Taking the mystery out of the mortgage process

English: Mortgage Backed Security

English: Mortgage Backed Security (Photo credit: Wikipedia)

The home buying process can seem complicated and overwhelming for the average buyer. Helping your customers better understand the different phases in the mortgage loan process early on – and what is expected of them at each step – can help make the process less intimidating and reduce frustration.

Phase 1 – Origination:
This begins the mortgage process and is actually several steps. The loan officer will help the customer learn what their mortgage financing options are through a pre-qualification process, and assist with filling out a loan application and gathering the necessary documents.

Customers should know: They’ll need to provide income, asset and debt information, and their Social Security number to allow the lender to pull their credit report.

Phase 2 – Processing:
The loan processor will then collect, verify and review all required documentation provided by the buyer, order appraisals, order a title search and send all this information in a complete package to underwriting.

Customers should know: Processors will be checking for errors, discrepancies and possible missing information, so customers need to understand how critical it is to provide accurate, complete information in a timely manner.

Phase 3 – Underwriting:
The underwriter analyzes the documentation for accuracy and evaluates the customer’s ability to repay the loan based on their credit and employment histories. An appraisal and title review is completed to ensure the loan program guidelines are met, the title is clear, and to determine risk acceptability.

Customers should know: This is “decision time” as the underwriter weighs the risk of lending money and approves or denies the loan – so customers may be asked for additional financial information even at this stage.

Phase 4 – Closing (or Escrow):
The loan processor coordinates all aspects of the closing with the buyer and the closing agent and/or attorney. The closing agent conducts the closing, ensures that all necessary documents are signed, assures closing fees and escrow payments are made, and confirms that all documents are sent out to be recorded according to state and local requirements.

Customers should know: Before closing they should receive information explaining the closing costs, including a standardized Good Faith Estimate (GFE) of how much cash they will need at closing.

With keys in hand, the process is completed for the homebuyer, but there are still a number of steps that take place behind the scenes after closing.

  • Warehousing: About 10 days after closing, the lender uses their warehouse line [line of credit] to finance the new loan until it is “sold” to an investor on the secondary market.
  • Secondary market: Allows lenders to sell mortgages to investors, providing them [the lender] with new funds to offer home loans to new borrowers. Your customers’ mortgage rates are influenced by the yields demanded by these investors.

Typical investors of mortgage-backed securities in the secondary market include:

  • Shipping and delivery: Once an investor is secured, the loan is packaged with other loans,, and applicable documentation, and becomes part of a mortgage-backed security (MBS). These mortgage-backed securities are then delivered to the investor.
  • Loan administration/servicing: A loan servicer takes care of the administrative duties once the mortgage-backed securities are delivered to the investor. This includes: customer support, collection of mortgage payments, management of escrow accounts and fund recovery efforts.
Thanks to  Coldwell Banker Home Loans



Real Estate Financing: Recipe for Success

For homebuyers today, the paperwork involved in securing a loan is often more painstaking than actually qualifying for a mortgage.

In an effort to avoid substandard loans and underwriting practices, Fannie Mae and Freddie Mac have cracked down on “bad,” or poorly documented and underwritten loans of the past. As a result, most mortgage lenders began greater enforcement of thorough underwriting guidelines and procedures, understanding that the key to avoiding future loan repurchase or buyback losses is to create the “perfect” loan file, as discussed by Mark Greene of Forbes.

Proper documentation is vital to developing a borrower loan file that meets today’s stringent credit and underwriting guidelines. Providing all required documentation requested will help facilitate a smoother mortgage process and help avoid unwelcome surprises.

Borrowers will have to disclose everything about their financial lives, from how much money they have in checking, savings, investments and retirement accounts, to gifts received to help with the purchase of the home. Full disclosure of credit as well as previous home ownership must also be captured to eliminate any potential obstacles to closing.

