DallasLoanGuy’s - Texas Home Loan Weblog

Last Week in the News

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After falling or remaining flat from September to November, consumer prices climbed 0.5% in December, as gasoline prices staged a momentary rebound, the Labor Department reported January 18. For 2006 as a whole, consumer prices rose by 2.5%, the lowest increase in three years. Wholesale prices, the cost of goods before they reach the consumer, increased 0.9% in December, down sharply from a 2% jump in November, the Labor Department said January 17. Total 2006 wholesale prices were up just 1.1%, a dramatic improvement over the 5.4% surge in 2005. The preliminary reading on U.S. consumer sentiment by the Reuters/University of Michigan Surveys of Consumers rose to 98.0 in January from 91.7 at the end of December. The reading — the best in three years — was propelled by falling gasoline prices and a favorable view of personal finances and the economy. The number of Americans filing new claims for jobless benefits dropped by a surprisingly large 8,000 last week to 290,000, the lowest level in 11 months, the Labor Department reported January 18. Analysts had expected new claims to reach 315,000. Meanwhile, rates on 30-year mortgages hit a nine-week high, as financial markets reacted to these and other positive economic reports, lowering chances that the Federal Reserve will move any time soon to cut interest rates. This week look for updates on existing home sales on January 25 and new home sales on January 26.

Courtesy of: American Home Mortgage Investment Corp.

Well, if you can afford it…. then it probably isn’t worth the price!!!

The credit bureaus have stated that the only thing you can do to ‘repair’ your credit is pay your bills on time and wait…. and wait…. and wait.

Well, they are partially right. There are some things you can do to speed up the process. But if you have been solicited by someone who says they can remove unpaid collections, or bankruptcies on some little technicality…… RUN!!!

What can you do? Well, that depends on your file, and everyone is different. I will spell out a few things that will help.

1. Don’t hide from your debts. If a collection agency calls, be nice and take down ALL of the information you can. Original creditor, amount of principle, interest, late fees…. generally, what makes up that amount they are collecting. Get the name and address of the company along with any account numbers. Then, politely say that you need to research it, or you need time to gather the funds. Immediately, send a ‘Cease & Desist’ letter certified mail to the collection agency. Huh? Cease & Desist? Yes!!! The collection agency is offering you an undesireable service…. and you can ‘fire them’. If you do this right away, there is a great likelihood that it will not get placed on your credit report. If you are in this circumstance, i don’t have to tell you, that these debts get sold & resold and can show up 2 or 3 times on your credit report. Stop them in their tracks. Now, I am not suggesting that you NOT pay your bills. But you should pay the original creditor when possible.

2. Keep those credit card balances down. The number one killer of a FICO score is the high utilization of revolving debt. And if you get a Home Equity Line of Credit(HELOC), then get a bigger credit line than you need. Why? Because if you need $10,000 and get a $10,000 line….. it is ‘maxed out’ from day one. Another little trick you can do is ‘convert’ that revolving debt to installment debt. A bank or credit union would be where to start. Although you may have to ’secure’ that debt with some type of collateral.

3. Pay on time. Yes, it is that simple…. over time, your late pays will hurt your score less and less…. so it is important to come up with a plan that you can stick to and follow that plan. If you can’t stick with the plan, ask for help.

4. Debt counseling. I am not talking about those debt cancelling services, because I have yet to find a legitimate one. I am talking about consumer credit counseling(CCCS). If you DO decide to use a service like this, you really, really need to sign up for credit monitoring and make sure they are paying on time. I have seen folks come out of CCCS with a TON of late pays. Ask up front if your scheduled payments will be suficient to bring the accounts current and be reflected as good accounts on your credit report.

5. Seek advice and counsel from someone who understands the FICO score. A good loan officer can show you what steps you need to take to increase your scores. Sometimes that includes opening new accounts. Whatever the steps are, do what you can when you can and watch your scores increase over time.

