February 2008 Archives

Somebody who's only looked at the specifications for the FHA purchase program will ask me if I'm on drugs. The answer is yes, I have taken my allergy medication today, but there really are ways to purchase a property through the FHA with no down payment, as I have recently discovered.

This is not the same thing as 100% financing. The FHA doesn't do that. The FHA really wants borrowers to have some of their own money invested into the property. In fact, they have supposedly made it very plain they don't like down payment assistance programs and using them can involve additional scrutiny - but the FHA will accept them if they're done right, meaning that some people are able to buy who would not otherwise be able to.

Here's what the legislation says: The FHA will allow the seller to assist the buyer with up to 6% for closing costs only. No seller carrybacks, and no cash back from seller to buyer (which is fraud, anyway). The owner cannot give the seller the down payment.

But the FHA allows up to a 6% gift for the down payment, and this can come from either immediate family members or from non-profit organizations. If your family members, usually parents, can come up with a gift - not loan - to enable the purchase of a property, that is acceptable to the FHA. Non-profit organizations may also do so. Indeed, there are non-profits that make it their primary activity to do so.

Here's the way it works. The owner (seller) of a piece of property agrees to furnish an amount of money equal to the necessary down payment assistance plus a certain small fee, but does not actually send any money until the transaction closes, at which point escrow is given instructions to . The down payment assistance non-profit then advances the money into escrow, with appropriate contingencies. When the transaction funds, escrow sends the money back to the non-profit for use with the next assistance client down the line.

This is just far enough from direct cash back that the FHA will sign off on it, and most lenders doing business with them will as well. Everything has to be disclosed to everyone - if you're ever involved in a transaction where somebody wants to keep some aspect a secret from some other participant, run away before it happens, or disclose it to them yourself. But there is a difference - a registered non-profit third party, and they are advancing actual cash even though they haven't received any yet. Furthermore, the buyer is not getting cash - what they are getting is money to make a down payment with. This changes the transaction enough that the principles that say cash back is fraud no longer apply, because it isn't cash back from the seller to the buyer.

These grants are in no way, shape or form free money. They come with extensive strings attached. They are an effective way to leverage the current market to make purchasing now, while the market is in the favor of buyers, possible, even for someone who may not have a down payment. Nor do they require repayment.

Why would an owner agree to do this? Two reasons: Price and saleability. First of all, owners who are willing and able to do this have the capability of selling to buyers that other owners do not. This makes the property unique in a way, and provides negotiating leverage because most owners are not willing and able to do this. Instead of eighty properties, a given prospective buyer may only have a choice of three properties. Now their property only has to compete against two others, and those others might not be suitable. The result is quite possibly that a given buyer does business with you or with nobody at all. Now they don't really have the opportunity of walking away from your property. You think maybe a competent listing agent could get significantly more money out of the buyer in such circumstances?

Furthermore, the price the owners might be willing to accept obviously gets raised. If they might accept $400,000 without one of these programs involved, but they have to furnish 3% for closing costs plus 3% for a down payment and $500 for a fee to the non-profit, they need $426,100 just to get the same gross revenue. When you consider that they're paying commissions based upon the higher number. At 6% total agency commissions, that adds over $1500 to what the owners are paying in commission, plus about $60 for owner's title insurance, $30 in lender's title insurance, and roughly $30 extra for each side for escrow, in this case. Your point of equivalence between this prospective buyer is about $427,700, as opposed to a generic buyer at $400,000, but it's very possible to get more than a breakeven amount - not to mention selling the property, where you wouldn't have otherwise.

I have to mention appraisal issues.. It doesn't help if the appraisal is below the purchase price, particularly for high value financing. However, this is one area where the factors working to push everybody towards the FHA loan also work in your favor, because due to the decline in prices that has the lenders in full on PANIC! mode, appraisals are generally fairly easy to justify above the purchase price. I've had to ask them if they could hold the value down a couple of times of late. I don't remember the last time an appraisal didn't come back with plenty of value on a purchase.

Another note is that it doesn't necessarily have to be an FHA loan to work with one of these programs, but the fact that the FHA is willing to work with these programs takes away a lot of lender anxiety, because the FHA guarantee is the only thing that has lenders willing to go 97% loan to value ratio at all in most of the country. Once the FHA signs off on the whole transaction, that guarantee eases lender fear, because otherwise the lenders are stopping at 95% or less. So it's going to be a rare lender that agrees to all of this without the FHA being involved.

Finally, it should be obvious that buyers would be better off to come up with a down payment themselves, rather than pay the higher price, especially as we're specifically considering a loan for 97% of value. The higher property taxes, the higher purchase price, and definitely the higher loan amount are all going to be something you have to deal with for basically the rest of your life. The seller gets their money, where it all comes out in the wash, and goes their merry way. The buyer is paying a higher price, more taxes, increased cost of money, has to deal with a higher loan to value ratio if they need to refinance, and will net less money if and when they go to sell. In the example given, I'd much rather come up with $12,000 cash for a down payment than have to deal with a purchase price $15,000 higher (remember it was 3% closing costs plus 3% to the down payment program, so half of $30,000), pay an extra $200 per year in property taxes, an extra $900 per year interest, and end up with $15,000 less money in my pocket if and when I sold. Wouldn't you? But none of this takes place in a vacuum, and if you wait until you can save that $12,000, the conditions at purchase are very likely to be even worse - because right now the market is in the tank, and buyers have more power and properties are likely to be more affordable than they ever will be again. If you can save $500 per month, by the time you are ready to buy it will be two years in the future, and I'm expecting the prices of properties selling for $400,000 now to be significantly higher than $415,000.

Caveat Emptor

General: La Mesa, 3 Bedroom, 1 Bathroom


What's Wrong With It: There is currently only one bathroom. There are no grassy areas.

Why It Hasn't Sold: Most people want two bathrooms already installed.

Who it's Not Appropriate For: People who need a lot of lawn. People with very young children.


Selling Points: Hardwood floors and lots of light throughout! Kitchen is clean, bright, and very usable! California room and pool for entertaining on hot summer days! Private sauna! Very close to elementary school, park, and little league field.

Who Should be Interested: Families with children, particularly if they're older than about five. People who like to have other people over. People who like swimming pools.

Why it's a Bargain: because it doesn't yet have the second bathroom, but it does have an obvious place to put it.


What I think I can get it for: $320,000.

Monthly Payment examples: I've currently got a thirty year fixed rate loan available for qualified buyers at 6%% without points!

With no down payment: VA 30 year fixed rate loan at 6% no points (FHA 97% financing) payment $1919, (APR 6.073)

With 20% down: Fully amortized payment of $1535 (APR 6.073).

Other financing options are available, potentially lowering the payments, but I'm quoting real loans that real people can get, that will stay exactly the same until you pay it off.

Investment potential: If you keep it ten years and it averages only 5% annual average appreciation per year: Based upon a purchase price of $320,000 the property would be worth approximately $520,000. If you held it those ten years before selling, you would net about $250,000 in your pocket (not including increased value from updates!), assuming zero down payment. As opposed to renting the $1700 per month most comparable currently available rental and investing the difference at 10% per year tax free, you would be approximately $190,000 ahead of the renter, after the expenses of selling.

To learn more: Agree that you'll use me as a buyer's agent if you buy it. If you don't like it or don't buy it, no obligation is incurred. If you're not working with someone who will go out and find properties like this, maybe you should consider working with me instead!

Contact Information:

Dan Melson, Buyer's Agent
Action Realty Inc
9143 Mission Gorge Road, Suite A
Santee, CA 92071
619-449-0723 X 116

The Best Loans Right NOW

5.875% 30 Year fixed rate loan, with one total point to the consumer and NO PREPAYMENT PENALTIES!. Assuming a $400,000 loan, Payment $2366, APR 6.011! 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 percent even!

Best 5/1 ARM: 4.875% with 0.8 total points and no prepayment penalty. Assuming $400,000 loan, payment $2117, APR 4.985. This is a loan where the rate is fixed for five years, and the payment pays your balance down! With rates on hybrid ARMs having dropped of late, they are once again something for people to consider. You can have a 5/1 ARM at a lower rate for no points than you can a 30 year fixed rate loan for two points! 5/1 ARMs as low as 4.00 percent!

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

Great Rates on jumbo and super-jumbo loans also available!

Zero closing costs loans also available!

Yes, I still have 100% financing and stated income loans!

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 any of the above loans!

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

I am an adamant believer in the Non-exclusive Buyer's Agency Agreement. In practical terms, as opposed to the Exclusive Buyer's Agency Agreement, it is so much to the advantage of the consumer that it isn't funny, and it doesn't usually hurt good agents. On the other hand, the proponents have one argument going for them that I do respect, having experienced it more than once. I start a client on the searching process. I explain it's going to take looking at a minimum of 12 to 15 properties before they know what the market is really like in their area in their price range. I find a whole bunch of properties, and start taking them to a few. I offer rational, real world comparisons of their comparative virtues. Ask about what they liked versus what they didn't, what they could live with and what they couldn't. And then, in between, one or both partners gets a wild hair about going to view another property. I've explained what their price range is, but they either don't realize it's out of their range or don't care. They just want to see what it's like. And because the property is out of their price range, it's going to be a more desirable property - that's why it costs more money!

So they go out, and after my careful work of making sure to stay within their budget, on a sustainable loan they can afford, this other agent shows them what, by comparison, is the property of their dreams and says they can buy it!, and he knows where they can get the loan! If this sounds familiar, it happens a lot. "Dan was showing us such ratty properties by comparison! This guy is showing us beautiful stuff we love! Let's buy one!" and the first I find out about it is they tell me they're in escrow on someone else's property, and of course they've applied for a negative amortization loan done stated income.

Most people buy based upon emotion. If you want to make one change in the value of your financial future, learn how to take emotion out of your decision-making process, especially on anything big enough to require payments. Once people have emotionally convinced themselves that they deserve this property, my rational analysis of the situation doesn't have a snowball's chance in July of talking them out of it. I know this very well. I could stamp out buyer's transactions at the rate of three or four per week by showing clients two or three ratty fixers within their budget and then moving in for the kill by showing one immaculate property in ready to move in condition for thirty percent more. But I'd have problems shaving without looking in the mirror, and I need to shave every day that I work. The reason that wasn't within their budget is that they cannot afford the payments, or they cannot afford the real payments.

And that's why there is money in fixers. It's all very well for people to say they are interested in the $400,000 fixer that fits within their budget and that they can fix it up and sell. Particularly first time homeowners, particularly young married couples, and especially if they have children, show them the $600,000 move in ready and they will bite almost every time, budget buster or not. Put all three factors together and not all of the wisest people in history together could talk them out of it.

So the smart operator offers $350,000 for the fixer that's been on the market for four months, spends $40,000 on upgrades like carpet and modernizing the kitchen or adding one more bedroom and bathroom, and turns around and sells for $620,000, of which she keeps approximately $186,000 in profit. If the buyer needs them to pay some closing cost in order to make the transaction happen, she still makes $175,000 for a few months work. Not bad, eh?

Now the average couple don't have $40,000 to upgrade the property immediately. I don't know the last time I saw or heard of a first time buyer who wanted to put a downpayment. Most potential buyers right now don't have anything significant they could put down if they wanted to. But if they buy that fixer, they have a lot more room on their monthly budget and as much time as they want. At 6% interest rate and California standard property tax rates, the $620,000 loan has a payment of $3717, plus $646 in property taxes. The lesser property, even if they buy for $400,000, the payment is $2398 and the taxes are $417. I know that it's smarter to split the loan into two, but work with me for the sake of simplification. So the already fixed property costs $4363 per month, while the fix it themselves costs $2815. That's over $1500 per month difference they have to put towards fixing it up. In two years, they've got the $40,000 from that $1500 per month alone. This is leaving aside the issue that the rate on the bigger loan isn't going to be as low. They can concentrate on the most important updates. Sure, it's a pain. That's why buyers are willing to pay $620,000 for the ready to move in property. Actually, they'll line up to pay $620,000 for the more attractive property. It's just the way things are. And they get done with their two year project, and now it's worth every bit as much as the property that was worth $620,000 to start with. At 5% for two years, that's $683,000. If they sell, that's approximately $235,000 in their pockets (tax exempt in most cases) instead of in the professional fixer's. If they bought the move in ready property and then sold, they'd net about $15,000 by the same calculations.

Now most properties, even fixers, won't generate quite this kind of quick windfall. But that is a real example I encountered not long ago. Moral of the story: fix it yourself if you can. By isolating off the emotional appeal, you've made yourself - or saved yourself - a lot of money. And the reason there is money in fixers is because most people won't do this, instead convincing themselves that they're good people and they deserve this beautiful property. But if you deserve the beautiful property, you also deserve the huge cost, and the huge payments to maintain it, and you definitely don't deserve all the profit that the folks who buy the first kind of property make from the sale.

Caveat Emptor

Every so often, someone who thinks they're a wit sends me a copy of The Rules For Relationships According To Women. Unlike those rules, which might have been funny around the time Nefertiti was a debutante, these rules are real and they are not based upon caprice.

Very recently, I was walking through a grocery store parking lot and heard someone screaming on their cell phone, "It wasn't my fault! The broker told me not to make that payment, and then they didn't pay the loan off on time!" Which leads me to Rule Number One: It is YOUR responsibility to make all payments on time. Nobody else. Your name is on that contract, not theirs. Under text that says essentially, "I agree to repay this loan on these terms." When you are in the process of refinancing, make it a point of paying that mortgage on time and in full. The worst thing that will happen is that you will get a check back a couple weeks later. Whereas if you blow the payment off, you are taking the risk, as happened to this person, that some incompetent person doing your new loan will not get the loan done in time to make the payment date. On the sixteenth, there's a penalty due. On the thirty-first day, it hits your credit, where it can conceivably make a difference of 150 points. And if the lender is getting ready to fund the loan the next day and runs your credit then and sees your drop, the terms of your loan just got worse, if they can fund the loan at all. It is the mark of a bad loan officer to tell you not to make your payments. A good one will specifically tell you to continue to make payments on time. I haven't blown a rate lock in a very long time, but there's always the possibility it might happen and the loan takes longer than I think it will. Don't let it happen to you. Make your payments on time, whatever you're doing.

Corollary to Rule Number One: You are responsible for getting it to them. All of this nice convenient stuff about mailing a check or sending the payment online is quite a convenience, but they do not legally have to do it. Your grandparents had to walk the check (or the money) in every month. You can still do this if your lender has branches and you suddenly remember on the 15th that you forgot to make your mortgage payment. Many lenders are very forgiving about this. But they don't have to be,

If that payment doesn't get made on time, it is your fault. End of discussion. If you mailed it off on time and it got lost in the mail, you are the one that owes the penalty. If you transferred the money online, and it somehow doesn't get credited to the right account, it is your fault. These don't happen often, but they do happen. The lenders are actually pretty forgiving about it, provided you can convince them that the payment was made. You have a receipt, a canceled check, something that says you made the payment in full and on time. If you're good enough about paying on time, sending the check on the first even though it's not officially late until the 16th, they're pretty forgiving about checks that get lost. On the other hand, if you are always paying on the last possible day, the lender is going to regard that late fee as the least they are due. While you are at it, always include something with your account number on it when you send the money. Write it on the check, include a coupon, put it in comments. Otherwise the lender could conceivably end up misapplying the funds of the check, especially if they figure to use the address on the check, and you're making a payment on another property. Most of the time they do get it right. But if they don't, it's your fault. If they get the payment with all of the necessary information and misapply it, that's their fault. If they didn't get it, on time or at all, or missing some important information, it's your fault.

There is no rule two, at least that I can think of right now. There is only one rule, but you violate it at your extreme disadvantage.

Caveat Emptor

This is a temporary program, launched by President Bush and Congress a few months ago. Its goal is to prevent as many homeowners as is reasonable from losing their homes through foreclosure. It won't help you if you bought a property that was far beyond your real means, but it is likely to help a lot if didn't stretch very much.

In order to qualify for FHA secure, you need to have a non FHA ARM that has "reset," which is lender talk for "passed the end of the fixed period, if there was one." FHA Secure probably isn't going to help you anyway if you already have a fixed rate mortgage. The limit on the loan is the current conforming limit, which is $417,000 nationwide (except Alaska and Hawaii) as I type this. We're expecting information in the next few weeks that details how big the loans the FHA will actually insure in a given area are likely to be due to Congress mandating raising their loan limit. Them being a government agency, they have to do what Congress says, but it does take time to implement these things.

FHA Secure mortgages are not like those "free magazine - take one!" offers. You do have to qualify for the mortgage under the normal FHA rules. This means full documentation of income on a fully amortizing loan with a debt to income ratio of 41% in the textbook case. They also have Loan to Value limits of 97.15%

The ONLY "normal" mortgage qualification that the FHA Secure is willing to overlook is whether you were current on your loan after it hit the adjustable period. You must have been current on your existing mortgage for six months before it hit the adjustable period, but if you made late payments or no payments after the loan hit the adjustable period, FHA is willing to waive the usual requirements to have your loan current. They're even willing to consider your loan if you are currently in default.

Another way that FHA Secure mortgages are different from most FHA mortgages is that there is no CLTV limit, and the FHA will allow secondary financing for FHA Secure loans. The primary form this takes is second mortgages carried by previous lenders for amounts over the FHA limits, either in terms of Loan to Value or absolute dollar value. Be aware that in some states, this is going to change your loan from a non-recourse loan into a full recourse loan.The protections given by non-recourse loans are generally over-rated, but it's something you should be aware of. Since the FHA normally funds up to 97% Loan to Value ratio, and conventional lenders and second mortgage holders don't want to go that high right now, they are not going to agree to fund the difference unless they understand the choice they have is between funding the difference and going straight into foreclosure. For example, let's say you've got a $500,000 loan on a property that you purchased for $500,000 with 100% financing on an interest only 2/28. You still owe $500,000, but the property may only be worth $440,000, and the FHA will only fund to $417,000 until the new limits are implemented. This leaves $83,000 (at a minimum) that the new loan is short. If the prior lender can be convinced that it's a choice between write a loan contract for that $83,000 and go straight to foreclosure, where they'll lose a lot more than $83,000, they may agree to carry that second mortgage. Of course, they also may not. It's their money and their choice, and there's no way to compel them if they won't listen to logic.

