Wednesday, May 30, 2007

Put Down the Subprime Mortgage Application and Back Away Slowly

Author: Nick
Category: Money
Topics: , ,

stop in the name of basic human intelligence

Are you itching to buy a home but think the best you can do is an 8.75%, 5-year variable ARM with 3 points and a kick in the face? Chances are you just aren’t looking hard enough, says some guy whose job it is to stick poor suckers with ridiculous mortgage loans. Here are some startling–no, shocking numbers on how many well-qualified dummies are saddling themselves with subprime loans:

  • What is the difference between a prime 6.00% and a filthy 9.00% $300,000 mortgage payment? $600 every month, or more than $200,000 on a 30-year mortgage.
  • Fannie Mae says half of subprime borrowers can find a prime loan instead.
  • Over 30 percent of homebuyers let their real estate agent find their loan for them.
  • How many subprime but prime-qualified borrowers could have saved thousands and thousands of dollars if they weren’t lazy and dove into the homebuying process without knowing a thing about it? All of them.

So what about that other half of sub-prime borrowers who are truly subprime? Maybe they should spend a few months fixing their credit before making the largest purchases of their lives at a trashy interest rate. Then they can come back, carefully explore their mortgage loan options, and save a stupendous amount of money.

Besides, the subprime label usually indicates someone who

  • isn’t the best at handling money,
  • doesn’t have a decent down payment, and
  • can’t afford to pay an extra 25% on their monthly mortgage bill.

In other words, subprime borrower should be synonymous for “person who has no business taking out a six-figure loan.”

Monday, October 9, 2006

Crazy Mortgage Loan Products Coming Soon

Author: Nick
Category: Money
Topics: ,

A time bomb is about to explode. Hit the deck!

mortgage time bomb goes off

time to break the bank

Fortunately we’re not talking literal explosions here. But the mortgage time bomb is a very real problem facing millions of American families whose adjustable-rate mortgages (ARMs) are about to move from relatively low rates to potentially outrageous ones.

You might feel sorry for all those folks being taken to the cleaners on their new mortgage payments. Yeah, there will be people whose housing costs balloon from $1,200 a month to $2,500 or so overnight. But maybe we’re forgetting the real victims in all of this…

Mortgage lenders.

Yes, that’s right. As more and more real estate loans go into default, rates on new loans will skyrocket, and it’ll become harder for new homebuyers to afford a loan in the first place. That means lenders will see their business slowly evaporating.

But if there’s one thing of which the banking industry still has plenty, it’s ingenuity. While the days may be numbered for your run-of-the-mill interest-only ARM, I have little doubt that new, fiendishly clever mortgage products will pop up and allow a whole new generation of people to buy over-priced houses with little more than a dollar and a dream.

Coming Soon to a Mortgage Lender Near You:

  • No payments, no interest until 20XX. I’m sure anybody can afford a mortgage payment of $0 a month, right? How’d you like to pay just that much to move into a fabulous new home of your choice? Oh by the way, your payment starting with month 13 will be roughly 80% of your monthly gross income. But you don’t need to eat or pay taxes, do you?
  • 130-year fixed. Hey, it’s a fixed-rate loan, so you can’t lose! And neither can your children, grandchildren, or great-grandchildren. In fact, you’ll find it very hard to lose those housing payments because you’ll only be paying about 23 cents on the principal every month.
  • Lottery loans. Everyone who applies for a loan each week gets put into a drawing, and the winner gets a fantastic rate on their loan. Everyone else, they get slightly less than fantastic rates. The perfect loan for people who think the only way to become rich is to win the lottery!
  • Pre-scheduled foreclosures. The bank recognizes that they’re selling you a loan you won’t be able to afford in a few years, but they work with you before closing to determine the exact date when your savings account will run dry and you’ll be forced out on the street.
  • “Magical happy-change loans.” Adjustable-rate mortgage sounds so menacing, doesn’t it? Under this new title, these loans will sound much more appealing to potential borrowers. Instead of interest-only, they’ll call it a “delightful temporary discount.” And it’s not a foreclosure anymore… now it’s just “home ownership switcheroo.”
  • Indentured servitude option. Can’t afford your newly-adjusted mortgage payment? That’s okay, because the bank is looking for some extra help on nights and weekends. If you can handle a mop or a broom, you can work off your payments in a few (25 or so) short (long) years (never).

