The Veridian Blog

When Ben Bernanke stated last Wednesday that the Fed is prepared to keep interest rates at record lows until the end of 2014, I had to do a double-take to make sure I wasn't losing my hearing.  It was already an unprecedented statement last year when he merely forecasted low rates into 2013, but now, we are truly in unchartered territory.  The implication is that the housing glut is a long-term issue and any hope for a speedy recovery have long since evaporated.

This was somewhat confirmed this morning when Consumer Spending for December reported a disappointing, lower-than-expected increase of ZERO.  Despite rising incomes, consumers are opting to save more than before.  The benchmark 10-year Note has fallen 1.86% as a result of the report, as well as continued woes in Greece and Europe. 

Hi Everyone,

Hot off the press... see: http://finance.yahoo.com/news/fed-set-push-back-timing-062228298.html

Rates are already at all-time lows and should not be going up anytime soon.  It is rare that the Fed makes announcement like the one last year, saying it would keep the federal funds rates low (0-0.25%) until at least 2013, and now they have extended it until late 2014.  On one hand, this tells me they know exactly what the bane of the poor economy is - the housing market and that it should be the focal point of recovery; on the other hand, this forecast implies that the economy is not recovering any time soon.

For homeowners fortunate to have enough equity in their homes, there has never been a better opportunity to refinance their mortgage.  From traditional conforming loans, to high-balance conforming loans, to Jumbo loans, mortgage rates are incredibly attractive now.  Please consult your mortgage broker for more details! 

Hi Everyone, 

The Santa Claus rally has yet to show its face and investors are pressing their bets on Treasuries again.  It all started Tuesday after the Fed failed to offer any new sign of direction then snowballed as the November Retail Sales increased much less than expected.  Add to that the modest November CPI report suggesting that inflation is well contained and by the end of the week, the yield on the benchmark 10-year Note dropped to a two-month low just below 1.85%.  It's sinking even further this morning after the reported death of dictator Kim Jong II over the weekend raising fears of political instability in a now leader-less nuclear power.

Mortgage rates, particularly the 30-year conforming, have reached sub-4.0% all-time loans.  3.875% for a no-cost 30-year loan is a stunning opportunity for many homeowners who are fortunate to have equity and a job during this holiday season.  Call you mortgage broker today!

All of our no-cost loans will cover all "non-recurring" closing costs incurred by borrower in the transaction.  These are all fees that are associated with the funding of the loan.  But that doesn't mean the borrower doesn't pay anything in escrow, because they usually have to settle the "recurring" closing costs.

Recurring charges can be summed up with the short acronym “PITI”, which stands for:

Principal – including down payment of purchase price or any balance reduction in a refinance.

Interest – borrowers will more than likely pay a prorata share of interest, on a per diem basis, depending on the day of the month escrow closes (or in some cases, when the lender funds).  Thereafter, monthly interest payments are due on the 1st of every month.  Note that with 2nd mortgage purchase HELOCs, there is no interest due in escrow, and the payment dates will be based on the day of the month escrow closes.

Taxes – If escrow closes when taxes are due (1st installment – November 1, 2nd installment – February 1) then lenders will require borrowers to pay outstanding property tax in escrow.  For those of us who don’t usually pay taxes until the late date (1st installment – December 10, 2nd installment – April 10), this can be an unwelcome surprise.

Insurance – In purchases, the annual premium is due in escrow, or in refinances, during the annual renewal period.

What’s also part of typical recurring charges are HOA fees for condominiums and PUD’s, which in large part represent the home insurance portion of PITI.

Cliff and Becky both carry large debt in the form of auto and student loans.  They are both Ph.D’s with high-salaried positions but have large credit card balances because they recently married and only just started working.  What steps can they take in the near future to improve their credit scores? 

George is closing on his first purchase just before Halloween.  He is excited about owning his first home until he gets to the closing table to find out that he needs additional funds for payment of the first installment of property tax.  Since the first installment is not due until November 1, will he be able to avoid paying that?