FHA Secure is otherwise similar to "regular" FHA loans, and it's not free. There's a funding fee of 1.5% charged up front, and an annualized half a percent charged on a monthly basis. The FHA's "Naughty List" also applies.

FHA Secure is not any kind of a cure-all. You do have to qualify for it as regards both Debt to Income Ratio and Loan to Value Ratio. If you stretched way too far beyond your real means - as evidenced by income documentable by tax returns and W-2 forms - this program is not going to help you. If you were late on your mortgage even before it hit reset, this program is not going to help you. If you're a member of that group that's always with us, people who have lost their jobs, careers, or otherwise seen a decline in income, it may not help you even if you originally qualified full documentation. It's also not going to help you if your loan was for $900,000, which is way over any FHA limit currently being contemplated. But if you're a middle class borrower who only stretched a little, figured you'd be okay with a hybrid ARM because of it, and now you're not, this may be the program that saves you.

Caveat Emptor

FHA Loans: Poised for a Comeback


I want to state that I am in no way shape or form an FHA loan guru. I haven't done an FHA loan in years. But with the new developments in the market rapidly transforming FHA loans into being the most likely savior of the market, I invested in a class to learn some more about them. Between my general knowledge of loans and this information from someone who is an FHA guru, I think I can make some sense on the subject. Besides, one of the best ways to understand something better is trying to explain it to someone else.

FHA will guarantee loans up to 97% of the purchase value, not 100%. This means that you do need a minimum of 3% down from some source. The FHA will allow seller paid closing costs only of up of 6%, and the really cute thing is that they will also allow the down payment component to be a gift from family members or non-profits (provided they are not otherwise involved in the transaction), which opens up some interesting possibilities I'll write more about in another article. FHA loans can also be interfaced with some types of locally based first time buyer programs, although whether there is money in the budget at the time you apply for those programs is subject to funding, which usually goes quickly.

The first thing you need to understand about FHA loans is that they are intended to enable people to transition from renting to ownership of a primary residence. They are not intended to help anyone grow a real estate empire. For this reason, they will not work with investment property except in the case of non-profits. Second homes are only allowed where you already own a home elsewhere and can show an employment related need. Vacation homes are not allowed.

Refinancing is possible for existing FHA loans, up to a maximum of 85% 95% (see Mortgagee Letter 2005-43) loan to value ratio, provided it was purchased via FHA owner occupied loan. The only exception allowing FHA refinance of non FHA loans is the FHA Secure plan, which I'll write about in another article. There is no prepayment penalty on FHA loans, and they can be refinanced into conventional loans anytime you can qualify for conventional financing. Most folks do refinance FHA loans into a conventional conforming loans as soon as they can, because FHA rates aren't as good as conforming and conforming loans don't carry financing insurance. It's something to be decided on a case by case basis, on the basis of what is best for a given homeowner.

I did say conforming loans. FHA has loan limits which has mostly precluded them being a big player in most areas for the past several years. With the decrease in housing prices that has hit many areas and new legislation raising the conforming and FHA loan limits (which we're still waiting for hard numbers on), they are likely to be what saves the market as traditional lenders are seemingly more fearful of high loan to value ratio loans every day. Truthfully, I anticipate FHA loans as being what saves the bacon of traditional lenders and provides the upwards impetus to the market that will cause traditional lenders' fears to ease and relax their restrictions.

With loan limits preventing them from lending upon most single family residences these past few years, you'd think FHA would be friendlier to condominiums. Unfortunately, government bureaucracy being what it is, condos have to be approved by the FHA before they will fund loans upon them. Since relatively few developers care to do that, that means that most developments don't have blanket approval from the FHA.

Just because the FHA hasn't issued blanket approval to a condominium development doesn't mean that you can't get spot approval, however. The requirements, in addition to the usual ones, are no ongoing class action suits open or pending, and 60% or more owner occupancy for the complex. This last tends to be the most difficult requirement, as it's a little unusual that a particular complex has 60% owner occupancy.

Like all government programs, FHA loans require full documentation of sufficient income to afford the loan. No stated income or lesser loans will be funded. This is another reason they've been unpopular in recent years, as mortgage products for those with eyes bigger than their wallets proliferated, and agents and loan officers became accustomed to qualifying people for properties and loans far beyond their means. Now that that's all over and we're back to solid fundamentals as far as loan qualification, you can decide to stay within the budget for a loan you can prove you can afford, you can put a significantly larger down payment on the property to qualify for conventional financing, or you can do without buying any property at all. But FHA does not do stated income loans.

Matter of fact, the FHA doesn't do "interest only" financing, either. All FHA loans are fully amortized. However, the FHA does accept some hybrid ARMs as well as fixed rate financing. But no interest only, no stated income, no negative amortization. You must qualify for an FHA loan based upon the fully amortized payment and full documentation of income only, which eliminates most of the ways that people were being qualified for loans beyond their means in recent years, and is one more reason why the FHA has not been a major provider of loans in recent years.

Allowable debt to income ratios are 29% 31% front end and 41% 43% back end, according to the written guidelines. However, the 29% front end can be gotten around and the 41% can be subject to increase in the case of strong credit , high reserves, or a stable job. For instance, owner of a stable business of long standing. Nobody fires owners. Large amounts of money in retirement accounts is one that the instructor specifically mentioned as being a possible reason to get the debt to income ratio increased. The range of 45-49% is supposed to be reasonably possible to get the FHA to approve. Beyond that, exceptions are fewer and significantly harder to get.

There is no requirement for reserves with an FHA loan at all. With that said, however, having reserves can be a major point in your favor, particularly above 41% back end ratio. People with hundreds of thousands of dollars in retirement accounts that they could fall back upon if they had to is something the FHA will consider while traditional lenders would not. They'll even allow non-monetary reserves, the example given being a collector of old motorcycles which could be sold. Jewelry, automobiles, and other non-liquid assets may be considered. Of course, it's a very good idea to source and season every dollar you're using to justify the transaction, but the FHA has even been known to accept "mattress money" for down payments (not generally reserves), which is unheard of in other loans.

Here's the really cool part about an FHA loan: It's not FICO driven. You don't even have to have a credit score in order to be approved. With that said, however, I'm told that below a 600 credit score things do get tougher to get approved, and below the equivalent of about a 575 it's not likely to be approved. You can also use alternative credit , of which utility bills are probably the best example. Especially in some cultures, credit can be a thing that people aren't accustomed to having or using, so these capabilities are very helpful. You don't even have to be a citizen, but you do have to have the right to work in the United States.

Prior bankruptcy is allowable. Chapter 7 with two years of seasoning and re-established credit, chapter 13 with one year payment history and court approval.

Even prior foreclosure is not an automatic disqualification from an FHA loan. They will, however, require documentation of extenuating circumstances such as major illness. Job transfer is explicitly disallowed as an acceptable extenuating circumstance, so people who walk away from properties thinking they're going to get an FHA loan are going to be disappointed. What the FHA really seems to be looking for is debilitating illness, either one which you personally went through, or one where you had to care for an immediate family member.

For how easy they are to work with for individuals, however, loan providers find themselves with many additional requirements, which is yet another reason FHA loans have been less popular of late. In addition to everything else, in order to originate FHA loans, originators have got to go though an annual audit with an accountant who's specially certified FHA auditor. This audit costs a minimum of about $5000 just for the auditor, never mind the cost of the originator's own time or that of anyone else they may have to pay. The FHA does not permit an agent to hang their license with one broker for real estate and another for loans, either. If your broker does both, however, it may be permitted. The extensive paperwork means fewer providers - especially discount providers - are interested due to the increased costs, which drives things exactly opposite to what you'd expect the government to want - it drives prices of FHA loans up, by restricting the supply of those willing to do them. It is hoped by many that FHA modernization will change some aspects of this, but that has been stalled in Congress for over a year. It's pointless to speculate as to what will and will not be included in FHA modernization until Congress sends an actual bill to the president.

One thing not likely to change is the FHA's blacklist. It's not called that, but that's what it is. Once a real estate agent or loan provider is on their list, they are on it for life, and the FHA scrutinizes all transactions for anybody affiliated with it being on their "no way" list. If someone should default on an FHA loan, the insurer is going to look for a reason not to pay the guarantee, which insures that every FHA foreclosure gets scrutinized for fraud and a number of other offenses. If the agent or loan officer was involved in such an offense, onto The List they go, and they are forever barred from transactions involving an FHA loan. For this reason, it's probably a good idea for consumers to ask about this in their first meeting with a prospective loan officer or real estate agent - on the phone would be better. Just say that you're going to be needing an FHA loan, so if they're on the FHA's "naughty" list, they might as well tell you now, because they're going to be wasting their time. If they try and talk you out of an FHA loan, well, that should tell you everything you need to know. FHA loans are superior to anything that isn't conforming A paper, and if you haven't got the qualifications for that, FHA beats A minus, beats Alt A, and beats subprime like a drum (OK, so the VA is a better deal than FHA as well).

The FHA does not normally permit secondary financing, either in the form of second trust deeds or seller carrybacks. The one exception to this is in the FHA Secure program, which will have to be another article.

One final thing: FHA loans aren't free. There is an upfront cost of 1.5 points to fund the loan. This is over and above all other loan related fees. This pays for an insurance policy that insures the lender against loss, much like private mortgage insurance on conventional loans. In addition, there's an annualized cost of half a percent on top of principal, interest, taxes, insurance, etcetera - and this is included in debt to income ratio calculations. This will continue until the loan to value ratio is 78% or less, and if the loan period is over 15 years, cannot be removed for five years. If the loan period is 15 years or less and the loan to value ratio is initially less than 90%, there will be no continuing (i.e. the annual component) mortgage insurance charged, but the only way to elude the 1.5 point initial charge is by having a loan to value ratio of 80% or less. Since in any of these cases, it's overwhelmingly likely there will be better choices available to the consumer, essentially all FHA loans are going to have this financing insurance. The continuing cost is one of the main reasons people refinance to non-FHA mortgages, incidentally.

With lenders becoming increasingly fearful about the state of the market (far too late to avoid damage), FHA loans are an excellent way to qualify someone for financing that's at least close to 100%, and legal avenues do exist that can enable FHA financing to be essentially 100% financing. Given the state of the housing market, particularly the starter market, and the recently passed legislation which will enable FHA limits to be raised, the FHA loan is likely to be a very powerful force for market stabilization, leading to market recovery. It's a good alternative for consumers who cannot currently qualify for conventional loan financing.

Caveat Emptor

If a home for sale has a refrigerator included on the listing report, and the buyer's agent does not write that it goes to the seller in a contract, is the buyer actually entitled to the refrigerator. I am actually going through this right now.

The listing does not matter. What does the purchase contract say? That is the complete controlling fact of the whole entire transaction.

If the contract is silent, what matters most is whether the refrigerator in question is appurtenant to the land or not. Appurtenances are things which are physically and structurally attached to the land which is always the primary thing being sold in a real estate transaction. For a standard house, nobody would seriously argue that they have the right to remove it, because it is attached securely to the property. There are service pipes coming out of the ground attached to the ground and a foundation it is attached to. There are electrical service wires, telephone wires, and cable TV wires. All of which would come up if you pulled the house away. So the house is appurtenant to the land. This is how all real estate transactions are really structured, by the way. You are buying the land, and the house, if there is one, comes along because it's attached to that land.

So if the refrigerator is somehow built in, such that removal would be a nontrivial project, then it's appurtenant to the land. If all you have to do us unplug it and push it away on a dolly, that's not appurtenant, and there is no more reason why they should have to leave that than why they should have to leave their dog, cat, or child.

Now this is not to say that you can't build an excellent court case based upon the fact that there was an implicit promise made in the listing, and everything else in the contract was built off of what that listing said. Talk to an attorney for more information than I can ever give you on that score.

Even if they're not obligated, the seller might leave the refrigerator anyway. Maybe they've got another, maybe they are just living up to what they promised even though they might not be legally required to do so. Most people are mostly honorable.

In any of these cases, of course, the seller also can force you to go to court by being an obstinate donkey. It's not like you have the magic power of enforcing agreements. That power belongs solely to the executive branch, which will take no action in cases like this without a court order. Whatever the court says is final. Unless it's some $25,000 wonder fridge, however, it is not likely to be worth going to court over. Much cheaper to buy a new refrigerator, and your expected return on investment is much higher.

Caveat Emptor

I just moved into a rental house with an option to buy. I figure I can probably save up around $40-45k for a down payment in three years. how should i save? The Roth IRA tax loophole for first time home buyers maxes out at $10k and takes 5 years anyway. It sounds dumb, but the best safe short term investment I can think of is savings bonds. There has to be something better!

Your major constraints here are a relatively short time frame and you want a certain amount of safety. The idea of investing the money is that you want to get more money, not lose your investment savings.

So if you're going to move outside the realm of guaranteed investments for this purpose, you are going to worship at the altar of diversification. Stocks generally go up, but can go down (roughly 28 percent of all years since records have been kept), and indeed, are not anything like a panacea. Therefore, if you're going to risk the stock market or the bond market in order to obtain their higher returns, you're going to want to diversify, diversify, diversify in order to prevent anything short of a general market decline from ruining your investment.

With that firmly in mind, individual stocks are probably not a good idea. If successful, the idea is that the income will be mostly capital gains, which are taxes at a lower rate. Unfortunately for this idea, it's hard to get an efficient and diversified individual stock investment for less than $100k. At $100,000, you've got a down payment to be extremely proud of.

The same with individual bonds to an even greater extent. When most bonds run in $10,000 to $50,000 denominations, diversifying is not really an option when you're just trying to save up for a down payment. If one of them suffered a significant downgrade, your price would take a hit.

Next on the list is government savings bonds and bank CDs. These offer a guaranteed return. The problems are that it's a mediocre return at best, and it's all ordinary income. Still, 5.5% or so for bank CDs is safe and secure, even if it reduces to about 4% after taxes. US Treasury securities have a four year minimum holding period to get their guarantee. Me? I stopped loaning the government money twenty years ago.

All of the various insurance products are a bad idea. You're saving for something you want within five years, not something forty years away or trying to insure a possible loss. Nor does the tax treatment help. Secure commodities investment is one of those oxymorons like plastic glass.

Finally, there are mutual funds. These are diversified by their very nature. In fact, my usual complaint is that they are too diversified, but in this case, that's actually good. Pick a good fund family that covers all of the major asset classes, including bonds. Yes, you pay management fees (and advisement fees or a sales load if you are smart, to help keep you from over-reacting to short term market events), but you can average nine to 13 percent per year, pretax, seven to ten afterward. A large portion of gains will be capital gains, taxed at lower rates than ordinary income. This isn't a certain or guaranteed investment, and can lose some of your principal, even all of it in theory. Nonetheless if you're comfortable taking what is in my estimation a small amount of risk, it can really pay off.

Caveat Emptor

Yesterday I dealt with a very disturbing phone call from a would be client. He was very happy with the way I found bargain properties, and wanted me to find him such a property. All very well and good. But he said that a condition of the transaction had to be that he would receive cash back from the seller in order to rehabilitate the property while financing the entire amount. This is not so good.

I am well aware there are all kinds of self-proclaimed real estate gurus out there, many of whom push precisely this sort of strategy. That does not change the fact that it is *FRAUD*.

The lender evaluates a property based upon accounting principles, which is to say Lesser of Cost or Market. Whichever is less, the cost of the property or the market value. Market value is measured by the appraisal. It's not perfect, and it's not foolproof, but it's the best thing there is. Cost is measured by purchase price - the price at which a willing buyer and a willing seller exchanged the property. It has to be worth that much or the buyer would not have been willing to pay it, would they? It can't be worth more or the seller wouldn't have sold, would they?

Manipulating either purchase price or appraised value for financial purposes such as justifying a higher loan amount is fraud. Since there is no other rational reason to do that, it's pretty universal that manipulating appraisal value or purchase price is fraud.

Many people have all kinds of rationalizations why doing this sort of thing is permissible. "Real Estate goes up in value," "It'll be worth that much eventually," and "It'll be worth that after the renovations!" being very common. None of these addresses that fact that that's not the situation now, and the lender is lending based upon the value now, not later.

The purchase price, in particular, is the purchase price because that it how much money the buyer is paying and how much money the seller is receiving. But if the purchase price is $400,000 but the seller is returning $20,000 to the buyer, then the real purchase price is not $400,000, is it? The seller is only getting $380,000, and the buyer is only paying $380,000. If it was a cash transaction with no loan involved, there would be no doubt. If I hand you $400,000 and you hand me back $20,000, I've only given you $380,000, not $400,000, and there's no doubt about it. You've only got $380,000. Only the fact that there is a lender in the middle of most transactions gives any leeway to confuse the issue, and if you're hiding something about a transaction in order to induce some other party to perform a financial action they would not otherwise, that is a textbook definition of fraud.

Lest there be any mistake, you do have to hide it. If the terms of the purchase contract state that there will be this rebate, the lender will treat the purchase price as $380,000, and underwrite the loan based upon a $380,000 purchase price. Telling the entire truth defeats the possibility of it working, and once you have neglected to inform the lender of this significant fact, you are committing fraud.

Some people will cite the example of Seller Paid Closing Costs as justification for this, but that is an entirely different matter. Indeed, traditionally lenders treated seller paid closing costs, over and above the seller's usual share, as reducing the purchase price. It is only the last few years, when it has been pointed out that everything about real estate transactions is negotiable, and that the seller must have been willing to pay those costs in order to consummate that transaction, that the lenders began to allow it. But it is to be noted that all of that money is going to third parties, people who are being paid for their services in making the transaction happen, none back from the seller to the buyer.

Consider instead this scenario: Jim and Joe trade the stock of corporation A. The public sale price of that stock is $100 per share, but as soon as Jim has Joe's money, he quietly hands Joe back $20. The price Joe is paying Jim for the stock is $80, but to the observer unaware of the side transaction, it's $100. It's going to appear to the general public that both Jim and Joe consider that to be a fair trading price, and people will often be willing to pay both Joe and Jim that $100 per share price because it looks like that's the price, or think they're really "getting a deal" if Joe or Jim will sell to them for $98.

Now lest we be unclear, as soon as the side transaction comes to light, the SEC and FBI are going to sweep in and both Joe and Jim are going to find themselves charged with share price manipulation, which is to say, fraud.

