July 2007 Archives

One of the most important things for the buyer in any transaction is confidence that the seller has disclosed all known problems. One of the things most people don't realize, or act like they don't realize, is that it's at least as important to the seller.



The California Association of Realtors (CAR) has a program called Winforms that lets me ask all of the little niggling questions about the home. Very convenient, very nice, and I've done my duty when I fill it out with a listing client.



This does not mean that I or the seller can ignore any metaphorical elephant in the room not covered by the form. If there's something that's obvious, I have a duty to ask about it and record the answer, even if it isn't on the form. The seller has a legal duty to disclose anything they are aware of that might cause a reasonable buyer to change their minds or their offering price. A cracked light switch protector plate is not a big problem and you're going to either fix it or agree with the buyer that you won't. But past termite damage, whether someone has died in the home recently, soil subsidence (even on the far side of the property), and any number of other factors can be reasons why prudent buyers may no longer be interested, or may wish to re-evaluate their offer. The rule for smart people is "disclose everything and let the buyer decide if it's important." A certain percentage of sellers, however, just want to get through the transaction without the buyer changing their mind. For Sale By Owner (FSBO) sellers seem to be significantly worse about it, by the way, which is one of several major reasons I'm always leery of FSBO properties with my clients. These sellers either don't realize how strongly omissions can come back to bite them, or are hoping they will be gone by the time it comes to light.



First off, unless you're planning on dying, you can be found. I know a lawyer that makes a good living at it. Furthermore, failure to disclose frequently makes your liability worse, in that you had a duty to disclose and you did not. It is possible that failure to disclose means a judgment for punitive damages in addition to increased economic damages is in your future, whether you are seller or agent or even buyer's agent if it was bad enough. Furthermore, you can count on the damages being larger because the problem has had time to get worse, paying the costs incurred in order to find you, and so on, when if you had simply disclosed in the first place you would have been off the hook.



Now, your real estate agent is not (generally) a building inspector, tax records expert, or any of those kinds of specialist. I recommend an inspector for every purchase, because I'm certainly not qualified to do that job. But if I spot something that may not be right, I have a duty to disclose it to my principal, and find out if it really means anything from a real expert. Sometimes there's a tax assessment that has passed or pending that doesn't have numbers associated with it yet. If it's passed, the title report should have the information, but they've been known to miss one occasionally. If it's pending (e.g. bond measure on the next ballot), it's a good idea to tell the buyer, or at least tell the buyer about where to find out.



For an agent, failure to disclose may mean that your professional insurance won't cover it. The professional insurance is for errors (honest mistakes) and omissions (errors of ignorance), not intentionally hiding something. This liability can easily run to several times any commission you made, so it's a really bad idea to hide anything. Agent or seller, if they buyer can prove you knew, or that you should have known, you're basically up the creek.



Caveat Emptor (and Vendor).

On of the biggest time and money wasters in real estate is people that apply for the wrong loans - loans that they can never qualify for because they can't meet the guidelines, or can't prove they meet the guidelines, which amounts to the same thing. Often, loan officers are the worst offenders, judging by the people who come into my office with messes for me to clean up. They don't know how to submit a loan, or they know full well it won't be approved, but they get you to sign up by dangling this carrot, and then snatching it away, but now they've got you working with them and they end up with your business because they told you a fairy tale that sounded better than what the other guy talked about because he restricted himself to talking about loans he could actually deliver.



How do you know what mortgage market is best for you?



There isn't a cut and dried answer unless you're one of those folks who can qualify "A paper" full documentation. If you can do it, and a lot more folks can qualify this way than think they can, A paper full doc is the way to go. Because it's the least risky loan, the banks give you the best pricing. What if you can't make it, however?



The reasons why people fall away from A paper full doc is long. The two largest ones, however, are people who cannot prove they make enough money and people whose credit score isn't high enough. At a distance from that, the third reason why folks don't qualify, is late payments. A paper permits one thirty day late on the mortgage, or two on other credit. If you fall off the pace due to late payments, you have to go subprime.



A paper accepts only two ways of proving your income: Income tax forms and, for some employees not in construction or on commission, w-2s and year to date pay stubs. If, with the income taken from these forms does not qualify you according to A paper debt to income ratio considering your known debts (typically 45% back end ratio, but I've seen high seventies get accepted in some circumstances), you do not qualify full documentation. Think of full doc as being where you prove you're got enough income to make your payments. If you can't do full documentation, you have to go to stated income.



A paper also requires an absolute minimum credit score of 620. 619 is an automatic rejection from any A paper program out there. Some A paper may require higher credit scores (640 jumbo, 660 stated income, 680 for both), and if you haven't got it, you don't have the loan, either. If you don't have the relevant credit score, you're going to subprime.



A paper stated income is where you've got a good credit score and can prove that you've got a job (or a source of income) and you've had it for two years. You just can't prove you make enough money to justify the loan. You could be making it, though, and the lender agrees not to verify, although they will look at it to see if the income you claim is consistent with your profession. You're paying your bills on time, though, so lenders are willing to believe that you're living within your means, and therefore qualify for the loan. They are not agreeing to close their eyes if something indicates you cannot afford it or what your real income is; they're just not going to go out of their way to verify your income. They are going to have you sign an IRS form 4506, releasing your taxes to them. Don't worry too much about it. The IRS takes a minimum of 60 days to respond, and the loan will be done in thirty, if your provider is competent, and it's not fraud to overstate your income on a stated income loan. Dumb, maybe; fraud, no. The major reasons why "A paper" stated income falls out are low credit score, insuffient time with your source of income, and incompetent loan officers who allow the underwriters to find out that the client doesn't make that much. Low credit score goes to subprime, insufficient time in line of work goes to NINA, and loans with incompetent loan officers start over with another lender.



A paper NINA is a loan driven by the credit score and the situation you find yourself in. There is no debt to income ratio, and the personal qualification consists of a good credit report. Of course, you still have to have the appraisal and the rest of the documentation relating to the property. Furthermore, the rates are higher than stated income (which is in turn higher than full documentation), and the maximum Loan to Value Ratio is lower. Common fallouts are credit score too low (go to subprime), loan to value ratio too high (go to subprime) and something wrong with the property (go to hard money)



Subprime is an entirely different world than A paper. The standards are different, the qualifications are different, everything is different. Just because you can't go full documentation A paper doesn't mean you can't do it subprime. For one thing, typical subprime goes up to fifty percent debt to income ratio, and a few lenders will go higher - some as high as sixty percent! So even though the rates are higher, it may be easier to qualify.



Subprime also has another form of accepted income documentation: bank statements for the last six, twelve, or twenty-four months. When I started, this was always discounted, but of late personal bank statements have been accepted on the strength of 100 percent of the income they show. This rate will be higher than a borrower who can prove their income via one of the A paper methids, but is lower than stated income. Number one reason for falling out of subprime full documentation: Not enough income. Number two: sub-500 credit score. Number three: the underwriter believes that you manipulated your income on your bank statements. Not enough income goes to stated income subprime (with another lender, as if it was submitted full doc it cannot go stated income with that lender). Sub 500 credit score goes to hard money, which is where you might as well start when you find out, because regulated lenders can't touch you if you don't have at least one of your three credit scores above 500. If the underwriter thinks you manipulated your income, you or your loan officer have either got to convince them you didn't, which usually requires w2s at least, or you are going to another lender.



Subprime stated income is fairly wide open, with the proviso that a given credit score will have a higher rate and a lower maximum permitted loan to value ratio. Number one reason for falling you here is that you don't meet loan to value guidelines. Number two is you didn't state enough income in the first place, and you don't qualify by debt to income ratio guidelines. Number three is you stated too much income, and the underwriter doesn't believe you make that much money. They can always require income documentation - they don't have to let you state it without verification. At best, anyone suffering from any of these three problems can expect to have to go to another lender, because this lender will not now approve their loan. Maybe lose a little time if you're working with a broker who then submits the package elsewhere. Back to square one if you were working with a direct lender.



Subprime NINA is even more wide open. A loan officer has got to be a serious bozo to blow this one, but I clean up behind ones that went bad on a distressingly frequent basis.



