Simply The Best Loans

In 2003, congress passed a law for Fair and Accurate Credit Transactions entitled Financial Literacy and Education Improvement. This law called for the establishment of the Financial Literacy and Education Commission. The Commission established and sponsors/hosts the website www.mymoney.gov. This website is essentially an index or a collection of links to other Departmental websites containing consumer information–some of it is useful, but consists largely of static text, the content of which is general in nature and requires the reader (1) to be highly literate, and (2) to do further, extensive research.

National Strategy for Financial Literacy-2006 and, subsequent addendum, clearly calls for more consumer education, but stops short of defining the means by which to do so. This is in spite of the presence of a number of financial literacy training advocates among the Commission’s working groups.

Treasury Secretary Henry M. Paulson, Jr. spoke on October 16, 2007 at the Georgetown University Law Center on Current Housing and Mortgage Market Developments and stated,

“…Let me be clear, despite strong economic fundamentals, the housing decline is still unfolding and I view it as the most significant current risk to our economy.”

In the later half of his speech, he makes a number of statements which, inside the beltway, are considered a clear “call to action.”

“We need simple, clear and understandable mortgage disclosure. We must identify what information is most critical for borrowers to have so that they can make informed decisions. At closing, home buyers get writer’s cramp from initialing pages and pages of unintelligible and mostly unread boilerplate that appears to be designed to insulate the originator or lender from liability rather than to provide useful information to the borrower. We can and must do better.”

“Borrower’s have a responsibility as well. Mortgage providers must offer clear, transparent and understandable information on the mortgage products they sell. And home buyers have a responsibility to use that information. Buying a home today is a complex process, but than in no way excuses home buyers from their obligation for due diligence. Just as investors in the stock market have a responsibility to understand the risks associated with their investment, home buyers have a responsibility to understand their mortgages.”

“…we need to bring a higher level of integrity to the mortgage origination process. The development of a uniform national licensing, education, and monitoring system for all mortgage brokers is worth considering.”

It takes little effort or imagination to connect-the-dots from the Financial Literacy and Education Improvement Act of 2003 to the National Strategy for Financial Literacy of 2006 to Secretary Paulson’s comments, delivered just prior to a well-publicized meeting with the G7 Finance Ministers.

On October 22, US Representatives Brad Miller (NC 13th), Barney Frank (MA 4th) and Mel Watt (NC 12th), introduced HR-3915-The Mortgage Reform and Anti-Predatory Lending Act of 2007 in the House Financial Services Committee, where Rep. Frank presides as Chairman. This could be cause for concern if regulatory action, once implemented, becomes burdensome and costly to both the industry and consumers.

While the overarching problem effecting the mortgage industry is diverse and disparate in its origins, implementation of (1) a well-managed certification and accreditation program for mortgage professionals, (2) paralleled by a concerted effort to lift the veil of complexity on mortgage-buying for consumers, are an essential part of any solution whether devised by government or industry, and will serve to keep us from repeating this situation again when the market returns to good health.

When applying for a mortgage to buy a house, whether it’s your first or fifth, there is certain information your loan officer should tell you. It doesn’t matter whether you are applying for your mortgage with your local bank or with a mortgage broker, the information you want is the same.

First, your loan officer will have to pull a credit report to accurately qualify you for a mortgage. If you are qualified without having your credit pulled by the loan officer, then your qualification is not necessarily going to mean that you would actually qualify for a loan. In such a situation, the qualification would only mean that your debt to income ratio falls within the lender’s guidelines.

Assuming that the loan officer has pulled a credit report, they should tell you what your credit scores are. Credit scores over 620 are considered acceptable and/or average credit. Credit scores over 720 imply that you have an excellent credit history. Your credit report will also indicate if you have had any late payments, have any accounts in collections or have any judgment outstanding. If you find that any one of these kinds of things showing on your report—don’t panic. Unfortunately, it is becoming more and more common that such items are being reported in error. If this is the case, your loan officer should provide you with all pertinent information from the report so that you can investigate the situation and have it corrected.

