FHA, I'm Dumping You

Dear FHA,

As you know from the many clients I’ve sent your way, I have long been enamored with you.  Yes, you are more cumbersome and paperwork-heavy for me and my team, but your flexible loan terms, attractive interest rates and reduced down payment made you a loan choice that I proudly shared - even though it meant everyone had to jump through hoops to make you happy.  I believed you were worth it. 

I’m sorry to say this, FHA, but I no longer feel that way about you. Our love affair is over.  You have broken my heart too many times and I can’t defend you any longer. 

Let me share the ways you have let me down, in the hopes that you can find it in your heart to change your ways:

Higher Mortgage Insurance

Oh FHA, you have really done me wrong here.  Not only have you increased the mortgage insurance to 1.35% per year (WAY higher than the conventional rates), you have made monthly mortgage insurance a permanent part of the loan.  Permanent.  As in – FOREVER. 

Really FHA?  If my buyers have their loan all 30 years, in year 29 you’re still going to be charging them the same overly-high monthly mortgage insurance premium that you charged them in year one?  And it’s not like you decrease the cost each year as the balance decreases.  Oh no, you’re going to charge the same initial monthly amount all 30 years.  And you feel this is the right way to treat loyal, long term customers?

Flip Rules

OK, FHA, I get why you had property flipping rules back in 2003.  Tons of big dreamers watched “Flip This House”, bought a dump, put fresh paint and flooring in it and sold it for more than they should have.  Naive buyers got fooled by the nice staging and neutral colors and overpaid, so you stepped in to protect them.  You were only looking out for their good, so I defended your ‘big brother’ ways.

This isn’t 2003 anymore though, and buyers don’t need this protection today.  If a real estate investor wants to buy a distressed home, improve it and sell it for a profit, making them jump through extra hoops if their buyer uses FHA financing is just wrong.  Let it go already, FHA. It’s time to move on.

Higher Priced Mortgage Loans

Maybe I could have tolerated your ‘quirks’ with higher mortgage insurance and outdated flipping rules, but this new twist with higher priced mortgage loans is my last straw.  In case you’ve forgotten what you’ve done, let me link you to a letter put out by HUD’s Assistant Secretary for Housing- HUD HPML Letter.  In a nutshell, now that mortgage insurance goes on FOREVER, I have to calculate the APR differently which is making many FHA loans in my reasonably-priced community trigger the HPML limit. 

What this means in ‘regular people’ terms is that I can’t give these buyers their FHA loan, even if they want it, because you got greedy with your monthly mortgage insurance and now my hands are tied.  Way to go, FHA.  That sets a new bar in pushing away those that love you.

All To Say...

So…..I’m out, FHA.  If my buyer really needs to work with you because of credit challenges, needing a non-occupying co-signer, or some other unique little thing that only you accommodate, then I’ll play nice and give you their loan.  For the rest of my buyers who have average or better credit and at least 3% down, though, I’m heading straight to my new sweetie, the conventional loan. 

    Sincerely,

 

 

Beware The Repair

I pride myself on smooth, on-time closings for my clients but this week seems to be a ‘pride goes before a fall’ kind of week for me.  Of the seven closings I have scheduled for this week, five of them were delayed, rushed, or cancelled because of repairs.

Sigh.

So why is this happening?  And how can we prevent it?

Sometimes, a buyer knows they want something fixed on the house from the very beginning so they write this into the purchase agreement.  I love it when buyers do this.  It lets all parties know at the very beginning of the process exactly what is wanted so they can plan accordingly.

The problems come up when the repair is delayed.  Sellers will often wait on doing them until they know that all other open issues related to the purchase are done.  Understandably, they don’t want to pay for repairs only to then find out that the appraisal came back low, the loan got declined or the septic failed.

Why is this a problem? 

If a buyer writes a repair into the purchase agreement, the lender sees it as a condition of the sale so it also becomes a condition of the loan approval.  Most lenders need to have all open conditions in hand at least a week before closing to finish out the final steps.  That means the repair needs to be done and verified as done by the appraiser 7+ days before the closing.

How can we keep this from delaying the closing? 