Hard money is the last hope of the unfortunate. These folks don't care about your income, your credit score, or anything else. What they care about is that they can sell the house for enough to cover the loan if you default, and unlike regulated lenders, they will record that Notice of Default on the day you become eligible. Sometimes they are the only choice, but if you find yourself dealing with them you should really ask yourself if this loan is something you absolutely have to have, or if you just want it. If the answer is the latter, my advice is to reconsider getting the loan.



There you have it, something like a flowchart of what kind of loan you should apply for. These are far from the only reasons loans fall apart, of course, but they are the most common. A good loan officer knows enough of the tricks and traps to tell you the truth straight off, and apply to the appropriate loan first, without wasting your time and money. Bad ones don't.



Caveat Emptor.

There are a fair number of specific helpful suggestions to make in helping you purchase a home. All of them revolve around the loan. Let's face it, the loan is far and away the most hypothetical and uncertain part about most real estate transactions. If there is a non-loan related problem, chances are that you really didn't want to buy that particular property anyway. Most of the time, these problems mean that you would be buying into trouble, and nothing but. Unless you have specialized knowledge in sorting out that particular problem, it's likely to be more expensive than any money you saved through reduced purchase price.



A poor loan officer can always botch a loan, of course, and even the best may not be able to push it through if you are a marginal enough case. So how do you improve your case standing?



The first thing is to get a credit score above 720. If you're there already, keep doing what you're doing. Even if you're not there yet, it's easier to improve than most people think, although it takes time. Make all of your credit payments on time, especially any mortgages and rental payments. These are the most important things to mortgage lenders. Note that you make a payment a few days later than it is due, and you may even pay a penalty, but the lender will not report it as late until 30 days later, and that's when it counts as late to everyone else. In order to qualify for the A paper loan, at the top of the market, the general rule is no more than two 30 day late payments on revolving debts within two years, or one 30 day late on mortgages or rent.



Most lenders want you to have three lines of credit, and a twenty-four month credit history. Not all of them need to be still open, but if you don't have at least two open lines of credit, a given reporting bureau may not report a score, and if you don't have two different scores from the three big bureaus, only a few sub-prime lenders will give you a loan. The longer your particular lines of credit are open, the higher your score will be. So if you keep opening new lines of credit, expect your score to be low.



Revolving credit balances should be kept low, less than half of their limit. There is a significant hit if your credit line is more than half its limit, and the higher you go, the worse it is. If you have two $5000 limit credit cards, it is much better to have $1500 on each than $3000 on one and nothing on the other. It make even more difference if you have $2000 balance on each as opposed to $4000 on one. And if you're one of those people who keeps doing the "transfer your balance to a new card and get zero interest for six months" thing, it will really impact your credit in a negative way, because if your credit balances sum to $8000, that's usually what the limit on the new card will be, and so you've got a brand new credit card that's maxed out, which is a major hit on your credit.



One of the best ways to improve your credit score relatively quickly is to use your credit regularly but pay it off every time you get a bill. Once per month, charge something small that you know you will be able to pay off when the bill arrives. This may still take some months to improve your score, but better months than years.



The next way to improve your ability to afford a house is not to have any large monthly payments. The best rates are for full documentation loans, where you prove to the lender that you make enough money to be able to afford all of your payments. "A paper" lenders will allow you to have total monthly payments of 38 to 45 percent of your gross monthly income. Some sub-prime lenders will go to 55 percent. If your family makes $6000 per month, this means that total payments can be up to $2700 for certain A paper loans, up to $3300 for sub-prime and still qualify full documentation. This also means that the more income you can document, the more house you can afford.



This number includes not only the amount of the mortgage, but also the property taxes, homeowners insurance, association dues (if applicable), and anything else you may need to pay in order to keep the home, as well as car payments, credit card payments, and any other debts you may have. This means that somebody with other payments of $80 per month can afford a lot more house than somebody with other payments of $900 per month. This should be intuitive, but you'd be surprised how often people don't realize it.



The final thing that is helpful is a down payment. The larger your down payment, the less you have to borrow. Lending money is a risk-based business. Up to a point, the lower the ratio of loan balance to value of the property will help you get a lower interest rate and more favorable terms, because the bank will be more certain of getting all of their money back. A 5% down payment is better than none. 10% is better than 5%. The first 5% makes the most difference, but every bit helps. Of course the larger your down payment, the less you have left over for other purposes. It seems to be a phenomenon today that people don't want to risk any more of their own money than they have to, and 100% loans can be done right now, although how much longer that will be the case is anyone's guess. Still, people who make a habit of saving money are always in a stronger position that those who do not.



Now just because you are missing one or more of these does not mean you do not qualify for a mortgage. People in much worse situations than this get mortgages all the time. The vast majority of the time, somebody claiming you're a difficult loan is only looking to pad their pocket at your expense. Loans much worse than I'm talking about here are done on a routine basis. But making yourself a better prospect can certainly save you a lot of money.



Caveat Emptor

real estate mortgage credit consumer education

What is the reasonable amount of notice to give when changing contract terms in California

That was a search I got. Unfortunately for this person, a real estate contract is not something like Lando Calrissian's bargain with the Empire, where Darth Vader was free to alter it at will.

The real estate contract is negotiated until both sides are in complete agreement as to the terms the exchange will be made upon. There cannot be any differences in the terms of the proposed agreement and accepted agreement, or you aren't done negotiating yet.

Once accepted by both parties, the contract terms are not unilaterally alterable by either party. They can, in most cases, walk away from the deal completely if something isn't right, but they can't say, "The deal is still on, but you're paying me $5000 more than you thought," any more than they can tell you, "And I get your car, too!"

Now, if something pops up such that you don't think it's a good exchange to be making any more, in most cases you can walk away from it, albeit with possible consequences for the deposit. In such cases, if the other party wants to keep the deal going, they can offer concessions, but you cannot force them to change the terms of the contract. The same thing holds true in reverse. They can't force you to alter the terms of the contract, but if they're ready to walk away and you want to keep them in the contract, you can offer concessions or ask what it would take to keep the transaction going. If you don't like what they say, you don't have to accept those terms, any more than they had to accept the contract in the first place.

In short, contracts to purchase real estate are two-sided contracts, and are not alterable by any party to it without the agreement of all parties.

Caveat Emptor.

A search I just noticed asked the question "Who gets the deposit if escrow falls through?"



The theory of the deposit is that here is an amount of cash that the buyer is putting up as evidence of their ability to consummate the transaction.



This is a good question. I've only dealt with real estate sales in California, so I'm going to deal with it from a California perspective. California is a widespread model for real estate practices (as New York is for insurance), but I can't speak to the specifics which states are and aren't following this model and to what degree.



Most of what happens in real estate sales contracts has a default, but is subject to specific negotiation. In other words, there's a standard way of doing it, but you can change that by negotiation with the other party. CAR has a specific set of forms that are encouraged, in order to make these questions somewhat more clear cut.



The standard here in California is that the purchase is contingent for seventeen calendar days, after which the buyer's deposit will belong to the seller whether escrow closes or not. From the time the contract is accepted by both sides, the buyer has seventeen days to finish all inspections, and to obtain a commitment for acceptable financing. If they call it off within those seventeen days, they get the deposit back. If the purchase falls through later than the seventeen days, the seller is usually entitled to the deposit, within limits. The seller can't just arbitrarily cancel the transaction on the eighteenth day and keep the deposit. The time specified in the purchase contract has to have expired, there must be evidence of bad faith dealing on the buyer's behalf - something.



Let me make very clear that the seller is indeed giving the buyer something when the purchase contract is signed. To be precise, the exclusive right to purchase that property for a certain amount of time. There are expenses of selling that they must pay and that they don't get back if you can't carry through, not to mention expenses related to preparing to move, at least potentially having the house sit vacant, etcetera. They cannot conclude a purchase contract with anyone else while the current buyer's contract is going on. If I'm selling, I insist upon retaining the deposit if the buyer can't carry though. If I were to be unable to consummate a purchase, I certainly understand that the seller will retain the deposit in most circumstances.



Now the escrow company won't just give the deposit to the seller. They are paid to be a neutral third party, to stand in the middle and make sure that everybody gets what everybody agreed upon, but it is not their place to settle a dispute. For that, you're going to have to go through whatever dispute resolution process is appropriate. This can be mediation, arbitration, the courts, or possibly something else. You can spend a lot of money fighting what the contract says, but in the end you can also expect to have to live up to it, and likely to pay the other party's costs as well as your own, so better not to fight something the contract says you should have done. The escrow company will often also charge a cancellation fee from out of the deposit, by the way. They do an awful lot of work, and if the transaction gets canceled for whatever reason, they do not otherwise get paid.