For credit issues that need to be addressed (e.g. Collection accounts or outstanding judgments) your loan officer should offer you information for what you need to do in order for your issue to be addressed and pass the underwriting requirements for a loan. (For further information on correcting credit reports and addressing credit issues, see www.protectyourgoodcredit.com)

A complete pre-qualification for a mortgage loan will include a review of your gross monthly income, your monthly debt (total of minimum payments on all accounts, not including rent or current mortgage payment or utilities), and your credit scores. Once completed, your loan officer should provide you with a pre-qualification letter for your real estate agent or for the seller of the home you wish to purchase. Pre-qualification should not be confused with pre-approval. To be pre-approved for a loan, your loan officer must submit a completed loan application and a credit report to a lender for underwriting. The application will either be denied or approved pending certain underwriting conditions being met. Loan commitment is given by the lender only after all conditions are met and the loan is ready to schedule for closing. It is very important to understand these distinctions as both realtors and many loan officers will often use the terms interchangeably despite their specific differences. –Continued in Part II-The Good Faith Estimate.

Routinely couples, whether married or just in a commited relationship, will come to my office to apply for a mortgage and only one of the parties present is aware of the “family” finances. Or, one member of the couple will come in to get the process started because of work or scheduling conflicts of the other individual, only to discover they don’t know enough about their joint finances to go through the application process.

Do you know where the money is? Do you know how it’s invested? Do you know what interest rate you are paying on your credit accounts and/or current mortgage? Where are your important documents kept? Who is your insurance carrier? These are all fairly basic pieces of financial information but, more often than not, only one member of the couple knows the answer. Show me the money! Let’s talk Turkey! However you want to say it, it boils down to one thing, both individuals should know what their financial picture looks like.

For anyone to be able to maintain a good financial and credit history, they first need to understand what they have, what they owe, how much interest they’re paying for it, how it is insured and where the supporting documentation for everything is kept. It is fine for one member of the couple to handle the details of paying the bills, making the deposits, etc. as long as both are aware of the overall situation. Remember, sharing finances with someone means that you get the good with the bad. If one party is great at making sure the the bills are paid on time each month, then both will benefit. However, if the party responsible for paying the bills isn’t timely, both will suffer the credit consequences.

I hear comments from clients such as “well, he does a better job with that than me” or “she’s just more organized than me” and allowing the person with more organization skills or financial savvy handle the day-to-day responsibilities is fine. But that does not mean that you can abdicate your responsibility in maintaining a good grasp of your financial picture.

As a couple, it is imperative in sharing finances that you have shared goals for your financial future. Most people argue over money because they are not in agreement on what should be done with it, how it should be invested or what it is spent on. If you take the time to sit down together, review your finances regularly and agree on what your finanical goals are and the process you plan to use to achieve them, then the likelihood of arguments over money is greatly reduced. It may mean you have to agree to compromise. One individual believes in the need to save funds in safe, insured accounts, while one individual believes in the need to invest in potentially riskier ventures, you may have to agree to do a little of both. Or you may agree to be more conservative now in order to have the flexibility for more adventurous investing later. It doesn’t matter how you decide to compromise as long as you both understand the ups and downs of the decisions you make.

This is where the help of a good financial advisor and/or CPA can be beneficial. Also, there are numerous good books readily available, at the local bookstore or library, to assist you in understanding and developing your plan. Whatever you want your financial picture to be, it can be realized if you are willing to invest the time, focus and research necessary to make it happen.

Few people go into a marriage with thoughts of what they need to do once the marriage is culminating in divorce, unfortunately, in most cases that’s exactly what they should do. Statistics show that more than 50% of all marriages end in divorce. While there are numerous issues that have to be addressed when a marriage is ending, since a home and its mortgage are most couples’ biggest financial commitment, it is one of the most important.

For those that haven’t faced this situation before, let me clear up a couple of common misconceptions:

If the mortgage is in both names, both parties are fully responsible for the payments. Even if the decision is made for one party to accept responsibility for the payments while going through the divorce process, whether through a verbal agreement, a legal separation agreement or by court order, should that party not make the payments timely, it will affect the credit of both. Lenders do not overlook late payments reported on a mortgage or any other credit line just because you have an agreement, even if legally binding, stating your estranged spouse is responsible for the payments. If the credit is joint, you are 100% accountable for the debt and that’s the way the lender views it.

