Why I’m Mad at the New York Times and their view of the Mortgage World…..

admin — Tue, 14 Jul 2009 14:00:38 +0000

Here is an article where i disagree with the author. If you read the entire post, you will see that the New York Times wrote an article detailing just how difficult it is to get a mortgage now days. The author of this post strongly disagrees with the times. But as a mortgage professional myself since 1999, I have to say that I think The Times is right on the money here.

You read and you decide.

Here is the post:

I read this article over the weekend and it was so full of inaccuracies and distortions that I had to share my perceptions on it. My comments are in bold and italics….. and I’ll have more at the bottom.

Tight Mortgage Rules Exclude Even Good Risks – NYTimes.com

Inna Komarovskaya was ready to do her part to revive the economy: She found a “really cute” condo to buy.
Despite a good credit score, a six-figure income and an ample down payment, Dr. Komarovskaya, a recent dental school graduate, could not get a loan. Her mortgage broker told her she ran afoul of new rules requiring two years of sufficient tax returns from some home buyers, instead of only one……

Tom here – the way they say it makes it sound like they are randomly saying, “we need two years tax returns rather than one.” Let me tell you the details that I “know” they aren’t putting in the story: Dr. K recently graduated from dental school and then, rather than going to work for a practice with a guaranteed salary, either started her own practice or bought into a practice where she has an ownership stake in the practice. Because of her ownership interest, the mortgage market is going back to what they have required for years which is a 2 year history to verify income. Is that a new and restrictive guideline? Nope, it’s going back to the way things have worked for a very long time.

The recession is the major reason sales are dragging, of course, but it is not the only one. As Dr. Komarovskaya found, buyers once viewed as perfectly qualified are being denied mortgages……

Tom here – “once viewed as perfectly qualified?” As in, perfectly qualified for a subprime loan? Perfectly qualified for a stated income loan? Perfectly qualified for one of the loans that is performing so badly it was the “match that light the fire that almost blew up our financial system?”

The credit pendulum is stuck at ‘stupid,’” said Lou S. Barnes, an owner of Boulder West Financial Services, a Colorado mortgage bank. “I am turning down loans every day that my grandfather in his Ponca City, Okla., savings and loan in 1935 would have been happy to make. And he was tough.”………
Tom here – I’d like to talk to this Lou Barnes and find out what his customer baser is like. Am I talking to customers on a daily basis who can’t do what they want to do? Yeah, I am. But why? Not because the guidelines are too tight, but because the bubble burst and property values have fallen. It’s not stupid lending to refuse to do a “secured” mortgage at 130% of the value of the property.

The denials are occurring for a wide array of reasons: the buyers’ incomes are adequate but irregular; they are self-employed and take many deductions, reducing the taxable income on which lenders focus; their credit scores are below the cut-off point, which has been raised drastically; their down payments are less than 20 percent……
Okay, I think I can disagree with a lot of things in this sentence:

Adequate but irregular – Gee, hasn’t the mortgage world always (as in like since I was in 1st grade?) taken a 2 year average to deal with irregular income? So what’s the problem now? The problem now is that too many people are used to dealing with mortgage rules that allowed virtually anyone to get a mortgage. Those days are over.
Self employed and take many deductions, reducing taxable income: This one has bothered me for a long time. For many many years, well educated lenders have known that true non-cash writeoffs that self employed people take on their tax returns can be added back to their income. The cash expenses – well, guess what “cash expenses” means? It means that you actually paid them. Now some of you are probably saying, “But I write off the payments on my car loan, so why should that penalize me?” A couple of things about that: 1) If you are writing off your car loan and doing it appropriately, you should have absolutely no issues providing enough documentation to your lender so that while you can’t count it as income, at least you don’t have to have it counted as a liability. 2) If you structure things in such a way that you can use “pre-tax” income to pay for personal expenses, then you end up not having the same amount of income to qualify for a long, but employees don’t have that option.
Their credit scores are below the cut-off point, which has been raised drastically; Yeah, the cut off points have been raised drastically for credit scores. Why? Because the people with lower credit scores are a large amount of the people who are delinquent on their mortgages. But guess what? Through FHA, we’re still doing doing mortgages for people with credit scores down in the lower 600’s. So, if someone has a credit score that’s too low for an FHA mortgage, then yes, they areally shouldn’t be getting a mortgage.
Their downpayments are less than 20%. Have the PMI companies instituted what are called “restricted markets?” Yes. What does that mean? It means that if you are located in a restricted market, you have to come up with an extra 5% down. Take the state of Michigan for example. We are, according to some PMI companies, a restricted market, so rather than being able to do a 5% down conventional mortgage, we’re limited to a 10% down mortgage. Oh, and how about FHA and VA? According to what I’ve read, FHA and VA are in excess of 30% of the entire market. So, there are a lot of options without 20% down.

