Declined the Day Before Closing

"I told her to call you first but she didn't.  She just went to her bank and now they're declining her and we're supposed to close TODAY!  Can you meet with her?"

Realtor calls like that always make my stomach hurt.  I want to help but, if the other bank declined their client, odds are good that they had a valid reason.  Admittedly, it's normally a reason that they should have spotted early on and not the day before closing but still - it's typically valid.

I'm always willing to try though and, at a minimum, help educate the home buyer on what went wrong and how to potentially fix it for the future, so I said yes and invited them to come to my office later that day.

"They said the PMI company wouldn't do it" she shared when we met.  "They said their bank would approve me, but the private mortgage insurance company declined me because of my previous foreclosure."

I reviewed her credit report and saw that, yes, she did have a foreclosure in November of 2007 which was less than 7 years ago.  She needed a conventional mortgage because of the condition of the house and 7 years is the magical number typically for conventional loans.

However, the mortgage in question was actually included in her bankruptcy from January of 2006, which was over 7 years ago.  This past July, Fannie Mae came out with a new ruling saying that - in situations like that - the borrower is held to the bankruptcy's waiting period and not the foreclosure's waiting period.  She had met the bankruptcy's waiting period so I felt the other lender might be able to educate the PMI company on this and still get her closed quickly.

"No.  Absolutely not.  I don't want anything to do with that bank.  Can you just make it happen fast with Ruoff please?"

Of course I could.  We started her loan immediately.  I had it to my underwriting area within hours and we were cleared to close within 2 weeks.

So how did I work around the problem?  Did I convince the PMI company that they should honor Fannie Mae's new ruling?

Nope.  I didn't have to.  I just used another PMI company.

Let me explain.  There is not just one provider of private mortgage insurance out there.  There are many of them with four primary providers.  While they all provide similar coverages at similar prices, they are not all the same.  One often gives lower rates when there are two borrowers on a loan.  One works great with down payment assistance programs.  And one?  It just trusts the lender to make the approval decision.

That's the PMI company I went with.  They don't have their own rules (often called 'overlays') that they apply to the approval.  This particular PMI company (Radian) says "If you have an approve/eligible response from Fannie Mae, we're in.  No further questions asked."

I sent them the approve/eligible response with the PMI order and, as promised, there were no further questions asked and the coverage was given (at a very attractive price, I might add).

And why didn't her original lender just do that?  Sadly, not all lenders will shop the PMI.  Many have one PMI provider they use and that's it.  If that one provider can't accommodate the unique nuances of the borrower, they will decline the borrower.

Thankfully, Ruoff doesn't work that way.  We not only work hard to make sure we're offering buyers a wide range of mortgage options, we make sure to have multiple PMI options as well.  Why?  Because it's the right thing to do.  

I'm starting to think that should be our tagline at Ruoff Home Mortgage :).  Doing it right, because it's the right thing to do.

Lori Hiscock is a Sr. Loan Officer at Ruoff Home Mortgage‘s South Bend office.  One of Michiana’s top mortgage loan officers, Lori started her lending career in 1995 after obtaining her bachelor’s degree in Finance from Western Michigan University.  You can connect with Lori Hiscock or apply online here. NMLS#404320.

Ruoff Mortgage Company, Inc. is an Indiana corporation licensed by the Indiana Department of Financial Institutions (DFI) and operates with the following licenses:

Indiana-DFI First Lien Mortgage Lending License #10994;
IL Residential Mortgage Licensee #MB.6760734;
Michigan 1st Mortgage Broker/Lender License #FL0017496.

Salvation from the Rapid Rescore

A Realtor I regularly work with called me last Thursday.  "Well, I doubt you can help this girl, but I thought it was worth a try having her talk to you," he said.

Hmmm....well that didn't sound promising.

I'm always happy to help people get moving down the right path though, so I got her name and number and gave her a call.

"OK.  Here's the problem" she shared as soon as we got on the line. "I was pre-approved with my bank and everything was great.  I made an offer on a PERFECT house and they accepted it but then I called my bank and they re-pulled my credit and said my score had dropped from 660 to 628 so now they can't give me a mortgage.  Can you??"

