RTC Mortgage Blog

Are Underwriting Guidelines Too Strict? Or are Loan Originators Too Dumb?

It’s been estimated that an average one-third of all home sales fall out. Mortgages being declined or unreasonable conditions of approval are where most real estate agents and borrowers place the blame. Is that blame fairly placed or are the Loan Originators to blame for not knowing the guidelines of the loans for which they were hired to originate?  Read on for a different point of view…..

A few years ago when the mortgage and housing markets and the overall economy started to tumble, the underwriting guidelines were changing almost daily. Lenders couldn’t keep up with all the changes made by Fannie Mae, Freddie Mac and FHA – the three housing agencies that are now part of our federal government and account for more than 90% of all mortgage money. Loan Originators, Processors & Underwriters were trying to figure out what could be approved, what should be declined and how to properly document a loan file.

But more recently the guidelines have stabilized with relatively few changes in the past year or more. So, if the guidelines aren’t changing any more, shouldn’t we as loan originators be expected to know what can be approved and what shouldn’t? And shouldn’t we know what documentation is required to properly assemble a loan that will be approved when it reaches the underwriting department?

The mortgage process starts with the loan originator. And as the saying goes, “the buck stops here”. A good loan originator should know by the completion of a loan application and immediate review of the borrower’s income, assets and credit whether a loan can be approved. And he/she should also anticipate what documentation an underwriter will require to issue a loan approval without a list of conditions a mile long.

Why Do So Many Loan Applications Get Rejected?

In today’s mortgage climate where “no-doc” loans no longer exist, a loan originator should possess the following qualities:

·         Knowledge of underwriting guidelines

·         Expertise in knowing what documentation needs to go into a file and what doesn’t

·         Control of the file during the loan process

Knowledge and expertise come from experience. An experienced loan originator should know how to review and analyze the borrower’s tax returns, credit report, and other financial information. If the originator merely takes the application and hands it off to a processor never to look at it again, that loan has a lower probability of being approved. The necessary loan documentation should be gathered from the borrower within the first few days and analyzed upon receipt. If it is, then there’s no reason to be surprised by an underwriters request for more documentation and explanations later. A pro-active loan originator will have already identified the potential weaknesses in a file and addressed it long before it gets to the underwriter.

By keeping control of the file the loan originator can monitor the documentation as it is received. Constant review helps to identify a potential problem earlier in the process and allows time to request any additional documentation to overcome the issue. Larger companies that utilize centralized processing located in another part of the country (or in some cases in another country) lose the ability to monitor the file as it develops.

The loan originator in today’s mortgage market needs to be more than just an “order-taker”. Knowledge, understanding, expertise and control of the file will all serve to mitigate problems that will otherwise arise in a later stage of the loan process. Too many loan files that are declined could have been easily approved if only the loan officer had just taken the time to review the file upfront; scrutinized the documentation; and, identified and addressed the concerns with the borrowers, loan processor or underwriter.

Relying only on an experienced knowledgeable, professional and local loan originator will help to improve the likelihood of your loan closing.

2011 vs. 2012 in the Mortgage Market

We enter 2012 with a higher degree of optimism than the previous few years. Let’s start the New Year by taking a look back at the major factors that shaped last year’s mortgage market and discussing what’s in store for 2012.

The Highlights of 2011:

Interest rates: Ranged last year between 4.96% near the beginning of the year to 3.99% at year-end according to the weekly Survey by Freddie Mac of a sample of lenders. The average for 2011 was 4.45% with 0.7 points. These rates are a national average of 30-year fixed rates offered by a sample of lenders for loan amounts of $417,000 or less.

Lenders: The winners and losers have been decided. Many lenders exited the business or merged with others, and others have re-entered the market. In general, the big banks failed at providing customer service levels to satisfy their customers. At the same time, mortgage brokers, once given up for dead, have survived and their market share grew in volume by 33% from the loan point of a few years ago. The market also saw an increase in the number of jumbo lenders where there once was none. Jumbo loans are readily available up to $4 million or more to those that qualify.

Loan Programs: FHA loans gained in popularity due to their minimal required down payment of only 3.5% on loan amounts up to $729,750. Adjustable rate programs are more available and many with interest-only options.

Underwriting: Guidelines have stabilized and the seemingly daily changes have ceased. Loan originators should know what to expect and be better able to advise their clients.