Unfortunately, George is out of luck.  Even though in California the 1st installment of property tax is due on November 1, and the 2nd installment is due on February 1, lenders are allowed to require payment of property tax 30 days (sometimes longer!) in advance of the due date.  The reason is because taxes become a lien on real property on January 1st of every year and thus will appear on the preliminary title report as "unpaid" in the vast majority of cases.  The early payment comes as an unwelcome surprise to many borrowers, especially if they normally elect to make their tax payments on the due dates of December 10th (for the 1st installment) and April 10th (for the 2nd installment). 

The best thing for George's lender/broker is to address and disclose this upfront to avoid any uncomfortable conversations further in the process.

http://finance.yahoo.com/news/Rate-on-30year-mortgage-falls-apf-2069630673.html?x=0&sec=topStories&pos=main&asset=&ccode=

Of course, this was last week, and rates have crept up since then.  Nevertheless, these are unprecedented times.  Although the scintillating lure of bottom-basement mortgage rates exist, the class of eligible borrowers continues to narrow and the difficulty of obtaining these loans grows by the day. 

As an example, if you are borrowing $400,000 for a home appraised at $500,000, which at the current zero-cost, 30-year fixed market rate of 4.25% equals a monthly payment of $1968, then add in property tax and insurance for a total monthly housing debt of about $2550.  Assuming you have no other debt then your top and bottom DTI will be the same.  Say your gross income is $6666 per month ($80,000 per year), which means your DTI is about 38.25% - well within the range of approval for a good credit, good equity borrower.  If the ratios were closer to 45%, we would take a closer look at other possible revenue streams, choice of loan program (hybrid ARMs may require a higher qualifying rate) and your credit card debt.  Even though borrowers may pay off credit card balances every month, DTI will factor in a percentage of the balances at the point in time when the credit report is drawn. 

Please remember that DTI is just one factor into an overall approval decision and minimum standards for FICO scores and LTV must also be satisfied.

From time to time, I will get calls asking about bi-weekly mortgage payment plans or making an extra payment every year.  It sounds like a good idea at first glance because of the enormous amount of interest it appears you may save, plus the shorter time period in which your mortgage will be paid off is an added bonus.  But what lenders don’t like to tell you is this:

1. The math is a no-brainer.  Akin to paying down your mortgage, your opportunity cost is what you could be otherwise earning in the market which is almost certainly higher than today’s mortgage rates in the long-term.  Furthermore, that investment rate is being compounded year after year, unlike your mortgage interest which is a fixed amount in a traditional amortized loan program.  When paying down your mortgage, you certainly save on interest, but lose out on earning even more for yourself.  After all, when you send them extra payments – where do you think they put the money?  It goes into an investment vehicle earning a higher rate of return – otherwise they would not be offering the program in the first place, right?

2. Next, if you ever need the money back for loss of income, medical emergency or home improvement, you have to refinance at rates which may be higher than your current rate – even if you’ve always been on time and made extra payments.  Worst of all, it may be difficult or impossible to obtain a loan in a bad market, if your credit has turned for the worse, or if you have lost your job.  Of course, selling the house is always an option, but what if values have gone down and where will you move to where you can buy a house without having to obtain a loan anyway? 

3. On top of these two disadvantages, lenders will actually charge for the service of taking your money early!  Enrollment fees of approximately $10-15/month or one-time fees of $250-300 are common.  If a homeowner insists on making extra payments for peace of mind, then at least do it on your own for free (as long as there are no prepayment penalties)! 

The golden rule that has stood the test of time is this - lenders simply will not go out of their way to save you money.  They are in the business of making money so any program which claims to save you money instead should be highly scrutinized. 

I’m sorry if this sounds a tad like Econ 101, but since this is a  trending topic, I decided to regurgitate my college education.  The Fed – which includes the Board of Governors and the broader Open Market Committee (FOMC), has three major tools at its disposal – they are 1) the Discount Rate, 2) Reserve Requirements and 3) Open Market Operations. 

The Discount Rate is the interest rate charged to commercial banks and other depository institutions when they borrow money from the Fed.  They will lower this rate to increase money supply and add more liquidity by making it cheaper for the banks and/or its consumers to borrow money.  The theory here is that they will, in turn, spend the money, create jobs and thus help the economy grow.  The Fed will raise the Discount Rate in a time of rising prices to curb the onset of inflation.

The Fed can also set requirements for banks to hold a certain amount of reserves in the form of vault cash or deposits with Federal Reserve Banks.  Lowering reserve requirements will increase money supply and put more funds into circulation and vice versa.  This is probably the least used Fed tool. 