To keep this from delaying your loan, put a timeline for the seller in the purchase agreement.  Don’t just say “deck to be stained”  say “deck to stained by June 27^th”, leaving enough time for the appraiser to verify that it’s done and get their report back to the lender at least a week before closing.

Another option is to write up an addendum and remove the condition from the purchase agreement once the buyer feels that the work has been properly done.  I like this option better because it doesn’t require an appraiser to go back out which is an added cost and time delay.  The bank will still need that 7+ days to finish the approval and close smoothly, but they won’t need the 3-4 days on top of that to have the appraiser go back out.

What if the repair came up mid-contract?

Sometimes all parties don’t know about the repair upfront.  They become aware that it’s needed when the home inspection or appraisal come back. 

When the repair came up as a part of the home inspection, this typically won’t delay the loan process because the bank is not normally involved in that piece.  Some lenders do require copies of inspections, but not most, so these repairs can be done right up to closing if needed.

The Realtor still needs to allow extra time, though.  We’re in a busy season and trades people are backed up.  The work done is also not always up to the buyer’s expectations.  If the Realtor is thinking the work can be finished the morning of closing and things will go smoothly, their risking a closing nightmare and a very unhappy client.

When the repair comes up because of the appraisal, we’re back to the “7+ Days” thing.  That means either the seller needs to get the repair done fast, an extension needs done or – sometimes – both.

Hope for the Best…

Bottom line - when repairs are on the radar, the Realtor needs to hope for the best but plan for the worst.  Repairs take times.  They’re not always done right.  The bank may need to verify that the work is done.  To keep a happy homebuyer and to reduce the stress levels for all parties, expect delays from the repair and allow extra time for things to be done as needed.

It’s The Loan Officer’s Fault – 3 Reasons Deals Die

Get around any crowd of Realtors today and you will quickly start hearing stories about home sales that fell apart in the last hour.  It feels like an epidemic.  Yes, sales are increasing but, sadly, so are fall throughs. 

With all the stress in getting a buyer from the first showing to the week of closing, it’s incredibly painful for the Realtors when things fall apart at the last minute (not to mention for the sellers and buyers).  Sadly, many times it’s the loan officer’s fault.  Here are the top three things loan officers don’t do that can kill a sale:

They Don’t Ask

There’s a huge list of things that some loan officers don’t ask the buyer up-front that can make or break the sale.  Some aren’t asked because the loan officer feels like they’re prying by asking and it makes them uncomfortable (things like if the buyer pays child support or if they are a US Citizen).  Sometimes they don’t ask because they’re not paying attention.  For example, the loan officer may not review the paystub before sending it to the underwriter so they don’t see the garnishment withdrawal and don’t ask the question to find out what it is. 

Whether from awkwardness or sloppiness, questions are missed upfront that are critical to whether the loan gets approved or not.  Yes, the questions may seem invasive.  Yes, the questions may be uncomfortable.  However, it’s much more uncomfortable to call a buyer the day before closing and telling him he can’t buy his home after all.  Bottom line - Loan officers need to ask the questions that need to be asked, in full and upfront. 

 

They Don’t Know

Other times, the deal dies because the loan officer just didn’t know what they should have known.  You’ve likely heard this sentence in a Realtor’s horror story “But the loan officer knew about that the whole time!  It wasn’t something new, they knew about it from day one!”  Many times a deal dies because of a situation that the loan originator knew about.  What the loan originator didn’t know was that the situation mattered. 

Perfect example – a Realtor friend of mine had a deal die last week because the home her client was buying as a primary residence is a 2.5 hour drive from where he works.  The underwriter declined it saying that this was too far of a commute to believe it would really be his primary home.  Did the distance from the house to his office change from start to finish?  Of course not.  The loan originator just didn’t know that the distance mattered so they didn’t address it upfront and instead left it for an underwriter to notice and decline the loan over.

They Don’t Tell

This one kills me, because it happens too often and it’s so unnecessary.  There are times when the loan officer asks the questions, they know there’s a problem with the loan approval, but they don’t tell anyone.  They’re afraid of the confrontation so they keep it to themselves, hoping they can find a way to fix it or that a miracle will happen and the problem will go away.