Going below 640

Good question.  This is the point in a conversation with a potential home buyer where my super awesome detective skills come into play.  I often can provide a mortgage to  someone with a 600-640 credit score, but they have to meet some 'ifs' so I have to ask some detailed questions.

Currently, a buyer can purchase a home in this credit score range if the down payment is their own money and not a gift, if they have a clean rental history, if they have a couple of months' worth of savings and if they have a clean credit report in the last 12 months (plus a few other smaller things).  I dug into this girl's story and...shoot...she didn't meet all the 'ifs' so we couldn't go below the 640 score for her.

Identifying the Culprit

That's not where I give up though.  I pulled a copy of her credit report myself to see why her score had dropped.  The other bank had told her it was because of a collection she had, but that collection was over a year old.  It wouldn't have made a change in her score in the last 60 days.

Thankfully, I spotted the culprit right away.  "Hey, what's the story on your Capital One credit card balance?  This report is showing you have a balance of $506 but your limit is only $500.  Is your balance really that high?"  "Oh. No!"  She replied.  "It was but I paid it off entirely last week.  I don't owe anything on that."

Eureka!  We had found the answer.  Having a higher balance on your credit cards can make your credit score lower.  Being OVER the limit though - that's a real score killer.  Her score had dropped over 30 points just because she was $6 over her limit.

"Does that mean I have to wait a whole month for the credit report to cycle before my score shows the new balance?" she wailed.  "We can't do that!  The home will be gone by then!"

I completely felt her anxiety.  Luckily, I had a plan.

Getting the Score Up FAST

"Typically, that is the route that a lender will take" I told her.  "Given this situation though, and the time sensitivity of getting you pre-approved again, let's go with route B.  I'll order a rapid rescore."

A rapid rescore is a tool that lenders have for situations just like this.  Rather than waiting for a credit report to cycle and let a score go up on its own, the lender can provide the credit reporting agency with proof of the item that has changed since the last report and ask for it to be rescored right away.  In this case, I just needed a printout from Capital One's website showing that she had made the payment and her balance was now at $0.

She got the paperwork to me Thursday night and I ordered the rapid rescore on Friday morning.  It typically takes about a week for these to come back but, thankfully, it only took three business days in her case.  The new credit report came back this morning.  And her score?  A shiny, workable 661.

When a Rapid Rescore Can Work for You

For this buyer, the rapid rescore was the solution.  She's getting me the rest of her paperwork today and we're going to get her in her new home in the next 30 days (yea!).

The rapid rescore isn't the right route for everyone though.  For starters, it's expensive.  If there is time to let the score go up on its own, we're going to go that route.  A rapid rescore should only be used when there isn't time due to the specific situation we're dealing with.

A rapid rescore can also only help with certain types of credit problems.  If there is an error on the credit report that is hurting you, it's a fit for that.  Common errors are things like a derogatory debt listed under your name that isn't really yours or something showing as an active collection or charge-off that has actually been paid off.

A rapid rescore can also work when the lower score is being caused by higher balances that have now been paid down, as in this situation.

To know what credit steps you should take for YOUR home purchase, you need a seasoned, knowledgeable lender to review your credit report and help you work out a plan.  If you are considering a home purchase in Indiana or Michigan, I'd be happy to assist with that.  I can be reached at lori.hiscock@ruoff.com.  Hopefully your story can have a happy ending too!

Lori Hiscock is a Sr. Loan Officer at Ruoff Home Mortgage‘s South Bend office.  One of Michiana’s top mortgage loan officers, Lori started her lending career in 1995 after obtaining her bachelor’s degree in Finance from Western Michigan University.  You can connect with Lori Hiscock or apply online here. NMLS#404320.

Ruoff Mortgage Company, Inc. is an Indiana corporation licensed by the Indiana Department of Financial Institutions (DFI) and operates with the following licenses:

Indiana-DFI First Lien Mortgage Lending License #10994;
IL Residential Mortgage Licensee #MB.6760734;
Michigan 1st Mortgage Broker/Lender License #FL0017496.