Probably the number one reason for failed escrow is loan providers leading borrowers down the primrose path. "I can do that," and no, they can't. Unfortunately, I've never seen anyone able to recover damages from a failed loan provider. So keep in mind the The Best Idea About Applying for a Mortgage, and apply for a back-up loan.



Now you can change the standard contract by specific negotiation. If you're a seller who wants to get the deposit no matter what on day 30, you can ask for that as a condition of the initial sales contract. In a hot market, this is easy to ask for and get, but in a buyer's market, you are likely to lose the buyer. If you're a buyer who doesn't want to lose the deposit no matter what, you can ask to put that into the contract you propose, but most sellers, even in a buyer's market, are going to tell you to take a hike somewhere else. No big deal if it was "Hey, let's make a bid on this and see how desperate they are!" A real problem if you fell in love with the property and just have to have it. Over-playing your hand in negotiations is as disastrous as under-playing, and I've seen people so intent on being Mr. (usually) Tough Negotiator that they diddled themselves out of an excellent transaction. In any case, being too sticky on the deposit is a good way not to get as good of a price as you otherwise might have. For a seller, you have this property and you want cash. You need somebody to agree to pay it - the cash is not going to materialize out of thin air. For a buyer, the whole idea is that this property is attractive to you for some reason, or you would not be making an offer. You are asking the seller to trust thousands of dollars to your ability to swing the deal as much as you are trusting their ability to deliver a clear title to a property without hidden defects.



Whether you are a buyer or a seller, once that contract is signed, you want to get cracking on whatever your obligations under it are. Get it Done. The alternative is that you're likely to forfeit whatever rights to the deposit you may have had if you had been prompt. Just because Things Take Time in Real Estate Transactions is no excuse for you to waste time. Wasting time is expensive for everyone, and one of the strongest signs of a sour transaction I know. Buyers and borrowers pay increased loan and other costs, sellers lose money from delay. This is equally true in refinancing, by the way. The loan you are quoted today does not exist tomorrow unless you act on it today. In summer 2003, when rates hit fifty year lows, many people were in no hurry. They insisted upon thinking, in the face of evidence and testimony to the contrary, that the rates would always be there, and they lost out. If rates go down after locking, a good broker can usually get you better rates. If they go up, you've got the lock. If rates go up and you didn't lock, you get the higher rates. Period.



But the deposit is definitely something that the buyer can owe the seller if the transaction falls through, and that's as it should be.



Caveat Emptor.

A high percentage of buyers out there have no idea of how qualified they really are themselves. They have no clue as to any of the major factors in determining credit-worthiness. To be fair, there are dozens, if not hundreds, of little details that can kill a loan dead. This is one of the significant advantages to dealing with a loan brokerage instead of a direct lender, because if a loan killing detail strikes, a brokerage doesn't have to start all over from square one. Pretty much all the paperwork is still usable, I just have to submit it to a new lender that can do the loan. But so long as a very few things about the buyer's situation are acceptable, I'm confident that a loan can be done.



Nonetheless, with a large minority of clueless loan officers out there, and still others who will keep stringing people along as long as they can, hoping to get an approval that's just not going to happen, sellers are understandably concerned. It costs serious money to carry a property, and an unqualified buyer stringing a seller out for three months before the transaction falls apart usually runs into five figures. That's what sellers are potentially looking at when they sign a purchase contract. RESPA strictly prohibits the practice of steering, many listing agents have absolutely no clue as to whether the buyer making the offer can possibly qualify for the necessary loan. A significant number of listing agents violate RESPA anyway by requiring the buyers deal with a given loan provider. The way it was explained to me, even asking a buyer to get qualified with a specific provider and no other obligation counts as steering. Even as a buyer's agent, I can't so much as hint that there's any obligation to do the loan with me - all I can do is offer better terms. Carrots only, never sticks.



The correct way to handle it, of course, is with agreements for deposit forfeiture in certain circumstances. I don't list a lot of properties, and I'm certainly not going to point out something that isn't in my client's best possible interest when I'm agenting for a buyer. I'll tell the listing agent that something seems like steering, and is therefore unacceptable, but I'm not about to suggest terms that could result in my client losing their deposit.



Some agents go overboard with deposit forfeiture provisions, and in a buyer's market like we have locally right now, being too aggressive with those is a good way to lose potential buyers. People are stupid enough to sign up for negative amortization loan that wastes thousands of dollars per year for precisely this reason - they understand money in terms of cash and payments. That deposit is cash, cash they usually spent a significant period of their life setting aside out of earnings. They understandably have a problem with potentially losing it. Even affluent and well qualified buyers may not want to accept the risks, which in a market like this is a good way to miss out on the best buyers, if not upon selling the property entirely.



There's no way to know whether a loan is going to fund until it does. Pre-approval means nothing. In fact, lenders can pull funding back until documents are recorded. There is no guarantee that anyone except an underwriter can make that a loan will fund. Nobody can guarantee a loan except a loan underwriter. Period.



On the other hand, there is a compromise solution. You can't find out if the loan officer is a bozo except after the fact, but you can find out if there's no way in heck that loan can be done. The borrower information you need to know is: Approximate Credit Score (FICO), How much they make, What their other monthly payments total, and whether they have any derogatory notations in the last two years, most notably payments 30 days late or more. You already know what the purchase price and down payment are. With this information, a decent brokerage loan officer should be able to tell if a loan is possible. If the other side is doing a stated income loan, job title can substitute for actual income information. Within a twenty point band is close enough on the FICO score (e.g. 660 to 680), with differences in higher credit scores mattering less. There really isn't a whole lot of difference, even today, between a 721 and an 800, for purposes of whether they'll qualify. There isn't that much difference between 681 and 719. Below 500, of course, regulated lenders can't do business and we're talking hard money only. But the loan market changes over time. If you're not a loan officer dealing with twenty lenders or more, you're going to have some real issues keeping on top of it yourself. Yes, this is privacy act information, but let's consider this: That property owner is risking an amount that's likely to run into five figures when they sign a purchase contract, because that's how much they're likely to be out if the buyer can't perform. It's reasonable to agree to give them a certain amount of information. For instance, a copy of the credit report with social security and account numbers blacked out. W2s or 1099s with anything sensitive that the seller doesn't need to know removed. Bank statements, ditto. The buyers and their agents can combine to make a copy, remove sensitive information sellers don't need, and then give the sellers a copy of the copy. It is to be admitted that many credit providers are prohibiting this now, because they want to sell another copy of that credit report to the buyers, but methods exist to satisfy them.



I realize that these loan officers want something for their trouble, which is one of the two reasons why steering happens (kickbacks, even more illegal, being the other). Steering is nonetheless illegal. An agent whose counter my clients walked away from a few days ago got really defensive about it, but getting defensive doesn't change the fact that you are violating the law by asking the clients to so much as contact any one specific loan provider. If my clients had wanted to go through the hassle, they could have cost that clown his license. Most people don't want to go through the hassle, but all it takes is one who is.



If you know these very few pieces of information, you can figure out things like debt to income ratio and loan to value ratio. You can know if a loan is going to be able to be done. If the buyer chooses a bozo of a loan officer, that's their prerogative, however unfortunate it may be for you. It doesn't change the fact that they could have qualified, which is all any loan officer can really tell you anyway. Matter of fact, a large proportion of the loan officers that agents try to steer towards are bozos. I recently had one agent try to steer my client to a loan provider who had blown a trivially easy loan for a previous client, who would likely have cleared $100,000 profit after fixing the property up, but instead ended up losing his deposit. I get angry about things like that. As I wrote earlier, just because the buyer is my client for the purchase doesn't mean I can force them to do the loan with me. If I can't force them to do the loan - or even put in an application - with me, what gives some lazy (expletive) of a listing agent the idea that they can? Especially when they don't owe the buyer fiduciary duty and I do? Only in as hard a seller's market as we had a couple of years ago is there any prayer of getting your way in that. Buyers with a competent agent now are either going to walk, or use the fact that you violated RESPA as leverage against you. Whichever it is, you've violated your fiduciary duty to your client.



Caveat Emptor

This is definitely not a "Who you gonna call?"