Do miracles happen sometimes for buyers?  Absolutely.  I often joke about my ‘great loan karma’.  Things really do just seem to go right for my clients with the loan approval process, even when it seems like the odds are against us. 

I’m not against trying for the Hail Mary and believing that a solution can be found.  I AM against keeping the other parties involved in the dark.  If there is a problem with the approval, the buyer(s) and selling agent need to know.  The loan officer and selling agent need to jointly decide how to keep the listing agent in the loop as well.  No one wants to scare the seller, but they have a right to know about problems too, especially when repairs are in process.

Conclusion

So….why do I share all of this with you?  Do I really want to point out how loan officers mess up and break hearts of home buyers and Realtors alike?  Of course not – it’s not fun pointing out the failings of people.  Fact of the matter is, though, this stuff happens.  It happens a lot – BUT IT DOESN’T HAVE TO. 

Selecting the right loan originator will help prevent problems like these.  Everyone makes mistakes sometimes, but some people make a whole lot fewer than others.  There really are very good, high quality loan officers out there who DO ask the right questions upfront, who DO know what the potential problems are so that they can address them at the beginning, and who DO man-up and tell the buyer and Realtor if a problem arises that may impact the loan. 

The choice in loan officer matters in getting smoothly to closing – choose wisely. 

 

 

Three Mortgage Migraine Makers

Sometimes the mortgage approval process is easy and smooth for the home buyer.  Sometimes it is not.  When it is not, there is typically one of three culprits that is causing the headache.  

Culprit #1 - Show Me The Money

“Why does it matter where the money came from if I have the money??”  Countless home buyers have asked me this, and it’s a valid question.  Unfortunately, when it comes to getting a mortgage loan approved, the bank not only wants to know THAT you have the money, they want to know where that money came from.

 Your lender is typically going to ask for your last two months’ bank statements.  She will then look at every deposit showing on that statement to see what it is.  If it is the direct deposit of your payroll, no problem.  If it is a smaller deposit (typically under $250), that’s fine.  If you have deposits that are not small or are not a direct deposit of pay though, the lender will want a signed letter from you explaining what the deposit is and a copy of the deposited item or some other documentation to show the source (a check stub, expense report, etc.).

These items are typically obtainable by the home buyer but it can be a hassle.  Odds are you didn’t keep a copy of the check that your bother gave you two months ago for his half of dad’s birthday gift, right?  Your bank can likely print those items out for you if needed (some charge a fee).  If you’re lucky, your bank will automatically scan all your deposited items in and have them available online as a part of their online banking, making it easy for you to print them out.  Easy or hard, though, you will have to get those for your lender so be prepared for that and keep copies as you go if possible.

Culprit #2 - A Little Me Time 

It’s not uncommon for people to take unpaid time off.  Vacations, family situations, or even just a little ‘I need a break’ time is all a part of the rhythm of work and life.  When the bank is looking at your pay stubs, though, they’re looking for consistent hours.  If you’ve had unpaid time off in the last month, the lender is going to need to find out if this happens often so that she can calculate your income correctly.

To verify this, the banker will probably need to send a form to your employer to fill out.  You also might need to write a letter explaining the unpaid time off and clarifying if it is a repetitive thing. If your employer doesn’t return the form promptly, you may need to get involved to encourage them to get it back to your lender.

All of this is more work for you and your lender.  As best you can, try to avoid unpaid time off in the months leading up to a home purchase.  You’ll likely want to save that type of time for once you’re a home owner anyhow, because there’s ALWAYS stuff that needs done then!

Culprit #3 - 'Close Enough'

Your lender is going to ask you for a lot of paperwork.  You might go through the list, gather up most of it and then decide “That's close enough”. 

'Close enough' is not good enough.  The lender needs everything she asked for.  If she asked for all pages of your bank statements and one page is completely blank, she needs that blank page.  If the lender asked for your full federal tax returns and you think the first two pages provide enough information, it doesn't.  She asked for it all because she needs it all.  Giving the lender just part of what she asked for will just make the process more frustrating for you because she will come back and ask for the rest.  Make life easier for you and your lender – give her everything she requested upfront instead of hoping that 'close enough' will work.

