Georgia FHA Home Loans - (& Opinion)

"I'm not paying any points!"

Well, okay then. I guess you're paying cash because everybody who borrows money from a broker, lender or bank (regardless of their misleading advertisement) pays points. Simply defined the word points means a percentage. What they are a percentage of is the next question. And, in this case, they are a percentage of the loan amount.

For example if we are talking about $100,000 and we say "one point" we mean "one percent" or $1,000 (one thousand dollars). If we say "two points" we mean "two percent" or $2,000 (two thousand dollars).

Since we know what a point is (1 point = 1 percent) and we know what it is based on (the loan amount) why exactly are points charged and why is it a good or bad thing? To the mortgage insider there are lots of points. There are origination points, there are discount points, there are yield points and there are service release points. Some of those points are directly visible to the borrower(s) and some are not so let's take them in order.

Origination Points - this is your loan officer's paycheck. She does not get it all (usually) but rather splits it with other people. Even if she does keep it all she has some other fees to pay out of it to her broker or lender. When people say, "this is a no point loan" they are not talking about this fee. They are talking about ...

Discount Points - this is the fee to buy the interest rate down. In plain language if you are offered an interest rate of 5.5% and you want the interest rate at 5% you will pay discount points or buy down points. On a purchase loan this may be paid by the buyer(s) or the seller(s) where permitted. Again 1 point = 1% of the LOAN AMOUNT. This is the fee almost everyone except mortgage industry participants are talking about when they say, "I'm not paying any points!"

The tricky part about "discount points" is it costs more than 1% of the loan amount to "buy down the rate" 1% - so you don't pay 1% of the loan amount to go from 5.25% to 4.25%

An example of discount points not intending to confuse: Say your loan amount is $100,000 and the interest rate is 5.25% but you want a rate of 4.625% - every loan officer will know exactly what these numbers mean. If they don't then they are not, in fact, a real loan officer. But I digress. The RATE column is obvious. The 25d column means once that rate is "locked" the file MUST be closed in 25 days or a rate lock extension must be purchased.

RATE     2d      10d     25d     40d
4.250  3.375  3.500  3.875  4.000
4.375  2.500  2.625  2.875  3.125
4.500  2.000  2.250  2.500  2.625
4.625  1.625  1.750  2.125  2.250
4.750  0.875  1.000  1.375  1.500
4.875  0.375  0.500  0.750  1.000
5.000 -0.125  0.000  0.375  0.500
5.125 -0.500 -0.375 -0.125  0.125
5.250 -1.500 -1.250 -1.000 -0.875
5.375 -2.000 -1.875 -1.625 -1.500

The -1.000 in the 5.250 row and 25d column means there is a cost to the borrower of -1% of the loan amount. Since the cost is negative one percent that means one percent comes back. Generally that would be shown on the mortgage broker's HUD1 as 1% of the loan amount in YSP. So if it is a $100,000 loan that would be $1,000 to the mortgage broker. You won't see it at all if it goes to the bank or lender.

The 2.125 in the 4.625 row and 25d column means the rate of 4.625% will cost 2.125 percent of the loan amount PLUS the 1% of the loan amount the broker won't be making. So in this case it will cost the borrower 3.125% of the loan amount to "buy down the rate" to 4.625% (there are many other ways to slice this pie but you don't have the patience and I don't have the time for the full book version :)

In the above example on a $100,000 loan to "buy down the rate" from 5.25% to 4.625% would cost the borrower $3,125 - on a refinance this could come from the new loan and on a purchase it can be paid by the seller or the buyer depending on loan guidelines.

Yield Points - called Yield Spread Premium, are probably the most maligned and possibly misunderstood "fees" there are. Funny thing is it's not a fee. What many bankers, bloggers and ill informed talk show hosts (plus a so-called "Real Estate Expert" on About.com) either do not understand or simply choose to lie to you about is these are the only "back end points" ever revealed to the borrower. Has YSP been abused? You bet! But bankers abuse rates and never tell you how much profit they are making. I know, I are one. I have also been a broker. If your rate is competitive you really should not care at all about these points. If you disagree or do not understand call me and we can chat.