Mastering the Mortgage Letter of Explanation

In my 12+ years as a mortgage lender, I've found that there are some steps to the mortgage approval process that make a home buyer anxious and some steps that just make them annoyed. 

Price Negotiations?  Inspections?  Appraisals?  Anxious, definitely anxious.  Lender disclosures?  Documenting of deposits?  Letters of explanation?  Annoyed.  DEFINITELY annoyed.

One of my top focuses as a mortgage lender is to reduce the anxiousness as much as possible for my buyers and, as best I can, not annoy.  How do I do that?  By only asking for things that I truly need and by making it easy for my home buyers to give those items to me.

To help with that, I've recently written a little e-book.  Yes, these blogs were just not enough writing for me!  My new e-book, 'Letters Lenders Love' walks home buyers through the process of quickly writing a letter of explanation on any topic needed as part of their mortgage approval.  It also provides 30+ examples of ready-to-go letters that just need tweaked for a buyer's specific situation and then submitted. 

If you need a letter of explanation and would like a copy of the book, contact me or go to Letters Lenders Love.  It should help take some of the 'annoying' out of home buying and get you back to the fun of this exciting step in your life!

My Take On My Home

IHCDA (Indiana Housing and Community Development Authority) introduced a new mortgage option called ‘My Home’ last June.  While I am typically a big fan of IHCDA’s products, I must admit that I’ve been lukewarm on this one.  Frankly, I wasn’t seeing the benefit.

Today I decided to put some math behind my first impression to see if this program really is beneficial to the homebuyer, and I thought I’d share what I found with you.  So...here you go!

The Advantages of My Home

My Home is a conventional loan option offered to both first and repeat home buyers that lets them buy with a reduced down payment (3%) at an attractive, at-market interest rate.  Typically, if a conventional mortgage has a down payment lower than 5%, the interest rate is higher in order to make up for the additional risk, so this at-market interest rate is a strong advantage.  Also, the My Home buyer gets a reduced private mortgage insurance (PMI) rate making the monthly PMI cost less than it would be with other 3% down options. 

The 3% down payment can come as a gift from a family member, which is also rare for conventional loans.  With the ability to get a conventional mortgage at a good interest rate with 3% down, reasonable PMI and an option to use gift funds for the purchase, many buyers would be attracted to the My Home program.

The Disadvantages of My Home

The biggest drawback to this program are the fees.  Like IHCDA’s Next Home product, the My Home loan typically has 2 points charged as a closing cost.  A point is a cost equal to 1% of the loan amount.  The seller can contribute towards these points but a conventional mortgage will only allow a seller to give a total  of 3% of the sales price towards the buyer’s costs so the seller’s contributions typically will not cover the 2 points, plus the additional closing costs/prepaid items related to the purchase.  This means the buyers will need to cover some of those costs themselves, along with their 3% down payment.

Additionally, the PMI is still slightly higher than it would be on a 5% down mortgage.  Yes, it is lower than many other 3% down loans out there, but putting 5% down puts a buyer into a lower PMI bracket.  Because of this, the cost of PMI for a regular 5% down mortgage is typically lower than the reduced 3% down PMI.

So Which Option Is Best?

Seeing that a buyer needs 3% down for My Home and then has to pay 2 points on top of that, my initial feeling was that they might as well just do a regular 5% down mortgage and get the lower PMI that goes with it.  They’re paying 5% either way, right?  And the PMI is cheaper?  So going with a regular 5% down loan is best, isn’t it?

For some buyers, it definitely is.  For some buyers, though, it isn’t.  Why is that, you ask?  It’s because of the credit score impact.

Let me explain.  The My Home program has just one interest rate for all buyers.  Today it is 4.5% for the 30-year fixed loan (this is the current rate and subject to change at any time).  A regular conventional loan’s interest rates will move slightly based on your credit score, though.  If you were buying a $125,000 home right now with 5% down and had a 720 or higher credit score, your interest rate would also be 4.5%.  If your credit score was 680-719 though, it would slide up to 4.625%. 

