When it comes to that credit approval waiting for the offer to be accepted, what was good last month may not be good today. Guideline’s and lenders interpretation of same are very tight and getting tighter. Consider this, Chase and Wells Fargo are steering very clear of any mortgage transaction that is remotely close to the outer edges of “the guidelines” because they are fearful of massive buybacks.
What are the red flags you need to be aware of with any transaction?
The credit score – this is not new but lenders want scores well above 700. If the usable score (lowest mid-score of all borrower’s) is below this number then everything else better be ship shape
DTI- this is Debt to Income ratio. The maximum ratio is 43.99% for conventional loans with extra latitude for FHA loans. VA uses a residual income approach. On each loan the key component is how income is calculated. In many transactions I have seen this year; the adjustments to income can seem draconian. Think worst case scenario and adjust downward from there until your banker issues that credit approval.
Housing to Income Ratio – the same approach to income but the preferred ratio is 28%. You need every other part of the credit package to be solid to venture above this.
Income – what used to work may not work anymore. The self-employed seem to be the hardest hit and this has always been the case. However, a downward blip on last year’s income can send lenders running because of the “ability to repay” component of a Qualified Mortgage. There really is no guidance on what “ability to repay” means and this is why big banks are running for fear of buybacks.
What does this mean for you? Make certain you understand all of the components of your credit approval whether the buyer’s agent or the buyer. Once your credit approval is in place, put your financial picture in stasis until the transaction is closed.
Where is the best place to seek a credit approval? I am partial to the small, independent mortgage company with a local presence and a record of longevity. Unlike big banks, they only have one way to make money and that is closing loans.
The cost of originating a loan literally jumped from one quarter to the next, caused primarily by coping with compliance. What does this mean for the consumer?
Certainly, increased costs will be covered by higher fees and/or higher rates. Expect cash strapped first time buyers to be insistent on closing costs being paid by sellers. Will this put a strain on valuation when it is time to appraise? Right now, this is not likely with the shortage of inventory. However, when things cool down (they always do) expect real challenges getting top value for a seller while the buyer seeks the concessions they need to close.
Nationally, we are in a housing recovery but from my view, it is tenuous. In our region, the market is strong and will likely stay that way, unless rates take a ridiculous and unexpected jump.
What does this mean for you? I recommend making hay while the sun shines.
I was speaking with one of my colleague’s and he was frustrated. He had taken a loan application on the 30th of April and had docs to escrow on the 15th of May for signing and funding on the 16th . It was business as usual with the typical dynamics in play such as the borrower wiring funds, moving trucks ready to unload and the sellers expectations met. You can imagine his consternation when the buyer of his clients’ home in Spokane had a glitch at closing. The funds to close his local transaction were coming from the sale of the Spokane home. Uh oh!
Ever diligent, he was immediately in touch with the Spokane selling agent and then the mortgage loan officer in charge of the buyer’s financing in Spokane. The good news was it truly was a glitch and the Spokane loan closed a few business days later and in turn, my colleague’s transaction funded. As you can imagine, it was not without furrowed brows and stress on this side of the mountains. But what if there is a real problem that could have been foreseen?
This situation is not rare and it raises the question, how far do you go as the listing agent to represent your seller’s interest when you have an otherwise good (or only) offer contingent on the buyer’s home selling? And what if that contingency was one of two or three? When I spoke with one agent, she was adamant she would quiz the listing and selling agents as well as the loan officer on each of the other contingencies until she was satisfied all of the transactions would close. Other agents were less strident about how to manage the situation, and understandably so. My question is this, as a listing agent or an agent representing a buyer in a contingency chain; would it not be better for the licensed loan originator to manage due diligence for you? They are the lending professional and know the right questions to ask without triggering a situation where the other borrower’s financial privacy could be compromised. And they can give you the assurance you need by backing up what they learned with credit approvals and relevant information about the other transactions.
By all means you should expect the mortgage banker on each link of these contingencies to be cooperative and as transparent as is legally allowed. For the lender, a chain of contingencies can present a challenge with verifying funds to close, qualifying their borrower and the actual credit approval. Real mortgage pros will talk to each other, share information appropriately and will be responsible for their part in this chain. Whether you do it yourself as an agent or rely on your chosen mortgage professional, it is a due diligence component that should always be followed.
I would love to learn what you think about this. Click on the link above this post to leave your comments.
The Mortgage Industry Is struggling; National Mortgage News reported today profitability of the industry for Q4 2013 was down 7% from a year ago. Increased competition, as well as increased compliance costs were the big reasons for the large drop in profit per loan originated in the fourth quarter. The average profit of $150 per loan is the lowest since the Mortgage Bankers Association started keeping track in 2008. The MBA reports the average is down from $743 in the third quarter and $2,256 in the fourth quarter of 2012. This is a drastic decline by anyone’s measure.
What does this mean for you? At the moment, no real impact. You can expect major cost cutting from all lenders, re; layoffs and office closures. In the future, fewer choices as company’s disappear or consolidate could put pressure on rates, regardless of easing or the economy.
Home Sales Continue To Slide; NAR reported pending home sales were down 0.8% as expected. This is the lowest level of pending sales since Oct 2008. Pending sales have been declining for 8 consecutive months. Many believe this national trend was magnified by the harsh winter. I think this is so. However, residential real estate is local and national trends don’t mean a thing in your local market.