In Summary

Buying a home is an exciting time but the fun can evaporate if you're constantly dealing with stress from the mortgage process.  Knowing these top three mortgage migraine makers and how to avoid them, though, should help keep the enjoyment in the experience of home buying.  Good luck!

 

You're Killing Me Here Ramsey

I recently talked to a young couple that is considering buying a home this summer.  As I reviewed their information, I saw that they were remarkably well prepared for the step.  Both had stable employment, their monthly bills were negligible, they had great credit scores and the savings for a 20% down payment.  With buyers like that, most lenders would just do a happy dance and hand over a pre-approval letter.

I'm not most lenders though.  To protect them from unpleasant surprises, I reviewed their credit report more deeply and saw a problem lurking in their future.  They had been diligently following Dave Ramsey's Financial Peace process and, over the previous several months, had paid off and closed all debt under the husband's name. While the wife had a couple of credit cards still open, the husband had closed his last trade-line in December.  

So why does this matter, you ask?  Good question, and one I had to answer for this sharp young couple as well.  Let's take a minute to talk about how trade line's impact credit scores.

The 6 Month Rule

Mortgage lenders use the FICO model to pull credit scores for potential home buyers.  This FICO model gives the buyer a score based on several factors, such as balances, length of credit history, and historical late payments.  The lender uses that score to gauge the type of credit risk they are taking with that client.  

One key thing that many people don't know about credit scores is that FICO won't give a score to a person unless they have recent, active credit items.  You could have had all the credit history in the world two years ago, but if you've paid it all off and closed it down, your score goes away with it.

So what is considered recent?  Six Months.  The current FICO scoring model requires that you have one undisputed account that has been reported to the credit bureau within the past six months or you will not have a credit score.

When You Need A Score

This raises the question then, do you actually have to have a score?  Not always.  For a conventional mortgage loan, you do need a credit score.  FHA financing will allow a buyer to get a mortgage based on a 'non-traditionial' credit report though.  A non-traditional report can be created for a lender by verifying things that aren't normally reported to the credit bureau, like rent payments, car insurance payments, utility bills, etc.  If a buyer has a 12+ month history of several of these types of items and they've paid them on time, they could likely qualify for a FHA loan even without a traditional credit score.

FHA's Downfall With Ramsey

Even though a FHA mortgage would fit with a Ramsey lifestyle, David Ramsey would never encourage a FHA loan for one primary reason - mortgage insurance.  While Ramsey's preference is that people save up enough money to pay cash for their home, he has said that he can understand getting a mortgage sometimes.  His rule is that you get a 15 year term though and put at least 20% down to avoid mortgage insurance (MI).

With the changes to FHA's mortgage insurance taking effect later this year, all FHA loans will have monthly mortgage insurance.  It won't matter if you take a 15 year term or if you put 20% (or 50%, 60% or even 90%) down.  All FHA loans will have monthly MI for at least 11 years.  If the borrower puts down less than 10%, the monthly MI will stick for the life of the loan.  Seeing Ramsey hates MI, he'd very likely disapprove of this option.

Final Advice To My Buyer

So where does this leave my clients?  I personally dislike debt and wouldn't encourage a buyer to rack debt up just for a credit score.  This buyer's score is going to disappear in June, though, if he doesn't take some action.  Seeing he doesn't have enough saved yet to pay cash for the home and FHA is not a good choice, he'd be wise to take some minor steps to keep his score intact.

The easiest thing would be to add himself to his wife's credit cards.  They already exist so there is no 'new' debt being incurred.  If those cards are gone now too, though, then he will want to take the further step to open something new in his name to keep his score in place.

The key word here is OPEN.  Not use.  Not carry a balance.  Simply opening a credit card and, at least once every 6 months, doing something with it that would make the credit card company report the activity, should keep his score intact.  It can be a $1 charge for a pack of gum that he pays off as soon as the bill arrives.  Truly - carrying debt balances is not needed for this.  Taking this step will help this home buyer stay true to the heart of the Ramsey principles while giving him the credit score that leads to better mortgage options when the time comes to buy his home.