I’ve had more than one client attempt to purchase a new home after going through a divorce only to discover their credit has been severely damaged due to their former spouse’s late payments on their old marital residence mortgage. The best advice I can offer is to personally check each month, even after payment responsibility has been assigned to the other party, to ensure the payment is timely. While it may be a tremendous financial burden, if you find the other party has not made a payment timely, make it yourself before the payment can be reported as 30 days late. In the long run, it can mean the difference between maintaining your good credit history over having credit that is too damaged to allow you to qualify for another mortgage.

Lenders can repeat credit checks at anytime before a loan closes even after loan approval for certain terms has been given.

Many individuals facing divorce don’t want to wait for it to be final before attempting to purchase another home. Often individuals in this situation want to quickly re-establish a home for themselves and/or their children. One common assumption is that when a lender checks a borrower’s credit at the time the loan is submitted and outlines the terms they are willing to offer, the borrower doesn’t have to worry that something derogatory might show up on their credit later. Unfortunately, many lenders routinely pull credit again, just prior to closing. If the credit scores have dropped at all or late payments, previously unknown, appear, the lender can deny the loan or change the terms. There is nothing worse than being a day away from closing and getting a call from the lender saying that they are denying the loan or raising the interest rate or increasing the required down payment amount or some combination thereof.

The best course of action for anyone, regardless of their personal situation, is to make sure they are careful to maintain their credit history while they are going through the mortgage process. Make sure to pay all bills on time and avoid applying for any new credit during the process. Then if the lender does pull a new credit report 2 days before closing, the new report should be the same and the lender will have no cause to change the terms of the loan.

Again, there are no easy answers when a marriage is ending, but, with the help of a qualified legal advisor, some issues can be resolved easily by considering one or several of the following options:

1. The spouse that has agreed or been ordered to make the mortgage payment can refinance the mortgage into their name solely, thus eliminating the joint mortgage account and risks associated with it.
2. Close out any other joint accounts immediately ensuring that each individual’s history is protected from activity of the other.
3. If the above are not options for any reason, each party should personally check that any joint accounts are being kept current. If a delinquency is discovered, make sure the payment is made, even if you have to wait to recover the money from the responsible party later. Protecting your credit is paramount.

Armed with the knowledge of how to avoid potential financing and credit pitfalls when going through a divorce can mean the difference between a positive credit history and a poor one. A poor credit history can impact your finances and credit options for a long time after the divorce is final.

Every real estate investor is looking for a “deal”. A property priced well below market, usually as a result of some financial difficulty of the seller, such as potential foreclosure. Financially-strapped sellers will often sell their property 10, 20, sometimes 30 percent or more below it’s appraised value to avoid foreclosure or to cash-in on whatever equity they can get to deal with their financial crisis.

An investor client of mine recently shared the following information with me. While discussing a potential purchase with an attorney, he was told that the recent changes in bankruptcy law could create a risk to an investor that purchases property from someone who may be on the verge of filing for bankruptcy protection. While new laws are sometimes unclear until tested in court, it’s always prudent to investigate what new risks may be posed by changes in the law.

As it was presented to my client, the new bankruptcy laws may create potential risk for investors who buy property 10% or more below its market value. The new laws indicate that there is potential risk if a seller sells his/her property more than 10 percent below it’s current market value and then files for bankruptcy protection anytime within the next 10 years, the bankruptcy court may have the option of pursuing the buyer for the difference between the sale price and the appraised value at the time of the sale.

An example: An investor buys a house valued at $100,000 for $70,000 and the seller files bankruptcy anytime within the next 10 years, the buyer could have to pay the bankruptcy estate the full difference of $30,000.

Before the purchase of any investment property, I recommend that investors find professional legal and financial advisors that have experience with investment property to assist them. When considering an investment purchase that has any unusual circumstances surrounding it, it is best to carefully review any legal or financial ramifications with your advisors first.