The situation I've described as defrauding the lender in this instance is no different at the root. You are hiding a part of the transaction in order to induce the lender to give you a larger loan than they otherwise would have.

Now, before I leave this subject, I want to ask you what kind of an agent or loan officer you'd trust to commit fraud upon someone? When such activities are discovered, such agents and loan officers lose their license and usually go to jail. Do you want to do business with a loan officer or real estate agent who commits fraud? Who deserves to lose their license and go to jail? If they're willing to lie and commit fraud upon one part of the transaction at the lender's expense, why would they be unwilling to lie and commit fraud at someone else's expense? For instance, yours? If I were to point out some agent or loan officer who is under indictment for fraud, and is going to lose their license and go to jail as soon as the verdict comes back, I'm sure you'd all go right out and book a transaction in a hurry with them right now, right?

Now this would-be client quickly lost interest when I explained all of the above. He said, "I'll get back to you on the property!" and hung up. He'll find someone to help him out, no doubt about it. But that's one transaction a good professional wants no part of. I'm better off without him.

Caveat Emptor

FYI, I attended a class on FHA mortgages, FHA Secure and down payment assistance programs this morning. I'll probably have two or possibly three articles in the next week or so. In the meantime, if I can help with a loan in California, please Contact me.

We still do not have hard numbers on what the new FHA and conforming loan limits will be. Nobody does. I've heard estimates that say anywhere from another week to another eight weeks before all of that information is available. In the meantime, I must point out that, as I said in Conforming Loan Limits and the Economic Stimulus Package, the enabling legislation says that the limit can be up to 125% of the median sales value in your MSA most recent information here in pdf), up to a limit of $729,750. In other words, it will not be more, but it very well could be less. Nobody knows until Fannie and Freddie, and the FHA separately, publish their new guidelines. There is no safe harbor guess, no matter where you live, and all speculation will do in advance of publication of the actual numbers is get people mad or disappointed when the actual numbers hit.

If you live in California and want some strategies that make sense for you in a purchase or loan, Contact me. Otherwise, we all need to wait for official announcements from Fannie, Freddie, and the FHA, and I am planning at least two articles out of this morning's information.

Rates move up and down constantly. This is one of the strongest reasons both Intelligent consumers and intelligent loan officers love zero cost loans. Every time rates drop, I call or send an e-mail to those clients who signed up for low cost loans since the last time rates dropped this low, and voila, I'm saving them money for basically nothing.

A streamline refinance is a refinance where there is no cash out by Fannie and Freddie's definition. The rate must be lower, the payment must be lower, and the equity situation must qualify for at least the same program the borrowers had last time. If you roll the expenses into the balance cannot be higher than what was approved last time. Most streamline refinances are with the same lender, but there are a very few lenders who will or have in the past allowed streamline refinancing of another lender's loan.

Here's how and why it works. There is always a tradeoff between rate and cost. Rates have actually come back up considerably since a month ago, but that's good fodder for an example. I'm going to assume a $400,000 current loan. Closing costs on that loan are $2815 including appraisal, escrow, and title insurance. Usually, appraisals are not required for streamline refinances, but right now, lenders are in panic mode, so they are. Those who have the gold make the rules for lending it out. The A paper rates for the day I'm writing this (no longer available by the time you're reading this) are a thirty year fixed rate loan at 5.875% for two points, 6.25 for one point (actually about 3 tenths), or 6.375 for zero points. Here's a table listing new rate, new balance, monthly interest cost, and how long it takes to recover the cost for the loan via lowered cost of interest in months as opposed to the 6.75% loan that I can do for no cost to the borrower at all.

New Balance

Now once you've paid those costs, they're sunk into the loan. Furthermore, your rate is locked into concrete. Just because better rates come along does not mean the lender is automatically going to lower your rate, any more than they can raise it if rates go up. That Note is a binding contract on both sides. So if you want to refinance before you've broken even, any money you haven't recovered yet is just gone. The alternative is not to refinance at all, and keep your old loan, horrible though it may be by the standards of a later time. And if you do want to refinance again, it doesn't matter what your current rate is - you're going through the entire qualification process anew, and you have to pay closing costs again as well as, if you want them, discount points to buy the rate down.

Let's say it's a year from today, and rates drop to where they were a month ago. 5.25 for two points, 5.5 for one, 5.75 for zero points, and 6 percent even for zero cost. Let me stress for the hard of understanding who may be reading this that this is a purely hypothetical supposition. Depending upon the loan you chose today, here's your situation in twelve months:


At our hypothetical rates one year from now, the person who chose 5.875% today cannot be helped without spending some money. In fact, I can move anyone who chose a loan costing one point or less down to a rate almost as good as what you spent $11,000 to get for absolutely zero cost. So their balances stay exactly the same, and here's the new situation

Orig Rate
New Rate

Notice that the person who chose that zero cost loan in the first place has a monthly cost of interest that's $8 to $17 lower than anyone else - and he owes thousands of dollars less on his loan! The people who spent money buying the rate down will literally never catch up to him! Even though the interest for the guy who keeps the initial 5.875% interest rate is a little lower, with thousands of dollars difference on the balance, you're still talking fifteen years or so for him to break even with the people who initially spent less to buy the rate down, straight line computation, never mind time value of money!

This isn't magic, and it isn't totally hypothetical. This is almost predictable. A few years ago the median age of mortgages was down to sixteen months. I can't seem to find it in the current Statistical Abstract, but I've heard it's all the way up to 28 months - still less time than it takes to break even for the costs of the expensive loan above, and pretty much the same as the break even for the loans where you spent some money to get the loan. Why in the name of whatever divinity you worship would you want to spend money that most people are never going to get back?

Now, considering this information, there's another loan that actually makes even more sense for most folks - a hybrid ARM. This is a thirty year loan with an interest rate that is initially fixed by the loan contract for a certain number of years, after which it will become an adjustable rate mortgage. For about 15 years, I've been doing 5/1 ARMs for myself. Even when the rates on thirty year fixed rate loans were ten percent, I've always been able to get a 5/1 ARM around six percent or less. For the last couple of years, the rates on 5/1 ARMs have been essentially the same as for thirty year fixed rate loans - meaning there's no real reason not to buy thirty years of insurance that your rate won't change. Why not, when it's been cheaper than 5 years worth of the same insurance? But ARMs are now diverging significantly below the rate/cost tradeoff of thirty year fixed rate loans, so now we're getting back to the normal situation, where people willing to relax just a little bit on a mental requirement for a thirty year fixed rate loan can reap substantial rewards. A month ago, a 5/1 ARM at zero cost was at 5.75%. Now it's around 6.125. So for the same zero cost of a 6.75% thirty year fixed rate loan, you can get a five years of fixed rate at 6.125%. On a $400,000 loan, this saves you $2500 per year - more than a full month of interest on the thirty year fixed rate loan. Furthermore, we've already covered the fact that the vast majority of people aren't going to keep their loan long enough for a 5/1 ARM to turn adjustable anyway. If you're among those 95% of all real estate borrowers who aren't going to keep the loan five years, there isn't any practical difference between a thirty year fixed rate loan and a 5/1 ARM except that you pay five eighths of a percent less interest - slightly over $200 per month saved in this instance. You can pay the same as a thirty year fixed rate loan and apply the interest savings to principal - which means you'll owe $14,000 less at the end of five years, assuming you keep it that long, and that rates don't drop so you can refinance at a lower rate, again for free. Another alternative is that you can invest the difference, in which case you'll have over $15,000 extra in an investment account, assuming an average 10% return per year. Who cares if you then need to spend $3000 of it refinancing if the rates never get this low in that period? Okay, I care, but since I'm still $11,000 or so ahead after I spend it, if I need to spend it, that is one heck of a good investment!

Some people prefer other ARMs. I see people encouraging the 10/1 and 7/1 for people who think the 5/1 isn't long enough. And if you're one of those folks who is going to lie awake every night for five years because you don't have a thirty year fixed rate loan, the difference between a 5/1 ARM and a thirty year fixed rate loan makes a difference of about $6 interest per night. Split two ways, for you and your significant other, that's $3 each for a good night's sleep. A good night's sleep is worth $3 to me, it's worth $3 for my wife, and I presume your sleep worth $3 per night to you, also. There's nothing explicitly wrong with choosing a 7/1 or a 10/1 as opposed to a 5/1, either. It's mostly a mental comfort issue. Most folks don't keep their loans 5 years anyway, so if I'm one of that huge majority of homeowners, why would I want to buy seven or ten years worth of insurance that my rate won't change? The only answer that makes any sense other than mental comfort is if the rate/cost tradeoff for those loans is cheaper, and that is only rarely the case. At today's rates, you're giving away three eighths of a percent for the same zero cost loan on a 10/1 basis - 60% of your savings, although the 7/1 is almost exactly the same cost as the 5/1, so that's a good choice. Most folks won't use the two extra years, but if it's essentially free, why not take it in case you do? For the 3/1 ARM, on the other hand, it's actually slightly more expensive at the zero cost level we're considering today, and even if it was cheaper, you're getting down closer to average holding period, so perhaps a third of the people who got it might want to hold it longer than the fixed period. Furthermore, I don't think I've ever seen a zero cost 3/1 more than an eighth of a percent lower rate than a 5/1 at the same cost. Let's say you could get one at 6% today for that loan, instead of 6.25. You save $41 extra per month - $241 over the thirty year fixed - but you've only got a maximum of 36 months of savings. $241 times 36 is only $8676, as opposed to $200 times 60 months, which is $12,000, not to mention more ability for compounding to have an effect in the case of the 5/1 ARM, and that the idea is refinancing to a favorable rate before the end of the fixed period. For all of these reasons, I can't really see choosing a 3/1 for any set of circumstances I can remember seeing any time in the last fifteen years or so.

To summarize, rate/cost tradeoffs between loans go up and down constantly - the rates for A paper change every business day, at a minimum. Nobody can predict exactly when they will rise or drop again, but that they will vary over a given range is pretty much axiomatic. Furthermore, there is always a tradeoff between rate and cost for any given loan type at any time, and if you choose a loan with low rates but comparatively high costs, it will be years before you have recovered your initial investment via cost of interest. Since by that point it is very probable that rates will have fallen below today's rates, and you will have wanted to refinance, this is only rarely a good investment. A better way to cut your cost of interest is to choose a hybrid ARM with a fixed period likely to cover the period of time you will keep a given loan in effect.

Caveat Emptor

The same as in every other area of life: Get out in front and stop it from becoming a problem.

I do not understand why many people approach real estate transactions like a casual outing. Go window shopping, decide on an impulse purchase, expect to sign a few papers and you're done. That might be appropriate for a toaster oven or microwave, possibly even for a refrigerator. In all of these cases, you're dealing with huge companies and products that are basically commodities. All the important stuff like price, size, and functionality is right out in the open, and you're spending $50 for the toaster oven, $100 for a microwave, maybe $2500 or so for a top of the line refrigerator with lots of bells and whistles. Furthermore, the huge companies that make and sell these need to sell millions of these to other people. It's not only not worth it, but actively counterproductive to their bottom line if they don't deal with complaints both quickly and generously.

Contrast this with the situation in real estate. First off, you're not dealing with a major company whose deep pockets are going to bail you out. You're dealing, at most, with a franchise operation that's paying big bucks to license a name, and consumers have no claim against the franchising organization. Here is a list of California license actions in the most recent three months for which information is available. Not one heavily advertised household name among them, although every one of those household names was affiliated with someone on the list. The big names might have some neat bells and whistles in the way of agent tools and client interface, but that's a distraction, especially in these days of expanding MLS capabilities, where any agent can set up a client gateway and get a link to the public portions of MLS on their website.

More importantly, the amounts at stake are, instead of fractions of someone's monthly salary, multiples of their yearly gross income. What this means is that the amounts at stake are many times larger, and therefore the potential reward. I don't know anyone who will cheat over a penny, and not many over a few dollars. But when the amounts at stake inflate to hundreds of thousands of dollars, that's a different level of temptation, and the list of people that can be trusted shrinks drastically. A smart agent working for you will always be on the list, if for no other reason than you can sue for breach of fiduciary duty and expect to win more than they could ever make for that breach. Unfortunately, as has been made clear to everyone who's paying attention, not all agents are smart.

Most important of all, a large fraction of the important issues aren't out in the open. Indeed, the amounts at stake are sufficient for the other side to do their best to bury them. Spotting these issues, particularly before a client has wasted time and money on the property, is one of the prime characteristics of good real estate agents. Whether or not you spot them is not the determining factor as to whether these issues are present, nor does keeping quiet make them go away. Even when called upon the facts, however, many sellers and their agents will still try to brazen it out in the best tradition of the communist party, by denying the issue. Several years ago, when buyers outnumbered sellers 4 to 1, many of them got away with it. Getting away with it is a lot less likely in a buyer's market like today. Furthermore, deceits of this nature are fertile ground for lawsuits, but despite the fact that it is far better - for both buyer and seller - to deal with all of the issues in a straightforward manner, there will always be those who think they can vanish with the money if only they can get that money wired into their account. They can't, but it can be more trouble than it's worth to track them down. Better just to deal with the issue in the first place, even if it's by choosing not to pursue that property.

When a good agent takes a listing, they have all the issues from appropriate pricing on down the line dealt with before the property actually hits MLS. The seller has to have restrictive showings? Reflect it in the asking price and tell everybody when and why in the property profile. There's an issue with the property? Make it clear in the property profile - showings where the prospective buyer aren't willing to deal with the issue do nobody any good. Even if you can hide it temporarily, you can't hide it forever, and the effects when the deception are discovered are going to hurt more than if you were honest in the first place.

When a good agent considers a property for their client's purchase, they consider it complete with shortcomings. If there's an issue with traffic, noise, structure, schools, or anything else, I want my client to be aware of it, and I want to have a plan to deal with it in negotiations, before my client says they want to put an offer in. Yes, this makes it more difficult to persuade a client to put an offer in, but if your agent hasn't explained that there is no such thing as a perfect purchase situation long before you get to the stage of making offers, something is wrong. I haven't seen a property yet that was an exception to this. They've all got problems and issues. The question is whether these problems and issues are ones that the client is comfortable dealing with. Even if there are no other problems, the issue then becomes, "Is your client happy paying the extra money not to have them?"

Any time the problem gets in front of an agent, they are playing catch-up, much like a Cessna pilot trying to handle a high-performance military jet. It's controlling them more than they are controlling it, and the same applies to real estate. Pilots have a saying to the effect of "he (or his body) got to the crash site fifteen minutes after the airplane." Real estate is no different, except the time lag is usually measured in months instead of minutes, and only gets caught up when a lawsuit is filed. I've seen agents - usually "team leaders" trying to pack in more business than they can really handle - so far behind the power curve on actually solving real problems for their clients that the client would have been better off with a fresh licensee on their first transaction, who at least aren't so busy delegating that they can keep track of what they need to know and what they need to deal with before it bites their client. Those subsidiary functions that busy high producing agents "delegate" to lower paid "team members" (which is 95% industry code for "poorly trained low-paid employees who have no idea how that piece of paper relates to everything else about the transaction but enable the agent they work for to rake in more commission checks")? You'd be surprised how often the details that bite agent and client both are buried in them, and any time an agent puts their focus on production, the quality is going to suffer. A better agent may not live so high on the hog, but their clients come out of the transaction much happier.

Caveat Emptor

With the market turndown, Liquidation auctions are becoming a big thing. They were just advertising one on all the stations around here. The other agents in my office asked if I was going, and I told them, "There will be no bargains there." Two of them went anyway, one going so far as to take a client.

To be fair, this only applies 100% to one specific auction house, which I'm not going to name - but the tactics and terms are pretty standard. Here's the claims they make: "Huge selection" (which means, in this case, 222 properties of all sorts, 147 of them in the county, 75 out of the county, as opposed to 20,600 active residential properties in San Diego County MLS on the day in question), "Easy financing" (they rent some space to one specific lender). In fact, they do their best to restrict choice of lenders - giving some minor preferred terms if you do business with their tame lender, which isn't known in the business for being a good lender to do business with. This violates RESPA, by the way. "Perfect for families." If you believe this, I own not only beachfront property in Florida but also a bridge in Brooklyn and an albino pachyderm, and I want to sell them all to you for a low discount package price -contact me for private details. You've got to be some kind of idiot to believe that it's a good idea to bring kids - a genetic and conditioned emotional distraction - to a real estate auction. Their commercials have sound bite interviews with people right after they win an auction - excited that they "won" an emotional battle for a house! Of their very own! Not later, once they've discovered how rotten the situation is that they have gotten themselves into.

Reading the fine print, it didn't take much to figure out what's really going on here: They want to get buyers together in an emotional auction environment where it's psychologically very easy to overbid for a property, get them committed to buying the property, and cut them off from all of the really good due diligence they're allowed to do on every other property out there. Lock the buyers into what they do in the heat of the most emotional moment these artisans can create - while the sellers are free to reject the deal on a whim. They allow the prospective buyers no "cooling off" period at all. This is legal for purchases, but isn't a good situation to be getting yourself into as a buyer, particularly not in the current environment for most of the country.

Here's the skinny: First off, prospective buyers need a $5000 cashiers check made out to yourself, which you will endorse over to them, and the balance of 5% of the purchase price in the form of a personal check or something similar. What this means is that no matter what, the lender is getting $5000 of that buyer's money. Period, end of sentence. Furthermore, they have to put 5% of purchase price into escrow. This is way above the "traditional" 2% which is far too high for most transactions nowadays. Putting it into escrow means that, at a minimum, somebody else is holding onto it until and unless all parties agree to release it or a court tells them to. Given that you have to use their special "purchase contract" which wasn't available ahead of time, what do you expect that the terms of that contract are as regards to things like liquidated damages and money owed to the lenders for the "privilege" of sitting in escrow on a property where there's no real due diligence done? Their brochure said the purchase contract was available on their website, but I couldn't find it, and I not only checked their site map, but clicked on everything that I thought could conceivably be associated with it - which was basically everything. It wasn't there, but I don't have any reason to distrust their claim that it renders you liable for damages if you don't carry through on purchase. In other words, you find out a reason why you don't want the property, you still pay for the fact that you had the high bid. Not to mention their purchase contract is completely mandatory, and you can't negotiate anything about it, and you don't even find out what those terms are until after you've agreed to the price. Since contract terms can move the price by thousands or tens of thousands of dollars in regular negotiations, it shouldn't stretch your imagination to figure there's a reason they're waiting to spring all of this upon you - most likely a contract people wouldn't have signed at the peak of the seller's market in 2003. Furthermore, you're required to sign a "winning bidder confirmation" immediately upon making the high bid. What that says also wasn't subject to prior investigation - which is a polite way of saying they want it to be a deep dark secret until you "win" the auction for a given piece of property. Use your imagination for a moment, and ask yourself, "Why would they want to keep it secret until then? What might such a document say?" I'll bet you millions to milliamps the reality would be worse. These folks are professionals.

