As we all are aware, the mortgage lending environment is a mess. The reasons have been alluded to time and time again in print, radio, television and on line. We have heard the terms ad nauseum- securitization, Fannie and Freddie, liar loans, secondary market, etc. You are hard pressed to come up with an article or story with a positive spin on this industry. Well, let's change that, shall we? Here is an insider's account of who is doing it right, so to speak. But first, a little background. I have been on the front lines of the mortgage game for the past 10 years and I have seen just about everything there is to see. In just the last 4 years, I have seen the pendelum swing 180 degrees. Banks went from offering people with a pulse 100% financing, to declining borrowers with plenty of equity, perfect credit and 7 figure bonuses. I have a saying that I believe explains the dichotemy-banks were acting completely irrationally at one end of the spectrum. What makes you think they will act rationally at the other end? Yet, there are some lenders out there that have and continue to pursue the proper path. Here are a few of them:
HUDSON CITY SAVINGS BANK- This New Jersey based bank has maintained a simple philosophy throughout the crisis and that is common sense underwriting. Underwriting is NOT credit score driven unlike almost all other banks. the totality of the credit report is taken into account. Once the commitment letter is issued, it is basically free and clear of conditions. Rates are very competitive and they do allow financing up to 90% in some cases. They do NOT allow financing on co op units.
ASTORIA FEDERAL SAVINGS BANK- Strangely enough, this was a lender that I was very hesitant to send loans to many years ago. Now, they are my first choice if the borrower qualifies. Conservative to their core, they too maintain common sense underwriting. They do have post close reserve requirements that are tougher than most lenders but if the loan fits, they are terrific. Extraordinarily good ARM rates.
Don't get me wrong, there are others out there as well that are very good. I wanted to give a small sampling.
Tuesday, May 31, 2011
Monday, May 23, 2011
The confusion about closing costs
Can anyone know what their closing costs are going to be? Seems like a simple question with what should be a simple answer. Take it from me, its not simple. There are several areas that I want to cover here in an attempt to clarify:
At the end of the day, I believe that borrowers want to know the following question-how much money do I need to bring to the closing table? If that's the question you want answered then you have to understand what is a real closing cost and what is a pre paid item. Below is a list of both but does not encompass all of them:
REAL CLOSING COSTS PRE PAID ITEMS
Title insurance Per Diem interest (1st mortgage payment)
Credit report Tax escrows
Ancillary title fees
Bank attorney
Underwriting fee Appraisal
Mansion tax
Mortgage tax
Ok, now you know which items fit into which category. Should be easy now, right? Wrong. Typically, the real closing costs are fairly easy to figure out. The most difficult part on that side is the title bill. For all purchase transactions, the borrower's attorney orders the title insurance and tends to use the title company that they know and have done buisness with. The title premium is state mandated so no matter which title company is used, that number is set. Once you get into the area of searches, endorsements, title closer, etc, it can vary from one company to another. The pre paid items is where it gets complicated as these are not fixed costs.
Per Diem Interest- Again, this is your 1st mortgage payment. The bank doesn't want to wait to bill you for that, thus if you close on March 15th, the bank will collect the mortgage payment that starts on March 15th and runs through March 31. You will not receive your April bill until May 1. So, the day of the month you close changes that payment number and if you have a large mortgage, it can be thousands of dollars.
Tax Escrows- If you choose to pay your taxes with your mortgage payment, the bank is going to collect anywhere from 2-6 months of taxes at the closing table. The method by which it is determined how much they will take depends on a few factors-when the last tax bill was paid, when the next tax bill is due, etc. Many times, you don't know what month you are closing so its very hard to determine upfront what that is going to be. Always assume the worst. Also, realize that if there are any taxes due within 60 days of closing, those will be collected at the closing table
As you can see, a lot goes into this but there are a few rules of thumb that are important to follow:
At the end of the day, I believe that borrowers want to know the following question-how much money do I need to bring to the closing table? If that's the question you want answered then you have to understand what is a real closing cost and what is a pre paid item. Below is a list of both but does not encompass all of them:
REAL CLOSING COSTS PRE PAID ITEMS
Title insurance Per Diem interest (1st mortgage payment)
Credit report Tax escrows
Ancillary title fees
Bank attorney
Underwriting fee Appraisal
Mansion tax
Mortgage tax
Ok, now you know which items fit into which category. Should be easy now, right? Wrong. Typically, the real closing costs are fairly easy to figure out. The most difficult part on that side is the title bill. For all purchase transactions, the borrower's attorney orders the title insurance and tends to use the title company that they know and have done buisness with. The title premium is state mandated so no matter which title company is used, that number is set. Once you get into the area of searches, endorsements, title closer, etc, it can vary from one company to another. The pre paid items is where it gets complicated as these are not fixed costs.
