Underwriting and Appraisals

Underwriting and appraisals - two items that originators have only limited control of. Our role as originators is to know the products we offer, just like a doctor would know a drug, and to educate people about those products. Within the scope of these products there are many variables. The constants remain; income, assets, credit score, debts. However, within each transaction there is the understanding that the "underwriter" may see something they don't like and either...

A) Ask for more information from or about the borrower
B) Check with "Senior Management/Review Board" for approval
or C) Deny the loan entirely.

There is some responsibility that must be placed on the originator as the "quarterback" of the deal to make sure enough information is collected up front to find the right program. However, there are times when this doesn't happen and we will call it human error.

(Please forgive us for the times we make mistakes - as much as you want the loan to go through, so do we -- our well being depends on it...very high levels of stress)

In order to avoid the small underwriting snag along the way; before you come to the table for a loan, as a consumer, be prepared to answer questions about everything from last night's meal to the time you almost had your tooth knocked out of your head by that remote control airplane. (Don't ask - long story.) In all honesty, we don't mind the information and the more upfront and honest you are, the more smoothly the process can go. From there, we will do our best to find the best program for you based on your plans and financial capabilities. Be willing to learn and we will be willing to teach. You may not like what we have to say or offer, but I am sure that we hate delivering bad/different news than what you were looking for just as much as you hate hearing it.

Note: Underwriting and programs are changing constantly. I cannot stress enough that products/loan programs available today may very well be gone tomorrow (kind of like interest rate changes). Be prudent with your decision but don't hesitate too long unless you are prepared for the changes that can occur.

Appraisals - the quick run down. Completely out of our control and if we knew what your house was worth we would be a licensed appraiser. But, I am not and most LO's I know aren't as well. We do have access to resources that may give us a good estimate, but again a full appraisal by a licensed appraiser is the only way to know what your house is worth - in theory, on paper, based on what other people have listed for sale/paid for a similar house in that neighborhood.

If you aren't sure about the value of your house, you can take the risk and have the appraisal done or you can wait. I would love to pay for every single person's full appraisal but at an average of $350 a pop (though I make a million dollars a year...I would still be able to only do appraisals for about 3000 homes) you can see how costly that would be. The scrutiny placed on appraisals is currently slowing down underwriting times and with the lenders/investors constantly in "Caution" mode (link to article on AZ Central today - reinforces this weeks topics) it is taking a long time for deals to be closed.

Quick Hits:

1. Disclose as much information to your LO as possible (this will help them choose the best loan)
2. Be patient during the process. Understand that some things are just due to the human element involved in underwriting and originating.
3. Appraisals can make or break some deals (especially today) but don't let it discourage you from refinancing or purchasing if you are in need. It just may mean that things need to be adjusted later.
4. Current Market - May take a while for underwriting and it is definitely time to be as clear as possible with your situation and loan request.

Excuse the length of the blog. I am trying to cover a bunch of information quickly so that you have a good base as we move through this year. As I move forward I will try to bring more insight, knowledge, and resources to the table to help you in the process.

Next week-- Step-by-Step look at the overall origination process from initial pre-approval to application to closing of the loan.

Have a great weekend...until Monday!

Purchase Price vs. Loan Amount

Series Note: Part 3 was originally slated to be "Underwriting and Appraisals", but the editor felt the following article flows better within the context of the series. Enjoy.

In this market of foreclosures and home prices dropping by the minute (not exactly but it can sure seem that way), there are times when the appraised value and the purchase price are not the same. For starters, if the appraised value is lower than what you are going to pay, you may want to rethink your offer. There are also instances when you are purchasing the house for $225K and it is worth $250K (or so the appraiser says).

Quick Tip - A house is only worth what someone is willing to pay for it. So even if the house has an appraised value of more than what you are offering, you must think that it may only be worth what you were willing to pay, because there may not be someone else who thinks it is worth more.

In the example above you believe that you have built in equity, which may be the case, but the lender will not base your Loan To Value (LTV) on the appraised value, he will base it on your Purchase Price. Here is what that means for you...

1. You must consider that the purchase price is your starting point. A loan for $225K on a purchase price of $225K is...that's right 100% LTV.
2. The loans that give you the best rates , if the borrower qualifies, are those at 80% LTV. You would need to put down at least $45K + closing costs to get this loan. Your loan amount would be $180K.
3. Any loans over 80% LTV require PMI (Private Mortgage Insurance), or you can choose to get a 2nd loan to cover the difference. (Purchase Money 2nd's are very difficult to obtain in today's market so PMI may be the way to go.)
4. 100% LTV loans are difficult to obtain and come with a higher interest rate. In this market the likelihood of a buyer needing to bring money in to complete any deal is pretty high.