Did I mention that you're agreeing that you've already done your due diligence? Yes, but I didn't go into what it really means. They supposedly have three open houses for inspection, but how many people are really going to drag an inspector, an appraiser, a termite inspector, etcetera out to the property just because they might be thinking about bidding on the property? That's sinking anywhere from $800 on up into the property just on speculation of winning the bidding. If a prospective buyer does this due diligence ahead of time, it psychologically prepares them to be willing to go higher on the bid (they've already spent money). If they don't do this due diligence ahead of time, they're putting that 5% of the purchase price - however many thousands of dollars - at risk. Suppose you bid $400,000 and it's accepted. You need to put $20,000 into escrow immediately! If a prospective buyer thinks they might bid on two properties, that's twice as much. Furthermore, although the purchase contract wasn't available, I'm quite willing to take the word of their brochure that there are no financing or appraisal contingencies allowed in that contract, even for their preferred lender. Their verbiage is adamant on the point of "as is, where is, including all faults." They're very explicit about no liability by sellers, which is basically standard for lender owned property, but they're not going to accept any requests for repairs either, which isn't. In fact, in some circumstances, it's illegal. Not to mention that you normally have seventeen calendar days to do your due diligence after there's a fully negotiated purchase contract, even with lender owned properties, before your deposit is likely to be in jeopardy.

They use a "property previously valued to" come-on, which is disclosed in the fine print to be the highest of 1) an appraisal 2) asking price, 3) assessed value or 4 ) broker's price opinion. You shouldn't need to be a Rhodes Scholar to figure out that this means the asking price - the exceptions just make for something even more cockeyed. It's been on the market for months, and it didn't sell for that price. If it had, they wouldn't be auctioning them off in these circumstances.

There's also an undisclosed reserve price. What this means is that if the auction doesn't get high enough to go over the reserve price, you don't get the property even if you have the high bid. Furthermore, reading through the fine print, you find that the auction has planted other bidders in the crowd, who can and will bid the price up. If claims they won't go over the reserve price, but since neither the identity of the plant nor the reserve price is disclosed, it's somewhat difficult to verify this. The job given these plants is plain and simple: Get the bidding going, and get it emotional, so people will keep bidding for a long time. Since the auctioneer knows both the plant and the reserve price, they can collude quite easily to a common purpose. As a matter of fact, the fine print says the owners don't even have to accept the reserve price. What does this mean? If, after all the psychological games they can play with you, you don't bid enough to make them happy, you still don't get the property! In fact, they've got 15 days to turn you down. You, on the other hand, are required to close escrow within thirty days, which means you had better get working immediately, even though they reserve the right to pull the rug out from under you.

If all of this isn't enough, they reserve the right to alter terms and conditions as they go, specifically including, "Advancing the bidding," which is a euphemism for jacking up the price for no apparent reason. In addition to that, there's a 5% surcharge on all winning bids in order to arrive at the final sales price. So someone knows their limit is $300,000 and advances the bidding to $297,000 before winning - only to discover that this translates to a "real" price of $312,000 - a price they already know they can't afford! Result? Minimum of $5000 in their pocket (your endorsed cashier's check), and they offer the property for sale again right away.

Have I mentioned the psychology of an auction yet? Particularly one with inexperienced bidders? Most of whom have no idea of the risks they are taking, let alone the fact that they should be compensated for them, or how much? I've heard too many inexperienced people saying that "Everybody knows" that foreclosures and auctions are great deals. I'd like to meet this Everybody, because he's spewing rank fertilizer in the form of unsubstantiated rumors that are far from universal even if they are sometimes valid when you've got a sharp agent on your side in a high transparency situation where both sides have to come to the table as equals. That's not the case here.

I looked through their book of available properties. There was precisely one that I had been in. It was a 3 bedroom 1.75 bath property on a lot that was mostly level because the developer had terraced it fifty years ago, with a deep crack in the foundation the entire width of the house - you could even see the evidence on the outside, for crying out loud. Nice paint, great view, some other nice touches - but flat roof I couldn't see, no yard, no close parks, no place for kids or pets, all the fixtures and surfaces other than the carpet were original, it sat on a busy connector street, and I couldn't tell you whether that house was going to be there tomorrow without a soil engineer's report on how well the leveling of the lot was standing up, how well the soil had been compacted, etcetera. I suspect problems, because the foundation wouldn't likely have cracked if there hadn't been soil compaction issues. I remember thinking, "Maybe $300,000, if the soil report comes back solid. Otherwise, you couldn't pay me to take this property." They were telling people it was valued at $429,000. Seriously, I would rather have a 1970s vintage townhome less than a mile away listing for $279,000 - and this includes HOA dues and dealing with a homeowner's association in the first place. More usable yard, a couple of small communal parks and a communal pool, and less environmental noise - not to mention that even if that condominium had structural issues I didn't spot, dealing with them would have been a communal issue as well. This seemed about average for what was being offered. The less desirable areas seemed to be heavily over-represented in their offerings. This is about as coincidental as falling down when you trip. All the usual war zones that people don't want, even when they think they're getting a deal.

The point of all of this is to get people foolish enough to bid on these properties locked into deals, where the sellers are not locked in at all. Get them emotional, so they bid up the price, and if they can't do that well enough, the seller has the option of taking their marbles and going back to what they were doing. So you can imagine that I wasn't very surprised when my two co-workers called me about halfway through the proceedings to say, "You were right. We're leaving. There are no bargains here."

Caveat Emptor

On a regular basis, I get emails that ask me what I think of a particular company. When I check out public forums, I see questions about particular companies every time. "What do you think of X Realty, or Y Mortgage?"

Reputation has a certain value of course, but in my experience, these people are overvaluing reputation. These people are looking for a "silver bullet" solution to their situation that lets them relax, and there aren't any. They want to be taken care of without doing the mental work of figuring out whether the person is really doing a good job. "This is a great company, and great company would never take advantage of me, so I must be getting a great bargain!"

This utterly leaves aside any number of issues. Suppose the Mortgage Firm of Dewey, Cheatham, and Howe were paying me a fee for every referral. Most people might have justifiable concerns about whether my recommendation was motivated by that fee or by the desire to get them a great loan. Well if you're chumming for a recommendation, you have no idea if the anonymous person recommending the firm of Dewey, Cheatham, and Howe is a virtuous benefactor - or one of their loan officers. The bigger the firm, the more loan officers they have. Huge National Megacorporation can have hundreds of their loan officers log on to the website anonymously and all endorse National Megacorporations loan programs for some mysterious reason. Suppose the person isn't affiliated with Dewey, Cheatham, and Howe, but does work for a similar firm. They could be trying to build demand for the same sort of operation that feeds them, so when people read about Dewey, Cheatham, and Howe's methods being recommended, and then encounter this similar firm, they are ready to do business.

Suppose the person answering is a complete babe in the woods? They just plain have no idea. They've never gotten a loan, or if they have, they got took just as badly as anyone else in the history of the world, and worse than most. Does the possibility of such a anonymous recommendation for the Mortgage firm of Dewey, Cheatham, and Howe seem like a thing you want to follow? Unless you audit that person's transaction and compare it to other similar transactions going on at the same time, you have no real idea whether this person would recognize a scam if it bit them. Even if you do audit their transaction, that doesn't necessarily mean anything, good or bad, for your situation.

Suppose the reason they thought Dewey, Cheatham, and Howe did a good job was because they didn't pay attention. They've read every single one of my articles, and they understand all of the things that could go wrong, and they actually know how to read a HUD 1 form, but they just didn't bother because their Uncle Joe works for Dewey, Cheatham, and Howe, and they trust Uncle Joe completely, and Uncle Joe would never take advantage of them. This ignores the issue that Uncle Joe is unlikely to be your loan officer, and even if he was, Uncle Joe may have compunctions about his family that do not apply to you. Furthermore, a very large fraction of the most unethical stuff I've seen since I've been in this business was Uncle Joe (or Brother Moe, or Sister Sue, or Cousin Lu) raking people over the coals who they knew would not shop around for a better deal. But even if they are completely unrelated, they decided to trust Joe, and didn't do the diligence that would have told them whether Joe was doing a good job, let alone the best possible job.

Now in both the loan and in the real estate business, service is provided by individuals, not companies. It's the guy you're sitting down talking to right here that decides how much of a margin they are going to work on, not some mysterious exalted Chief Operating Officer in New York City. That COO may lay out base requirements that say "no more than X, no less than Y", but it's the person doing your loan, or the agent doing your transaction, that decides where in that spectrum you fall. And I shouldn't have to point out that if they say "The corporate president says we have to make at least two points on every loan!" and somebody else offers you a better loan for you, that's their problem, not yours. They are not getting, or at least they should not get your business if you know of a better possibility. You don't owe anyone your business.

Finally, every situation is unique. People ask me what I think of a particular lender, and I'm thinking about the clients they'll do well with, or the clients where that particular lender's programs are most competitive. The lender with the best thirty year fixed rate mortgage in the business is not a lender I would use for an 80/20 short term piggyback on someone with a 600 credit score. That particular lender doesn't want to touch 100 percent financing, and refuses to do business at all with anyone whose credit score is less than 620. The lender I'd most likely use for the latter borrower has a rate and cost tradeoff for their loans that knocks them completely out of contention for the A paper full documentation 80 percent LTV thirty year fixed rate loan with no prepayment penalty. They're not competitive for that borrower, and both that account executive and I know it. They'd be grateful to me for placing the loan with them, and they'd certainly get it done, but my wholesalers and I have an understanding: The lender who has a program that can deliver the lowest rate cost tradeoff on the best terms for the client gets the business. They don't want to compete on price, but a good loan officer forces them to do precisely that. And if the wholesaler is one of those who refuses to compete on the basis I want them to compete on, there are plenty who will. Don't BS me about service. Everybody should have great service. If you don't have great service, we're not meant for each other, and the lenders I already do business with all have great service. What I want is a great loan for this client that you can actually deliver on time. If you've got that, we may have some business. If you haven't got that, we don't. This point, incidentally, is one of the reasons you'll end up with a better loan from a good brokerage than you will from the best lender. A broker knows how to shop loans better than any ordinary consumer.

This isn't to say you should just trust a broker. Indeed, my point is that you shouldn't trust anyone. Shop around, compare what's available, ask them what for written guarantees, verify everything, and don't give them your dollars to hold hostage until they've actually delivered. That's why I put out the yardsticks for measuring performance I do, that's why I give you the strategies for finding the people who will do a better job, and for forcing them to actually do a better job. You can't know if something is a good bargain except by comparison with something else like it, or several somethings. Given the amount of legal wiggle room there is, unless you pin a loan officer or real estate agent down with specific guarantees and conditions in writing, what they actually deliver is completely dependent upon their good will. If they have good will, you don't need to work nearly so hard, although comparison shopping would still be a really good idea. But if a decent proportion of agents and loan officers had goodwill, there would be a lot fewer problems with the industry.

Caveat Emptor

Legally, immediately.

With that said, there are economic reasons why it may not be a good idea for you to refinance.

If you have a prepayment penalty, you're going to have to save a lot of money to make it worth paying that penalty. Suppose you have a rate of 7 percent, and an penalty of eighty percent of six months interest, that's a prepayment penalty of 2.8 percent of the loan amount. So, in order to make it worth refinancing in that instance, you have to save at least 2.8 percent of your loan amount in addition to the costs of getting the loan done, all before the prepayment penalty would have expired anyway. So if it's a three year prepayment penalty, you have to cut almost a full percent off your rate just to balance out the prepayment penalty. The higher the rate you've got now, the bigger the penalty and the more you've got to save in order to make it worthwhile. On the other side of the argument, the longer the prepayment penalty is for, the easier it is to save enough to justify paying it. If you've got a five year prepayment penalty, you're likely to get transferred or need to sell or somehow end up paying it anyway.

Second, your home has not appreciated yet, especially not in the current market. You bought for $X, and your home is still worth $X, and you haven't paid the loan down much yet, so your equity situation is essentially unchanged. In fact, since relatively few loans are zero cost, you're either going to have to put money to the deal or accept a higher rate than you might otherwise get. Don't get me wrong; Zero Cost Refinancing is a really good idea if you refinance often. But when you go from a loan that takes money to buy the rate down to a loan where the lender is paying for all of the costs of getting it done, you're not going to get as good of a rate unless the rates are falling. As of right now, they have been going through a broad and more or less steady increase for the last two years. If you or someone else paid two points to get the rate on your current loan, you are not getting those two points back if you refinance. They are sunk costs, gone forever when you let the lender off the hook. If rates had been going down for the same amount of time, it might be a good idea to refinance, but that is not the case right now.

If you got your current loan based upon a property value of $400,000 and total loans of $380,000, that's a 95 percent Loan to Value Ratio. So your property is still worth $400,000, you've only paid the loan down $400. That's still a ninety five percent Loan to Value Ratio; more actually, as doing most loans is not free. So unless your credit score has gone way up, you can now prove you make money where you couldn't before, or you have a large chunk of cash you intend to put to the loan, chances are not good that refinancing is going to help you. If your credit score has gone from 520 to 640, on the other hand, or you now have two years of tax returns that prove your income, or you did win $100,000 in Vegas and you want to pay your loan down, then it can become worthwhile to refinance, even in a market like this one where the rates are generally rising. Unfortunately for loan officers like me, that does not describe the situation most people find themselves in.

One more thing that can influence whether it's a good idea to refinance is your rental and mortgage payment history. If when you got your current loan, you had multiple sixty day lates on your credit within the past two years, and now they are all more than two years in the past, that can make a really positive difference in the rate you qualify for. On the other hand, if you had an immaculate history before and now you've had a bunch of payments late thirty days or more, then it's probably not going to be beneficial to refinance.

Cash out refinancing is one thing many people ask about surprisingly soon after they close on their home. Now if you have a down payment, it's better to put aside some of the down payment for use in renovations rather than to initially put it towards a purchase and then refinance it out, as it saves you the costs of doing a new loan. If the equity is there and if you have the discipline to take the money and actually do something financially beneficial with it, it can be a very good idea. If you're just taking the money to pay off debts so you can cut your payments and run up more debts, it's probably not a good idea, even if your equity situation supports getting the cash out. It often can and does in a rising market. In the current market where values are retreating, not so much. If you bought any time in the last two years, it is unlikely that you have significantly more equity now than when you bought, making the whole situation unlikely to be of benefit.

A lot of situations have something or other that makes them an exception to the general rules of thumb. The only way to know for certain if the general rules apply to your situation is have a good conversation with a loan provider or two.

Caveat Emptor

About half the listings around here do not have a single number asking price, but rather a range in which offers will be considered. Even many agents have trouble understanding range pricing. I've seen and heard more than one agent rail against it, saying that it is essentially "repricing the home".

Range pricing began in Australia and was brought to the United States by a certain major real estate chain. That chain is not one I particularly like doing business with, but that doesn't mean range pricing is a bad idea.

Range pricing is a way of starting people talking, and to begin the negotiating process; nothing more. If there's no offer made in the first place, I can guarantee there will be no transaction. The idea of range pricing is to jump start the negotiations.

Range pricing is not appropriate for all properties, nor in all markets. In the buyer's market we have now, I'm certainly more hesitant to use it, as it offers more information as to the owner's state of mind. In a seller's market where prices are rising rapidly and sellers have all the power, it gives an indication as to what a serious offer is and what it is not. In a buyer's market like now it tells some buyers exactly how much leverage they may have. I'm also more leery of using it on commercial properties.

One thing many agents (and others) misinterpret range pricing to mean is that any old offer inside the range should be accepted. This is the mark of an inexperienced negotiator. If they say offers will be considered between $400,000 and $425,000, that is not the same thing as saying "I want $425,000, but I'll take $400,000." There are many other terms and conditions on a purchase contract besides just the price, and there is no mandate to agree with even a full asking price offer if those other terms are prohibitive. Indeed, an agent who knows how to figure out other terms to offer in place of higher price is likely to save you far more than any commission they earn. Even price is rarely just price. For instance, if I write an offer for $410,000 cash, no contingencies, with a $10,000 deposit, most sellers should rightly treat that as superior to an offer of $425,000 with the seller paying $10,000 of closing costs and only a $2000 deposit, contingent upon financing for sixty days. Note that the seller nets over $4000 more if the latter offer actually closes, but the former is a much stronger offer and if two such offers were to come in and other things were equal, I'd strongly counsel taking the cash offer, especially as the latter offer is indicative of a not very well qualified buyer without much commitment to the idea of purchasing the property, and there would be a high probability that the transaction will not actually close. There are all kinds of terms on purchase contracts, and having a discussion as to what's important to the other side can be a way of making your offer much more attractive without necessarily raising your price. For instance, owner occupants are often understandably nervous about whether the transaction is going to close, and committing large sums to alternative housing before it actually does close. If you can think of a way to address that concern, you're miles ahead of the negotiator who can't. Every situation is different, and what works one time may not be appropriate to even offer the next.

So if I see a property with range pricing of $400,000 to $425,000, I want to educate my buyer clients that an offer of $400,000 exactly, with the seller paying up to $20,000 of closing costs is not within the range indicated. Indeed, as I've said elsewhere for such offers, a $380,000 sales price with the buyer paying their own way is a superior offer from the seller's point of view. If they insist, I must and will submit it, but even in the current buyer's market I wouldn't be surprised to see it rejected outright with no counteroffer.

In the current buyer's market, those few buyers willing to purchase properties have an enormous amount of power, and this will continue until the seller to buyer ratio gets a little less lopsided. So in the current market, I might actually offer significantly less than the asking price range, secure in the knowledge that if this seller rejects it, I'll find something just as good tomorrow where the seller will accept. Some will. So if some won't, so what? You learn to spot the sellers that have the power to refuse, and the ones who have to take anything vaguely reasonable.