Fannie Mae, the government-controlled company that buys mortgages, is so dominant in the lending market that its rules set the standard. It recently toughened its policies, saying it would count only 70 percent of the value of stocks and mutual funds when calculating a buyer’s assets. Previously, that figure was 100 percent…….

Once again, that’s not true. If you have a current statement for a mutual fund AND IT’S NOT RETIREMENT FUNDS, you can use the entire amount because you could liquidate it Monday and get the money by the end of the week. But, if the money is in an IRA, 401K, 403B, deferred comp plan or anything like that with tax deferred advantages, then yes, they’ll count 70% of it. Why? It’s pretty simple. If I went and wanted to cash in my 401K plan on Monday, they would take 20% of it and withhold that for taxes and 10% because I’m under the age where I can take the money out without penalties. So, assuming I had $100,000 in my account, how much would I get? $70,000. But come on, this isn’t something new.

Mortgage brokers say those who are being rejected for loans are often entrepreneurs who are used to taking risks. “They are chomping at the bit to get into this market, but are forced to the sidelines,” said Stuart Fraass of Guaranteed Rate Inc. “If you’re self-employed, you have virtually no chance of getting a mortgage now.”……..
If you are self employed, don’t claim all of your income, write off a lot of personal expenses as business expenses, haven’t been in the business for at least 2 calendar (tax return) years, yes, you’re going to find it challenging to get a mortgage now. But if you are self employed, are showing a profit and are reasonable about what you want to borrow, you should be good to go. If that applies to you and you are having troubles getting financed, call me.

Mr. Fraass was unable to help Raghbir Singh, a real estate investor who owns a gas station in Dover, N.H. Mr. Singh tried to buy a $301,000 house for himself and his family with 10 percent down and excellent credit, but was rejected. “It was unfair,” Mr. Singh said. “I’m a good risk, but I’m forced to rent.”

A couple of things about this story that don’t “line up.” Let me explain: 1) Mr. Singh is a real estate investor who claims that he’s “forced to rent.” What’s up with that? 2) I’d be willing to venture that Mr. Singh’s tax returns don’t show quite the same income amounts that he’d like to “tell you” he makes. 3) “I’m a good risk?” Didn’t we get away from the borrower underwriting (stated income loans) because they performed so horrendously?

Members of Congress are proposing to extend and enlarge an $8,000 credit for first-time buyers, which is due to expire in December. One bill would extend the credit to all buyers through next June. Another would extend it to all buyers through 2010. A third bill would expand it to $15,000 for all buyers.

Remember – none of these have been approved yet.

Some economists, noting that tax incentives helped stoke the boom, say these proposals should be shunned. “When do you decide enough is enough?” said the housing consultant Ivy Zelman. “I don’t want to feed the drug addict with more drugs.”