What to Expect in 2012:

Interest Rates: We begin the year with rates at an all-time low of 3.91% + 0.8 points according to Freddie Mac’s survey. The mortgage industry’s largest trade organization, The Mortgage Bankers Association of America (MBA) expects rates to average 4.3% this year (you can see the entire MBA forecast on my website: www.rtcmortgage.com ). The Fed vows to keep the Federal Funds rate low through 2013 unless the economy heats up too much. On a negative note, borrows will pay for the 2-month extension of the Social Security Tax Cut approved by Congress to the tune of about a .125% increase in cost over the next ten years.

Lenders: I predict that Mortgage Brokers will continue to increase their market share as they can provide more efficient, local service; can typically originate loans at a lower cost than the big banks; have more resources to choose from as more wholesale lenders are entering the market; and recent licensing laws require brokers to have more stringent licensing guidelines and knowledge than their unlicensed counterparts at the big banks.

Loan Programs: Fannie Mae and Freddie Mac lowered the maximum conforming loan limit from $729,750 to $625,500 while FHA kept their limit at $729,750 for the highest-priced markets such as Orange County. I expect FHA loans to be popular in filling that gap, although the higher cost of FHA mortgage insurance this year will force some to consider jumbo loans instead. Fortunately, more jumbo choices are available. The Government has also issued improved guidelines under their Home Affordable Refinance Program (known as HARP-2) which should enable more underwater homeowners to refinance and take advantage of lower interest rates.

Underwriting: The perception is that underwriting guidelines are too tight. While I don’t expect to see a return to “no-doc” or “stated-income” loans any time soon, we no longer see the parade of changes that have made it impossible for loan originators to keep up. We should all now know what to expect and advise our clients accordingly. (I’ll be writing about this in more detail very soon).

The Most Important Factors to a Sustainable Recovery in Housing:

·         Will the recent signs of positive data continue? At the turn of the year we have seen an improving trend in Employment data; an uptick in manufacturing; negligible inflation; and increase in home sales; and improved consumer sentiment.

·         The severity and the impact of the European debt crisis is still unknown, but the financial markets seem to be reacting less to the related events.

·         Politics and the outcome of the presidential and congressional elections will most likely have an impact. But, in which direction?

·         Employment, in addition to housing is the key to recovery. Is the recent improvement in the Unemployment Rate an aberration or is it a trend that will continue?

Have home prices hit bottom? Many economists predict this year as the turning point where values stabilize and even increase moderately. Non-distressed home values are already showing signs of stabilization and distressed sales are accounting for a smaller percentage of overall sales in recent months.  The shadow inventory of foreclosures and its impact on housing will continue to be a topic of debate.

2012 is starting out to be an interesting year. Lets’ hope it is the turning point for an overall improvement in the economy.

Tax Cut Extension = Higher Mortgage Rates

We all recall the battle that took place in Congress recently to extend the tax cut to working Americans in order to help the economy. But, did you know that nearly everyone financing a home over the next 10 years will pay the bill for the two-month temporary extension that Congress approved and the President signed into law?

Technically, Congress increased the "Guaranty Fees" that Fannie Mae and Freddie Mac charge to lenders that securitize Mortgage-Backed Securities (MBS's) with these agencies. Ultimately, this cost must either be absorbed by lenders, passed on to consumers, or some combination of the two. And I'll bet it won't be the lenders that volunteer to pay the price. Therefore, the borrowers will pay for it.

The 10 basis point increase in the Guaranty Fee or "G-Fee" as it's called, equates to a pricing difference of 30-40 basis points in terms of cost/rebate or roughly 0.125% in rate. 

Does it seem right that a 2-month temporary cut in the income tax rate should be paid by everyone financing a home for the next ten years? I welcome your comments.

Mortgage Rates Hit All Time Lows (Again)!

It’s all about rates this week as they have retreated back to their all-time low point that was also touched in September. Another strong Treasury auction and lack of any real solution to the European debt crisis helped, among other things.

While mortgage rates are not based on US Treasuries, the Mortgage-Backed-Securities (MBS) that do influence rates are similar to Treasuries and tend to trade in the same direction. Read on for a better understanding.............

Can Rates Go Any Lower?