More about this subject is available on the resources page of my website. I hope this helps someone.

http://www.dallasloanguy.com/resources.shtml

http://www.dallasloanguy.com/docs/about_credit.doc

http://www.dallasloanguy.com/docs/about_credit.pdf

 By Kenneth R. Harney Saturday, November 18, 2006; F01 When home builders behave badly, some of their customers may have an unexpected resource: The federal government’s “RESPA police,” who say they have become increasingly active in resolving consumer complaints through nonpublic interventions with builders. RESPA stands for the Real Estate Settlement Procedures Act, a consumer protection law that targets kickbacks and other settlement-related abuses. The RESPA police are investigators at the Department of Housing and Urban Development. They are best known for their splashy public settlement agreements with real estate, title insurance and mortgage industry firms, sometimes involving hundreds of thousands of dollars. But with no public fanfare, the RESPA police have begun intervening in complaints brought by individual consumers who say builders are unfairly forcing them to use their affiliated mortgage companies. The affiliates’ loan deals, the complaints say, typically are more costly than those available from independent mortgage brokers and lenders. In one case outlined by HUD officials in an interview, a builder canceled a sales contract and seized an $11,845 good-faith deposit when a buyer refused to use the builder’s affiliated mortgage company. Under RESPA, builders and others generally are prohibited from requiring the use of a specific lender or title company as a condition of a sale. HUD officials talked about enforcement operations on the condition that their names not be printed because agency policy requires that they remain anonymous when discussing nonpublic investigations. According to the HUD officials, after RESPA investigators contacted the builder and gave the company 15 days to resolve the dispute, the builder — which the officials also declined to identify because no public action was taken — not only allowed the buyer to proceed with independent financing, but also paid the buyer’s lender to lower the interest rate. In another recent nonpublic intervention, a consumer complained that a builder seized her $10,000 deposit when she refused to accept the loan deal offered by the builder’s mortgage affiliate. The affiliate’s loan officer “fraudulently altered financial documents,” according to HUD, “that would have placed the consumer in a home she could not afford.” In other words, the builder’s loan officer allegedly was willing to approve the buyer for a mortgage amount and monthly payments that ultimately would cause her to lose the home to foreclosure. After investigators intervened on her behalf, HUD officials said, the buyer was refunded the $10,000 deposit. In a case involving incentives dangled by many builders to attract buyers in soft markets, a prospect was offered a “free” morning room addition to the new house. The builder said the addition was worth about $13,500. The only hitch was that the purchaser would need to use the builder’s mortgage subsidiary. The builder assured the buyer that the rates, fees and terms offered by the subsidiary were “very competitive” with outside lenders and brokers, according to the complaint. But when the buyer checked out the competition, he found the subsidiary’s fees to be bloated — a $5,400 “origination” charge, for example — and far more costly than in the regular market. The buyer complained to investigators at HUD, arguing that the builder was engaged in an intentionally deceptive practice. After investigators hinted at legal action, the builder agreed to waive the $5,400 fee and threw in the $13,500 morning room, too, according to HUD. Investigators actively are pursuing other nonpublic mortgage-related complaints, officials say, including allegations that builders: · Raised the prices of homes when buyers declined to use their mortgage affiliates or subsidiaries. · Required buyers to deposit extra money in escrow accounts if they refused to use the affiliated lender. · Pushed buyers into using a designated lender with the threat of withdrawing a $5,000 “seller’s credit” toward closing costs and also adding $10,000 onto the home price. If you find yourself in a builder squeeze involving mortgage, title or other affiliates, HUD has some practical advice for you: · Compare interest rates, loan terms and closing costs of several independent lenders before agreeing to use the builder’s affiliate or wholly owned subsidiary. Determine whether the affiliate’s rates and total charges are higher than the going market rate and offset any discounts, incentives and upgrades. · If you intend to use a builder’s affiliated mortgage company to take advantage of incentives and then refinance the loan to get a lower rate, be sure that the mortgage note does not contain a hefty prepayment penalty designed to discourage early refinancing. · Be suspicious of large discounts or additions that are contingent upon using the builder’s loan affiliate. Knowing what comparable homes in the area are selling for may help you determine whether the builder is offering a true discount or is simply raising the price of the home before offering the discount. If you have a complaint involving high-pressure tactics designed to coerce you into using a builder’s affiliate, you can call the RESPA enforcement staff at 202-708-0502. Alternatively, you can e-mail hsg-respa@hud.gov. For background on RESPA, visit http://www.hud.gov/. Kenneth R. Harney’s e-mail address isKenHarney@earthlink.net

Over the past couple months I’ve had borrowers ask for certain documentation types later to find out that’s not really what they are seeking after all, the most common variation I’ve seen is people looking for no doc loans when they should be looking for some variation of stated income or no ratio loan.

