By Liz Pulliam Weston
Applying for a mortgage can be a daunting experience.
It's not enough that you're agreeing to take on the biggest debt of your life, one that represents two to three times your annual income. You're also confronted with piles of paperwork, flurries of fees and a tidal wave of terms, from amortization to title insurance, whose meaning is fuzzy at best.
"Whether it's a professor at Stanford or a ditch digger," said San Francisco mortgage broker Leon Huntting, "most people don't understand the loan process."
In this confusing and pressure-filled atmosphere, it's easy to make some mistakes. Here are some common ones that lenders and mortgage brokers see, and what you can do to prevent them.
Not fixing your credit Mortgage brokers say they're confounded at the number of buyers who apply for a mortgage with their fingers crossed, hoping their credit will allow them to qualify for a loan.
Before you even think about applying for a mortgage, obtain copies of your credit report and your FICO credit score. Your FICO score is the three-digit number that's used in 75% of mortgage-lending decisions. You can order your FICO score on the Web for a fee of $14.95, which includes a copy of your credit report.
Doing this at least six months in advance should give you plenty of time to challenge any errors on your report and ensure that they're removed by the time you're ready to apply for a loan. You can also see the legitimate factors that are hurting your score and do something about them, such as paying off an overdue bill or paying down credit card debt.
Not looking for first-time home buyers' programs These programs, typically sponsored by state, county or city governments, often offer better interest rates and terms than you'll find among private lenders, said mortgage consultant Diane St. James. Some are tailored for people with damaged credit, while most can help people with little saved for a down payment.
Some of these resources are listed on St. James' educational Web site, ABC Mortgage Consulting. You can also call the housing agencies for your state, county and city to see what they offer.
Not getting pre-approved for a loan Many first-time borrowers confuse being "pre-qualified" with being "pre-approved." Pre-qualification is a pretty casual process, where a lender tells you how much money you probably can borrow based on how much money you make, how much debt you already have and how much cash you have for the down payment.
Getting pre-approval, by contrast, is a much more rigorous process and involves actually applying for a loan. You typically submit tax returns, pay stubs and other information. The lender verifies the information and checks your credit. If all goes well, the lender agrees in writing to make the loan.
In a hot or even warm real estate market, the house hunter who is only pre-qualified is a cooked goose. Home sellers and their agents give much more weight to offers being made by buyers who already have a loan lined up.
Borrowing too much money Many people take out the biggest loan they possibly can, figuring that their incomes will eventually increase enough to make the payments comfortable. But few first-time buyers have any clear idea of how expensive homeownership can be. Not only will you shell out more for mortgage payments than you probably did for rent, but you'll also need to cover property taxes and homeowners insurance, as well as higher bills for utilities, maintenance and repairs than you faced as a renter.
Lenders are perfectly willing to let you overextend, knowing that you'll probably forgo vacations, retirement savings and new clothes for the kids rather than default on your mortgage.
"Mortgage money … is way too easy to get," said Ted Grose, president of the California Association of Mortgage Brokers. "People tend to overbuy … and that can really stress family life. It's also a formula for foreclosure."
Instead of going to the edge of affordability, consider limiting your housing costs -- mortgage payments, property taxes and homeowners insurance -- to 25% or so of your gross income. That's a much more sustainable level for most people, financial planners say, than the 33% lenders are typically willing to give you.
Not shopping around for rates and terms Mortgage broker Allen Jackson of Bristol Home Loans in Bellflower, Calif., sees too many borrowers with decent credit getting stuck with loans meant for people with poor credit. So-called "subprime" loans are often more profitable, so less ethical mortgage brokers may push them.
If the borrower doesn't know what the prevailing interest rates are for someone with their credit standing, Jackson said, they can easily pay thousands of dollars more than they need to. You can see a listing of loan rates by credit score at MyFico.com, and a comprehensive listing of prevailing rates and fees can be found in MSN Money's Banking area.
Even people with a few dings on their credit can often qualify for better loans than they're typically offered, said Grose of 1st Mortgage Advisors in Los Angeles. He believes most of the people being shunted into government loan programs, such as Federal Housing Administration (FHA) loans, would pay less if they used mortgages now being offered by private-sector lenders.
Paying junk fees Lenders can boost their profits by adding on a variety of fees. Some may be legitimate, some may be inflated and others may be pure fluff. Lenders may charge for "document preparation," for example, when all that involves typically is having a computer spit out a form. Or they may charge $150 for a credit check that cost them $15.
