Dan Melson: April 2007 Archives

Beautiful Older Home with Large Lot on Quiet Street!

General: Urban East County, 3 bedroom 2 bath, and two extra rooms. Asking price between $475,000 and $500,000. I think an offer of $460,000 net would get it sold.

Why you should be interested: 1) It's gorgeous 2) Quiet Neighborhood 3) Large back yard 4) Great Schools 5) It's close to just about everything.

Selling Points: Throughly modernized kitchen and bathrooms, water efficient front yard, back yard is large enough for kids to play. The ceiling is a little low on the extra rooms for them to be legally bedrooms, but people have obviously used them for that.

Why I think it's a potential bargain: This is one of those pleasant surprises you find every once in a while if you look at enough properties.

Obvious caveats: I do want to slap whoever it was that put pergo down on top of hardwood in the front section of the house.

Why it hasn't sold already: The listing agent is basically acting like a bump on a log.

If you keep it ten years and it averages only 5% annual average appreciation per year: Based upon a purchase price of $460,000, the property would be worth approximately $750,000. If you held it those ten years before selling, you would net about $360,000 in your pocket (not including increased value from updates!), assuming zero down payment. As opposed to renting the $2100 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.

Fact you should be aware of: Evidently, school buses use the street in the morning.

Obvious way to enhance value or appeal of property: Other than get the pergo off the hardwood, not much.

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

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

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

An email:


I've recently been pitched the idea of refinancing my home and investing in apartments, or more precise, a four-plex. The idea is to refinance and get a negative amortization loan on my house. With the money I pull out of my home, put a down payment on a four-plex, also with a negative amortization loan. That way, I am told, my payments would stay relatively the same on my home and I can have a positive cash flow from the four-plex. Along with the pitch I am told that I can refinance after five years and get another plan, or sell outright, the apartments. Their belief is that in five years, the apartments and my home would have gone up enough to offset the interest that I will not be paying in a negative loan.

I've read, on this site and elsewhere, that negative loans are not the way to go for most people. I'd like some more input as to what to do in my situation.

Here are the specifics in my case:

Home --- owe - 200k

worth - 600k

would get around 200-215 from refi

Apartments --- worth about 900k

downpayment would be 20%, or 180k

keep the money left over from refi in savings for emergencies

loans for both properties is a five year fixed rate of 7%

paying only 4.25% of it, with the rest being added to debt

Is it too good to be true?

Now I know how Hercules must have felt fighting the Hydra.

This situation can be called many things, but "Too Good To Be True" is not among them. It not only isn't true, it isn't good.

Let's go over what's going on in the situation as proposed.

You would have a loan on your home for about $420,000, including closing costs. This is just over the conforming limit of $417,000, but negative amortization loans are not A paper and pay no attention to the conforming loan limit. A real principal and interest payment on that loan is $2794.28, of which you are paying $2066.15. Over the course of three years, your loan balance would increase to about $435,327.16, at which point that $15,200 and climbing pre-payment penalty is no longer hanging over your head. After 5 years, you owe $447,480. Total of payments to that point: $123,969.00.

On the apartment building, you would have a $720,000 loan at 7%. The real payment on that is $4790.19, of which you would be paying $3541.98. After three years, you would owe $746,275, at which point that pre-payment penalty of $26,100 (to start, and climbing) is no longer over your head. After your planned five years, you owe $767,109. Total of payments is $212,518.80.

Now, I'm going to compare and contrast with two other loans I really do have as I'm typing this, but will be out of date by the time anyone reads it. I should mention that I have difficulty believing that the investment property, especially, would not be at a higher rate than you have been quoted. I don't believe that these are zero points loans, but I'll even assume that they are, in order to have a fair compare and contrast. I know for a fact that this isn't even the best I can do, but I'm just picking the first rate sheet that comes to hand. This is with all costs included: loans I could lock and write a loan quote guarantee on. A 30 year fixed on $417,000 (maximum conforming) at 6.25%, and I can even give you about $750 to help cover your closing costs, but let's say net total cost to you is $3000, and therefore your net is $214,000 when all is said and done. The payment on this is $2567.54. There is no prepayment penalty on this loan. After 5 years, you owe $389,216.30 and your payments totalled $154,052.44.

The loan on the apartment building would be bumped all the way to 7.375% because it's non-conforming, and so that the yield spread covers the adjustments for investment property and 4 units. Every lender has these charges, and these are on the mild side. So you see why I do not believe the real rate on the investment property loan would end up being 7% without they charge you some pretty stiff figure in points. I'm not sure your real rate can be bought as low as 7% on such an Option ARM. This lender does both A and Alt A, and their adjustments on the Option Arm are a half point more expensive, which means even the highest rate on their sheet only buys your net retail points to one, but let's run with our assumptions as stated. Payment is $4972.87, after 5 years you will owe $680,400 and your total of payments will be $298,371.66.

Let's look at the end of those five years.



Total paid


Neg Am



30 fixed







So you see that every dollar you saved on cash flow cost you two dollars in real terms. Lenders love this kind of math! Nor am I certain that this is really a fair comparison between the loans, but it's what I have to work with.

Now, lets do the apartments. As I said, I am as certain as I can possibly be that this is not a true and fair comparison between loans. I'm restricting myself to "no points" loans, and if that lender told you there were going to be no points on an option arm at 7% on a 4 unit investment property, I'd call him a liar to his face.




Neg Am



30 fixed







So you see that, even giving this person every possible benefit of the doubt, you come out better on the thirty year fixed, even though I don't believe their loan really exists.

Now I'm have not, thus far, allowed for the possibility that you wouldn't qualify for both loans, (with all the lovely potential for gain on the apartments) with both sets of fully amortized payments. There is a pretty serious monthly income zone ($3800 wide) where you would qualify for negative amortization but not fully amortized, at least "full documentation." It is to be noted, however, that these loans can be done independently of one another, dropping the monthly income range gap where you qualify for at least one full documentation to just over $800. I am intentionally ignoring the possibility of "stated income" loans because stated income is a very dangerous game to play in these circumstances (or anything similar). Also keep in mind, however, that property values don't have to go up in five years. It's a pretty reasonable bet, especially right now, but I don't think we're going to see more than 5% annualized for a while.

People sell Negative Amortization loans based upon cash flow, not based upon how wonderful they are to your bottom line. When you consider them on anything other than a short term cash flow basis, their virtues become non-existent. They are popular because they are easy to sell to most people. Most folks think of cost in terms of the check they are writing every month, and that's just not all there is to it. There are also deferred costs - costs that have the potential to step out and grab you with a bill, in this case for another $85,000 that most people won't realize they owe. This is 2003 thinking in a 2007 world: "The equity increase will more than pay the difference." Except that it isn't necessarily so.

It's much easier to persuade people to give the bank tens of thousands of dollars in equity that they might have someday, than it is to persuade them to write a larger check or endure negative cash flow in the first place. Persuading them to write the larger checks remains the correct thing to do in 99% plus of all cases. You can't fault loan officers and real estate agents as sales folk for making the easy sale - but you can fault them to the extent they represent themselves as analysts, consultants, or advisers, and I just don't see a whole lot of people in either of my professions representing themselves as straightforward sales persons. I've got a property one of my clients is in escrow on with about eighty business cards on the kitchen counter - and mine is one of about three cards on that counter with anything like a sales representation ("Loan Officer and Agent"). Some say things like "Real Estate Consultant", while others say things like "Relocation Specialist" or "Financial Vice President". It's all very deliberate to convince people to drop their defenses, because "I'm not a salesperson," but if you are going to represent yourself that way, you have a responsibility to comport yourself in accordance with that representation - and all the evidence I'm seeing says that this is not the case. I would like to see some civil cases make their way through the courts which fault agents and loan officers on the basis of their self-representation as something other than sales folk.

Actually, let me take that back. If they're acting as your real estate agent, they do have a fiduciary duty to you no matter what they're representing themselves as. Loan Officers do not - which is one of the reason the loan side is so messed up - but Real Estate Agents do, and if they're also doing the loan, they have a responsibility to advise you that this appears to be beyond your means, and exactly what risks you may be taking with this purchase - something I'm seeing more evidence in contradiction of than in support of.

Negative amortization loans can serve a valid purpose as refinances in certain limited circumstances. They can help people avoid worse consequences than necessary, when the numbers are right for it. But as purchase money loans, they are like playing Russian Roulette with your financial future. Sure, the market might take off like it did a few years ago - but it also might sit stagnant for the next several years, or even decline a little. Even if it goes up, it may not go up enough to pay the extra money you now owe. Of all the scenarios listed, the market taking off at 10% plus gains per year is the least likely, in my opinion, at least for the foreseeable future.

Caveat Emptor

The only one I trust is one that I wrote.

I got this search engine hit:

pre-approved loan underwriter changes terms illegal

I have gone over these issues in discussing the pre-qualification.

Loan officers are salespersons. There is intense pressure on them from supervisors, brokers, stockholders and their own pocketbook to tell you what you want to hear. A large proportion of the people who ask me for a either pre-qualification or pre-approval already have a property in mind, and they get angry if I tell them it appears to be beyond their means. They should be kissing my shoes because I'm trying to keep them from making a half-million dollar mistake, or at least make certain they go into it with their eyes open, rather than just keeping my mouth shut and pocketing my commission. Most of these folks just go get their "Think Happy Thoughts" letter elsewhere.

Furthermore, if the loan officer is counting upon referrals from real estate agents for a living, now they're getting the agent angry to no good purpose. This agent thinks they have a commission check all lined up, and you're trying to talk the buyer out of it, threatening that commission check. Most Real Estate Agents do not respond well to this, I'm sad to report. I'm thinking, "Boy, I'm glad I found out now, before the default, when investigators and lawyers and courts get involved," but most agents see only the immediate check that just evaporated. One such experience is all it takes before they not only stop referring to that loan officer, but try getting any clients they may have in common away from that loan officer. This may be short-sighted, but it is also human nature.

Not to mention the fact that nothing about a pre-approval or pre-qualification is binding. In fact, until the underwriter writes a loan commitment, there is nothing that says you have a loan at all. Furthermore, it's rare for loans to be rejected outright. What happens far more often is the underwriter puts an unmeetable conditions on it.

Furthermore, there is nothing about any loan that says the terms cannot change unless there's a lock in effect. If the loan isn't locked, it's not real. Quite often, loan officers will tell people their loan is locked when it's not. Locking paperwork can be easily faked.

Finally, unless you have a written Loan Quote Guarantee, the loan officer can always decide to sock you for more in fees. The games that can be played with the Good Faith Estimate (Mortgage Loan Disclosure Statement in California), Truth-in-Lending, and all of those other forms you get when you sign up are legion. None of these forms means anything, really, in any objective sense.

Even with the best will in the world, I can't guarantee you've got a loan until I get the loan commitment from the underwriter. I can go through all the guidelines for a given program, and make certain the borrower meets every single one of them. It doesn't mean anything until the underwriter writes that loan commitment. I don't have the power to approve that loan - no loan officer does. Loan commitments are the exclusive province of the underwriter. A good loan officer can and does go through guidelines to ascertain whether there's an obvious reason that you will be turned down. If the underwriter rejects the loan, none of it means anything.

This is one of the reasons that I have written several articles explaining how to calculate what you qualify for, in terms of payment and in terms of purchase price, so that you will not be at the mercy of somebody who tells you, "Sure you can afford it," while qualifying you for a "stated income" negative amortization loan. The most mathematically correct and detailed of those articles is Should I Buy a Home Part I, while the most accessible is Can I Afford This Property?.

The stages in this process are first, the lock. If you don't have a lock, the loan is not real, and it will fluctuate with the market - every day for A paper. Once you have a lock, then it is possible to get a loan quote guarantee that means something. Even that is not absolute, however. A real loan quote guarantee is written contingent upon underwriter approval. The loan officer cannot really promise you that loan until the underwriter writes a loan commitment with conditions you can meet. What I can do, however, with a loan quote guarantee is say, "If the underwriter approves it, the loan will be on these terms" If the underwriter rejects the loan (or doesn't approve it), you still don't have that loan. You can choose another one, that you are likely to qualify for, or you can do without. I'll tell people that if the loan officer gets back to them within a week, it's likely that they're honest and they really thought you qualified for the loan they told you about in the first place. If it takes them three weeks or longer, or if they spring it on you at closing, I wouldn't believe they were honest with sworn testimonials from George Washington, Abraham Lincoln, and Mohandas Gandhi that they saw the whole thing, and it's not the loan officer's fault.

Only when you have a lock agreement, loan quote guarantee, and a loan commitment from the underwriter do you have a deal going that somebody might be able to stand behind, in the sense of being able to hold them responsible if they don't deliver on exactly those terms, and even then there are limitations. Of course, what really happens most of the time is that loan officers tell you about loans they have no prayer of being able to deliver. This is despicable, but it's the way things are. There are reasons why the situation is complex, but that's no excuse for loan providers to play any additional games to obscure or confuse something that is already complicated enough. Part of the reason that I'm writing here is that I would like to change this for the better, but the power to demand real change is in the hands of consumers, not any individual provider.

Caveat Emptor

The housing bubble is not the primary focus of this website, but to pretend it does not exist is plainly wishful thinking. One of the ongoing phenomenon that have been driving the bubble is the "Stated Income"loan, where the lender does not verify that the prospective borrower actually makes enough money to qualify for the loan, only that they have a source of income that could generate enough income. If you're working the night shift at 7/11, they're not going to believe you make $90,000 per year, but if you're a in a profession where some folks do make $90,000, you may be able to qualify "stated income" regardless of whether you actually make it or not.

Lest I be unclear on this subject, despite being known as "liar's loans" because people use them to lie about their income in order to qualify, it is not what they are intended for. Nor is "stated income" intended to help shifty or incompetent loan officers shaft lazy borrowers by not bothering to document income. They are intended for those who really do make the money, but because of the way that the income tax laws work and the way that lenders qualify people for loans based upon income, do not appear to. Business owners and the self-employed and people on commission get to legitimately write off a lot of expenses that the hourly or salaried employees do not. For instance, I write off a large percentage of my vehicle miles, office expenses, etcetera. I'm paying for business related expenses with pretax dollars, where most folks generally do not get to take this deduction. Being self-employed, if I was silly enough to want the home office deduction it would be easy enough to justify. Not to mention asset depreciation. All of these don't have much effect upon the money I have to spend, but they do have an effect on my tax forms, where it looks like I make a lot less than I effectively do. So instead of using my tax forms to qualify for a loan, sometimes I need to do a stated income loan in order to qualify for the loan, because the tax forms show a lower number than people making comparable amounts who are salaried. This is what stated income is for.

On the other hand, I'm sure that most of the adults reading this have seen the potential for abuse. When I can just tell the lender how much I make and they agree not to verify it, a certain number of people are going to say they make more than they do, and indeed, both stated income and NINA loans are often informally known as "liar's loans". Furthermore, since if the person getting the loan does not qualify, there is no loan and the loan officer does not get paid, there's a certain amount of pressure on the loan officer to get the loan done even if the prospective borrower does not qualify. Let's say they don't qualify, but the loan officer wants to get paid. So the loan officer puts them in for a stated income loan, says the clients make more than they do, and voila! funded loan. Clients get the loan where they would not have qualified by documenting their income, loan officer gets paid, bank gets a loan, and if it was a purchase, real estate agents get paid for their transaction and the seller goes happily on their way because they got their money.