To help clarify the different documentation types on a mortgage, arranged from usually what gets the best pricing & terms to the worst:

Full doc - if you are self-employed this most likely means 2 years of federal tax returns (all schedules). If you are a wage-earner it most likely means 2 years of W-2’s and a paycheck with YTD earnings information. If income is hard to determine based on the paycheck & W-2 then a verification of employment (VOE) form can accompany it. Also requires assets, usually the rule of the thumb is you need 2 times your monthly mortgage payment in reserves + any funds to close. Sub-prime lenders usually don’t have the asset verification part. Employment is verified.

Lite doc - usually when 3, 6, 12, or 24 months of bank statements are used to document income in lieu of paycheck stubs, W-2’s, & 1040’s. Assets are still required in addition, sub-prime’s asset requirement is usually the same as full doc. Employment is verified. This is a common document type for sub-prime financing, while not many non sub-prime lenders & programs find this acceptable.

**Stated income (also known as stated income/verified assets - SIVA) - income is stated on the loan application, employment is verified, assets are verified (asset verification becomes more common on stated income sub-prime loans than full doc sub-prime).

**Stated income/stated assets (SISA) - income & assets are stated on the application but not verified, employment is verified. Most sub-prime stated income loan programs are of this type.

No ratio - employment & assets are verified, income is either on the application but debt ratios do not apply or income is left completely off the application.

No income/no asset (NINA) - income nor assets are listed on the application, employment is still verified.

No doc - zip, zilch, nunca (thanks David Spade), no assets, no income, no employment. Most sub-prime lenders “no doc” program is really a NINA but they call it “no doc”. About 1 out of 3 or 4 of sub-prime lenders offer this documentation type.

I’ve met several loan officers who have been in the industry for over 3 years who still have a tough time figuring out which document type is most beneficial to the borrower, just be sure that you and your loan borrowers are both on the same page.

** I wanted to say something about the Stated Income loans. I am aware that good people will have a second job that pays cash or cannot document their income in some way. The stated income program was designed for them. It WASN’T, however, designed so that one borrower can include spouse income, or inflate income to get a bigger house. Unfortunately, this is all too common. It is fraud to state your income higher than it really is…. and you will be asked to to sign a 4506-T form which allows the lender to get copies of your tax return from the IRS in order to audit the file. They usually do not audit the file…. but you better believe they will if it defaults.

Since you Realtors already know this fact….. let’s cut to the chase.

I recently got a lady pre-approved for a loan that I didn’t know about 2 yrs ago.

My borrower was pre-approved by another lender. She was quoted almost 8% on 20% down loan(with a 3yr prepay penalty). Why? Well, she had a $17,000 medical collection. And 2 yrs ago…. I probably would have priced her the same loan.

Well, it seems that she makes less than 80% of the median income for her county. And I found a loan program that would ignore the collection and give her a loan in the mid - high 6’s….. This is called a “Community Commitment” loan. There are similar loans, but this one is powerful. Banks have a vested interest in lending money to people who earn less than the median incomes in their area. Why? The community Reinvestment Act!! Thats why!!! Because they can get heavy fines if they cherry pick certain parts of town to put their money.

Why didn’t the other lender do this? Why didnt the Realtor say….. Whoaaaaaa?

There are programs out there that a lot of brokers/lenders are not aware of these days. Don’t let YOUR buyer get stuck in a sub-prime loan because the loan officer is lazy or doesn’t have this knowledge.

Hook up with a lender that can talk to you honestly about loans. Ask why one guy is subprime and another lady is prime when they have relatively the same credit score.

Why would a Realtor want to arm themselves with this information? They aren’t lenders. That is not their job. But it IS the job of their lender partner…. who is an extension of Realtor themselves.

I was sitting in a Title Company’s office out west of Fort Worth, Texas. I usually do not travel that far for a closing…. but this guy really wanted me there.

Anyway, the client was a city slicker, 100%. And west Ft Worth is FAR FROM the city life.

