5 Financial Benefits of Owning Your Home

Home calls to mind family, community, friends, relationships, and a shared history. Where we live affects our self-esteem, the control we have over our environment, and our perceptions over financial security. Being a homeowner is seen by most as a sign of accomplishment and success. Buying a home takes a lot of thought, hard work, and sacrifice.

Whether you are a single person or have a family, you need to decide whether or not owning a home is right for you. There are many things to consider, including where you want to live, how much you can reasonably afford, and what you are willing to do to make sure your new home maintains its value.   Aside from the important psychological benefits of homeownership, there are many financial benefits to consider:

(1) Mortgage payments are a sort of forced savings with a portion of your monthly payment going to reduce the principal balance,

(2) The U.S. tax code allows homeowners to reduce mortgage interest from tax obligations (limits apply),

(3) Real estate property taxes paid are also fully deductible from tax obligations,

(4) If you live in the home for more than two years and then decide to sell it, up to $250,000 of the profit gained from the sale is excluded from capital gains taxes for single persons and up to $500,000 for married persons, and

(5) Price appreciation helps build home equity, which is the difference between the market price of the house and the remaining mortgage payments.

Careful consideration of all applicable benefits to your particular situation can be reviewed with a certified public accountant.

 

Sylvia M. Gutiérrez is author of Mortgage Matters: Demystifying the Loan Approval Maze. RealWorks Press: 2015. Available at Amazon, Barnes & Noble, iTunes, and independent booksellers everywhere. Distributed by Ingram.
Licensed and registered mortgage loan officer with NMLS id: 372427
Diversity & Inclusion Co-chair, NAMB – Association of Mortgage Professionals
Government Affairs Chair, South Florida Mortgage Bankers Association
Associate Member, National Association of Real Estate Editors

Under TRID, Can A Lender Review Loan Documents Prior to Issuing a Loan Estimate?

As part of the implementation of the final rules of the Dodd-Frank Act, one of the most contested issues regarding the changes under the Truth-In-Lending and Real Estate Settlement and Procedures Act  Integration Disclosure (aka TRID) is the question of whether or not a lender can review loan documents prior to issuing a Loan Estimate. The Consumer Financial Protection Bureau has issued clarification on this and many other questions that lenders, realtors, closing agents, and borrowers have through the Federal Reserve System’s audio conference series on consumer compliance issues that can be found here:  Index of TRID Questions Addressed During Webinars-2.

The short answer to the above question is yes.  A lender CAN review loan documents prior to issuing a Loan Estimate if the borrower volunteers the information.

Borrowers:  When shopping for a home loan, ask your loan officer for a Pre-Application Cost Estimate for any loan program you wish to consider.  This is non-binding to the lender and allows you to view different options prior to deciding which loan program, rate, and terms are best for you.  Information quoted is based on many assumptions including:  loan amount, intended occupancy, credit score, property type, valuation, timing of rate lock, and whether or not your debt-to-income ratio falls under 43%.  Changes to any of these assumptions may result in changes to quoted terms or access to loan programs.

Lenders:  If you haven’t programmed Pre-Application Cost Estimates for your loan officers to assist borrowers in their selection process, you’re behind the 8-ball and may be exposing yourself to unnecessary compliance and fair lending risks.   Also, take a moment and remember when you were buying your first home.  Didn’t you want to see all the closing costs in writing before you made your buying decision?  Before you gave a stranger your social security number?   Allow your LOs to provide the proper tools for borrower decisioning and train your LOs to go over the above mentioned assumptions.  With a clear explanation of risks, an educated borrower will appreciate the lesson and identify you’ve earned their business.

Sylvia M. Gutiérrez is author of Mortgage Matters: Demystifying the Loan Approval Maze. RealWorks Press: 2015. Available at Amazon, Barnes & Noble, iTunes, and independent booksellers everywhere. Distributed by Ingram.
Licensed and registered mortgage loan officer with NMLS id: 372427
Diversity & Inclusion Co-chair, NAMB – Association of Mortgage Professionals
Government Affairs Chair, South Florida Mortgage Bankers Association
Associate Member, National Association of Real Estate Editors

6 Basic Steps to Mortgage Approval

Has this ever happened to you? You are pre-qualified with a lender for a certain loan amount and spend the next few weeks with a Realtor searching neighborhoods until you find the perfect place and negotiate a contract. You are through the moon excited because it’s the right price in the right location. You tell your parents. You tell your friends. You tell your co-workers. You tell your book club members. You tell everyone you know that you’ve finally found your dream home and that you’ll be moving in a few weeks. Then, three weeks down the road, you get the call, “I’m sorry Mr. Smith, but we are unable to approve your loan request.” Your stomach sinks to the floor.  Everything had seemed to be going along perfectly. You gave everything that was asked of you, time and again. What happened?