I've done a couple articles in the recent past on the two ratios, debt to income and loan to value. Nonetheless, there exist a plethora of reasons why someone can be turned down for a loan even though they make it on the ratios.



The first of these is time in line of work. A paper looks for two years in the exact same line of work. One change that trips a lot of people is going from being employed by a company to being self employed in the same line of work. Believe it or not, a promotion can also sink a loan if your job title changed, for instance from salesperson to sales manager. If it was with the same company, it can sometimes be okay, but if you changed companies to get the promotion, that's a really tough loan. Subprime loans will accept shorter time periods.



Making payments on time is probably the biggest deal buster for A paper. In general, you are allowed no more than one mortgage late, or no more than two other lates. The reason does not matter. It does not matter how justified you were in not paying. The fact remains that you are reported as being late. The only way to remove them is for the company to admit it was in error in reporting you late. Many people will not pay the charge as it gets marked later and later and later. This is self defeating. Pay it now, dispute it afterwards. Yes, it's harder to get your money back - but the money it saves you on your home loan is typically much larger.



Store credit cards are one of the biggest headaches here. If you buy merchandise with a generic credit card, you've got the card company, who are neutral, looking at the transaction. Both you and the merchant are their customers, and the merchant needs to take credit cards. They're not going to quit taking them. If you use your store credit card, the dispute department is going to take the view that you bought that merchandise at their store and therefore you owe the money. I run across five or six store card problems for every generic card problem I encounter.



Bankruptcy is another deal buster. People in Chapter 13, or just out of Chapter 7. Most banks won't touch them. It's not really rational, but you there you are.



Reserves can be a deal buster, particularly for stated income loans. A paper stated income requires six months PITI reserves somewhere that you can get to it. Subprime is less demanding, but if you don't have the lender's requirements, you won't get the loan. Would you loan money to someone with absolutely no cash in the bank? Payment shock, where your monthly cost of housing is increasing, can increase the reserve requirements.



Related Party Transfers are another questionable point. All of the background for loans assumes that the transaction is between unrelated parties, who have no reason to cooperate in order to do the lender dirt. If you're buying the house from your brother, that assumption goes out the window. Some lenders will do them, others wont. Some will but charge extra. Others will but have special requirements. Whtever they are, you have to meet them.



The appraisal coming in low is another. The lender evaluates the property on a "lower of cost or market" basis. The Appraisal is the "market" part of that, and the lender will only loan money based upon the lower of these two methods of evaluation. I have people tell me all the time that their new purchase is worth $20,000 more than the appraised value (or the purchase price). No it isn't. By definition - it's worth what a willing buyer and a willing seller agree upon. The bank's evaluations are necessarily conservative, and they don't want to take over the property. They're not in that business. They want you to pay back the loan.



Late payments. Whatever you do, while the loan is in progress, keep making all your payments on time. Whether just indirectly due to the credit score dropping, or directly because now you've got a(nother) thirty day mortgage late, this can raise your rate or even break the loan.



Sourcing and seasoning of funds to close. Just because you've got $100,000 in the bank doesn't mean the bank is happy. Nobody rational keeps that kind of money outside of investment accounts. At least nobody rational who needs a loan - Bill Gates might. Lots of folks hide loans that way. The bank is going to what to see that you've had it a while (seasoning) or prove where you got it from (sourcing). If you really just got $400,000 from the sale of a previous property, you're going to have the escrow papers and HUD 1.



Final credit check: I have a set spiel I go through, "Until this loan is funded and recorded, don't breathe different without getting my okay. Make the payments you've been making. Make them on time. Don't take out any new credit. Don't allow anyone (other than mortgage providers!) to run your credit. Just before the loan gets recorded, the lender will pull a final credit report. Woe be unto the person whose situation has deteriorated, and it means we'll have to start all over again, if there even is a loan that makes sense."



Failures of verification. Three biggies here: employment, rent or mortgage, and deposit. I do not know why people bother lying, but they do. Don't you be one of them. World of hurt if the lender wants to prove a point.



Lines of credit/credit history/no credit score: Most lenders want to see at least 3 lines of credit with a 24 month history of making payments on time. Freezing your credit cards is a wonderful idea, but you need to use them to demonstrate a payment history. Once per month, I use mine for something small and stupid that I would otherwise pay cash for - just to show payment history (it also helps your credit score). Pay if off as soon as the bill gets there. Waivers for two lines of credit are fairly easy, but if a given bureau doesn't know you have two open lines of credit, they may not score your credit profile. If you don't have at least two credit score among the big three - no loan.



Property is structurally unsound, is not certified for habitation, unsuitable or not zoned for intended use, etcetera. Wouldn't you really find out about this before you have a very large debt to pay? Okay, this can cost you money, but it's a "Thank (deity) I found out now!" moment.



So there you have them, most of the most common reasons why loans - and therefore real estate deals - fall through.



Caveat Emptor.

Lender Owned Huge Lot with a Granny Flat!



General: Urban East County, 3 bedroom 1.75 bath with a flat in back. Asking price between $450,000 and $475,000. I think an offer of $420,000 net would get it sold.



Why you should be interested: Step out the back door and look at all the room you have! Lot is over a quarter acre in a great part of town, central to everything. You can use the flat for granny or a teenager, or rent it out for extra income!



Selling Points: Already has a granny flat! Trees in the back yard! Quiet street! Great schools!



Why I think it's a potential bargain: It needs some work, but this could be worth a lot more money than it's selling for!



Obvious caveats: Base structure is seventy years old, and there's some deferred maintenance.



Why it hasn't sold already: That deferred maintenance. People want gorgeous now. This creates an opportunity.



If you keep it ten years and it averages only 5% annual average appreciation per year: Based upon a purchase price of $420,000 the property would be worth approximately $680,000. If you held it those ten years before selling, you would net about $320,000 in your pocket (not including increased value from updates!), assuming zero down payment. As opposed to renting the $2200 per month most comparable currently available rental and investing the difference at 10% per year tax free, you would be approximately $230,000 ahead of the renter, after the expenses of selling.



Fact you should be aware of: The individual rooms are small by modern standards.



Obvious way to enhance value or appeal of property: All the fixtures are old. Modernize them. A little bit of landscaping would go a long way here.



This property does not appear to be eligible for a first time buyer Mortgage Credit Certificate provided your family income is not more than $82,800 or $96,600. Ask me for more details, on this or any other property.



I'm a buyer's Realtor®. I am looking to represent buyers, so I find places like this that can be gotten at bargain prices. I save you money while getting paid out of the listing agent's commission, not costing you a penny. Nor are these the only bargains I find. In order to protect everyone's best interests, I require a Non-Exclusive Buyer's Agent Agreement. This is a standard California Association of Realtors form that leaves you are free to work with other agents, but if I find the property you want, I'm the agent you'll use. That's fair, and there is no reason not to sign such an agreement unless you're an agent yourself.



Contact me: Action Realty 619-449-0723, ask for Dan or email danmelson (at) danmelson (dot) com. Ask me to find a bargain that fits you!

I read with great interest you article on the internet about pre-payment penalties. I find my self in a situation involving a pre-payment penalty and would appreciate your advice on this. I currently have a loan in which the prepayment penalty is up on DELETED. I have gone to another lender for a refinance and have been approved for a loan. Since this loan process occurred before the pre-payment penalty was up, my current lender has included it in the payoff demand information. My new lender has approved funding a loan with this penalty ($12,000) included. Documents are scheduled to be signed DELETED and the loan will be funded (13 days before the penalty expires). If I try to push back the date of my loan, my interest rate will go up, and I may not even qualify for a new loan since my FICA scores have dropped. My intention is to go through with the loan and have the loan person hold onto the payoff check until DELETED, after the pre-payment penalty has expired. I will then request a refund of this amount from my current lender. Do you think this strategy is viable or can you suggest an alternative without changing the the time schedule or amount of my new loan?

So you're want to be paying interest on two loans for two weeks?

Doing it your way is okay if you want to pay the penalty and are willing to pay interest and points and everything on the extra. If not, just have your loan provider get a rate lock extension. You'll pay about roughly a quarter of a point in fees, but that's less than the interest - or the penalty. Have your new lender get a payoff demand valid from expiration of the pre-payment penalty forward.