A few years ago this kind of practice was an occasional thing. Of late, however, it has become endemic. And although if the clients really do make the money there is nothing wrong with it, if they don't make the money to qualify but they get the loan they are still going to have to make the payments. This reflects the reason for the rise of the negative amortization loan, where the minimum payment does not cover the interest charges. Either one of these is something a good loan officer does with a trembling hand and a lot of care. I always make certain that these folks really can make the payment they're going to have to make, but the vast majority out there do no such thing.

Well, it looks like everyone is going to have to, because of IRS Form 4506. Form 4506 is an item the clients sign, usually at the end of the loan process, that gives the lender and anyone they may sell the loan to access to your tax returns. IRS form 4506-T is basically the same thing, except that it gives access to a transcript (the numbers) rather than an actual copy. Signing form 4506 is mandatory. No signature, no loan. It's that simple.

Now it take the IRS about sixty days to respond to this request, so this has zero effect upon funding your loan. If your loan isn't funded withing thirty days of you signing the loan application, there's something wrong with that loan unless something external to the loan is holding them back and you should go apply for a back up loan. But for later on, it can have an effect.

One of the ways it can have an effect is on the loan provider's subsequent business. Traditionally, as long as the borrower made the first three payments on time, a loan broker was off the hook as far as borrower default. Lenders who have recently become much more nervous about their loan portfolios have recently started to change this, whereby a broker who put through a stated income loan (or any loan, for that matter) which is not subsequently borne out by the evidence of form 4506 is liable for the loan for the loan's full duration. Since form 4506 is never borne out by any stated income loan, else the client should be getting the better rates for full documentation, this means that every time any broker puts through a stated income loan, they are liable for the consequences to the lender.

Well, it shouldn't take much of an imagination to figure out the effects this is having upon the loan market. With the shifting of the consequences to the broker, the brokers are having second thoughts about doing stated income loans. Make no mistake, stated income was way out of control over the last couple of years. I've always been religiously careful about them, but that made me a member of a tiny minority of loan officers. Most of the loan officers out there have no clue as to what is an appropriate stated income loan, which has to a large extent put the brakes on stated income here locally. I'm not certain what effect this is having upon loan officers at direct lending houses, and there are a certain percentage of broker loan officers that are too clueless to understand what this means to them so they are going to keep right on doing them until the lawsuits pile up, but it's really starting to put the brakes on stated income loans here locally.

Now stated income loans have been a large proportion of what drove home prices upwards. It was an easy way for loan officers and real estate agents to get people into loans, and therefore properties, that they really could not afford and did not qualify for. Both easier sales and bigger commissions, as people want the better house with the higher price and tend to reward the agent and loan officer who can get them in, regardless of whether they can really afford it or not. People who did not really qualify, but this gets them the loan, and therefore that beautiful McMansion they've got their heart set on, despite the fact that they cannot really afford it. It really is easy to sell people on too much house, and very few of them really understand the implications. I've sat people down, taken them through the math, and they still signed up with the agent who promised to get them into the McMansion because they wanted it so much.

Well, with the lenders getting aggressive about enforcing financial consequences, every loan officer with the brains to understand that heavy objects fall is suddenly taking a hard look at their business practices. Now it's not just a question of "Get paid or don't get paid," it's a matter of whether the money they get paid right now is enough to balance out the money they are going to have to pay later to buy the loan back, and the answer is largely coming back "No!" Furthermore, there could be actions taken against licenses by lenders and not just by clients. That brings a completely different trade-off into the picture, and a lot of loan officers aren't liking what it says.

Now because the prevalence and easy availability of "stated income" loans has been one of the things driving the increase in the price of housing, essentially killing the stated income loan is not going to have a beneficial effect as far as sellers are concerned. It decreases, by some amount, the potential market of people who can afford to buy your property. Where before, the bottom line with most agents and loan officers was that anyone who wanted the property could probably be qualified for the necessary loan and was therefore a legitimate potential buyer, that is now changed. Since anytime you constrict your market of potential buyers, the equilibrium price of the market is going to fall, expect this to have a further deflationary effect upon property values. Indeed, there are a lot of factors that are conspiring against highly appreciated property values right now, but this one small item could well be what starts housing prices more notably downwards. Because it attacks a way of doing business that was at the heart of the run up in prices, this relatively small measure may be the pin that pops the housing bubble.

Caveat Emptor.

One of the things the place I work does to attract clients is advertise foreclosure lists to our clients. Several times a week, people call and ask for the lists, and we say, "Great! Just come on down, fill out a loan package and an agency agreement, and we'll get them to you fresh every morning, and when you see one you might be interested in, we'll help you get it!"

Before the end, over 95% of the people have stopped us, saying they are already working with someone. "I just want the foreclosure list. Can't I get it?" Well, we pay money for that. Why should we give it to someone who is not our client and has the ability to pay for it on their own? Why didn't their agent get it for them? (Everyone can get a weekly list for free from the county - but that list is worthless except as a timewaster, because that list is three to ten days out of date and they've already been swarmed.) If they want to work the foreclosure market, they should have signed up with an agent who has daily foreclosure lists. They haven't even found a property they are interested in yet, and already they know their agent isn't cutting the mustard for their purposes. But they are still stuck with them.

Another trick high margin ("expensive") people use is social groups. Nothing wrong with social groups and using people you know there, but make certain you're not paying three or five times the going rate for a loan, and that your agent really knows what they are doing before you sign on the dotted line. Church groups, soccer coaches, scoutmasters - I can't tell you all of the social acquaintances I've rescued people who became my clients from. These predators look at other members of the group as a captive audience. It isn't so, of course, those people have the option of going elsewhere - it's just difficult socially, and many of them are unwilling to make the effort.

One of the worst of these is family. Your brother, sister, aunt, or nephew is in the business, and your family makes it difficult not to choose them. "You simply must use your sister Margaret!" Well, if subsidizing Margaret to the tune of two points more than anyone else would get is your cup of tea. Around here, that's $8000 or so for the average transaction. You are not writing the check for the extra to Margaret directly, but you're paying her just the same.

Lest I be misunderstood here, there is nothing wrong with using friends, family, members of your social group. Please do check with them. The mistake is not in giving them a shot; it lies in giving them the only chance. That's what you call a monopoly situation, and the chances of you getting the best possible treatment are horrid. But if Aunt Marge or Uncle Bob know you're shopping around, they have more incentive to do their best work. If they know you're not, well I hate to break it to you, but the average person is looking for a bigger paycheck for the same work, and this includes friends, family, and social acquaintances, particularly because you are not the one writing the check, but you will pay for it, guaranteed. The worst mess I've ever had to clean up was caused by my client's uncle, who had been in the business twenty years, and was trying to extort just a little too much money for the deal to work.

On the other hand, when my cousin calls me out of the blue, I can cut him a deal because here is a transaction that I didn't have to spend time and money on wrestling it in the door; it walked in of its own volition. This is far and away the toughest part of any transaction, and one of the most expensive to any real estate practitioner - getting a potential client into your office. It's why the "big names" spend so much on advertising nationally, and give their folks half (or less) of the cut a smaller place will give them. (Hint: just like in financial planning or any other service, what's important is always the capabilities and conscientiousness of the individual performing the service, not the company).

So here's how you live up to the social expectations. Give them a shot, but not the only shot. If you are looking to buy and they are an agent, sign a non-exclusive buyer's agreement with them. This gives you free rein to work with other folks as well; just don't sign any exclusive agreements. Most agents, unfortunately, want to lock up the commission that your business represents and so they will present you with an exclusive agreement. The harder they argue for an exclusive agreement, the more you should avoid them. All an exclusive agreement does is lock you in with one agent. If they are a lazy twit, you either have to wait until the agreement expires, use them for your transaction anyway, or hope you can get them to voluntarily release you. There is no way for you to force them to let you go. I get search phrases like "breaking an exclusive buyer's agreement" hitting the site every day. The only two ways to break an exclusive agreement are 1) wait for it to expire, or 2) get them to voluntarily let you go. I've never heard of the latter happening. So don't sign an exclusive agreement in the first place. Sign a non-exclusive agreement. This puts all of the motivations for work on your side, where they belong. The one who finds the property you are interested in will get the commission, but they have to work for it, as your business isn't locked up.

This also gives you an out if Aunt Marge or Uncle Bob doesn't cut the mustard. You can tell anybody who gets their nose out of joint, including them, that you gave them the opportunity to earn your business, and somebody else did a better job. The other guy saved you money, the other guy found you the property you wanted, the other guy got you a better loan. You wanted to do business with them, but they didn't measure up. Case closed, and Aunt Marge or Uncle Bob will drop it if they are smart, because the more stink they raise, the more likely it is that another family member, friend, or social acquaintance will pass them by in favor of "Could you give me the name of that guy who helped you?"

The only exception to the non-exclusive buyer's agreement is if they are giving you a service that you would otherwise have to pay money for. I am not talking about Multiple Listing Service - those are free and plentiful. I'm talking about real time information not available to the general public - like daily foreclosure listings. Our office pays hundreds of dollars per month for that as a way to bring in business. It is reasonable for someone working the foreclosure market thusly to be asked to sign an exclusive agreement, because otherwise there may be no way to determine who introduced you to the property (Lawyer's Full Employment Act strikes again!)

For sellers, unfortunately, you've got to make a commitment to list with one agent. It's just the way it has to be, economically, in order to get them to commit to spending the kind of money it takes to get a good result. But you can interview more than one agent. What are they going to do to sell your property for the highest possible price? Put it in the contract when you do sign. Everybody can put it in the MLS, and during the bull housing market we had for years, where unless the property was obviously overpriced you'd get multiple offers within a week, a lot of monkeys masquerading as agents made a good living doing that and only that. That doesn't cut the mustard any more. I work more with buyers than sellers, but there are venues that sell the property, venues that bring people to open houses, venues that generate people looking for the cheap bargain (which you don't want) and venues that generate people looking for property like yours in your neighborhood (who is your ideal buyer). Especially in a major city, these are all different venues, and the agent who knows which one is which is worth more than you will pay them, and the cheap agent who doesn't is likely to cost you a lot more money than their cheap asking price saves you.

For loans, I've written about this before, but shop around, ask questions of every loan provider you interview, beware of red flags, and stick to your guns. Try and find someone to act as a backup loan provider if you can, and do the work so both loans are ready to go when you need them. If you get multiple volunteers for backup provider, that would tend to indicate that they know that the loan you're telling them about isn't real. That's the question I ask before I volunteer to put in the work of a backup provider. "Could the loan they are telling me about be real?" If the answer is no, I volunteer to act as backup. Every single time, it's been my loan the person ended up getting. Your prospective loan providers should know the market if they are competent. Make use of that knowledge. And lest you be tempted to quote something at those loan officers that is not real, it's a self-defeating strategy. Honest loan officers will tell you point blank they can't do that, while the scamsters are going to get into the spirit of the situation, by which I mean saying anything it takes, no matter how fanciful, to get you to sign up. And those who are knowledgeable about the state of the market always know what is likely real and deliverable, and what likely is not.

Caveat Emptor.

2 Bedroom House with Office on Large Lot!

General: Urban East County, 2 bedroom 1 bath. Asking price between $375,000 and $400,000. I think an offer of $360,000 net would get it sold.

Why you should be interested: Cottage on large lot with room for expansions. Quiet street in a decent neighborhood. Detached 2 car garage with finished office or crafts space above.

Selling Points: Solid two bedroom starter home with room to grow on a large lot. No Association, no Mello-Roos, just you and your property.

Why I think it's a potential bargain: You can't get properties this cheap in this neighborhood. Except for this one.

Obvious caveats: Most of it is dated to one degree or another.

Why it hasn't sold already: It's not modern or beautiful. But it does look solid, and seems to be in good condition.

If you keep it ten years and it averages only 5% annual average appreciation per year: Based upon a purchase price of $360,000, 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 $1400 per month most comparable currently available rental and investing the difference at 10% per year tax free, you would be approximately $80,000 ahead of the renter, after the expenses of selling.

Fact you should be aware of: Just that it is older.

Obvious way to enhance value or appeal of property: Paint the walls, buff the floors. If you want to do something big, add a master suite.

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

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

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

When we sold our home just over a year ago we were talked into selling for a bit more than the original offer so the person could get money back to do renovations... I objected based on percentages and stuff and my realtor and the other realtor agreed to commissions based only on the original agreed to asking price. Then I could not find any other reason to object, after all, if the loan officer was willing to loan that much money, what reason was it for me to say nay?

But now I hear it is illegal to do this? Yikes? Have you heard of this?

What should I do now?

The same thing anyone should do when they discover they may have inadvertently violated the law: Talk to a lawyer.

For all of this article, please keep in mind that I am not a lawyer. I don't even play one on TV. Not in California nor in any other state, and the laws and precedents can be different from place to place. So please double check everything with someone who is a lawyer, and if there is a conflict, follow their advice.

That said, my understanding is that it is not illegal per se for a seller to give a buyer cash back. If I hand you $500,000 cash - or something worth $500,000 to you - and you hand me back title to the property and $50,000 cash, or something worth $50,000 to me, there is absolutely nothing wrong with it. It's a free exchange, willingly agreed to by competent legal adults. No harm is done.

Where illegality does come into it is when there is another party to the transaction to whom it is not disclosed. In most transactions, there is a lender involved. That lender is loaning what is usually a very large sum of money based upon the representations which were submitted to them. To intentionally and materially falsify those representations in order to persuade a lender to make a loan they would not otherwise make is a textbook case of FRAUD. Loan fraud is, literally, a federal offense. Go to jail for a while, and be a convicted felon for the rest of your life. Whether it's done by lying (stating something that isn't true) or by omission (failure to inform the lender of relevant facts) does not matter. Furthermore, due to the fact that fraud is a felony, there's a good likelihood of adding conspiracy in there - another federal offense felony.

The potential offense here is in failing to disclose the cash back to all parties in the transaction. If the lender knows about it and issues the loan anyway, there is neither a criminal offense nor a civil tort, at least according to my best understanding.

The reason this happens is because if the cash back is disclosed to the lender, then they will treat the purchase price as being the purchase price less the cash back amount. If the purchase contract says $400,000, but the seller is giving the buyer $20,000 back, it isn't really a $400,000 purchase price, is it? Net to the seller is only $380,000. Net cost to the buyer is only $380,000. That looks like a $380,000 piece of property to me, not a $400,000 one. The lender will take the same point of view, and base all of their calculations off of a $380,000 purchase price.

What that means is that if the buyers are not putting at least $20,000 down, they are over 100 percent of the value of the property. Which means the borrowers loan amount will be reduced accordingly. In fact, as I have said elsewhere, it's better for both the buyer and the seller if they don't do this, because it is in both of their interests to use the lower purchase price.