Many of my mortgage clients routinely ask me about homeowner’s insurance. I always recommend that they get quotes from their current car insurance provider, if possible, because it can mean some premium discounts for multiple policies with one company. While the credit history isn’t affected the same way it is when credit is pulled for a mortgage, credit is pulled by insurance companies as part of their process for determining your insurance premium.

Those with the best credit get the lowest possible premium payments. Borrowers with less-than-steller credit pay much higher premiums for homeowners coverage. If you have less-than-perfect credit and are buying a new home, get quotes from two or three insurance carriers. Ask about discounts if they cover your other insurance needs such as car, life, disability, etc.

Insurance is required by mortgage lenders and, if you have a loss due to something unexpected, you’ll be glad you have it, but do take time to determine the best insurance carrier for your needs, financial picture and credit history. Be sure to have your agent review the policy with you in detail so that you fully understand your coverage. Shop for the best rate available to you. Some carriers include items as part of their basic coverage while others may charge extra for the same item. Make sure that when comparing carriers that you’re comparing “apples to apples” on the coverage.

Loan programs require certain criteria for qualification. In addition to meeting this criteria, the borrower’s particular financial picture such as credit score, the loan amount, the loan-to-value (the percentage of the loan amount as it relates to the sale price or appraised value), the choice of loan program, and/or the type of property can all contribute to changing the cost of the loan.

As previously outlined, lenders quote interest rates with corresponding yield spread premiums. Then the lender has pricing adjustments for all the different variables possible for one loan. Pricing adjustments can be as little as .125 percent of the loan amount up to 5% percent or more of the loan amount. Calculating these pricing adjustments correctly for a specific loan can be one of a loan officers biggest challenges.

Rate sheets vary from lender to lender, program adjustments vary from program to program and everyone’s financial picture is different. With so many variables going into the determination of loan terms, it is virtually impossible for a consumer to compare apples to apples in shopping for a mortgage. It can also be counter-productive for a borrower to attempt to do so.

If a borrower is “shopping” a mortgage with multiple companies s/he risks having too many credit checks, getting confusing or misleading information and possibly having duplication of upfront service fees for appraisals, credit reports, etc. The advantage to working with a professional mortgage broker is to have an experienced professional do the shopping and evaluating for you and then give you an overview of your best options. The broker’s focus is to get the borrower the best possible terms for his/her financial circumstances and needs.

Is Fed tightening of interest rates over? Has the bond market gone bust? At first glance, it would seem that rising interest rates and lower yields are driving the economy into a recession. However, a recession isn’t an inevitable event when yields flatten and rates go up, it’s just an indication of changing market conditions.

To protect and build your assets, no matter what market conditions exist, you have to be realistic and disciplined. First and foremost, assess your income and your spending. Are you saving at least 10% of what you earn? If you own a home, are you paying toward the principal balance each month, even if you have an interest-only loan? Do you have unsecured debt, such as multiple credit cards? Do you make more than the minimum payment on them each month?

It doesn’t matter what your income is. I have clients that have six-figure incomes who live paycheck to paycheck and I have clients that make as little as $25,000 a year who have enough liquid assets to live comfortably for a year or more, if they lost their jobs. The difference? Preparation and planning!

An investment advisor I know once told me that the right investment is just like the right mortgage, it is dependent on numerous varibles that are highly individualized. Think about it— a lottery ticket is a great investment if you have the winning number—the odds of having the winning number, however, are not very high. If your preparation and planning efforts are like those of playing the lottery—one small effort with expectations of one big payoff—your finances are probably not well-protected against either a recession or unexpected income loss, such as a disability or lack of employement.

Tax season is a great time to think about recession-proofing your finances because it’s the time of year that most everyone is reviewing and evaluating their overall financial picture. Did you invest this past year for retirement? Did you put money into a liquid asset fund to be available if you find yourself suddenly without a job? Are you paying down the principal on your mortgage to build equity instead of counting on appreciation to create equity?

Find yourself a professional financial planner that can assist you in creating a realistic savings plan. With his/her help, choose low-risk investment opportunities that provide solid returns year in and year out, despite changing market conditions. Pay down the principal balance on your mortgage. Pay off unsecured credit cards and use them sparingly or only in emergencies in the future.

