Tuesday, November 15, 2011

Fixed rate vs ARM. Is one better than the other?

  Fixed rate mortgage vs ARM.  Which one is better?  You can make legitimate and salient arguments for both but at the end of the day, there is no right answer.  Each one has its place and its up to the borrower to decide which one is best for them.  The job of the loan officer is to explain the pros and cons of both.

  Let's start with the fixed rate loan.  It is certainl;y hard in this environment of low rates to argue against taking a fixed rate mortgage.  You never have to worry about your rate or your monthly payment increasing.  But, that comfort does come at a price.  Fixed rate loans have a higher rate than ARMs.

  ARM products have a 30 year amortization just as fixed rate loans do.  The difference is that the rate is not fixed for the life of the loan.  There are 3, 5, 7 and 10 years ARMs and the rate is fixed for that respective amount of time.  Think of it this way-its risk vs reward.  The risk is that if you still have the loan after the fixed period is up, your rate may go up.  The reward is that you have a lower interest rate.  Strangely enough, because of current market conditions, those that have ARM products that are adjusting now are actually adjusting lower than the start rate.  Don't expect that years in the future!  Its also important to note that statistics show the average legnth of a loan to be 7 years.

  Understanding the principles above leads us to the trends that guide people in deciding which product to take.  Those that are buying a home in which they will stay long term tend to look at fixed rate loans.  Those that see themselves in the home for 5 or 7 or 10 years, tend to look at the ARM products because the chances of entering the adjustable phase are smaller.

  Know the pros and cons of each.  Run the numbers and see exactly what the difference is in the payment. Its not rocket science.  With that information, make the decision that is best for you or your family.

Friday, November 11, 2011

The mortgage appraisal process and what you need to know

  It has been almost 18 months since the implementation of the HVCC appraisal process.  It feels like its been 18 years.  I understand the idea behind it-reduce the influence of outside sources (loan officers and mortgage brokers) on the apprasiser so the appraisal can be as objective as possible.  Certainly, there was a lot of that going on among the worst elements of our business, but for those of us that are above board and have always acted with integrity, unduly influencing appraisers was not in our lexicon.

  The problem is multi fold and I want to tackle them one by one:

1.  Too much bureaucracy:  The system requires that an appraisal management company that works with the bank chooses the appraiser.  In some instances, there is a vendor management company AND an appraisal management company.  Let me give you one example that speaks volumes.  I have a borrower that wants to refinance her co op in Manhattan.  I process the loan with the bank and give them the contact information for the managing agent so the appraiser can obtain the required information in order to complete the appraisal.  2 weeks go by and I hear nothing so I decide to pick up the phone and find out what is going on.  I call the appraisal vendor company and ask for a status update.  Logic would dictate that the vendor appraisal compnay can talk to the appraiser, right?  Wrong.  The vendor management company puts me on hold and calls the appraisal management company.  The apprasisal management company is told we need a status update so they place the vendor management company on hold and call the appraiser.  Remember, that I am not allowed to call or speak to the appraiser.  Invariably, they cannot get the appraiser on the phone so they leave him a message to call them back.  They hang up with the appraiser, take the appraisal vendor company off hold and tell them they left the appraiser a message.  The appraisal management company hangs up with the vendor management company and the vendor management company takes me off hold to tell me that a message was left with the appraiser.  This all takes about 10 minutes.  This type of exchange goes on about 3 times during the course of the appraisal process.  So when my client asks me what is going on with the appraisal, how do I explain this to them?

2.  The apprasiers:  I cannot confirm this as fact but I have been told by an appraiser that I know and trust with an impeccable reputation that the appraisal management companies choose the apprasiers based on lowest price and they "beat them up" to get their prices as low as they can.  This speaks volumes.  I have also seen instances where apprasiers are chosen who are located very far from the home to be appraised. Familiarity with the area is crucial for understanding values.  Especially in NYC with co ops and condos.

3.  The variation of values: There are some banks that consistently have very low appraised values and some that are more reasonable.  I have seen instances where one bank will appraise a property for one value and another bank, not a few weeks later will appraise it several hundred thousand higher.

4.  Lost money to the borrowers:  Before HVCC, if a borrower called me to refinance or buy a property and was concerned that the appraised value was not where it needed to be, I could call any one of my trusted appraisers and ask them to do a comp search and give me a good ballpark on the value.  Of course, the true value could not be done without an inspection but I knew it would be a good educated guess.  I would then order that appraisal and it would be usable at almost every bank.  Now, with HVCC, we are flying blind on the appraisal.  I have had many client pay for an appraisal, have it undervalued and thus, it kills the deal.  If my client starts with one bank and something in the process goes awry, I cannot take that appraisal to another bank.  We must order a new appraisal with the new bank.  Lost money for the borrower.

  By the way, there are banks that still allow us to at least choose from a list of appraisers or if the value is below a certain number, we can choose the appraiser.  But this is not typical as most banks require the use of HVCC.  Its a tough time in the business and its difficult to close loans.  The appraisal process only makes it that much worse.

Tuesday, November 8, 2011

What you need to know about your credit report

   In order to get your mortgage approved, there are 3 areas in which you have to pass muster-income, assets and credit.  Just a few years ago, that statement wasn't true.  If you had good income, but poor assets and credit, you could still get a loan.  If you had good assets and poor income and credit, you could still get a loan.  Get the picture?  Well, those days are gone and have been for quite a while.  Now, you must be able to pass the litmus test on all 3 in order to get a loan. 

   The one that I want to focus on today is credit which in my opinion has taken the hardest hit.  The Fannie/Freddie government takeover has caused huge changes to how your credit score impacts your mortgage loan.  Here is a perfect example:

   Prior to 2007- If you had a 680 credit score or better, you didn't even have to show documentation of income or assets in order to get the best available rate out there up to 80% financing.  It was called the Fannie Mae SISA program.

   Today-  If your credit score is 680 and you want to do 80% financing, your rate will be .375% to .5% higher than the market.

            - If your credit score is 739 and you finance 80%, your rate is .125% higher than the market.

            -If your credit score is 719 and you finance 70% or more, your rate is .125% higher than the market.

            -If your credit score is 659 and you finance 60% or more, your rate is .25% to .375% higher than    the market.

  The contrast is so dramatic is incredible.  A 739 credit score is very, very good yet you are still penalized.  By the way, for jumbo loans not owned by Fannie Mae, the credit score requirements have not changed much at all.  This is why (if you dont have a jumbo loan) you need to keep your credit as perfect as possible and here are some tips:

1.  Do not have too many lines of credit.  4-6 lines is optimal.

2.  Keep the balances below 33% or the credit limit.  This will insure optimal scores.

3.  Never, never, never be 30 days late on a payment.  Any payments that are late up to 30 days are not going on your credit report.  It's only if you are 30 days late and that kills your scores.

4.  If you have a collection and pay it, your scores will go down before going up.  Most people do not know this.  The only way to get your scores up after paying a collection is to get the collection company or company to remove the collection from your report rather than have it on the report as paid.  Most times, you will not get them to do it.