The mortgage approval process is rigorous for a reason – to avoid defaults and loan buybacks for lenders. [And consequently, should protect the buyers.-SA] These higher standards and strict guidelines are required by mortgage investors (e.g. Fannie Mae and Freddie Mac). Not having a “perfect” loan file can ultimately result in the lender having to buy back the loans at a loss from the investor – a scenario all lenders strive to avoid.

Courtesy of Coldwell Banker Home Loans

This week’s MORTGAGE TIPS: The FHA 203(k) Mortgage

Purchase and Renovate: Recapture the American Dream

Pick appropriate ladders

Often times home shoppers will come across a fixer-upper property that just fits the bill; perfect in every way except that it needs just too many costly repairs to bring it up to acceptable condition. And what’s worse, the buyer has little or no money to pay for the needed renovations. Now there is a way to make it all possible: It’s the FHA 203(k) mortgage. With a 203(k) loan, your buyer can purchase a property in need of repairs and refurbishing and roll the renovation costs into one, easy mortgage loan based on the home’s post-improved value.

For example, if they wanted to buy a house in which the kitchen had been torn out, they could include in the mortgage loan, the cost of new cabinets, counter tops, flooring, a refrigerator, stove, oven, microwave, sink, dishwasher, garbage disposal, and the cost to design and install it. Plus, get up to six months of mortgage payments included in the loan to cover the mortgage payments while they’re renovating.

Floor plan before kitchen renovation

And the down payment terms are extremely favorable too – they only have to come up with 3.5% of the home’s purchase price and repair costs. For example, if they were buying a house that cost $150,000 and the repairs cost $15,000, their down payment would be just $5,775.

If you have a buyer shopping for a home and seriously considering a property in need of repairs and updates, the 203(k) mortgage can really simplify their purchase. Just make sure that you work with a mortgage lender who is experienced with the 203(k) program.

You can learn more about the 203(k) loan and other FHA loans by contacting an FHA-approved lender. To find a qualified lender in your area who is experienced with FHA 203(k) mortgages, visit online at http://www.hud.gov

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April 13, 2012

FINANCE talk …


Improving Your Credit Score

FICO scores are based on specific credit history, with hundreds of inputs used to find your score. There are 5 main parts of your credit score:

Finance Talk

1. Payment History: 35% of your credit score

Payment history measures how you’ve paid on your debts. Payment history is the largest part of your credit score because if you’ve recently missed payments your creditors, it’s likely those missed payments will continue, and may lead to default. Payment history also measures how “severe” a missed payment has been. An item in collection is worse than an item paid 30 days late.

Tip to improve: Make payments on time, all the time — even items in dispute. Pay the bill and worry about refunds later

2. Amounts Owed: 30% of your credit score

Amounts owed measures how “maxed out” you are. It is the second-largest part of your credit score because a person that is maxed out has no safety valve in the event of a crisis. Amounts owed is not about the dollar amount you’re borrowing — it’s about the dollar amount you’re borrowing relative to the amount available to you.

Tip to improve: Don’t close out “old” credit cards, and don’t lower your available credit limits. Having access to credit is good.

3. Credit History Length: 15% of your credit score

Your credit history is your track record with respect to managing credit. It matters in the FICO model because “experienced users of credit” are viewed differently from new users. Similar to the hiring process for a job, the credit bureaus want to see that this isn’t your first experience.

Tip to improve: Don’t close cards with “history”. You need them to show you’re experienced with credit.

4. New Credit: 10% of your credit score

This category accounts for your recent attempts to secure new credit. In general, the more credit for which you’ve applied, the more damage it will do to your credit score. This is more true for credit cards than for mortgage applications. A consumer in search of new credit cards is presumed to “need” more credit lines.

Tip to improve: When you shop for a mortgage, multiple credit checks can count as a single credit inquiry, protecting your credit score.

5. Types of Credit: 10% of your credit score

The type of credit you carry matters and not all credit types are the same. Installment loans such as mortgage loans and student loans, for example, are considered “better” than credit cards and charge cards. This is because installments loans eventually pay down to zero. Consumer cards, by contrast, can only go up.