The PMI is also impacted by your credit score.  If you were buying a home with a 760 credit score right now with 3% down, the PMI would cost 0.57% per year.  If you were buying with 5% down, it would cost you 0.54% per year, which supports my original idea that 5% down is cheaper because the PMI costs less.

If your credit score was only 680 though, the benefit goes the opposite way.  A 5% down option would have PMI at 0.89% per year while the 3% down option would actually be less at 0.80% per year.

So What Does This Tell Us?

Based on this math, My Home very well might be a good option for some conventional buyers.  Buyers who want to use gift funds for their down payment and closing costs, or buyers who have a credit score under 720, should consider this. 

But how do YOU know if it’s right for YOU?  Simple.  You talk to me.  Together, we look at your specific situation and the exact numbers for you.  Based on that, you make the decision for which type of mortgage suits you best.

If you are considering a home purchase in Indiana or Michigan and have questions about the IHCDA My Home program or any other mortgage program, just give me a call!  I’d be happy to help you take your next step towards your new home.

Lori Hiscock is a Sr. Loan Officer at Ruoff Home Mortgage‘s South Bend office.  One of Michiana’s top mortgage loan officers, Lori started her lending career in 1995 after obtaining her bachelor’s degree in Finance from Western Michigan University.  You can connect with Lori Hiscock or apply online here. NMLS#404320.

Ruoff Mortgage Company, Inc. is an Indiana corporation licensed by the Indiana Department of Financial Institutions (DFI) and operates with the following licenses:

Indiana-DFI First Lien Mortgage Lending License #10994;
IL Residential Mortgage Licensee #MB.6760734;
Michigan 1st Mortgage Broker/Lender License #FL0017496.

 

 

 

 

 

 

More Home for Less Payment

Mortgage preapproval letters can be a bit deceiving.  Your typical mortgage preapproval letter says that a buyer is preapproved up to a set price for their home purchase.  Truth be told though, buyers are not approved for a set PRICE of a home.  Buyers are preapproved for a set PAYMENT.

Isn't the price based off of the payment though?

Yes, the maximum price is based off of the maximum payment.  A lender will decide that a buyer can afford to pay a certain amount each month for a mortgage payment and then back into a home price based off of this figure.

The problem with this system is that the lender is making certain assumptions when they back into this price.  They are assuming a certain interest rate, a certain cost for home insurance, a certain cost for property taxes and a certain cost for mortgage insurance.  If these figures are higher or lower than what the lender assumed, the price of a home that the buyer qualifies for will also be higher or lower.

What else impacts this price/payment calculation?

One of the bigger things that impacts this price payment calculation is the loan type.  This often isn't discussed much though.  Lenders frequently decide on a type of loan that seems to fit a buyer and then shows them the numbers related to that one type of loan only.  That can cap them at a lower priced home than they would have qualified for though, if a different loan type was used.   

Hmmm.....Give me an example please....

Gladly!  Amy and Russ met with me this spring about buying their first home.  They had stable employment, little debt and solid credit, but no down payment.  They could get a gift from their parents for that piece though.

They qualified for a payment up to $1,150 per month.  Many lenders would have said "FHA Mortgage!" and gone with that.  FHA will allow the down payment to be gifted so it sounds like the right fit. 

FHA has its drawbacks though.  There is a FHA financed upfront fee of 1.75% of the loan amount and the monthly mortgage insurance is higher, making the amount they qualified for lower. 

The biggest drawback for Amy and Russ was that this $1,150 payment wouldn't let them buy the home they wanted.  They had fallen in love with a house and they wanted it and only it.  The FHA payment for their dream home was going to be $1,183, so above their $1,150 max.

Saving the Day With Creative Financing

Amy, Russ and I met to go over all of their options and determined that IHCDA's Next Home conventional mortgage was a better fit.  It only needed 3% down and that piece would be provided by IHCDA.  The seller could cover some of the closing costs but they would still need some money to cover the balance.  Their parent's gift could cover that though.

Because the conventional loan had lower monthly mortgage insurance, their payment with this option was only $1,134.  Not only was it almost $50 less per month, but their parents didn't have to gift them as much money with the Next Home option.  They only needed $3,495 from them versus $5,530 for the FHA option.