Your new lender is not going to tolerate being second in line for several weeks. Until that previous trust deed is paid off, the loan to value ratio is higher than their underwriting allows, and I'll bet that debt to income ratio is as well. Suppose there's a fire during those two weeks? Is there enough money in the insurance to pay both of them? The answer is no. Until that prior loan is paid off, the value of the property is exceeded by the loans against it. This is the purpose of escrow - and there's escrow in a refinance as well as in a purchase. You don't get that check - you only get what's left over after escrow does their job, which includes paying off the prior lender.

As to your personal situation, why has your FICO dropped? Credit scores don't drop without a reason, and one credit check isn't going to make that much of a difference. Basically, it looks like your lender is trying to make more money off you, and feeding you a line of nonsense to facilitate it. By boosting the loan amount, their compensation in the form of origination and yield spread rises. Okay, so 1% of $12,000 is only $120 - but that's $120 more for basically the exact same work. Not to mention the loan is funded now and they get paid now. Loans that are finished don't fall apart. I'd bet millions to milliamps that they're intending to fund your loan before the penalty expires. If they weren't, there's no reason to have you sign loan documents that early. I wouldn't have you sign until your right of rescission runs out concurrently with your penalty.

From the information given, this is not likely to be a lender with your best interests at heart. About the only thing I can even think of where it might be in your interest is if there's a notice of default or trustee's sale looming - and then we have to consider whether paying that penalty and all of the costs of the loan is really in your best interest. And since you didn't say anything about either one of these situations, I have to question the wisdom of basically volunteering to pay 6 extra months of interest plus loan costs. In this loan environment, I just have trouble believing that the new loan is going to save you that much money over the course of the time you are likely to keep it, let alone over the two weeks early you're paying it off. Even if you're at 8% now and moving to a 7 percent thirty year fixed rate without points, that's over $15,000 you are spending to save 1%. On a $300,000 loan, you're just getting close to breaking even at 5 years, which is longer than ninety or ninety five percent of everyone keeps their loans, and your balance is still higher. And yes, rates are going up, but neither I nor any other analyst I read is expecting that much higher, that quickly - even if your rate isn't locked, and rates that aren't locked aren't real.

Rate lock extensions cost money. But sometimes they're still the smart thing to do. In your case, it's spend approximately a quarter of a percent of your loan amount (depending upon lender policy), or three to four percent for six months interest that I can't see any compelling reason for you to owe.

Caveat Emptor


PS next time, you might contact me to give me a shot at your loan before you're in this position. I do loans all over California.

Low Maintenance With a View!



General: Urban East County, 3 bedroom 1 bath. Asking price between $400,000 and $425,000. I think an offer of $370,000 net would get it sold.



Why you should be interested: Well maintained 3 bedroom home with a view on a quiet street in a nice area



Selling Points: Hardwood floors, nice backyard patio, newer kitchen.



Why I think it's a potential bargain: Very pleasant property in a very pleasant neighborhood, and inexpensive to boot. If you have kids, the schools are excellent!



Obvious caveats: Back yard is small.



Why it hasn't sold already: It's a little on the small side for kids.



If you keep it ten years and it averages only 5% annual average appreciation per year: Based upon a purchase price of $370,000 the property would be worth approximately $600,000. If you held it those ten years before selling, you would net about $280,000 in your pocket (not including increased value from updates!), assuming zero down payment. As opposed to renting the $1600 per month most comparable currently available rental and investing the difference at 10% per year tax free, you would be approximately $120,000 ahead of the renter, after the expenses of selling.



Fact you should be aware of: May be a little small for some.



Obvious way to enhance value or appeal of property: Just update the bathroom.



This property does not appear to be eligible for a first time buyer Mortgage Credit Certificate provided your family income is not more than $82,800 or $96,600. Ask me for more details, on this or any other property.



I'm a buyer's Realtor®. I am looking to represent buyers, so I find places like this that can be gotten at bargain prices. I save you money while getting paid out of the listing agent's commission, not costing you a penny. Nor are these the only bargains I find. In order to protect everyone's best interests, I require a Non-Exclusive Buyer's Agent Agreement. This is a standard California Association of Realtors form that leaves you are free to work with other agents, but if I find the property you want, I'm the agent you'll use. That's fair, and there is no reason not to sign such an agreement unless you're an agent yourself.



Contact me: Action Realty 619-449-0723, ask for Dan or email danmelson (at) danmelson (dot) com. Ask me to find a bargain that fits you!

Not too long ago I got an email from an ex-prospect who decided to buy a developer's property without a buyer's agent. They persuaded her that she would get a better deal without them having to pay a buyer's agent commission. They then proceeded to hose her. She wanted to know if there was anything I could do. The only answer I could honestly give was basically, "Sorry! The transaction is already done!" This is the way that developers like it. Once the transaction is complete, the damage is done. You own the property, and you owe the money. The only recourse is through the courts, which takes years as well as lots more money - and that's if you win.



Many folks want a brand new house for one or both of two reasons. First off, there's that new house feeling. Secondly, they don't have to deal with a real estate agent, or so they think.



This is mistaken. The agents who work for developers are very pleasant, very professional sharks. They're not allowed to actually lie, but other than that, they have no significant responsibility to the buyers. Their responsibility is to get the most money on the quickest sale, period. If you let slip the wrong thing that leads them to believe you'll be a difficult transaction, you can be torpedoed before you even start. They're not there to tell you the bad things about a property, or that there's a better deal two blocks over. They have a responsibility to get the property sold. Period. The developers hire them from among the very sharpest, most ruthless agents there are.



Indeed, developers usually have higher hurdles for buyer's agents to jump over than any other seller can get away with. Buyer's Agents must accompany the client upon their first visit, and register them in writing. Seems minor, but anyone else who tried this would be dead in the water as far as getting agents to show their property, but developers will do both of these and more. With anyone else, when an offer comes in through an agent, that's enough. During the seller's market, many developers were refusing to pay commissions to any buyer's agents at all. This left potential buyers to pay their buyer's agents themselves or do without. The feeling on the part of developers was that buyer's agents spoil their party, so since they didn't have to deal with them, they weren't going to. The demand was there to sell the developments out whether they were willing to deal with buyer's agents or not - and if they didn't deal with buyer's agents, they would have things more their own way.



This has changed now. Every last buyer is precious, so developers are grudgingly working with buyer's agents. I went to a development with a client a few days ago, and the developer's agent had no difficulty conveying the same sentiments as that classic San Diego bumper sticker, "Tourists go home - but leave your dollars and daughters." They wanted my clients - but they didn't want me. Some of it traces to the fact that they want the whole sales commission, some of it to the fact that clients with a buyer's agent working on their behalf have a stronger proponent and negotiate better bargains, meaning lower bonuses and less in commission.



Indeed, a buyer's agent is a fairly unique position in sales. A buyer's agent's responsibility is to get you the best bargain possible - lowest price for the best property. Since commission is based upon sales price, this is the only job I'm aware of that gets less money the better they do their job. The idea, of course, is the better they do their job, the more people will want you to do it for them. You may not make as much per transaction, but if you do more transactions than you would, you come out ahead.



Some agents try to leverage this by rebating a percentage of the commission they would get. After all, it doesn't take a lot of time to fill out an offer. However, it does take a lot of time to shop effectively for a given client. I'm making offers now for a client I've been working with for two months. I've probably spent in excess of a hundred hours looking at properties just for them, never mind researching the properties before I left, or all of the things that contribute to general market expertise. They looked at a few on their own - and stopped, because they were seeing better values with fewer issues through me. A good agent knows what else is available on the market - but the agent who sits there with a license and a fax machine has no clue. There's nothing ethically wrong with agents getting paid for sitting by a fax machine. I'm perfectly willing to rebate part of the buyer's agent commission if someone doesn't want me to scout and evaluate properties. If, however, you want someone who's able to recognize what is and is not value, and who is going to be a strong negotiator on your behalf, thereby getting you a better property at a better price, you need someone who gets out of the office and looks at property. Agents can't get that kind of expertise sitting in the office. And if your only qualifications are a real estate license and a fax machine, why are you making more than ten dollars per hour? What benefit does that have for the public? I visited a new development on behalf of some clients last week. They had one left, in which I spotted a foundation crack literally from side to side of the structure. I checked the area again today, because we're still looking, and that property has gone Pending. I'm not a licensed inspector or contractor, but if someone can spot this before the sellers have your deposit, it can really save your bacon. If I were a discounter, that would have been my clients, because they loved the property.



