The Lending Coach

Coaching and teaching - many through the mortgage process and others on the field

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Home Buyers and Mortgage Seekers – Beware of Online Credit Reports

U.S. Air Force illustration/Senior Airman Grace Lee

Many consumers are shocked to find out that their Credit Karma or other online scores do not match their true FICO score when it’s finally run by their mortgage lender.

This happens quite often – and it’s important to understand the differences and reach out to your mortgage professional first. 

Unfortunately, many would-be buyers have an incorrect view of their actual credit worthiness and begin looking at homes too soon in the process.

To repeat, the key thing to remember here is to reach out to your mortgage professional to get your official FICO score.

Dive Deeper

I’d invite you to find out the particulars here – as the free online credit products and the FICO score used in mortgage qualification process are noticeably different.  Essentially, they use different algorithms to come up with their own score. 

Most lenders determine a borrower’s creditworthiness based on FICO® scores, a Credit Score developed by Fair Isaac Corporation (FICO™). This score tells the lender what type of credit risk you are and what your interest rate should be to reflect that risk.

FICO scores have different names at each of the three major United States credit reporting companies. And there are different versions of the FICO formula. Here are the specific versions of the FICO formula used by mortgage lenders:

  • Equifax Beacon 5.0
  • Experian/Fair Isaac Risk Model v2
  • TransUnion FICO Risk Score 04

The Key Takeaway

The major takeaway is that your Credit Karma score will be different than your FICO score…and in most cases, the free, online score is better than the FICO score – at least that has been my experience.

Also, you can find out here how your credit score affects your mortgage rate – this is also worth the read!

Delayed Financing – A Great Purchase and Financing Option

Paying cash for a house has its advantages. Purchasing with cash rather than getting a mortgage could help you as the buyer win a bidding war when buying a new home. You may even be able to negotiate a lower price on the home if you’re paying cash.

After all, cash in hand is a sure thing, and a mortgage approval can take some time and isn’t always guaranteed.

Delayed financing is a specific program that allows the buyer to take cash out on a property immediately in order to cover the purchase price and closing costs for a property they had just purchased with cash.

How Delayed Financing Works

Delayed financing is a mortgage that is originated on a property after you already own it, in comparison to a typical mortgage that is used for the acquisition of a property. The delayed financing mortgage option allow buyers to compete with all-cash buyers when purchasing the property. 

By financing the property after the initial cash transaction, the borrower/buyer is able to regain their liquidity because the money isn’t tied up in the house after the delayed financing is completed.

Keep in mind that the value of the property might not the same as the purchase price. Borrowers will need an appraisal done by their new lender to determine the value.  Moreover, your new loan can’t be more than what you paid for the property plus your closing costs and lender fees.

Why Delayed Financing?

Delayed financing is generally helpful for:

  • Investors who want to compete with all-cash buyers’ short timelines
  • Investors who want to have more bargaining power because they’re paying with cash
  • A property that has multiple offers and the seller doesn’t want to wait on financing
  • Investment properties, vacation homes, and primary residences
  • An investor who wants to take their cash out and buy another investment property

The primary reason to utilize delayed financing is that buyers can stay liquid. Investors use delayed financing to recover their cash and be able to purchase another property.

Generally, delayed financing is right for an investor who wants to take advantage of all of the benefits of purchasing a home using all cash. They can often negotiate a lower price, close faster and compete with multiple other buyers. An investor who doesn’t immediately qualify for conventional financing may also opt for delayed financing.

An Investor’s Point of View

In this case, the buyer is an investor and purchases a property using all cash.  The buyer then wants to free-up some cash back to buy another property.

The buyer can then delayed financing to recoup the cash and take a loan out on the new property, utilizing the cash back from the initial transaction!

A Primary Occupancy Borrower’s Point of View

The buyer can also use this option to compete with all-cash buyers and negotiate better terms. Delayed financing can be done as quickly as three weeks after purchasing the property, which is different from a standard “cash-out refinance” transaction, where the borrower must wait six or more months.

How Long Do You Have to Wait to Refinance?

If you’re doing a delayed financing transaction on a property you purchased in the last 6 months, you’re allowed to take cash out immediately without any waiting period.