Now admittedly, I don't do a lot of listings, as most sellers don't like to listen when I tell them to price their property to the current market if they want to sell. (And if they don't, why are they talking to me?) I've only got one listing right now, and quite often, none. But when I'm showing them what the market is like, and what reasonable prices for properties like theirs are right now, I'll ask a couple of questions once I'm convinced they understand. Everyone knows what they want to get for the property, and by the time I'm done, they better understand what a reasonable asking price is and why it's stupid to list for more. But after that, once I've explained that there are offers and then there are offers, and the price isn't the only thing worth paying attention to, I'll then ask them, "Now that you know what a realistic asking price is, what would be the lowest price you would consider selling for, if someone offered everything else you wanted? Great deposit, all cash, no contingencies for financing, etcetera?" Next I'll ask, "How far over the realistic asking price we've agreed on would you require going if the buyer came up with some odious terms: takes possession early, no deposit or not much of one, wants a long escrow, etcetera?" Rebates always raise the necessary price at least dollar for dollar, by the way. A $380,000 offer with no rebate is superior to $400,000 with $20,000 rebate from both buyer's and seller's perspectives. Then, depending upon how much the seller needs to sell, I'll use that information to help me figure the endpoints of the asking range (assuming I'm not just going to use a single asking price). I won't just use either number, of course. But that, together with the state of the market and how much power buyers think they have in the market at the time, will give me a good feel for what the lower number of the range should be.

There is another, entirely different benefit to range pricing is that when the search is done on MLS or its substitutes, the lower number in the range is going to trigger your property coming up on more searches. Now, if you're a listing agent, MLS and MLS substitute buyers are more likely to be aggressive, and often unrealistic, bargain hunters, as opposed to people who really want to live in the neighborhood around this property. MLS inhabitants are not my favorite buyers when I'm listing a property, for that and other reasons. But if this property comes up on their search, they might look, and if they look, they might make an offer my client is happy to accept. If they don't even see it as they're searching, I guarantee no offer will come in from them. So range pricing helps me capture these people's attention. Whether interest, desire, and action follow is anybody's guess. But they might, where without range pricing they definitely wouldn't.

In short, range pricing, properly done, is not repricing the home, and it is a good way to get the buyer and seller to the table. It is not appropriate for every property in every market, but for those it is appropriate for, it's a useful tool. Properly used in the right market, it can even help your seller get a higher price for the property than any single number asking price you'd dare use.

Caveat Emptor

what happens if partner refuses to pay his half of the mortgage?

The lender will hold you each responsible for payment in full. That's the long and the short of it. You both agreed to the loan contract, and if it's not paid in full there will be all of the consequences: Hits to your credit, notice of default, foreclosure.

This is basically blackmail on the part of your partner, and a disturbing number of partnerships have this phenomenon. The only way I know of to recover the money is through the courts, which takes forever and costs more money. Even when you have a judgment, it can be difficult to actually get the money if they have taken certain steps to place it beyond your reach. Talk to an attorney right now, keep good records, and send everything Certified Mail.

Unfortunately, there are no method except time that I am aware of to repair the damage to your credit once it has been done. You just have to wait it out. For that reason, it is usually cost effective to loan your partner the money, even at zero percent interest.

What if you don't have the money for both halves of the payment? Well, that's a real question, and the answer is found in the article What Happens When You Can't Make Your Real Estate Loan Payment. This is not a good situation to be in. Talk to that attorney about liquidating your investment. It takes time and a lot of money if your partner doesn't want to.

What can you do to prevent this from happening? Pick a good partner that won't pull this nonsense. Spend the money to protect yourself up front with a partnership agreement. But the fact is that if your partner wants to be a problem personality, you really can't stop them in the short term. Not that it makes any difference to your pocketbook, but sometimes it's not intentional. People do fall on bad times for reasons not under their control.

Corporations are another step people take to protect themselves from this sort of thing, but that brings in all sorts of further problems. How the corporation qualifies for a loan is often a significant problem, and many times practically speaking, is insurmountable.

Borrowing money in partnership with someone else is something to be done with a lot of forethought and preparation, otherwise there's nothing you can do when bad things happen.

Caveat Emptor

Is a VA Loan a Good Deal?

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Veterans Administration, or VA loans, are government guaranteed loans available to veterans and active duty members of the armed services, that enable them to purchase homes for not money down. In fact, VA loans go up to 103 percent of purchase price to allow for some closing costs as well.

VA loans are a unique creature in the world of mortgages. Because there is a government guarantee on the loan, they are available, usually at the same rate, whether your credit is perfect or abysmal. They have a qualification limit equal to the conforming loan limit from Fannie Mae and Freddie Mac, $417,000 as of this writing.

Now, the Veterans Administration runs a website where you can get all kinds of information on VA loans, but I'm going to touch some high points.

VA loans are available both for purchase and for refinance. There is a streamlined program for pure interest rate reductions that can sometimes be at documents in as little as a week. This is called the Interest Rate Reduction Refinance Loan program, or IRRRL, but usually just called a VA streamline. There is, or so I understand, a cash out program as well, but I've never done one of those.

All VA loans have two important feature: Government Guarantee and Assumability. The government will guarantee a certain percentage (usually 25% of the original loan amount), which is more than enough to persuade most lenders that these are loans worthy of a fairly low rate, as they are low risk. A person with a VA loan can allow anyone else to assume it, with the approval of the lender and the VA. They have to prove they qualify for the loan, and the veteran still has some responsibility for the loan. Last I checked, prepayment penalties on these loans were prohibited.

Now the bad news. Even with the government guarantee, the rate/cost trade-off isn't the best. Most VA lenders want two at least two discount points for their VA loans, a fact which makes low cost and zero cost VA loans problematical. Even with those discount points, the rate will probably not be as good as A paper. Veterans with good credit, particularly if they have a good amount of equity or a decent sized down payment, will generally be able to obtain a better rate at a lower cost in the A paper marketplace. Even so called A paper "jumbo" loans over the $417,000 limit, or A paper "stated income" loans, will usually have a significantly lower rate/cost trade-off than the VA loan. They're better than just about all sub-prime loans, but they lose out to A paper.

If you have good credit but not much of a down payment, the VA loan can be an option worth exploring. VA loans have no mortgage insurance requirement (aka PMI), that purpose being served by the government guarantee, and so splitting your loan into a first and a second mortgage in order to avoid mortgage insurance, with the second being at a higher rate, is generally not necessary, and your full loan amount can be at the lower rate of the first mortgage. But be careful, because once again, most VA lenders want their two discount points, and maybe more. You might want to read my article on the Trade-off between Rate and Cost in Real Estate Loans and Why You Should Ignore APR for more as to why. Nevertheless, this could go either way and is well worth shopping the loan both ways.

If you have rotten credit, a VA loan can be the only way you can purchase a home, particularly if you have no down payment. Since credit is irrelevant and there's a government guarantee, I used to know a couple lenders that didn't bother to run credit for VA loans. Even the ones that do, it's just a checked box that plays no part in the decision making and underwriting process. Furthermore, you get a rate of a sort that would normally be available only to someone with a much higher credit score than yours.

Now in addition to relatively high closing costs, there are some other games that get played with Veterans Administration loans, of which the Rate Buydown is probably the most pernicious and widespread. But if you're one of those veterans who thought they could never be approved for a loan on a home, VA loans can make it happen where nothing else could.

UPDATE 2/14/2008: With 100% financing programs difficult to come by right now, the fact that second trust deeds don't want to lend over 90% of the value of a property currently, and PMI rates skyrocketing, VA loans have become the absolute best route for 100% financing as of this update. I did the math, and the fact that VA loans are the only 100% financing available right now without PMI or lender paid mortgage insurance saves someone making San Diego Area Median Income over $600 per month, which works out to qualifying for the loan with over $1400 per month less income - $17,000 per year.

Caveat Emptor

The Best Loans Right NOW

5.5% 30 Year fixed rate loan, with one total point to the consumer and NO PREPAYMENT PENALTIES!. Assuming a $400,000 loan, Payment $2271, APR 5.633! 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 4.875 percent!

Best 5/1 ARM: 4.75% with 1 total point and no prepayment penalty. Assuming $400,000 loan, payment $2087, APR 4.877. This is a loan where the rate is fixed for five years, and the payment pays your balance down! With rates on hybrid ARMs having dropped of late, they are once again something for people to consider. 5/1 ARMs as low as 3.5 percent!

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

Great Rates on jumbo and super-jumbo loans also available!

Zero closing costs loans also available!

Yes, I still have 100% financing and stated income loans!

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 any of the above loans!

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

Sometime today, February 13, 2008, President Bush is scheduled to sign the Economic Stimulus Package into law. Maybe it's already happened by the time this publishes. I've made my opposition plain from the time it was first proposed, but it's going to be law effective today.

Ever since it was proposed, people have been going crazy with suppositions on what the increase in the conforming loan limit is going to mean. Except that Fannie Mae and Freddie Mac, who buy conforming A paper loans, are mostly private corporations. In fact, the limit of how big the loans they want to buy is what really determines a "conforming loan", as in "Conforming to the underwriting requirements imposed jointly by Fannie Mae and Freddie Mac." How big the loans they want to buy is really up to them, and it's only been a couple of months since they decided not to raise their conforming loan limit for 2008.

Here's some text excerpted from an e-mail I got February 12 from one of the biggest lenders in the business:

As you are likely aware, the House and Senate recently passed the Economic Stimulus Package, which includes increases to standard GSE (Fannie Mae and Freddie Mac) loan limits and Federal Housing Authority (FHA) loan limits.

It is likely that the bill will be signed into law by the President as early as tomorrow, Feb. 13. We would like to let you know what to expect from DELETED once the bill is officially signed into law. We will follow up with additional messaging as we learn more from the GSEs and FHA about timing and availability.

Several steps must occur before DELETED can accept applications with the higher loan amounts in the bill, including:

• First, the GSEs and FHA must assess their internal impacts to determine the delivery approach they will require of mortgage lenders and investors.

• Second, GSEs and FHA must communicate their requirements to mortgage lenders and investors.

• Third, DELETED will work to identify impacts and implement the changes as quickly as possible.

Due to these necessary steps, the higher loan limits offered by the GSEs and FHA as a result of this bill will not be immediately available to our clients (higher loan limits are available through our non-conforming product offerings). (emphasis mine)

High-level Details of the Stimulus Package

Details of the GSE/FHA requirements are not finalized; however, outlined below is some information regarding what is expected as a result of the new law:


• The increases are a temporary solution for some high-cost areas based on Metropolitan Statistical Areas (MSAs).

The higher loan limits will not be immediately available. (emphasis mine)

• Changes related to FHA Modernization were not included in the Economic Stimulus Package.
GSE Loan Limits

Loan limits may be as high as $729,750; however, $729,750 will not be the nationwide loan limit (emphasis mine).

Increases will be available in high-cost areas based on the median area sales prices and will follow the standard HUD mortgage limit calculation process.

To determine high-cost areas, the calculation factor will increase to 125% of the area median sales price (emphasis mine).

• The increase applies to loans originated from July 1, 2007, through Dec. 31, 2008.


• Loan limits in high-cost areas may increase to as much as $729,750.

• To determine high-cost areas, the calculation factor will increase to 125% of the area median sales price.

• The increase applies to loans with a credit approval issued prior to Dec. 31, 2008.

Please watch for more detail in the near future as we learn more about timing and availability.

In short, it's temporary, and it's based upon the median sales price in your MSA. In order to hit the $729,750 limit, the median sales price in your Metropolitan Statistical Area has to be $583,800. San Diego just barely makes it, and the Bay area blows it away. Orange County makes it handily. LA just barely makes it. Honolulu is the only area outside California I see that makes it to the maximum. I don't see any others on the list that make it (Manhattan is only a small part of the New York MSA).

Furthermore, as the email said and I've been explaining to people for weeks, just because Congress raised the conforming loan limit doesn't mean Fannie and Freddie have to buy them. FHA yes - that's a federal agency. But Fannie and Freddie are mostly private corporations these days. They're certainly going to give weight to what Congress has indicated it wants them to do, but they're not going to completely ignore actuarial concerns, and the bigger the loan, the worse the consequences if it should default. I'd expect Fannie and Freddie to raise their limits, but until they say that their limits have been raised, all of the lenders have to keep the old conforming limit of $417,000.

Want more information, or hard information for your area? here is a .pdf of the most recent data available by MSA. 125% of those numbers is the maximum, and this should get pretty close. For hard numbers, we're going to have to wait for the FHA, Fannie, and Freddie to release them to us. They're the ones who have to apply the law, and tell us what they will and will not fund.

Caveat Emptor

UPDATE: (March 6th) FHA has now announced their new conforming loan limits. I expect Fannie and Freddie to follow as quickly as they can.

I knew that people, particularly first time buyers, were going to be forced into condominiums in San Diego, I just didn't know how soon.

Most people, particularly first time buyers, want 100% financing. Actually, most first time buyers don't have a down payment and couldn't put a significant down payment (5% or more) if they had to. And since 5% of $400,000 is $20,000, and 10% is $40,000, that's a significant chunk of change. Especially when you think in terms of lifespan to save: a family that makes San Diego area median income ($69,700 per year) and manages to save a full 10% of their gross salary - $580 per month - takes almost three years to save a $20,000 down payment, and 69 months to save $40,000! Never mind closing costs, which can be anywhere from another $4000 on up, depending upon how many points you want to buy the rate down. Considering the psychology of the average American, these time estimates are hopelessly optimistic.

For at least the last ten years, 100% financing has been available, and the means to qualify for it have been routine. Since the vast majority of all buyers need a loan, this availability has been priced into the market. Indeed, it was one of the early factors that led to a run-up in prices in many areas. Nor is there anything wrong with 100% financing, per se. When you look at fully amortized fixed rate loans done on a full documentation basis, the levels of default and lender loss are not significantly higher than the most hidebound "traditional" loan standards.

It was only when the standards became so relaxed that this was too much to ask for that everybody got into trouble. There is a reason why less sustainable loan types - interest only, short term hybrid ARMs, and negative amortization loans had always required a much larger down payment - greater risk of default! Lenders with an eye on selling the loans to Wall Street figured there was no down side to loosening loan standards until even "fog a mirror" was asking a little bit much. The assumption was that prices had gone up several years in a row, so "of course" they were going to keep going up forever - and ignored anyone who tried to tell them otherwise.

Well, we all know by now how that one turned out. Unfortunately, everybody in positions of responsibility at various lenders is now in full blown damage control mode - by which I mean playing CYA by slamming the barn door after all the horses have departed. For good measure, they're locking the doors to all the other buildings as well - even the ones that never held horses. Among these are full documentation 100% loans.

The best and cheapest way to get 100% financing was split the amount into two loans - a first for 80% of the value and a second for the remaining 20%. Unfortunately, as I reported a little over six months ago, second mortgage holders found out that they were the ones really holding the sack for all of this, and stopped approving anything over ninety percent of value. As I said then, this made things worse, especially for everyone trying to get out of unsustainable loans and those who lent to them.

The second way to get 100% financing was with Private Mortgage Insurance. PMI rates had gotten very cheap when they were competing with another option for 100% financing. It was still more expensive than splitting the amount borrowed into two loans, but it was possible, and if the debt to income ratio was lower for A paper, it only made a marginal difference on qualification of approximately 10%. Even when PMI rates suddenly jumped, things were still manageable. The decline we had already had here in San Diego more than covered it.

But now lenders have withdrawn all 100% financing programs except the ones backed by government or quasi-governmental entities - FHA, Fannie Mae, Freddie Mac. And here's the rub: The income necessary to qualify for the base purchase amount plus PMI on properties bumps up against the maximum income limit of $97,800 for those programs (assuming a rate of 5.75%) at around the current conforming limit, and that's assuming no other debts whatsoever. The increase in the conforming loan limit isn't going to help 100% purchasers at all.

So what happens when 100% financing suddenly isn't available? People who could have bought and were willing to buy suddenly cannot. This constricts demand for housing, as there are fewer people able to qualify for the loans. Prices fall, when they would have been stable otherwise. Because of this, people are unable to refinance. Whether it's because they cannot refinance or there was just no way they could really afford the property in the first place, people who sell are unable to sell for enough to pay lenders in full, and those lenders, predictably enough, lose money they otherwise would not have. Poetic justice to a degree, but the lenders aren't the only ones paying. Just like when things were going crazy, This is all a vicious cycle - except in the other direction

Furthermore, even if you are able to qualify, via one of the governmental or quasi-governmental programs, the added cost constricts what you can afford. If your family makes area median income ($69,700 in 2008), you can't afford a $300,000 property at 6%, even if you have no other debt. About $270,000 is the absolute limit.

Who are the big winners? Two sorts of folks, and for either one this is a real buying opportunity, the sort where if you buy now, you will be very happy in a few years. The first is people eligible for a VA loan. That's the only 100% financing program available right now without PMI or its equivalent. Since PMI for 100% financing is more expensive than property taxes, it makes a big difference. Furthermore, there are ways to leverage it for a property of up to about $600,000, instead of the current conforming limit of $417,000. Someone eligible for a VA loan making area median income can stretch to about $330,000, and I don't know of any income limits on VA loans. Assuming the new limits come in, a family making $100,000 per year will qualify for $500,000 with no money down on a VA loan. When you can qualify and other people can't, that's negotiations leverage. The current owners can keep waiting and hoping for a prospective purchaser in the who makes $120,000 or more per year, but that's about two more standard deviations. Look up the normal probability distribution - at $100,000 per year you're already looking for about one family in 10,000 who might qualify, and most of those already have the property they want.

The other winners are people who have cash for a down payment. All this stuff about PMI doesn't constrict people who don't need PMI, or who at least have enough so that they don't need 100% PMI. If you get up to 10% down payment, now you've got the possibility of a second mortgage, and once again, PMI goes away. So if you have a 10% down payment on a $400,000 property, not only are you only borrowing $360,000, but there's no PMI on that money, either. This saves you $480 per month on your first mortgage, $453 per month on PMI, and if it costs you about $293 for a second mortgage, you're still saving $640 per month, meaning you can qualify as if you were a purchaser who makes an extra $1420 or more per month - $17,000 per year!