Release Points - called Service Release Premium, are the most ignored points even though they are virtually identical to Yield Spread Premium listed above. For secondary marketers and mortgage bankers there is a huge difference between the two but to the end user really the are very similar. Both affect the interest rate paid by the borrower and the profit made by the lender/banker/broker. What should matter to borrowers is 5% 5.5% 6% - whatever the rate is and your other closing costs.

One of the big problems with mortgages is so many people have no idea how to shop for one. They think if they know the words, "points" "rate" and "closing costs" they know everything needed to know. What they really do when they ask those questions in the wrong manner is tell a savvy loan officer just how little they know. They would be better served by saying, "tell me about your mortgages and all the costs associated".

You are going to pay points one way or another. Either you are going to pay a higher interest rate, your loan amount is going to be increased or you are simply going to pay them exactly as they are.

Let me interject a note about "hidden fees". It is not that hard to have "hidden fees" on loans but even with "hidden fees" you can still shop if you look at the three most important numbers: How much money you have to bring to the closing table, your total loan amount and your monthly payment (and whether or not that payment can ever change). For example if your loan is $100,000 and you have to bring $10,000 to the closing table and your monthly payment is $500 for one loan but for another loan of $100,000 you have to bring $20,000 to the table and your monthly payment is $550 - YOU have to decide which one works for you. A true mortgage professional can advise you. Don't fall for some hopped up claims like, "all of our fees are up front" or "we have flat rate mortgage fees". So? So what? That in no way qualifies that company as more honest or trust worthy.

If you want to know how to shop for a mortgage, even if you are not in my market area, I will be happy to speak with you. Just give me a call and ask! Maybe I should write another post about how to compare mortgages ...

Every loan officer who has done their job for more than a week or so has heard the question. Some loan officers avoid it altogether by simply not sending the Truth In Lending (TIL) until they absolutely are required by law to do so. Why? Because in the top left corner in prominent font is a number that confuses almost every borrower and non-financial insider - the Annual Percentage Rate (APR).

The APR disclosure requirement was sort of a good idea when it came out back in 1968 when there was pretty much just one type of home loan: a 30 year fixed interest mortgage. With time and exotic mortgage solutions the APR became highly obfuscated and even a tool of obfuscation.

Recent changes to the RESPA laws and the injection of the Mortgage Disclosure Information Act (MDIA - call the Mediah by insiders) was supposed to fix what has been broken for years. What it is doing, however, is bottleknecking the process for almost everyone who is using a mortgage to purchase or refinance a home.

The main problem and fault with the APR for the last several years has been the ease of manipulating it by how closing costs and other mortgage related fees can be hidden in the loan or rate to obfuscate the APR. The idea behind the forced disclosure of the APR was to give an apples to apples comparison of mortgage costs. It doesn't work, hasn't worked and another ignorant piece of legislation designed more to give the appearance of help rather than actual help like MDIA is just another road block to home ownership for home buyers.

If every mortgage was exactly the same, all closing costs had to be line itemed and there were no variations in terms them APR would be a more valuable but still useless tool. Here again the intelligent homebuyer is punished because of the few ignorant ones who refuse to take a moment and look at what is really important about home finance. Am I bitter? No. I'm still going to be making home loans and my clients are still going to be paying for them. It's just that sometimes it will take them longer to get to the closing table if anything changes with the loan post application and prior to close - in some cases.

In a nutshell the MDIA law says if the APR changes more than .125% (an 1/8th of a point of interest) then the disclosures must be resent and a period of no less than 3 business days must expire. This means changes to any of the APR tracked fees or loan amount. The law does not say whether or not this applies if the APR decreases or increases just if it changes. Some lenders are redisclosing in both directions other only if the APR increases more than .125%

A quick definition of the APR is the actual interest rate plus the other mortgage associated costs expressed as a percentage of the loan amount over the life of the loan. For example if you have a $100,000 loan and your APR included costs are $3,500 you would first find out what percentage of $100,000 is made up by $3,500. This one is simple it's 3.5% but that has to be annualized so divide it by 12 to get .29% and add that to your initial interest rate - let's say 6% to get 6.29%. So in this scenario our interest rate is 6% but our APR is 6.29% - so you can imagine why people see that TIL and call immediately and say, "I thought I was getting a 6% loan!"  When you indicate that is correct they invariably say, "But this paper says 6/29%" When explained to the masses they simply say "oh" and just forget about it!

