This is the conclusion of the series begun in The 2010 Good Faith Estimate (Page One) and continued in The 2010 Good Faith Estimate (Page Two)
Page Three is where the most blatant lies of this whole piece take place, and the first part is where they are found. It segregates the charges into three different camps: Ones that it claims cannot increase, ones that it claims cannot increase by more than 10% in total, and ones that, supposedly unlike the other groups, can change at settlement.
This is nonsense on stilts, lulling the consumer into a false sense of security.
Loan providers can low-ball every bit as much as they ever could, and this form, in my honest opinion, is the worst part of all because it explicitly states something that is not true. What it really means is that these charges cannot increase without being redisclosed three to seven days in advance of signing the final paperwork. Guess what? Crooked loan officer lies like a rug to get you to sign up, and on day 38 or 42 of a 45 day process is finally forced to tell the truth or something close to it. At that stage of a purchase, there is (thanks to other new regulations) no way on this earth that you’re going to be able to get another loan ready before the deadline written into your purchase contract. You have no choice – you are stuck. And the whole concept of back up loans has been killed by changes in the market. Even on a refinance, you’ve spent the money for an appraisal and other sunk costs. There’s no way to force them to release that appraisal to you. Net result: You’re out the money and the time, and many refinances have an external reason forcing them to happen – almost all “cash out” refinances have an external deadline, a time by which the people have to have the money. People are extremely unlikely to begin the process anew at that point in the transaction, which means that the people who LIED to get them to sign up are rewarded with a loan commission, people who told the truth and are spurned by consumers because the lie looks better receive nothing and go out of business, and the federal government is an unindicted co-conspirator to the raping of the consumer by making a false promise that the liar’s numbers cannot change.
We’ve covered how this whole premise is a lie, but let’s cover the three categories and how honest loan providers are going to approach them until they go out of business
The charges that cannot increase at settlement are loan origination charges, discount charges for the specific interest rate chosen adjusted origination (which I covered in the page one article) and governmental transfer taxes. It is worth noting that even on the new Good Faith Estimate form the government does warn you that discount is changeable until you lock your loan, something that the market is trying to push as close to the day of settlement as possible by imposing high costs on brokers and correspondents for every loan that is locked but does not fund. The reality is that these charges are going to change. Until they started charging me for loans which don’t fund, I locked every loan when people said they wanted it. Now I have to float the rate until I’m certain underwriting isn’t going to reject the loan. If your loan isn’t locked, you are at the mercy of the market even without mixing in possibly foul loan officer intentions. The closest thing to a guarantee even the best most conscientious loan officer can give in the new lending environment is “Everything but the rate/cost tradeoff I can guarantee right now – but I can’t guarantee that until we lock your loan, all I can do is tell you what it would be if we locked today” Since the rate cost tradeoff is far and away the largest determinant of the loan you will get, this amounts to guaranteeing the molehill while the mountain moves every day. It would be a useful yardstick for comparison as to which loan to sign up for if lenders had to tell the truth at loan sign up, which they do not.
The charges which supposedly cannot increase more than 10% in total are services that the lender selects, title services and title insurance, required services where you’re allowed to shop but the lender ends up choosing the provider, and government recording charges. First off, on purchases trying to get escrow and title companies to honestly disclose their charges is a battle all on its own – I don’t know why, as I have no problems getting “one flat rate” quotes from them on refinances. Maybe because it’s because they can seduce the less diligent real estate agents by offering them help prospecting for clients, while on refinances they have to deal with loan officers who are competing on price for consumer business. But the same thing applies to this section as the previous – these charges can change without limit if they are redisclosed three to seven days in advance of closing.
The only charges that receive a completely honest treatment from the new form are the ones that the form advises you can change at settlement; These are services that you can shop for and don’t use providers identified by the lender, title (if you don’t use their selected provider)
The one thing I do like about this new form comes next, because it tells consumers for the first time anywhere in an official publication that there is a tradeoff between interest rate and cost by telling you that there may be alternative loans available for lower cost at a higher interest rate or lower rates for a higher cost. Of course, this being the government, it misses something important – the changed loan amount or how much money you will receive from the same loan amount if you do choose the different loan.
It then gives consumers an place to write down and compare the loans they are being offered. Once again, this might mean something if prospective loan providers had to tell the truth at loan sign up, which they don’t. As it is, this section serves as nothing more than another way to lull the consumer into a false sense of security about what they are being told. If the loan providers are permitted to lie about their loan characteristics and what it costs, the whole exercise becomes a competition to see who can tell the tallest tale believably. Traditional methods of comparison do not help in such an environment, as the numbers they are using to compare are fabrications told for the purpose of securing your business and getting a commission check, because by the time they have to tell the truth most people cannot change loan providers and most of those who can, won’t.