Suppose you don't fall into one of these two categories? There are about four alternatives. First, you can "settle" for a lesser property, which is probably the smartest alternative for most folks. The best way to save for a down payment on the property you really want is to buy something less expensive now. Second, you can wait until you have saved the difference, fighting against leverage the whole time. Most folks never save enough to make the property more affordable. Third, you can find an owner with enough equity to carry back a large part of the transaction, a consideration for which they are going to demand a much higher price. For one thing, that money is their down payment for the move up property. To say this is not a good way to get a bargain may be the understatement of the year. Finally, you can do completely without - in other words, stay a renter until the situation changes. Now every time I write one of these articles, I get some clueless watchers of immediate cash flow who have no understanding of leverage, real estate markets, or the fact that the crashing of the market is putting significant upwards pressure on rents, for two reasons. First, the people who have lost property have no choices except renting and homelessness for at least two years. Second, the leverage that was working in the landlord's favor these last ten years, encouraging them to keep rents relatively cheap, has disappeared with the housing bubble. Locally, I've seen the average rental price in the areas I work jump by $150 per month or so just in the last year, and this is just the leading edge of the adjustment. Paying attention to only the cash flow as it exists now is a way to make a bad decision - you need to look at the entire situation as it is going to be for the rest of your life.

Property values are going to come back. For one thing, as soon as prices stabilize, expect 100% financing alternatives to become more available again. Since their absence had a negative effect on the markets, what's going to happen when they become available again? If you answered, "A one time shift back upwards in property values," give yourself a pat on the back. If you followed it with, "Which will have the further psychological effect of causing everyone who's been putting off purchasing to rush back into the market for fear of getting priced out again, putting further demand and causing another shift upwards in pricing," then you have some memory of how the general population chases last year's returns and the effects thereon. Fear and Greed, just like last time. Some people never learn. But if you buy before the great mass of humanity gets their fear and greed up, that will amount to a nice large chunk of change in your pocket, especially if you then want to move up. I expect San Diego to at least recover most of what we've lost very quickly once the average person gets it into their head that current price levels are unsustainably low, which they are.

Caveat Emptor

Disasters and the Mortgage

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after Katrina I am upside down with my mortgage. my house is uninhabitable. My flood insurance check doesn't payoff the mortgage. How can i get a short payoff due to financial hardship - i.e. relocation loss of jobs and steady income?

This is one of the hard truths about mortgages. They are a contract between you and the lender to pay back a certain amount of money that you borrowed in order to purchase that property. They have nothing to do with any unforeseen hardship, and if you do not pay that money back, in full and on schedule, you can anticipate negative consequences no matter how good the underlying reason. Especially to your credit, and those are going to be long term consequences indeed.

Now unforeseen disasters, like Katrina, Earthquakes, floods, fires etcetera, are one of the biggest reasons why things go wrong with your ability to repay that money. Something happens to the property and now you can't live in it, and you do need to pay for housing elsewhere. Furthermore, in widespread disasters like floods and earthquakes, since your job may no longer be there, you may have to relocate a considerable distance away in order to find work, and have difficulty paying your mortgage even if your property, in particular, came through just fine.

There are several issues that trap the unwary or uninformed consumer. Homeowner's Insurance in general is the first of these. Many lenders in other states have requirements that the property be insured for the full amount of all mortgages against the property. This requirement is illegal in California (and a few other states), and actually is counter-productive as this implies that the objective is to pay off the lenders, when the objective of insurance is to repair the damage. The phrase that California lenders look for in the policies of homeowners insurance that any lender can and all lenders do require is "Full replacement value." In other words, the insurer must agree to bring the property back to being in the same condition it was in prior to the covered event that caused the damage. Nonetheless, there are many properties where this kind of coverage is not available, most often due to their location in areas vulnerable to periodic fires. In such instances, you can expect lenders to require significantly larger down payments and charge higher interest rates, if they are willing to lend against the property at all. Since in the current "Everybody buys with 100 percent financing" trend this severely impacts your ability to sell your property, and therefore the value you will receive for it, you should be advised of the difficulty before you purchase the property, no matter how much you have for the down payment. An agent who doesn't tell you about this issue on properties where it is an issue is either incompetent, or not looking out for your best interest.

Another issue with homeowner's insurance is that you must keep the insured amount reflective of your home's current value. If you bought ten years ago here in San Diego, you probably paid about $150,000 for a three bedroom single family residence. I don't know of any single family residences below about $350,000 now, and most are in the mid 400s or higher. The insurance companies, quite reasonably I might add, take the position that even if you have "full replacement value" coverage, your home is only insured for $150,000, and is worth $450,000, you are not insuring it for the full value and will not pay the full bill for any repairs even if it is only for $100,000. In such a case, it's been a while since I went over the figures that are the legal basis for the math, but in this particular instance, I get that the insurance company will pay $41,666 out of that $100,000 repair bill in this particular instance. The threshold is legally if you had the property insured to at least eighty percent (80%) of its actual value, they will pay the full bill, but you only had it insured to 33 percent of the value, and therefore they will only pay 33/80ths of the bill. So once every couple of years (more often in markets rising 20% per year!) talk to your insurance company about making certain your property is properly insured. Yes, you'll pay more money, but it is a trivial amount compared to the cold hard fact above. My first property has multiplied in value by about three and one half times, and the difference between the insurance premium then and the insurance premium now is less than fifty percent. Now some insurers (mine among them) have a good record of not invoking the 80 percent rule I'm talking about here and paying the full amount, but this is a matter of company policy, not legal requirement, and it can be changed at any time and no matter how benevolent they are, if the disaster is bad enough they will have no choice. Furthermore, those folks who keep their coverage updated are de facto paying for those who don't under such a policy, and for those who do make a habit of keeping their insurance coverage updated may find more competitive rates with other insurers.

Two things everybody needs to be warned about is that no regular policy of homeowner's insurance, not even the vaunted H.O.3 policy with the H.O. 15 endorsement, covers against flood or earthquake. If possible flood or earthquake is an issue where you are, you need to buy a special policy to be covered by them. Flood and earthquake policies usually have a higher deductible than a basic homeowner's policy, and the reason for this is simple: solvency of the insurer and price of the insurance. Flood and earthquake are typically widespread devastating disasters that make for major damage over a widespread area. If the deductible was smaller, the price of the added policy would need to be much higher, as paying off such claims strains the financial resources of even the strongest insurer. Now if you're buying on stable soil atop the highest ridge line for miles around, flood insurance is probably not a worry for you. I sit roughly two tenths of a mile from a creek bed, but the amount of territory it drains is relatively small, only a of couple square miles, as the big watercourses go well away from where I sit and there are large hills between me and them. On the other hand, being in California, I've had earthquake insurance since the day I bought the property.

One more thing with flood insurance: There is a federally mandated thirty day waiting period between application and payment of premium and the time it goes into effect. This is to prevent, for instance, people in New Orleans waiting until there is a hurricane headed their way and rushing out and buying flood insurance, then canceling it and asking for a return of their premiums afterwards. I think the thirty day requirement is waivable to the extent that it can go into effect on the day you buy your property, but talk to your insurance agent.

Now, one final thing to be aware of. The value of the land itself is not insured, only the value of the improvements to that land. If a flood goes through your land, the land will still be there afterwards (and research riparian rights sometime if you're worried it will not be - another thing a good agent should warn you about if it's relevant). So if, like many in San Diego, you bought the property for $500,000, but it only cost the builder $200,000 to put the property together, the value of the land is obviously $300,000, right? Well, your mortgage is for eighty percent or ninety percent of the value of the improvements plus the land. Let's say 80%, $400,000, although I suspect that's on the low side of both mean and median. So when a disaster destroys the improvements (i.e. the home) and your insurer sends you a check to rebuild those improvements, that $200,000 check is obviously not going to cover the full amount of the mortgage. What do you do?

Well, that's where the importance of a good insurance policy, that will cover the costs of housing while you rebuild in addition to the costs of rebuilding the home in the first place, comes in. You'll also need to learn the value and importance of managing cash flow versus amount you may owe, but that's a subject for another essay and you should consult a good professional financial person if you haven't learned this before said happens in any case. Trying to learn that financial skill "as you go" is a recipe for guaranteed disaster. Furthermore, no matter how good your policy of insurance is, there is always a deductible and there are always extra expenses of rebuilding that you need or desire to undertake because it's the best and cheapest time to do so. This illustrates the value of building up and maintaining an emergency fund that you can access, because even if the finished property will be worth far more, no regulated lender will touch a refinance for cash out while the property is still under repair. A "hard money" lender might lend you new money, but they require so much equity in the property "as it sits right now" that this is not an option for the vast majority of all property owners. And in the meantime, you must keep up all payments required under the original loan contract you agreed to.

Caveat Emptor

Okay, I did an article called Why Renting Really Is For Suckers (And What To Do About It). Fairness demands that I do a companion article on situations where buying is not a good idea.

There actually are some. First off, the math just plain works against it for less than about three years. If you know you're going to have to relocate in less than three years, chances are you shouldn't buy. This is not to say that professional speculators are stupid, just that they are playing with different assumptions than most of is. If one victim isn't desperate enough to sell for thirty percent under the general market, they'll go find someone who is. But they don't buy for a place to live. They're buying with a professional eye towards making a profit, and quite often, they don't. If your situation is that you're looking for a home to live in, and you're going to have to sell it instead of renting it out after less than three years, chances are you shouldn't buy. In this instance, it's not the idea of being a property owner in general that is the major factor in the decision, it's how long you're going to own that property.

This is not to say that nobody has ever made money buying for less than three years. The just concluded seller's market right here in California is the counterexample to that contention. But real estate appreciation happens when it happens, and you never know until afterward what it was. If people could predict the market with that much certainty, then it would make sense to try and time the market. They can't, and it doesn't, at least not for the ordinary person.

You shouldn't buy if you can't get a sustainable loan that you can afford. If you don't have at least three years of a fixed rate on an amortizing loan you can afford, you should probably not buy. The market returns 5 to 7 percent per year on average. That is a very different thing than five to seven percent every year. Some years are plus twenty. Other years, like this one is likely to end up, are minus twenty. If you have a sustainable, affordable loan, you'll pay some principal down and you should be able to refinance when the adjustment hits. This doesn't apply with negative amortization, interest only, or shorter term loans. Particularly if there's a prepayment penalty, you'll likely eat up all the principal payments you made with that prepayment penalty. Now suppose you got caught in a twenty percent down year? Over longer periods of time, things even out, trending towards the average return of 5 to 7 percent per year. But that's no comfort whatsoever to those people who bought into unsustainable loans on overinflated properties in the last two years and are now facing huge problems because they can't sell for what they owe, and they can't refinance into a payment they can make. I didn't do it to anyone; I could have made a lot more money if I was so willing. But that doesn't mean there aren't a lot of them out there.

The market is unpredictable. All I can tell you for sure is that it's still declining right now and the next upturn might not come for several years. The only time the value of your property is important is when you sell or when you refinance, but if you haven't got a stable loan, you're looking at a mandatory time when your value is important. If you can't last until then, the eventual market upswing will be of no comfort. Eventually, I'm confident you'll make a better profit than you could anywhere else. But eventually can be quite a while, and if your time constraints don't stretch far enough, that's a problem. A big problem.

Third group of people who shouldn't buy is those without a sufficiently stable income, particularly if their available cash isn't enough to smooth out the bumps. If you need $6000 per month, and you make $24,000 in one whack about every four months, that might appear to be enough, but consider what happens if for some reason it is six months between paychecks? Once you're a couple of months behind and your credit score is toast, it doesn't make that go away if your next check after that is only two more months.

I think I've been clear enough on the evils of buying too much house for your income. People should not overstretch financially to buy a home, but the majority do. You get a month behind on rent, and it is a problem, but if you get a month behind on your mortgage, that's part of your credit score for ten years, and puts you in a whole different class of borrower for two. Plus you're likely to be behind on your next month, and the one after that. This is a lot less of a black mark for renters than it is for owners with a mortgage. Then when you're ready and can otherwise really afford a mortgage, you can't get one or you can only get one on prohibitive terms. So save up enough to smooth out the bumps, and it certainly doesn't hurt to have a down payment also, as that will make the hurdles you have to get over with irregular paychecks that much lower.

That's basically it. If you think you have another one, I'm interested in it, but those are the only three I can think of. The mathematics and economics do generally favor home ownership, even without that generous tax allowance given for the interest deduction and state property taxes, but there are cases where the general rules get overridden. Contrary to what many people were saying not too long ago, you can lose money in real estate, as the fact that property values locally are down about 20 percent from peak should attest. You can also become financially crippled for years. Nonetheless, if you take care to keep it within the realm of what you can afford, and what you can afford to make payments on indefinitely, then the worst that is likely to happen is that you'll owe more than the property is theoretically worth for a while. If you don't need to refinance or sell during that period, that's just unimportant. In cycles stretching back hundreds of years, real estate has always come back to higher prices than before, even accounting for inflation. The critical thing is to make certain you can wait it out.

Caveat Emptor

Option ARMs and Cash Flow

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One of the standard arguments I hear about negative amortization and Option ARM loans is that they "give the client the option to make a smaller payment if they need to." This so-called "Pick A Pay" benefit is a real benefit, but it's an expensive benefit, one that the client will pay for many times over. They are better off just managing their money well to begin with.

Let's go into some details. Let's consider someone with a $400,000 loan on a $500,000 property, and dead average credit score, and to keep the playing field level, the same 3 year "hard" prepayment penalty. On this morning's rate sheets (outdated by the time you're reading this), I have a 30 year fixed rate loan at 6.00 percent, less than one point total net cost to the consumer. The equivalent Option ARM/"Pick A Pay"/negative amortization loan is actually a little above 7.5 percent real rate, although it carries a nominal rate of 1%. Furthermore, removing the prepayment penalty would make a difference of about an eighth of a percent to the rate on the thirty year fixed, while I have yet to see a Negative Amortization loan that even had the option of buying it off completely, and this loan carries higher closing costs to boot.

Now, let's crank some numbers. That thirty year fixed rate loan has a payment of $2398.21. Nothing ever changes unless you change it by selling or refinancing. The first month, $2000.00 even is interest and $398.21 is principal. You pay for a year, $23,866.38 in interest and $4912.05 in principal is gone, and you've made payments totaling $28,778.43. You are also free to pay down up to twenty percent of the loan's principal in any year without triggering the prepayment penalty.

Plugging in 7.5% for the real rate to keep the math a little easier, the Negative Amortization Loan has four payment "options" of $1286.56, $2500.00, $2796.86 or $3708.05. These options represent "nominal" payment, "interest only" payment, "30 year amortization" payment, and "15 year amortization" payment. Actually, the last three options will vary every month, and trend upwards under these market circumstances, but let's hold them constant just to make my point. As a matter of fact, if you don't make a habit of paying at least the thirty year amortization payment, the options will drift up over time. The chances of this happening in the real world are minuscule, as I make clear in my first article on this subject, Option ARM and Pick a Pay - Negative Amortization Loans, but let's play the game, just to see how it turns out if you give the advocates everything they ask for and more.

Crank the numbers through for twelve months, and you've paid $29,874.96 in interest, $3687.34 in principal, and made $33,562.30 in total payments. This is the "going along, making the loan payments" that the advocates are talking about. Here's a table, comparing this to the 30 year fixed rate loan:

total paid
30 Fixed
Option ARM

When you put it in those terms, I don't think there's any question which loan a rational person would rather have. But that's not the situation the advocates would have us believe is beneficial, at least not with this particular argument. Let us presume that two months out of that year - and to keep the math as simple and as favorable as possible, let's make them the last two months - that you decide you have the need to make minimum payments, and let's see what happens. you've paid $29884.40 in interest, lost all but $657.30 in principal payments, and made $30,541.70 in total payments. Now, if you're making the minimum payment more than one month out of six, most folks should agree it's not an "occasional" thing, it's more of a "regular occurrence" thing, which situation I have already done the math to refute any claims of advantage. Here is a table comparing that to the thirty year fixed rate loan:

total paid
30 Fixed
Option ARM

Look very carefully at that "total paid" row. The thirty year fixed has saved you $1763.27 in total payments. Now, this begs the question of what you're paying it out of, but if you haven't got the income to make the payments from somewhere, you shouldn't have the loan. It's not good for you. So we're assuming that money is coming from somewhere, and as I have illustrated, if you'll just not spend it as it comes in and set a little bit aside in case something happens to your cash flow, that 30 year fixed rate loan leaves you with $1763.27 of your hard-earned money in your pocket. Not to mention just an all around better situation, as evidenced by the rest of the second table.

Now, given the fact that these loans have basically nothing to recommend them to clients, why do alleged professionals keep pushing them off on the public? Well, two reasons, both of them having to do with money. $$$. Coin of the realm. Specifically, commission checks.

First off, it should come as no surprise to anyone that lenders are willing to pay very high yield spreads for negative amortization/Option ARM/"Pick a Pay" loans. The yield spreads start at about 3 and a quarter percent of loan amount, and go up to 4 percent, with most clustering in the higher part of the range. By comparison, that thirty year fixed rate loan pays 1 percent. On a $400,000 loan, like the one in the example, that's the difference between a $4000 check and a $15,000 check. Doesn't that make you feel good that they left you twisting slowly in the wind so that they could make $11,000 extra? Didn't think so.

The second reason that people do this to you is that it makes it look like you can afford a larger, more expensive property than you really can. Most people tell professionals how much property they can afford in terms of monthly payment. Well, shopping for a property or a loan by monthly payment is a disastrous thing to do, as the first part of this article, among many others, illustrates. But let's say you tell the Realtor that you can afford $2500 per month. Now most people are thinking of mortgage payments in the same terms as rent payments, when most people can afford a higher mortgage payment than rent, but let's use these numbers. Let's just use that numbers, and have insurance and property taxes call it a wash. For $2500 per month payments, you can make real payments on a $410,000 property, or you can make minimum payments on a $775,000 property. At 3% buyer's agent commission, assuming they are only representing you and didn't list the property, and assuming they do the loan as well, they can get checks totaling about $16,400 for the buyer's agent commission and loan in the first situation, or $52,300 in the second. Not to mention I don't have to tell the client to limit themselves to what their pocketbook can afford in the second situation. Even here in San Diego, that $775,000 property is a beautiful five or six bedroom 2800 square foot home with all of those nice little extras like travertine floors, three car garage, marble counter-tops, etcetera, in a highly sought after area of town with great schools, whereas the $410,000 property has linoleum floors, no garage, Marlite counter-tops, and is in a neighborhood with marginal appeal and probably not so wonderful schools. Which do you think sounds like a more attractive property and an easier sale, for what the typical buyer thinks of as the same payment? Which property do you think the typical buyer is going to select, particularly if they have never had all of this explained to them?