In short, this whole charade is self-defeating if it is disclosed to the lender, as they will only lend based upon the net purchase price. If it's disclosed to the lender, I cannot think of a reason to do it, because whatever purpose you wanted to achieve with the cash back will be defeated. If the buyer wanted the cash to fix the property, they're either going to have to take it out of their down payment or, dollar for dollar, out of the cash they got back. $400,000 minus $20,000 is $380,000. So if they put $20,000 down, it's doable, but it's a 100% loan, and the net benefit they got out of their down payment is zero. Alternatively, they can just take the $20,000 cash and apply it to the purchase price, over and above the $380,000 the lender will base their loan calculations on. Net benefit to doing all of this: Zero. Furthermore, there are drawbacks for both the seller and the buyer. It actually hurts them to do this if they disclose it to the lender.

What was the purpose of that $20,000 again? If it wasn't a down payment, the buyers will need to come up with $20,000 from somewhere else. If it was a down payment, well, why not do 100% financing in the first place? I assure you that a lender to whom this is disclosed will see it this way. Why not just reduce the official sales price by $20,000, pay less in commissions, lower fees, less capital gains, and have the buyer have a lower sales price, which translates into lower property taxes in a lot of places?

Which is precisely the reason this whole thing does not get disclosed to the lender. The buyers are trying to have their cake and eat it, too. They only want to pay $380,000 for the property, and have the lenders think that they paid $400,000. In other words, a material misrepresentation of the situation in order to induce the lender to make a loan they would not otherwise have made.
In short, FRAUD.

It is mostly the buyers, their agents, and loan officers who pull this kind of nonsense. Some of them are thoroughly blatant about soliciting this kind of crime. I don't know what they're thinking, but this is not harmless, this is not minor, and it has been explained to licensees. I can only presume a willful disregard of the rules. It can be difficult for sellers to even know who the buyer's lender is going to be, and it really isn't any of their business. Nonetheless, if the lender can show that sellers were a party to the deception (side agreements aside from the main contract are pretty much proof on the face of it), they can be dragged into the mess. Actually, sellers and their agents can be dragged in quite easily, side agreement or no, but side agreements are the equivalent of a smoking gun still in your hand. So if you're going to insist upon a side agreement, also insist that it be disclosed to the lender and proof that it was disclosed to the lender. Better still to make it all a part of the main contract. Optimum is not to give or ask for cash back in the first place. It sets you up for a criminal fraud investigation, and no matter how innocent you may be in fact, I have it on good authority that they are no fun to endure. If you're a professional, it shows up in records as a complaint against your license, and I'm not even certain it comes off when you're found not culpable.

Caveat Emptor

Post Probate Property In Great Neighborhood Cheap!

General: Central San Diego, 3 bedroom 1.75 bath. Asking price between $425,000 and $450,000. I think an offer of $390,000 net would get it sold.

Why you should be interested: Quiet street in a good neighborhood. Good schools in the area, easy freeway access.

Selling Points: Basically, this is a nice entry level family home in good condition, with a usable back yard. No Association, no Mello-Roos, just you and your property.

Why I think it's a potential bargain: Everything around it is much more expensive, plus it's post probate and been on the market for a year.

Obvious caveats: Some of it is a little dated.

Why it hasn't sold already: It's not modern or beautiful. But it does look solid, and seems to be in good condition.

If you keep it ten years and it averages only 5% annual average appreciation per year: Based upon a purchase price of $390,000, the property would be worth approximately $630,000. If you held it those ten years before selling, you would net about $300,000 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 $130,000 ahead of the renter, after the expenses of selling.

Fact you should be aware of: Roof has only a shallow slope.

Obvious way to enhance value or appeal of property: Re-do the garage.

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

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

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

Mortgage and Real Estate Red Flags


This is going to be one of those occasional posts that gets expanded and reposted from time to time. This list is not exhaustive, although over time it is intended to become closer. If you have one, send it to me (danmelson at this domain name)

Any of these is sufficient reason, all by itself, not to do business with that company or person, to cancel your loan if in progress, or to go get another backup loan.

Any actual lie

Up front application fees, or sign up fees.

Up front lock fees.

Up front appraisal fees, as opposed to at the point of appraisal.

Any up front fee beyond credit report.

Requiring the originals of your documents.

Trying to sell you a Negative amortization loan, under any of its names, without explaining in detail all of the gotchas

Not locking your rate, or letting it float

On stated income or NINA loans, not giving a real idea of what the payment is going to be, and making sure you can afford it.

On full documentation or EZ documentation loans, needing to document more money than you make.

Requiring you to pay an "in house" appraiser (Who is receiving a salary)

Not allowing you to choose an appraiser if you want to.

Not allowing you to order the appraisal.

Consistently using the same phrase in response to a question. "Nothing out of your pocket" ($30,000 added to your mortgage) and "Thirty Year Loan" (note the absence of the words "fixed rate") are two that are sufficiently pervasive as to merit independent mention.

An answer to a question that is somehow similar, instead of to the question you asked. Especially if said obviously intended to distract and mollify you, or is a pat phrase you've heard them use before.

You check their calculations on a couple of calculators and the numbers are both consistent and different from what you were quoted as a payment. (Some web calculators lie, but they usually lie in slightly different ways, although note that an auto payment calculator uses different first payment assumptions).


Use of non-standard forms when standard forms are available

Asking you to sign an Exclusive Buyer's Agent Agreement before they've shown you anything.

Asking you to sign an Exclusive Buyer's Agent Agreement at all without furnishing you something special (i.e. daily foreclosures lists, or some service you would otherwise have to pay for).

Not finding out what your budget range is and sticking with it. For example, if you've got $30,000 for a down payment and closing costs, can qualify for a $270,000 loan, they shouldn't show you anything that you cannot get for $300,000 total, including all costs you need to pay.

Not finding out what you actually make, and what your current monthly obligations add up to. This lets me, as the real estate agent, know what I'm really dealing with here, even though I have no real need to know if I'm not doing the loan. In case you haven't gotten the idea, there are a lot of mortgage folks out there who may not have your best interest at heart, and "stated income" loans allow for a lot of sins. You can get offended at invasion of privacy if you want, but I'd be grateful - This is one part of the system checking another, looking out for you, when they could just grab their commission and bow out of the picture.

Promising to find houses below market value. I do my best, but so does every other agent out there. This is something nobody can guarantee, and they're usually gone before the public even has a chance.

Telling you about "money in your pocket" when you ask about closing costs


Use of non-standard forms where standard forms are available.

Excessive pressure to sign listing agreement immediately (Some pressure is normal and to be expected)

Not being upfront about their business model. I've got an article about business models in the real estate industry (there are 2 basic, and many variations). Each has situations they are best for, and situations they are not so great for. You want to know if it fits your situation.

Not running advertisements for your property. This helps them generate clients as much as it helps you sell your house.

Not holding at least one open house per month on a weekend date. Sometimes this is tough during the holiday season, but there's no excuse for the rest of the year. Especially during the summer, if they want to take a three week vacation, there should be someone else there to take up the slack. Perhaps it might be unproductive if you live in a thinly inhabited area, but anywhere within the commuting area of a major city, this is a minimum.

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

Remember how I said moths ago that I could see signs that the market might turn back this year, perhaps around the beginning of July?

That's looking to be a decent guess.

Making offers isn't quite the monopoly situation it was. Last week, I made an offer on behalf of a client, and the listing agent told me they got four offers on the property in a 24 hour period. I take those claims with a cynical mind, but my client's offer was good considering the market, and they have yet to counter. That agent is acting like somebody who does indeed have "offers to burn." If four people send offers to one of my listings, I send out four responses, whether they're rejections for hopeless low-balls or counters for everyone else. So far, it's just silence. Unless they're just going to accept one of the other offers as it sits, that's silly. An agent with more than about a week in the business isn't going to throw more money on the table without a counter from the owner.

However, the ratio of sellers to buyers is still about 30 to 1. Not as great as it was last year when the ratio hung in the 38 to 40 range for months, but buyers still have a lot more power than they had three years ago. And here's a critical difference: Properties that are properly priced to the market are drawing interest. I'm running into about two or two and a half times the number of other agents showing the same property I want to see as I was six months ago.

Condos, in particular, are starting to come back, where they were dead the last couple years. The seller to buyer ratio for condos is almost 10% lower than for detached housing. This is due, in large part, to the long delayed sub-prime lender meltdown. When you can metaphorically wave a magic wand and make it look like people with no down payment who cannot document the necessary income can afford the payment on anything they want, people are going to want single family detached homes. That's just the way it is. I lost at least half a dozen prospects that I can name to other agents because I was showing them the two bedroom condos they could really afford, while the other agents made it look like they could afford brand new four bedroom houses with negative amortization loans, often done on a stated income basis.

But now that lenders standards are in retreat, and some long anticipated legal action is starting to happen on Option ARMs, the loans people are being told about are a little less irresponsible. With most of the gonzo negative amortization 100% loans being gone, that means that agents have to sell something people can pay at least the interest on, or tell them they need a down payment. This existence of a down payment of 5% or more is black and white. People either have it or they don't. If they don't, no negative amortization loans. Since most people don't have it, and most negative amortization lenders are now limiting themselves to 80%, and most lenders don't want to stand second in line behind a negative amortization loan for some reason.

The upshot on all of this is that most folks have to make at least the interest every month, and that limits how far over their head unscrupulous agents and loan officers can go. Since it's difficult to make it look like they can afford a property three times more expensive than they should buy, now they are limited to properties no more than about forty percent more expensive than they can buy. Interest only loans are still just as available as they have been, as are short term hybrid ARMs. For people who can afford $300,000, most agents still aren't talking about the $300,000 condo - but they are talking about the $400,000 Planed Unit Development (PUD) instead of the $750,000 house.

Stated Income loans are going through most of the same things that negative amortization loans are. 100% financing has become far more difficult to pull off without a good credit score or ability to document that you make enough money - and "stated income stated asset" loans have been clamped down upon a lot harder than "stated income verified asset" loans. If you've got a down payment, a decent credit score, and money in reserve, you can still get a stated income loan. However, most folks that were buying properties fell into none of these three categories. Stated Income loans were never intended to be "anything goes." They were intended for commissioned sales folk and small business owners who really did make the money and could afford to pay their bills, but had a large number of deductions due to tax laws. With most folks having difficulty with newly tightened stated income guidelines, however, they're having to show they make enough money or go without. This means that they not only have to make the payments, but also that they are restricted to loans where they can prove they can afford the payments. In other words, if you want 100% financing, you may have no choice other than "full documentation."

All of this has consequences for sellers as well. I am going to make my computations off of top of the line A paper full documentation loans with no points, plus California property taxes, etcetera. For loans totaling $300,000 on a $300,000 condominium purchase, it will cost someone approximately $2500 per month for housing, which means they have to make $5000 per month in order to qualify, even if they have no other debts whatsoever. For a $500,000 home, the numbers are cost: $3875 and income: $7750 per month, assuming no other debt service. For someone who wants to buy a $750,000 home without a down payment, the numbers are about $5925 per month expenditure and $11,850 per month in income, assuming no other debts. For every $100 per month in debt service they have, raise the monthly income requirements by $200. How many people do you know with no car payments, no student loan payments, no credit card debt, no computer payments, no furniture payments, no payments at all? Furthermore, since Wikipedia has the median income as being $47,816 per year, or $3984 per month, the median person doesn't qualify for a $300,000 condo even if they didn't have any debt.

The farther up the price scale the property you are trying to sell is, the harder it's going to be to find a potential buyer. The upside is that people want to live in San Diego, and they will do what it takes to make it happen. The downside is that San Diego employers don't want to pay enough so that they can buy a house. You need to be realistic about how many people are competing for your property, and what their means is likely to be. To take the point of view that once you get paid for the property, it isn't your problem is not facing the entire scope of what's out there. Qualified buyers are scarce right now, if not quite so scarce as they were. Furthermore, most of the buyers at the upper end of the income range have already bought at least one property.

I think things are going to stabilize this year. Properties that are correctly priced are moving. Most of what's holding various properties on the market for months is denial on the part of sellers - trying to get more than the neighborhood will support. As a consequence, even though mean time on market is still high at 77 days, properties which are priced correctly are seeing strong activity, and even occasionally, multiple offers. Furthermore, if you're one of those that needs to sell, you are facing a financial deadline, and keeping your head in the sand isn't going to make it more likely you'll beat it. I can see two main tracks for properties out there: The ones that price correctly and get strong activity and a fairly quick sale, versus the ones that list. And sit. And eventually have to lower the asking price even lower than where it should have been to start with. The longer you wait to price correctly, the more it will cost you. In this market, just like any other.

Caveat Emptor

I have found your blog to be very informative. I was out riding my bike and rode past a house for sale. In a few minutes of Internet research I've found out a bit about it. The property is bank owned and it sounds like a property in need of repair. However the information I have found out doesn't add up.

From a real estate web site listing recent sales in the area, I found out that the property last sold for 5% less than the asking price. Apparently the sale happened in October 2006.

The house is now listed in the local MLS service, and the text of the listing leads me to believe that the house was listed in December of 2006. It seems from what I have read on your site a foreclosure takes at least 3 months, and this house apparently was back in the hands of the bank and listed two months after it sold.

The house is priced well below the market and within my budget, but that the bank got it back that quickly raises a giant red flag for me. Also, given that the MLS listing says the sale is as-is and that there are no contingencies allowed raises another red flag.

How if they don't accept contingencies do you do a home owners inspection? Pay for one before making an offer, and risk you'll be throwing the money away if the seller doesn't take your offer? Or do a home inspection after they accept your offer, and forfeit your deposit if the inspection covers up a big problem.

Actually, foreclosures are perfectly fine for a first time buyer if you've got the wherewithal to work with them.

Lender owned, which means it didn't sell at auction, is an entirely different story than buying at the auction. You can make offers with contingencies for inspection, usually for seven or ten days, and providing it's an attractive offer otherwise, the lender may very well accept. You're always risking the inspection money on any property, because if it comes out that the house is messed up, you still have to pay the inspector. For lender owned (REO) properties, you don't need to forego an inspection contingency. Financing contingencies are also very doable - I've got one in escrow now with both, and I'm working on another. If it wasn't possible, they would reject the offer out of hand, and they haven't. Disallowing an inspection contingency makes the property worth a lot less, because a lot fewer people are willing or able to handle the risks involved. If your particular property is specifically disallowing inspection contingencies, it tells me they know about a problem, and it's almost certainly a big one. It can still be worked, but get yourself a really top-notch buyer's agent. It's worth paying them (or paying them extra) yourself if you need to, because you'll make more on this property, and they will earn it, because there's a lot more liability for them on this kind of property.