So what fees affect the APR? I'm so glad you asked. But the answer is variable by the state wherein the property is located. I can give you the ones for Georgia as a reference but your state may be different. Remember all of these fees may not actually be on your loan but if they are they are to be added to the APR.

Georgia APR fees include: processing, underwriting, origination, discount points, broker fees, commitment fee, lock fee, attorney's fee, wire fee, disbursement fee, warehouse fee, amortization schedule fee, copy fee, fax fee, courier fee. There are other fees that may be charged but these are the fees that affect the APR. (These fees may even change from lender to lender believe it or not.)

If you are an agent, home owner or home buyer with questions about APR feel free to call me anytime on my cell at 678-439-8683 and I'll be happy to help you as much as possible.

This one kind of goes along with "When Can We Close?" from a couple of years ago and another "How Long Does It Take To Close Today?" from a few weeks ago. It is further inspired by feedback from many agents and clients over the last many years.

First it is important to understand the difference between a pre-approval, an approval and a clear-to-close. That explanation is given here at "Pre-Approval, Approval, Conditional, Cleared - What the ____?!" Let me augment that by saying you, the home buyer, have a lot of power over how certain your pre-approval is.

Pre-approvals are generally good for 30 days. This almost always depends on lender guidelines. To make sure you are getting a real pre-approval listen to how long it takes to get your pre-approval and to what you supply to the loan officer before you receive your pre-qualification letter.

Recently I received a call from one of the largest banks in the world and the phone call started by telling me I had been pre-approved for a very low interest rate to refinance my current home. When I asked the phone bank operator to send me the pre-qualification he said he would have to ask just a few questions first. There was probably only a pre-qualification based on my credit score and estimated property value. Worth nothing.

A real pre-qualification can take as little as a couple of hours and a seasoned loan professional can easily guide you through the process. Anyone who gives you a pre-qualification over the phone without having seen any evidence to prove what you have said is giving you a decision based on credit and payment history with your statements only. This type of pre-qualification is what gives loan officers a bad name.

If you are thinking about going shopping for a new home you should get pre-qualified before you even begin. Unless you have significant income, strong credit and payment history and plenty of cash you need to know what the lender is going to offer based on your specific qualifications. The loan officer will also be able to tell you which property types and costs are okay for which loan products.

To sum it up - get qualified first then start shopping. Otherwise you may be wasting your time and the time of others as well.

Here are the facts about FHA and foreclosures on credit:

If there is a foreclosure on the borrower's credit (any of the borrowers) it must be at least 36 months previous in most cases. There are a very limited number of instances which would allow a foreclosure to have been within less than 36 months (from application date) and the lender may continue to underwrite the application even though it may have not been approved by the Automated Underwriting System (AUS).

Those events are pretty much limited to:

Death or serious illness of a wage earner.

Yes, that's it. HUD 4155.1 REV-5, the guideline from HUD which governs this topic, states:

D. Previous Mortgage Foreclosure. A borrower whose previous principal residence or other real property was foreclosed or has given a deed-in-lieu of foreclosure within the previous three years is generally not eligible for a new FHA-insured mortgage. However, if the foreclosure was the result of documented extenuating circumstances that were beyond the control of the borrower and the borrower has re-established good credit since the foreclosure, the lender may grant an exception to the three-year requirement. Extenuating circumstances include serious illness or death of a wage earner, but do not include the inability to sell the house because of a job transfer or relocation to another area.