Per Diem Interest- Again, this is your 1st mortgage payment. The bank doesn't want to wait to bill you for that, thus if you close on March 15th, the bank will collect the mortgage payment that starts on March 15th and runs through March 31. You will not receive your April bill until May 1. So, the day of the month you close changes that payment number and if you have a large mortgage, it can be thousands of dollars.
Tax Escrows- If you choose to pay your taxes with your mortgage payment, the bank is going to collect anywhere from 2-6 months of taxes at the closing table. The method by which it is determined how much they will take depends on a few factors-when the last tax bill was paid, when the next tax bill is due, etc. Many times, you don't know what month you are closing so its very hard to determine upfront what that is going to be. Always assume the worst. Also, realize that if there are any taxes due within 60 days of closing, those will be collected at the closing table
As you can see, a lot goes into this but there are a few rules of thumb that are important to follow:
- Always speak to a mortgage professional before entering a contract so you have a good idea of approximately what your closing costs are.
- When estimating pre paid items, always assume the highest numbers as you do NOT want to be caught short.
- Speak to your attorney and ask them what the title bill should be.
- Have your real estate broker, mortgage professional and attorney be on the same page about these costs.
Wednesday, May 18, 2011
What loan is right for you?
There is much debate as to what product makes the most sense for someone buying a home. Some people say that you can never go wrong with a 30 year fixed rate. You never have to worry about the payment changing and you can have peace of mind knowing your costs are fixed. On the other end of the spectrum, Alan Greenspan, the former FED chairman made a comment a few years ago that basically said you should take an ARM product at all times.
My opinion is that the circumstances dictate the product. Give the pros and cons of each and let the borrower decide. Let's go over them:
FIXED RATE MORTGAGES: This is the easy one. As I mentioned, if you take this product, your costs are fixed in and you never have to worry about change over the life of the loan. The perfect product for those people that are going to be in a property long term. It's a product that for the most part, is hard to argue to not take. What's the downside to it-you pay a premium in rate in order to have fixed costs.
People that tend to take fixed mortgage products:
1. Fiscally conservative.
2. Plan to be in the home for the long term.
3. Steady income earners.
ADJUSTABLE RATE MORTGAGES: There are 3, 5, 7 and 10 year ARMs. That simply means that they are amortized over a 30 year period but the rate is only fixed in for 3,5,7 and 10 years. After the fixed period, the rate usually adjusts once a year for the remainder of the loan and there are caps which restrict just how high the rate can go. The upside to the ARM products is that the rates are lower than a fixed rate mortgage. Yes, there is more risk but with the risk comes the reward of lower rates. This is a favorite of people in the financial world.
People that tend to take adjustable rate mortgage products:
1. Those that feel they won't be in the home long term and will not reach the adjustable portion of the loan.
2. Wall Street workers.
3. Bonus driven individuals that need a lower payment because of smaller base salaries.
4. Gamblers. Seriously.
Again, this is about the individuals circumstances at the time they get the loan and what they project for themselves in the future. The most important thing is that you make an informed decision weighing all the pros and cons.
My opinion is that the circumstances dictate the product. Give the pros and cons of each and let the borrower decide. Let's go over them:
FIXED RATE MORTGAGES: This is the easy one. As I mentioned, if you take this product, your costs are fixed in and you never have to worry about change over the life of the loan. The perfect product for those people that are going to be in a property long term. It's a product that for the most part, is hard to argue to not take. What's the downside to it-you pay a premium in rate in order to have fixed costs.
People that tend to take fixed mortgage products:
1. Fiscally conservative.
2. Plan to be in the home for the long term.
3. Steady income earners.
ADJUSTABLE RATE MORTGAGES: There are 3, 5, 7 and 10 year ARMs. That simply means that they are amortized over a 30 year period but the rate is only fixed in for 3,5,7 and 10 years. After the fixed period, the rate usually adjusts once a year for the remainder of the loan and there are caps which restrict just how high the rate can go. The upside to the ARM products is that the rates are lower than a fixed rate mortgage. Yes, there is more risk but with the risk comes the reward of lower rates. This is a favorite of people in the financial world.
People that tend to take adjustable rate mortgage products:
1. Those that feel they won't be in the home long term and will not reach the adjustable portion of the loan.
2. Wall Street workers.
3. Bonus driven individuals that need a lower payment because of smaller base salaries.
4. Gamblers. Seriously.
Again, this is about the individuals circumstances at the time they get the loan and what they project for themselves in the future. The most important thing is that you make an informed decision weighing all the pros and cons.