Time to show the survey: The escrow officer explains that there is an ‘easement’ on the property and that the buyer should not build anything permanent on top of the easement. She said a small shed would be ok. “HUH?….” says the client. “So, can I build on it or not?” She went on to explain that if the city ever needed access to that piece of the property the homeowner must grant it…. Then she said: “So, just don’t build anything there that can’t be removed with a 6-pack & a sledgehammer”

 My borrower, the city slicker, heard that and about hurt himself laughing. Only then did that poor escrow officer realize that she wasn’t dealing with a local.

There is no moral to this story. But I did learn a new way to explain property easements to my clients. ;-0

Bryant’s blog reminded me of something that I have been saying for years.

http://activerain.com/blogsview/27122/Your-home-is-your

Bryant talked about how people are using their homes as a cash machine. How they do not realize that consolidating debt can be dangerous when you eat up all of the equity in your home.

For years, I have been saying that colleges should have a required course on ‘real world finance’. No, not that finance course that teaches you about markets and corporations….. but about the following:

1. How long does it take to pay off a credit card when you make the minimum payments? And how much did that $500 Ipod REALLY cost after you factor years of interest payments on it?!?!

2. Buying a home. Dangers of no money down and how it affects you should you need to sell right away.

3. Financing an auto

3. How credit works. Maximizing your credit scores thru behavior.

4. Managing debt, emergency cash needs, to finance or not to finance.

ect….

I have counseled many couples who have been overwhelmed with debt in the past. People who run up their credit cards and struggle to make the minimums.

Thinking back on my college education…. I can think of many courses that could be dropped in favor of this course. I mean, aren’t we trying to get our kids ready for the real world in college?!?!?!

More info can be found in my free e-book titled “About Credit” at http://www.dallasloanguy.com/resources.shtml

What the heck?

I have been running across more and more stories about buyers/borrowers being charged upfront for services.

I can’t believe people get away with it.

Recently, I had a question from someone wanting to get preapproved for a loan…. she even found a house already…. and the loan officer she contacted first asked her for $15 to pull credit. Now, let’s forget that that is probably not the ‘actual’ cost….. which is all that should be charged. But UPFRONT? No, I am sorry…. I cannot hold my opinion back. No fee should ever be charged upfront. One exception ,might be for an appraisal when it is ordered. I do try to get my borrowers to pay for it at the door…. I have been stuck with that fee before.

I see application fees all of the time. $100 - $500 and people actualy pay it.

I even saw where one realtor asked for a $100 retainer from a buyer before he would go show houses.

I eat a couple of credit reports per month. And it costs me money to run a file thru Fannie Mae for approval…. I even eat a few of them too. But I will never ask my client for money upfront. And I will certainly share that information with anyone who will listen.

Is this just part of the changes in this industry? With the discount brokers and internet business?

I embrace technology and change. But some things should remain the same.

Credit tune up, that is.

And, how long before home shopping do you wait to apply for a loan.

A big mistake made by a lot of buyers is to not get a pre-approval LONG before they start looking for a home.

Now, not all programs are score driven, but scores do count in a lot of programs. And a good mortgage lender can coach a borrower into a few extra points if given the time.

Example: Borrower just maxed out a credit card buying widgets. If the borrower can spread that around to several cards, the score may improve a little. Borrower may have a home equity loan maxed out doing repairs to the home they are selling. If they can ‘up’ the credit line, that revolving line of credit will not look maxed out. And the credit scores will CERTAINLY increase. The borrower may also decide to pay off a bunch of debt so they look better to the loan application…. effectively wiping out all of their reserves. Not a good idea in most cases.
And what about the guy who thought that insurance paid all of his doctor bills? To find that some collection agencies just reported him past due on several accounts…. tanking his score? Again…. things we can deal with.

I am a firm believer in prequalifying a borrower LONG before they inten to look at homes. That way, if there needs to be a little tweaking….. we have time to deal with it before we do the loan. Maybe saving the borrower thousands of dollars over the life of the loan.

 Realtors: Do yourself a favor…. convince the client to get preapproved right away. Even if they arent going to buy for 3+ months. Give the lender time to improve the clients position. And YOU will be a HERO in that clients mind.