So, while it is possible to be qualified for an FHA mortgage with a foreclosure on the buyer's or refinancer's credit within the last 36 months the reasons for making that exception are very narrow. Meanwhile please don't try and qualify your clients yourself as there are many , many caveats which may be overlooked even by the most estudious.

As a seasoned loan officer I don't even deny an applicant just because I see a foreclosure without hearing the full story and submitting the information to the AUS. Then again I like my application to close ratio to stay as high as possible within the lending guidelines available to me.

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Looking for a great place to live with some of the best values in America? Look no farther because I am sitting in it right now keyboarding this post to you! On October 6th NBC's Today Show with Al Roker highlighted Marietta, Georgia as the number 4 place in America to buy a home and get the most "bang for your buck".

I happen to agree with them because I live here, have lived here my entire life except a little college stint, and I am very actively involved in my community and lending here. During the boom builders constructed some very beautiful homes which in turn emptied a number of existing homes and left us with a surplus of larger, newer homes. In fact on October the 12th I wrote about "My Home, Marietta, Georgia" which was a featured article here on Active Rain.

We were hit late in the price drops but when we got hit we got hit hard! Sarasota is number one, San Fransisco is number two, is number three is Lansing (another great city), and Marietta (that's me) is number four. By the way, the Gone With The Wind Museum is way down on the list of "pride and joy" of this community. Seriously, only an outsider would say that! Don't get me wrong, it's very cool but the life is in that old town area is very vibrant and that is just one of hundreds of attractions in that immediate area.

You can watch the video here on the City of Marietta's website. When you get finished call me. I'm not a real estate agent - I'm a very seasoned home lender based right here for my entire career in Marietta, Georgia. 3300 homes in the Atlanta/Marietta area have been financed across my desk I have a pretty decent "handle" on the market here.

So you have the down payment - sourced and seasoned just like it needs to be. All saved up, stored away nicely in the bank for the last 60 days, and ready to be invested into a home. The closing costs are there, too, and all perfectly documented for the last two months. Great job! Your down payment and closing costs are in order. This is something to be proud of!

It's always something that needs to be covered right up front. When the loan officer is taking the application and they know what it requires for down payment and the approximate closing costs they also need to calculate in the speficied amount of reserves. What are reserves? Straightforward it is enough to conver the principal, interest, taxes, and insurance (at a minimum).

Most loans require two months of reserves on the purchase of a primary residence and as much as six months (PITIA) on investment property purchases. But it's not enough they be available they must also be sourced and seasoned just like the down payment and closing costs.

Here's a little good news, though: reserves don't have to be in cash form. In fact 100% of the following can be counted for reserves:

1. Stocks, bonds, mutual funds, U.S. government securities, and other securities that are traded on an exchange or marketplace general available to the public (such as NYSE, NASDAQ, Midwest SE, CBOT, or OTC) whose price can be readily verified through financial publications.
2. Cash-value life insurance (rather than face-value) that is verified. The borrower must be the owner of the policy and not the beneficiary.
3. Personal IRA and SEP-IRA accounts that are owned by the borrower and verified.
4. The borrower’s portion of undistributed trust funds.

Additionally a portion of the value of the following may be counted as reserves:

1. 401(k), KEOGH, 403(b) and other IRS-qualified employer plans may be counted as reserves; however, to account for withdrawal penalties and estimated taxes, 70% of the vested amount of the account should be used to determine the borrower’s available reserves. The borrower will be required to provide documentation that the funds are accessible for withdrawal. If the retirement account only allows for withdrawals in the event of the borrower’s employment termination, retirement, or death, these funds should not be considered as reserves.
2. Savings bonds may be counted at 100% of face value if mature. If the bonds are not mature, the amount counted towards reserves is based on the redeemable value at the time of underwriting.

Ask your Loan Officer about reserves. If you are an agent and want help understanding these please never hesitate to call me or have your client call me. I'm more than happy to help even if I do not have the ability to assist in your area.