A huge factor in how low mortgage rates can go is the underlying Mortgage-Backed-Securities (MBS) market.  Nearly all loan products offered by lenders are sold to Fannie Mae and Freddie Mac and end up as part of MBS pools or securities.  These MBS securities are then purchased by institutional investors.

In general, the lender that services the loan will receive .375% of the rate on a 30-year fixed rate loan. The ultimate investor in the MBS will receive the rest, except for the remaining .125% that gets eaten up by a variety of fees. So, on a 4% loan, the servicing lender gets 0.375% and the investor receives 3.5% as their rate of return.  Lenders can pool loans +/- .25 of the MBS rate. So, if the MBS security being sold into is at 4%, lenders can deliver loans with rates between 3.75% and 4.25% into that pool.

If rates go any lower, there will be a need to create a 3% MBS pool with a 3.5% interest rate. But, in order for lenders, Fannie and Freddie, to create MBS’s with a lower rate, there has to be investors willing to buy these MBS’s at a lower rate. With rates so low already, there likely isn’t much, if any, demand for lower rates on Mortgage-Backed Securities.

Therefore, the nature of supply and demand for Mortgage-Backed Securities will probably prevent rates from going lower. Unless economic factors force them down even more. And, any positive signs in the economy or in Europe can make rates pop back up again in no time.

The Fed

The Fed, officially known as the Federal Reserve, had one of their regularly scheduled Federal Open Market Committee meetings this week too. Although their comments were generally non-committal, Many observers believe the Fed will step in to take steps to stimulate growth in 2012, first through communications measures that drive home their expectation that interest rates will not rise for a long time, and then through more bond buying. Some have said the central bank should resume purchases of mortgage-backed securities to help revive the depressed housing market; others would prefer to stick with purchases of U.S. government debt, i.e., Treasury securities.

In the meantime, ‘tis the season…………

To track the factors that influence mortgage rates on any given day or week, you can always click on the following link to my Daily Rate Lock Advisory:

http://www.rtcmortgage.com/DailyRateLockAdvisory

Housing Survey, HARP2 & More

Survey Finds Uptick in Attitudes toward Housing

For the first time in six months, responses to Fannie Mae's Monthly National Housing Survey were positive regarding home prices.  Respondents are a mixture of homeowners both with and without mortgages including renters. Here are the highlights from the November Survey:

·         22% expect home prices to appreciate over the next

·         0.2% is the anticipated home price increase over the next year (not a lot but at least its positive)

·         19% expect prices to decline, down from 23 percent last month

·         53% expect prices to remain the same

·         68% view this as a good time to buy a home

·         41% expect rents to increase

·         6% expect rents to decline

My Conclusion: If home prices and rents are expected to rise, now is a good time to buy!

Update on HARP2: Home Affordable Refinance Program

Details have been coming out about the long-awaited Home Affordable Refinance Program that allows underwater borrowers to refinance their home regardless of how deep underwater they are. The previous version limited the loan amount to 125% of the current value of the home, but lenders would not lend above 105%.

Under the new version, there are no restrictions on the current value of the home but; neither Fannie Mae nor Freddie Mac will have their automated underwriting programs changed until March 31^st. Until then, lenders are sticking to the 105% limit.

Fannie and Freddie have also lessened the rate or pricing adjustments for loans that are refinanced under this program making it more attractive than the earlier version.

Other Details:

·         Payments on the existing loan must be current with no delinquencies in the past six months and no more than one delinquent payment in the past 12 months

·         The existing loan must have been originated prior to May 31, 2009 (they should have dropped this requirement in my opinion)

·         The existing loan must now be owned by Fannie Mae or Freddie Mac, regardless of the lender that services the loan. Looking it up is easy. Here are the links to look that up:

o    http://www.fanniemae.com/loanlookup/

o    https://ww3.freddiemac.com/corporate/

My Advice:

·         If you are underwater and refinancing between 80% and 105% of the property value: do it now

·         If you need more than 105%, wait until March 31^st but contact me now so I can keep you advised.

Mortgage Rate Update: Rates Are At An All Time Low Again!

Last Friday the Government announced that the nation's unemployment rate in November slipped to 8.6 percent from 9.0 percent. At first blush it appeared that stocks would rally and mortgage rates would rise. But, after dissecting the data, it was realized that the drop was due largely to a 315,000 decrease in those actually looking for jobs rather than an increase in the number of people hired. Out of the 120,000 new jobs created, 49,800 came from retail, and the majority of those came at clothing stores. Therefore, the gain is unlikely to hold up once the holiday season passes.