And last but not least, the FOMC mostly prefers to buy and sell US Treasury products as a means to affect the Federal Funds Rate (FFR), or what banks charge each other.  Now even though banks are lending money from their Federal Reserve deposit accounts, did you know that the Fed cannot actually change the FFR?  Instead, the FOMC targets a rate that it believes would mean stability and strength for the economy on the whole – and this is what we hear in the news.  Then it engages in open market operations to try and get the actual FFR close to the target rate.  Open market operations are based on the same principle as the other tools:  changing the supply of money.  By selling government securities, the Fed decreases the supply of money available to depository institutions (because it's effectively giving security notes in exchange for cash) — and that, in turn, increases the price of that money — the federal funds rate.  Buying government securities, on the other hand, increases the supply of money available to depository institutions (it's effectively taking security notes in exchange for cash), which, in turn, decreases the price of that money — the federal funds rate.

Confused?  Email me for some fun supply and demand graphs (just kidding, I would never do that to anyone)…

Stocks took a nosedive on Friday after an awful report on the jobs market renewed fears of another recession.  While the unemployment rate held steady at 9.1 percent, the Labor Department reported that no new jobs were created in August.  That made for the worst report in 11 months.  Add to that Consumer Confidence plunging to a 2-year low and Treasury prices jumped.  Yields fell to an eye-popping 1.996% at one point, while the major equity indices fell over 2%.   Global selloffs occurred in Europe and Asia over the long weekend as the US markets are bracing for another round of selling.

Forgive me, I am still dizzy from the unprecedented market swings last week.  So, where were we?  A quick recap.  We had a downgrade to the US credit rating followed by a FOMC policy statement that called for exceptionally low Fed Funds rates until at least mid-2013 (someone pinch me if I heard wrong)!   The benchmark 10-Year Note sank to 2.03% in the middle of trading on Tuesday - more than a full percentage point lower than where it stood a mere two weeks ago!  As  you can imagine, with an assist to the media, our phones have been ringing off the hook for countless days now (my calendar reminds me it's really been about a week), so please be patient.  This morning, the markets are unusually trading in a normal range so rates are just as spectacular as last week.

The DOW is currently down over 300 points and NASDAQ over 80 after Friday evening's news of the S&P downgrade to US credit agencies sent ripples across the global economy.  While the downgrade itself is not good news for bonds because it makes US debt unattractive as we are less likely to pay back debt, the severe decline in equities has pushed up the demand for Treasuries.  The benchmark 10-Year Note, which started the day at 2.57%, plummeted to 2.40%.  It remains to be seen this morning what effect that will have on mortgage rates. 

It will likely take a sustained sell off over multiple trading days to see mortgage rates continue to decline.  Long-term, the credit downgrade does not help anyone.  The resulting effects on inflation and deterioration of future value will eventually pull bonds back, we just don't know when.  Stay tuned...

Despite the long-awaited resolution to the debt ceiling, the major stock indexes went into heavy selling today for the third straight trading day.  Treasuries were the big beneficiary and mortgage rates have plummeted, yet again, to all-time lows.  Unbelievable.

The benchmark 10-year Note fell to 2.62% - levels we haven't seen since the untouchable year of 2010.  Many wholesalers have revised pricing two or three times today, lowering rates from 0.25 to 0.50 discount points.  For those interested in refinancing, this is the start of another boom period.  Some quick tips - act now, act quick!  The sooner you get your transaction started, the sooner you can lock-in on these mind-boggling interest rates.  Turn times will likely balloon very quickly so every day matters.  We do not charge any application fees or rate-lock fees... why wait?   Call now!

With all other factors being equal, interest rates will generally decrease the higher the loan amount for traditional conforming loans (<$417,001).  The same is somewhat true for high-balance conforming (<$729,751 in the Bay Area - until September 30th, 2011) and Jumbo loans (> $729,750 in the Bay Area) as well, but there are two important quirks to know:

1) high-balance and Jumbo loans are always on a different rate schedule than traditional conforming loans so if an applicant borrows $418,000 (high-balance) instead of $417,000 (traditional conforming), s/he may or may not be paying a lower rate – it just depends on two separate rate schedules.  But like a traditional conforming loan, the higher the loan amount, the lower the interest rate… to a certain extent. 