That experience can be both embarrassing and hurtful to you and your family. Whether you are a first-time homebuyer or a long time real estate investor, understanding and preparing for each step of the loan approval process can avoid delays due to missteps, miscalculations, misunderstandings, and unintentional misrepresentations.  Too many times, buyers simply go off the estimations given with a pre-qualification and commit to a property only to learn later on that something about the initial data listed on their loan application was significantly different from verified data.

The process of mortgage approval is basic, but it consists of six steps. In the above scenario, you probably started with step three, skipped over steps four and five and then expected to land on step six. The first two steps are completed without the involvement of your lender and will require a significant investment of your time, attention to detail, and effort in making corrections where necessary. The remaining four will have you working closely with your lender.

Step 1: Credit Report

Knowing your credit profile is key in determining loan program eligibility. Get a copy of your credit report and dissect it looking for errors and confirming accuracy.  You can obtain a free copy of your credit history annually at Annualcreditreport.com. While this is a good place to start, it doesn’t provide your FICO score that loan officers will need as a guide to prepare cost estimates and have discussions around loan program eligibility. Service providers such as Identity Guard provide you with access to your scores from all three credit repositories (TransUnion, Equifax and Experian) for a monthly fee and have options to help you monitor credit activity, prevent identity theft and model the impact of changes to your credit profile.

Step 2: Supporting Documentation

Gather all documentation as listed on the Comprehensive Mortgage Documentation Checklist.

Step 3: Pre-Qualification

Sometimes people use the words pre-qualification and pre-approval interchangeably, but as they apply to mortgage financing, they turn out to mean quite different things. In the pre-qualification phase, we take a look at your loan program options. You’ll likely have a discussion with a loan officer where you’ll share the amount of monies you have available for down payment and closing costs, your monthly income, recurring debts and offer an estimate of  your credit score. Quick calculations are performed that suggest how much home you can afford and discussions are had over which loan programs you may be eligible.  You’ll also learn what documentation is needed and have a general expectation of the timeline for when you should make formal application and the application fees that will be required.

While pre-qualification is an important step in the process, if all you have is a pre-qualification letter, you essentially don’t have a solid commitment to lend from a creditor.  A creditor is the entity that funds your loan. It could be a bank, a nonbank mortgage company, or a private investor. Within each of these classifications, there are hundreds of entities providing different loan product options, adhering to different underwriting guidelines, lending on only certain types of housing, and pricing their loans based on assessed risk and desired profit margins.  I use the term “loan officer” throughout for reader clarity, but you can make application directly with a representative of any of these creditors or you can engage with a mortgage broker who searches for a creditor that matches your specific needs.

Step 4: Pre-Approval

The US government has decided that a lender cannot “require” that you provide supporting documentation before it issues loan disclosures. That said, it doesn’t disallow a lender from collecting supporting documentation.  This post isn’t about what a lender needs to do to stay compliant with government regulations.  This post is about how you can successfully navigate the mortgage approval process.  Bring your supporting documentation to your lender meeting so that you can have a meaningful conversation over program eligibility, identify areas of concern and list accurate data on your loan application.  Gathering documentation is time-consuming.  If you’re someone who struggles with organization, put your financial house in order right now in preparation of homeownership by following the instructions in Step 2.

Your lender will obtain a copy of your credit report using one of their vendors.   Program eligibility is once again reviewed and pricing is re-calculated based on your now verified representative credit score.  At this point, you may need to reconsider loan programs or down payment options if your credit score varies significantly from your initially estimated score. When you make loan application, you can only select one loan program for lender consideration.

With a program selected, the data on your loan application is run through an Automated Underwriting System (AUS). A lender will typically use Desktop Underwriter (DU) or Loan Prospector (LP) that are the proprietary underwriting systems for the government-sponsored entities (GSEs) Fannie Mae and Freddie Mac, respectively.  Sometimes a lender will use their own proprietary AUS system to accommodate for their specific portfolio lending programs or additional overlays (restrictions) to GSE guidelines. Based on the initial AUS findings, the loan officer will receive a recommendation and a list of loan conditions.