Caveat Emptor
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Continued from The 2010 Good Faith Estimate (Page One)
The next section is on origination charges. Indeed it is titled “Your adjusted origination charges”
It starts with “Our origination charges” saying this is the charge for doing the loan. Indeed, that is and has been the meaning of origination for as long as I’ve been a loan officer. But they want to add other things into it. Furthermore, be advised that prospective loan officers are allowed to change their minds about origination up until 7 days before the final loan documents are signed. In short, they can tell you they are not going to make anything in order to get you to sign up – then decide they want to make 3 points after it is too late for you to change loan providers.
The next subsection talks about “Your credit or charge (points) for the specific interest rate chosen” This is what is traditionally known as discount (in the case of a charge) or yield spread when this money is money paid back into the loan by the lender. I should mention that Congress is trying once again to ban Yield Spread in loans on the sly – something very disadvantageous to consumers. Then it offers lenders three different options. They can say it’s included in the origination line. This means they’re not breaking it out as a separate charge, but lumping it in with true origination. The second option is to tell consumers they will get a credit out of the rate chosen, which does sometimes actually come true in the real world. I have used this credit dozens of times to get clients a true zero cost real estate loan. This usually happens when rates drop precipitously, so instead of seven percent, people can get a loan at 5.5% for literally nothing, as the lender pays enough to pay me and all of the other settlement charges. Of course, people willing to pay those charges get a substantially lower rate – ALWAYS. But if the people know they’re going to have to sell or move in a year (not enough time to recover the costs of those lower rates), a zero cost loan saves them money every month they have it because there are no costs to recover. Finally, you could be paying this charge on top of regular origination. The one thing I want you to take away from this part is that origination is going to get paid on every loan somehow, and you need to understand how it’s going to be paid before you tell someone you want their loan. And note that none of this is set in concrete at the time you sign up for your loan.
The next set of items is “Your charges for all other settlement services” Unlike previous versions of this form, there’s a lot of lumping into sections going on here. Lumping is a good thing, as far as it goes. It lessens the ability of people to pretend that certain charges aren’t going to happen. However, keep in mind that at sign up, and up to 3-7 days before final loan paperwork is signed, loan providers can still change all of these simply by giving you another Good Faith Estimate. It needs to be emphasized that the general practice ever since I can remember is to delay telling you about as many of the charges as possible (and pretend the ones they can’t are going to be smaller than they are) until it is too late for you to switch loan providers, and the new Good Faith Estimate is doing damned little to change that fact or hamper that practice.
“Required Items that we select” tells you about the service providers that you have no option on. A year ago, this section should have been blank. Now with http://www.searchlightcrusade.net/2009/03/the_home_valuation_code_of_con.htmlHome Valuation Code of Conduct raping consumers and making it difficult for good loan officers and good appraisers, this is where the appraisal needs to be. Loan officers are not allowed to choose appraisers or even appraisal companies in most loans. The appraisal company is predetermined for us and we are not allowed to use anyone else – and that company gets to assign the appraisal to whomever they want. Usually, this is the appraiser who is most desperate for work who submits the lowest bid. If the qualify was there, or if I even had the option to kick bad appraisers off the list, that would be a good thing. As it is, I feel lucky any time an underwriter actually accepts an appraisal ordered under this procedure.
“Title services and Lender’s title insurance” Once again it might be nice, if the title insurance company provided complete charges at sign up. About two months ago when the seller chose one in a transaction, they were imcomplete to the tune of about $480 when we started the loan, and when I was trying to nail everything down for MDIA compliance, they were still $120 too low on what they actually ended up charging the consumer. I was not happy, and my client even less so. Even if the title company is truthful however, there is no guarantee at loan sign up that a lender will disclose those fees honestly.
“Owner’s Title Insurance” This should not be a part of refinancing. As far as I know, owner’s title insurance can only be purchased when you buy the property in order to prevent what insurer’s call
adverse selection (the second section definition is substantially better than the first). Around here, the title company is on purchases is specified by the purchase contract and the lender has exactly zero control over it. Furthermore, every purchase contract I’ve ever written requires the seller to pay for an owner’s policy of title insurance. If they’re not willing to pay for the buyer to have a policy of title insurance, there is a reason, and none of the explanations that are really possible is a good situation for the buyer to be getting into.
“Required Services that you can shop for” this means they have to get done, and they have to be paid for, but you can choose by who and the charges are only an estimate. Be aware that no matter how conscientious the loan officer, they can’t be held responsible for accurately quoting a service you are going to choose later, either morally or legally. I quote what I can deliver from service providers I know – but you’re welcome to take the business elsewhere with the understanding that you are responsible for the outcome of doing so.
