Author: Elise Loan Tucson

Underwriters Are Not Evil (Not All of Them)

On a recent loan, we needed one simple document from the borrower’s bank, nothing more.  We weren’t seeking lost pages of an Ernest Hemingway novel (I’ve read some of his stuff, and anything lost can stay that way, if you ask me).  The borrower went to one branch and was told that what we were requesting was impossible.  We’ve obtained this type of document hundreds of times before on other loans, so I was extremely confident we weren’t asking for anything exotic.  Nevertheless, the teller insisted to the borrower that they couldn’t provide what we were seeking and gave him something else – something that WOULD NOT fly with the underwriter (which I was fairly certain it wouldn’t in the first place).

After reviewing the document he sent over from the bank, I regrouped with the borrower and asked him to return to the bank and ask in a different way.  He called me back about twenty minutes later and told me that I would never believe what just happened.  I told him I’m pretty sure I’ll believe him because I see weird stuff every day:  He went to a different branch this time and the teller gave him EXACTLY what we had requested the first time.  I burst into laughter and then quickly collected myself and apologized to the borrower saying, “I’m sorry about that.  I shouldn’t laugh, but it’s all I can do when I come across these situations, and they happen fairly regularly.”  To that, the borrower said, “I don’t see how you can deal with this kind of thing on a daily basis without drinking on the job.”  This is coming from a guy who teaches high school so his own level of “grin and bear it” has to be through the roof.

I shared that little piece of . . . absurdity so I could share this with you – there’s a very solid reason underwriters are so extremely persnickety and insistent that things be done in a certain way and documents look just so.  You could say it’s because they hold the gold, so they make the rules.  Or, you could say that they’re getting ready to lend, perhaps, the largest chunk of money an individual will ever borrow in her/his lifetime, so they want to make sure everything is in order.  Either of those two answers is partially correct, but the REAL answer is far more simple: they’re covering their butts.  Everything they do from the moment they touch a loan application is to make sure they can’t be blamed for anything.  (What must their home lives be like?)

In the case of my teacher buying a house, the form he needed had to show the money being transferred out, but it also had to show the transactions before it to show that the account had enough money to make the transfer in the first place.  To a normal human being, the fact the statement showed that after the transfer was completed there was a balance of $XXX should be sufficient to prove there was enough money in the account for the transfer to go through.  To an underwriter, though, they have to show that the account holder didn’t walk in that day, hand the money to the teller, and then transfer that money out.  Sourcing and seasoning rules don’t allow that, and the underwriter has to make sure of that. The underwriter didn’t make that rule (or any of the rules they’re tasked to follow), but their continued employment depends on their sticking to it – they’re forced to be the devil about the details.

Whether you’re a seasoned real estate agent or a first-time homebuyer, the next time you think the underwriter is being unreasonable or especially stubborn, bear in mind that 99% of the time they’re just doing their jobs – they’re just covering their backsides.  If they’re like me, the older they get and the less exercise they undergo, covering that area becomes a bigger job by the day. To borrow a notion from the Rolling Stones, have some sympathy – even if you still think of them as the devil.

Take a Walk on the Wild Side

FHA loan

Once in a while, someone will ask me to name my favorite loan type.  VA?  Conventional?  FHA?  USDA?  My answer: it’s none of those; my favorite type is one that is CLOSED.  That was cheesy, for sure.  I felt my eyes rolling as I typed it.  Sorry about that.

Regardless of the eye rolling and the groaning, it’s the truth.  If the loan is closed – no matter which one got us to that point – that means the client was able to reach their goal, long or short term, and they can move on to the next project/passion in their life.

Quite often, though, what I do get from a number of people is the attitude that an FHA loan is a second-class citizen in the land of loans, and that couldn’t be further from the truth.  Sure, if you’re buying or selling a sizable property overlooking the valley, someone qualifying for an FHA loan isn’t going to be in your pool of prospects.  That’s not snobbery; that’s math.

Sometimes I get sneers from the borrower when I mention an FHA loan; sometimes it’s a look of “give me a break” from an agent when I tell them their client is going to use an FHA loan to purchase their home.  For buyers and agents alike, that really needs to stop – not because I’m a thin-skinned crybaby who’s starting to take it personally but because you’re missing out on more than one of the great benefits that the FHA loan has to offer.  Rather than don my buckler and shield and stand a mighty defense for this oft-maligned and misunderstood princeling of a loan product, let me show you some simple math.

Same borrower is qualified to purchase a $250,000 home with either an FHA or a conventional loan:

                                                                                                  FHA                         Conventional

Interest Rate                                                                               4.125%                     4.875%

Down Payment (%)                                                                   3.5%                         3%

Down Payment ($)                                                                    $8750                       $7500

Monthly Payment (P&I w/Mortgage Insurance)                $1359.22                  $1659.21

Money Spent in 1st Year                                                          $25,060.64               $27,410.52

Money Saved in 1st Year                                                          $2349.88                  —

Money Saved Each Year After                                                $3599.88                  —

Money Saved in Seven Years                                                  $23,949.16               —

Most first-time home buyers stay in their homes for seven years (or fewer), and then they move on to the next house.  Whether the buyer went FHA or conventional, in the first seven years of ownership, the mortgage insurance would still be in place on either loan.  The FHA loan, though, would allow them to have $300 more per month to spend on something else or save, and it’s always nice to have options, right!

If your mind isn’t quite completely blown, let me throw in this little stick of dynamite to finish off the job.  On the same $250,000 purchase, the only way to get the monthly payment on a conventional loan to be almost identical to the FHA payment is to put down 10%, or $25,000.  Let me remind you: on the FHA loan, the minimum down payment of 3.5% is only $8750.  So, in order to get your monthly payment (principal, interest, and mortgage insurance) to be roughly the same, you would have to spend $16,250 MORE UP FRONT – all for the sake of having a conventional mortgage.

This may seem like overkill, but I’m going to do it anyway: remember, FHA loans allow a higher debt-to-income ratio than a conventional loan.  This means that if the borrower can qualify for a payment of $1659.21 (under conventional guidelines and a LOWER allowed DTI), that same borrower could use an FHA loan to purchase approximately $50,000 more house, or $300,000.  What agent wouldn’t want that type of “cushion” for search and negotiation purposes?   And what buyer wouldn’t want more options?

The next time you hear the letters FHA being bandied about, think of them as standing for Flexible Home buying Alternatives, because being conventional isn’t always the best thing to do in life – allow yourself to take a walk on the wild side.

For any more information or direction on this subject get in contact with Priority Lending LLC today.

The Costs of Generosity

Someone sent me an article this morning about a major bank that will be offering a program to help people get into a home by providing them with up to $10,000.  Honestly, as I read deeper into the article, rather than sitting there and mumbling to myself that this is another cheap shot by the big boys to grab market share, I thought, “Good for them,” (and then I grumbled a bit about them grabbing market share).

There’s absolutely nothing wrong with this, and there’s nothing nefarious about it – this type of program is projected to help up to 20,000 families and individuals get into a home, and that’s a good thing.  However, before any of you accuse me of becoming a shill for the big banks, let me make my point – because I do have one.

On a $200,000 30-year fixed mortgage at 4.5%, the principal & interest payment is $1,013.37/month.  Over the 30-year life of that mortgage, the borrower will have paid $364,813.20 – that’s $164,813.20 that the bank will make off that loan.  If this big bank added NOTHING (like, say, an increased interest rate) and spent $10,000 to get that new loan, that $10,000 is only 6% of the overall profit.  Lest you think me a fool for believing a bank would just GIVE UP that 6%, let’s take this to the next logical step.

It’s HIGLY likely that the interest rate for this program is going to be at least a point higher than the going rate for a 30-year mortgage – they have to have SOMETHING to compensate them for “giving” away $10,000.  Same amount ($200K) at 5.5%, the principal & interest payment is $1,135.58 for a 30-year total of $408,808.80 and a $208,808.80 profit.  By adding that simple point, they increased their overall profit by almost $45,000.  Still, there’s absolutely nothing tricky or underhanded about this: they’re offering a service that requires something in return, a higher interest rate.

For some people, this is a perfectly acceptable trade-off, and they’ll sign on all day, and twice on Sundays.  Before anyone you know jumps at this “free” money, give them this little thought nugget to chew on and digest:

The difference between the monthly payment at 4.5% (the rate given to someone NOT accepting the “free” money) and 5.5% that comes with this generous program is $122.21.  If you take $122.21 and invest it every month in something earning as little as 5% interest, you would have $10,279.48 in just six years.  That’s over $10K in YOUR POCKET, not anyone else’s, and that’s a good thing, right?