The other factor weighing in on mortgage rates is the progress (or lack thereof) with the European Debt crisis. If and when it gets resolved, mortgage rates will rise a little. For a while, the markets were overreacting to any tidbit of news. Now the market seems to have factored in a long, slow resolution or perhaps no resolution at all in the short run.

Please look at the Daily Rate Lock Advisory on my website for day by day advice on the factors that are influencing mortgage rates:

Update on Higher Loan Limits:

While still no definitive news on increasing the conforming loan limits back to $729,750 in certain high-priced markets, it appears that Congress is now ready to vote on raising the limit on FHA loans, but not for loans sold to Fannie Mae and Freddie Mac. The bill is set to be voted on November 18^th. This is puzzling for those of us in the industry. Read on….

FHA loans are insured by the Federal Government. The program was originally created to help lower-income borrowers by insuring lenders against default by the borrower. FHA loans require a minimum down payment of only 3.5% of the purchase price of a home. By contrast, “conventional” loans require higher down payments and lenders are protected against default by “Private Mortgage Insurance” (PMI) companies rather than the Government. Our government seized control of the two providers of Conventional loans a few years ago when these enterprises went broke. With a Conventional loan, the minimum down payment is 5% or 10% depending on the loan amount and the PMI is required whenever the buyer is putting down less than 20% of the purchase price. Therefore, the Government has exposure only to 80% of the value or purchase price of the home. With an FHA loan, the Government is on the hook up to 96.5% of the value or purchase price.

All three agencies – Fannie Mae, Freddie Mac and the FHA (Federal Housing Administration) are losing billions of dollars each year. And now the Government is considering increasing the limit on the riskier FHA loans rather than the less-risky Conventional loans. Go figure!

The Impact of the Lower Fannie, Freddie & FHA limits:

The temporary approved limits were reduced on October 1^st from $729,750 to $625,500 on single-family home loans. We have only one month of data to compare but according to DataQuick Information Systems, Orange County home sales fell 2.5% in October. And, 50% of the drop occurred in the $600,000 and above price range. This strongly indicates that the reduction in loan limits is further hurting the already depressed housing market.

More About FHA Loans:

If FHA loans are going to become more popular, we should learn more about them. Here’s what you need to know:

·         FHA loans now account for about one-third of all loans in the U.S. That figure is likely to be lower in Orange County and southern California in general, but growing.

·         FHA loans require a minimum of only 3.5% of the purchase price as a down payment. And, that down payment can be borrowed from a relative.

·         FHA lending guidelines are a little more relaxed than Conventional loans, sometimes allowing higher Debt-to-Income ratios and lower credit scores.

·         There are two parts to the FHA mortgage Insurance Premium (MIP). First there is an upfront MIP of 1.00%. This gets added to the base loan amount. For example, if the base loan amount is $500,000, the Loan Amount with MIP becomes $505,000. Secondly, there is the monthly MIP calculated at 1.15% of the loan amount. On the same loan of $500,000, the monthly premium is $479.17. The cost of the MIP is reduced with higher down payments.

·         FHA loans are for Owner-Occupied 1-4 family properties only. The loan limits are higher for 2, 3, & 4 unit properties.

·         Appraisals tend to be a little stricter if the appraiser notes any items that need repair.

·         Lending on condominiums is more restrictive than on Conventional loans.

·         Interest rates are about the same as they are for Conventional loans

The FHA Advantage:

FHA loans may have the advantage whenever the down payment is less than 5% on a loan amount up to $417,000 and less than 10% if the loan amount is over. FHA loans may also provide an interest rate advantage for borrowers with lower credit scores. And if the bill passes as expected, there will be a definite advantage on loan amounts between $625,500 and $729,750 in the higher-priced counties.

Buying a Home After a Foreclosure, Short Sale or Bankruptcy:

Now that the housing and mortgage crisis is a few years old I’m often asked “how long do I have to wait before I can buy or refinance a house again”?

The following chart can be used as a guideline to help you:

·          Waiting periods are from date of foreclosure sale, short sale or discharge of Bankruptcy.