While a pre-approval is significantly better than a pre-qualification because credit history is reviewed and a recommendation of approval is received, an underwriter (decision maker) has still not reviewed your supporting documentation.  A pre-approval just sits with the loan officer until you receive and review loan disclosures and issue your Consent to Proceed with the loan application.

Step 5: Conditional Loan Commitment

You may be thinking that you don’t have to go through the trouble of a “formal” review of your loan application but you should because rarely is the income you disclose at application the qualifying income that a lender can actually use. Once consent is recorded and application fees are collected, only then is your loan file submitted to an underwriter for review.  This process can take as little as two days or as long as four weeks, depending on lender turnaround times.  Having submitted all necessary loan documentation, you should expect this initial conditional loan commitment to be issued subject only to acceptable appraisal, clear title and property insurance.  

Now you can begin shopping for a home.

Step 6: Final Loan Commitment

With a purchase contract in hand, a lender then orders a property appraisal and a title request is sent to your selected settlement agent. When the appraisal comes in, you are given a copy and you will begin working with your insurance agent to secure adequate property insurance coverage and provide evidence of that coverage through a Certificate of Insurance.

When the lender receives all documentation complying with the preliminary loan conditions and the appraisal is in, the file goes back to the underwriter with the hopes that the documentation submitted complies with the requirements to satisfy loan conditions and a Final Loan Commitment is issued.  The Final Loan Commitment will show that all preliminary funding conditions are cleared and will list any pre-funding conditions that must be satisfied. Most pre-funding conditions can usually only be satisfied at the closing table or within ten days of closing, so you’ll never receive a final loan commitment that is completely free of conditions.

It’s important for you to follow the steps in the process. While its good to know where you stand, don’t make the mistake of the homebuyers in the above example by pausing at pre-qualification and jumping into contract negotiations. Know your credit, gather your supporting documentation, research lending programs, and shop pricing and loan eligibility with different lenders.

Sylvia M. Gutiérrez is the author of Mortgage Matters: Demystifying the Loan Approval Maze.  Miami: RealWorks Press, 2015.  Print and eBook.

 

The CFPB Has Confirmed What Loan Officers Have Always Known

In a January 2015 study, the CFPB has confirmed what loan officers and mortgage brokers have always known, the first provider to engage with the borrower has the highest likelihood of acquiring the loan transaction. For about 77% of borrowers, the mortgage shopping process stops after their first application. That is significant.

The interest rate on a mortgage is one of the key components of the mortgage’s total cost, and offered mortgage interest rates vary across lenders, implying that consumers can potentially save a significant amount of money if they shop effectively. But interest rates are only one component of finding the right lender match. To shop effectively, a consumer must must know what features and benefits are available and what eligibility standards are applicable. Not all lenders offer the same loan products and not all lenders follow the same credit criteria.

Key findings from the National Survey of Mortgage Borrowers include:

      1. A sizable share of borrowers report that factors not directly related to mortgage cost, including the lender or broker’s reputation and geographic proximity, are very important in their decision making. Borrowers who express such preferences are much less likely to shop.
      2. Almost half of consumers who take out a mortgage for home purchase fail to shop prior to application; that is, they seriously consider only a single lender or mortgage broker before choosing where to apply. The tendency to shop is somewhat higher among first-time homebuyers.
      3. The primary source of information relied on by mortgage borrowers is their lender or broker, followed by a real estate agent.
      4. Consumers who report being unfamiliar with the mortgage process are less likely to shop and are more likely to rely on real estate agents or personal acquaintances.

 

The study goes on to ask consumers what characteristics – besides interest rates or other mortgage terms – may play an important role in their choice of lender or broker. While none of these characteristics were considered very important by a majority of the borrowers, these characteristics were very important for a sizable minority of consumers:

  • Having an established banking relationship
  • Reputation of the lender/broker
  • Having a local office or branch nearby
  • Recommendation from a real estate agent/home builder

 

For those consumers who had a tendency to shop, these are the primary characteristics that motivated them:

  • Lender/broker operates online
  • Recommendation from a lending website
  • Reputation of the lender/broker
  • Recommendation from a real estate agent/home builder
  • Recommendation from a friend/relative/co-worker
  • Spoke my primary language, which is not English
  • Having a local office or branch nearby

 

The bottom line is this… Consumer education on the mortgage lending process is critical for potentially saving thousands of dollars over the life of the loan.