Friday, May 13, 2011
Co Op Transactions
If you live outside of the NY metro area, you may say to yourself-what is a co op? To all of you that read this blog, you know exactly what it is. As mentioned in previous blog posts, its those lenders that were and to this day, remain conservative that have weathered the housing storm. Its just as true when its comes to building type. Co op loans have changed very little. Why? Its 2 fold. Firstly, the banks know that the co op is a built in filter and in most instances, the buildings requirements are tougher than the lender. Secondly, the requirements to get a co op building approved really haven't changed. If you don't think so, try and buy a condominium with financing these days. It's a nightmare. Here are the bullet points on things to be aware of when dealing with a co op:
- Taking the mortgage out of the equation, know that boards tend to look at 2 things when looking at a package-post closing reserves and debt ratios. Every board is different so its crucial that you, your attorney or your realtor know exactly what the requirements of the board are before entering into a contract. Post close reserves can vary from needing 1 years worth of maintenance in the liquid assets to needing twice the purchase price in liquid assets. Of course, its the higher end co ops that would need the latter. As far as debt ratios, most vary between 25% and 35% and its normally a simple calculation of what is your gross income vs what your expenses are (credit cards, car loans, student loans, etc). Be careful though because some boards allow the use of certain types of income like bonus and some don't. By the same token, some boards count certain liabilities and others may not. KNOW YOUR BOARD!!!!!!!
- Lenders want to see that at least 51% of the units in the building are owner occupied. Some of the portfolio lenders are a little more strict but thats the general rule. Many times, realtors call me to ask if the building is on a lender's approved list. Its a very good way to clear one of the financing hurdles quickly or to get a heads up as to whether the building may be a problem.
- Be careful about locking your interest rate too early. Many boards have a very long approval process and that can delay things.
Tuesday, May 10, 2011
The Mortgage Market-Where we are and where will will be
We have all seen, ad nauseum, why we are in the predicament we are. We've read it in newspapers, magazines and on line. We have seen it on CNBC, MSNBC and every other station- "subprime", "credit default swaps", "securitization", "liar loans", "foreclosure". I could go on on and on. My goal is to give you an insider's view of the mortgage market from someone who has been on the frontline for the last 10 years. Let's start with where we are and finish with where will will be.
Currently, the mortgage market is a tough one to navigate. The majority of conforming loans are bought by Fannie and Freddie and we all know what shape they are in. Because of that, banks are scared to death that any loan they originate will have to be bought back from the GSEs. Thus, they are nitpicking EVERY single aspect of the loans. That, along with tougher credit guidelines and dropping property values have made things very difficult. Don't get me wrong though. For those out there that have good credit and a steady income, you can get a loan. Its just a tougher task now. Everything must be documented to the enth degree. All large deposits in bank accounts have to be excplained. Credit inquiries on a credit report need to be explained. In many instances, bonus income must be consistent over a 2 year period. If your loan is non jumbo, cross your T's and dot your I's, folks. Otherwise, you are in for a very bumpy ride.
On a more positive front, many of the savings bank/portfolio lenders (those that do not sell to Fannie and Freddie) have actually loosened up some of their guidelines. Why? There are several reasons but in my mind, one of the major reasons is out of necessity due to a lack of loans. You see, many portfolio lenders have weathered the storm very well simply because their historically conservative approach to writing loans insulated them from many of the Fannie and Freddie pitfalls. That very conservative approach has now bitten them in the rear. For example, let's assume the lender would only allow 70% financing before the credit crisis hit. With a precipitous drop in values of homes, that 70% financing has turned into 50%. How many people out there have that? Not many. They have had to loosen up in order to increase loan volume.
That's a synopsis of where we are. I can go on, but why bore you with more disappointing facts. Let's now talk about where we will be in a few years. of course, this is only a predicition, an educated guess. From a timing stanpoint, I do not see a general alleviation for several years. The foreclosure market needs to shake itself out and so do the majority of loans closed that might turn sour within the next few years. I harken back to George Bush's words about "draining the swamp". We need to do that and let nature take its course. Here are some other tid bits that I believe will come to fruition:
1. The conforming loan limit will drop and that will allow porfolio lender to have more power and have a bigger impact on the mortgage market. That will be good for the mortgage brokers that have survived.