Tip to improve: Don’t carry an abundance of store charge cards. Interest rates are high and the FICO model looks unfavorably upon them.

[Next MONDAY FINANCE TALK…:  “5 Steps to Save for a Downpayment”]
Thanks to Trulia!

The amount of the Downpayment is Important.

What exactly is the down payment? It’s the amount of money that you, the buyer, kick in out of your own pocket, right at the start, toward the purchase of the house. But exactly how much do you need to put down?

Here’s my feeling about this: always try to put 20 percent down. Period. I’ve been recommending 20 percent forever—since long before the market had its recent huge downward swing. But as so many people fell prey to the idea of putting less than 20 percent down in recent times, we have to talk about this because it’s a big deal and something I feel very strongly about.

Seven Reasons to Put 20 Percent Down

  1. Improved chance that you will get the mortgage—The first and biggest reason to come up with 20 percent down is that in today’s new market, many banks won’t give you a mortgage unless you come up with at least that much. The loan programs that once existed for 10, 5, and 0 percent down are not just not available.
  2. Skin in the game—Twenty percent has been the norm forever. It really serves to ensure that the homebuyer has “skin in the game” and is financially viable for the homeownership responsibility.
  3. Smaller monthly mortgage payment—More money down means you borrow less, which means you will have a smaller mortgage, which means you will have a smaller, more affordable mortgage payment.
  4. Lower interest rate—The interest charged on a loan with 20 percent down is often lower than the interest on a loan with less money down. Your lower interest rate will save you thousands if not tens of thousands of dollars over the life of the loan.
  5. No private mortgage insurance (PMI)—Putting 20 percent down allows you to avoid private mortgage insurance. Also called lender’s mortgage insurance, PMI is extra insurance that lenders require from most homebuyers who obtain loans in which the down payment is less than 20 percent of the sales price or appraised value. Many lenders will even add a percentage that is like an insurance policy onto the mortgage interest rate.
  6. Instant equity building—A significant down payment builds instant equity in your home. A 20 percent down payment immediately puts equity into a property when you purchase it. That down payment safeguards you if the market turns downward temporarily.
  7. Great saving skills—Saving for a full 20 percent down is a great way to establish practical and healthy saving practices. If you have saved up for 20 percent down, you have probably learned how to manage your money wisely. That skill is going to come in very handy because the money outflow doesn’t stop once the seller hands over the keys to the front door!

The George L. Burlingame House at 1238 Harvard...

Let’s say you have $80,000 saved toward a down payment. You’re wondering, why buy a $400,000 house with 20 percent down when you can buy an $800,000 with 10 percent down? Wow: more house, better neighborhood! Hey, that sounds like a deal. But it’s not.

The entire real estate market and our economy in general were affected by the number of homebuyers who artificially exaggerated their purchasing power with this thinking—buying properties with 15, 10, 5, or even 0 percent down, thinking they were getting more house for their money.

But what really happened was that homebuyers purchased homes that were higher priced and far more expensive than what they could ultimately afford.

Stick to the 20 percent rule and you’ll be buying safe, sane and secure!

6 ways to save your underwater home

By Tara-Nicholle Nelson, Tuesday, January 3, 2012.

Inman News®

<a href="http://www.shutterstock.com/gallery-248635p1.html" target=blank>Distressed homeowner image</a> via Shutterstock.com.Distressed homeowner image via Shutterstock.com.

What seemed like a housing market downturn is now nearly universally seen as the new normal. Accordingly, many homeowners are taking a tough look at their mortgage situations in this stark light.

This New Year’s season, I’ve received a massive influx of reader questions — quasi-challenges, really — asking me why they shouldn’t just walk away from their underwater homes and upside-down mortgages.

If you’ve read my work at all, you’ll know that I almost never give an absolute answer to such an important question. The decision whether to walk away from your home is too big and too personal, and there are simply too many variables — legal, financial, credit, tax, personal, lifestyle, family, etc. — at play for me to give a glib black-and-white answer.