“Government Recording charges” these charges are for recording your documents so they become part of the public record. This is a requirement for all regulated corporate type lenders. The mafia or your dad doesn’t necessarily have to record your loan – Bank of Whereever (or Credit Union of Whomever) does, and it’s for your protection as well as theirs. Whatever it is, it’s charged by the government, and everyone’s charges should be the same because they’re passing along a charge. If they’re not the same as everyone else, that’s a problem.
“Transfer taxes” are charged on the transfer of real estate (or refinancing, in some states) by the government. Once again, everybody should be the same because they are just passing along a government charge where it exists. If someone is different from everyone else, that’s a problem.
“Initial Deposit for your escrow account” If you want or are required to have an impound account, the money to seed it is accounted for here, despite the fact that it is not a cost of the loan no matter who or how many people say it is. It is to be used to pay your property taxes and your homeowner’s insurance when those charges are due, and when the loan is over, you get any excess back. This is just the lender holding on to your money. Once again, this should be the same for everyone. If one lender is telling you something different, odds are they are low-balling you by telling you you’re not going to have to come up with what you are really going to have to come up with.
“Daily Interest charges” go to paying the prepaid interest. You pay interest on every loan for every day you have it. You never ever really skip a mortgage payment – but this is what allows some lenders to pretend that you do. This is not really a cost of the loan – you would be paying it even if you didn’t refinance. It should be loan amount times interest rate divided by 12, then divided by 30, times the number of days. The most common method of playing games with this is to pretend that the prepaid interest is going to be for fewer days than actual. On a refinance, it can never ever really be less than thirty (30) – it’s usually a day or two more. On a purchase, it’s the number of days between closing date and the end of the month, counting both days (in other words, on the first day of a 31 day month, it’s 31).
“Homeowner’s Insurance” This is the money that will be used to pay for your homeowner’s insurance. This is required by all regulated lenders, but I cannot imagine owning a home without having insurance from a solvent company able to pay whatever claims may arise from a widespread natural disaster. So unless you’re one of the people who disagrees with me on that, it really isn’t a cost of the loan, is it?
Once again, I must emphasize that at sign up, lenders are permitted to low-ball costs, particularly the ones that aren’t fixed in concrete by other parties (government fees, prepaid interest, insurance). They don’t have to be honestly disclosed until 3-7 days before the final loan documents are signed – far too late to change lenders in most cases.
I’m going to stop here for today. Tomorrow will be the final installment of this series.
Caveat Emptor
The concluding article on page three is now here
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I had a great rant about the limitations of the Good Faith Estimate all planned out in my head when I when I was in the very first stages of planning this website in my head. It was the first idea I had for an essay, as it is the most commonly abused item in the whole mortgage system of ours, and abuse of the GFE (as the industry calls it) sets the stage for a significant amount of everything else that goes on.
Some people are asking if the new MDIA rules make any difference to this. The answer is emphatically no. They actually muddy the process. The only difference it makes is that crappy loan officers now have to tell you the truth three to seven days in advance of signing final loan documents. Since those same MDIA rules together with other new regulations have stretched what was a seventeen day process a couple years ago into about forty, you tell me how much good it does the average buyer of real estate to find out 40 days into a 45 day escrow period that they’re not getting the loan they thought they were getting. There’s no time for a purchaser of real estate to get another loan – they’re stuck with that crappy loan. Even on a refinance, how likely are people to start another 45 day process after spending 40 days with the first lender? Furthermore, if you rely upon redisclosure to determine whether or not you were lied to, the waters are even muddier. I just closed a loan last week where everything was exactly what I had quoted the day the folks signed up – but the lender still wanted the redisclosure made to cover their backside, as MDIA has substantial penalties for failing to redisclose, but no reasons not to. At least one lender intentionally refigures the APR in a way different from Regulation Z (which governs APR calculations among other things) to force redisclosure even though that redisclosed APR is not accurate according to Regulation Z!
Nor are the new Good Faith Estimate rules coming into effect on January first going to make any difference. All they mean is that if the fees change (or go outside of a margin allowance in some cases) the lender is going to have to redisclose, exactly like they are doing now, with exactly the same situation for the consumer. Too late to change lenders for buyers, have already spent appraisal money for an appraisal that can’t be moved to the new lender, and even for refinances, at a stage where they are just jerking the consumer after the last practical moment to chance as the new lending environment means nobody can guarantee their quotes upon sign up any longer, and nobody is doing back up loans either. Seriously, my opinion of these new rules has evolved over the last year since they were published from my initial “they could have done better but this is a good thing” reaction to “This (expletive) was designed to muddy the waters and confuse consumers”
On the other hand, the federal Good Faith Estimate is what we will have to use, and on that note:
The first page, if it was binding, would actually accomplish a little bit of things I’ve been telling anyone who would listen that we need. If it was binding, it would warn people in advance of all the lenders that pretended they were getting the consumer a sustainable loan for that ridiculously low payment when it was really a negative amortization loan. However, this section is no more binding than any other part of the form and can be redisclosed (i.e. changed) up to 3 days before signing loan documents.