Under normal circumstances, if you bought a home with a mortgage instead of cash, you have to be on the title at least 6 months before you can take cash out and refinance your home, so delayed financing is a notable exception.

Delayed Financing Qualifications

There are certain qualifications that need to be met in order to qualify for a delayed financing transaction.  Most specifically, the property must have been originally purchased using all cash.

Lenders generally have the following qualifications for this type of transaction:

  • Arm’s Length Transaction: You can’t be related to or have a personal relationship with the seller
  • Closing Documents: Closing statement from the property purchase
  • Proof of Funds: Showing where you got the funds to purchase the property
  • New loan amount can be no more than the actual documented amount of the borrower’s initial investment in purchasing the property plus closing costs.
  • Appraisal: Ordered by the lender and paid for by you, generally $500-plus

There can be more needed and other regulations may apply, but these listed above are most standard.

Although you may have just ordered an appraisal when you originally purchased the property, as mentioned previously, the lender will want to conduct their own appraisal before they approve your loan.

It would be my pleasure to help any borrower with a delayed financing transaction, so don’t hesitate to reach out to me for more information or to get started!

Why Home Ownership Matters – A 2019 Resolution

Is a home purchase on your 2019 “to do” list?

If so, now is a great time to do it, as market conditions are quite good!

Homeownership has traditionally been an important way to build wealth and the financial returns on homeownership have been more far more beneficial than renting for most homeowners.

Your home is likely the biggest investment you will make in your life, which brings with it some fear and anxiety.  Don’t let it!  While home ownership may seem a bit scary, buying your home should be an exciting time.

Enjoy the process and engage the right people.

“Twenty years from now, you will be more disappointed by the things you didn’t do than by the ones you did do. So throw off the bowlines. Sail away from the safe harbor. Catch the trade winds in your sails. Explore. Dream. Discover.”

Mark Twain

Why Home Ownership is Important

According to a Trulia report, “buying is cheaper than renting in 100 of the largest metro areas by an average of 37.7%.” 

That may have some thinking about buying a home instead of signing another lease extension, but does that make sense from a financial perspective?

In the report, Ralph McLaughlin, Trulia’s Chief Economist explains:

“Owning a home is one of the most common ways households build long-term wealth, as it acts like a forced savings account. Instead of paying your landlord, you can pay yourself in the long run through paying down a mortgage on a house.”

The report listed five reasons why owning a home makes financial sense:

  1. Mortgage payments can be fixed while rents go up.
  2. Equity in your home can be a financial resource later.
  3. You can build wealth without paying capital gains.
  4. A mortgage can act as a forced savings account.
  5. Overall, homeowners can enjoy greater wealth growth than renters.

More Statistics

  • 87% of people said owning a home is part of their American dream
  • A typical homeowner’s net worth was $195,400 while a renter’s was $5,400
  • Academic studies have shown that homeowners are healthier. This result arises from a better sense of self-control and self-worth among homeowners versus renters
  • Owning a home is good for the economy. With each home sale there are expenditures related to lawn care, home remodeling, new furniture, mortgage origination, moving, and an inducement to build new homes

Infographic courtesy of Trinity Homes

Other Benefits

Homeownership benefits the homeowner’s family and their surrounding community. This includes improved health and school performance for children, increased civic engagement and volunteering, reduced crime, and higher lifetime wealth.

When taking a look at the lessons learned from the last housing crisis, the Bipartisan Policy Center’s Housing Commission noted that homeownership can “produce powerful economic, social, and civic benefits that serve the individual homeowner, the larger community, and the nation.”

The reason is fairly simple: economics. When someone owns an asset, they are more likely to engage in behavior that ensures its future value. You can find out more here from US News and World Reports….

Unlike stocks and bonds, a home’s value is determined by both the physical quality of the structure as well as the general character of its neighborhood.

That means homeowners are more likely to spend their limited time and resources engaged in improving their neighborhood, if for no other reason than to protect the value of their investment.

Bottom Line

Before you sign another lease, perhaps you should sit with a mortgage professional and real estate agent in your area to better understand all your options.

Let 2019 be the year you make the move into your own home!

Key Factors Lenders Consider When Evaluating Applicants

Mortgage approval can be a lengthy, detailed process.

As you can imagine in today’s environment, lenders scrutinize their mortgage applications, along with a myriad of other documents, in order to determine if borrowers are low-risk and able to repay the loan.