The time to challenge junk fees is not when you're about to sign the loan papers. Use a mortgage broker or call a number of lenders to compare their loans. Ask about the interest rate, the "points" charged to get that rate (each point is 1% of the total loan amount) and any other fees the lender charges. Then you can compare terms.
Once you've selected a lender, you'll be given a good-faith estimate of closing costs, which should include any fees being charged. Ask about each fee, and try to negotiate down the ones that seem excessive.
If the lender won't negotiate, "take that estimate to someone else," St. James said. "I'll bet they can beat it."
Unfortunately, this doesn't absolutely guarantee you won't face junk fees when it comes time to sign the loan. Many borrowers complain that they still face higher costs than were originally estimated, and so far the federal government has done little to prevent the practice. You can try challenging junk fees at this point, but most likely you'll have to bite the bullet and pay the fees to get your loan.
Not planning for closing costs The day you're scheduled to get your loan, known as closing, you'll also be expected to write a check for a number of expenses, which typically include attorney's fees, taxes, title insurance, prepaid homeowners insurance, points and other lenders' fees. Together, these are known as closing costs, and the total can be eye-popping: somewhere between 2% to 7% of the selling price of the house. "Usually, when people see the closing costs, they're like a deer in the headlights," said mortgage broker Huntting, who works for Pacific Guarantee Mortgage. "It's much more than they ever think it's going to be."
Plan for closing costs by getting a good-faith estimate from your lender as early in the loan process as possible. Make sure you have the cash on hand (or rather, in your checking account) and that it doesn't "disappear" before closing because of sloppy bookkeeping or a last-minute emergency.
Not having enough cash on hand after closing After borrowing too much, and scraping together every last dime for closing costs, many home buyers have nothing left in the bank to pay for anything unforeseen happening --and something unforeseen always happens.
"It costs so much just to move in," Grose said. "Then the water heater breaks."
Some people are so tapped out by the process, Jackson said, that they're not able to make their first mortgage payment on time. That's why "more and more lenders are requiring [borrowers have] three months' reserves after closing," Jackson said.
That's a smart idea for borrowers, anyway. Having three months' reserves, which means a fund equal to three months' worth of expenses, will help you handle the added costs of homeownership with much less stress.
Liz Pulliam Weston's column appears every Monday and Thursday, exclusively on MSN Money. She also answers reader questions in the Your Money message board.
Wednesday, April 23, 2008
By Liz Pulliam Weston
Posted by Rockfish at 6:15 PM
Thursday, November 15, 2007
Today The House or Representatives upheld the controversial mortgage bill by a vote 291-127. Details of the bill are in my post from earlier these week. In support of the wide ranging bill, House Majority Leader Steny Hoyer said, "Increasing loan rates on subprime mortgages have left thousands of American families close to foreclosure, and this crisis has led to the worst slump in the housing market in 16 years."
Although the House passed the bill, final action by Congress will most likely be pushed into 2008. It will be months before any final legislation comes to fruition. The Bush administration has said it supports parts of the bill, but it has not given an indication of what parts they are in most favor of. The administration has also not threatened a veto of the bill. Many Republicans opposed the bill, citing it is too harsh and would disrupt the free market for mortgages. California Republican Rep. John Campbell said, "What we are doing here is practicing medieval medicine. We are bleeding the patient. We are going to make the patient worse ... by drying up credit."
It is safe to say that reform is definitely on the Horizon for the mortgage business, something that those in the Industry have foreseen for a long time, with many welcoming the needed changes. It is unclear what the final outcome will be. Hopefully the changes enacted by Congress will be for the good of the people, and not too stringent, ultimately hurting borrowers in the short and long term.
The response has been mixed for the bill in whole, but many parts seem to be a step in the right direction. Its obvious the Industry has fallen on hard times, much of the problems are self inflicted with overzealous lending and fraud running unchecked at every level.
Posted by Rockfish at 11:42 PM
Tuesday, November 13, 2007
Sweeping Changes Proposed
HR 3915 The Mortgage Reform and Anti-Predatory Lending Act of 2007 was recently introduced by House Financial Services Committee Chairman Barney Frank (D-MA), along with Representatives Miller (D-NC) and Watt (D-NC) and proposes sweeping changes that would drastically change the face of the mortgage industry. Many believe it would practically eliminate mortgage brokers from the industry by raising capital requirements and reducing income streams. By enforcing a mandatory $100,000 bond for all originators, as well as outlawing ysp, aka rebates, the law would hinder many brokerages ability to open up shop and make money. Rebates are paid to brokers and in exchange for selling a higher rate to borrowers that may not have the ability to pay out of pocket to pay brokers commissions. This part of the bill, would not only cut broker's income, but would also automatically shut down the ability for many to refinance and purchase homes. Basically if you don't have the money to pay your brokers commission you would not be able to obtain financing.
