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Five New Rules For Getting the Right Mortgage
1. The higher the credit score, the lower the interest rate
Before the mortgage industry exploded, mortgages never had tiered pricing ranges. If your mortgage is approved, you will get the same interest rate as everyone else. Under the new mortgage rules, the higher your credit score, the lower your interest rate. Your interest rate is calculated based on your FICO score and the value of your mortgage. It is subject to price grading, which should be the same as most lenders, but ask for security. No matter how much home equity you have, a low credit score can affect your interest rate!
2. Cash reserves are as important as FICO scores!
The rules have changed when it comes to money and how much you have or don’t have. In the past, borrowers only needed to show enough money to get closed; now they need to show enough.
The old mortgage guidelines only required you to make a down payment, closing costs and a two-month housing advance after closing. The new rules call for higher down payments, closing costs and six to 12 monthly payments in post-closing reserves.
The more reserves you have left after closing, the better you’ll be able to keep making payments if you lose your job or run into financial trouble. Lenders are now also looking at total debt and liquidity. So if you owe $25,000 on credit cards and have $40,000 in the bank, you can pay it all off if necessary. I used to ask borrowers to verify only enough money to close the deal. Now I say show me the money and ask them for every account they have.
3. Fraudulent Assessment and Loan Process
The problem is that the assessment is based on the opinion of subjective research done by one person. This value can vary from person to person, so it’s somewhat arbitrary. The appraisal industry has been booming, and the dilemma is compounded by the fact that many people start new careers thinking they can make big money on volume alone. Appraisers hire inexperienced people to perform physical inspections and never visit the home in person. Then they hire other inexperienced people to do the research and don’t always scrutinize it as closely as they should. Business is booming and they have to keep up with volume and turnaround times.
If mortgage companies and realtors can’t fix a problem in a few days, they’ll drop them in a minute. Rushing is considered the turnaround of the day. It was a crazy time and everyone wanted a piece of it.
Lenders also employ environmentalists on the street and fail to properly train staff to read and review assessments. So the underwriters just rubber stamped them to go through all the paperwork.
The whole situation led to manipulation. This process gradually exacerbates the inflation of false values. You can’t tell me that something worth $250,000 in 2004 was worth $400,000 in 2006. This is impossible and unreasonable. Then the market started to lose momentum and inventories started to build. As more homes remain on the market, buyers have more options and may question prices.
During the housing boom, values were easily inflated, which in turn expanded loan lines much higher than they should have been. Appraisals are being lowered and loans are being inverted as values fall. When a loan is inverted, the borrower owes more than the home is worth. These circumstances will hinder refinancing and sales. Unless buyers have to sell and can make up the difference out of pocket, they stay where they are.
As part of the assessment, sales history for the past five years is listed. It will show how many times the property has sold and for what price. I recommend that you ask your real estate agent for this information before proceeding. You’ll see if it shifted a few times, or if the seller tried to lower the bid by flipping the deal.
4. Declining market value
An area is considered a recession market if home values in an area are down 10-15% year-over-year. A geographic area can be a state, county, or town. Year-over-year is measured by comparing current prices to the same period last year. This information was obtained from the Board of Realtors’ sales and listings data.
The appraiser will include this information in the appraisal and the lender will refer to the data they have on site. If the home is in an area of declining market value, the lender is entitled to take 5% off the top part of the value and base the loan on that, which means the mortgage will be smaller than you think.
Richard buys a house in the Bronx, New York, for $300,000 and takes out a $270,000 mortgage, or 90% loan-to-value. The county is listed as a declining market and the lender has chosen to lower the assessment by 5%, making the value $285,000. This reduces Richard’s loan amount to $256,500, so he must calculate the difference. If he can’t, the deal falls through.
To avoid getting caught in this situation, ask your real estate agent:
o The last two sales of the home, dates and prices
o Listings of recent sales in the area, similar to your house, also known as “comps”
o If the home is in a “decreasing market value zone”
Getting this kind of information can help in negotiating a price and make you feel good about the value.
5. For sale: no refinancing allowed
Most banks do not allow refinances or cash-out refinances on any home that has been listed for sale within the past 12 months. The premise is that the house cannot be sold, and now the property rights of the house are withdrawn, and if a buyer comes, it will be sold. Originating a mortgage is expensive, and banks don’t look for short-term investments.
The time starts from the listing date or listing date, depending on the bank. They will need evidence that the listing is unique and an explanation of why the borrower changed his mind and stayed.
Remember, if a listing is removed, it will remain on the list that banks and appraisers use to research the home’s value. Appraisers are obliged to state that the home has been listed for sale within the last five years and cannot be concealed. They will think of everything you can do!
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