Finally, for pure loan officers, it's a way of appearing to compete on price without really competing on price. The average person is told about this great 1% payment of $2500 when the real payment for a thirty year fixed rate loan (allowing for the fact that this has become a jumbo loan) is $4771.80, and they just aren't looking at little things like two extra points of origination or higher closing costs, as it just doesn't make that much difference to the payment. They can also slide in a higher margin over index that gets them an even higher yield spread, and it doesn't influence that minimum payment at all, which is the only thing this client has their eyes on. So what if the final payment comes in at $2600 (making the loan officer roughly $35,000 or more)? So what if their loan balance is increasing by $2000 per month? Most people just do not and will not do the work that enables them to spot this trap.

Caveat Emptor

General: San Diego, 3 Bedroom, 1.75 Bathroom


What's Wrong With It: The Bedrooms have pergo floors. The second bathroom is essentially original 1950s, if clean.

Why It Hasn't Sold: The bedrooms aren't attractive and the closets are small, but those are easy to fix.

Who it's Not Appropriate For: People who need a lot of lawn.


Selling Points: Quiet street, in desirable neighborhood served by excellent to top notch schools. Modernized kitchen with wrap around living room-dining room-family room. TWO indoor Fireplaces, covered patio with a outdoor fireplace. Main bathroom is modern.

Who Should be Interested: Families with children, particularly if they're older than about eight. People looking for a place to be happy for the rest of their time in San Diego. People who like to have friends over.

Why it's a Bargain: This property looks solid, as far as I can see. What you'd have to spend is a fraction of the difference the money would make in value.


What I think I can get it for: $365,000.

Monthly Payment examples: I've currently got a thirty year fixed rate loan available for qualified buyers at 5.625% without points!

With no down payment: Fully Amortized Payment $2618 including financing insurance (APR 7.815), dropping to $2101 when you have 20% equity (APR 5.670)

With 20% down: Fully amortized payment of $1681 (APR 5.682).

Other financing options are available, potentially lowering the payments, but I'm quoting real loans that real people can get, that will stay exactly the same until you pay it off.

Investment potential: 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 $590,000. 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 $1900 per month most comparable currently available rental and investing the difference at 10% per year tax free, you would be approximately $180,000 ahead of the renter, after the expenses of selling.

To learn more: Agree that you'll use me as a buyer's agent if you buy it. If you don't like it or don't buy it, no obligation is incurred. If you're not working with someone who will go out and find properties like this, maybe you should consider working with me instead!

Contact Information:

Dan Melson, Realtor
Action Realty Inc
9143 Mission Gorge Road, Suite A
Santee, CA 92071
619-449-0723 X 116

Okay, you might expect a Real Estate Agent to have a post with that title, but I'm going to surprise the doubters by hauling out a spreadsheet and proving it with numbers.

The fact is that if you have moderately decent credit you can qualify for 100 percent financing. The more you have for a down payment, the better your interest rates and the lower your payments, but even so, you can make it.

The first thing to remember is that you have to live somewhere. When you buy, you place your cost of housing forevermore under your own control. Inflation means nothing to the housing costs of someone who's already bought. Rising rents means nothing - unless you've bought an investment property to rent out, also. We are currently facing a period wherein rents are likely to rise precipitously. Why? Low vacancy rates (3.4% in San Diego), and many landlords facing adjustable rate mortgages that are going to adjust upwards. It doesn't matter that your landlord has been nice up to now. They were banking on selling for a profit and right now, they can't. When the monthly outlay goes up, they're going to raise the rent. They will get it, too. If you won't pay it, someone else will.

Once you have bought, you step off of that one way escalator of rising rents. Rents increase at a yearly rate about comparable to inflation in most cases, and rents never drop. I have never heard of a rent decrease except in areas that were so far gone they might as well have been war zones. You only borrowed $X when you bought, and unless you take cash out (which is under your control) you should never owe more money next year than the previous one.

So buying stops your situation from getting worse. What about making your situation better? First off, I need to observe that with rising rents, your situation will always get worse until you sell. But buying really does make your situation better. Not immediately; there's always a hit for buying, and it always costs money to sell. But within a couple of years the average person will be above any reasonable return they can earn any other way, and the reason is leverage.

Fact one: you always need a place to live, and the options are to rent or to buy. Renting typically requires less cash flow, but returns nothing. Once you have bought, all that lovely appreciation belongs to you and nobody else but. Let's look at an actual scenario for San Diego, one of the highest priced places to buy.

I looked at one particular property earlier today with an asking price of $450,000. The most comparable rental in the area is $1700 per month. For people with dead average national median credit scores, I have 6.125% on a thirty year fixed rate loan for the first 80% of the loan, and 8.75% on the second mortgage. Yes, I'm assuming a 100% loan. Total loan costs, one point and approximately $3400 in closing costs. With sellers outnumbering buyers 36 to 1 right now, it's an idiotic seller who isn't willing to pay your closing costs. Your payments on the two mortgages are $2187 and $708, respectively. Call it $2896 with rounding. I'm going to assume you're married, which means you get a $10200 standard deduction on your federal taxes for 2006. Furthermore, property taxes are about $470 per month, and homeowner's insurance costs about $110 per month for an HO-3 policy, the best there is. Total cost of housing: $3476 per month. Over twice your cost of renting, yes. But $400 of that goes straight into your own pocket, in the form of principal you're paying off from month one. Furthermore, $2960 per month is a tax deduction, from which you'll get a benefit of $(2960*12)-10,200 (standard deduction), or slightly more than $25,500 per year, from which someone in the 28% tax bracket will see a tax reduction of about $7145, returning another $595 per month to your pocket. $3476-$400-$595=$2481 net costs per month to own that property. Less the $1700 rent, works out to $781 extra you're spending. Furthermore, if you turn right around and sell it, you're going to be out about 7% of that sale price. Assuming it's the same $450,000, that's $31,500 you're down.

However, property values don't stop rising just because the renters of the world would like them to. Let's assume you're going to make a slightly below average for this area 5% per year in absolute terms - not inflation adjusted. Most of California has been averaging seven percent per year for the long term, over cycles and cycles of pricing. The CMA for the first property I bought, at the peak of the last cycle fifteen years ago says $320,000, an 8.8 percent per year average increase. So 5% is definitely on the low side. Let's assume you have a twin who continues to rent, and invests that $781 per month, tax free, while you take it and buy a property. Actually, let's go ahead and give your twin the full net cash differential of $1143 per month.

One year later, he's got about $14,400, while your property is worth $472,500. You've got about $27,000 in equity. On paper, you're ahead of him, but remember that real estate isn't liquid and there are always selling expenses. You're really still down by about $20,000 as opposed to your twin. Darn! Just when you had a really good brag going. But wait! Now your twin's rent is raised to $1768 - right in line with 4% inflation. But your mortgage costs are fixed.

Run it out another year. Your twin has about $29,700 in that account. Looking pretty good, right? Well, you've now got a value of a little over $496,000 and you have about $56,000 in equity. You're not really ahead yet, but deducting the 7% costs of selling net you about $461,400. You've made over $11,000, net, not counting the equity you paid down! But your twin has almost $30,000. Why is renting for suckers, you ask?

Go out one more year. Your twin's rent has gone to $1838 per month, but even so his investment account still has a tad over $46,000 in it. Looks like he's pulling away! Or is he? Your property value has gone to almost $521,000, and you only owe $434,000. You're up almost $87,000, and even allowing the standard 7% for costs of selling, you're would now have over $50,000 in your pocket, several thousand dollars more than your twin.

Every year from then on, you pull further ahead. After ten years, when his monthly rent is over $2500 per month, you've got $350,000 in equity, and even after the costs of selling, are over $100,000 ahead of your dimwitted twin.

Lest you think that if your twin started with $45,000 due to a ten percent down payment it would make a difference, the answer is not really. It cuts the lead, but not the essential facts. I could cut the rate on the second mortgage a bit, but let's leave it at 8.75% for the purposes of this exercise. True, after three years you're still lagging your twin in this scenario, as that investment account is $95,000, but only by a few hundred bucks. Your equity is $130,000, of which $94,300 would be left after the expenses of selling. After ten years, he's $80,000 behind you, net of the cost of selling.

Suppose you start with a full 20% down payment? You're still $55,000 net ahead of the game after ten years. Your twin started with $90,000 earning ten percent, but not only do you not have that expensive second mortgage, you've got $450,000 earning 5%, and it's all yours and then some. This is the concept of leverage. That loan turns out to have been a good thing, as it enabled you to leverage your down payment into a much larger appreciating asset. So you only earned half the return - it was on five times the principal! It translated into a much bigger number. By the way, your twin only has the edge on you in cash flow by about $120 per month at this point, and he's going to be negative next month.

Now the real estate market doesn't earn nice smooth returns like this. Neither does the stock market, or anything except maybe bank CDs or the money market, at a fraction of the return illustrated here. Furthermore, it reliably and unavoidably takes about three years to come out ahead on a real estate investment. There are always the twenty percent per year markets, but those don't happen very often and never predictably. What I'm talking about are is making money in the slightly below average market years also. Note that you'll still make twenty percent in the years the market does. Sometimes you get lucky. But "time in" is so much more important than timing that they don't even play in the same league.

You don't have to be a genius, you don't have to have perfect credit, and you don't have to make a mint. You do have to pick properties that you can afford to make the payments on, and you do have to make the decision to accept a couple of tough years for cash flow. There just is no avoiding this hard fact. There are loans that promise otherwise, but they have bitten everyone I've ever met who tried them. Once you have made the decision to accept those lean times, however, the good times seem to flow from them for the rest of your life. The sooner you make the choice to accept them, the better off you will be.

Caveat Emptor

This is one of those commercial gambits I keep seeing that has nothing intrinsically wrong with it, and yet it is most often a tactic employed by the more costly loan providers. In short, sharks and scam artists.

The basic come-on is this: Loan provider offers to pay for your appraisal if you do the loan with them. They often use such come ons as "free appraisal!"

TANSTAAFL. Repeat after me. TANSTAAFL. There Ain't No Such Thing As A Free Lunch. "Free" stuff has an ugly habit of being the most expensive there is, and this particular come-on is no exception. Offer you a few hundred with the left hand while picking multiple thousands out of your pocket with the right. If you want to be an educated consumer, engrave TANSTAAFL upon your soul.

What's going on here is that they are trying to make it look like you're getting something free. You're not. They may front the cash for the appraisal, but in all but a few cases you're going to get explicitly charged in the end. Even for those people whose final loan papers does not show an appraisal charge, they are charging it to you somewhere else. Odds are that they're charging it about ten times over somewhere else. Either in origination or yield spread, one way or another you are going to pay for this appraisal. Actually, you are likely going to pay for that appraisal several times over. People are strange about cash. Many folks, if told they don't have to lay out $300 to $500 for an appraisal, will choose loan providers where the proposed rate is 1/4 to one half a percent (or more!) higher than competing loans, with closing costs thousands of dollars higher. They are getting the cost of that appraisal all right. In this scenario, they're making half a point to one point more than anyone else on the same loan, plus all of the extra closing costs. That's if they're a broker. If they're a direct lender, the difference is between a point and a half and two and a half points, more if there's a prepayment penalty!

Low cost loan providers do not pay for your appraisal. The loan providers who pay for the appraisal are paying not only for your appraisal, but the appraisal of all the people who cancel, and a good margin besides. Not to mention that this loan provider completely controls the appraisal, leaving them in control of what happens if you actually notice their huge fees when you go to sign loan documents, and decide you want to go somewhere else. This is one of the ways that loan providers avoid competing on price, by pretending to give you something for free. I say "pretend" because they are not giving you anything for free. I do not understand that normally competent adults who are well aware what "free" really means in other contexts will think it means they're getting a benefit. But just like the "buy one, get one free" offers that jack the price up threefold first, this is only a good bargain if the few hundred dollars it saves you stays saved, rather than giving you $400 with one hand while taking $6000 with the other, through higher loan rates and costs. Rate and cost trade-offs on real estate loans vary constantly. You can't know what the best bargain is right now unless you price it out right now.

Caveat Emptor

The Best Loans Right NOW

5.375% 30 Year fixed rate loan, with one total point to the consumer and NO PREPAYMENT PENALTIES!. Assuming a $400,000 loan, Payment $2240, APR 5.507! 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 4.875 percent!

Best 5/1 ARM: 4.875% with 1 total point and no prepayment penalty. Assuming $400,000 loan, payment $2117, APR 5.003. This is a loan where the rate is fixed for five years, and the payment pays your balance down! With rates on hybrid ARMs having dropped of late, they are once again something for people to consider. 5/1 ARMs as low as 3.5 percent!

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

Great Rates on jumbo and super-jumbo loans also available!

Zero closing costs loans also available!

Yes, I still have 100% financing and stated income loans!

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 any of the above loans!

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

Issues with Relocation Loans

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Sooner or later, a pretty fair proportion of the population are going to get an offer for a much better job, but the catch is that job is located in another city on the opposite end of the country. What are the major issues relating to the mortgage?

Well, first off, the relocating spouse may not have the job until they actually report for their first day at work. Many times people are told "Go there and you'll have a job," and when they get there, they don't. So no matter how much time you have in that line of work, until you actually have the job things are iffy and you can expect loan underwriters to reflect that. The job offer letter may or may not get the job done - it usually doesn't. Usually they want at least an employment contract, sometimes (particularly A paper) the first pay stub as well. It can be rough, and a waste of money to rent, but over the lifetime of a loan with a higher interest rate, it may pay off to actually wait until you've got that first pay stub.

Now just because the one spouse has a job offer doesn't mean the other spouse will get a job in their field. Sometimes they work in a field where there is no problem finding work, like health care. Sometimes they work in a field where moving means they don't have a career, and they're going to have to start all over in some other field. If you worked in a distillery and you're moving to Salt Lake City, you're probably going to need a career change. If that job is similar enough to the one you left behind, that's cool. But if you used to be a bookkeeper and now you're a retail clerk, they you do not have two years in the same line of work. Chances are your family is not going to be able to use your income to help qualify for the loan. They are not going to be able to use it at all until you have a job that has income. Since this can take a while, you really might be better advised to rent for a month or two (or even six, if that's the shortest lease you can find). If, of course, one spouse isn't working and doesn't plan to, this isn't really an issue.

Next, there are the issues with the property in the old city. Many times, especially in a buyer's market like now, the property has not yet sold, becoming a drag upon your ability to qualify for a new loan. If you can rent it, that's certainly one solution, but most lenders will only allow 3/4 of the monthly rent to be used to qualify you for a new loan, but will charge all of the expenses against this. Considering that around here it's tough to get a positive cash flow for a rental property in actual terms, you can imagine how tough it is when your monthly income from the property is chopped by 1/4, and how much more you will need to be making, in order to justify the loan.

Another thing is that most folks expect to be able to use the entire amount of the new salary to qualify, and that's not the way it works. If you made $6000 per month for the past two years, one month at $9000 isn't going to move that monthly average income up very much. The computation is done on a weighted average basis - you've got 23 months at $6000 per month, or $138,000, and 1 month at $9000, which when added makes for a grand total of $147,000, or about $6125 per month. Often newly relocated folks have to settle for sub-prime loans when they are normally A paper so that they can use bank statements or something else to qualify. And of course there is always stated income, but there are rules for that, especially A paper.

Caveat Emptor

One of the things I keep getting told by people is that my loans are the same as everybody else's. I quoted a 5.625% with no points a few days ago, and got told, "That's the same rate someone else quoted me!"

Rate, yes, but what's the cost of getting that loan? There's always a tradeoff between rate and cost, and focusing only on the rate ignores half of that very important equation.

It turned out that they other folks wanted to charge him more than a point for the exact same loan I was able to do for zero. Seeing as this was a $340,000 balance payoff, it was the difference between a new balance of $343,000, with a payment of $1974.50 and monthly cost of interest of $1607.81, versus about $346,500 with a payment of $1994.64 and monthly cost of interest of $1624.22. Don't think that's a lot? Then consider the difference of $3500 in what you owe and $16.41 per month in cost of interest, every month you keep the loan.

I've heard similar things from people I was offering a lower rate to, for less money. For instance, that was a 5.375% loan with a bit less than a point at that time. So for actually a bit less than a balance of $346,500, he could have had an interest rate of 5.375. In the interest of keeping things simple, I'll even use the same balance when it would have been a little less. That drops the payments to $1940.30 and the monthly cost of interest drops to $1552.03, saving over $70 per month! If you keep it a statistical average 28 months, that saves you $1960! If you keep it the full 30 years, that's a difference of over $19,000! But I can't tell you how many times I've heard, "Is that all you can save me?" Hello! Do you really need a better reason that thousands of dollars?

It just doesn't seem like all that much, because people think in terms of payment. Clever salesfolk will seize upon this as a method of selling inferior loans to people who don't know any better. Salesfolk, after all, get the difference in pay for the loan right away. Therefore, they understand in their bones what a big difference those small differences make over time. If you multiply it out, you should understand as well. This is all real money coming out of your pocket!

Far and away the biggest component of any new loan is what you already owe, or what you've agreed to pay to acquire the property. This can make differences seem small, but I guarantee it wouldn't seem small if someone was asking you for $3500 cash out of your pocket! .I've said this before, but don't let cash make you stupid. $70 per month is $70 per month, every month for as long as you keep the loan, and money added to what you owe with this loan will quite likely still be there when you sell or refinance, converting it into a strict liability. That's money you won't have, and additional interest you'll pay because you don't have it!

The differences may appear to be marginal, but they're not. Would you rather add $3500 to what you owe, where you'll pay interest on it, or keep it in your pocket, or at least out of your mortgage balance? No, it's not paying off your mortgage entirely, but it is saving you money. Over time - and most people will have mortgages for the rest of their working lives - it makes a substantial difference. If you refinance every three years, this makes a difference of $35,000 over thirty years. Would you like that money in your pocket? If not, why don't you hit my tip jar up there on the right? If you're not getting any use out of the money, I certainly can.