People in the financial press like to complain about real estate commissions being too large. But they are not as large as they are by some accident of nature. People didn't just decide to pay five, six, or seven percent of the sales price because someone told them to. Sellers do it because experience has taught them that they end up with more money in their pockets because of their listing agent's expertise. It's not a large jump from there to understanding that if the seller has someone whose expertise for one transaction is worth that kind of money, it's a real good idea to have someone on your side who knows just as much, not only about real estate in general, but your market in particular. Various businesses have been trying to offer real estate brokerage services at discounted rates since at least the mid 1970s from my personal knowledge. Traditional sales models have lost a little bit of market share, but they're still going strong. There are reasons for this. Reasons like how long it really does take to get a property sold, like how much work it really does take to know the market. Reasons like there is no way to evaluate the relative value of the property except by looking at lots and lots of properties. Reasons like the paperwork that has to get done, and the legal liabilities involved if something goes wrong, or the buyer isn't happy, or any of hundreds of other reasons. Not to mention all of the transactions that stop before consummation. Real Estate is the only occupation I'm aware of that anything like the work we routinely do, and doesn't get paid at all if the sale doesn't happen. When discounters work for less pay, the only thing that can give in this whole process is the services they provide.



Developers know all of this very well. They are not charities. They are out to make the largest profit possible. They don't hire discount agents. They hire the best agents they can get, and support them with large advertising budgets, because that gets the properties sold, and for enough more money to more than pay the costs of what they spend. These agents act very friendly, very charming and disarming, and completely ruthless. Developers' strategy of discouraging buyer's agents from being involved is part and parcel of ending up with more money in their own pockets. The only place for the money in their pockets to come from is the pockets of the people who buy from them. If you want to deal with a developer, you want someone on your side who knows enough about real estate and your market to stand up to the experts on the other side.



Caveat Emptor

Hi Dan,
I am a first time home buyer and a big fan of the advice on your blog. I was wondering if you could offer some advice on my current situation. I apologize for sending you this question but I've had many sleepless nights over this and I really respect your opinion.

I've narrowed my search down to two properties, one is a condo in DELETED (where I work) and the other is a new home in DELETED (closer commute for fiance). As a first time buyer I'm looking to stay in this place 5-7 years and then if possible rent it out as an investment.

The new home builder has a 2-1 buy down plan so the rates on a $519,000 5/1 arm would be Year 1: 3.75%, Year 2: 4.75%, Year 3-5: 5.75% on the first mortgage and 9.375 on the 2nd (which I would try to refinance right away).

The condo is $335,000 (a similar model sold on 5/07 for 400,000) and the rates are 7% on the 1st and 8% on the 2nd. Both loans are with 100% financing.

I really like the house but don't wanted to be lured into a larger loan if it might come back to bite me. I would go for the condo if it would be a better investment in the long run but would be sad without a yard. I my income is 94,000 a year and I have good credit, my fiance will also be contributing to the monthly payments.

Thank you for reading my lengthy email, I'd really appreciate your help!

If you really respect my opinion, why haven't you contacted me to act as your buyer's agent and/or loan officer? You are local enough.

I am not going to pass judgment on either property and its worthiness as an investment, its comparative value, etcetera. Those are buyer's agent questions. The real question I can deal with here is numbers: What can you afford? If you can afford both, is the more expensive property worth more money to you?

You make $94,000 per year, which equates to $7833 per month. At a fifty percent debt to income ratio, that is total monthly housing and debt service, you can afford $3916. That's got to cover first, second, taxes, insurance, Mello-Roos and HOA, etcetera, as well as your existing debt. A paper fixed rate firsts allow basically 45 percent, while A paper hybrid ARMs are usually lower, and compute based upon the fully indexed payment, not that low initial payment. Matter of fact, what they're trying to sell you on looks like a Temporary Rate Buydown, so they can sell you the property based upon a low initial payment.

Let's look at these two situations.

On a $335,000 condo, that's a first of $268,000 at 7% and a payment of $1783. On the second, that's a $67,000 second at 8%, which is a payment of $492. At 1.25% (standard California rate) your property taxes would be $349 per month. Insurance is not required for condominiums even though it's both cheap and a really good idea, so it doesn't impact debt to income ratio. On the other hand, there will be HOA dues, and may be other monthly expenses such as Mello-Roos. As long as these, plus your other debts do not exceed your remaining $1292, you're likely to be able to afford it. Add in 75% of whatever your fiance will sign a lease for, as standard allowance for rent, in addition to the $1292. Bottom line, based upon the information provided, it looks likely that you can afford that condo.

On a $519,000 property, that's a first of $415,200 and a second of $103,800. The second gives a straightforward payment of $863. The first has an initial payment of $1923, but that's not the real payment. The real payment is $2423 - $500 more. Nor is this the qualifying payment that an A paper lender will use, which is computed based upon what would happen if that loan hit the end of the five year initial fixed period today. That rate would be 7.125, or a payment of $2797. Yes, I like 5/1 ARMs, but they are perversely harder to qualify for than fixed rate loans. I get that basic California property taxes would be $541, I'm guessing insurance would be about $100. Total is $4301, and we haven't considered Mello-Roos, HOA (if any), or your existing debt. On the plus side, we haven't considered your fiance's contribution, either, but it's not looking good as you're nearly $400 over your monthly total payment limit already, and that's without considering possibly lowered debt to income ratio guidelines.

Now, let me point out a couple of tricks going on here: That temporary buydown isn't free, or even cheap. Nor is 5.75 available on a 5/1 without points right now, from any lender I'm aware of. This developer is not going to do your loan for free just to unload the property, and they used the temporary buydown to make it look like the payment is lower. They came close to hooking themselves a sucker fish, too, from your email. The money to do all of this is coming from somewhere, and the only candidate I'm seeing is the pockets of the buyers. It's almost certainly a waste of money as well as defeating the purpose of a hybrid ARM to pay points and temporary buydowns - and paying them you would be. If not explicitly, through being able to negotiate a lower price on the property without the developer paying for all of that. Which would you rather have: slightly lower payments for a while, or a lowered amount of debt in the first place? They pad the price, so they get more money right away, while paying out a part of it to make the payments look lower for a while. If you offer someone a dollar for thirty cents, most of them will take you up on as many dollars as you have, then turn right around and hand you back a portion of the money you just handed them. When you reduce it to the basic mechanics, that's what is apparently happening here. Of course, the average consumer is clueless about this - all they understand is that they're getting a beautiful property that they didn't think they could afford for an initial payment they're happy with. Well, they really can't afford it, but someone who knows a critical bit more of how the game is played persuaded them they could.

All of this is one more argument why everybody should get a good buyer's agent. If you don't have one, especially in dealing with developers and their lenders, nobody has a fiduciary responsibility to you. That and shopping your loan extensively are the best ways to avoid rude awakenings expensive enough to jeopardize your entire future that there are. In fifteen minutes with a calculator, I may have just saved your financial future. The other side has people whose job it is to get that property sold for the most possible money and make money with that loan, too. They're paid to act like your friend while picking your pocket. If you really want to play that game without someone on your side who knows the same tricks they do, you're a foolhardier braver man than I am, Gunga Din.

Caveat Emptor

Appraisers Petition Against "Make The Deal"



I've spoken about these issues before in this post.



I've certainly heard of plenty of abuse on both sides of this equation, and there is plenty of motivation for lenders to abuse the situation by requiring a higher than "real" appraisal value. Still, I think that by reading only the comments from various appraisers one would get a skewed vision of what is going on.



It is the appraiser's job to do their best to get a value that is useful. Theirs is a service occupation, just as mine is. I don't expect to be paid if I can't help the people with their situation. Sometimes I put in hundreds of dollars and dozens of hours of work and it all falls apart because of something beyond my control. Situations like this are part of being in business for yourself. I don't expect to get paid when I can't help the people. Why does the appraiser?



These houses are selling for these prices. If the last three similar houses in the neighborhood sold for $600,000, then this one is likely worth $600,000 also. When the appraiser tries to tell me a house that I've seen and is immaculate and further upgraded than than any of the last three is worth $150,000 less than those sold for, something is wrong, and it isn't with the house.