Other aspects of the bill that I find to be more positive to the market include stricter requirements on disclosure of compensation, stricter education requirements for originators, and the elimination of higher compensation for risky loans like option arms. Parts of the bill are necessary to clean up the mess that has been created in the past few years, and if the correct steps are taken we can prevent future blow ups in the industry. on the flip side, if legislators go too far with bills such as this, they will ruin the free market for loans, and remove much of the options borrower's need to purchase or refinance their current residences.
Key points of the bill and their possible effects on the market:
Improve Quality of Originators
-Criminal background checks
-Increased continuing education requirements,
-Tests for originators to prove basic knowledge of loan products.
-National Registry of Originators
Improve Transaction Transparency
-Simple disclosure of broker role and compensation being received
-Increased continuing education requirements,
-Tests for originators to prove basic knowledge of loan products.
-Brokers would no longer receive monetary compensation for pushing risky variable loans such as Option Arms.
Reduce Borrower's Options and Ability to Finance
-Elimination of rebates, forces borrowers to pay closing costs out of pocket
-Elimination of rebates, causes the number of originators to drastically decrease, reducing the number of options for borrowers to obtain financing through
-$100,000 Net Worth or Bond requirement, reduces the number of brokers, further reducing borrower's options
-Federally mandated underwriting standards, remove the free market for loans, would further reduce borrower options in the market
-Large Banks would inevitably monopolize the market and borrower's would have less choices for good customer service and speed of transaction
Summary of the Bill outlined Here.
Credit Boosting - Credit Piggybacking
Websites like http://www.taylorstreetcredit.com/ offer services like the advertisement placed here on the left for credit piggybacking services. Credit piggybacking is the practice of "renting" high-quality credit account histories to borrowers with bad credit. The add to the left came from . Piggybacking companies claim to raise scores by 100 to 200 points in 30 to 90 days. The scam works by letting borrowers with bad credit, become authorized users on accounts with long histories of good payments. Internet companies pay people with excellent credit to allow their account numbers to be used by others. Those looking to boost their scores are charged fees upwards of $1,000 to achieve the higher scores. A borrower with poor credit could conceivably rent tradelines from multiple others and boost scores from subprime score levels of the 500's to A-paper ranges in the 700's. This method is being used by loan officers and borrowers to basically build good credit for borrower whom do not deserve the great scores. Many are pointing to this process as weakening the housing market, yet it is not illegal and cant be stopped unless the credit scoring system is adjusted to account for authorized user tradelines in scores. Some lenders are combating the issue by changing their guidelines to not count authorized user accounts towards minimum tradeline requirements.
Typical Credit repair Promises:
Add up to 15 YEARS of Positive Payment History to Your Credit File Overnight Without Occurring ANY Debt or Liabilities.
Discover Credit Repair SECRETS That The Credit Bureaus Don't Want You to Know.
Quickly Learn Exactly What You Need For Getting Approved For ANY Bank Loan.
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Learn How to Use the "1974 Equal Credit Opportunity Act" to Build Years of Good Credit History to your Credit File, Legally.
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Wednesday, October 24, 2007
Another commonly used Mortgage Scam is the Double Owner Occupied Purchase. In this scam, a borrower buys two or more homes simultaneously, stating on the numerous applications that the home will be their primary residence. It is a crime to lie on a mortgage application. Borrower's engage in this activity to obtain better rates and terms on multiple transactions. This scheme is typically used to qualify for Non Owner, or investment purchases, as Non Owner transactions have stricter guidelines, typically require more money down and have higher interest rates than other transactions. Since the risk on a Non Owner property is higher than on an Owner Occupied residence, lenders pass the risk on to the borrowers in higher risk premiums, rates, and higher equity requirements. The other reason this is used is to qualify for loans that the borrower would otherwise not be able to. The advantage to this scheme is the fact that lenders on each transaction will not be aware of the future debt payments the borrower will incur with the new loans. In this way borrowers can skirt the issue of affordability standards and can show lower debt ratios than they will really have. I have heard of borrowers buying3 and 4 properties at once, in some cases 3 and 4 unit properties, all being represented as Owner Occupied residences.