2) Most wholesale lenders have pricing points where the rate will increase if the high-balance or Jumbo loan amount exceeds a specific threshold.  So, while the general rule is that your rate improves as the loan amount increases, high-balance and Jumbo rates will take a “step back” when reaching certain loan amounts – typically $650,000, then $1,000,000, then $1,500,000, etc. 

 The reason why rates suddenly increase at very high loan amounts is because it represents a new type of risk to the lender – to have a large basket of undiversified money with a single applicant increases risk.  Conversely, the reason why rates are higher at low loan amounts (less than $150,000) is because the lender simply doesn’t realize a competitive nominal return given the flat overhead per loan transaction, so to compensate, rates increase.

In conclusion, if an applicant’s sole motivation is to seek the best interest rate possible, the “ideal” loan amount, more often than not, has been $417,000 or $729,750 in recent years.  That, however, will change over time with the termination of the high-balance conforming threshold and as the conforming limits and housing prices change.

Mrs. Lin wants to deed one of her rental properties to her son and her daughter-in-law and then refinance the loan, in their names, to a lower rate.   What are the implications in terms of gift and estate taxes for both Mrs. Lin and her son?  

Gift Tax consequence:

The main rule with gifts is that there is no deduction for the donor and no income reported for the recipient if the transaction amount falls within the IRS’s annual exemption of $13,000 per donor, per recipient.  If any gift is made in excess of $13,000 per year, then it must be reported.  Gift taxes do not, however, need to be paid unless it is a very large amount.  IRS rules allow every person to give $1,000,000 during your lifetime (outside of the $13,000 annual exemption) without ever paying gift tax!  In Mrs. Lin’s case, she is obviously gifting in excess of $13,000 so the remaining value of the house will reduce her $1 million lifetime gift exemption by the market value of the house, less $13,000.  It’s important to note that this amount will also reduce the donor’s estate tax exemption (see below).

Estate Tax consequence:

In addition to the gift tax, the IRS also taxes the gross value of a decedent’s estate (yes, you are taxed even after you die).  Even though there is a $5,000,000 estate tax exemption from now through 2012, some grand estates, especially in the SF Bay Area have exceeded that threshold.  One easy way to reduce the amount of your estate is to gift property during the owner’s lifetime.  But remember that in Mrs. Lin’s case, she has by far exceeded the $13,000 annual exemption – an any excess gift amount reduces the estate tax exemption in the year of her death.  If her house is worth $1.0 million, then she has already used half of her estate tax exemption (if she were to pass away in 2007).  So her strategy of reducing her exposure to estate tax by gifting away her rental property is probably ineffective. 

There are other exceptions to the general gifting rules – such as gifts for education, medical expenses and gifts to spouses.  These types of transactions are complicated legal ones and may involve sophisticated estate planning.  Don’t try it at home without the advice of a reputable estate planning attorney (not me)!

My blog today touches upon the basic premise of the Deed of Trust (DOT) but did you know… that because of the DOT in California, there really isn’t a single “mortgage” that exists?  Before you jump out of your seats in utter glee, let me remind you that you still OWE money to the bank.  The word “mortgage” is incorrectly used in everyday terminology as a synonym for “home loan”.  Instead, the more accurate definition of “mortgage” is a document that a borrower gives to the lender as a security instrument – sort of like a DOT.  Also like the DOT, both documents are recorded in public, and both give the borrower full ownership rights and title before the debt is paid off. 

So… what’s the difference?  Practically, there’s not much, unless and until payment become delinquent.  The legal structure of the DOT consists of three parties (trustor, trustee, beneficiary) whereas the mortgage consists of two (lender and borrower).  When foreclosure becomes an issue, and a DOT has been recorded, the trustee (usually the escrow company) is the party that has the power to sell the house.  The lender must ask the trustee to initiate foreclosure proceedings and the trustee must progress as allowed by law and as dictated in the DOT.  But the process bypasses the court system, making it a much faster and cheaper way for a lender to foreclose whereas with mortgages, the lender must take action themselves through a lengthy judicial foreclosure. 