By NOW! I mean if you have not called a loan officer to get qualified, found a property and made an offer you're dangerously close to missing the First Time Home Buyer's Tax Credit. I know what you hear in your mind, "it's good through the end of November." You would, of course, be correct in so saying. Your correctness would be equivalent to leaving New York City for a trip to Tokyo to see your best friend's wedding which happens at 5PM your time and you are getting on a jet at Noon your time the day of the event. In other words it's "possible" you can make it on time but not very likely with the available equipment.

I know there will be loan officers and others reading this who will say, "shoot man I can close a loan in 8 days". Well, so can I. But it's by far the exception and not the rule. If you are a first time home shopper and you are reading this pick up the phone right now and call your local loan officer. If you just have questions feel free to phone me at 678-439-8683 and I can answer some questions for you.

Here are some pointers to speed the process and hopefully close before the end of November:

• Get prequalified right now, today. Not in a minute RIGHT NOW.
• Once you are prequalified ask your loan officer for a list of "findings" this will likely include:
  • Last two years of tax returns all pages all schedules
  • Last two months of bank statements on all accounts all pages (ALL pages)
  • One month's worth of pays stubs (if you get paid weekly that's FOUR)
  • Name of your landlord and their contact information for rent verification
  • Explanation of any credit checks that have been done on you in the last 90 days
  • A clear (CLEAR) copy of your driver's license (photo ID) and Social Security Card
  • If your down payment is a gift a GIFT LETTER and supporting documentation (the giver's paper trail from their bank to you)
  • Name and contact information for your preferred home owner's insurance agent
• Be prepared to get more stuff and don't argue with the loan officer or processor - JUST GET IT

If your home purchase closes on or after December 1st, as it stands today and there is no reason to believe it is going to change, you will NOT be eligible for the tax credit. Trust me, there will be hundreds, if not thousands, of people nationwide who think they are going to qualify for the tax credit who do not get it because they started too late. Today is getting just about too late.

So what are you going to do right now? Right CALL A PROFESSIONAL, EXPERIENCED LOAN OFFICER!

While for the last several years I have been blogging as partner and "President" of a busy but small mortgage lender licensed in Georgia, Florida and for a time North Carolina things have changed mightily over the last few weeks. Many of you knew I was considering mothballing my Novation Mortgage and indeed had spoken to some about various opportunities around the industry.

Early on in the change process I decided if I were to continue with my experience in the mortgage industry it would be at Regional Director or above or good old Loan Officer. Several people contacted me through Active Rain or as a result of Active Rain I should say and others with whom I interviewed rapidly found my 3 plus years of blogging here as well as proliferated around the Internet. Some liked the idea and others did not - understandably - as keeper of the keys to my own company I was often more outspoken than I will be henceforth.

Be all that as it may I have landed at a new company. So far I like it very much. I know most of the underwriters and even my own underwriter for the last several years works right here in the office with me. Most of you know my lovely wife Myra. Of course she can't do my files here but that's okay I can still see her smiling face every day.

The best news is yet to come about my new employer and cannot yet be publicly discussed. Still, as of today, the company has multiple branches across the nation and we are licensed in over half the states in the US and growing every day. I checked out every company which recruited me and felt my talents and experienced best matched to be a Loan Officer with America Home Key based in Dallas, Texas.

Why did I decide on Loan Officer vs. continuing to hash it out with overly pretentious young bucks and wannabe middle managers trying to get to the Executive Board? I'm 50. I've had very successful years. I've been kicked in the teeth by the economy, Congress and deflated investments. Something is very appealing to me about concentrating on nothing but my relationships with networks of good people, real estate agents, builders, and other industry people. As a Loan Officer I can concentrate on what gives the customer the best outcome.

Middle management was good. Ownership definitely had its perks but it also has and had its drawbacks. Let me do what I do best and that's service my relationships and clients. (To the numbskull who says, "they're not clients you're not a lawyer", I say "buzzz - you're wrong". Merriam-Webster defines a client as "a person who engages the professional advice or services of another".) Having time to get out and see the agents and brokers in my area as representative of a well funded bank is going to be enjoyable. Playing golf with some will be even better!