·          Lenders may impose minimum credit scores

·          Conventional Loans are loans originated to be sold to Fannie Mae or Freddie Mac

·          FHA loans are insured by the Government. Minimum down payments are 3.5%

·         Extenuating Circumstances are credible excuses with a very low probability of recurrence. Typically they would a combination of factors such as: extended illness, serious accident, death in the family, victim of fraud, etc.

If you have experienced a Foreclosure, Short Sale or Bankruptcy, I recommend a consultation with a mortgage professional well in advance of buying a new home. This allows time to review and monitor your credit and to develop a plan that might expedite the process after meeting the minimum waiting period.

Will Higher Conforming Loan Limits be Reinstated to $729,750?

There is renewed hope that these limits may be extended in certain high-cost real estate markets. Late last week, the Senate passed an amendment to an appropriation bill that would reinstate the conforming loan limits back to $729,750 through December 2013.  The Senate and House now are working out the differences between the Senate and the House bill, which the House passed earlier this year.

Congress never should have allowed these limits to expire in the first place. We don’t know how much time this will take or if it will even happen so for now its business as usual with the cap of $625,500.

New Refinance Plan for Underwater Homeowners:

There’s has been lots of press this week about the enhancements to the Governments Home Affordable Refinance Program. The details won’t be released until November 15^th so I’ll write more about this when all the facts are known. On the surface it appears to me that it’s a little better than the earlier version of this program but still falls short of helping enough underwater homeowners refinance. It remains to be seen if lenders will still be allowed to impose their own stricter guidelines. I say the Government should not allow that and if they do the success of this program will be very limited.

Conforming vs. Jumbo Financing:

Last week I wrote about the weekly survey of mortgage rates published by Freddie Mac and reported by the media. From the calls and emails that I received I can tell that there is some confusion concerning the types of loans and interest rates so I thought I would elaborate a little further this week.

To read last week’s article, click here: http://www.rtcmortgage.com/Rates+Below+4%25+-+Really%3f

Basically, mortgage loans are categorized into three groups which determine interest rates: Conforming, Super-Conforming and Non-Conforming or Jumbo. Read on for more detail………

Conforming Loans:     

The rates that you see published by the media always pertaining to “conforming” loans. These are loans that meet the criteria set forth by the two Government-owned agencies known as Fannie Mae and Freddie Mac plus HUD which oversees FHA loans. These rates always pertain to loan amounts of $417,000 or less. Loans sold to these agencies by all lenders account for 99% of the mortgage financing in the U.S. today. They are called “Conforming” loans because they conform to the guidelines established by these governmental agencies.

Interest rates for Conforming loans are determined by the supply and demand for Mortgage-Backed Securities (MBS’s) which are traded in the financial markets all day long just like stocks and bonds. Therefore, the rates for these types of mortgages change every day and throughout the day. Neither the Fed nor Lenders set these rates.

Super-Conforming Loans or High Balance Conforming Loans:

These are loans also governed by Fannie Mae, Freddie Mac and HUD but they allow larger loans in certain designated “High-Cost” markets. The limit in Orange and Los Angeles Counties is $625,500 -recently reduced from $729,750. Interest rates for these loans work in the same manner as rates for the smaller conforming loans described above with the exception that loans between $417,000 and $625,500 are always about .25% higher in rate than loans of $417,000 or less. Again, the rates are changing all the time and are not set by the Fed or by individual lenders.

Non-Conforming or Jumbo Loans:

This category describes loan amounts above $625,500 that are not saleable to Fannie Mae or Freddie Mac. Accordingly, there are far fewer lenders offering true jumbo loans. IN general, the underwriting criteria and guidelines are stricter than they are for Fannie Mae/Freddie Mac and each lender is free to set their own rates and terms. However, in order to remain competitive I don’t see much variation between all of the lenders offering this type of financing. Interest rates are typically about .75% higher than they are for the loan amounts of $417,000 or less. Lenders typically adjust these rates daily also.

How to Finance More Than the Conforming Limit and Still Get the Low Rate:

Say you need to finance $800,000 yet you want the Super-Conforming Rate? Sometimes we can use what we call a “Piggy-Back” loan where we make a first mortgage for say $625,000 and simultaneously close a Home Equity Line of Credit (HELOC) for the rest – in this example $174,500.