If you're looking at an REO, be aware before you even step onto the property that there are going to be maintenance issues. More often than not, there are even sabotage issues. Furthermore, because the lender doesn't live there and almost certainly knows less about the property than an inspection will reveal, they are exempt from transfer disclosures. They are not for Mr. and Ms. Upper Middle Class looking for the perfect house, they are not for Mr. and Ms. Just Barely Scraping Into The Property, and they are not for Mr. and Ms. Fumblefingers, Mr. and Ms. No Time, or even Mr. and Ms. Procrastinate. But if you've got the inclination and the skill or the cash to fix it, foreclosures can be quite lucrative. Foreclosures are always a risk. But if you've got the resources to make that risk a manageable one, you can pick them up well below the price of properties with similar characteristics.

You might also want to read my article, "Why There Is Money in Fixer Properties" if you haven't already.

Caveat Emptor

I've found several of your mortgage articles very helpful, and wondered if you could help me find a way to solve the dilemma I've been presented with by a loan officer at my bank. My husband is Active Duty DELETED, and is getting out in August of this year. We've found a house we want to buy in the state we'll be moving to, but when I went to the bank I was told no lender would touch him with less than a year in the service and no promise in writing of a job in DELETED. He doesn't have any credit history, but mine is fair (I haven't seen my FICO score recently but I do believe it to be over or around 620). I can provide w2s, income tax records, rental history (never a late payment), etc, but I cannot provide proof of the future. Is it true that we're simply out of luck? Where should I turn from here? I'd be very grateful for any information you can provide to me or post on your website, so far this seems to be a unique dilemma...

You have run smack into the question at the heart of every loan: How are you going to pay the money back?

This is understandably a cause for concern for the lenders. They don't want to make loans that aren't going to be paid back, and in order to pay them back, you've got to have or be able to get money from somewhere

What they are looking for is a regular source of income, and you don't apparently have one. You're not going to keep the one you have, and you haven't got a new one.

Now there are loans for people in such situations. They're called NINA or No Ratio loans, because there is no income stated or verified, and no debt to income ratio. However, these loans have lower allowable loan to value ratios (100% financing is tough to find for NINA loans, especially now, and I always did think it was a little over the top) and the rates are higher than full documentation or stated income. Full documentation shows that you have had and are likely to keep a good stable source of income, and documents that you've made enough in the last two years. Stated Income shows that you at least have had the same stable source of income for two years, and usually that you have some money in the bank. NINA loans are driven purely off the Loan to Value situation and your credit score. You are essentially telling the bank, "Here I am! Gotta love me!" You are not providing any kind of documentation that you are able to repay the loan.

Your husband's lack of credit history and the fact that your score is only about 620 do not help. There is no evidence in your email that you are working outside the home.

Now I understand how tempting it is, especially right now, to buy a home. The two of you are getting out and looking to start your post-military life together, and you want to move right in to your new home, and start your new lives all at once.

This is, unfortunately, the kind of desire that quite often leads to disaster. Have you considered what happens if you don't get work? What if you do get it, but delayed several months? Or what if they keep promising to hire you in a few months but it just never quite happens? Meanwhile, that mortgage have to be paid, and you're not likely to be able to pay them working fast food. Meanwhile, the fact that you have this house is tying you to that location and its commuting area, where maybe you could find something that would support your family if you were able to move.

The fact is that buying real estate is something to do when you're certain you are stable enough to make those payments - as in you already have the money coming in, or solid reason to believe it will be coming in. A written offer of employment might be such reason - it isn't always. Cousin Bob saying, "Sure, we'll take you on!" isn't. Even though he's family, Cousin Bob needs to feed his own kids before he feeds you. Friends, old military buddies, former employers - I've seen more than enough examples of people who thought they had a job but didn't than you'd care to know about. You might have a job when they're willing to promise it in writing - they can be held responsible for that in court if they fail to follow through. If they haven't given you such a written guarantee, there is a reason why they haven't.

The one thing that messes up your entire financial situation, for now and for the next several years, worse than anything else is failing to pay a real estate loan on time. I have seen credit scores drop by 150 points for one thirty day late payment. If it gets to the point of a notice of default, or foreclosure, the consequences last for years. Plus you still owe the money, even though you haven't got it.

Once upon a time I wrote an article called, "When You Should Not Buy Real Estate." You fall into the third category I mention, those without a sufficiently stable income. You might also fall into the insufficient time to benefit category. As much as I like putting people into houses and such, the fact of the matter is that you buying a property right now would be very likely to mess you up financially for a very long time. Move into a rental for a little while, unpleasant as it may be. That way, if you have to change your plan, you are free to pick and leave if you need to. Having a property ties you to it and it to your wallet until it is satisfactorily disposed of, something hard to arrange on good terms right now in large portions of the country. On a $500,000 property like most around here, you are risking $500,000. With purchase money loans, there are limits on your liability and the lender's ability to get a deficiency judgment in most states. Nonetheless, to go into a house purchase with the idea of sticking the lender for the difference if it doesn't work out is at least a close cousin to fraud - and it might be fraud itself. This sort of thinking is one of the primary reasons behind the bubble in many parts of the country - and is false to boot. One way or another, you will almost certainly pay for a lender's loss. Since I'm presuming you don't want to do that, better to just not do this until you are a little more stable.

If you could afford to pay cash, this would not be a concern. But if you could afford to pay cash, the loan would not be a stumbling point. Also, some folks might ask, "what if I can make the payments off of a minimum wage job?" which is not the case anywhere in California. To be fair, this does change matters, but be careful that minimum wage jobs are obtainable in your area. If there's 26% unemployment except for four weeks per year, you may not be able to get a minimum wage job, even if you've got the time for it. Furthermore, be careful that you're not biting off more in property taxes than you can chew. California's property taxes are comparatively low. ratewise, which is one reason why clueless renters come here from other states and think, "Wow, they're only paying $4000 per year on a $400,000 property!" and think there's plenty of room to raise property taxes. But somebody making California's minimum wage of $7.25 makes $14,500 - and $4000 is over 27% of that person's gross wages. Senior citizens will lose their homes in droves if the tax rates ever rise - not to mention property values would drop like a rock, thus turning it into a self-defeating measure. Nonetheless, other states do have much lower property values - and much higher property tax rates.

Caveat Emptor

On a regular basis, I see advertisements for real estate offices that say "discount broker - full service".

This is nonsense.

A discount broker has consciously chosen a business model whose economics do not permit them to give the same service provided by a full service provider. Here's the rundown.

A discount broker's listing agreement typically calls for them to receive 1 percent of the sales price, and the "selling broker" to receive the area standard, whether it's 2.5 or 3 percent (perhaps higher in some areas). Some few will reduce the selling broker's commission if it's them.

A Full Service broker's listing agreement typically calls for both sides to get the same 2.5 to 3 percent.

So a discount broker is saving you 1.5 to 2 percent of the cost of selling your home.

But what does a selling broker or agent do?

They put your property on MLS and put a sign in the yard, of course. And when there is an offer, they serve as "go between" on the negotiations.

This is all a discount broker can afford to do. They have expenses of being in business. Rent, machinery, assistant's salary, etcetera. It's not like they get to freely spend every dollar they are paid, and you're not paying them enough that they can do more. Furthermore, their business model requires them to sell more properties than a full service broker, just to stay in service. The difference in their compensation between a $450,000 sale and a $470,000 sale is only $200. Which would you rather have - the high likelihood of a $4500 paycheck in a couple weeks, or the hope of a $4700 paycheck eventually? They're human too. They are much more likely to advise you to take the sale in the hand now even when you would likely do better to wait. Even though it would make a difference of nearly $20,000 to you (and that may double the money you actually get from the sale in many cases), it's not important to them. Full service brokers are hardly perfect either, but they tend to be at least somewhat stronger negotiators on your behalf. At least the $20,000 difference it makes to you means $500 or 600 to them.

A Full Service broker can afford not only the Multiple Listing Service and the sign in the yard, but also ads in the papers and other places that people actually see. MLS is the single best way to sell a house, but hardly the only one. Signs in the yard help me find clients and keep my fellow agents from bugging you for the listing, but rarely actually sell that house. Ads in the correct papers at the correct time are the second best way to sell the property, and full service brokers can not only afford them, but they are motivated to do them by the "carrot" of the doubled commission if they also find the buyer. Open houses also help significantly, and full service brokers and their agents have a business model which makes holding frequent open houses worthwhile and advertising them correctly a paying proposition. Furthermore, you're likely to see better offers off of these sale sources. MLS offers are more likely to be people looking to buy on the cheap, whereas advertisements and open houses target people who want to live in your neighborhood. Once you have an offer, full service types tend to be tougher negotiators. Finally, once you accept an offer, the prospect of getting a larger paycheck motivates them to work harder getting the sale consummated, including being at the property for inspectors so that you don't have to. Some discount houses do a decent job of this last, but full service do better.

Which of these alternatives is better? Well that depends upon the state of the market and your situation. In a white hot market where everything that gets listed gets four offers within three days and bidding wars break out between prospective buyers, a discount broker or agent is likely to be the way to go. If, on the other hand, the market is a much cooler one like most of the country nowadays, and it takes considerable effort to bring in any offer, or if your property has issues that make it undesirable (less 'curb appeal' than average), you're likely to want a full service broker or agent.

Your situation also plays a part. If you don't care if the property sells tomorrow, next year, or at all, a discount broker is more likely to meet your needs. After all, if you don't get a good offer, you'll just keep the property. On the other hand, if you need the property to sell fast, or if you need the offer to meet certain criteria, and most especially if it would be difficult for you to accommodate inspections yourself (for example, if you're now hundreds of miles away), a full service broker or agent is likely to be the choice for you.

I have seen many sales where paying a full service commission would have caused the seller to end up with more money in their pocket. See my article Production Metrics versus Consumer Metrics for more.

Discount Real Estate Brokers should also not be confused with Discount Mortgage Brokers. The "discount" part of a real estate broker's name usually refers only to listing agreements - people who want to sell a property. For customers who approach them as property buyers, these places usually receive the same full commission that anyone else does. There are exceptions where they rebate part or all of their commission for buyers, which should be disclosed and committed to in writing. But typically if you use them to buy, if it's 3% for the full service folks, it'll be 3% for them. Furthermore, I have directly encountered several of them who benefit from the presumption that any loans they provide will be as low cost as their real estate services, and this is far from the case. I've had direct dealings with very well known discount real estate brokerages, and their margin on the loan they got their borrower was much higher than mine - from triple to more than four times what mine would have been. My responsibility was to my clients, so I kept my mouth shut and got my clients their money for the sale of the property. But inwardly I was definitely wincing.

Caveat Emptor

Every so often I'll say something about misplaced improvements. You may be wondering what a misplaced improvement is.

Simply put, it's something that stands out above the surrounding properties so far that they pull it down. Like having a mansion in a neighborhood of shanties. Yes, it's still a gorgeous house and yes, the functionality is exactly the same, but as soon as your walk out the front door you feel like you're in a third world country.

Repeat after me: Real Estate is only worth whatever I can get someone to pay for it. Real Estate is only worth whatever I can get someone to pay for it. One more time, with feeling: Real Estate is only worth whatever I can get someone to pay for it.

Got that? Good. Now ask yourself, would you be willing to pay more for a beautiful mansion surrounded by other beautiful mansions, or would you be willing to pay more for a beautiful mansion surrounded by cardboard boxes? The vast majority of the people out there want to look out of their beautiful mansion and see other beautiful mansions. I understand that even in the areas of the world where most folks live in shanties, the mansions of the wealthy are clustered together.

Probably the most egregious example of a misplaced improvement I've ever seen was this turkey. Yes, ladies and gentlemen, a Realtor really is making fun of a property. Beautiful brand new 2000 square foot home - actually an entire development of about 30 of them - less than a quarter mile off the departure end of the main use runway at a busy general aviation airport. That airport is open 24 hours per day, 365 days per year, and it has to by the terms of the land grant. I love small planes, and I couldn't have lived there. Plus you have to drive through a white trash neighborhood to get there, and there's a freeway being built that will come within about 75 yards. I have zero idea how the developer sold most of them. There shouldn't have been a housing development there at all. If they had to put something in, they should have run a road in off the other side and put in an industrial park or something, but I know of at least two crashes in the field where this development used to be. A travel trailer hook up would have been a misplaced improvement.

Now misplaced improvements aren't always that much of a waste. Matter of fact, if a buyer isn't looking at a property for its investment value, but rather for something like housing five or six kids as cheaply as practical, they can be a good way to find a property that meets your needs less expensively than comparable properties. Why? Because everything around it drags it down, where most like properties are surrounded by other properties of comparable features. You never want to buy the best house on the block if investment is your criterion - but you might want to if you're just trying to find housing for a family of seven and you don't make two million dollars per year.

For instance, about six months ago I found a gorgeous 5 bedroom 3 bathroom property in a sixty year old business route neighborhood, surrounded by trailer parks and older offices and apartments. Some nincompoop had wasted at least $60,000 fixing it up to look like some big executive's entertainment house - but the chance of some big executive buying the property was nil. Across the street was an old office building with chunks out of the stairs, the neighbors all look lower middle class, and there's a trailer park entrance at the end of the block. So I can guarantee that the target market wasn't interested, which is too bad, because it really was a nice place. The guy was asking $80,000 above what I thought the market might actually support, and he eventually lost the property because he couldn't afford the payments on a vacant property and nobody was willing to pay what he wanted. But if he had asked what the neighborhood would support, it would have sold quick to some working family who needed somewhere for their kids to sleep. But the brand new kitchen and travertine floors were just wasted money on the owner's part. Before you improve a property, if selling for a profit is your intention, always look around at the rest of your neighborhood to see if there's anybody else with that level of improvements. If not, you're wasting your money. Don't waste your money, because I guarantee you that potential buyers are going to look around before they make an offer.

Some misplaced improvements aren't as extreme. Just a couple of weeks ago, I found a beautiful property for a couple of my clients that was nonetheless a misplaced improvement. This was beautifully refurbished 3 bedroom 1.75 bathroom home in a neighborhood where those go for $450-460 thousand. The ask was a little over 550, and let me tell you, it was gorgeous. It might have been the nicest kitchen I'd ever seen in a property of that price range, the public areas were beautiful and open, and had a nice mountain view. The bathrooms were new and extremely attractive, not to mention a downright cozy place to take baths, and the bedrooms were great, too. Everything was just wonderfully laid out, and it even had an atrium that lit up the middle of the house. The owners did everything right except one: They didn't consider the neighborhood, which really was a pretty good neighborhood, but houses in this configuration and with this square footage just weren't selling for anything like 550. I consulted an appraiser, who said that if everything was as I described, they might have been able to justify as much as 510 on the appraisal. My clients were looking for a nice place to live and entertain for the rest of their lives, and they had a down payment, so the fact that it wouldn't appraise for 100% of purchase price was not an insurmountable obstacle, like it would be to someone without much of a down payment - which is to say 90% of everyone out there looking. Furthermore, it had sat vacant for seven months with no action (typical for misplaced improvements). We put an offer in, trying to jaw it down to something not too hugely above the neighborhood, and despite all of the evidence I cited, the owners blew us off. I understand that nobody likes to take a loss, but it's not the buyer's problem if you do, just like it's none of their concern how much you might be making. Residential properties are only worth what they are worth, and whereas this one didn't have many of the usual mandatory deductions, there really is no way to make a silk purse out of a sow's ear. The neighborhood is the neighborhood, and this one wasn't Rancho Santa Fe.