On item 1, the interest rate for the GFE should basically always say the quote is good for today only. If they were required to be totally honest, it would say “This rate is available right now, but may change without notice. Nor are we going to lock your loan until we have a reasonable assurance of it closing”. The only way a rate is good for longer than right now is if it’s got a “margin” built in to absorb some change. Since this “margin” would mean almost everybody ends up paying more than they would otherwise need to, quote good for longer than right now either are not honest quotes (see my comment upon redisclosure above) or the consumer can get better rates elsewhere. Since the second possibility means that provider becomes less competitive in the marketplace, the first is far more likely.
Item 2, the estimate for settlement charges should be better, but isn’t. My company’s charges are exactly the same on every loan. The only things that should change are investor charges and third party charges. If I put a loan will investor A, the charges may be as low as $225 while if I put it with investor B the charges may be as high as about $900. I have to consider this alongside of the tradeoff between rate and cost those investors (lenders) offer to determine which is the best investor for the consumer to place the loan with. On refinances, I have “one rate” contracts for third parties (title and escrow, and before HVCCrules came into effect used to be able to do that for appraisals as well, and can usually do it even now. But once again, loan officers intentionally low-ball “forget” to fully disclose these charges at sign up, knowing they are going to disclose the correct charges later.
Item 3 tells your alleged lock period, and if this were any better than the rest of the form, would be a very good thing to disclose to consumers. Item 4 tells people how long before closing they must lock. Expect this number to seven days. Why? Because seven days before closing is the longest period they might have to wait between final redisclosure, which really translates into “finally telling the truth” and loan signing.
Summary of loan is no more binding at loan sign up and no more accurate than it is now. Why? Because they are allowed to change it later, and promising a great deal at loan sign up is how lenders lure people into signing up! But let’s go over it anyway
“Your initial loan amount is:” On refinances, this should be current loan amount plus closing costs plus prepaid amounts – unless the loan officer knows you intend to pay those out of pocket because you said so and mutually agreed upon it. If this number is anything else, they are telling you point blank that they are a low-balling liar. On purchases, this should reflect what you are actually borrowing, not just cost of property less down payment. Remember, it’s going to cost you some out of pocket money for appraisal, inspection, escrow and title costs, etcetera. This money has to get paid somehow, and the Loan to Value Ratio is measured off the amount actually borrowed versus official purchase price or appraisal, whichever is lower. If you don’t have a firm handle on where the money to pay those extra costs is coming from, something is wrong.
“Your Loan term is:” good thing to have and know. Doesn’t have to be honestly disclosed at initial sign up any more than anything else, but only the real crooks lie about this.
“Your interest rate is:” Important and critical. But note that it doesn’t have to be disclosed honestly here – not until the final disclosure seven days out. Usually the lender actually intends to deliver on this interest rate – just not for the costs disclosed above, and that tradeoff between rate and cost is critical. To pretend they have the rate available for lower cost than real is LYING. It is lying with malice aforethought. I can do loans a full percent lower than what I am currently quoting most people – but for outrageous costs I wouldn’t trick my worst enemy into paying!
“Your initial monthly amount owed for principal, interest, and any mortgage insurance is:” What most people think of as the payment. You’ve got to be able to make it. If the payment needed to be honestly disclosed at initial sign up any more than anything else, might be useful. But as I keep telling people, Never Choose A Loan (or a Property) Based Upon Payment!
“Can Your Interest Rate Rise?” would be a good thing to know if they had to honestly disclose it at sign up. Amazing how many lenders told people who signed up for all of the worst loans of a few years ago that they were getting a thirty year fixed rate loan even past the period when the loan had funded – right up until the people noticed something wrong and they had to come clean. We’re not talking just brokers here by the way – some of the biggest name direct lenders in the country did it. Now, they have to tell the truth (guess when?) three to seven days before the final paperwork gets signed – but still not at initial sign up.
“Even if you make payments on time, can your loan balance rise?:” See the above paragraph. Same stuff, different line.
“Even if ou make payments on time, can your monthly amount owed for principal, interest and any mortgage insurance rise?:” Same caveats, iteration three
“Does your loan have a prepayment penalty?:” I will bet you money that this remains one of the most common things loan providers lie about to get people to sign up. Same caveats, iteration four
“Does you loan have a balloon payment?”: This isn’t a common point of lying at sign up now – hybrid ARMs tend to be better loans for everyone – even dishonest loan officers – than balloons. But it would be good to know if they had to honestly disclose it at sign up.