Extension of Loan Limits of $729,750 Dead for Now

Despite efforts by Realtor and Mortgage trade organizations to fight for an extension of Fannie Mae, Freddie Mac, and FHA conforming loan limits, Congress failed to extend the $729,750 loan limits and allowed them to expire Sept. 30.  This means the maximum loan amount that Fannie, Freddie, and FHA will buy or guarantee is $625,500, and anything above that amount will be non-conforming and will require a jumbo loan.  AS explained earlier, these loans typically carry a higher mortgage interest rate and require a higher down payment, increasing the monthly payment, which will particularly be hard on middle-class buyers and sellers.

Our Government had a perfect opportunity to help homeowners and buyers by extending the loan limits. It just makes no sense to me that they would ignore something that could help so many people without contributing to our national debt. The California Association of Realtors estimated that this would affect as many as 30,000 potential home sales in California.

Rates Below 4% - Really?

Yesterday the headlines across the country screamed “Mortgage Rates Below 4% for First Time” and my phone rang off the hook with people saying “they lowered the rates, lock me in”!!!!

I actually locked a few deals in at 3.75% with no points last week so yes, rates did hit an all-time low. But, let’s examine the headline and what it really means.

Definition:

Every week Freddie Mac releases a report announcing the average rate for loans originated Monday thru Wednesday of the previous week on a 30-year fixed rate mortgage that is owner-occupied for an amount less than $417,000.

Things to Know:

·         Average implies that about half the people got a lower rate and half got a higher rate.

·        Points: Many of the articles fail to mention that most people paid a point or some fraction of a point for that published lower rate. Last week’s average point paid was 0.8%. On a $400,000 loan that’s $3200. Loans for 0-points were at a higher rate.

·         Not everyone gets the same rate. There are many factors that affect your rate. Credit Score and Equity are the two main factors but there are others. The best rates go to those with a combination of 40% equity or down payment and credit scores above 700.

·         Rates change every day and throughout the day. By the time you read the news, it is Thursday of the following week. So, you can assume that rates have changed numerous by the time the average figure is reported.

·         There is no “they”. Mortgage rates are not set by the Fed and they are not set by the banks or lenders that originate mortgages. Rates are determined solely by the supply and demand for Mortgage-Backed Securities that are created by Fannie Mae, Freddie Mac and Ginnie Mae and bought and sold in the financial markets along with other securities such as stock and bonds. These agencies account for 99% of all Conventional and FHA mortgages originated in the U.S. by all lenders.

So, remember that while the headline attracts readers, it’s only an average, and its old news by the time you read it.

Mortgage Rates This Week:

I hate to spoil the party but rates have risen slightly since last week’s Monday-Wednesday average rate of 3.94% with 0.8 points was reported. So don’t expect next week’s Freddie Mac report to show lower rates than this week.

 The spoiler was today’s monthly Employment Report. On the first Friday of every month the Government releases the official Employment numbers for the previous month. While the rate of Unemployment was unchanged at 9.1%, the number of new jobs created was higher than expectations. This caused a sell-off of Mortgage-Backed Securities this morning forcing rates a little higher.

How Do You Get the Best Rate?

First of all, you have to deal with a mortgage professional with the experience and knowledge of how mortgage rates work. We subscribe to services that alert us to the trends and patterns of MBS trading and help us determine the best time to lock in your rate. The banks are too big to manage this type of service whereas independent mortgage brokers can not only keep their eye on the moving target of interest rates but they also deal with multiple lending resources to find the most competitive terms to fit your needs.

Secondly, if you are refinancing and wait for the headlines, you will be too late. Make your application and get your loan processed. Once you are in the system I can watch the rates and take advantage of the dips which sometimes last only a few hours. Mortgage rates are just as volatile as the stock market these days and the average borrower has no chance of timing the market to take advantage of opportunities when they occur.

You can always visit the “Daily Mortgage Lock Advisory” on my website for current news about mortgage rates. Just click here:

http://www.rtcmortgage.com/DailyRateLockAdvisory

Do You Like Classic Cars?

Next Sunday, October 16^th is the annual Laguna Beach Rotary Club’s Annual Classic Car Show. This is always one of the best car shows anywhere. Click (or copy & paste) the link below for more information. I’ll be there and hope you’ll contact me for tickets and say “hello” at the show.

http://lagunabeadhcarshow.com

A “Pre-Approved Buyer” Has the Advantage!

