What every home buyer or seller needs to know in 2008 and beyond!
What has changed?
Denver, CO~ May 14th, 2008~As we sit here in the aftermath of the mortgage meltdown many people aren’t quite sure what to do with their desires to buy a house. There has been a huge concern about the ability to get mortgages, what are the down payment requirements, and will my loan actually fund. Gone are the days of the easy pickings and sub-prime loans where anyone could get a mortgage. Lenders who survived the scare have tightened the underwriting guidelines on conventional loans and that has trickled over into changes for the first time in 60 years on FHA mortgages
With the reemergence of FHA and VA financing you might not be sure what you should be on the lookout for. What programs are best suited for today’s first time homebuyers? What can you do if you are a real estate investor? What questions should you be asking your lender to determine their grasp on the changing mortgage marketplace. How has underwriting changed in the last 12 months and what is important to them now? These are all questions that with a simple understanding can help make sure you close on your home smoothly and don’t fall victim to last minute calls with bad news in the witching hour.
One thing to understand is that there still is a way to get you 100% financing either through traditional financing or through mutually accepted down payment assistance or community housing assistance. Of course the one true 100% financing option still available to you is the VA loan available to qualified veterans for home purchases. They can get a loan with no money down and pay no mortgage insurance. The seller can contribute to pay their closing costs and allow them to save their money to put into the house. Of course just as Colorado requiring mortgage licensing on an individual level. FHA and VA lenders have to be approved as well, hence not that many are and the good ones are fewer and farther between. VA loan limits are $417,000 currently, which will buy you a pretty nice house in Denver, and rates are just as competitive as FHA rates these days.
Another popular government backed mortgage program has become popular once again, that is FHA financing. Although FHA traditionally requires 3% down payment, you can get the seller to participate in down payment assistance or to use one of the many community housing programs as well, such as CHAC (although that is a silent second mortgage and they have been low on funds, and has income limitations). You may be asked as a home seller (or you as a buyer ask the seller) to participate in the Nehemiahor similar programs. This can be in combination of the up to 3% that may be asked to help pay the buyers closing costs. This could total a 6% concession to the buyer. These are the nonprofit organizations that offer down payment assistance to homebuyers. The homebuyer doesn’t have to be a first time buyer to qualify and there is no income restriction for this kind of program.
While many people believe FHA is built solely for first time buyers, that is not at all the requirement. With the changes in the market, many people are looking to FHA, because FHA offers more competitive rates and lower mortgage insurance then the new conventional world. Many of our buyers even those looking to put up to 10% down have found that FHA was a better solution, due to a lower overall payment and cost of the loan long-term.
What matters today in FHA is the same as always. The credit history for the last 12 months is most important, along with job and rent history. While FHA doesn’t have an asset (reserve) requirement, it NOW has a credit score minimum. It also remains tied to qualifying on actual income (not allowing stated (non-verified) income). What changed this is all of the sub-prime type of credit clients who are still trying to get mortgages. As you may or may not know FHA allows for manual (outside the box) approvals. Although with the influx of these sub-prime credit profiles, FHA lenders (NOT HUD) have instituted a 580 minimal requirement for a manual approval. There is however, one lender that still allows for less than 580 manual approvals (with the right client profile). If you haven’t been able to get an approval because of your credit score being under 580, you should be working with someone who will guide you on what to do to fix your credit score and get you into homeownership. As of right now we are on a string of 3 clients (none of whom have even closed yet) referred to us all because we have gotten the first one approved manually (outside the box). One great thing that works in the (outside the box) manual approval side of FHA is that they can still use compensating factors to help someone qualify. These are intangibles that don’t actually apply to the loan, but can sway an underwriter to approve the mortgage manually.
Conventional loans have changed as well. What has led the change oddly enough hasn’t been the loan program changes, rather the mortgage insurance companies. You see mortgage insured loans have become popular again with the second mortgage pull back due to the national foreclosure crisis. This means that the 80/20 is a dinosaur. Now you are seeing one loan with mortgage insurance again. The mortgage insurance companies have been looking at paying out billions of dollars in claims (for foreclosed homes) and thus, just like health care, have been passing on the increases premium costs to the consumer. This means that the borrower would pay higher mortgage insurance then in the past for the same loan and could be knocked out of an affordable loan if they go into a conventional mortgage (as an example on a $200K home FHA mortgage insurance would be $80 per month, and could be $130 or higher for conventional loans). What this chain effect caused was to have mortgage insurance companies effective March 31, 2008 eliminate the insurance on loans going to 100% loan-to-value. Then the lenders followed suit, because why have a mortgage program if you can’t get a third party mortgage insurance company to insure the client.