If you’re trying to make this decision now, it absolutely behooves you to consult with a reputable real estate broker, mortgage broker, local attorney and local tax professional — at minimum.

However, I’ve also noticed that most upside-down homeowners don’t really want to default on their mortgages. If you count yourself in that number, I thought I’d take the opportunity  to encourage you to harness the renewed energy and commitment that comes along this time of year and provide you with some direction for it, in the vein of avoiding foreclosure if you decide that is the right path for you.

Here are six alternatives to walking away, some more obvious, some less, but all underutilized, from my vantage point.

1. Get rid of your credit card debt. Again, this might seem obvious, but I’ve encountered a number of people who say they can’t afford their mortgage payments who actually could afford them if they dealt with their credit card and other debt.

Call your creditors and make an effort to settle your debt; many will take a lump sum payment much lower than your balance. While this might have tax and credit score implications, it might also help you keep your house. Or work through steps No. 2 and No. 3, below, to just eliminate those balances, by any means necessary.

2. Get a second job. This seems obvious, too, but I believe it’s simply not done nearly as often as it should be, mostly out of pride and emotional defeatism.

You already work 40 hours a week. You’re already tired. But you know what? I know MBAs who got into a bad debt situation and are climbing their way out with high-end, table-waiting tips. It won’t last forever and, again, could be very much worth it.

If you’re not up for this sort of hustle, and you’re a white-collar professional, there are tons of consulting or contract gigs out there to be had, which can help you catch up on missed mortgage payments or bring down your debt.

3. Start a side business. Sites like Etsy, TaskRabbit and elance allow people to monetize their spare time, quirky hobbies and special skills. I know a journalist who nearly matches her day-job income dog-sitting while she writes.

4. Rent a room — or two — out. Put your man cave on Trulia or Craigslist for rent. If you can’t stomach the idea of a permanent roommate, check out Airbnb and see if you can generate some extra cash renting out your rooms to those visiting for short periods of time.

5. Apply for everything. Decide right now to simply refuse to be deterred by the first roadblock that comes up in your pursuit of a loan modification — and there might be many. Commit, instead, to applying for everything for which you might possibly qualify, and don’t make assumptions about what programs might work for you (many loan mod programs have loosened their guidelines or gotten more efficient over time).

Apply through your lender to the federal HARP program, and also to the lender’s own loan mod program. Visit this federal site to determine whether there are additional state programs available to you under Treasury’s Hardest Hit Fund. Apply to the wildly successful (as these things go) Home Save program run by NACA.

It ain’t over till it’s over.

6. Short-sell it. Banks are now taking a couple of years, on average, after the first missed payment to foreclose on and repossess a home. If you list your home for sale with a local agent who has experience closing these transactions right this moment, your chances of selling it and having the short sale complete in time to qualify for the income tax exemption that expires Dec. 31, 2012, are actually better than your chances of qualifying for the exemption if you stop making your mortgage payments right now.

Again, it’s ubercritical that you work with professionals, from the folks at NACA to a local agent and attorney and certified public accountant (CPA) if you’re seeking a loan mod or a short sale. Beyond advising you about implications to be wary of, the pros can help educate you about the full scope of options available to you.

Your best bet is to run even getting a second job past your trusted advisers before you do it, as it might impact your prospects of getting relief from your lender.

Fortunately, your options for avoiding a foreclosure are not so limited as they might seem at first glance.

Tara-Nicholle Nelson is author of “The Savvy Woman’s Homebuying Handbook” and “Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions.” Tara is also the Consumer Ambassador and Educator for real estate listings search site Trulia.com. Ask her a real estate question online or visit her website, www.rethinkrealestate.com.


Price is not all that matters in real estate sales

Sellers typically prefer deals with fewer contingencies

By Dian Hymer, Monday, January 16, 2012.