Over half of the states in the country use mortgages, and the rest (including us) use the DOT.  But no, I am not changing the company name to “Veridian Deed of Trust”…!

Which two documents are the most critical to review during a loan signing, as far as "legal weight" is concerned?

A promissory note is the binding contract that obligates the borrower to repay the lender.  The terms of any note will include the principal amount, the interest rate, monthly payment and the maturity date.  Another important provision is the Borrower’s Right to Prepay – which may include a prepayment penalty that may leave the unwary borrower in an unsettling position if they try to refinance during the penalty period. 

The Deed of Trust is a very powerful legal document that creates a security interest (lien) in the borrowers home and gives the lender the right to sell the property in case of default.  Technically, the Deed of Trust creates a trust entity with a trustor (the borrower), trustee (usually the escrow company) and the beneficiary (the lender).  Therefore, it grants the Trustee the right to foreclose/take the borrower's home for defaults such as nonpayment of principal and interest, nonpayment of real estate taxes, failure to maintain the property ("waste"), or failure to maintain property insurance and the lender receives foreclosure proceeds as the beneficiary. 

The Deed of Trust is cancelled when the debt is paid and the lien is taken off public record through a Deed of Reconveyance.  Until then, the trustee has the power to foreclose if the debt is not paid.  Be sure to distinguish Deed of Trust from the Grant Deed – which is the document that transfers title and ownership of real property from one party to another.

Don and Joanie, husband and wife, are 56 and 54, respectively, and wish to sell their house in Los Altos where they have been living for over 20 years in order to move to a bigger house on a bigger lot in Walnut Creek.  They mention to you that they'd like to take advantage of the one-time election of Proposition 60 - which allows transfer of the base year tax assessment from one residence to another and hence avoid a potentially huge markup in property tax.  Can they?

Proposition 60 is a once-in-a-lifetime property tax reassessment exclusion that allows homeowners 55 years or older to transfer their base year value of their principal residence to a newly purchased principal residence in the same county.  There are other rules – such as a two-year window to find the replacement property which has to be equal or lesser in value than the original home.  Now, either the claimant or the claimant’s spouse need be 55 years old, so in Don and Joanie's case, they are eligible except for the fact that they are buying a new house in Contra Costa County, while selling one in Santa Clara County.  As such, Proposition 60 does not apply.

Alas, Proposition 90 allows homeowners to transfer their base year value to another county – under the same rules and restrictions of Proposition 60 – provided that the county that they elect to move to has approved Proposition 90.  As of 2011, only the following eight counties participate:

Alameda, Los Angeles, Orange, San Diego, San Mateo, Santa Clara, Ventura and El Dorado (as of 2010).  Unfortunately, for Don and JoAnn, they are out of luck again as Contra Costa dropped out of the Prop 90 program.  In a time of rising values and property appreciation, just knowing that little tidbit could save you or your client thousands of dollars by knowing which county they can transfer their tax base to.

The annual percentage rate (APR) is an interest rate that is different from the Note Rate that is used to compute monthly payments.  The Federal Truth in Lending Law (Regulation Z) requires banks and mortgage companies to disclose the APR when a potential borrower applies for a loan and when they advertise a particular program's interest rate.  The legislation was written to create a level playing field for potential borrowers to shop and compare loan programs from different lenders.   What often gets missed in the analysis, however, is that APR is merely an estimate to measure the “true cost of a loan” and offers little protection to the consumer if the lender fails to adhere to the estimate.

In practice, APR is a very confusing calculation because the rules to compute APR are not clearly defined so different lenders calculate APR differently!  So a loan with a lower APR does not necessarily translate into better note rates or terms.  The better way to compare loans is to examine the Good-Faith Estimate of their closing costs on the same type of program (i.e. 30-year fixed) at the same interest rate.  Then exclude from analysis all fees that are independent of the loan such as homeowners insurance, govt. transfer taxes, title fees, escrow fees, attorney fees, etc., before adding up all the loan fees.  The lender that has lower loan fees has a cheaper loan than the lender with higher loan fees.