So...$49 less per month and $2,035 less upfront?  Plus the ability to buy the home they truly wanted rather than have to find a cheaper one to stay under their payment cap?

Yep, that's how the story ended.  Amy and Russ got more home for a lower payment with less money needed upfront thrown in for good measure. 

If you'd like to have this kind of analysis done for your home purchase to make sure you are getting the best terms possible on your Indiana or Michigan mortgage, drop me a line or give me a call today!  (lori.hiscock@ruoff.com email, (574) 234-5201 office).



Lori Hiscock is a Sr. Loan Officer at Ruoff Home Mortgage‘s South Bend office.  One of Michiana’s top mortgage loan officers, Lori started her lending career in 1995 after obtaining her bachelor’s degree in Finance from Western Michigan University.  You can connect with Lori Hiscock or apply online here. NMLS#404320.

Ruoff Mortgage Company, Inc. is an Indiana corporation licensed by the Indiana Department of Financial Institutions (DFI) and operates with the following licenses:

Indiana-DFI First Lien Mortgage Lending License #10994;
IL Residential Mortgage Licensee #MB.6760734;
Michigan 1st Mortgage Broker/Lender License #FL0017496.

How Your Credit Clean-Up Could Derail Your Mortgage Approval

When I ask a potential homebuyer if they know their credit score and they do, I do a little happy dance inside.  This tells me that they're proactive buyers who have probably already taken any steps needed to improve their credit, allowing them to get better terms on their mortgage.

There is also a little red flag that goes up in my head when I hear this, though.  If a buyer has taken steps to review and improve their credit score, there's a chance they've filed a dispute on things on their credit report.

"So what?"  you ask.  "Isn't it a consumer's right to file a dispute?"  Absolutely.  If something is wrong on your credit report you should dispute it and get it fixed.  While that's happening though, your lender will not be able to approve you for a mortgage.

WHAAAAAT???

Yep.  It's true.  A mortgage lender cannot approve your mortgage with an open dispute showing on your credit report.  Any disputes have to be removed or resolved.

Here's why - when a consumer files a dispute, they are telling the credit reporting agency that the item in question is wrong.  The credit reporting agency takes steps to confirm that.  To be fair to the consumer while that process is happening, they remove the disputed item from the calculation of the credit score.

The removal of that item likely will inflate the credit score (you wouldn't be disputing it if it was good stuff, right?) , which means you likely have a higher score while that dispute is in place than you would if it wasn't. 

When a loan underwriter sees a dispute on a credit report, this raises a red flag that tells them that your credit score is not a true credit score.  It's a temporary one until the item(s) in question are resolved.  Because of that, they have to stop the mortgage approval, get your dispute removed or resolved, and have your score recalculated.

This would not be a huge problem if a lender looked for disputes right upfront and discussed it with the buyer before a home was found.  The problem is, most loan originators don't think about this risk and don't review the credit report for it.  This often isn't recognized as a problem until a buyer is a couple of weeks into the process of a home purchase.

If the disputed item is newer or more significant in nature, the impact of adding it back into the credit score can be enough to cause a loan to be declined, sometimes days before closing.

So....what do you do now that you know this?  First, if you have any open disputes, contact the credit reporting agency to get them resolved and removed.  Second, when your lender pulls your credit report, ask them if there are any disputes showing on it.  Third, if the lender seems confused by the question or tells you that some are there but that they don't matter, find a more informed lender.

For homebuyers in Indiana and Michigan, I'd be happy to be that 'more informed lender'.  Just give me a call or drop me an email if I can be of service!

Lori Hiscock is a Sr. Loan Officer at Ruoff Home Mortgage‘s South Bend office.  One of Michiana’s top mortgage loan officers, Lori started her lending career in 1995 after obtaining her bachelor’s degree in Finance from Western Michigan University.  You can connect with Lori Hiscock or apply online here. NMLS#404320.