What do you do if you are on the fence about whether to list, buy, remodel, expand or do nothing? Consult your local real estate professional. If they are pro’s they will know what is going on n your local market and can give great advice you can trust.
Bin Laden is dead, and we are coming up on ten years of engagement in Afghanistan with no clear solution in sight. I believe we need to try something different.
This is my solution for bringing peace to Afghanistan:
Divide the country into the Southern 2/3rd and the Northern 1/3,
Round up all the men, every one;
Move the men to the northern third, assure them they are still in charge as they presumed and name their country Af-Man-Is-Tan;
Send the women and children to the southern 2/3rds, put the women in charge and call it New Afghanistan – it will be a Taliban free country;
Build a wall, fortress style, between the two countries just like the Great Wall of China but call it the Great Wall of Change, US troops and their allies will secure the wall, built as a fortress to keep them as safe as possible;
Mandate a free market for New Afghanistan and Af-Man-Is-Tan and the means to create, acquire and finance private property;
With the women in charge of New Afghanistan we will sell them the resources to create their own government, economy and culture – they are in charge of everything;
Do the same for the men;
After functional government and economic infrastructure has been established in New Afghanistan the men will be allowed to petition for integration into New Afghanistan. The women will decide who is allowed to immigrate based on their own rules, created and enforced by them. The same will be true for women wishing to immigrate to Af-Man-Is-Tan. While it is obvious why men would want to immigrate to New Afghanistan, you can be certain there will be women who will petition to immigrate to Af-Man-Is-Tan. Think Tina Turner as Aunt Entity in “Mad Max Beyond Thunderdome.”
My theory is this – the women will create a balanced, productive society and I doubt Af-Man-Is-
Tan will survive. I predict Af-Man-Is-Stan will quickly embrace traditional ways and devolve into a nation of warring tribes.
There are undoubtedly thousands of good Afghan men who could go into their wilderness with a pocket knife and a magnifying glass and create a shopping mall. But the women will more quickly organize, work cooperatively, build a better shopping mall and everything will be on sale!
Does this sound stupid? Maybe not. The British, Russians and now us (so far) have failed miserably in the region. I say we put the women in charge and get out of their way.
I call it Lysistrata 2011
PS I read this to a very dear friend of great intellect and she asked, why can’t we do this in our country. I quickly replied, ‘no!” The overwhelming majority of men in this country are good, mean well and in no way, shape or form do they resemble the Taliban.
PPS Who would I send as envoy’s from the United States to assist New Afghanistan in their new venture? May I suggest a team from the Women’s Council of the National Association of Realtors. They know how to get thing done and they have a great national leader in Margo Willis.
Just think how easy life would be if we could buy a kit house from the internet for under $2,000. Life was good in 1903.
Fast forward to right now and things seem very different. Or, are they?
You see, in 1903 the average price of a home was $2,200. But wait, the average annual income was $700. When you apply a traditional benchmark of home affordabitliy, that $700 transalates to a home price of $1,750. This is very close to the kit price of the above home. Add the cost of the dirt and of course, labor and you have a home that would have a cost of at least $2,200. One thing we can learn from this is housing was expensive in 1903. If you were making $700 a year how long would it take you to save $2,200? This is why we were a nation of renters at the turn of the last century.
Getting back to right now how do things compare? Well, the median price of a home sold in Seattle is about $345,000. Today’s median household income is well under $100,000. Housing is still expensive yet we are a nation of homeowners with over 65% of our population living in owner occupied homes.
What is the difference from 1903 and today? Financing. We had a great system to create home ownership for the majority of our citizens by offering safe and sound terms across the down payment spectrum up through the early part of this century. Then Wall Street and BigBank greed got a stranglehold on the mortgage industry and their lust for quick money ruined everything. The bubble burst.
Now we are at a crossroads and in my opinion the bureaucrats have the stranglehold. They are making grave errors in judgement with new policy, restrictions and regulations that are hindering any nuance of a housing recovery. Who are they listening to, and why?
There is a phenomenon happening here in Seattle that is likely being repeated around the country. The median price of a home sold is about 10% BELOW what the median income in the region would predict.
I believe this clearly shows the general population is holding back on buying. In my mind this means normal market forces (or pent up demand) will have a significant impact on the lowest priced homes in the area. As buyers grow weary of recession fatigue and start to move forward, the lower priced homes will be the first to see a surge in price. I don’t believe this will cause the price point for the higher priced homes to follow. Why? Many of the homes available to first time home buyers are foreclosures or short sales, meaning the sellers are not using proceeds to buy a larger or more expensive home. The residential housing market is a bottom up game and until the lower priced inventory is absorbed, the rest of the market will drift along.
What does this mean for the first time homebuyer? It could mean that those who get in now, in front of a possible surge could be the first ones out and buying into the “move up” housing market before it too starts to surge.
Is this a lock? No. But the sweet spot is here and who knows how long it will last. It rarely hurts to take advantage of the sweet spot.
For the record, I am routinely quoting loans with Note rates below 5% that qualify for a lender credit at this time. That too is a sweet spot.
Creating clarity in the complex world of residential real estate and real estate finance. Written by Craig Goebbel with contributions by other real estate professionals.