I have seen a blog post and it has been reposted that gives the impression the federal First Time Home Buyer's Tax Credit has been extended for 12 months. Actually it has not yet been extended. Only the house has voted on a resolution titled "The Service Members Home Ownership Tax Act of 2009" which does provide for an extension of 12 months for veterans or service members who spent 90 or more overseas during calendar year 2009.

As everyone knows for a resolution to become a law it must also be passed by the Senate which sometimes adopts the House Resolution as their Senate Bill. I have not seen the Senate Bill which echoes this  but I have heard it calls for an extension of 6 months, not 12 months.

I just wanted to make sure you realize this is not a done deal and could face changes or not make it through the Senate. Guessing it will make it through the Senate with that modification is what most industry pundits are indicating.

Meanwhile if your buyer's are not already loan qualified and have made and had an offer accepted you're headed for a very bumpy ride at best.

Some years ago I had an agent to whom I referred a lot of business ... seriously a couple every month. She got in with "Dr. Morton" on their close-out list and we were moving a couple of units per month to clients I had generated with my advertising. Suddenly it became a problem for MY BUYERS whom I had created as clients with my efforts and my free training classes to use my mortgages and "Dr. Morton" decided they would no longer honor their closing cost contribution unless the buyer used their preferred/inhouse lender.

Woah.

I'm not that great of a business man or negotiator but I am very protective and jealous of my customers and for my staff members. To make a long story short before I had the agent get me to the right person at "Dr. Morton" to resolve the issue I made a few calls to a few state and federal agencies including the Federal Trade Commission

But "Dr. Morton" wasn't the only builder doing this, several others offered incentives to buyers for using their inhouse or preferred lenders as well. That is until the FTC and even the FBI got involved and started doing some snooping around. Then came the lawsuits and regulators and it's still kind of a mess. So you would think builders would catch on. Not so fast ...

I have a buyer I have been working with for about three months who has been waiting on the builder to finish his home. In the beginning he called me because his builder did not want to get "stuck" with the home so he needed a pre-qualification letter. The buyer called me and I took a full application on an "address to be determined" at my cost for credit, my liability for compliance and my couple of hours of phone, email, fax and office time. I did provide the pre-qualification for the buyer and even sent the letter directly to the builder who also phoned me to verify I was legit.

So here we are, I have answered at least a dozen emails, two dozen phone calls and had the secure data storage responsibility for the buyer's private, financial information. I have also kept him posted on rate changes and changes in FHA guidelines which will or could affect him. I think that's enough to set the stage and you know what's coming.

Today I get an email from the buyer who says, "Ken, I just want to give you a heads up that the builder is offering financing and says he will give me $5000 credit toward closing if I use his financing but only $3000 if I use someone elses."

I thought, oh boy, here we go again! Tell you what I'm going to do, I've asked the borrower to get a GFE and TIL from this lender. I'm going to use my regular pricing and see what they can come up with. You know how it works and so do I so I expect they can't touch my rate/costs and still do the loan for $2000 less without some sort of closet payment.

So here's what I'm telling you if you are a builder: Don't do this. It does harm the market and I'm not alone here in mortgage professional world in my understanding of how that happens. Same thing goes for any seller who offers incentives for a buyer to use a particular lender. Do I want a good relationship with builders? Sure, the ones who pay attention and do business on the up and up. Any builder who would do something like this is very likely to pull other gray area moves, too. Payoff the inspector? Use a cheaper grade of building materials? Beat the subs down on price so low they don't do the job any better than just barely expected.

Play fair and get treated fairly. Try to use coercion/bribes to steal one of my customers and the gloves are off.

References:

Coercion - http://en.wikipedia.org/wiki/Coercion
RESPA - (for the spirit if not the letter) - http://www.hud.gov/offices/hsg/ramh/res/respa_hm.cfm
Federal Trade Commission - http://www.ftc.gov.bb/library/2003-06-13_unfair_trade_practices.pdf
The Rico Act - http://en.wikipedia.org/wiki/Racketeer_Influenced_and_Corrupt_Organizations_Act