Is Conventional Better For Your FHA Buyer?

The deadline is in sight for the increase in FHA’s monthly mortgage insurance.  Any buyer trying to avoid the higher monthly premium should be in contract this week to get a case number assigned by the April 1^st change date.

Not all buyers will find their home this week though, and FHA is not necessarily the best option even if they do.  Many FHA approved buyers would actually be better offer using a 3% down conventional mortgage.

Wait – Buyers can use conventional financing with only 3% down?
Yes, they can.

Will it cost them more?
More than what?  More than a conventional loan with a larger down payment?  Yes, it will cost them more than that.  Depending on the market, the interest may be a touch higher (currently 0.125% more).  The monthly PMI will also be a bit more per month. 

But more than FHA financing?  Typically not.  The annual cost for PMI for a 3% down conventional buyer with a 740 credit score is over 0.5% less per year than for the same FHA buyer. 

So how do they compare side to side?

You want math?  Yea!  I love math.  Let’s compare some numbers: 

 In this chart, I'm assuming that your borrower is buying a $120,000 home with taxes of $1,200 per year and home insurance costs of $720 per year.  I'm also assuming that your borrower would qualify for a conventional loan with a credit score of 740 or higher. 

As you can see, with the conventional 3% down option the loan size, cash needed and monthly payment amount are all lower than the FHA option.  For the borrower who can scratch together the additional $1,800 in down payment money, the savings goes up even more.

What are the drawbacks of the 3% down conventional?

The biggest drawback of it is the impact of credit score.  The example above assumes strong credit.  If the credit score was 684 instead of 740, the interest rate would be 0.125% higher currently and the PMI would cost $12 more per month for the 3% conventional option, making the total 3% down conventional payment $5 higher per month than the FHA payment.  The cash needed would still be lower though, as would the loan size, so the conventional option is still the best choice.

Aren’t there additional drawbacks with conventional options?
There were in the last several years, but those are quickly fading as the PMI companies begin to get their flexibility back. 

Up until just a few months ago, most PMI companies were placing additional rules on the conventional buyer, including that that had to have 2 months of savings left after closing and a certain number of trade lines on their credit report.  The market is getting competitive again, though, and the PMI companies are responding by loosening these rules.  Currently, two of the four top PMI companies have removed these additional requirements, making it much easier to get approved for a conventional loan.

So what is this telling me?

Bottom line, not only COULD your FHA buyer likely go conventional, your FHA buyer SHOULD likely go conventional.  Many lenders won’t tell them about the 3% down option though, either because they aren’t aware of it or because they haven’t used it much and they’re not comfortable with it. 

Your buyer deserves to be working with a lender who will share with them the best options for them.  It’s your job to make sure that they are.  Feel free to forward this to anyone considering FHA financing for their home purchase along with my contact information (Lori Hiscock - lori.hiscock@ruoff.com) and I'll gladly help them compare their options to make sure they're getting the best terms possible for their home financing.

30% Credit Declines - YIKES

Last Friday, I took an off-site planning day to work on some of the proactive things that make business and life better.  One of my goals was to conduct a thorough review of the referrals I received in 2012 to see where my business is coming from and where it’s going.

I’ve gotta say - the ‘where it’s going’ part was surprising.  I hadn’t realized it, but 30% of the buyers who were referred to me last year were not able to get a mortgage due to credit issues. 

WOW.  30%.  Clearly credit challenges are a bigger roadblock than I’d realized.  Given that, you're going to see more of a focus on credit scoring and credit repair in my educational efforts. 

My YouTube channel now has a playlist dedicated entirely to those topics: Credit Scoring & Credit Repair.  It contains two videos added today that talk about the first steps of credit repair - Knowing Your Rights and Filing a Dispute.  More will come as I continue researching this topic and carving out time to record what I’ve learned. 

For now, feel free to enjoy the first video in the Credit Repair series and – better yet – feel free to share it!  It’s becoming clearer to me that many, many people in our community need this information.