But unless these new products catch on, the future for many mortgage lenders looks a bit grim. So please, take some time out to drive down to your local financial institution, have a seat with a loan officer–any loan officer–and tell them, “I’m very, very sorry.” While you’re at it, you might want to bring them some canned goods or warm blankets… or maybe an ARM to refinance.

Thursday, August 31, 2006

Adventures in First-Time Homebuying #5: Your Sexy and Glamorous Journey to Pre-Approval, Part 4

Author: Nick
Category: Money
Topics: , ,

local piggies good, internet piggies bad

Yes, I know that this episode officially concluded yesterday, but I forgot one extra bit of advice that I don’t want to get buried in an edit to Part 3.

Another Reason to Stay Away From Internet Lenders

Recall that, in my experience, Bank of America‘s loan packages absolutely crushed those presented by internet lenders like Amerisave.com. But what if one of those internet lenders had a better, cheaper loan? And what if they had excellent customer service, too? As it turns out, we are very lucky that an internet lender did not beat Bank of America’s loans.

Had we gone with an internet lender, our offer would have been rejected by the sellers.

Got that? Yes? Well, just to be sure, I’ll say it again.

Had we gone with an internet lender, our offer would have been rejected by the sellers.

Even if we had presented a genuine, bona fide pre-approval letter from First Internet Bank of Awesomeness, our offer on the house we close on next week would have been rejected. The sellers’ agent said exactly this to our agent.

So why all the hatin’ on internet lenders? In this case, the sellers had already located a new house and wanted to ensure that the process of selling their old house went smoothly. That meant no hiccups on the part of the buyer (me) and definitely no hiccups on the part of the buyer’s lender. Knowing that my loan would come from Bank of America did much more to soothe the nerves of the sellers than if it were coming from some lesser-known internet lender.

Of course, plenty of sellers accept offers with pre-approval letters written by internet banks all the time. But in cases where time is short and there may be other offers on the table, the type of lender you choose could make all the difference in you getting the house or not.

Wednesday, August 30, 2006

Adventures in First-Time Homebuying #5: Your Sexy and Glamorous Journey to Pre-Approval, Part 3

Author: Nick
Category: Money
Topics: , ,

warning warning, mortgage loan warnings

Now that we’ve covered finding the lender that’s right for you and the difference between pre-qualification and pre-approval, it’s only fair to give you a few warnings about the pre-approval process. While the end result is a loan for a handsome sum of money, there are a few potential bumps in the road you’ll definitely want to avoid.

Ding! The Effect of Mortgage Pre-Approvals on Your Credit

how a mortgage app will affect your credit

Just like when you’re out applying for a new credit card or a car loan, your application for a home mortgage loan will appear on your credit reports. And if you’ve ever seen the effects of applying for a new credit card or car loan on your credit score, then you know your score will get dinged a few points when you start seeking pre-approval. Fortunately the effects are minor, though the severity and duration of your score drop will depend on those magical formulae put together by the fine folks at TransUnion, Experian, Equifax, and Fair Isaac.

“But what if I apply for pre-approval at 20 different places? Will my score drop 20 times as much?”

Lucky for you, my bold-fonted friend, the credit reporting agencies will see all of your mortgage-related credit inquiries as a single inquiry–provided they all take places within 14 days of each other. (Some of the agencies will see all inquiries within up to 45 days as just one, but you should care equally about all three scores since that’s just what your lender will see.) So be sure to do your lender research ahead of time and group all of your pre-approval efforts into a two-week span.

Flavors of Pre-Approvals (Hint: Chocolate Ain’t One of Them)

There are three types of pre-approval letters you can receive from your mortgage lender. All three are equally powerful in that they specify that someone is willing to lend you money based on a full analysis of your financial status, but some may give you a competitive advantage when putting in an offer on a property.

Here are the three different flavors of pre-approval letter and the pros and cons of each.

  1. Full pre-approval amount. Most commonly, a lender will give you a single pre-approval letter specifying the maximum you can afford to borrow and pay for a property. I suggest only providing this letter with your offer if the price you’re offering is considerably lower than your pre-approval amount. Otherwise, the sellers may see that small difference between the offer and your maximum pre-approval amount as extra cash they can squeeze out of you.
  2. Offer amount. Another option is to obtain a pre-approval letter for the specific amount you wish to offer on a property. Of course, if you’re seeking pre-approval before you start looking, you’ll need to go back to your lender for this later. This type of letter can stop sellers from picking those extra pennies from your pockets, though it can also hurt you if the sellers receive a slightly better offer and reject yours because they don’t think you can beat it.
  3. Specific to a property. This pre-approval letter has no dollar amount on it–only a property address. Using this, you can keep your maximum affordability a secret while still proving you can pay what you’re offering and maybe go a little higher if necessary.