The next section talks about escrow or Impound accounts as they are less confusingly known. If you have one, it can only increase the amount of cash you need to come up with or borrow. I generally counsel people to plan direct payment as it eliminates the need for this cash, and avoid doing loans where it is a requirement. Sometimes, however, not wanting to have an impound account can mean a hit of a quarter to a half point of cost at the same rate, and it is then that you have to weigh those costs versus your pocketbook and available cash.
Summary of Your Settlement Charges: Adjusted Origination Charges Plus Charges for All Other Settlement Services Equals Total Estimated Service Charges. I have four words to say about this calculation: Garbage In, Garbage Out. If the figures it’s based upon don’t have to be correct, how can the final amount be correct?
I had hoped to have the complete article done and ready to go today. Unfortunately, that didn’t happen for reasons that are mostly my fault. But this is a good bit to chew on for today. Come back tomorrow and I’ll have more.
Caveat Emptor
The article on page two is here, and the article on page three is here
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From an e-mail:
I live in (City 1) and recently signed a work order on a semi-custom new construction house in (City 2). My wife and I make a combined 120K income and still can’t afford a decent place in City 1. It was preapproved rather quickly from both the builder’s mortgage company and a few outside companies and everything was moving along splendidly, until my employer decided to refuse to transfer me (something we had mutually decided on back in April). To make a long story short, the house will be built and ready to close in early November and 2 of mortgage companies are asking for a Relocation letter from my employer. Seeing as how I make 66% of the 120K combined salary, my plan is to tough it out here until I find (1) a job in City 2, or (2) a job here that will transfer me to City 2. My question is, if I can’t supply them with a relo letter am I dead in the water? Do I have to scrap the loan (primary residence) and try to get a second home or investment loan? The broader question here, is how critical is any piece of documentation? Obviously W-2s and bank statements can be deal breakers, but what about the other stuff? I.E. relo letters, proof of homeowners dues, etc etc.
First off, you have an obvious potential issue with your current employer. If your work order was predicated upon a promise of transfer, you may have a case against them if you want one for the amount of any money you’re out. Consult an attorney, preferably one that is licensed in both states. Obviously, this poisons the atmosphere, so you may not want to. On the other hand, you may have decided by now that you are done with them one way or the other.
Second, getting to the item of contention, the relocation letter. Every lender’s guidelines are different. You didn’t say how many lenders you had applied with, but few people apply for more than two loans. Any item the underwriter asks for can be a deal-breaker, especially if you can’t provide it. What the underwriter is looking for is a coherent picture of someone who is going to be able to repay the loan. If the loan underwriter doesn’t see a coherent picture of you being able to repay the loan under the circumstances it was submitted under, the loan will be declined. The underwriter can ask for anything they want. They can ask for proof your father gave birth to identical triplets, if they think it has some bearing on the loan. If you cannot furnish them what they want, and your loan officer can’t shake an alternative or an exception out of them, the loan is dead.
Now they’re not likely to ask for proof of something impossible and irrelevant like my example. Legally they probably could – Everybody has a biological father, so it’s not discriminatory on the face of it. They’re certainly not going to violate anti-discrimination lending laws by asking for something based upon race or sex. But they’re in the business of making loans, which in many cases make more money for the developer than the sale. However, if the underwriter approves loans that go sour, they can expect to be held accountable by their employer, and so they require and are permitted a certain degree of necessary latitude on additional requirements in order to do their jobs. If I tell an underwriter that I make $2 million a year in the stock market, I’d better be able to furnish proof. If it’s not relevant to the loan, I should keep my mouth shut about it because it’s asking for trouble. Never tell an underwriter anything not absolutely necessary for loan approval.
It’s a horrible lie about people from Missouri, but I tell people to think of underwriters as Missouri accountants. Their favorite sentence is, “Show me on paper.” All loan approvals are based upon the potential borrower and their current status quo. In other words, the situation as it is, not as you hope it will be someday. Yes, when doing Verification of Employment they ask about prospects for continued employment, but that’s just to establish that the employer isn’t willing to admit they’re about to fire you. They know that in the real world, people get told “Yes, we’re going to keep Mr. X here forever” and next week Mr. X is applying for unemployment.
What the underwriter is looking for is a coherent picture of you occupying the property and working at your current employer. You’re working in City 1 and living in City 2, which are not within daily commuting difference, but you applied for the loan as intending to make it your primary residence.