Inman News®

Negotiation strategies differ depending on how well the home is priced and who’s on the other side. If you’re trying to buy a short-sale listing where the lender has to agree to accept less than the amount owed, the seller doesn’t have much say in the negotiations about price unless he can contribute money to pay down the loan amount.

Regardless of who you’re dealing with, you’re more likely to grab a seller’s or lender’s attention if you are preapproved for the mortgage you’ll need and can provide verification of cash for the down payment and closing costs.

Many buyers feel that cash is king. If buyers are willing and able to pay all cash with no mortgage, no hassling with the lender and no appraisal contingency, they feel they’re owed a price concession.

Not all sellers agree. Some, who are confident in the value of their home, would rather work with an offer from a well-qualified buyer who needs to obtain a mortgage but who will pay a higher price.

<a href="http://www.shutterstock.com/gallery-59982p1.html">House and cash image</a> via Shutterstock.com.House and cash image via Shutterstock.com.

Negotiation strategies differ depending on how well the home is priced and who’s on the other side. If you’re trying to buy a short-sale listing where the lender has to agree to accept less than the amount owed, the seller doesn’t have much say in the negotiations about price unless he can contribute money to pay down the loan amount.

Regardless of who you’re dealing with, you’re more likely to grab a seller’s or lender’s attention if you are preapproved for the mortgage you’ll need and can provide verification of cash for the down payment and closing costs.

Many buyers feel that cash is king. If buyers are willing and able to pay all cash with no mortgage, no hassling with the lender and no appraisal contingency, they feel they’re owed a price concession.

Not all sellers agree. Some, who are confident in the value of their home, would rather work with an offer from a well-qualified buyer who needs to obtain a mortgage but who will pay a higher price.

Before you start negotiating, you should understand as much as you can about the other party. For instance, if the sellers are moving to a retirement home, they might go for the highest-priced offer in a multiple-offer situation, even though it might not be ideal in other regards. If they are liquidating their last asset, every penny will count.

An all-cash or large-cash-down buyer might not be able to negotiate a “deal” based on the fact that no lender will be involved. But if the home is a good value and suits your long-term needs, you might increase your offer price and include a mortgage. This way, you conserve cash for other uses.

HOUSE HUNTING TIP: Many buyers don’t want to negotiate. They want their first offer to be their best offer. Usually, the only time this is effective is if yours is the only offer, the house is priced right for the market, and you offer full price. In this market, you’re better off planning for some negotiation, and not putting all your cards on the table at once.

In most areas, the home-sale market still favors buyers. A lot of sellers are selling for less than they paid. Some have to bring money to the closing. Sellers who have owned for years are selling for less than they would have years ago. It’s natural that they would want to try for the highest price possible.

Negotiations are about more than price. Generally, the fewer the contingencies or the cleaner the contract, the more attractive it will be to the seller. Closing and possession dates can become issues at the bargaining table. What’s included and excluded, time periods to satisfy contingencies, and virtually everything in the contract is negotiable.

Since everything is up for grabs, be clear about what’s not negotiable — for instance, you can’t go over a certain price. Show flexibility in areas that will hopefully be valuable to the sellers, such as buying “as is” regarding some needed repairs.

Don’t waste your time with sellers who are firm at a price that is considerably over market value. Wait until they become realistic while you continue looking. Some sellers eventually get tired of having their home listed and reduce the price to market value. Others don’t.

Sellers need to understand that buyers in today’s market will walk away from a negotiation if they feel they’re not getting anywhere or are being treated unfairly. Buyers could become suspicious or disappear if they’re told by the sellers or their agent that other buyers are lining up to make an offer when they aren’t.

THE CLOSING: A smart strategy is to defend your position while being honest and fair with the other party.

Dian Hymer, a real estate broker with more than 30 years’ experience, is a nationally syndicated real estate columnist and author of “House Hunting: The Take-Along Workbook for Home Buyers” and “Starting Out, The Complete Home Buyer’s Guide.”