But even after that, APR comparisons have inherent flaws: 1) APR is an estimate by definition and as long as lenders publish APR in good faith, there is no obligation to meet the terms of the stated APR, should rates and fees change by the time closing occurs; 2) APR does not necessarily tell you how long your rate is locked for.  A lender who offers you a 10-day rate lock may have a lower APR than a lender who offers you a 60-day rate lock; 3) Calculating APR on adjustable and balloon loans can be misleading because future adjustable index values are unknown; 4) When comparing a 30-year loan with a 15-year loan, a 15-year loan may have a lower interest rate, but could have a higher APR, since the loan fees are amortized over a shorter period of time, and; 5) Many lenders do not even know what they include in their APR because they use software programs to compute their APRs.  It is quite possible that the same lender with the same fees using two different software programs may arrive at two different APRs!

The bottom line is that APR is a good starting point to compare loans but is not a conclusive decision-making vehicle.  For more information on what fees are and are not typically included in APR calculation, please email me…

The dual purpose of a basic revocable living trust is to avoid probate and to delay payment of estate tax.  The critical step in accomplishing these goals is known as “funding your trust” through title documents.  For automobiles, as an example, this means changing the pink slip with the DMV.  For real estate assets, this means the Trustors or Settlors (the creators of the trust) simply have to execute a Grant Deed for each property to transfer their houses from themselves "as husband and wife" – to themselves, "as trustees of said living trust". 

Confused?  Think of a trust as a legal fiction… a make believe, intangible entity, like a corporation in business.  By transferring assets to the trust, settlors are essentially relinquishing those assets to this legal entity in name.  Therefore, because they don’t technically own anything at death, these assets will not be required to go through probate – an extremely time-consuming and costly court process.  Practically, during their lifetimes, nothing will change because they are named as the trustees, or “managers” of their own assets.  During their lifetimes then, they retain the power to do as they choose – just as if they owned it outright on paper. 

In addition to the Grant Deed, a Preliminary Change of Ownership form must also be filled out and submitted.  This will help the county assessor identify the transaction as exempt for a reassessment for property tax purposes.

For more information on revocable living trusts, or estate planning in general, please email me separately…

Converting a current primary residence to an investment property is a popular choice for homeowners looking for the flexibility to purchase a new home without having to immediately sell their current home.  Rental income, however, can sometimes make or break this strategy.  In order to be able to factor in rental income, all of the following conditions must be met:

1. Up to 75% of the rental income may be used to offset the mortgage payment with documented 30% equity in the existing property

2. 30% equity must be verified with a HVCC appraisal or AVM, minus outstanding liens

3. The rental income must be documented with a copy of the fully executed lease agreement

4. Copy of receipt of the security deposit from the tenant and proof of deposit into borrower's account is required

If these conditions CANNOT be met, then payment for both properties must be used to qualify the borrower.  In addition, some lenders will have higher reserve requirements for PITI payments. 

The US Court of Appeals has granted a stay on Fed's LO Compensation rule.  This order does not permanently stay or otherwise modify the enforceability of the rule.  Instead, it is a temporary measure to give the Court an opportunity to review the case and make a final determination.  The Federal Reserve has until 12PM EST today to file a response to NAMB and NAIHP's (the plaintiffs) motions, and then the plaintiffs will be given the opportunity to file a response to the government's response no later than 10AM EST tomorrow.  After that filing takes place the Appeals court can order a hearing or make a decision on the basis of the filed briefs.  If the court decides in favor of the NAMB and NAIHP then the most likely course of action would be that the case would move back to the District Court.  The stay would probably be extended to cover the period of time the case is in the District Court and could be extended further if there is another appeal.  Oh boy... if the Appeals Court decides in favor of the Federal Reserve the stay will be dissolved upon the issuance of the decision.

The mad scramble to turn in LO compensation plans at the wholesale level was all for not (for now), and we'll see what the next steps are in the process.  During this whole time, our focus should be on our client borrowers and it's unfortunate how the uncertainty of this whole measure has distracted brokers across the industry. 

Rates are down.... from Associated Press:

NEW YORK (AP) -- Treasury prices are rising for a third day in a row as fears grow over Japan's nuclear crisis.

Treasurys jumped, sending yields to their lowest levels this year, after the European Union's energy chief was quoted as saying that Japan's nuclear crisis could get much worse. Traders often use U.S. government bonds as a refuge in times of turbulence.