Caveat Emptor

Cosmetic Fixer on HUGE lot!

General: La Mesa, 3 Bedroom, 1.75 Bathroom


What's Wrong With It: It needs new flooring, a new roof, and paint inside. Matter of fact, the bathrooms and kitchens could use an update also.

Why It Hasn't Sold: Too many properties that are cosmetically unattractive now on the market.

Who it's Not Appropriate For: Those who can't climb stairs.


Selling Points: Quiet street, served by excellent to top notch schools. How many affordable properties on 10,000 square foot lots can say that? As best I can tell, the exterior walls are adobe! Fruit trees, covered patio with cooking area, three cars worth of garage and a driveway that can handle RVs. Two outbuildings that could be used for storage, or made into peachy offices. You could even wall off the interior stairwell and use it for two separate living units, and it appears to be zoned R2.

Who Should be Interested: Families with children. Work at homes and people with home businesses. Property fixers. My own wife was talking about moving when I told her about it.

Why it's a Bargain: This property looks solid, as far as I can see. What you'd have to spend is a fraction of the difference the money would make in value.


What I think I can get it for: $370,000.

Monthly Payment examples: I've currently got a thirty year fixed rate loan available for qualified buyers at 5.5% for less than one total point.

With no down payment: Fully Amortized Payment $2409 including financing insurance (APR 6.935), dropping to $2101 when you have 20% equity (APR 5.636)

With 20% down: Fully amortized payment of $1680 (APR 5.647).

Other financing options are available, potentially lowering the payments, but I'm quoting real loans that real people can get, that will stay exactly the same until you pay it off.

Investment potential: 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 $290,000 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 $220,000 ahead of the renter, after the expenses of selling.

To learn more: Agree that you'll use me as a buyer's agent if you buy it. If you don't like it or don't buy it, no obligation is incurred. If you're not working with someone who will go out and find properties like this, maybe you should consider working with me instead!
Contact Information:

Dan Melson, Realtor
Action Realty Inc
9143 Mission Gorge Road, Suite A
Santee, CA 92071
619-449-0723 X 116

"What mortgage fees can i recover after loan denial" was a search I got. The answer is basically, "None."

Indeed, one of your search criteria should be mortgage providers that don't charge anything up front, except maybe a credit check fee. Those are about $20, and you should be prepared to spend that $20 several times over while you're shopping lenders. If you're worried about twenty dollars when you are applying for a mortgage, chances are that you shouldn't apply.

Now many lenders want you to make a deposit that varies from a few hundred dollars to one or even two percent of the loan amount. Deposits are charged by lenders who want to get you committed to the loan, and they do it for at least two reasons. The first is psychological commitment. Usually when I mention things like that, I get people who immediately come back with, "Those kind of mind games don't work with me!" I'm not looking for an argument, and with most folks, I don't know their past history well enough to come up with an example, but this phenomenon is essentially universal as far as humans go, and those few not subject to it are probably suffering from some other more debilitating psychological problem. In fact, the normal progression of a loan is a series of commitments upon your part. The decision to talk to potential providers. The application.

After the application, lenders want the originals of your documentation and money. The original documents are requested so that you cannot shop or apply for a loan elsewhere. I, as a loan officer, do not need your original documents for anything I can think of at the moment. I need the original of the loan application and a couple other items you fill out with me, but not of your pay stubs, your taxes, your insurance bill, or any other documents you have pre-existing. Copies are just fine for any lender I do business with, so long as they are clean and readable.

The next step is to get money out of you. If all they want is the credit report fee of about $20, that's fine and normal. Credit Reports cost money, and if you're just shopping around, a loan provider has two choices: raise their loan prices slightly so that they charge those people who finalize their loans more, or charge folks whatever the cost is to run credit when they apply.

But many loan providers want more than the credit check fee. A lot more. They want a deposit that varies from several hundred dollars to one percent of the loan amount, even two percent in some cases. They might say it's for the appraisal, and usually at least part of it does go to the appraiser. Nonetheless, you should not give it to them. I've had my clients tell me about the tales they've been told, about how that money is to pay the appraiser. The appraisal should be paid for when the appraiser does the work. As I've said before, you want to be the one who orders the appraisal, and therefore controls it. I've had clients tell me about loan providers who only use "in house" appraisers. Well, those "in house" appraisers are drawing a salary and requiring "in house" appraisers is usually indicative of lenders who aren't competitive on price.

The reason they really want larger amounts of money out of you upfront is two-fold. First, it builds that psychological commitment I talked about a while back. Second, it makes you financially committed to a loan, which tremendously raises the level of psychological commitment. It means they've got some of your cash. Most people don't really understand loans, not deep down where it really matters. Consider, for a moment, which you would rather have: $400 cash, or a loan that costs $5000 less (not so incidentally making a difference of $25 on the monthly payment), but is otherwise identical. Dispassionately sitting there on the monitor in front of you, the choice seems obvious. You're going to have to pay that $5000 back sometime, and in the meantime you're paying interest on it. But move it to a situation where these potential clients have already put down a $400 deposit with an overpriced loan provider, and the vast majority of them won't sign up for my loan, even though I'm willing to guarantee my loan quote and the other company isn't willing to guarantee theirs. Why? Because they're thinking of that $400 in cash that came out of their checking account, not the $5000 in extra balance on their mortgage. Companies want that deposit to stop you from going elsewhere, to a loan provider that can do the loan (or, more importantly, is willing to do the loan) for much less money. Practically speaking, they're not only guaranteeing themselves a certain amount of money, they are guaranteeing that the client won't change their mind about their loan.

So do you get it back if the loan is denied? Nope. At least I've never been told about an instance where it happened. That money was a good faith deposit. Legally, it was an incentive for that loan provider to do the work of that loan, all of which costs money. Provably costs money, I might add. The loan processor doesn't work for free. The underwriter doesn't work for free. The escrow officer doesn't work for free. The appraiser doesn't, the title company doesn't. Nobody works for free. Phone calls and copies and word processors to generate all of your documents from the title commitment to the loan documents. Some documents are the same for every loan and can be computer generated. Others, like the title commitment, require humans to enter literally everything on them.

Now, a deposit isn't necessary. In fact, you can find loan providers out there (I'm one of them) who routinely work the whole loan on speculation of it funding. They might ask you to pay for the credit report up front, but everything else is paid for as the work is done. You write the check to the appraiser when they do the work. You might ask the advantages to the consumer of this. That advantage is that these loan providers are not holding your money hostage. This means that if the loan falls apart because the loan provider told you they could do the loan and they couldn't, they're out the money, not you. This means that if you find a more competitive loan, there's no reason why you can't apply for that one instead. This means if your back up loan is ready to go and this one isn't, all you've spent is the $20 for a credit check. You're not out hundreds to thousands of dollars that were in the deposit.

So if a loan provider asks for a large cash deposit up front to begin the loan, chances are that you shouldn't give it to them. Particularly if they won't guarantee their loan quote, chances are they are trying to lock you into their loan by holding your money hostage, and when you discover at closing that they tacked thousands of dollars onto the loan charges that they conveniently "forgot" to tell you about or pretended didn't exist ("Escrow's a third party charge. We don't have to tell them about it until afterwards"), and now you are facing a choice between forfeiting your deposit and signing off on a loan that's not what you agreed to when you gave them that deposit. Better not to face that choice, by not agreeing to pay anything beyond the credit fee up front.

Caveat Emptor

"I am married but want to refinance my house only in my name. What do I have to do?"
This is actually pretty easy, and there are at least two ways to potentially accomplish this, depending upon lender policy and the law in your area.

Most lenders policies require the property to be titled in a compatible manner to the loan. Some few do allow the spouse to be on title and not a party to the loan, in which case they will be required to sign the Trust Deed, although not the Note. Most lenders, however, will require that if you are the only one on the loan, the property be titled in your name exclusively. So your spouse will be required to sign a quitclaim to "Jenny Jones, a married woman as her sole and separate property" (Or "John Jones, a married man as his sole and separate property). If you don't like the title being this way, that's fine and don't sweat it. You can quitclaim it back to "John and Jenny Jones, husband and wife as joint tenants with rights of survivorship" as soon as the loan records. What matters is that the people agreeing to the loan, as of the moment the Trust Deed comes into effect, is reflected in the official title of the property.

For those intelligent individuals whose property is in living trusts, this is also a common feature of getting a loan on the property. The lender will usually require it be quit-claimed from "John and Jenny Jones, trustees of the Jones Family Living Trust" to either the sole individual who qualified for the loan, as in the previous paragraph, or to "John and Jenny Jones, husband and wife as joint tenants with rights of survivorship."

All of that is the easy part. Now comes the hard part. If one spouse wants to be the only one on the loan, then they must qualify on their own. Only their income may be used. However, since most debts in a marriage are in the names of both partners, typically they are going to going to be charged for most debts on their qualification sheets. This really is no big deal if that particular spouse is earning all of the money anyway, but in most cases these days, both spouses are working, and they want to buy the biggest home they can, so it can be difficult to qualify them for that home based upon the income of only one spouse. Here's a typical scenario: He makes $5600 per month, she makes $5000. They have two $400 per month car payments and $120 per month in credit card minimum payments. But he has rotten credit, so they are hoping to secure a loan on better terms. By A paper full documentation guidelines, she only qualifies for a PITI payment of $1330 ($5000 times 45%, minus $920), which might get a one bedroom condo in a not so hot area of town. So then they have to go stated income in order to qualify for the loan on the home they really want. As a couple they qualify for payments of $3850 ($10,600 times 45%, minus $920), which will get a decent single family residence in an okay area of town. You, the readers, can guess which of the two properties the average couple in this situation is going to shop for. Unfortunately, many times her profession is not one where the lender will believes she makes twice what she really does without verification. This is a real issue, especially if they went and got a prequalification from someone who figured both of their incomes in the equation, so here they are with a purchase agreement and they can't qualify like they thought they could. This is one reason I've learned never to trust someone else's prequalification of a buyer, because in this situation, the only way to make it happen is to put John, with his rotten credit, on the loan. Because he makes more money than Jenny, he will be the primary borrower, and so the loan will be based upon John's bad credit history, not Jenny's above average FICO. There are ways to potentially get around this, but sometimes they work and sometimes they don't, at least in the sense of getting John and Jenny a better rate on their loan, or of qualifying them to get a loan at all. Better to get John's credit score up where he will qualify for a good loan beforehand, of course, but usually these folks want a loan now so they can get this home they've already signed a purchase contract on. The ability to improve credit scores in a short period of time is limited, and it's even more limited if John and Jenny are short on cash, which is usually the case.

These can all be issues with the spouse who makes less money, also. Reverse the incomes, so that John, with his bad credit, makes $5000 per month and Jenny, with her good credit, makes $5600. So at least Jenny is primary on the loan, now, but most people are not in professions where the lender will believe they make almost twice what they really do, so stated income A paper doesn't fly, and John and Jenny have to go sub-prime because if you put him on the loan, both spouses must qualify A paper and John doesn't. Sub-prime means higher rates and a pre-payment penalty, unless you buy off the prepayment penalty with an even higher rate.

Now, in point of fact many borrowers these days are ones that have settled upon a property before they even considered a loan, and are determined to get that property no matter what they have to do. Alternatively, they may have talked to someone about loans who gave them a budget which was in fact accurate, but they liked this property so much that they are utterly ignoring that budget. Such people are going to end up with bad loans. They want more house than they can really afford, and they want it now. I can get the loan for them, any competent loan officer can get it for them, but there will be consequences down the road, because there are still those pesky payments they have to make (or negative amortization that builds up. Or both). A loan you cannot afford is a course for disaster, and the longer you're on it, the worse the disaster gets.

But so long as a couple is qualifying for a loan where they really can make the payments, it's all okay. The one thing that bites a fair number of people is divorce, where one ex-spouse figures that because he (or she) qualified all by themselves so they should be able to make the payments all by themselves. But the loan officer used stated income without telling them, and once that other income is gone, it turns out that they can't make the payments. Not only can they not make the payments, they cannot qualify to refinance now. Typically, most people live in denial about this for way too long, ruining their credit to where they can no longer qualify for the loan on the lesser property they would have been able to get if they had done the smart thing in the first place.

So one spouse qualifying for a loan on their own has some real issues to be aware of, and that will turn and bite you if you're not careful enough.

Caveat Emptor.

What Pre-Approval Should Mean

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People are understandably hazy on the difference between pre-qualification and pre-approval. Pre-qualification is a non-rigorous process whereby somebody says that based upon the information as presented to them, it appears you'll qualify for the loan.

Pre-approval should be more rigorous. For A paper, it should mean that you've fed the final loan information, including qualifying rate, income information, credit, etcetera through one of the automated underwriting programs, and it has come back with an "accept". All that is needed is the actual information on the property, and the actual underwriting.

Now due to the nature of the loan and real estate market, very few people actually get a pre-approval. Why? It costs money to do all of that, and takes a lot of time. Furthermore, it's based upon a qualifying rate. If rates go up, you have two choices: live with a higher rate or pay more money to buy the rate down, and sometimes no matter how much money you pay, the old qualifying rate isn't available. You can't lock the loan with any lender that I am aware of until you have a specific piece of real estate, so your rate will float between pre-approval and a fully negotiated agreement to purchase.

Furthermore, people have an unfortunate habit of stretching to the very limit to buy more house than they should. If you attempt to build in a little margin on the pre-approval, you're going to qualify them for less money than someone else.

Now with sub-prime lenders, they don't have Fannie and Freddie's programs to fall back upon, and if Fannie and Freddie will approve you, you shouldn't be getting a sub-prime loan. So in most cases, they have to go through essentially a full underwrite of the file, and agree to pay a cancellation fee if you don't fund within X number of months. Remember also what I told you about having an underwriter do part of their work now, part later. Every time they pick up that file is a real possibility that they will find something wrong that is a good reason not to fund the loan, or imposing a condition that the borrower cannot meet. Result: Dead loan, and in this case where you thought you had it covered, it really ticks off the client, understandably so. I'm a broker; I can always submit elsewhere, but direct lenders are stuck, and the client doesn't exactly like paying that cancellation fee, either.

Now many seller's agents are getting tired of getting left at the altar because a pre-qualification means so little, and are starting to demand a pre-approval with offers. Maybe a couple of years ago they would have gotten it; not in the buyer's market we have today. I submit an offer on behalf of a client, they are required to submit it in any case. In today's buyer's market, sellers are (or should be) eager to accept any qualified offer, but most seller's agents wouldn't know what a qualified buyer was if it bit them. Income documentation? Credit Score? Debt to income ratio? They are happily clueless, and they don't know how to negotiate for an appropriate deposit, with appropriate controls on who gets it and when. Furthermore, they don't want to drive off potential buyers, although this is exactly what requiring a pre-approval does. A good buyer's agent knows better in this current market, knows they aren't really necessary no matter what the listing says, but on the other hand they don't want to waste time with an unqualified buyer in the first place, and many of them have no more clue than listing agents what a qualified buyer looks like.

I've told you before that a large number of listing agents are lazy clods whose skills are mostly limited to getting the seller's signature on the listing agreement. They don't want to do the work they have more than once, and will drive off willing buyers who actually are decently strong, hoping for someone like King Midas to roll in so they only have to do the work once. Never mind that if they do it right, most of the time the clearances and such only have to be done once. But in the current market, driving off any willing buyer with a decent chance of qualification is a good way to have the property sit for months. Every so often, when I'm calling around to check about showing properties, an agent will tell me that they have two offers. Right. After it sits for six months, suddenly two separate groups decide it's worth buying when everything else on the market is languishing? If the two offers are real and not a figment of someone's imagination, neither one of them is good, or it would have accepted it and the property would be in escrow. If such offers are real, they're desperation checks from the sharks.

But even in a seller's market, requiring a pre-approval is counterproductive, and may mean that you are disallowing the person who would give you or your client the best offer, and may indeed be a well-qualified buyer. Yes, it may stop you from dealing with some of the "riff-raff", but the work it saves you could cost your client thousands of dollars, and you signed on to do that work. So if you're a potential seller, ask questions about this potential situation.

Caveat Emptor

Just like "we'll beat any deal!" in any other competitive sales endeavor, this is a game. Actually, it's even more of a game for loans than it is anywhere else, used cars included. What they are hoping is that you'll go there last, and tell them what the best thing you've been quoted, and then they can sell you on their loan and most people will go with them, because "we're here, not there."

The first issue is that anyone can give a low quote. It's like the old joke, "Your lips are moving." Unless they guarantee that quote, that's all they're doing: flapping their gums. All a quote is is an estimate, and I've more than adequately covered the games it is legal to play with a Mortgage Loan Disclosure Statement (as the Good Faith Estimate is now known in California). By itself, A low quote means nothing. Loan officers can, legally, quote you one loan and deliver a completely different loan at a completely different rate with a completely different (higher, or course) closing cost. Without some kind of Loan Quote Guarantee, a quote isn't worth the paper a verbal contract is printed on.

The second issue is that even if they are quoting a loan they intend to deliver, unless they are quoting to the exact same standard, the quote game favors the lender who pretends third party costs don't exist, who pretends that you're not going to get zonked for the add-ons that you are going to get zonked for at the end of the process, the lender who quotes based upon a loan that you do not qualify for. Are you going to pay these costs? Absolutely. Would you rather know about them at the beginning, so you can make an informed choice, or get blindsided at closing (assuming you even notice)?

The third issue is that they are looking for safe harbor, and they're hoping you give it to them. If someone brings them everyone else's quotes, they know what everyone else has talked up, how big the lies are that the prospect has been told, and they just have to tell one that's a little bit better. This is trivial when you've got all that information you've been freely given. This is called false competition. You've metaphorically given them a mark, and told them to "tell a more attractive story than this one." Easy enough in a storytelling context - tell the same story with a little more sex - and even easier with loans.

A good loan officer has no need to know what quote you've been given to tell you what the best loan they can deliver is. Tell them to quote you the best loan they can without this information. Ask them if they'll guarantee that quote, because a quote that isn't guaranteed - as in they pay any difference, not you - is worthless. That's how you can choose the best rate that can really be delivered, not by allowing someone the advantage of knowing how much they have to lie to get the business.

Caveat Emptor

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This page is an archive of entries from February 2008 listed from newest to oldest.

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