So Many Pre-Approvals–Which One’s the Best Deal?

my calculator cannot count this high

All that hard work and form-completing paid off! You’ve received numerous pre-approvals from various lenders, and you’re ready to start shopping around for a home. But before you call up your real estate agent and start visiting properties, you’ll want to weed those offers down to a few or even just one. After all, you only need to show a seller one pre-approval letter, and that’s probably going to be the one for the lender from which you’ll ultimately obtain your loan.

To narrow down your big selection of loan offers, follow these simple steps in order.

  1. Ditch offers too good to be true. Start off by eliminating any loan offers which seem suspiciously superior to the others. Unless they’ve fully disclosured of all their fees, that delicious rate may be packing a ton of hidden charges. Also research your prospective lenders on the internet and discard offers from lenders with bad reputations or a history of poor customer service.
  2. For the remaining lenders, compare same rate, same day, same products. Mortgage rates change daily or even hourly, so you want all of your offers to be as recent as possible. It is also difficult to compare a 5-year adjustable rate mortgage to a 30-year fixed mortgage, so try to separate your offers by product type. It also helps to ask your potential lenders for all of their offers at the same rate. So if the average rate between lenders is about 7%, ask them to provide details for loans at that rate. Some lenders may need to include extra discount points (not necessarily a bad thing) to bring your offer to that rate, but it makes it much easier to compare products if they all have the same rate.
  3. Total and compare lender fees. Fees charged for originating or processing your loan will vary between lenders, so they are the main source of price differences between loans. Don’t bother to compare “third-party” fees like title insurance or appraisal fees since lenders do not set the prices of these. If all that matters to you is saving money, choose the loan with the lowest fees and you’re done.
  4. Consider other factors. Sometimes lowest closing costs don’t indicate the best loan for you. If you have little cash on hand, you should choose the cheapest loan that asks for little or no money down. If you’re planning to move to another home after a few years, you might want to choose an adjustable-rate loan product regardless of its closing costs because it’ll carry a lower initial rate. And one lender may simply give you a bigger loan than others; you may have no choice but to use that lender to afford the home you want. But if multiple loans meet all of your needs, and all else being equal, it makes sense to choose the one with the lowest lender fees.

You may end up keeping two or more loan offers in mind. For example, consider these loan offers for which all other factors are equal:

  • Offer A. Maximum purchase price: $200,000. APR: 6.25%. Lender fees: $10,000.
  • Offer B. Maximum purchase price: $225,000. APR: 6.5%. Lender fees: $15,000.

Offer A has a lower rate and fewer fees than Offer B. But if you’re looking to make a $215,000 purchase, you’ll have no choice but to go with Offer B. So hang on to both of them until you’ve finalized your offer price.

Locking Your Rate: A Hidden Feature Which Can Save You Thousands

lock in that rate, you better not wait

Buried somewhere in your loan offer documentation should be some text regarding the rate lock period. This is the crucial but limited length of time during which your loan’s interest rate cannot change. How would you feel if you walked into a store, loaded a $20 item into your cart, and when you went to checkout the price had increased to $40? That’s what rate locks attempt to prevent. Since interest rates fluctuate daily, you want a promise from your lender that your rate will be the same on day one as it is on closing day. Aww, how nice of your lender.

Rate locks can vary in duration, though 30- and 60-day locks are most common. You might be able to obtain a longer lock for an extra fee, so keep that in mind if you anticipate a long period of time between loan application and loan funding since even a small rate jump can cost you tons. Different lenders may start your rate lock at different points in the loan process, too; some will begin it upon pre-approval while others wait until you’ve found a property and submitted the formal loan application.

Note that the rate lock also prevents your rate from dropping. If you suspect rates may come down before your closing date, you may wish to “float” your rate–allowing it to change in response to market conditions until the time of your choosing.