The yield on the 10-year note dipped as low as 3.15 percent in late morning trading, then recovered. In afternoon trading the yield was 3.21 percent, down from 3.32 percent late Tuesday. The price rose 81.2 cents for every $100 invested.

The 30-year bond rose $1.25. Its yield fell to 4.39 percent from 4.47 percent. The yield on the two-year note dropped to 0.56 percent from 0.61 percent.

Q: “If I can afford to keep both mortgages at the same time and rent out my current home, what problems may arise during the loan process for the new home?”

A: In no particular order, here are some possible issues that an underwriter may condition to be satisfied prior to signing in escrow:

1.      Down payment:  Because most people must sell their home before purchasing another, the source of your down payment on the new home will be highly scrutinized.  In addition, you will still need to come up with a minimum of 20% for conventional loans -  a tough task in the Bay Area when you decide to keep both homes.

2.      Rental Income: In the past, the underwriter would require substantiation via rental agreement and probably also a copy of the cancelled check for the security deposit or first month’s rent.  Beginning in 2009, Fannie Mae requires a minimum of 30% equity in order to factor in rental income into the debt/income qualification ratio, so an appraisal might be necessary.  This year, some lenders have tightened even more and are requiring a 6-month seasoning period before using rent and/or a history of rental management.

3.      Note and DOT for existing mortgages: Nowadays more than ever, lenders will condition for the Note on existing mortgages to ascertain the exact terms of the loan.  Most, if not all, disallow interest-only features, negative amortization language, prepayment penalties and acceleration clauses. 

4.      Mortgage Payment verification:  You will be required to provide a Verification of Mortgage (VOM) or payment history, or cancelled checks for newer mortgages.

5.      Heloc Premium: For borderline situations, underwriters may require higher qualification standards on existing lines-of-credit.  Because they are based on a variable rate that can fluctuate at any time, a conservative, higher qualification rate, usually 2% over the starting rate, will be used in calculation income qualification and that will increase your debt-to-income ratio.

This additional paperwork is required after income is first established to qualify for both mortgages.  If you don't have the required income to begin with, then this analysis is moot.  But it is becoming more and more apparent that lenders do not like to see homeowners straddling loans while looking for a new home. 

Q: “I am well-qualified to borrow the money required to purchase this new house but how long should my financing contingency be, if any?”

A: Most instances I will defer to the realtor who is familiar with the subject property, neighborhood market, dealings with the listing agent and the their negotiation history.  The only advice I can offer is my confidence level with your ability to obtain financing.  Only in rare seller’s markets will I recommend a financing contingency waiver – which was not at all uncommon during the so distant housing boom of the early 2000’s.  Aside from that, I usually require 3 to 5 days, but since last year 7 to 10 days because of the new RESPA disclosure regulations.  This number may grow even longer after April 1 this year with the implementation of the new compensation rules.  In today’s mortgage market, it doesn’t take long to get an answer given all the automated underwriting that wholesalers have finally adopted into their online submission paths.  If there are red flags or issues I am concerned with, I recommend a longer contingency period – to allow time for the file to be reviewed by the underwriter for official approval.  That way, we will be able to see the approval conditions and ascertain the likelihood of funding with much greater clarity.

IF your are well-qualified in terms of Debt-to-Income ratio, Loan-to-Value and FICO scores, I wouldn’t hesitate to recommend a 3 to 5  day contingency period – even with the market’s tightened lending standards.

Q: “I have an job offer on the table for another, higher paying job.  Should I accept it now, or wait until close of escrow before changing positions?”

A: The general rule of thumb is that if close of escrow is at least 30 days away, and you are moving from a salaried position to another salaried position in the same industry, then there should not be a problem in qualifying with the same or better income.  So you should be okay.  In situations where one or more of those factors are not present, then you will have problems qualifying.  The central issue is employment stability.  Underwriters look at how long you have been at your current job, how similar the position (title) and industry are, the location of the new job, and whether income is staying the same or increasing.  Any decrease in income, or a demotion, or a different industry will certainly raise a red flag.  Also, if you are moving to a self-employed, hourly or contracting position, you will not be able to use the earned income because a 2-year history is required.  This is true even if the position is the same, or even with the same company!  Guidelines regarding employment used to be more lenient in regard to self-employment income, but nowadays, the 2-year rule is pretty strict.