Misplaced improvements can be frustrating as anything to sell. Even if you do get an offer for $550,000, when the appraisal comes in at $490,000, that's all the lender will loan on. In fact, the vast majority of lenders won't fund if the total encumbrances are more than the appraisal, so even if you are in a position to offer a seller carryback for part of the price, it's just not going to work unless the down payment is at least equal to the difference between the appraisal and purchase price. How many people do you think want to put down $60,000 of their own money just so they can go through the hassle of obtaining 100% financing, breaking the loan into a first and a second or paying PMI? How many people are even going to have $60,000 to put down if they wanted to? Vanishingly few right now. What happens to most accepted offers is they waste 30 to 60 days in "pending," and then they fall out of escrow and you are back to square one. It's just a cold hard fact that if the proposed down payment won't at least cover the difference, you almost certainly don't have a transaction.

The way appraisers find comps is not by going out five, ten, or fifteen miles to find the comparable properties. Comps almost always have to be within one mile, and lenders prefer with half a mile. Further out, the appraiser is going to have to justify picking those properties as opposed to closer ones. The character of the neighborhood has to be very similar as well as the characteristics of the properties.

Often, in the case of misplaced improvements, someone suggests appraisal fraud. By some strange coincidence, this is almost always the owner, the listing agent, or both. Find an accommodating appraiser. Except that appraisal fraud is, well, fraud. Not to mention a violation of fiduciary duty, unless the buyer is stupid enough to choose to be unrepresented, and even there a good case can be made in law that this nasty seller and their agent took advantage of this poor ignorant buyer. No. Thank. You. There are reasons why there are limits to the lengths good agents will go to to make a transaction happen, and this is one of those cases where those limits are short, sharp, and crystal clear.

So we have seem that misplaced improvements are a disaster for the seller, while being a limited opportunity for a certain class of buyer, but they are tough transactions to make happen for a listing agent, and there is no glory in them. The seller is not going to be happy with the sales price, and it's almost certainly going to take longer than everything else around it to sell. I'm brutally frank with owners of misplaced improvements, because if they don't want to listen to what I tell them, they're not going to price the property appropriately or negotiate in the proper frame of mind, both of which are elements of a failed listing. Failed listings don't do anything good for anyone, and I prefer not to be a part of them. I'm not going to get paid, and everybody's going to end up angry at everyone else, which means it's likely to cost me some future clients also. I'd rather walk away before it gets started.

Caveat Emptor

Half Acre Lot in Highly Desired Neighborhood

General: Urban East County, 4 bedroom 1 bath. Asking price between $375,000 and $400,000. I think an offer of $390,000 net would get it sold.

Why you should be interested: Half Acre lot in a highly sought after neighborhood - could conceivably be approved for a split. Most of the neighboring homes are at least $600,000 and on smaller lots

Selling Points: The value of this property is in the lot and the location.

Why I think it's a potential bargain: Half acre lots at this price are rare!

Obvious caveats: Waiting on Certificate of Compliance, and the house is old.

Why it hasn't sold already: It's not modern or beautiful. But the lot is worth the money.

If you keep it ten years and it averages only 5% annual average appreciation per year: Based upon a purchase price of $390,000, the property would be worth approximately $630,000. If you held it those ten years before selling, you would net about $300,000 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 $130,000 ahead of the renter, after the expenses of selling.

Fact you should be aware of: Lot was split 50 years ago and has not yet been certified legal.

Obvious way to enhance value or appeal of property: I'd just start over, completely replacing the house.

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

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

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

I have an adustable rate mortgage (5.875) which is set to adjust in 8/2008. My prepayment penalty I'm told expires 7/2008. My first goal is to lock in a fixed rate asap. My second goal is to cash out any equity, but not necessary. I've recently been hearing horror stories about people losing their homes over their rate adjustment. Should I refinance now and bite the bullet on the prepayment penalty? or Attempt to refinance quickly as soon as the penalty expires?


my credit score is 712. My current mortgage is 244,000.00 and homes of the same model are selling between 255 - 265,000.00. What more can you tell me?

The answer to this depends partly upon stuff I don't know, and partly upon stuff nobody knows yet.

5.875 is good enough that you probably don't want to give it away before you have to, especially since you're going to pay $5700 to $7200 in penalties. 6.25 is about where A paper 30 year fixed rate loans with no points rates are right now, so over the next year, and it will cost about another $1000 in interest between now and then, as well.

The problem is that nobody knows what rates will be like in July and August of 2008 yet. Nobody knows what your property value might be then either. Nor do I understand your local real estate market well enough to even guess (it's a long way from Southern California!).

It's going to be hard to get enough back in 15 to 16 months to pay for a pre-payment penalty. On the other hand, this could be balanced out if rates end up being much higher then, or if your equity situation is likely to deteriorate.

One thing I can tell you for certain is that there's no easy answer yet. Every answer I give is going to depend upon things nobody knows yet. If it looks like someone with leftist economic policies is going to get elected President, or someone with basically rational economic policy is looking highly probable, that's going to make a major difference in the election year financial markets right there.

Here's what I expect, as far as rates go: They're going up. I expect rates will be at least in the high sixes by then, more likely in the low sevens, at least on thirty year fixed. My guess is that 5/1 ARMs are going to be between 6 and 6.5. Take all of this with a Mega-grain of salt - I fully expected us to be in the sevens by now, and we're not.

But if we postulate a rate of 7% when your pre-payment penalty expires, that will cost you roughly $17,100 per year on $244,000. 6.25% of $250,000 (your loan with your penalty added) is roughly $15,600. You save approximately $1500 per year on your interest by refinancing now, if my guess on interest rates is correct. However, refinancing now will cost you about $7000. $7000 divided by $1500 per year is roughly 4 years 8 months after that to get your money back. I wouldn't do it. That's about six years you've got to keep your loan to break even on the cost of refinancing now, and it's conditional upon things happening that nobody knows.

Now you don't have a whole lot of equity, and if your market falls, you could be upside down, in which case you're going to have to pay your loan down in order to refinance. If there's no way you could come up with that money, that's another reason to consider refinancing now. However, you would be guaranteed to use up pretty much all of your equity by refinancing now.

In your position, I'd just sit tight. Of course that's very hard psychologically, because you are leaving yourself open to the vagaries of the market, which are not under anybody's personal control. Otherwise Bernanke would lower rates every time he wanted to refinance his own personal loans, and that's just not the way it happens, because that's not the way it works. But spending that much money now and over the next fifteen months just in case rates go up and it saves you enough money over the next six years to break even just doesn't make financial sense. Most folks don't keep their loans that long, which means you've wasted whatever portion of the sunk costs you haven't gotten back.

Just one word in closing: There is no reason for a loan officer to stick someone with a credit score over 680 with a prepayment penalty. You can choose to accept one if you want, but my experience says that most folks end up paying them, and the penalty is a lot more than you're likely to save by accepting one.

Caveat Emptor

Every day I pass by another real estate office where the agent has a big banner outside "I SOLD 101 HOMES IN 2004!"

This is what is called a production metric, and this one sounds fairly impressive at first glance, right?

The question I want to ask is how good the price was for the seller. Anybody can sell homes quickly by pricing them 10% under the market. Last year's market was a hot seller's market. In some neighborhoods, a monkey could have sold it for $20,000 over the asking price.

Is there a general "did you sell it for a good price?" metric? Not really. The best I can come up with is whether the appraiser has difficulty getting value to support the sales price so the loan can fund. If the appraisal comes in less than the sale price, the loan will be based off of the appraised value, rather than sale value, and so whereas this is always a difficult situation to be in, that your sale in in this situation says that your agent really did get you a good price. It's comparatively rare, and with the buyer's market we have now, practically non-existent.

Production metrics of this nature are easy to game. When I worked in the financial planning business, the metric used was GDC - Gross Dealer Compensation. How much your firm got paid because of your work. Problem was, it always has two components: how much business you really brought in, and how much turnover there is in your clients accounts. I know people who work at the "no load" fund houses, also. That's their metric as well.

It's a good metric to have. Firms that don't get paid enough, don't stay in business. But, as a consumer, it's not precisely the sort of metric you want your financial planner to be judged on, and neither of these components measures anything important to you. Actually, I take that back. If there's a high ratio of turnover in the client account, it's always bad. There's always the temptation to call an existing client and sell them the "hot new investment" than it is to generate new business. If I was shopping for a planner, I'd look for a low ratio of Gross Dealer Compensation to total assets under management.

Matter of fact, there really isn't a metric in the investment world to measure how good an investment person is on any objective scale. What I'd really like to know is something like the return on investment of their lowest 25 percent of clients and highest 25 percent of clients, and compare that market averages and each other. This would tell me things like "How much (of any gain or loss) is the environment of the market, and how much is them?" and "Are they giving consistent advice?" (Low spread = yes, high spread = no). And not one firm I'm aware of computes this information. Not to pull any punches, what they are all set up to reward is sales ability, not investment genius.

The same can be found in real estate. There are any number of production metrics, but none of "Did Agent A's clients get the best price?", or on the purchase side "Did Agent B's clients pay no more than they needed to?"

Nonetheless, here are a couple of other ideas. If everything I sell is bought by real estate agents acting for themselves, it's not a good sign. The average real estate agent is buying property because the price is below market. They think they can re-sell for a profit, and it's usually not a little one. They're probably not interested in the property that doesn't have immediate equity built in.

If everything I sell is back on the market within a few months for a higher price, that's also not a good sign. That also means it was probably priced below the market.

The agent I talked about at the beginning of this article? I picked up a flyer listing about a third of those sales (thirty-two). Then I went to Multiple Listing Service and did a little search. Over half (18) were back on the market within 6 months for much higher prices. Almost forty percent (12) of total number of new owners identified themselves as being owned by licensed real estate agents on the listing. Seven been subsequently resold for at least a 10% profit, closing within three months of the original sale, even in what became a softening market. Only three are still active. The rest have sold, all at a significant profit, even in this market.

So now tell me, does this agent's "101 houses sold" seem like something that would cause you to want to do business with them?

Didn't think so.

Caveat Emptor.

Lender Owned Property In Great Neighborhood Cheap!

General: Urban East County, 3 bedroom 1.5 bath. Asking price between $400,000 and $425,000. I think an offer of $390,000 net would get it sold.

Why you should be interested: Quiet street in a good neighborhood. Most of the surrounding houses are much better. Good schools in the area, easy freeway access.

Selling Points: Older home with hardwood floors and a decent size lot. Garage and detached extra room. Covered patio with spa. Tile roof.

Why I think it's a potential bargain: Everything around it is much more expensive, plus it's lender owned.

Obvious caveats: Some of it is a little dated.

Why it hasn't sold already: It's not modern or beautiful. But it does look solid.

If you keep it ten years and it averages only 5% annual average appreciation per year: Based upon a purchase price of $390,000, the property would be worth approximately $630,000. If you held it those ten years before selling, you would net about $300,000 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 $130,000 ahead of the renter, after the expenses of selling.

Fact you should be aware of: Stairs in front

Obvious way to enhance value or appeal of property: Have the floors buffed out. Fix the closet doors,

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

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

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

The Best Loans Right NOW

6.00% 30 Year fixed rate loan, 1 total point, and NO PREPAYMENT PENALTIES!. Assuming a $400,000 loan, Payment $2398, APR 6.085! 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 5.375%! Zero points and zero closing costs loans also available!

Best 5/1 Loan trade-off: 5.75% 1 total point. Assuming $400,000 loan, payment of $2334, APR 5.843%. 5/1 ARM loans available as low as 5.00! This is not an Option ARM! This is a real loan with a real payment that actually pays your loan down, and the rate is fixed for five years!

No points and zero cost loans also available!

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

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

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

100% financing a specialty.

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

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

Mortgage - Questions you must ask every provider about every loan when you are shopping. Permission is hereby granted to print this out and use it for non-commercial purposes so long as no alterations are made and copyright is preserved.

(Disclaimer: This list is trying to be as exhaustive as possible, but is likely missing some important questions. If you have one that I missed, send it to me: danmelson at this domain name)

Is there a prepayment penalty?

If so, for how long and under what terms?

What is the interest rate?

What is the amortization period?

Is there a possibility that the note will be due in full before the amortization pays it off? (Vaguely equivalent to "is there a balloon?" but a broader question)

Is the payment interest only, or principal and interest?

(if interest only) how long is it interest only, and what happens afterward?

Is there any possibility of negative amortization (the balance increasing) if I make the minimum payment? (See my post on the Negative Amortization Loan at the bottom of this article)

Is the nominal rate different from the real rate of interest I would be charged?

How long is the rate fixed for?

(If fixed for less than the full period of the loan) What is the rate based upon when it adjusts, what is the margin, and how often does it adjust?

What is the industry standard name for this loan type?

Is the rate you are quoting me based upon full documentation, stated income, NINA or EZ Doc?

(If full or EZ doc) Assuming I have other monthly payments of $X (where $X is your other monthly payments), how much monthly income do I have to document in order to qualify? (If this is more than you make, Warning!)

How many points TOTAL will I have to pay to get that rate.

How many points of origination will I be charged?

How many discount points will I have to pay?

What are the closing costs I will have to pay?

(because they are allowed to omit third party costs from all estimates and totals, you must add the answers to the next three questions to the previous question unless the provider specifically includes them)

How much will the appraisal fee be?

How much will total title charges be?

How much will the escrow fee be.

Who will my title company be?

Who will my escrow company be?

(If escrow company is not owned by title company, i.e. same name, be prepared for unknown additional title charges).

How much, total, will I be expected to pay out of my pocket?

How much, total, will be added to my mortgage balance?

With everything added to my mortgage balance, what will my payment be?

How long of a rate lock is included with this quote?

What do you need in order to lock this loan?

If I say I want this right now, will you personally guarantee this rate with those closing costs, and will you cover the difference (if any) between the quote and the actual final cost?


After you have finished talking to this person, go check out the numbers. If you have a calculator that can handle mortgage calculations, use it. If you're able to do the calculations yourself, even better. Otherwise, do a web search for payment calculators or mortgage calculators or amortization calculators, and try out a couple of different ones (because some web calculators on lenders sites are programmed to lie!). This is math - there is only one right answer! The numbers should come out the same except for rounding errors! If the difference is more than five dollars in any case, that's a red flag! (You should also make certain the reason for the difference is not operator error. For instance, automobile payment calculators assume a different first payment than mortgage calculators, but student loan calculators should be compatible with mortgages.)

Copyright © 2005 Dan Melson all rights reserved.