Given that they are requiring a letter of relocation, you have several options. I know it has happened in the past that employers who were not willing to relocate employees were nonetheless willing to write letters that said they were. This is stupid. This is fraud, and if the loan becomes non-performing the employer could potentially become liable for whatever the lender lost, not to mention that a lot of your protections as a consumer go out the window. Second, they could sign a letter that says you are going to be telecommuting from your new home. Yes, your job is in City 1, but you could legitimately be living in City 2 and still employed and doing your current job. Bingo, happy underwriter (probably). If your loan officers aren’t complete idiots they will have asked you about this, so I presume the answer is no.
So now we’re bringing in other issues as well. Now you have a husband living in City 1, while the wife and new home (and I presume wife’s job) are now in City 2. Fact: husband needs a place to live in City 1. “What’s that place to live going to cost him?” they ask. They take this answer and add it to the previously known total of your other monthly payments. Because you now have more in known monthly expenditures, now you may not qualify for the loan you were “pre-approved” for. Pre-approval doesn’t really mean diddly-squat, and the developer knows it, so they likely required at least a decent sized deposit from you, so if you don’t get the loan, you don’t get the house, and you may have a substantial forfeiture. See my first paragraph at the start of the article. Furthermore, some underwriters may see a potential divorce situation here, so they may ask for some kind of testimonial from third parties that you’re not getting a divorce.
Now, if you had a decent agent, he likely wrote your offer “contingent” upon your relocation. Unfortunately, if you’re buying from a developer, your agent probably works for the developer, and so didn’t do this. You may or may not have a case against the developer and the agent. Consult an attorney, but this is one area of many where buyer’s agents really pay off.
(Even if they’re inclined to trust me, I do not want to represent both sides in a sale, and will usually insist that one side go get another agent, or at least sign a release indicating that they realize I am working for the other party, not them, and have no responsibility as to their best interests. As your experience indicates, too many actions are a potential violation of fiduciary duty to one side if you do them and to the other if you don’t. There are some agents who get greedy and do both sides, but usually they make their attorneys very happy. If your agent wants to do both sides of the transaction, that’s never a good sign.)
However, what I suspect you really want is the house and the loan you signed up for. So I’m going to go on that presumption.
You make $10,000 per month. You may be able to get a friend to rent you a room in their home in City 1 for fairly cheap, so that there is not enough difference so you don’t qualify for a loan. Several years ago before I met my wife, I rented a room out cheap to a friend who was in a situation not too different from yours. “A paper”, you are permitted up to about about a forty-five percent debt to income ratio, and it can go higher if you have a high enough credit score such that DU or LP (Fannie and Freddie’s automated loan underwriters) will buy off on it.
You could go to a different loan type, carrying a lower rate and hence a lower payment. Unfortunately, the debt-to-income limits on these are lower. Unlikely to work.
You could go to a “second home” loan. Unfortunately, the standards on those a a little tighter, and there may be an additional fee of a quarter point or even a half, and you’re still going to have to show the underwriter a residence in City 1, which means the payment qualification issue raises it’s ugly head here, also.
Finally when this was originally written you could have gone to a sub-prime lender (where maximum Debt to Income ratio can be higher) or done a “stated income” loan. Both of those options are now non-existent. If you were working with a broker’s loan officer as opposed to a direct lender or packaging house loan officer, either would be no sweat – you might not even have to do another application. The broker would simply withdraw your loan package and submit it elsewhere. Unfortunately, from a subsequent email, I know that you’re not working with any brokers. Well, the developer probably has a sub-prime lender on tap as well, so that may be a low stress option. On the other hand, if they are a different branch of the “A paper” lender, they may not be able to do your loan either. Or, if you’re lucky, the developer is acting like a broker in the first place rather than a direct lender.
One of the great rules of the business is that you cannot go from a higher documentation loan to a lower documentation loan on the same borrower at the same lender. If I submit to lender A “full doc,” I cannot then later submit it to lender A “Stated Income.” The reasons for this should be fairly obvious, and this is a no brainer without exceptions across the business.
For brokers, because the paperwork is in their name and not the lenders in the first place, this means no new reports. But since you’re not working with brokers, what this means is that you’re likely to need a completely new set of reports from the appraiser on down in the new loan company’s name. This may be done on a retyping basis if you are lucky, or you may have to pay for completely new ones.
I strongly advise you NOT to quit your job, unless someone a lot more familiar with your situation and prepared to take the consequences of being wrong tells you otherwise. Here’s why: You quit your job. Now you are unemployed. It does not matter if you’ve been doing what you’re doing for forty years. Right now you are unemployed. As things currently sit, you do not qualify for the loan. Even if you’ve got a written offer of employment somewhere else, many lenders will not approve the loan until you have a pay stub to show for it. Since this means waiting several weeks at least, it’s almost certainly outside your window of opportunity.