As such, it is critical that the new position be salaried.  By close of escrow, most lenders simply require a copy of the first paystub for loan approval, although we are starting to see that guideline expand to paystubs that cover the first 30 days.  If you can be flexible, it may sometimes be easier (and less stressful) to postpone the new employment until after close of escrow.

Q: “My parents wish to gift me funds for part of the down payment, but they have a substantial amount of it in cash.  This should be okay for us to deposit, right?”

A: No, no, no!!!  Every lender we work with today is itching for a reason to decline loans.  That may not necessarily be good business, but it's the nature of the industry now, whether we like it or not.  One of the most significant changes we've witnessed the last two years is with the underwriting guidelines for asset statements. 

Gone are the days when a single gift letter would suffice.  Bank statements are now scrutinized beyond belief as every large (over $1000) deposit OR withdraw must be paper-trailed until the lender is satisfied that there is no undisclosed debt obligation that the borrower is either making payments for, or receiving loan proceeds from.  Underwriters will also look for undisclosed income (business or investment) sources that may carry unreported losses.  One of the sure-fire ways to throw a wrench into the loan process is for the borrower to deposit a large sum of cold, hard cash into their account right before the process begins.  Since there's little or no record of where the money came from, the lender may not only disallow the use of that money, they may not even allow the borrower to use other, properly-sourced funds!  If there is a large deposit that is unsourced, they simply can't get the loan at that time! 

The solution?  You'll have to wait for 2-3 months to properly season the money so that when the loan papers are submitted, there would be no record of unsourced deposits on the recent bank statements.  For refinances, this could jeopardize the rate lock and subject the borrower to market fluctuations.  For purchases, close of escrow will likely need to be extended and other terms renegotiated if the seller is willing.  In conclusion, it is imperative in today's market for buyers to understand that any large money transaction will be questioned and could very easily disrupt the financing process.

Q: “I have plenty of funds to put down about 40%, but it is spread out amongst a half-dozen different brokerage, checking, savings and CD accounts.   If I have to consolidate it all into one account, can I do it at the last minute to maximize interest income?”

A: You are free to do what you want, however, the lender will be concerned that any recent, large transfers might be undisclosed debt obligations or "unsourced" gifted funds.  In addition, transferring from account to account can be very burdensome for you (and your mortgage broker) because you will be required to paper trail everything – deposits and receipts - and establish 60-day seasoning for the stated funds.  To make things even more difficult, some lenders still do not accept internet printouts unless they state the borrowers name, address and account number (which banks rarely do because of identity protection).  So with some financial institutions, the borrower may have to telephone to have a proper statement mailed or faxed.  All this takes time, and in a purchase transaction, time is a premium. 

Towards the end of escrow, we recommend wiring funds directly from one account into escrow.  That is the easiest way to establish and prove a paper trail of money.  And more importantly, it is the fastest way to transfer when time is of the essence. 

Q: “I just transferred the balance of my car loan to a new zero-percent interest credit card which is now completely maxed out – this should help improve my borrowing power because I made a savvy financial maneuver and I’m now saving money, right?“ 

A: You are correct in that your credit card payment will likely be much lower than your auto loan.  Even though a mandatory 5% credit card payment will be factored into the debt-to-income ratio, the new payment will still be lower than the car loan payment – which is typically at least several hundred dollars.  All things being equal, your borrowing power can easily increase by 30, 40 or 50 thousand. 

Now, for the dangerous part.  If income qualification is not an issue, then its best to hold off on such a maneuver because of the potential impact it can have on your credit.  One, anytime you add new credit, it will lower a FICO score – especially if the new credit account is recent or new, as in your case.  Two, anytime you have a revolving account (credit card) balance that exceeds 50% of the credit limit, the FICO score will begin to fall.  Anytime a revolving account is maxed out, it can result in severe drops in FICO score, again, especially if the account has been maxed out recently.  A common pitfall for borrowers is with retail accounts that have credit limits within easy reach within a day’s time span.  Even those smaller limit/balance accounts can damage a FICO score during a time that is most inconvenient.

This is the first of six parts of our annual pre-purchase Q&A series.  If you'd like to submit a question, please feel free!  info@veridianmortgage.com