In the current climate this scheme is extremely difficult to pull off for several reasons. Credit searches and increasingly detailed, and multiple mortgage inquiries on a credit report represent a red flag to lenders. Additionally, loan servicing has increasingly become consolidated, where only a few companies service loans, so the likelihood the same servicer will have both loans on their books is extremely high. For example the loans may be funded through different banks, but within months may be sold to the same servicing company, in which case the scheme will be uncovered and the borrower will be in deep trouble. In my experience as a lender I have actually seen this happen. The servicer caught the issue within 30 days of close, and actually rejected both loans. The lenders then pursued the borrower with legal action and the borrower was forced to unwind the transaction at their own expense.
This scam can be carried out in two ways. One route is through a single broker who places each loan at different lenders, thinking they are safe from discovery. The other manner it occurs is when a borrower uses multiple brokers, one for each transaction, to hide their intentions. I have seen it both ways. In either case the responsible parties are subject to prosecution and financial burden. The broker is actually putting their license on the line as well, as they can be disciplined and could lose their ability to continue doing business.
A common Mortgage Scam utilized is called the "Straw Buyer". A "Straw buyer" means someone is used to obtain financing under the false claim to intend to live in the property they are purchasing. In most cases the fake buyer is given a lump sum to pretend to purchase the home in order for someone else to live in. In some cases the straw buyer is not even aware that their name is being used for the purchase of a home. The most common usage occurs when a borrower is unable to qualify for a loan on their own, so they instead find a friend, family member or acquaintance to qualify for them. In general the straw buyer will have stellar credit, an abundance of assets, and an income to substantiate the payment on said purchase. After the purchase transaction is completed the straw buyer's name may be removed from title, while someone Else's name is placed in county records as the owner. It is a crime to state on an application that you intend to live in a home when in fact you have no intention of doing so. The scheme works when the actual intended occupant makes the payment in a timely manner and satisfies the debt obligation. Many mortgages are assumable, and in the long run, the actual occupant may be able to take over the debt in their name. On the flip side, if the actual occupant defaults, the original purchaser, or straw buyer, is responsible for the debt and could face litigation for their part in the scheme.
The chart below from The U.S. Department of Treasury demonstrates the rise in Straw Buyer suspicion as demonstrated in their Suspicious Activity Reports (SAR)
In a recent case involving a Newport Beach resident the offender plead guilty to mortgage fraud involving over $2.7 million in losses to lenders and HUD. The offender admitted to participating in multiple transactions between 1995 and 2001. The offender could face jail time if the court decides to put him behind bars.
Tuesday, October 23, 2007
The housing market is taking a nosedive, and speculation is everywhere. The question then becomes who is right? Is the housing market a speed bump, or is it a long term problem that will continue to haunt homeowners for many years to come? Data is mounting and its becoming more and more obvious that the end is not as near as many would like. My opinion is the housing market will not make a substantial recovery until 2010 or 2011, unless the government steps in and makes sweeping and drastic changes.
The vast number of sub prime and neg am loans funded in the past 2 years have not even begun to affect us as most of them have not reached their caps and have not reset as variable loans. As the foreclosures rise and home values decline farther, borrowers who closed loans in late 2005, 2006 and 2007, when money was still flowing from Wall Street and thrift banks, will be in poor shape and will be facing the same frightening issues that many are facing today. The bottom line is thousand of Americans will be faced with the overwhelming issue of owing more money than their home is worth, and will have double if not triple the payment burden.
Over the housing boom, the percentage of Americans who "own" their home has spiked, and as the boom crashes and burns, this trend will take a giant step backwards, bringing us back to the previous level of homeownership. Mortgage brokers, real estate agents and lenders have been selling a lie. First, not everyone deserves or can afford to own their home. Second, home values do not always go up. Yes some areas are more stable than others, but every homeowner should know the risk ans shouldn't be naive about the possibilities. The strict mortgage standards of the past were based in logic, while recent years have been marked by near insanity. Borrowing 100% to purchase a home is a risky move, particularly if you finance using an interest only or Option Arm. If you do not pay down the mortgage and your home value does not increase, you will be in a tight spot.
My hope is that Americans learn from this mistake and take homeownership more seriously in the future. Although lenders and brokers were pushing a fairy tale, borrowers bought into it. In that regard, we all share the blame.