There are alternatives...FHA Loans are great and allow a buyer to bring in a minimum of 3% (in the example above that would mean as little as $6,750 to the table), some lenders still have "My Community" mortgages but the underwriting is difficult because of declining home values (this may work if you have an appraisal higher than the purchase price).

Overall, it is good to remember that whatever your Purchase Price is, that is where the value starts.

FYI -Refinances are based on the appraised value. Tomorrow, I will get into underwriting and appraisals and how they relate to the loans.

Make it a great day.

What are your Rates?

Loan Originators are tied to interest rates. Our lives begin and end with interest rates. Though often times the difference between 6.25% and 6.125% is less than $20 a month, it can mean the beginning of the end for a deal. Competition is plentiful between mortgage companies but in the end the consumer should choose the company with the best service and products. Today, I want to briefly discuss a few key ideas about interest rates as well as explain the relationship between the Federal Funds Rate and the Long term 30 YR fixed rate.

Rates can fluctuate daily and hourly.

• During the past few weeks, rates have been as low as 5.375% on a 30 Yr Fixed loan to as high as 6.5%. These fluctuations are tied to the long term bond market prices and rates (not the Fed Funds Rate - more on that later). With the market and its recent volatility it is important to understand that choosing to play the "rate game" may end up costing you, the consumer, in the end.
• Constant adjustments occur, so if you are thinking of purchasing a house, understand that a quote on a Monday may very well be unavailable on Friday (save Monday evening depending on conditions). Instead of focusing on the rate focus on the payment and housing affordability.
• If you are refinancing, make the move only if the costs associated with the new loan don't outweigh your new reduced payment. (Talk to an experienced lender and they should be able to let you know what Interest Rate makes sense and where your break even point will be with the new loan)

Rates are different among Lenders

• Many lenders quote rates differently, some quote rates based on charging origination fees, some do not (I happen to quote rates based on no origination or broker fees to the customer)
• Lenders do not all have access to the same investors, thus the difference in the rates between lenders. Find a lender you trust to get you the best deal possible and work with them.

Historical data about Interest Rates

• From 1983-2006 the average 30 YR Fixed Interest Rate is 9.12%. (See http://www.homefinders.com/historical-interest-rates/ for the chart.)
• Current average rates on 30 YR Fixed loans are about 6.25%-6.75%. Anything between, below, or even a bit above these rates are great. If you have a high interest loan it may be time to refinance.

Lastly,

Unfortunately, the Fed Funds Rate (Prime Rate) is not tied to the 30 YR Fixed (long term) rate. Though it may appear that way, the recent change with interest rates was due to the bond market and its changes. The volatility of the economy and the stock market have attributed somewhat to the rate fluctuations and as long as it remains volatile we may see swings in both directions. Eventually you need to ask and answer three questions...

1) Do I trust my loan originator? 2) Am I getting a good deal? 3) What payment can I afford?

By answering these questions, you may discover the process of purchasing and/or refinancing to be educational and come to think of the interest rate as the secondary aspect to the deal.

Stay tuned for Part 3 - Underwriting and Appraisals...

Blog Series, Part 1

Over the next week, within this blog, I will be touching on different aspects of originating that sometimes make it difficult to complete the loan transaction. It will encompass everything from market conditions to debt ratios to consumer goals within each transaction. In the end, I hope that it is a week filled with some learning moments and if an "AH HA" moment occurs, then the job will be successful.

One of the most difficult aspects of originating loans is discovering the interest rate that will satisfy a customer. Often, consumers are a bit jaded when it comes to what their interest rate should be and they focus too much on that aspect and not on the aspect of housing affordability. True, an interest rate can price you out of the market, but an interest rate phobia can lead you to missing the right opportunity.

There are currently some difficulties within the lending business that may make it hard for first time home buyers and those in need of refinances to find a loan. Many underwriters and companies who buy loans on the secondary market have declared Maricopa County a distressed market. This distressed market rating automatically cuts the loan to value on maximum financing back by 5%. So, if the max LTV on a cash-out refinance is 95% on their guidelines, because of the current market conditions, the LTV can be no more than 90%. This, on a refinance, can kill the deal. The same goes for a purchase, if the max LTV on a specific purchase product is 100% (unlikely in this market but still available), the new LTV is 95%.

What does the above mean for you as a consumer. It means that you will be responsible for the cash necessary to close the deal. For example, on a $100,000 loan amount for 100% financing, with the cut, the loan is $95,000 and the consumer is responsible for the $5000, plus closing costs. A well informed originator will prep the customer for this change, however, it is always possible that unforseen changes occur of which the loan originator is not always at fault.

More about that tomorrow as we begin to break down the stigma against Loan Originator's and begin to educate people about how they can make the process work for them.