Basically, what's wrong is they don't want to work. They want to be able to drive over and pop the customer for the bill and let the chips fall where they may. And if the house is really only worth $450,000, the house is only really only worth $450,000. But most of the time, if they worked a little bit, and maybe chose a different sale to compare to, they could justify the higher appraisal, but they don't want to be bothered.



Let me ask you: Somebody bills you $400 or so for work that doesn't help you and in fact makes all of the work you put in worthless, it makes you feel all happy, right? They knew before they went over and asked for the check that they weren't going to be able to get the necessary value. You know something? I'd be more forgiving of him charging me $400 in those circumstances than charging my client $400. If the appraiser called first, and told me he couldn't get value, that gives me a chance to re-work the loan and save everybody's investment in this by talking to the client before the client has written a check for $400. If I can't get the client to accept the new loan, at least they're not telling people I screwed them out of $400 on the appraisal. That's right, it's the loan provider that gets the blame for this in the customer's mind. If I tell them about a change before they spent $400, they're not going to be as angry, and even if this loan falls apart they're likely to tell people I was honest and saved them from being out $400 rather than that I took their $400 and didn't deliver. As I think you might have gathered by now, I didn't get that $400 - the appraiser who screwed the loan up did. If I can't turn it into a new different loan, the appraiser is out a little bit of work. I've put ten times as much into making this happen. It's much easier to tell the client their house is only worth $450,000 before they've written that check for $400. The check gets written, and the whole thing is gone up in smoke.



The appraiser, understandably, wants to get paid for their work. So do I. All I ever ask is that they don't intentionally waste my client's money. If they can't get value, give me a chance to re-work the loan or find someone who can get value. In some situations on a sale, this allows me a chance to re-negotiate the price down so my client gets a better price on the house they want. If they just make the call that gives me a chance to fix it first, I will use them again. That's the kind of appraiser I want to work with. But do a "hop pop and drop" ("hop on over, pop the customer for the bill, and drop a useless appraisal on the bank") so that they get paid once while I'm stuck with a pissed off customer who is now going to tell all their friends and family what an awful person I am, and I think they've earned a spot on my personal blacklist of appraisers I will never do business with again. I'll forgive it once, maybe even twice, if this appraiser has a history of calling me first and this time it just happened that they couldn't get value when they thought they could. Treating your customers right is part of the requirements of being in business for yourself, and sometimes this means you did some work and didn't get paid. You want a job with a steady income where you don't take any risks, go find something with a w-2 involved, and the only risk you take is being fired. You won't make as much money, but you will get paid for all the work that you do. For as long as they put up with you.



UPDATE: Home values here locally have deflated significantly. Right now, the value the appraiser comes back with is not usually an issue unless there have been a lot of distress sales in the neighborhood. The appraisal is rarely a major issue when prices are deflating, because it works by historical sales. Yes, there could be five identical homes sitting on the market and not selling for $10,000 less; but the last one that actually did sell sold for $20,000 more, and the appraiser works off of actual sales.

A Fixer Worth Fixing!



General: Urban East County, 3 bedroom 1 bath, with attached garage, and a nice large lot! Asking price between $325,000 and $350,000. I think an offer of $310,000 net would get it sold.



Why you should be interested: Detached 3 bedroom home for about the same price 2 bedroom condos are going for in the neighborhood, and you can't beat the schools for anything like the price! Plus it's close to everything!



Selling Points: over an 8000 square foot lot, two car garage.



Why I think it's a potential bargain: This property is a great place to raise a family with great public schools in a nice neighborhood, and priced lower than recent comparable sales.



Obvious caveats: Busy street with traffic noise. Furthermore, the place needs work. However, it should repay your work handsomely!



Why it hasn't sold already: It's ugly on the surface. Old everything. On the other hand, there's money to be made by updating it!



If you keep it ten years and it averages only 5% annual average appreciation per year: Based upon a purchase price of $310,000 the property would be worth approximately $500,000. If you held it those ten years before selling, you would net about $240,000 in your pocket (not including increased value from updates!), assuming zero down payment. As opposed to renting the $1500 per month most comparable currently available rental and investing the difference at 10% per year tax free, you would be approximately $110,000 ahead of the renter, after the expenses of selling.



Fact you should be aware of: You're going to need to work to see a profit.



Obvious way to enhance value or appeal of property: Update everything! Landscape the yard!



This property does not appear to be eligible for a first time buyer Mortgage Credit Certificate provided your family income is not more than $82,800 or $96,600. Ask me for more details, on this or any other property.



I'm a buyer's Realtor®. I am looking to represent buyers, so I find places like this that can be gotten at bargain prices. I save you money while getting paid out of the listing agent's commission, not costing you a penny. Nor are these the only bargains I find. In order to protect everyone's best interests, I require a Non-Exclusive Buyer's Agent Agreement. This is a standard California Association of Realtors form that leaves you are free to work with other agents, but if I find the property you want, I'm the agent you'll use. That's fair, and there is no reason not to sign such an agreement unless you're an agent yourself.



Contact me: Action Realty 619-449-0723, ask for Dan or email danmelson (at) danmelson (dot) com. Ask me to find a bargain that fits you!

Yesterday, I checked my referral logs and found an article where somebody was essentially saying "If you want to be depressed, go read this site and then go rent somewhere for the rest of your life".



I can understand where the sentiment is coming from, particularly if they were of the sort of person who wants to meander around occasionally looking at houses until they find one they like, then sign a couple of papers and move in. Lest it not be obvious to you, these are the elements of disaster. I would never put an offer in without looking at at least ten to fifteen properties in the area, without aggressively shopping the mortgage market, or without taking positive steps to insure that I have at least as much leverage over the service providers as they do over me.



The fact is that for most people, the largest transactions of their life are all going to be real estate related. When the average transaction is in the hundreds of thousands of dollars, and those transactions are so complex as to defy understanding by non-professionals (and some alleged professionals), you have the elements for a system that's going to suffer abuses. Many past abuses have been corrected through the passage of legal impediments, but many others remain, and some are illegal but keep happening anyway (See my article on "What to Beware in Third Party Services" ).



What I am trying to do here (aside from picking up some business) is give you the insider's appreciation for what goes on. To that end, I'm setting out some tools for you to judge your agent's likely performance, and your loan officer's as well, and how to get better performance out of them - one hopes before it's too late. Do not think this gives you the knowledge to do it all yourself, however. It may not be "rocket science", but to pretend you can pick up everything a working professional learns and gets exposed to every day by reading a few articles would be false, and of no service to you. With this information, you can debunk the worst of the nonsense that you are told and get a better bargain for yourself no matter who your real estate agents and loan providers are. I am writing about knowledge that you need to have to understand the system, and I'm not pulling any punches about what goes on, anywhere in the transaction. I'm trying to show you limitations and blind spots in the information you may receive, and show you strategies that put you in a stronger position.



If you're the sort of person who prefers to go on in an "ignorance is bliss" state of mind, the education may be disturbing. Indeed, many people seem determined to go about their real estate (and other) transactions in this state of mind. They resist when I attempt to educate them in the realities of the market, figuratively in the same vein as people who put their hands over their ears and say "la-la-la! I am not listening! la-la-la! I am not listening!" It's like they want to get conned, or at least not having to think about it is worth more to them than the money they're being taken for. Since the money they're being taken for can easily go into five figures whether it's a purchase or a refinance, I find this difficult to believe. If you're making that much, you shouldn't need a loan.



Nobody does loans for free. Nobody does real estate for free (nobody does financial planning for free, legal advice for free, etcetera). "Free" is likely to be the most expensive service of all (This is different from at such a rate that yield spread pays all costs). If something about a loan, a real estate deal, or some aspect of financial planning seems "too good to be true," that should set alarm bells ringing right there. If the payment or interest rate on a prospective loan is nothing like what everyone else is talking about, they are looking to pull a con job on you.



If you're of the school that forewarned is forearmed, what you're reading here should give you the information you need to guard yourself against the deceits in the system. I've done lists of "red flags," warning signs not to do business there, "Questions to ask" that you can print out and take with you, "Salesgoodspeakian to English," debunking of pat phrases used to mislead you and what they really mean. I've given you strategies (apply for back up loans, order the appraisal yourself, don't sign exclusive buyer's agreements, etcetera) that, if adhered to, give you more leverage right down the line. I've gone through what real closing costs are, what points are, and warned you of the dangers of shopping for loans or real estate by what they tell you the payment will be. Most importantly, I've shown you how to keep control of your transaction by being aware at the start of the process what the likely bumps are going to be.



