchase a more expensive home, it just means you will need to make a larger down payment if you do.
Highlights of the FHA loan are:
The FHA loan can be a great program for "out of the box" situatioons that don't fit the cookie cutter mold a Conventional loan program requires. I recently helped a college student who had completed his AA but is still working on his 4 year degree at Eastern Washington University. He had some part time work experience, but nothing you could use to qualify for a home loan.
His mother was willing to co-sign his loan but two different lenders said the son needed to have a history of working before he could qualify. I knew that was not HUD's requirement so I spoke to a couple of our other wholesale partners and found one who was willing to accept the loan with just the mother's income - even though she wasn't going to live in the home. Now this young man is a home owner years earlier than if he’d had to wait until he graduated and obtained full-time employment.
WARNING ON FHA LENDING - When talking to a lender about an FHA loan be wary. In 2007 only 4.12% of all homes sold were financed with an FHA loan (Source: FHA Single Family Activity in the Home-Purchase Market Through January 2009). In 2008 that number had jumped to almost 13% and it’s running close to 30% year to date in 2009.
Why the dramatic increase in FHA loan business?
Well, FHA is the “new” loan program of choice for all the lenders who used to peddle subprime and alt-A loans. HUD’s new Secretary, Shaun Donovan, testified before the US Senate on April 2, 2009 that the number of FHA approved lenders had increased by 525% since 2006!! I’m not a math genius but I think that means that only 20% of the current FHA approved lenders have been involved in this specialized lending product for more than 2 years. The other 80% have just jumped on the bandwagon. If you talk to a lender about an FHA loan, your first question should be “how long have you personally been approved to offer this loan program?”
Home loans are my passion - if you have any questions about how an FHA loan can help someone finance their first home just give me a call at 509-252-9151 or send an email to mmullin@theloanconsultant.com
If you, or anyone you know, have not owned a principal residence in the last 36 months your opportunity to get a free $8,000 gift from Uncle Sam is quickly disappearing. To qualify for the tax credit you must close escrow on a home on or before Monday, November 30, 2009. That gives you about 60 days to find a home and get into contract so you can comfortably beat the deadline.
The Housing and Economic Recovery Act of 2008 makes it possible to get a “refundable tax credit” of 10% of the purchase price of the new house up to maximum of $8000. Thus in order to get a full tax credit of $8000 your purchased property must be above $80,000 in price. While “refundable” sounds like you have to pay it back the term “refundable” really means you get the full credit even if you owe no taxes. The credit will reduce your taxes owed or increase the amount of your refund dollar for dollar.
While the deadline to close escrow on a home is November 30, eligibility for one of the two tax credits (remember this started as a $7,500 repayable tax credit) extends back to homes closed on or after April 9, 2008. Keep in mind the “purchase date” to you and I would normally mean the day you signed the contract but the IRS defines it as the day you closed escrow and the property was recorded in your name. That will become a critical distinction; I’m sure, as this program expires. We’ll see a rush to close home transactions in the last weeks of November.
One of the biggest misunderstandings of the program is over the term “first time home buyer.” To the IRS that means an individual who has not owned a principal residence within the last three years. If you own a home but do not reside in said home, but rent it out instead, you would qualify as a “first time home buyer.”
The full credit is only available to individuals with a modified gross annual income (MGAI) of $75,000 or less and for married taxpayers with MGAI of $150,000 or less. The tax credit is gradually reduced to zero for individuals with MAGI between $75,000 to $95,000 and for married taxpayers with MAGI between $150,000 to $170,000. Your adjusted income for tax purposes is often times, but not always, less than your gross wages as reported on your W2.
A frequent question we get is how can you apply this tax credit to your down payment so you don’t need as much money to close escrow? The answer is there isn’t a way – at least in the state of Washington. Some states have made funds available as sort of a short term loan, repayable when you get your tax credit, but the Washington Housing Finance Commission was not able to develop a program. The best suggestion I have to limit your cash out of pocket is to make sure your real estate agent and lender structure your transaction to minimize your out of pocket expenses. There are just a few little known ways to accomplish this.
While there are lots of details that can’t be covered in the space of this post, two important ones are that you will not qualify for the credit if you purchase a home from a direct relative and you will have to repay the credit in full if you rent out the home within 36 months of purchase.
An important distinction is that this is an IRS program – it has nothing to do with loan programs or lending guidelines. I strongly recommend you speak with a tax professional if you have specific qualifying questions as they are the only ones with the expertise to do so.
If you have already purchased your first home, and it closed escrow anytime after April 8,, 2008 don’t forget to file for the credit when you complete your 2009 tax returns!
The IRS provides a remarkably great web page with all the pertinent details of the $8,000 Tax Credit for First Time Home Owners.
If there is any inside info about lending or real estate you’ve been curious about, please send an email to MMullin@TheLoanConsultant.com, or give me a call at 509-252-9151. I’m passionate about real estate and mortgage lending, and would be happy to share my knowledge with you!
I'm getting more and more calls from clients and friends who think that the new lending guidelines require at least a 20% down payment.
While having that much cash to put down would certainly lower your payment, there are plenty of low down payment options available right now.
One very little known program is the Gauranteed Rural Housing Loan Program administered by the USDA – yep, the same people that certify your beef!
Following are some general highlights:
The program is restricted to “rural” areas but that includes a large portion of our readers’ locations – ALL of Ferry, Pend Oreille, and Lincoln Counties are eligible as is most of Stevens County (the community of Suncrest is excluded), and the outlying portions of Spokane County. While I have only listed a few areas covered, we can help you with a USDA Rural Housing Loan Program in any eligible location in the states of WA, ID, and CA. We have reference maps to verify the eligibility of specific addresses and you are welcome to call us to check for you.
There is also an income limit of 115% of area median income limit, scaled to family size. The income limit is actually quite high, particularly when there are three or more family members residing in the home.
If you are a real estate agent or a prospective home buyer, and would like to know how this program could help you purchase a home just give us a call. We’d be happy to fill in the details.
If you have a question about lending or real estate, please send me an email at MMullin@TheLoanConsultant.com, or give us a call at 509-252-9151. I’d love to share my knowledge with you!
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"Building Wealth Through Professional Loan Strategies" 20 years of experience in real estate investment and finance - I have solutions for any real estate needs you might have.
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