The other day I quoted a loan to someone, and they chose a 5/1 loan at 6 percent with .05 points of discount, and they told me the closest competition was 6.375 with more discount than that. Then when I tried to lock the loan with the lender, I discovered a transient compliance problem that prevented that lender from accepting loans from us for about a week. No biggie, I thought, I'll just go with the second best. It's not as if the competition was even close. So it became a loan that would cost about one tenth of a point of discount instead of only 5%. Difference (on a $500,000 loan): About $250. However, this particular client had opted for the Upfront Mortgage Broker Guarantee, where my compensation is a fixed amount, instead of my standard Loan Quote Guarantee, where if it's not precisely the loan I quote, I have to eat the difference. So I did the ethical thing under those circumstances, and called the client right away to let them know that the pricing was a little different. They then canceled the loan, despite having been specifically counseled about the risks of the plan they chose.

Now the loan they would have gotten was still a much better loan than the competition was offering, and I would have been legally compliant had I just waited and socked them with the difference at closing. Even the Upfront Mortgage Brokers would have accepted the facts had the client complained - if, indeed, they had even noticed. I could have kept my mouth shut and gotten a loan, and at least 95% of all loan providers would say I was stupid for not doing so.

But let's look at it through your eyes: Wouldn't you rather be told, weeks in advance, so that you know what you're really getting? So that if you so desire, you can go shopping for something better? Isn't it better than having it sprung upon you at closing? Isn't this the sign of someone you want to be doing business with?

Some people may feel it's a sign of someone who's springing a little change now in preparation for springing a bigger change later. Except that I don't have to tell you about the changes now. There is absolutely no legal requirement. The fact that your loan provider does tell you right away is a sign that they are going well past the legal requirements. The vast majority of all loan providers are pretending that thousands of dollars in fees and adjustments and even barefaced low-balls don't exist - and you're getting all angry and disappointed because someone who's delivering something thousands of dollars cheaper than the competition is telling you weeks in advance about a $250 difference between the initial quote and the numbers he's going to stand behind with a Loan Quote Guarantee that's still way less than the competition, which isn't willing to issue the guarantee even on the higher quotes?

The problem with the loan industry is that lenders can tell you about one set of numbers to get you to sign up - numbers that they know good and well they are not going to deliver - and then thirty days later when they actually have your loan ready, deliver something completely different, secure in the knowledge that they have this unbeatable advantage of you having actually given them this thirty days to get ready. Entire business plans are drawn up based upon the fact that they can lie, and conveniently "forget" to tell consumers about all of these additions to what the consumer is actually going to end up paying, and consumers will reward them by not only signing up, but signing on the dotted line when it's time.

Now, take a step back and ask yourself: Is someone who comes right back and tells you about the difference within a couple of hours playing that game? Not likely. If they give you a real loan quote guarantee based upon the revised numbers, any future games they are playing are pointless. In fact, if they tell you that the difference came about in the locking process, you can be more confident that they actually have locked your loan, itself a huge problem with the industry. If I haven't locked your loan, I can pretend that the difference isn't going to happen because the rates might go down, can't I?

When people come back right away and tell you about issues in your loan, you should become more comfortable with them, not less. The less ethical ones can pretend the issues don't exist for weeks, until they spring all these differences on you at closing while distracting you with a thousand other things so that you don't notice what you're signing. In fact, the sooner they tell you about an issue, the more likely it is they are doing their best to be honest.

Caveat Emptor

RESPA (Real Estate Settlement Procedures Act) prohibits an agent from requiring you to have other services performed by outside companies. RESPA also prohibits an agent from accepting payment (kickbacks) from third party service providers. Nonetheless, these are major problems in the real estate world.

It is an unfortunate fact that many agents care far more about the little bit of extra they get from third party service providers than they do about their fiduciary responsibility to the client who helps put potentially many thousands of dollars in your pocket.

For instance, never take a real estate agent's unsupported word about a loan officer. It happens on a routine basis that I talk to people in other parts of California where I'm not set up to be their real estate agent (kind of hard for me to show someone a property in Redding when I'm in San Diego), but thanks to the modern age, I am perfectly capable and set up to be their loan officer. Approximately one real estate agent in three completely refuses to cooperate with me as a loan officer, despite the fact that I'm getting their client a better loan than the loan officer this person wants them to use. I can have written authority for the information, and they won't give it to me. Okay, so I go through the escrow company - no big deal in most cases.

I can understand and sympathize with this attitude, if what they were worried about was my ability to do the loan at all. After all, if the loan isn't ready at the end of the escrow period, this transaction they've spent so much effort on falls apart.

So I tell them what I'm going to tell you in another essay: Have your friend do the back up loan, if you're so certain I'm full of it. If they were worried about a client's best interest, they'd sign off on that in a heartbeat. I know that's my attitude in those rare cases where I'm the agent but not the (primary) loan officer. This guy delivers, my client is very happy and has gotten a better loan and I have served my client's interests. This guy doesn't deliver, my loan is ready to go, the client doesn't lose his deposit, and I've still served my clients interest.

There is only one motivation that I can think of for what happens consistently: the agent keeps carping at my client to cancel the loan with me. Let's consider what this means.

No matter how unlikely the agent thinks it is that I'll deliver exactly that loan, with cancellation, the probability I can deliver it goes to zero. So I can now guarantee that this client to whom he has a fiduciary responsibility doesn't get the lower rate loan I was working on. Greatest possible benefit to client: zero. Downside: higher payments, higher costs, worse loan, zero leverage on other loan officer to deliver the loan he said he would.

Furthermore, no matter how good a loan officer, there's always a chance something goes astray, and for whatever reason the loan doesn't get approved. He's now exposing his client to the possibility that his friend, the loan officer, won't have a loan ready to go. If this happens, client loses house, deposit and other time and money invested. Possible benefit to client: $100 retyping fee for the appraisal saved. Possible downsides to client: no house, lose deposit, fees for appraiser, inspectors, etcetera wasted. Furthermore, the agent loses his prospective commission - several thousand dollars.

So what could cause an agent to want his client to cancel my loan? The only thing I can think of that explains the whole shenanigan is that this agent is in line for a payoff. Can I prove it? Absolutely not. Have I tried to think of alternative explanations that make sense? Many times. Maybe I'm missing something here (if so, email it to me), but I sure can't see a benefit to the client or the agent.

Here's another thing. Title and escrow companies. There are a variety of services escrow companies are supposed to provide the transaction - but title companies are actually the ones set up to provide many of these services. So the title company charges a sub escrow fee, messenger fees, etcetera for performing those services. But, they will waive those fees (not charge them) IF the escrow company in the transaction happens to be one they own.

Hey, I think, a pretty nifty way I can save my clients several hundred dollars! Makes me more valuable to them! And since kickbacks from title and escrow are illegal as well as unethical (according to RESPA and the Code of Conduct as well as good business practice, respectively) I certainly can't see a benefit to me for urging them to choose otherwise.

(And I am truly sorry to anyone reading this who works at an independent escrow company. As far as I can determine, you're just as competent as the title company escrows, and no more intrinsically expensive. But it's really hard for your company to compete when choosing your competition saves my client money that's usually about equal to the base escrow cost. Plus the fact is that it's a violation of my fiduciary duty if I don't tell them this)

You wouldn't believe the resistance I get from agents who obviously want their client to choose one particular escrow company, and one particular title company that aren't affiliated. True, it is the sellers who have the right to choose title and escrow companies. But that's the seller's right, not the seller's agents. And a failure to inform them of obvious ways to save money by choosing an escrow company that will save your clients this money is a violation of fiduciary duty.

I just finished fighting one not too long ago where the seller supposedly wanted to choose an escrow company whose name just happened to be the same as the name of the real estate office that the seller's agent worked for (I.e. X Real Estate and X Escrow company). Now it may be possible that they are unaffiliated with that real estate office, and it may be possible that they are set up to handle all of the duties that cause the title company to charge those extra fees. So my client's counter-offer included the following phrase

"Since the seller has chosen title and escrow companies unaffiliated with each other, seller is to be solely responsible for all sub escrow, messenger, and additional fees assessed by the title company above the cost of the title policy."

It even gives them an out - if the escrow company is set up to handle these services that are supposedly their responsibility, and does so that the title company doesn't charge for them, it makes no difference to either client.

This guy didn't want to present the counter to his client. He specifically asked me to drop that wording. I knew exactly what this meant, particularly in the case of the escrow company that just happened to share the name of his real estate brokerage. No evidence admissible in court, of course. But I had to threaten to have my boss call his broker with the clear intimation that my next call would be to Department of Real Estate in order just to get him to present the offer to his client. Do you think it's possible he failed to inform his client about this trivial way to save money? How likely do you think it that there was some kind of payment going on off the books? All of this is illegal.

There are two companies that provide the vast majority of all home warranties, at least in this area. I can't even name another home warranty company off the top of my head. Each of them is affiliated with a particular title company. The policies are the same, as far as I can tell. Somebody wants to know the differences, I tell them to consult an insurance expert (The expert I consulted concurred with my opinion). But one of these insurance carriers is more expensive. If I'm representing the buyer, I don't care - his coverage is going to be pretty much the same. If I'm representing the seller, I'll tell them to please consult a licensed casualty insurance agent, but B is less expensive as far as I can tell. Why then, do I keep seeing sellers who are volunteering A? I can't believe a fully informed client is volunteering to spend more money for the buyer's benefit in order to buy coverage that looks to be the same.

The long and the short of this post is that just because it's illegal under the law doesn't mean it doesn't happen. Just because that agent has a fiduciary responsibility to you under the law doesn't mean they take it seriously.

What can you do?

Well, choose an escrow company that's affiliated with your title company, or an escrow company that's affiliated with a title company, and choose that title company too. On refinances as well, do not allow your loan provider to choose title and escrow who are unaffiliated with one another (to be honest, I haven't helped buy or sell property outside of California, so have no idea how this works in an attorney state). Look for something like "X Land Title" and "X Escrow." This will save you hundreds of dollars.

Ask not just your real estate agent, but also your insurance agent about home warranty policies. Or look in the Yellow pages under Home Warranty Coverage and call around if you're selling a property. Do this BEFORE you have an offer.

And above all, don't just go with your agent's recommendation on a service provider. It's unethical, illegal, and just plain bad business practice, but that doesn't stop a certain number from having their hand out behind your back. And it's just as likely to be the highly accredited agents with years in the industry who are doing this.

Caveat Emptor.

For all the fact that I rant on about problems in out national mortgage market here in the United States, the problems are mostly on a retail level. Almost in their entirety, they have to deal with what happens when one consumer meets one provider, and I believe that they will vanish when the consumers are informed of the facts, and take the time to make rational, informed choices.

The fact is that for mortgage providers, there are strong incentives to lie to consumers. "Everybody else does it, too - how else am I going to compete?" Also, real closing costs seem high. Real closing costs are high enough that many states with so-called "predatory lending laws," limiting the amount in total charges as a percentage of the mortgage, either have already repealed them or are considering repealing them so that their residents can get loans. I can talk to people about closing costs that have been significantly reduced by contracts I have with service providers, and they'll say, "Costs seem high." Well, yes they are expensive, but they're real, and what I tell you about up front actually covers what my clients will be asked to pay. Just because we allow you to roll them into your mortgage, where you pay interest on them for a very long time, instead of the money coming out of your checking account doesn't mean you somehow didn't pay this money.

So we can take it as proven that there's an incentive for loan officers to minimize costs of their loan in conversation with you. Many will tell you anything it takes to get you to sign up with them, do anything they can to force you to stay with them (signing fees or lock fees up front are common, and THE BIGGEST RED FLAG I KNOW, and requiring you to give them original documents is almost as common and almost as large). They will penalize you out of spite if you decide you don't want their loan.

From almost the first moment a consumer talks to some mortgage providers, they are lied to. The fact is that as long as the rate that they quote you is available, the providers won't be held responsible if you don't get it. If you ask them what their rate is on a 30 year fixed rate mortgage without points and they reply with a the rate that's available on a 30 year loan that's fixed for one month at a time with five points, that's actually legal. They can sign you up for the former, deliver the latter 30 days later, and with rare exceptions that they are adept at avoiding, not get in legal trouble. They can tell you all about a loan that's based upon completely different qualifications than the ones you possess, in order to get you to sign up. And many loan officers, from the largest, "most reputable" banks on down to the smallest brokers working out of their home, make a habit of it. The examples I give above may be more extreme than usually happens, but it's a matter of degree, not kind, and I have seen every single rotten trick that I tell you about, pulled on prospective clients by other loan officers in the most extreme way I talk about. Furthermore, blatantly unethical is still blatantly unethical, whether they're stealing multiple tens of thousands of dollars from you, or "just a few thousand between friends." If you found out you were victimized by a Nigerian 419 scam, I'm sure you'd feel much better to find out that you were only taken for $3000, where it could have been $30,000, right? This is no different. No, let me take that back - it's worse. If the loan provider were honest, your patronage would still have put a lot of money in their wallets, and they backstab you to get more?

The first thing to keep in mind is that all of the incentives are aligned for them to tell you ANYTHING in order to get you to sign up with them. The fact is, many people, once they sign the initial papers, consider themselves committed to that provider, and won't switch no matter what. At the end of the process, many loan providers are adept at hiding the crucial things you should study carefully in amongst the sometimes dozens of pieces of trivial paper that you have to sign. A large portion of people victimized in this way never notice that the loan delivered had three points more than the loan they signed you up for. A few more only realize it weeks later when they get a statement loan balance is much higher than they thought, and it's too late to do anything about it. And of those people who do notice that something is amiss when they're actually signing the final documents, eight to nine out of ten will cave in and sign. They're tired of the whole process, all they have to do to have it be over is sign right there on the dotted line. And if it's a purchase, the consumers are under a deadline. It's the thirty-ninth day of a thirty day escrow, and if they don't sign these loan documents right now, they not only don't get the house, they also lose their deposit and the extra money they've been paying to keep the escrow open while the loan officer got his (or her) stuff together and decided exactly how much in extra charges to stick them for. The leverage available to the consumer in such a situation is Zero. Zilch. Zip. Nada.

I'm going to make what seems like a heretical suggestion here. This is truly radical. The resistance in some quarters (particularly loan officers) to this suggestion is enormous. I can already hear howls of outrage already from loan officers and their bosses. Furthermore, I can hear millions of consumers griping about the paperwork involved already, and I haven't even said it yet - except to fewer than a dozen clients who took this advice and are forever grateful to me.

Apply for a back-up loan.

It isn't precisely a walk in the park to do the extra paperwork, I'll admit. But it isn't thirty years in purgatory either. There are issues to be aware of (most notable being the appraisal, about which more in another column), and extra charges to put up with from the appraiser, escrow and title companies. $100 to $200 if you handle it right, $500 or a little more if you don't. But this is likely the most cost effective insurance policy a consumer can buy today, and I'm going to harp on it until something changes this fact

You see:

Every so often I encounter a client who I'm certain has been lied to, and believes every word of it. I know what rates really are available, and at what cost. And this person has been quoted something where, if it were true, that loan officer not only isn't going to make money but is actually going to pay hundreds or thousands of dollars of their own money in order to get it for the client. Unless John or Jenny Consumer is a close relative or the loan officer literally owes them their life, it doesn't take a genius to figure out that that's not going to happen. (Some of the worst taking advantage of someone that I've observed on the part of loan officers has been from Uncle Bob, the first cousin they grew up with, or even Sister Sue, but I digress). So every once in a while, I volunteer to act as a back up loan. They cooperate with me for the paperwork, and I will do the work, knowing full well that if their primary loan goes through as advertised, it's all a waste of my time, effort, and money.