Are Realtors ready to explain the implementation of the 2015 TILA-RESPA Integrated Disclosure Rule to homebuyers?

According to a recent survey conducted by Wells Fargo, the answer is a resounding “No.”

Here’s a primer…
As part of the implementation of the final rules of the Dodd-Frank Act, there will be a combination of various RESPA and TILA regulations to create all-new disclosure documents designed to be more helpful to consumers, while integrating information from existing documents to reduce the overall number of forms.

Implementation of this new rule impacts two processes of the mortgage transaction and affects everyone involved in real estate and goes into effect October 3rd, 2015*. As Realtors are typically the ones who have the first interaction with homebuyers, its important that they are provided with educational resources to clarify the impact these changes will make upon borrowers in their home loan shopping process and with the scheduling of loan closings when the rule’s implementation can potentially require last minute negotiations for sales contract extensions.

Key Features of the Integrated RESPA/TILA forms include:
-When applying for a loan, the new Loan Estimate (LE) document replaces the Truth-in-Lending Disclosure (TIL) and the Good Faith Estimate (GFE).
-At loan closing, the new Closing Disclosure (CD) replaces the Final TIL and HUD-1 Settlement Form.
-Loan applications taken prior to October 2015*, require the use of the traditional GFE & HUD-1. As such, lenders will be telling closing agents for months to come whether to use the HUD-1 or the new CD at loan closing.

In essence, consumers will receive one document instead of two and implementation of the rule will expire the traditional Good Faith Estimate and the HUD-1 Settlement Form for certain loan transactions, but not all. These rules apply to most closed-end consumer mortgages. They do not apply to home equity lines of credit (HELOCs), reverse mortgages, or mortgages secured by a mobile home or by a dwelling that is not attached to real property (i.e., land). Oddly enough, for these loans, the old forms will continue to be used which will create a slew of issues for both lenders and settlement agents.

The Consumer Financial Protection Bureau (CFPB) governs implementation of the rules which define a loan application as the collection of these six items: 1) borrower name, 2) borrower Social Security Number, 3) borrower income, 4) property address, 5) estimate of property value, and 6) mortgage amount requested. Once these six items are collected, lenders are not permitted to require other items before issuing a Loan Estimate, as had been allowed previously before issuing TIL disclosures and/or GFEs.

The Loan Estimate
The Loan Estimate (LE) has been designed as a comparison tool intended to provide financial uniformity for borrowers with which to shop different lenders and aims to provide them with a better way to understand the information being given. Uniformity of the LE throughout the marketplace also applies to timing. The LE must be delivered to the borrower within three business days of taking a loan application. No fees can be collected and no Intent To Proceed (ITP) can be requested until an applicant has received the LE much as is required in today’s operating environment with the Good Faith Estimate.

Effects on Implementation and Unintentional Consequences
In the shopping phase of the mortgage lending process, a borrower traditionally expects to collect various pre-application cost estimates to view loan program options and these cost estimates can then be used to compare the same offerings from different lenders. These estimates are non-binding to the lender because they are based on certain assumptions which include:
-credit score
-property type (single-family, condo, PUD, number of units (1-4)
-value of property
-loan amount
-intended occupancy (owner-occupied, second home, investment)
-debt-to-income ratio (DTI) <= 43%
-date and time of pricing request

A fault of the proposed LE is that it doesn’t list all assumptions the lender has made in its calculation of pricing for clarity of comparison from one lender to another.

To provide a pre-application cost estimate, a lender needs only three of the six components that define a loan application – borrower name, estimate of property value and mortgage loan amount requested. Therefore, providing pre-application cost estimates does not trigger the issuance of regulatory disclosures for loan application.

Today, there is no rule in existence that prohibits a lender from issuing of a pre-application cost estimate prior to a borrower making full loan application. After August 2015, again, there is no rule that will prohibit this activity. Post August 2015, a pre-application estimate is prohibited to look like either the new LE or the existing GFE and will need to include specific language that it is not to be considered an LE.

Overall, the Loan Estimate is intended to give consumers more helpful information about the key features, costs and risks of the loan for which they are applying, but here’s the thing… If lenders begin using the LE in place of designing pre-application cost estimates and if their loan operating systems (LOS) have limitations that simultaneously prohibit the issuance of an LE to only instances where all six components of a loan application are received in order to ensure compliance with the timing of the delivery of the LE to the borrower (as they currently do when issuing a Good Faith Estimate [GFE]), then a borrower will essentially have to make application with a lender in order to receive the Loan Estimate– which is then counterintuitive to the partial intent of the LE which is to compare loan options prior to making application.