Our Progress So Far, And One Reason to Stay Away From Internet Lenders

With our closing just a week away, I can say that the most difficult part of the homebuying process has been seeking pre-approval. With so many lenders to choose from, just deciding whose long forms to fill out was a monumental choice. In the end, we applied for mortgage loans at a dozen places–mostly “internet” lenders with no local physical presence (or even no branch locations anywhere!). We did not use a mortgage broker because we are first-time homebuyers and most lenders do a pretty good job of advertising their best first-time buyer programs; a broker probably wouldn’t have found any other products we didn’t find ourselves.

We compared all of the offers we received and immediately discarded a few from internet lenders who couldn’t compete with the others. Our best internet offer came from Amerisave.com, a lender which featured great customer service initially but failed in the last mile thanks to our personal representative who couldn’t or didn’t answer some of my questions. For shame, Amerisave!

Our three best offers all came from the same lender–big ol’ Bank of America. Even though our primary checking account is with BoA, we only applied there because it was listed on the approved lender list for Maryland’s first-time homebuyer program. Our beautiful and talented Bank of America loan officer sat down with me and walked me through the application process. She immediately sensed I knew a thing or two about the mortgage process, so she only filled in the gaps as needed. The whole pre-approval process went smoothly, and she priced three product variations for us. All three were for 30-year fixed loans with rates that matched or even beat some of the 5- and 7-year ARMs we priced at other banks. Two of the loans were through Maryland’s first-timer program, but the product we ultimately chose was Bank of America’s own special first-time homebuyer program. How special are we talking? Very special…

a loan that is nice on our wallet

For the amount we’re looking to spend, we have a maximum 5% down payment available. Since we’re not putting down the 20% banks would like to see from borrowers, we would either need to pay private mortgage insurance (PMI, a.k.a. wasted money) or slap on a second mortgage at a higher rate… unless we chose Bank of America’s awesome first-time homebuyer program. Through this program, Bank of America gave us a single mortgage loan for 100% of the purchase price at a below-market rate with no PMI.

Yes, that special.

The only requirement for this program was for me to attend about four hours of first-time homeownership classes. Bank of America pays for all of it, so the only expense I incurred was time. Even keeping in mind that my free time is worth $90 an hour to me, that $360 is nothing compared to $200+ we’d pay each month for mortgage insurance or a higher second mortgage interest rate.

Top all this off with the fact that Bank of America’s lender fees are pretty darn low–and they even gave me an additional discount because they have a partnership with my employer–and the smoke signals coming from this offer could be seen from space.

We also went with a 40-year payback period. The terms and rates were the same as the 30-year option, and we can still pay down principle as if it were a 30-year loan, but the required monthly payments are lower.

If you’re a first-time homebuyer in Maryland, definitely keep Bank of America in mind. You should still price other lenders, but I can’t believe anyone can beat or even match this offer. Montgomery County residents, feel free to contact me if you want my loan officer’s name; she’s an absolute delight to work with.

As episode #5 draws to a close, I’m sure you can’t help but notice that all we have to show for our work is a piece of paper. But don’t worry, episode #6 will net us a bigger prize–a real live human being they call a “real estate agent.” OoOOooOooh, mysterious!

Tuesday, August 8, 2006

Adventures in First-Time Homebuying #5: Your Sexy and Glamorous Journey to Pre-Approval, Part 2

Author: Nick
Category: Money
Topics: , ,

only 718 more steps to getting one of these

In the first part of this episode, we discussed how to pay for a house and where to get a loan if you need one. Now let’s take a look at some of the ways you can find the mortgage lender or broker who is right for you.

How the Heck Do I Find the Right Lender or Broker?

The answer to this question depends on your definition of the right lender or broker. Are you looking for the absolute best rate you can on a mortgage loan? Or are you looking for a lender who will maximize the amount you can borrow? Or perhaps you’re willing to take a hit on the price tag of your loan if it means top-notch customer service. In any case, shopping around for a mortgage pre-approval is the perfect opportunity for you to gauge various lenders or brokers in all of these areas. Of course, while lenders and brokers will fight tooth and nail for your business, you’ll need to find some first! Here are some of the ways you can locate parties willing to give you a mortgage loan; they’re listed in my order of preference with the best choices given first.