Housing consultant? That’s a unique title that doesn’t tell us anything. I do believe that you can make a clear case that tax incentives were an influencing factor and I think she raises a valid point. When is enough enough? However, it smacks of irresponsibility to imply that the tax credits are responsible for the mess. I’ve said before that a tax credit for all buyers would be counter productive. All that would do is shuffle inventory. I do believe that the housing market would be in much worse shape if we didn’t have the $8,000 incentive for those who are renting to buy and that will probably be extended.

Okay, a couple of additional thoughts to wrap things up:

In case you can’t tell, this sort of “half story” journalism really bothers me. Is the mortgage world a lot harder than it was 3 years ago? Absolutely. But don’t tell lies and fabrications and half truths that make it seem worse than it is.
Can people still get a mortgage? Absolutely! If you have a downpayment (as little as 3.5%), verifiable and stable income, are looking at buying a house that is reasonable for your income and debt levels and have decent credit, you’re good to go.
This is exactly why I wrote my book, “Straight Talk About Mortgages – How to Survive and Thrive in Today’s New Mortgage World.”
The world already believes the mortgage industry is dead. It’s not and we don’t need irresponsible stories and half truths making it worse.

Mortgage Commitment Letters

admin — Wed, 17 Jun 2009 13:38:46 +0000

Mortgage Loan Commitment And Mortgage Prequalification Letter Myths

Every day at my office I get calls from Realtors with whom I work asking me for a prequalification letter for this client or that. A prequalification letter is nothing more than a letter on a mortgage company’s letterhead. It is not a mortgage commitment.

If you have ever read any mortgage company reviews, you will see that Just because a loan officer or lender issues you a prequalification letter, it does not mean you will be approved for a mortgage loan.

The mortgage prequalification letter states that the loan officer has reviewed the home buyer’s credit, income, work history etc and that the borrower is “Pre-Qualified” for a mortgage with a certain dollar amount.

Notice that the word is “PRE-qualified”. Pre meaning before the actual qualification.

Almost always, these letters state that the pre-qualification is not a mortgage commitment and that a commitment may only be issued after a complete loan package has been reviewed.

What does this mean?

What it means is that a pre-qualification letter is not worth the

paper it’s written on.

It is non binding, and the lender or broker is in no way obligated to issue a mortgage to you.

A mortgage loan commitment on the other hand is a document which virtually guarantees that you will receive a mortgage as long as you provide the lender with all the documentation and conditions required.

Your loan has been reviewed by an underwriter and is approved.

A mortgage loan commitment is binding and the lender must issue the mortgage if you fulfill all the requirements. After the lender issues a commitment letter to the borrower it has to fund that loan. It can not “change its mind” as to weather they want to give you the money or not.

So why is this important?

First of all, loan officers write pre-approval letters all the time at their own discretion. It’s nothing more than his or her opinion.

So the bottom line is that you may have been pre-qualified for mortgage, but when it comes right down to it, you may not be able to actually get approved for a loan.

I’ve seen cases where clients have gotten pre-approval letters, gone out and put a deposit on a home, packed their furniture, rented a moving van only to find out at the last minute that they were turned down for the loan.

This is a terrible crisis. They lost their home, their deposit money, everything. And on top of it, they have nowhere to sleep.

Avoid all this and get a Mortgage Loan Commitment from the start.

Not only will you avoid the possible nightmare scenario that I outlined above, but you will also have more bargaining power.

When you negotiate for your new home with a seller, having a mortgage loan commitment in your hand is virtually the same as being a cash buyer.

This gives you much more leverage than the buyer who merely has a pre-qualification letter. It says to the seller that you mean business and it presents virtually zero risk to the seller.

A mortgage loan commitment will help you win the home over a competitive buyer and can also help you negotiate a lower price for the home.

In my opinion the best place to go for a loan commitment is LendingTree Mortgage Loans .

Lending Tree is great because they are a one stop shop and they can have up to four excellent loan offers in front of you very quickly. Getting a Mortgage Loan Commitment through Lending Tree, makes the process a piece of cake.