One final issue: here in California, it’s illegal for a developer (or anyone else) to require that you do the loan with them in order to get the property. But it happens anyway (I’ve been told point blank by more than one developer’s agent that if the client doesn’t do the loan through them, the purchase contract will be canceled. Many others won’t tell you point blank, but they will throw obstacles up until you give up on the other loan), and it’s a long hard slog to prove legally and it costs you thousands and you still don’t get what you really wanted in the first place: the house you signed an order for. I am not certain the practice is even illegal in City 2, where you’re buying (although from some things I’ve heard about that state’s practices, I think it’s probably legal). So you probably want to be certain you’re not fighting the developer on this by finding your loan elsewhere. Unfortunately, you’ve already (probably) put a deposit down and you said in subsequent email that the home has appreciated while it was being built, so the developer has incentive to throw roadblocks in your path. Your transaction falls through and not only do they get to keep your deposit but they can turn around and sell the home for more. Preventing this kind of nonsense is what buyer’s agents are for (it also gives you someone easy to sue if something goes wrong!). Unfortunately, most developers will not cooperate by paying a commission to buyer’s agents for precisely this reason, which means that the average buyer will decline to pay an agent out of their own pocket and try to do the transaction on their own, which leads to situations like this.
Best of luck, and if this does not answer all of your questions, please let me know.
Caveat Emptor
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(This is a reprint from December 2006, with a few updates. It is instructive in the wake of a certain new mortgage quote service, launched with great fanfare. The negative amortization loan is gone, but I’m seeing lots of other fairy tales being told there – deliberate low-balling on costs and payment being most common. Heck, their automated property tax quotes are about half the real number, and there’s no ability to change them.)
I got a question about what I think about those online quote services.
The answer is that they vary from okay to putrid.
There are two sorts of online quote sources. The first is where mortgage companies have their rates online, and people come along and browse. Those are pretty much a waste of your time. Here’s why: Those companies have absolutely no hold and no real tracking on the people who come to browse. They might put a cookie on your machine, but it’s hard to parlay those into contact information, which is their whole entire goal: Getting loans out of it. Unless they have some way of contacting you, which they don’t, they need to use that forum to get you to contact them. They do this by low-balling their quotes, making it look like they are offering something nobody else has. Unfortunately for consumers, that’s not even an estimate. Here in California, the one caveat is that the rate must exist, but the real costs of getting that rate can be many times the costs they quote. This suffers from all of the limitations that a Good Faith Estimate does, plus more. They can say that they’ve got a 3.625% rate, and as long as they have a 3.625% loan, they are in the clear. Never mind that it costs a full six points and adjusts every month, that sounds like a great loan to the uninformed. Furthermore, many places will quote the nominal (“in name only”) as opposed to real interest rate on the negative amortization loan. When there are people apparently offering you 0.5%, that’s who most consumers will call, ignoring the people who have and can really do 5.5% thirty year fixed rate loans, more so on those forums where they include a payment quote as well. I’ve got the same 0.5% nominal rate forty year amortization loan available to me, but it will always be a putrid loan, as the real rate is a little over 8% and the rate is subject to change every month. I should note that lenders pay a lot of yield spread to brokers who do those loans: How often do people sign on the dotted lines for mortgage rates in excess of 8% (with a three year prepayment penalty!) when rates under 5% are available on a thirty year fixed rate mortgage with no prepayment penalty at all? I’ll tell you how often: Whenever people aren’t smart enough to realize that that $960 payment on a $417,000 loan isn’t the real rate. Indeed, they’d have to pay $2794 per month just to pay the interest – while the fully amortized payment on a thirty year fixed rate loan is hundreds less. But there are an awful lot of people who aren’t smart enough right now.
Furthermore, those online forums are supposed to enforce their quotations policies. I’ve never heard of one that enforces real concrete penalties for violators. On two separate forums, I went straight down the line contacting every listed company, using a loan scenario that was close enough to what they were supposed to be quoting to that I should have gotten the same quote or a little bit better, if they could really do those loans. Not once did I get a rate that was within half a percent of the rate listed online, and most of them were over a full percent off, and with negative amortization loans, most are not even in the correct ballpark. When I contacted the forums themselves, neither of them was interested in enforcement.
In short, those online quote forums tend very strongly to get business for the company that tells the biggest, most boldfaced lie. Often, the consumers are lulled by the existence of the forums into thinking they’re getting a deal, and they don’t bother going through the necessary steps to shop their loan around. Meanwhile, the companies that will advertise honest rates quit those forums in disgust. Since there are a lot more companies playing games with their quotes than honest ones, the forum wins by not enforcing their rules. However, since the consumer wants to find companies that really will deliver the loans they advertise, consumers lose. Matter of fact, I don’t think I’ve ever seen a real rate on a loan I would be willing to sign up for advertised in any forum: online, newspaper, or otherwise.