Ruoff Mortgage Company, Inc. is an Indiana corporation licensed by the Indiana Department of Financial Institutions (DFI) and operates with the following licenses:

Indiana-DFI First Lien Mortgage Lending License #10994;
IL Residential Mortgage Licensee #MB.6760734;
Michigan 1st Mortgage Broker/Lender License #FL0017496.

Is the FHA HAWK Program Worth It?

Last May, FHA announced that they would be rolling out a new program this fall that would let first time homebuyers save money on the upfront and monthly mortgage insurance. 

The program is known as HAWK which stands for 'Homeowners Armed with Knowledge'.  In a nutshell, first time homebuyers who take an upfront and post-closing home buyer education class will get a reduction in the cost of both the upfront mortgage insurance and the monthly mortgage insurance charge.

Sounds like a good deal, right? 

Maybe.  Maybe not.  Let's compare the pros and cons.

Pros

• Lower upfront mortgage insurance - right now, a homebuyer is charged 1.75% of their loan amount as an upfront mortgage insurance cost when getting a FHA mortgage.  This cost is added to their loan balance, making them owe more for the home.  With the HAWK program, the qualifying borrower would only pay 1.25%, so a 0.5% savings. 
• Lower monthly mortgage insurance - right now, the typical FHA homebuyer pays 1.35% annually toward mortgage insurance.  This is paid in monthly installments (initial base loan amount x 1.35% / 12) and stays at that level for the life of the loan.  With this program, the rate would be reduced to 1.25% initially.  If the buyer completes a post-closing homebuyer education course and pays the loan on time during the first 18 months, they get a further reduction to 1.10% at the two year mark. 
• More educated home buyers - this is the real reason for this program.  HUD is hoping it will help homebuyers be more educated about the home buying and home owning process.  Many home buyers go into home ownership unprepared.  Additional education could help with that.

Cons

• Time Investment - the home buyer who participates in this program is going to invest a lot of time in it.  They need to do six hours of homebuyer education before finding a home, one hour after they find a home but before they close on it and one hour after they close, so a total of 8 hours of home buyer education, a portion of which has to be done one-on-one with a HUD approved counselor. 
• Money Investment - the HUD approved counselor doesn't work for free, so someone will have to pay him.  At this point, it looks like the buyer will pay the counselor upfront and the lender who makes the FHA loan will reimburse them at the closing of the purchase.  What if the buyer doesn't buy a home after-all though?  Then they will have to pay that cost.  Exact costs are not determined yet seeing the program has not yet rolled out, but HUD has listed an estimated cost of $100/hour for one-on-one counseling (less if taken in a group setting). 

Bottom Line

So, is it worth it for the buyer to invest the money and time upfront?  If they have the time and are definitely going to buy a home with FHA financing, then definitely.  On a $100,000 loan, they will save $500 on the upfront fee, about $8 per month for the first 24 months and about $20 per month after that.

HOWEVER - if a buyer is proactive enough to do 6 hours of homebuyer education before making an offer on a home, could they be proactive enough to take the steps needed to make themselves eligible for conventional financing?  A conventional mortgage has no upfront financed mortgage insurance and, dependent on the credit score, the monthly mortgage insurance is typically significantly cheaper than even this program's discounted 1.1% rate.  Also, conventional borrowers eventually can remove the monthly mortgage insurance from their loan while most FHA borrowers have it for the life of the loan.

All to say....it can be a good program for the proactive buyer who absolutely has to go FHA.  If the buyer has the time and ability to become eligible for conventional financing, though, this route will typically beat FHA's HAWK program, hands down. 


Lori Hiscock is a Sr. Loan Officer at Ruoff Home Mortgage‘s South Bend office.  One of Michiana’s top mortgage loan officers, Lori started her lending career in 1995 after obtaining her bachelor’s degree in Finance from Western Michigan University.  You can connect with Lori Hiscock or apply online here. NMLS#404320.

Ruoff Mortgage Company, Inc. is an Indiana corporation licensed by the Indiana Department of Financial Institutions (DFI) and operates with the following licenses:

Indiana-DFI First Lien Mortgage Lending License #10994;
IL Residential Mortgage Licensee #MB.6760734;
Michigan 1st Mortgage Broker/Lender License #FL0017496.