With that said, here are some key factors that all lenders will consider….and make sure to reach out to your chosen mortgage lender to have them walk you though this process:

Income

In order for any lender to make sure that the borrower will be able to repay the loan, they will check the applicant’s income to determine loan eligibility. Essentially, this will help determine if the applicant can afford a home loan and budget for monthly payments.

If the applicant is self-employed or commission based, lenders will evaluate them differently than standard W-2 buyers.  Their income may be considered “unstable” and a more detailed earnings history may be required.

More often than not, the last 2 years of tax returns will tell the income story for these types of borrowers.

Credit Score

An applicant’s good credit score can demonstrate to the lender that they are financially responsible and can qualify for a mortgage, sometimes with significantly lower interest rates.

While a good credit score is a good indication that an applicant can pay off their loan, liens and civil judgments on credit reports can impact scores. Lenders will check with public records to determine if they have any liens or judgments against them that could affect their ability to qualify for a mortgage.

Financial Assets

An applicant must have sufficient assets and collateral they can use for a down payment, if they are purchasing a home. For example, liquid assets like stocks and a savings account can be used to secure higher lines of credit.

Since the property that an applicant purchases will often be used as collateral if they end up foreclosing, the value of the property must match the applied-for loan.

Essentially, lenders are trying to identify these 3 key criteria when it comes to lending to a particular borrower. Today’s rules are determined, for the most part, by the underwriting guidelines of Fannie Mae and Freddie Mac, as the majority of today’s mortgages a sold through these enterprises.

Pre-Approvals and “Findings”

Here are a few great quotes from agents regarding the importance of the mortgage pre-qualification process:

“If the buyer I sent in your direction receives a pre-qual, and then three weeks later does not pass underwriting, whose fault is that?”

“To be honest, if the mortgage broker or lender will not invest in the front end, collect and verify the critical information, I truly don’t have much use for them.”

“I need to KNOW that the buyer, who has invested their trust in me, will not be compelled to find someone else at the last minute in order to salvage the transaction.”

With that said, you can actually evaluate the quality of the pre-approval you received from your lender with one question:

“What are your findings?”

This simple question will go a long way in determining the validity of your pre-approval letter.  The answer is either Approve/Eligible (Fannie Mae) or Accept (Freddie Mac).

What Are Mortgage Pre-Approval ‘Findings’?

These “findings” are in the report that outlines the factors that were used to either approve or disapprove that loan application.

The Fannie Mae (Desktop Underwriter) or Freddie Mac (Loan Processor) programs are the specific automated underwriting systems.  These should absolutely be completed prior to the issuance of that pre-approval letter.

The underwriting  report summarizes the overall underwriting recommendation.  It lists the steps necessary for the lender to complete the processing of the loan file.

If a lender receives the go-ahead from Fannie or Freddie through these automated systems, underwriting should be relatively easy.  If not, the transaction is most likely heading for trouble.

Timeframes

The pre-approval process is not a 15-minute conversation.  If you supply me with all the documents necessary for a full document (full doc in industry jargon) review, I need time to read them.  I’ll do the analysis, load the data into systems, and run the analytics….which takes a bit more than 15 minutes.  Giving your lender time to process the information helps to secure a reliable pre-approval.

If your lender is offering you a super speedy pre-approval, you as the agent need to question your choice of loan officer.

Obvious mortgage killers, un-seasoned BK, late payments, etc, are the exception. These issues take only a minute or two to disqualify the credit approval.

Negotiation Importance

Home sellers and their Realtors insist that home buyers submit a valid pre-approval letter along with their initial offer for the home.  Sellers don’t consider offers from people who haven’t taken the time to determine if they can even get approved for a loan in the first place.

Again, make sure to have your client reach out to me prior to going house hunting to get a true pre-approval letter!

Financial Advisors – the biggest mistakes they have ever seen

coop-refinance

“You want to do what?”

“As a financial planner, I see clients make some pretty bad mistakes.  A sad fact of life is that financial mistakes can be made in a heartbeat.”

Here’s a great article about the 13 largest financial blunders seen by financial advisors – it’s absoford-superduty-1lutely worth reading

My favorite: The Retirement Truck…..

Source: Forbes

 

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