The second type of online quote forum work like the advertisements plastered all over the internet. “$510,000 loan for $1698 per month!” (to use the first I found just now). They show a couple dancing happily, having a party because their mortgage payments are reduced, or so they think. Another shows a guy jumping for joy. What they don’t show is those same people when they figure out all of the downsides to the negative amortization loan that they signed up for. “This is Jack calling his lawyer again, only to be told there’s nothing the lawyer can do again. This is John and Jane losing their home to foreclosure.”
Their come on is that you’re supposed to get four competitive loan quotes. The company advertises negative amortization loan payments because more people will click on them and sign up for the service if they think they might get something so great that anyone would want it. Unfortunately, just like every other negative amortization loan out there, the payment or interest rate they quote to get you to click their ad and complete their form online is not the real payment and it is not the real rate. Yes, they will accept that as a monthly payment. But the interest you are being charged is based upon a rate of 7.87%, and you have to pay $3345 per month just to break even on the interest – that other $1647 gets added to your loan, so that next month you owe $511,647. Doesn’t seem like a lot of extra, but go along for three years until the pre-payment penalty expires, and even if your rate doesn’t adjust upwards, your balance is now $576,600. If you go the full five years that the minimum payments last, you owe $630,000, and now your payment jumps to $4813, and you can’t refinance because you are upside-down on your mortgage, and your credit score is 100 points lower!
The games don’t stop here, by any means. You’ll be told that there are “no costs out of your pocket,” and even though they’ll be rolling $23,000 in costs and points into your loan, they give you a quote based upon the amount of money you tell them you need. No, $23,000 doesn’t make that much difference at half a percent forty year amortization, but it lets them quote that payment just a few dollars lower, even though they know that you want the $23,000 rolled into your loan. Nor is what they’re telling you about a good loan in any way shape or form, but most people shop mortgage loans based upon payment.
Furthermore, they aren’t telling the truth about four mortgage providers calling you. They may sell the lead to four different places, but those four places turn around and sell them to four others each, and each of those sells them to four more. There may be as many as six levels of this going on, and the average person who does fill out their form will be called by at least fifty providers in the first week, with others trailing out for potentially years. The lead seller doesn’t care – they made their money, and they don’t give refunds simply because the loan they talked about is toxic. Nor does it matter to them that the loan they talked about puts the loan providers paying them for leads in the position of either telling people – honestly – that the loan that was used to get you to sign up is a piece of garbage that causes people to lose their homes, or just selling you one of the abominations. They don’t get refunds from the lead seller in the first case; they’re just out the money. In the second case, they get paid roughly 3.75% of the loan amount by the bank ($19,125 on a $510,000 loan), plus whatever points of origination that they can con you out of. Finally, if they don’t, they know that one of the fifty or more other companies that will be calling you will sell you one of those loans. So their motivations are not on the side of telling you the downsides of their loan. Matter of fact, their motivations are never aligned with telling you the downsides of the loan, so if you find someone willing to talk frankly about good and bad, they are a treasure and it is worth keeping their contact information, and making a habit of talking to them first about future loans.
Once upon a time, if you could cut through the morass of fifty or more companies calling, those “competitive quotes” ads were a great way to find a good loan provider. Ethical low cost loan providers could make a very good living buying those leads. Unfortunately, that is no longer the case. First off, ninety-nine percent of the leads you pay for were lured in with the promise of a negative amortization loan. You don’t get refunds for those. You are just out the money, time, and phone expense of calling those folks – unless you make a habit of selling negative amortization loans, which low cost ethical providers do not. Furthermore, even on the few leads that are not lured in by Negative Amortization payments, just because you don’t try and sell them a negative amortization loan doesn’t mean that one of the other fifty companies won’t. Having been there and done that, I can tell you from experience that trying to talk people out of negative amortization loans is usually a waste of breath – the competing company will use conspiratorial tactics like, “That’s because this mortgage is too good – they don’t want you to have it!” People want to believe in Santa Claus, the Tooth Fairy, and Negative Amortization Loans. Bottom line for ethical loan providers: paying these services for leads no longer works. You cannot make any money at it. Since making money is what you’re about, and the payoff is too low to survive on the thin margins of good providers, you are driven elsewhere for your business leads. Since that’s the type of loan provider consumers want, it’s a waste of time to go to either sort of online mortgage quote service.
at this update, negative amortization loans are now long gone, but all of the old standby games are still being played. “Forgetting” about adjusters that apply, lowballing the actual rate/cost, quoting rates for a loan there is no way the people will qualify for, (there’s quite a divergence currently), quoting conforming rates when the loan should be Jumbo Conforming or non-conforming, and forgetting to add the costs to the loan balance when quoting payment. Anything to get you to call.
Caveat Emptor
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