One thing that hasn’t changed is the ability to get a great mortgage for an investment property given strong credit, income, and assets. While many people are looking for investments in Denver’s real estate market today because they view it as a discounted market, they aren’t 100% how to qualify and what they would have to put down. We know that the stock markets haven’t been 100% on par lately and many people are looking to add a rental or two before the market flips back around. We not only understand that philosophy but own rental properties as well. We understand how to read tax returns and calculate income properly off the different schedules a more advanced individual may have. Did you know a person can buy an investment property and put as little as 10% down and get a 30 year fixed rate under 7% ???? When you sit down to buy an investment property you should be looking at strategies, factoring operating income, cap rates, potential tax benefits, and learning about landlord law. This is an important undertaking even if it is not your first investment property.
Tax returns have become significantly important in getting clients who are self-employed approved as well. For many years stating the income was seen as a way to allow for less paperwork. Although one recent report showed a certain lender’s portfolio loans where income wasn’t verified actually had a lower delinquency rate the ones where income was verified. This just doesn’t matter because the secondary market (those responsible for buying mortgages on wall street) have lost their appetite to invest on mortgages where income wasn’t verified. In the past lenders could care less about not verifying income, now the loan officer needs to be versed in calculating income off of the client’s tax return. Especially when a borrower is self-employed, owns rentals, or maybe has dividend income.You need to make sure your income is being calculated properly and that they can qualify you in instances where it may appear to the eye that you aren’t eligible. I recently had to advise a client to amend her tax returns because she incorrectly filed her taxes. This actually helped her qualify for the mortgage, but could have caused her a huge headache because the I.R.S would have had a field day had she been audited.
Many of the stated income loans have gone by the waist side. The ones left behind have lowered the loan to values that they will lend on so dramatically that it makes no sense to the client to state their income. For example, the need to put 25% down and have high credit scores. Make sure you aren’t relying on inexperience with tax returns to be told you can’t qualify. Also, make sure you are having the right conversation with your self-employed friends and family members so they are prepared later and it doesn’t haunt them when they go to buy a house. For example, we all know self-employed individuals shield their income with deductions. But if you own a business and want to sell it later how will you have a business to sell if you report no income on paper. Not too mention how are you going to qualify for a mortgage if you show no income on paper.
There are many quick tidbits you can keep as reference to use when checking to make sure you’re are pre-approved and not just pre-qualified: Do you know what questions you should ask a lender? Do you know what the difference between pre-qualified and pre-approved? Part of that equation is making sure you do a bit of diligence to ensure you have a smooth and clean home purchase.
How underwriting works:
Once a client has signed a loan application there is a timeline to getting the loan approval taken care of. By following this closely your lender will be on top of all contract deadlines and be able to ensure a smooth closing for your closing. This is an outline of the process from start to finish to help you understand where your loans may be in the process of a contract:
Signing of loan application -> file to loan processor (2-3 days of data verification, documents from borrower) -> file to underwriting (2-3 days for underwriter to review) -> initial approval released and loan conditions requested from client (1-2 days depending on the client)-> once conditions are received from the borrower/ client they are sent to underwriting -> (1-2 days) to clear those conditions -> Assuming the appraisal was submitted for review also then at this point the lender will have a “clear to close” and can order documents for the closing from the lender (1-2 days) -> Documents are sent to the title company and the closer can calculate the HUD for the closing.
So you can see it goes back to what data was collected up front by the lender and what questions were asked. If the client has alimony for example, then the lender needs a separation agreement and divorce decree. If there was a bankruptcy in the past then the lender needs a full copy of the bankruptcy paperwork. When the right questions are asked the client will know what to give the lender and not be asked for surprises later on things that may be packed away in boxes.
Pre-approved vs. Pre-qualified: What are the right questions to ask, whether it is you buying or you are selling a home and your agent receives a lender letter. Is the letter you receive able to carry any weight? Things to think of when reviewing the lender letter like:
Did you run the client through automated underwriting personally? This is done in-house at our office to see if the client is capable of getting the mortgage. Underwriters merely are there to ensure the loan meets compliance. So things like “Sorry, we didn’t get the approval your income was too low” are things you won’t hear later if they aren’t properly approved.