Plan and save now for the life you want in the future! It’ll be here sooner than you think!

Yield Spread Premium—a percentage of a point that is offered as a rebate on particular rate of interest by a lender. Rate Discount—a percentage of a point charged to the borrower for a particular rate of interest.

Recent news on mortgage industry practices indicates consumers must become not only more educated about the borrowing process but more vigilant in reviewing the information provided to them by lenders. While regulators attempt to protect consumers with an ever increasing number of forms and mandated disclosures, real protection for consumers will only come when they are educated about the process and able to easily decipher the information they are given about their loan terms and settlement fees.

Hidden costs continue to be the bane of most consumers. One item that some consider hidden is the yield spread premium (YSP) that lenders quote on their daily rate sheets. There are those that would claim the YSP is a hidden fee even when it is disclosed on every settlement statement and clearly indicated as being paid outside of closing (POC).

While it is possible for unscrupulous loan officers to use this as a means to make more money on a loan than they would otherwise, reputable loan officers and mortgage brokers make borrowers aware of the YSP and disclose when and where it comes into play during their loan process.

To fully explain how this works, you must understand how lenders quote interest rates on a daily basis. Most lenders publish a rate sheet which shows a rate spread of somewhere between 1 and 2 points. On the lower end, a given interest rate will either cost the borrower a percentage of a point or will offer a YSP of a percentage of a point. The rate closest to or at 0.0 is considered the par rate for that day.

To illustrate, the chart below is what a lender will issue to its loan officers at the opening of each day. Rates can also fluctuate numerous times throughout the day as market conditions change. New rate sheets are re-issued during the course of the day as well. The following rate chart is from a rate sheet issued by a lender this past Friday. These rates are for a conventional conforming 30-year fixed rate mortgage.

Rate 15-Day 30-Day
5.125 3.125 3.250
5.250 2.375 2.500
5.375 1.750 1.875
5.500 1.125 1.250
5.625 0.500 0.625
5.750 0.000 0.125
5.875 (0.500) (0.375)
6.000 (1.000) (0.875)
6.125 (1.500) (1.375)
6.250 (2.000) (1.875)
6.375 (2.500) (2.375)
6.500 (2.625) (2.500)
6.625 (3.000) (2.875)
6.750 (3.125) (3.000)

Reading this chart a loan officer would know a borrower buying a new home wanting to lock a 5.25% interest rate for 30 days would have to pay the lender 2.5% in discount points plus any other adjustments the lender requires for property location, loan size, credit scores, program costs, etc. Par rate for this lender was 5.75% for a 15-day lock. If the borrower wanted 5.75% and to lock for 30 days, it would cost the borrower .125% of the loan amount in discount points.

If the borrower did not want to pay any points for loan origination or loan adjustment fees, the loan officer could quote the borrower a rate that offered a YSP to cover those costs. The yield spread is indicated by the parentheses around the numbers following the interest based on either a 15- or 30-day lock period. If the cost of origination and lender adjustments for credit, program, property location, etc. added up to 2.5% in points, the loan officer could quote a 6.5% rate of interest and lock for 30 days. With this rate, the borrower would have no fees for origination or lender loan adjustments at settlement which would significantly lower his/her closing costs.

Next, lender loan adjustments offset by YSP.

Many of us make up a list of the resolutions we intend to make for the New Year. Whether you’ve decided to diet, exercise, work more, work less, travel more, or change jobs, it’s not likely that you’ve made any resolutions regarding your homes. Maybe you should.

For most of us, our home is our biggest investment and also our biggest asset but without regular maintenance and care, it can become a huge liability. Small things can become big issues if neglected.

If you know that you have minor repairs around your home that you haven’t gotten around to fixing, make a list of your home resolutions for the New Year. List all small repairs needed and then give your home an annual “check-up.”

On CNN.com, Money magazine’s Kate Ashford offers an excellent month-by-month guideline for home maintenance. Regular “check ups” can help you make the most of your home investment. To read the article, click here.