Additionally, the TILA/RESPA rule prohibits a lender from requiring that supporting documentation be delivered prior to issuing the new Loan Estimate. As such, in most cases, the LE will be issued based on the unverified information that is provided to a mortgage loan originator (MLO). If borrowers unintentionally misrepresent their income, assets, property type or intended occupancy between one lender and another, the LE’s (and/or pre-application cost estimates) received from each lender will invariably produce different pricing.

The Closing Disclosure
The second component of the RESPA/TILA integrations is the Closing Disclosure and is intended to reduce surprises at the closing table regarding the amount of cash borrowers will need to bring to the closing table. The new Closing Disclosure (CD) is a blend of the existing Truth-in-Lending (TIL) disclosure and the Settlement Statement (HUD-1). It’s important to note that the new CD is governed by the Truth-in-Lending Act (TILA), not the Real Estate Settlement Procedures Act (RESPA). TILA provides different accuracy expectations and enforcement provisions than RESPA, as well as some differences in definitions, with associated risks and penalties that are much more severe than RESPA.

The biggest change that will come from the TILA-RESPA Integrated Disclosure Rule is that the borrower must receive the Closing Disclosure at least three business days prior to consummation as opposed to the current one day requirement of delivery for the HUD-1.

TILA defines consummation to be: “The time that a consumer becomes contractually obligated on a credit transaction.” Each lender is left to decide at what point it considers that a borrower has become contractually obligated on a transaction. Although a 3-day right of rescission rule applies when refinancing owner-occupied properties, many lenders are choosing to define the consummation date as the date the borrower signs the loan documents even though technically, the borrower still has three days to rescind the offer.

While its affect is no doubt a positive for all parties, its implementation is creating major challenges for lenders and settlement agents alike. Traditionally, settlement agents prepare the HUD-1 Settlement Statement. In this new environment where lenders are required to show compliance of delivery of the Closing Disclosure to the borrower, there is much debate and concern over who is responsible for the accuracy of the CD. Lenders can only guarantee their fees. Settlement agents are responsible for ensuring all other fees are accurately represented on the closing statement. This marriage of responsibilities is requiring lenders and settlement agents to open better lines of communication much earlier in the process.

RESPA-TILA Integration Details
The new Loan Estimate consists of three pages and the Closing Disclosure consists of five pages.  For borrowers and Realtors, to view the proposed new disclosures, visit the Consumer Financial Protection Bureau (CFPB) homepage and scroll to the Participate tab and then select the dropdown for Mortgages. For lenders, the CFPB has also issued a detailed 96 page explanation of these two new forms which can be viewed online at Guide to the Loan Estimate and Closing Disclosure Forms.

 

*Updated July 2015 to reflect the CFPB’s decision to delay implementation from August to October 2015.

Real Estate Agents Demand Local Lenders

contract

In an article dated August 22, 2014, Inside Mortgage Trends reports results from the latest Campbell/Inside Mortgage Finance Housing Pulse Tracking Survey to show that real estate agents strongly prefer local lenders and a Florida real estate agent was quoted as suggesting to the seller a requirement for all offers with financing contingencies to go through a local lender.

Agents report that closing delays are more common from a call center lender than from a lender with a local office due to a general lack of responsiveness, underwriting delays, lack of knowledge of local lending laws, and inaccessibility of lender contacts with settlements taking place after hours. When the time requirements of the sales contract are not respected, buyers are at risk of losing their earnest money deposits.

Tom Popik, research director of Campbell Surveys confirms, “Agents crave information and certainty of closing.” A Michigan real estate agent is reported to contact the buyer’s lender for access to information regarding the timeline of the underwriting process and expectations for meeting closing dates. To leverage against delays, he includes a contract addendum leaving his seller’s with “an out after a certain period.”

Selling agents are said to encourage potential buyers to avoid call center lenders altogether or as a safety net, submit a second loan application to a local lender. Additionally, when a listing receives multiple offers, sellers are encouraged by their agents to “shy away from offers financed by a call center lender.”

How can call center lenders do a better job upfront of calming all parties? By issuing true pre-approvals where credit, income, and assets have been reviewed and approved by a decision maker and by communicating clear closing expectations once a property appraisal has been received and reviewed.