The Pre-Approval process is one of the most important but often neglected parts of the home buying process. A pre-approval should always be obtained before a buyer even begins to shop for a home, no matter how well-qualified he or she thinks they are. Today’s mortgage qualification guidelines are full of potential traps that can prevent even a seemingly well-qualified buyer from being approved. A qualified mortgage expert can help a buyer in many ways if the pre-approval process is started early.

Pre-Approval vs. Pre-Qualification

First, let’s define the difference between a Pre-Qualification and a Pre-Approval

Pre-Qualification

A mortgage loan pre-qualification is simply an estimate of how much house you can afford and how much money a lender would be willing to loan you. This usually involves verbally providing information on your income, assets, debts, and a potential down payment amount to a lender. That lender would then provide you with an estimate of how much you could afford to pay for a monthly mortgage. There is no cost or commitment on either side. This estimate is just helpful in helping you figure out if buying a home is a viable option, and if so, what your price range would probably be. But, the lender did not verify your credit, income or assets, and it may not be worth the piece of paper that it is written on.

Pre-Approval

Getting pre-approved means that you have a tentative commitment from a specific lender for mortgage funding. In this case, you provide a qualified lender with actual documentation of your income, assets, and debts. This process requires an application and a credit report. Your loan application with credit information should be input into the Fannie Mae/Freddie Mac automated underwriting System to obtain an Approval. These Approvals are accepted by all lenders. If there is any doubt about your qualifications, the lender should also review it with an underwriter.

Once pre-approved, the lender will issue a letter of commitment, stating how much money they are able to lend for a home purchase. With a pre-approval in hand you can start your shopping. Real estate agents and sellers will take you much more seriously when they see you have your mortgage funding in place.

It is important to understand, however, that even a pre-approval is still not a guarantee that you will be approved for a mortgage loan.  The funding will only be given when the property appraisal, title search, and other verifications check out on the home you have chosen to buy. 

The pre-approval only takes a day or two once you provide the income and asset documentation.

What You Need for Pre-approval:

·         Most recent paystubs covering a 30-day period

·         W-2s for the two previous years

·         If self-employed, personal and business tax returns from the last two years

·         Two months of bank statements for each Bank, Investment & Retirement account

·         Loan documents on your current home (if applicable)

Benefits of Pre-Approval

·         Allows time to improve credit scores and structure your financing to obtain a better rate. Sometimes just 1-point in your credit score can affect the rate or even disqualify a buyer

·         Strengthens your offer – particularly helpful when there are multiple offers

·         Sellers will be more likely to immediately accept your offer, because you are giving the seller peace of mind that their home is sold and it’s OK to take their home off the market

• Enjoy a Faster Closing Period - The lender can speed up the entire processing procedure. Appraisals can be ordered immediately. The process that typically takes about 30-days can be shortened to just two or three weeks, which comes in handy if a seller needs to quickly move and can't decide which offer to accept
• Saves everyone time – the Buyer, Seller, Realtor and Mortgage Lender

As you can see, a pre-approved buyer has the advantage when shopping for a home. Just make sure that you are being pre-approved by a knowledgeable, reputable mortgage professional that has taken the time to review your documentation, run your credit and provide advice to structure your financing with the best possible terms for you.

Mortgage Rate Update: Another All-Time Low!

Yesterday 30 year mortgages had one of its best days in over a year. The Fed at one of their pre-scheduled FOMC meetings did what markets were expecting, plus more. The view prior to the FOMC policy statement at 2:22 yesterday was that the Fed would institute "Operation Twist" as it has been dubbed, selling shorter dated notes and replacing them with longer term notes and bonds to drive down long-term rates. The amount of shifting was expected to be about $300B, the Fed said it will be $400B. The Fed however surprised markets with the announcement it would turn back to buying Mortgage-Backed Securities (MBS’s) with principle pay downs on MBSs it now holds and instead of investing back into treasuries as it had been doing, investing in more MBSs. The reaction was swift in the mortgage market as MBSs soared in price and interest rates dropped.

The possibility of default by Greece and concern of an international recession have also helped to drive down rates this week in the MBS markets.

Whether buying or refinancing, my best advice is to act NOW!

You can follow the advice on whether to lock or float by reading the Daily Rate Advisory on my website. Just click here: