Category: General

Recently, I saw this gentleman at the gym whose upper body was almost entirely covered in tattoos. I struck up a conversation with him and learned that it took well over 100 hours, and it cost $85/hour. As we continued to chat, I was doing the math in my head: $85 X 100 hours = $8,500! Being the mortgage geek that I am, my next thought was, “I’m staring at a walking, talking down payment on a house!”

There’s a huge misconception floating out there that 20% is required as a down payment. There are those products that do require such an amount, but there are so many others that don’t. A very popular loan option only requires 3.5%. In the case of my new gym acquaintance, $8,500 represents a 3.5% down payment on a $242,000 mortgage – that’s not a palace, but that amount of money could buy a modest home in a nice neighborhood.

A recent poll revealed that potential homebuyers believe that because of student loan debt, they have no extra funds to save for a down payment. Like any human being who wasn’t born with a million-dollar trust fund, I understand the realities of budgeting and finances – there are so many demands on our income that it seems impossible to save enough for a down payment. Despair not, my fellow regular people! Let’s look at a real-life scenario that will give you hope – and a VERY workable solution.

A responsible young couple sets their sights on a place close to downtown: a small home with an asking price of $180,000. They could get a bigger house that’s new if they move farther away from downtown, but they decide that this option is best for them: less of a commute, closer to restaurants they love, etc. A 3.5% down payment is $6,300 – they have a little bit in savings, but they want to keep it there for emergencies. They need a plan.

Their VERY smart realtor sits them down and does some VERY simple math with them:

• The average person spends $8/day at a Starbucks/Dunkin Donuts/Peet’s – that’s on a drink and something to nosh (bagel, scone, that weird granola parfait, etc.)
• For a couple, that’s $16/day X 5 days/week (we won’t count weekends – live a little): that’s $80/week or $4,160/year
• A 3-lb bag of coffee at Costco costs $12.00, and it makes between 100-120 cups – conservatively, that’s a 10-week supply for two people
• Using the Costco coffee, they can probably do the year with 5 bags for a total of $60.00
• All told, switching to Costco for JUST one year, the couple could save $4,100
• As most young couples are wont to do (because they’re working and are busy), they tend to eat out 3-4 nights/week
• By cutting out just one of those dinners out each week, that could save $50/week – that’s $2,600
• With these two “tweaks” to the couple’s lifestyle (for JUST one year), they could save $6,700 – and that would keep their savings account wholly intact
• Even if home values increased by 5% over the year of saving, that would put the home (or one like it) at $189,000 – 3.5% of that is $6,615, and the couple has $6,700.

Is it a coincidence that the difference between the amount saved ($6,700) and the down payment needed ($6,615) is $85.00? That’s just enough to spend an hour with a tattoo artist where the couple can have their favorite realtor’s name forever inked on their biceps. It’s like it was meant to be!

Practically every time you turn on the news and hear the talking head discuss the economy, you usually get about six words into their spiel and your brain explodes – because they’re always talking about “mitigating factors” and “behavioral predictors”. Why do they employ such gobbledygook (that’s a word) when they talk about the economy? Because they’re just guessing, and they’re trying to make you think they’re smart. Believe me, I went to college with a bunch of budding TV journalists, and their class load didn’t involve Doctorate studies in macro- versus microeconomics in the 12th century – it was a lot of voice projection and learning how to stare at your interviewee until he gets really uncomfortable.

The following items of discussion are not my own making – I’m not that smart. Fortunately, though, someone was smart enough to distill this information down to a level I can understand, and I now submit this to you for your illumination. Here’s a list of more down-to-earth ways to track how the American economy is doing:

Lipstick Index
The “lipstick index” is a term coined by a guy at Estee Lauder in 2001. Since then, the concept has been expanded to nail polish and foundation. However, the basic idea remains the same: when finances are tight, consumers will forego large luxury purchases for smaller indulgences, like cosmetics.

Men’s Underwear
The men don’t want to be left out – this is a good indicator of the economy because it’s a basic necessity whose purchase can be pushed into the future until more disposable funds are available. This “index” came from that laugh riot, Alan Greenspan.

Hemlines
The Hemline Index: the theory behind this indicator is that women’s hemlines tend to follow the stock market. Skirts tend to get shorter during boom times, while ankle-length hemlines signify a bear market.

Cardboard Box Shipments
The idea behind this one is simple: many goods ship in corrugated cardboard boxes, so when box companies are producing more, it’s a good economic sign.

Now, I’m fairly confident the folks at the Fed, at their meeting this week, aren’t going to be discussing whether Alan Greenspan has purchased a new set of briefs (or boxers) or what color lipstick Janet Yellen should or shouldn’t wear (I think she should go with an autumn shade), but we lesser mortals can read the “signs” as well as they can – just fire up the internet and type in a few key words. You might want to avoid “men’s underwear” and “lipstick” in the same search, though.

Later this month, Fannie Mae will start requiring Trended Credit Data (TCD) as reported through Equifax and Transunion. At present, this will not affect FHA or VA loans – but that could change. So, what is Trended Credit Data, and how will it affect you?

While Fannie Mae, Equifax, and Transunion all use English words to define TCD, the definitions are very long winded and boring, so let me cut to the chase: it means that rather than looking at your credit score as it stands on the day it’s pulled, TCD goes back 24-30 months to examine your credit “behaviors”. The long and the short of it is this: if the “trended data” shows that you have a large credit card balance, and you pay it in full each month, you have a higher level of credit worthiness than someone who has a large credit card balance and only pays the minimum required amount each month. Are you with me so far?

There are a couple of big ramifications of this new policy, of course, but let me point out one of the most obvious ones: gone are the days of getting bigger near-instantaneous bumps (upward) in your credit score when you pay down a loan or pay off an outstanding credit card balance. The reason being that now the credit score will be based on how you’re been “trending” for the last 24-30 months: if you’ve been paying the minimum amount on your credit cards for the past two years, making one big payment to wipe out the balance is going to be significantly “downgraded” in importance because you have 23 prior monthly payments showing a completely different behavior. Buckle up because it gets . . . more interesting.

As part and parcel to this new policy of TCD, the nation’s largest property management company has convinced Equifax and Transunion to include late payments of HOA dues to be factored into a person’s credit score. Yes, you read that correctly. And you know that every other property management company, big and small, will follow suit shortly. The positive side to this is that since it’s going to be viewed through the TCD lens, this means that it will take 12 months, at least (but hopefully longer), to establish a “trend” before it can be included as part of the Trended Credit Data. For this reason, coupled with the fact rates are as low as they are, now is the time to start looking for that next home purchase – waiting will only give the credit folks time to build up their trended data, and there’s never a guarantee with the rates.

As for Fannie Mae requiring TCD, there’s no need to get unduly worried. Will requiring TCD change the options available to you to obtain a loan? It’s very likely depending on your current credit behaviors. With that said, though, we have always had more options to present and pursue than other banks and brokers – and we’ll continue to buck the trend(ed).

There’s absolutely nothing earth-shattering about this week’s edition of our lovely newsletter. That doesn’t mean you should stop right here and not read it; I’m just helping you set a suitable level of expectations. Not everything I write can be a literary masterpiece on par with To Kill a Mockingbird or The Lord of the Rings. I’m only human.

We’re going to have a little refresher course on debt and how it can BOOST your credit score. For those of you who are playing at home, you’ll get extra points for neatness and essay-style answers. Now, let’s look at how four key consumer loans can affect your mortgage worthiness:

Student loans
Because these tend to take a while to pay off, they can help your credit score if you pay your bills on time – you’re able to establish a history of paying regularly. These loans count into your debt-to-income ratio, so understand they do limit the amount for which you can qualify and borrow until they’re paid off.

Auto loans
These can also raise your score as you’ve demonstrated the ability to diversify the types of debt you can carry. A big part of the reason these play well into boosting your credit score is that an auto loan is harder to get than a credit card. Lenders look upon this favorably.

Payday loans
These don’t usually show on your credit report, but if you default, that could ding your credit. If certain circumstances have brought you to the point of needing to obtain one of these loans, the most important thing to remember, of course, is to pay it off on schedule or sooner. Wiping that debt off your plate will help have more cash available for other things.

Existing mortgage loans
Mortgages, when paid on time, are great for your credit score. Conversely, missed payments on previous mortgages will make your new lender nervous. Foreclosures, bankruptcies, and the like, obviously, are other concerns that can adversely affect your mortgage worthiness – but you already knew that, right?

Now that we’re all on the same page, let me ask you just one question: If your client hasn’t led a perfect “loan” life (as detailed above), do you want them to go to a lender who’s going to “refer” them out to a credit-cleaning service (who will probably charge) or to a lender who KNOWS HOW (free of charge) to help them clean and qualify? This is not a slam on a credit-cleaning service at all, but they’re in the business to charge for a service – nothing more, nothing less – and that’s the extent of their motivation. Sure, they want their customers to be happy and have an improved score, but their fee is their ultimate goal.

Conversely, we have a vested interest not only to show them how to improve their credit score but to help them read and understand a credit report so they can see what needs to be done to – and this is the payoff!! – get that house. THAT’s our motivation, plain and simple. So, let me ask the question one more time: do you want a mortgage company that turns this over to a third party, or do you want us working one on one with your client? Here’s a hint: it’s YOUR paycheck we’re talking about – control your destiny or subject yourself to fate.

A friend of mine, when he was a young man, had the chance to go on a tour of a Catholic seminary, which is a school where men train and prepare to become priests for the church. A young priest in training was asked to be my friend’s tour guide, and the two immediately fell into a pleasant conversation about the seminary and what takes place during a regular day. At some point, my friend subconsciously decided to leave his brain at the coat check and ask his tour guide, “So, what was your reason for wanting to become a priest? Was your father a priest?” The young priest-to-be was very gracious and just smiled, and then he said, “No. We take a vow of celibacy as priests, so that would not have been possible.” Not one of my friend’s brighter moments, that’s for sure.

With the same graciousness that the priest-to-be displayed in the face of a less-than-enlightened question, I hope to address some questions and misconceptions about VA loans that exist but shouldn’t.

Myth #1: VA Loans are not a great option for a buyer
Truth:
– No down payment required
– No private mortgage insurance required
– Higher allowable debt-to-income ratio

Myth #2: You can only use your VA eligibility once; use it and lose it
Truth:
– It’s possible to have more than one active VA loan at the same time
– Use it as often as you wish (with some restrictions)
– Losing a VA loan to foreclosure doesn’t mean you’re no longer eligible

Myth #3: VA Loans have much slower turn times, too much red tape
Truth:
– VA Loans close in 30-45 days like most other loans
– All VA-approved lenders do their own underwriting now

Myth #4: There’s no such thing as a Jumbo VA Loan
Truth:
– Yes, there is. Borrower must bring 25% of the amount over the $417K limit
Example
– Loan amount is $500K, which is $83K over the $417K limit
– 25% of $83K is $20,750
– $20,750 = 4.15% of $500K, MUCH less than a 20% down payment

So, let me summarize why buyers AND sellers should LOVE to have a VA loan as part of the transaction:

• No Private Mortgage Insurance – the buyer can afford a higher monthly payment
• Higher allowable Debt-To-Income Ratio – this EXPANDS the base of buyers who can qualify to purchase the home
• No Down Payment (when the loan is at or below $417K) – another obstacle removed from the loan-approval process

The next time you hear someone say, “I hear VA loans just aren’t worth it,” just smile and educate.