Big banks have bigger fees, without a doubt.  Someone’s gotta pay for all those commercials filled with beautiful people driving nice cars and acting like money is the least of their concerns.  That’s not a slam on big banks (ok, maybe a LITTLE), just a fact.  The $10K they’re “giving” you gets used up a lot faster by their fees and whatnot (I love that word).

Here’s my recommendation: GO to the big bank (I mean it) and have them put together a loan estimate for you (including all their incentives), and then come to us, a broker.  And after we’ve helped you buy your house, come back in six years (or sooner) with that money you’ve saved and invested, and we can show you how to make even more money with it.  THAT’s independence, for sure.  Happy Independence Day!!!!!

Cash Can Be a Dirty Word

Cash may be king, but in the mortgage world it can cripple.  How so?

A recent buyer and his agent got his offer accepted, so the next step for the buyer was to get to the title company and pay his earnest money.  In short order, he walked into the title company, handed them a money order for $1000, and walked out with a receipt for his earnest money.

As designed, the earnest money deposit is supposed to be credited toward the money needed to cover the down payment and the closing costs, right?  Well, in this case, that’s $1000 that we can’t use at all because the money order was purchased with straight cash, and cash can’t be sourced.  With underwriters, sourcing is sort of a big deal.

Why would the title company take this guy’s money and give him a receipt without saying anything?  Don’t they know they just screwed everything up?  The answer is more simple than you might think: the title company did exactly what the purchase contract said they needed to do, which was to take receipt of $1000 from the buyer for his earnest money – they didn’t screw up at all.

In the end, the buyer will get his $1000 back from the title company (it doesn’t disappear down a black hole), but in the meantime, he’s going to have to find a way to come up with $1000 of sourced money to add to what he already had ready for his down payment and closing costs.  In other words, if he was going to need $10,000 overall to cover what’s required for closing on his new home, he now needs $11,000 (for a while) because the money he paid to the title company can do nothing but sit as a place holder.

While he will, in fact, get his $1000 back eventually, he’s a buyer like most of us who might have a little difficulty coming up with an extra grand in a short period of time.  It’s going to make things very interesting for him (and for us), and it may delay things for everyone involved.  That’s the reason for this cautionary tale:

More often than not, when we get the contract, the buyer has already dutifully made her or his way over to the title company to take care of the earnest money (because good agents like yourselves have fully impressed upon them how important it is that they do it immediately).  As real estate agents, when you’re in the process of impressing them, tell them that cash is NOT a good thing in this particular case – tell them to go to their local bank and have the teller withdraw the money from their account to issue a certified check.  All of that is traceable and can be sourced.  The underwriter is a happy camper.

Even in those cases when we have taken the buyer through the entire underwriting process and gotten them pre-approved (not just pre-qualified), if we tell them about what to do with the earnest money requirement when the time comes, there’s about a .1% chance they’re going to remember that piece of very important advice.  You, the agent, are right there at the right moment: please take two minutes and walk them through the process – or IMPRESS upon them how important it is that they call us BEFORE they do anything else.  Two minutes could save two weeks . . . or an entire transaction (and your paycheck).

Getting the Cut Right

This is going to be a short one, I assure you.  This is probably stuff you already know, but I think now’s a good time to bring it back up and have a bit of a refresher course.  Are you ready?

When people talk about The Fed and “rates”, they’re not talking about home mortgage interest rates . . . at all.  They’re talking about the “Overnight Lending Rate” – this is the rate at which banks borrow money from each other – and it’s a short-term rate.  Mortgage rates, by their very nature, are long-term rates.  Are you still with me?

The Fed cuts rates to fuel economic growth and/or allow inflation to rise.  While that’s great for our 401Ks and the like, those things are bad for long-term rates like the ones we seek for home loans.  Conversely, when we have trade tensions and other global concerns, people get nervous so economic growth stalls and inflation stagnates.

In coming days, if The Fed chooses to HELP the stock market by cutting rates, we’ll have to wait and see what the market’s reaction does to the long-term rates.  Put simply: anything that helps stocks is usually not a help for long-term mortgage rates.

Have I oversimplified it?  Of course I have!  However, when you hear two guys at the barbershop (if such a place even still exists) having a chinwag about what the talking head on TV just said about The Fed raising or cutting rates, you’ll be smarter than 95% of the population and know where mortgage rates are headed.  Don’t let that go to your head, though – it might make it difficult for the barber to give you a proper cut.