Not everyone in the business does everything I've warned you about. There are ethical providers out there; people like myself who will walk away from business or tell clients the pitfalls if something is not in the client's best interest. You can find us if you look for us. Nor are those who practice otherwise necessarily evil. Real Estate, financial planning, and many other fields are set up such that someone new in the business learns from somebody experienced. In many cases, they've been told "This is the way things are," and they just don't know any better. The person who taught them didn't know any better. It is my aim to ensure that people "know better." The change is not going to come from within the industry - the system is set up for their best advantage, and any one agent or loan provider unwilling to toe the industry line is at a competitive disadvantage, and their business is likely to fail. It's kind of the tragedy of the commons: their own individual behavior shows them nothing to gain, and everything to lose, by full truthful disclosure, and where there are people who do it anyway, we are comparatively few. Therefore, the change must come from outside the industry. So by being knowledgeable consumers and helping yourselves, you provide impetus for practitioners to reform their practices for everyone. It may take a long time, and it may never be complete, but if it's never started I can guarantee it won't get done.

Caveat Emptor

Great Family House on Corner Lot!



General: Urban East County, 3 bedroom 2 bath, with detached garage, beautiful kitchen, huge family room, and great back yard! Asking price between $425,000 and $450,000. I think an offer of $420,000 net would get it sold.



Why you should be interested: It's a nice place to live in a great area with some of the best public schools there are.



Selling Points: Plenty of room for the kids to play in the back yard, and suitable for entertaining as well. Large detached garage with plenty of parking.



Why I think it's a potential bargain: This property is a great place to raise a family with great public schools in a nice neighborhood, and priced lower than recent comparable sales.



Obvious caveats: Cross street is used for getting through the neighborhood, so there is some traffic noise outside.





Why it hasn't sold already: That's a good question. I'm not certain I have a good answer.



If you keep it ten years and it averages only 5% annual average appreciation per year: Based upon a purchase price of $420,000 the property would be worth approximately $680,000. If you held it those ten years before selling, you would net about $320,000 in your pocket (not including increased value from updates!), assuming zero down payment. As opposed to renting the $2000 per month most comparable currently available rental and investing the difference at 10% per year tax free, you would be approximately $170,000 ahead of the renter, after the expenses of selling.



Fact you should be aware of: The front part of the house was built sixty years ago, with a more modern addition.



Obvious way to enhance value or appeal of property: Update the front bedrooms and bathroom.



This property does not appear to be eligible for a first time buyer Mortgage Credit Certificate provided your family income is not more than $82,800 or $96,600. Ask me for more details, on this or any other property.



I'm a buyer's Realtor®. I am looking to represent buyers, so I find places like this that can be gotten at bargain prices. I save you money while getting paid out of the listing agent's commission, not costing you a penny. Nor are these the only bargains I find. In order to protect everyone's best interests, I require a Non-Exclusive Buyer's Agent Agreement. This is a standard California Association of Realtors form that leaves you are free to work with other agents, but if I find the property you want, I'm the agent you'll use. That's fair, and there is no reason not to sign such an agreement unless you're an agent yourself.



Contact me: Action Realty 619-449-0723, ask for Dan or email danmelson (at) danmelson (dot) com. Ask me to find a bargain that fits you!

The Best Loans Right NOW



6.5% 30 Year fixed rate loan, 1 total retail point, and NO PREPAYMENT PENALTIES!. Assuming a $400,000 loan, Payment $2528, APR 6.641! This is a thirty year fixed rate loan. The payment and interest rate will stay the same on this loan until it is paid off! 30 year fixed rate loans as low as 5.75%!



10 and 15 year Interest only payments available on 30 year fixed rate loans!



Zero closing costs loans also available!



Best 5/1 Loan trade-off: 5.875% 2 total points. Assuming $400,000 loan, payment of $2366, APR 6.106%. 5/1 ARM loans available as low as 5.375%! This is a real loan with a real payment that actually pays your loan down (not an option ARM!), and the rate is fixed for five years!



Interest only, No points and zero cost loans also available!



These are actual retail rates at actual costs available to real people with average credit scores! I always guarantee the loan type, rate, and total cost as soon as I have enough information from you to lock the loan (subject to underwriting approval of the loan). I pay any difference, not you. If your loan provider doesn't do this, you need a new loan provider!



All of the above loans are on approved credit, not all borrowers will qualify, based upon an 80% loan to value and a median credit score on a full documentation loan. Rates subject to change until rate lock.



Interest only, stated income, bad credit and other options also available. If you need a mortgage, chances are I can do it faster and on better terms than you'll actually get from anyone else in the business.



100% financing a specialty.



Please ask me about first time buyer programs, including the Mortgage Credit Certificate, which gives you a tax credit for mortgage interest, and can be combined with either of the above loans!



Call me. EZ Home Loans at 619-449-0070, ask for Dan. Or email me: danmelson (at) danmelson (dot) com

Sometimes spam makes writing an article all too easy.



Here is a piece of spam I got today because my email at work contains "realestate.com", with identifying information taken out. This goes to show that the financial ignorance of most mortgage providers is astounding.

Thank you for your interest in the X Broker Program. Our program is designed to help you provide more value added service for your clients, increase your fee income and help you generate more loans. By simply providing a one page custom amortization and a completed one page enrollment form in your loan packages you will achieve a high enrollment ratio. By illustrating the three key benefits of the Bi-Weekly Payment Program for your clients, they will clearly see that your goal is to help them accomplish their financial goals sooner by saving thousands of dollars in interest, paying off their mortgages 5-10 years early and achieving a low effective interest rate. Please find enclosed an example of a custom calculator and our simple one page enrollment form.

Or the client can just make 13/12 of the regular payment, or make an extra payment once per year, and achieve the same result without any cost. This option without cost lets the customer choose to pay however much extra they can afford that month, or pay nothing extra if they're on a tight budget. As I computed in this article, the fact that you're making payments more often saves you almost nothing. It's the fact that you're making an extra mortgage payment per year that's saving you all that money.

Getting started is easy. All you have to do is pay a one time setup fee of $99. You will be provided with custom online tools and resources as well as training upon request. To sign up, just go to our online broker enrollment form and complete the required fields, shortly after you will receive an email with your broker code user name and password. Please be sure to save this email. Once you have these instructions you will be able to go to X.com and access your custom calculator and other online resources.

So I (the provider) pay a sign up fee of $99 for an internet driven startup. Cha-ching!

The X program is a great value at $395.00. You earn 300.00 on each enrollment, X retains only 95.00. We also charge a $3.75 per debit fee (emphasis mine). Our customers truly appreciate our one-time only enrollment fee, if the client moves, refinances or the loan gets sold, X will simply take them off the system and put them back on with the new loan information. Most customers prefer to pay the enrollment fee and choose the 3 debit option, where we will take an additional 135.00, 130.00 and 130.00 over the first three debits to comprise our one-time fee. We pay commissions on the 15th of the month for all enrollments on the system the month prior. Once you receive your approved broker email you'll be able to start signing up clients immediately.

Now we get to the real meat of what's going on. For me doing the work of signing someone up on the internet, they get $95 to start with, while dangling out a $300 stroke to mortgage providers to betray their clients by getting them to pay for something they could do themselves, with more flexibility, for free.



Then, once this is started, they make $3.75 per transaction, every two weeks, for an automated process that costs them somewhere between $0.25 and $0.50. Great work if you can get it. Three guesses who gets stuck with all the problems if they screw up.



This is one more reason why you want to shop your mortgage around and get multiple opinions. Anybody wants you to pay anything for a biweekly payment program, that is a red flag not to do business with them.



Caveat Emptor.

I found you on the Web after doing some research for my parents regarding short sales and foreclosures. I appreciate your straight talk regarding the whole loan and real estate process which I know they find incredibly intimidating. Right now, they're sort of putting their head in the sand regarding their financial problems. I have been trying to help them stay afloat but it's becoming tight.

My mom received a default letter from the lender last week since she was two months behind. She sent one payment last week and I wrote a check to her lender for this month's mortgage to bring her current. I told her I couldn't do this again. She wants to walk away from the house, I told her "bad idea." My parents can't make the payments anymore and I am wondering if they should sell or refi. Here a