2. Fannie and Freddie will be minimalized more and more through a conserted effort on the part of the government.
3. Within a few years, anything more than 80% financing will be weeded out. Back to the old days.
Thursday, May 5, 2011
What you MUST do before purchasing a home
The process of buying a home conjures up many things-stressful, confusing, expensive, etc. There is no guarantee that your process will be a smooth one but there are some basic things that you can do to prepare and set yourself up for success:
1. Get prequalified from a professional PRIOR to looking at any property. I cannot stress how important this is for you and the realtor you are working with.
a. You need to know what you can afford so when you do go looking for your dream home, you are looking in the right price range.
b. You might have an issue on your credit report that you were not aware of. I have seen many situations where there is a collection or a judgment that the borrower is totally unaware of and it has effected their credit score negatively.
c. You should be discussing all mortgage options so you can better understand what your price range may be. Some products may have a much lower interest rate thus having a lower monthly payment. Make sure the pros and cons of each product are discussed.
2. Know what your closing costs are. When you buy real property in NY (condo or single family home) closing costs will be significant. You MUST factor that in when deciding on cash needed for the transaction. I have seen all too many times when the borrower isn't aware and have already entered into a contract only to find out that they don't have the necessary funds.
3. Make sure your realtor and mortgage professional are on the same page. Good communication is essential prior to looking at property.
1. Get prequalified from a professional PRIOR to looking at any property. I cannot stress how important this is for you and the realtor you are working with.
a. You need to know what you can afford so when you do go looking for your dream home, you are looking in the right price range.
b. You might have an issue on your credit report that you were not aware of. I have seen many situations where there is a collection or a judgment that the borrower is totally unaware of and it has effected their credit score negatively.
c. You should be discussing all mortgage options so you can better understand what your price range may be. Some products may have a much lower interest rate thus having a lower monthly payment. Make sure the pros and cons of each product are discussed.
2. Know what your closing costs are. When you buy real property in NY (condo or single family home) closing costs will be significant. You MUST factor that in when deciding on cash needed for the transaction. I have seen all too many times when the borrower isn't aware and have already entered into a contract only to find out that they don't have the necessary funds.
3. Make sure your realtor and mortgage professional are on the same page. Good communication is essential prior to looking at property.
Monday, May 2, 2011
Why do I write this blog?
Just like any profession, you are always looking for ways to improve communication with those you work with. Ever since I started this blog, I have been thinking of ways to do just that and the idea of looking at other mortgage related blogs seemed like good, practical self advice. So I set about doing research and I was surprised to find what was out there. Most of the blogs I encountered ( I am sure I didn't scratch the surface of what is out there but I think I got a good sampling) that were considered highly rated blogs, were very nicely constructed, many of them having pictures and advertisements and the like. But after looking at blog after blog, I noticed a consistent pattern and 2 simple questions kept running through my head:
1. Who is the target audience for this blog?
2. What useful information are they getting that will help them?
Let's be clear about my main goal- Educate and inform borrowers, attorneys and realtors about the mortgage process in the tri state area.
What does a reader get out of the following types of articles I have seen:
1. Mortgage applications down 3.5% for the 4th quarter of 2010.
2. The median price of a home in the US was down 2.6% last fall.
3. How wonderful the service is at XYZ Mortgage Company.
4. Lovely charts and graphs showing trends in condo sales.
A realtor in NYC relayed a story to me many years ago and it has stuck with me ever since. He mentioned there was a mortgage broker that had a systematic campaign of sending out his monthly newsletter to as many realtors he could find and many of them were not people he had done business with. Upon receiving this newsletter, the realtor said "if I wanted another article about mortgage rates being up for the week or co op sales being down for the quarter, I would just look at the junk my company spits out on a daily basis".
In keeping with my goal, here is my tip for the week:
Gift money from family for down payments MUST be sourced. That means proof of where the money came from and proof of the deposit into a legitimate account. Gift money cannot come "from under the mattress" and must come from a spouse, fiance or close family relative.
1. Who is the target audience for this blog?
2. What useful information are they getting that will help them?
Let's be clear about my main goal- Educate and inform borrowers, attorneys and realtors about the mortgage process in the tri state area.
What does a reader get out of the following types of articles I have seen:
1. Mortgage applications down 3.5% for the 4th quarter of 2010.
2. The median price of a home in the US was down 2.6% last fall.
3. How wonderful the service is at XYZ Mortgage Company.
4. Lovely charts and graphs showing trends in condo sales.
A realtor in NYC relayed a story to me many years ago and it has stuck with me ever since. He mentioned there was a mortgage broker that had a systematic campaign of sending out his monthly newsletter to as many realtors he could find and many of them were not people he had done business with. Upon receiving this newsletter, the realtor said "if I wanted another article about mortgage rates being up for the week or co op sales being down for the quarter, I would just look at the junk my company spits out on a daily basis".
In keeping with my goal, here is my tip for the week:
Gift money from family for down payments MUST be sourced. That means proof of where the money came from and proof of the deposit into a legitimate account. Gift money cannot come "from under the mattress" and must come from a spouse, fiance or close family relative.
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