  • Ask someone you know. This is the best way to put together a list of potential lenders or brokers, hands down. Talk to family, friends, and co-workers to see if they have any good recommendations. This way, you’ll know what to expect if you decide to go with one of their picks.
  • Look into lenders offering first-time homebuyer programs. There’s a good chance your city, county, or state has a special loan program for first-time homebuyers. That’s because they’d love nothing more than for you to become a homeowner and start paying those lovely property taxes. Here is a comprehensive list of first-time homebuyer programs by state. Each program will have a different list of lenders who are approved to grant loans through the program, so talk to a few of them since closing costs can still vary from lender to lender.
  • Walk into your bank(s). Maybe you have a checking or savings account with a couple of local banks or a credit union. If so, chances are that they can hook you up with a mortgage loan, too. Of course, if you’re not happy with your bank’s level of customer service, you should probably shop elsewhere for your loan; but if you’ve been with a bank or credit union for a while and you’re satisfied with their performance, it wouldn’t hurt to give them a call and see what they can do for a long-time customer such as yourself.
  • Pick up a phone book. Most mortgage brokers will have a listing in your local area phone book, so pick it up, flip to “Mortgage Brokers,” and make some calls. Really, though, if you’re going to use a broker, I’d highly recommend choosing one based off someone’s suggestion rather than just thumbing through the Yellow Pages.
  • Use the internet. Sure, you buy your books, electronics, and gallons of milk online, but those are all small potatoes compared to buying a house. You can get pre-approved easily through a variety of internet-based mortgage lenders, and you may even find a better deal online than you would in your local bank. But while you can always pop into your local bank or mortgage lender’s office, you may have some trouble squeezing yourself through the tubes of the internet. If you go this route, your customer service experience will consist largely of e-mails and phone calls rather than face-to-face chats. That may be okay for you, but others will want a real person within driving distance handling their loan applications. And of course, beware of shadier mortgage websites who promise incredible deals; we’ll go over some of the more reputable internet lenders in a future episode.

Pre-Approval vs. Pre-Qualification–Yes, It Matters!

I’ll be brief so we can move on to real business. You want a loan pre-approval which is based on a complete look at your finances. Such an approval will require you to prove your income, show your cash savings, and consent to a credit check. A pre-approval tells you how much a bank will lend to you so you’ll be able to shop for a house you can afford. A loan pre-qualification is absolutely worthless. It does not require a credit check, paystubs, or proof that you have any money in the bank. Heck, I can pre-qualify you right now for a bazillion dollars if I wanted to! In short, you want a pre-approval, not just a pre-qualification.

Four Easy Steps to Mortgage Pre-Approval

Once you’ve put together a list of lenders and/or brokers, it’s time to make some calls or fill out some forms and get yourself pre-approved for a mortgage loan.

  1. Make contact. Many lenders, whether they have physical locations or not, will allow you to apply for a mortgage loan pre-approval online. For internet lenders, that’s probably your only choice other than calling in your application. If your local bank or credit union has a nearby branch, give them a call and find the nearest office that will handle mortgage applications. Then make an appointment to see a loan officer in person. Bring along all that paperwork you gathered in Step 7 of Episode #4. Do the same if you’re meeting with a mortgage broker.
  2. Share your life story. It may be through an online form, it may be over the telephone, or it may be in person with a loan officer; but one way or another, you’re going to be disclosing your entire financial picture in order to get a mortgage loan pre-approval. The lenders or brokers will need all of your stats–income, savings, credit, etc.–to process a pre-approval. You’ll also want to share your intentions–how much you’d like to put down, how much you think you can afford to pay each month, and what types of loan products interest you.
  3. Review available loan products. Based on the figures you provide, a lender or broker should be able to give you several options for loans. Some products may offer better interest rates, while others will allow you to borrow more, and still others may keep your closing costs down. Along with all this informaiton, you should receive a rough estimate of all the costs you can expect to incur for each loan product. Review your options carefully, and choose the one that will work best for you.
  4. Get your pre-approval letter. Once you’ve made your selection, and after the lender or broker processes all of your financial information, you’ll be given that glorious pre-approval letter. Even with a pre-approval letter from one lender, you can still shop around for better offers. But if you’ve shopped enough for loans and want to get started shopping for a home, then you are now free to do so.

There are a few more items about the pre-approval process that I’ll cover in the third and final part of this episode, including a few warnings about obtaining pre-approvals, some ways to tell if you’re getting the best deal you can on a loan, and the different flavors of pre-approval letters that are available to you. I’ll also share my own pre-approval letter adventures and explain why I went with my local bank for a loan rather than with an online lender.