Did you receive copies of their W2’s, paystubs, bank statements when you took their application? The miscalculation of income based on inexperience or lack of documentation will quickly kill a deal once it goes to underwriting. There are many methods of calculating income and depending on the income type (commission, overtime, bonuses, allowances…) they can be added or not allowed if the right questions aren’t asked when they are being taken in. Many of the clients only know what they take home and aren’t even sure what the income breakdown is on their paystubs. If the lender isn’t asking enough questions this error can haunt you in the 12th hour.
What was the middle score for the qualifying borrower?: Now this sounds silly and out of line, but if the lender can’t give you a number they may not have pulled the credit yet. And if that is the case, BEWARE!
What loan program are you using? Knowing a little about the different loan programs can help you gauge if the lender is being upfront and honest about what they are doing for you or even the client who is looking to buy your listing.
If you have trouble getting timely responses from the lender, if they don’t have an office, if they are a broker, or don’t communicate in a timely fashion these may be signs things are in trouble. Especially, if it is getting close to the closing date and they suddenly are unavailable!! The reason all of this is important is because if the offer is accepted and things fall apart not only is your client at risk, but your livelihood and money is too.
The reason it is tougher to work with brokers these days is that most of the lenders that mortgage bankers (correspondent lender) works with have a broker channel. We can tell you first hand that those broker channels are sitting at 5-8 business days for underwriting as we speak and when you are also needing 2-3 business days for conditions, and 2-3 days for docs to title then you are taking risks writing a 30 day real estate contract. This would be another question you can ask during the interview of the lender, “How many days is your underwriting department taking right now?” After all, closing in Colorado means good funds at the table, closing in escrow is not closing with good funds, merely frustrating! A good mortgage bank won’t allow the closing to take place in escrow and will deliver docs to title two days before closing, so the title agent can get figures out to everyone in a timely fashion.
Summit Mortgage is a fully licensed mortgage banker based out of Minneapolis. However, our team has worked in Denver for a combined 19 years. We are fully licensed and insured working strongly with FHA, VA, and conventional residential mortgages. Because we have been doing FHA loans since our inception we aren’t new to them. Over the last 12 months we have seen our business evolve from 30% government mortgages to 90% currently. Aside from the cut and dry approval process, we are well versed in the outside the box strategies that will ensure your client’s needs are taken care of. From the beginning of a relationship to the evolution of a client into our family of clients the focus is on the client’s needs.
We spend about 2 hours in our initial meeting with first time buyers to educate them on homeownership. We walk them through the process to include a credit scoring education, mortgage introduction, and basic mortgage mechanics. From there we make sure they are pre-approved before they get in your car. That means we have seen their credit, employment documents, bank statements and know there is nothing that will prevent them from buying a house and you closing a deal. We also look to make sure you are kept in the loop regarding the whereabouts of the loan’s progress. If there is a credit challenge we will set you on the right path and keep you in our pipeline while we help direct you on how to fix your credit. There have even been clients we worked with for 6 months before they went under contract to buy a home.
This same care comes from our underwriting department as well. When we submit a file it usually takes 2-3 business days for the initial approval, 1 day to clear client loan conditions once they are received, and 2 days to get loan documents out before a closing. Not to say we haven’t closed loans in 5 days from beginning to end, but that is not the normal practice. We like to ensure it is a smooth process for all involved.
Our underwriters believe in make sense home loan approvals. If the circumstances are there the underwriting department will approve a mortgage manually. The closing department is ran by someone who ran a title company and finds it unacceptable to have docs going to closing anything less then two days before a closing. So that means you will know what to bring to closing well in advance and even have the HUD a day for closing. We know things are hectic so we will go over the terms of your loan again to remind you and ensure you the rate you are expecting is what you get, and you are bringing the same or less money to closing. We also attend all of our closings to make sure the loan is explained buy the person responsible for handing out that debt to the client, not the title closer.
In our time in the industry we have seen many changes and evolutions of the mortgage industry. We have stayed on top of the changes by being knowledgeable on underwriting guidelines and how they have changed. We know that the key to our success is by making sure we are out there educating our clients that they still can buy a house despite what the media prints in the papers.
If you would like more information please check out our websites for updates. We hope this press release will help you in 2008 and not cause you to shy away from first time buyers because of the lending changes. If you would like more information feel free to email Ray ([email protected]) or Theresa ([email protected]).
To your success~
Summit Mortgage Denver