Every single time it's been my loan that they ended up getting.

Furthermore, there have been a lot of other situations where I wasn't 100 percent sure - the rate existed, and it was possible the loan officer might deliver something similar if they were willing to settle for a lot less compensation than most loan officers, and so I didn't make the offer, and they came back to me weeks later with "Can you still do that loan you talked about?" (The answer to this is ALWAYS no. Rates at every bank vary daily, and often within a day - even the sub prime lenders that publish rate books good for months have adjustments that change daily. This is part of the importance of a lock. But usually I can do something similar, and sometimes better if the rates have gone down).

Most consumers do not realize that there is not necessarily any correlation at all between the loan you sign an application for and the loan that gets delivered with the approved documents ready for a notarized signature. It's completely dependent upon the good will and good faith of that particular loan officer and the company they represent. Some are completely honest. Some are looking for extra bits and pieces of cash to pick up around the edges. And some will take the odd arm and leg from you if they figure they have the opportunity. Even those few companies that do guarantee their rates and closing costs up front are difficult to collect from if they should be stretching the truth. If I had a dollar for every time I told somebody that I didn't believe a rate was real and they responded, "I've got the paperwork on it," as if that settled the question (or made any difference at all), I would have quite a few dollars. Oh, most of the time from most companies, if they sign you up for a thirty year fixed rate mortgage, they will actually deliver a thirty year fixed rate mortgage, and the rate will generally be about comparable, albeit with two points and $2000 in extra closing costs they somehow forgot to mention (Quoth the loan officer: "Clumsy me!"). But until then, they'll be throwing around all kinds of rates on all kinds of loans just to get you to call, to come in, or sit down and talk. Once that happens, they are confident that their A salesmen (see my essay on A salesmen and B salesmen) will get you signed up.

If you have a back up loan, you've got something else waiting to go. Another arrow in your quiver. Plan B. Your fallback position is defended. You're not going to lose the house and the deposit and the extra money to prolong escrow if you don't sign these papers right now. You're not going to have to choose between completely missing the lowest rates available since your grandparents were children and are now unavailable and paying $6000 more than you were told for your refinance. You're not hanging out there all alone at the end of the process after discovering that your trust was completely misplaced Here you have a solid, bona fide alternative. Imagine yourself with the ability to say, "No, I'll just sign the other papers instead." You'd be amazed at the leverage this gives you, with both companies if need be.

If you want to watch someone experience a truly amazing level of discomfort, tell your average loan officer or real estate agent that you're signing up for a back up loan with someone else. Most of them will say literally anything and do their absolute best to talk you out of it. I'll admit, even I would be momentarily nonplussed. I would hope that I would respond with "Okay. How do you want to handle the appraisal?" (assuming that it hadn't already been done) secure in the knowledge that I actually intend to deliver the loan I said on precisely those terms. You see, given the circumstances, I don't think you're doing anything wrong. If you asked me, I'd have to agree you were simply being prudent. Because until I actually put the final documents in front of you for your signature, there literally is no way for me to prove that I intend to deliver that loan on those terms. (There are a lot of red flags that if a consumer runs across them mean the loan officer isn't going to deliver the loan promised, but a competent loan officer can conceal them. There's also one thing that happens on every loan that looks like a big red flag, but isn't one at all). There's a lot of paper I can put in front of you that makes it look like I intend to deliver the loan I promised. None of it actually means anything in the way of a guarantee. At the present time, the only form or piece of paperwork that a loan officer cannot play games with is a form called the HUD-1 - and that doesn't come until the very end of the process. So until then, what you're really relying upon is the loan officer's good will to deliver the loan they signed you up for, on the terms you signed up for. Some fully intend to deliver the exact terms of every loan, and some will tell you anything to get you to sign up. Guess which the short-term dynamics of the marketplace favor. Here's a hint: If the loan officer can't get you to sign up for a loan, there's an absolute gold-plated guarantee they won't make anything.

If you shop multiple alternatives like you should for a mortgage, it's quite likely somebody is going to tell you that the best rate you've been quoted doesn't really exist, at least not at the level of closing costs indicated. That's your perfect opening. Ask them "So will you volunteer to be my back up loan?" They're going to try to talk you into going with them, of course, and forgetting that other guy, not to mention all this heretical, unheard-of, ridiculous nonsense about back up loans. Disregarding the fact that a back-up loan gives you leverage over them, a way to force them to actually deliver what you sign up for or something similar, they want you to put money in their pocket and not the other loan officer's.

Not too long ago, I had one of my clients tell me that somebody had told her I wouldn't be making anything if I delivered the loan I promised. "Okay," I thought, "She has a fair enough concern. There's no way for her to know I actually intend to deliver this loan, and certainly no way real way to prove it until the HUD 1 is ready at signing. Just because it's me doesn't mean anything to her until I've actually got the track record of delivering what I quote." Keeping this in mind, I told her something consistent with what I'm telling you right now. Offer to do the loan documents to make the other guy her backup if he was that certain - if he was wrong, the only cost would be that his work would be uncompensated, something loan officers get used to, and if he was right, he'd be right there ready to close his loan and get paid. (The other loan officer declined. She ended up with my loan - on exactly the terms quoted at time of lock).

Indeed, in my experience, it is more likely that the person who tells you something isn't real may well be telling you the truth. Getting angry at them is about like getting angry at someone who's trying to prevent you from being conned. The constructive response is to make them your back up loan. This doesn't mean that the person who gave you the best quote necessarily doesn't intend to deliver. They could just be comfortable making less per loan than the competition. And this doesn't mean you shouldn't get back to the guy who gave you the low quote with some pretty pointed questions, including the information that you're signing up for a back-up loan. Make the calls and stick to your guns. Maybe you'll end up signing up with the second guy as a primary and find a different provider for your back up. It'll depend upon factors I can't see from here. But find the back uploan, if you can. If you can't, it likely means that the guy who quotes you the lowest rate is quoting you something that at least exists, and he could potentially deliver if he actually wants to. But there is no way to prove he wants to. Which is precisely the reason you need the backup.

Word to the wise: Do follow up on both loans. Sign the application documents for both loan officers; provide your copies to both of them. And make certain, to the extent you can, that both loan officers are actually doing their work. The backup loan is useless as leverage if it's not actually ready to go at about the same time as the primary. (This is one indicator as to which of the two loan officers knows what they're doing. It has happened that on the last day to sign and still fund within deadline, I had my back-up loan ready to go, and the primary loan officer didn't have theirs ready despite a head start. So I suppose I can't prove the other loan wasn't real - but it sure wasn't ready on time, and that's unreal enough to be another reason why you want to apply for a back up loan!

Caveat Emptor

The scope of the problems that exist in the United States Mortgage market are huge. Enormously, mind-bogglingly, "How Big Is Space?" type huge. Yet, the problems are almost entirely on a retail level, when one provider works with one consumer. The system works, and it works extremely well. Consider:

Most consumers in Europe or any other country in the world would trade their loans for yours in a heartbeat. Rates there are typically around nine percent or so. Here, that's a ratty sub-prime rate. Mexican rates start at about fourteen percent. Hard money lenders here can sometimes do better than that.

No matter where you are in the United States, you have ready access to home loan capital. It's considered almost a one of our inalienable rights. Due to our secondary markets, as long as you can meet some pretty basic guidelines, you can find somebody eager to lend to you. You can find very long mortgage terms and very short terms. You can find loans without prepayment penalties, and you can choose to get a lower rate by taking a prepayment penalty. You may end up with something that's not as good as someone else if their situation is better, and the lender wants more money to compensate them for the risk of your loan, but even so, the rates here are better than almost anywhere else in the world.

Consumer protections are also better here than almost anywhere else in the world. There are federal laws that give you time to call off a transaction if you change your mind, disclosure requirements, consumer protections against builders with teeth in them, and a tort system that, if it does go overboard some times, still gives you an excellent chance at recovering what unethical people took from you. Many states (California, for instance) go well beyond mandatory federal consumer protections.

So keep this in mind when you see me ranting on and on about the problems with our financial markets here. Consider a capital market willing to loan the average person several years worth of wages. I can get a family making $6000 per month a loan for nearly $400,000 on an A paper 30 year fixed rate basis - most expensive loan there is in the most favorable, hardest to qualify for loan market - no surprises, no prepayment penalties, no "gotchas!" of any kind, and I can do it without hiding or shading the truth in the least. That's more than every dollar they will make for the next five years, and this family is every bit as chased after as the richest person in the world (more actually, because there are more of them). When you stop and think about it, that's a pretty wonderful situation. For all of the rants I make, the unethical things that happen, and the problems that exist in our capital markets, they are pretty damned good, and have chosen a set of tradeoffs that appears to be working better than anywhere else in the world, at any other time in history.

Caveat Emptor

The easy, general rule is that legitimate expenses all have easily understood explanations in plain english, they are all for specific services, and if they are performed by third parties, there are associated invoices or receipts that you can see.

Let's haul out the Mortgage Loan Disclosure Statement, and go right down them line by line. Now, to be certain, it's the HUD 1 form that's really definitive, but if it's not on the earlier form it shouldn't be on the HUD 1.

Origination is not a junk fee. It can be excessive, but it is a real fee to pay a real service. Relating to this is Yield Spread on the HUD 1, which is what the lender will pay the broker for a loan on given terms. Origination plus yield spread plus line 808 (Mortgage Broker Commission) is what the loan provider makes if they are a broker. If they're a lender, they make a lot more, and they can hide it more easily. Yield Spread and Origination and Broker's Commission are disclosed on the HUD 1, while the price on the secondary market is not disclosed anywhere, and if you're talking to a direct lender, they don't have to disclose Origination or Yield Spread because there (usually) isn't any; they are paid directly off the premium the loan sells for in the secondary market. This is why I keep telling people to shop for loans based upon the terms to you. If you evaluate it on the basis of loan provider's compensation, a broker who has to disclose compensation of $4000 is going to look like a worse bargain that the direct lender who does not apparently make anything but turns around and sells your loan for a $25,000 premium. In this example, the broker's loan is likely to be about a point and a half to two points cheaper to you, but if you evaluate it on the basis of who has to tell you how much they make, you lose.

Loan Discount Fee is the fee you pay in order to get an interest rate lower than you would otherwise be offered. It is not junk, but you probably don't want to pay it, as most folks never recover the money they pay to get the lower rate via the lower payments and interest rate charges. I never pay discount points for anything except a 30 year fixed rate loan that I'm going to keep at least ten years.

Appraisal Fee is not junk. There is an appraiser who needs to get paid for doing the appraisal. Many times this gets marked PFC on the MLDS/GFE, to make it look like a given loan provider is cheaper than they are. Make no mistake, there's going to be a figure in the range of $400 associated with it eventually, but because it's performed by a third party, the loan provider can (and often does) pretend it doesn't exist as part of the charges until you have to pay it.

Credit Report is not junk. It's not free to run credit, you know.

Lender's Inspection Fee is usually (not always) junk. You're paying the appraiser. If you're smart, you're paying a building inspector before you buy, and the lender usually makes you do it even if you don't want to. Every once in a while, there's a home with a documented pest or structural problem that the owner wants to refinance, and that's where this comes in as non-junk.

Mortgage Broker Commission/Fee: Is all a part of how the broker gets paid. Around here it's origination and yield spread, but this could be part of what a broker gets paid. Origination plus Yield Spread plus this line is the total of what they get paid. If these are larger at closing than when you signed up, that's par for the course most places, unless they guaranteed their fees up front in writing. I do it. I know one other company that does it. Those who are members of Upfront Mortgage Brokers guarantee the total of the items that are their fees, but not the rest of the form. For anyone else, they can and most will change the numbers on these forms within very broad limits (and to illustrate with an example someone recently brought into my office, the difference between one quarter of a point and three points on a $450,000 loan is over $12,000).

Tax Service Fee is not junk, unfortunately.

Processing fee is not junk but it may be negotiable. When it's imposed by the lender, it's not. When it's imposed by the broker, it's to pay the loan processor, which may be negotiated sometimes. It is a real fee, however.

Underwriting fee is real. Lenders charge it to cover paying the underwriters.

Wire Transfer Fee is real, because it costs money to wire money. If you don't need it, don't get it.

Prepaid Interest (line 901) is definitely not junk. This is interest, exactly the same as you're going to pay every month of your loan.

Mortgage Insurance Premium is not junk but is avoidable.

Hazard Insurance premiums are not junk, either. This money is to put a policy of homeowner's insurance (or renew an existing policy) on the property.

County property taxes are not junk, either. Rats. If you buy during certain periods of the year (e.g. April through June in California), you'll need to reimburse your seller for property taxes they already paid.

VA Funding fee is charged by the VA on VA loans only. Not junk, but if it's not VA, it doesn't have this. As I remember, if you're 10% or more disabled this can get waived.

Reserves deposited with lender are not junk, either. They will be used to pay your fees as they become due.

Title charges: Settlement or Closing Escrow Fee is a real charge to pay the escrow company. Like Appraisal fee, this is often marked PFC, but something like $500 plus $1 per thousand dollars is common.

Document Preparation Fee is mostly real, and actually the lenders do most of it these days. When the title or escrow company need to do it, they will charge fairly steep rates (I've seen $200 for a single sheet document), but you are kind of a captive audience unless you discuss it beforehand.

Notary Fee is to pay the Notary. It's real. It often falls into the PFC trap, previously discussed for Appraisals and Escrow, but you really do need this stuff notarized. Sometimes you can save some money by finding a less expensive notary, but this can bring up other issues, like getting everyone to the same place at the same time.

Title Insurance is real. If it's a purchase, there will actually be two policies of title insurance purchased, one for the new owner and one for the lender. This insures against unknown defects in the title of your property, and yes, title claims happen every day. Lenders won't lend without one. Title insurance is another one of those third party fees that gets marked PFC so that less scrupulous loan officers can appear to be less expensive than their competition.

I'm going to mention subescrow fees here, even though they aren't preset onto the form, and are not only junk but also avoidable if your agent did their job. The title company charges them because they are usually asked to do work that is, properly speaking, the realm of the escrow company. But if you choose a title company and escrow firm with common ownership, they will likely be waived.

Government Recording and Transfer Charges are not junk. They are charged by the county, and they are not avoidable, nor should you want to. Recording fees and tax stamps (if applicable) are just part of the cost of doing business. Beware of one provider pretending it doesn't exist while another honestly discloses it.

Additional Settlement Charges. Pest Inspection is the only one on the form, and it is not junk. You want a pest inspection.

Now, you'll notice that of the permanently etched items on the form, there's not a lot of junk, but everybody keeps talking about high junk fees. What are these, and where are they?

Well, some of the things that people talk about as junk fees aren't junk fees. These are fees like Appraisal fee, escrow, credit report, notary, etcetera. These are, incidentally, half or more of the closing costs for most loans. They may have been hidden from you on the initial form, but they're not junk. They are essential parts of the process, and if you don't see explicit dollar values associated with them, somebody is trying to lie about their fees by not telling you about all of them.

Nonetheless things that really are junk fees are a real problem, but the reason they're not among those listed on the form is that the items listed on the form are mostly real. It's the extra stuff that gets written into the extra lines that you've got to watch out for. It is fine and legitimate for a loan officer to write "Total of lenders fees $995" or whatever it is. On the HUD 1, these should be broken out into separate charges, but this way the loan officer only has to remember one number. As long as they add up correctly, no harm and no foul, and it doesn't make any difference to you whether it's underwriting or spa visits for the CEO, it's part of doing business with that lender. What is probably not legitimate is to start writing all kinds of other fees. Miscellaneous fees. Packaging fees. Marketing fees. Legitimate Messenger fees should be something you know about because you need them at the time they happen. But the majority of messenger fees are the title/escrow company trying to get you to pay for daily courier runs that happen anyway. If you choose the right title/escrow combination, you should be able to avoid them in most cases.

It is also a common misconception that all junk fees are lenders junk fees. I don't impose junk fees on my clients, but even coming into situations other loan officers have left behind, title companies and escrow companies, in general, appear to impose about an equal amount in junk fees with most loan providers.

Caveat Emptor.

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From an email:

I was in the process of buying and selling the house when we saw a FSBO house we liked was for sale. But sale fell through, which is a good thing anyway because of contigency on our house. But I also suspected it failed ecause the seller refuses to pay commission to our buyer agent.

My question is that this real estate agent that would represent us as a listing agent is also a buyers agent. However, I had another friend look into the contract and the buyer's agent agreement is valid until December 31, 2005. So that means anytime we find a house, he will be paid? We do the work to find a house and he gets paid? It didn't strike to me as ethical or fair. It will simply takes us off the real estate market until January 1, 2006 when we can start all over with a clean slate. Correct?

We don't think it should've been in effect until December 31. It should be in effect only for that FSBO house we liked, and if the deal falls through, then his job as a buyer's agent also stops.

Am I dealing with a greedy real estate agent or is this typical?

Can I have one agent to sell our house and another agent that represents us to buy a house?

This depends upon the nature of the agreement you signed with him. I use non-exclusive buyer's agreements, which basically say that if I introduce you to the house, then I get paid when you buy it. Others use exclusive buyer's agreements, where they get paid no matter who finds the house.

If I have an exclusive buyer's agreement with you, then I am going to get paid on any house you buy. If I have an non-exclusive agreement, I will only get paid if I introduce you to the house, and you may have any number of non-exclusive agreements in effect as long as you are careful to inform each agent you are working with that you have previously been introduced to a given property, and therefore, any commission that takes place will be paid to the other agent. All of the forms used by California Association of Realtors state that you will pay a commission to the agent if the seller won't, so an agent has comparatively little stake in which house you buy, as long as you buy one through them. This gives them the largest possible incentive to work on your behalf, without binding you to one particular agent who rather be working with another client who came along with a bigger budget, and therefore a bigger commission in the offing. When looking for homes to show, ethical agents won't seek out a For Sale By Owner (FSBO) for reasons I go into near the bottom of this article (basically, protecting your pocketbook), but these do not apply if you, the client, choose to make an offer on a FSBO.

I suspect that you signed an Exclusive Buyer's Agent Contract with him, something I would not do unless he's providing you with lists of foreclosures or something. Once such a thing is signed, that agent is going to get paid no matter what house you buy during the agreed upon period. I would never agree to either a listing or buyer's agents period longer than six months. This gives the agent plenty of time to sell your house or find you one. So if the agreed upon expiration is December 31, 2005, then if you buy before then, that agent will be paid - out of your pocket, if not the seller's.

There are two competing factors here. One is your desire not to pay for services not provided for this particular transaction, versus the agents desire to get paid if they actually do the work anyway. If they serve as your negotiating agent, or help expedite the transaction by providing services, they are ethically entitled to be paid whether or not they introduced you to the property. On the other hand, if all they do is obstruct, there is neither a legal nor an ethical reason why they should be paid. Depending upon the nature of their obstruction and how much it cost you, you may wish to contact an attorney to recover, or your state's Department of Real Estate

Sad to say, there are agents out there looking to line their own pockets in any way they can. A better agent wants to get paid, but realizes they will make an excellent living - better in the long term - by putting your interests first. Without more evidence, I cannot say for certain, but it appears at first glance that this agent had you sign an exclusive buyer's agent agreement in order to represent you in a transaction you found. I am not aware of any regulation prohibiting this, but it does seem like it's excessive from a neutral viewpoint. It is probably not voidable, however.

There are standard California Association of Realtors (CAR) forms for both exclusive and non-exclusive buyer's agents agreements. Look up at the title of your copy. If it says "Exclusive", you are stuck with this person. If it says "Non-exclusive" you may do business with anyone you please, as it applies only to those properties this particular agent works on. Of course, many agents and brokers use non-standard forms for this, as the standard CAR forms are readable and understandable by anybody. If they want to throw curves, non-standard forms are one of the best ways to do it.

As to whether you are dealing with a greedy agent or if this is typical, the truth lies somewhere in the middle. As in all sales occupations, the idea of locking up your business creates powerful motivations for them to have you sign exclusive agreements. There are nonetheless, people such as myself who feel that if I am not helping you, I don't deserve to be paid, and let someone else have a shot. But if I've got an exclusive agreement with you, I should be providing daily foreclosure lists, copies of all new listings, or at least something that goes above and beyond sitting on my hands.

Many agents want you to sign an exclusive buyer's agent agreement before they do anything else. Unless you're getting something special out of it, you shouldn't sign one at all. Offer to sign a non-exclusive buyer's agent agreement - that way you have leverage over them, not them over you. They are motivated to work for you and find you a property that is attractive to you at a price you want to pay, because if they don't, someone else will. Even the best agent can't find stuff that doesn't exist, like a 3 bedroom home in La Jolla for $250,000, but if it does exist I'm going to work to find it first, and I will get paid for it because our agreement says I will get paid if I introduce you to it. If you have signed an exclusive agreement, there is no particular hurry for them to help you.

Finally, listing agreements for sale are (in general) individual agreements for a particular piece of property for a particular period of time. As long as there is no more than one listing agreement per property in effect at a time, you can have any number of different agents for sales, even if you have signed an exclusive buyer's agreement for purchases.

Please let me know if this does or does not answer all of your questions.

Housing Bubble Death Trap

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That was the wording of a search engine hit I got. It's not literally a death trap, of course, only much financial pain. But the hyperbole is forgivable in today's modern society and the state of the current market.

Other people may have other definitions of "housing bubble death trap," but when I'm talking about stuff like that, I'm talking about someone who bought too much house with an unstable (or insufficiently stable) loan.

I just picked a couple random streets in older lower middle class neighborhoods, and looked back a couple of years. I found a couple of homes that have sold twice or are on the market again.

A 3 bedroom home sold for $487,000 at the end of last year. It's back on the market now for $425,000. A condo sold for $285,000 at the end of 2004, and again just recently for $265,000.

Now just in case you don't understand, the owner doesn't get the full sale price, but they paid the previous sale price to buy it. Usual seller's expenses run about seven percent or so. So for the 3 bedroom home, the owner is only going to get about $395,000 to pay it off, even if they get full asking price. For the condo, the owner only got about $246,000.

Now, let's consider the sales involved. Either their down payment when they bought the home will cover it, or it won't. If it does, the homeowner is out about $92,000 in the first case, about $39,000 in the second. This doesn't include any prepayment penalties there may be or negative amortization it may have undergone, not to mention the cost of any payments they may have missed, etcetera, etcetera. There's always a reason people sell for a loss, and it's usually because they have no choice. They can't make the payments (and never could) or they have been transferred, have to get housing elsewhere, and can't make the payments. And what if the down payment won't cover the deficit? Well, at the end of the year they are likely to get a 1099 form that says they got income from forgiveness of debts. As I understand it, this is ordinary income, and it can knock you up to higher tax brackets, both federal and state, if your state has state income tax.

So why didn't the folks just refinance into something stable, you ask? They couldn't afford the payments on a stable loan. Furthermore, they couldn't refinance due to their situation. If you bought with anything close to 100% financing, and you lose $55,000 of value, well, banks don't like lending money for more than the property is worth. There's no security in it. Now there are 125% loans out there, but the rate is high and the terms are ugly. If you can't afford the rate at 100 percent, or 95 percent of value, you certainly can't afford the rate for over 100 percent. There are only two times that the value of a property means anything. One is when you buy or sell, and the value is whatever you paid for it, or your buyer pays. The other, alas, is when you refinance, and if you owe $480,000 on the property when similar properties are selling for $425,000, the odds of you getting a better loan with a lower payment are essentially non-existent.

Now if the folks are in a stable loan, and can make the real payments, it doesn't really matter what the property is worth right now. You're doing fine, whether you refinance or not. Refinancing might put you into a better situation, but if you can't refi, you're still doing okay. Yes, the prices are down and they're likely to go down more. It just doesn't matter if you don't intend to sell and don't need to refinance. Your cash flow is what it is, and if you really were okay with that to start with and the loan is stable, you're likely okay with it now. If you got a loan that was stable for three or five years long enough ago to worry about loan adjustment now (or soon), you've likely got plenty of equity in the property now. If, on the other hand, you did a 2/28 interest only a year and a half ago, then you're potentially looking at a payment adjustment in the next few months that's suddenly two percent higher and fully amortized, which could be thirty or forty percent difference in the payments. Ouch. Out of such scenarios are losing a property to foreclosure constructed, with consequences even worse than the ones I talk about above. Just the act of lender filing a Notice of Default usually adds thousands of dollars to what you owe, never mind any payments you may have missed or been late.

This then, is what I call the Housing Bubble Death Trap. People who bought too much house with unstable loans, then had the market recede a little on them. Now they are upside down (owe more on the property than it is worth) with a loan they cannot refinance and cannot afford, and they can't sell for as much money as they paid.

What are the loans to watch out for if you're buying. Anything like stated income, where you're not documenting that you make enough to qualify for the loan. Stated Income has legitimate usages, mostly for small business folk and those paid on commission, but should not be used nearly so often as it has been, of late. For all the people who have claimed otherwise (and used them for such), I have never seen a situation where I'd recommend any kind of negative amortization loan for the purchase of a property that you intend to live in. Stated Income Negative Amortization loans should scream out to anyone "WARNING, WILL ROBINSON! DANGER! DANGER! DANGER!" Short term (2 year) interest only loans are less clear-cut, but often a bad idea. These are sub-prime loans. I did a lot of 2/28 loans at six percent a couple of years back. They were intended as short term loans until folks' credit improved, and that's the way I explained them, emphasizing that fact that they have to make certain their credit score actually improves during those two years. They're going to be around 8 percent the first six months they adjust, and a $300,000 6 percent interest only has a payment of $1500 per month. If it adjusts to 8 percent and starts amortizing with 28 years left to go, that's a payment of $2240. I have a firm rule of no prepayment penalties longer than the fixed period of the loan, but I'm definitely the exception rather than the rule there among loan officers. If you were paying principal and interest all along, like most of my clients, you've got some breathing room (equity) in your property and the "payment shock" won't be nearly so bad, not to mention that if your score actually went up, you likely qualify A paper now.

Three year (or longer) fixed rate A paper probably gives you enough breathing room in all but the worst of all market collapses, and I prefer at least five, with thirty year fixed actually being my favorite loan right now, due to the fact that depending upon the lender and the client, I may actually be able to get them cheaper than anything else. This, however, is a short term phenomenon of the moment, due to the yield curve being inverted, and once it straightens out, I'll be doing more hybrid ARMs again.

Caveat Emptor

From an email:

I was wondering if you could tell me whether the following ways to save on interest are actually possible. If they are what are the penalties typically associated with these suggestions. I know you have mentioned a pre-payment penalty but what amount is reasonable?

1) Pay a certain amount over your monthly mortgage payment to pay your mortgage off sooner, pay more in principle, and to save on interest. Example: Your minimum monthly payment is $2000 so you pay $2200 a month instead.

2) Pay your mortgage twice a month so that more principle is paid off before interest catches up. Another nice thing about this is that most people are paid twice a month.


Prepayment penalties are something that is associated with the loan your loan officer chooses for you when you sign up. They become set in stone when the documents are signed, the loan is funded and the documents are recorded.

Sad to say, only a very small minority of clients ask about pre-payment penalties at sign up, and judging from my experience with people at a later time, most people either cannot spot it in the documents (there should be a section entitled something like "Pre-Payment" or "Borrower's Right to Pre-Pay". On the other hand, you need to read the whole Note that you're signing enough to understand what every piece says).

As I've said in this article, pre-payment penalties are a function of the market you're shopping in. Not necessarily the best market you can shop in, but most loan officers are going to looking to make money, not necessarily to get you the loan that's really the best possible loan. Pre-payment penalties add to what they get paid, and it's invisible to the client unless you go looking for it. In all markets, there is a trade-off between what you pay in up-front costs to get a given rate on a given type of loan, and what rate you get. Adding a pre-payment penalty (or not removing one) adds to the loan provider's commission, sometimes multiple points, and out of this they give you back a half point or so to make their loan look more competitive. A Good Question to ask and catch many loan officers off-guard is "and what is it without any pre-payment penalty?"

Pre-payment penalties are a thing to avoid if you reasonably can. On the other hand, circumstances can force you to accept one. No loan officer works for free, and if about all you've got is the money for the down payment, accepting a two year pre-payment penalty (meaning it is in effect for two years) can get the loan officer paid while you still get a affordable rate.

Here in California, the maximum pre-payment penalty is six months interest, and that is the industry standard for when there is a pre-payment penalty. A few lenders will pro-rate it, but for the vast majority, they will charge the same penalty on the day before it expires as on day one. This is pure profit, and they're generally not going to turn down pure profit any more than most people will turn down a bonus. So if your interest rate is 6 percent, you're going to pay a 3 percent pre-payment penalty if you sell or refinance before the pre-payment penalty expires. For Negative Amortization loans, the pre-payment penalty is based on the real rate, not one percent, of course.

On some loans, the pre-payment penalty is triggered by paying any extra money. One extra dollar and GOTCHA! But probably eighty percent or so give you the option of paying it down a certain amount extra each year, usually 20 percent, without triggering the pre-payment penalty.

Now as to the alternate payment schemes you mention, the first method, paying extra, is very possible and recommended with most mortgages. Anything extra you pay should be applied directly to principal. Especially in the early years of the mortgage, this has a multiplier effect, as now that you don't owe that money any more, your interest charges in the future will be less so less of your payment goes to interest and more to principal. On a $300,000 30 year mortgage at 6%, your monthly payment is $1798.65. Of this, $1500 is interest - which you're paying just to break even - and 298.56 is principal, which actually goes to pay off your loan. Let's say you pay $200 per month extra. If you're one of those extremely rare people who actually pay off your mortgage, you'll be done in 278 months - 82 months early. Almost 7 years. The interest you pay drops from $347,514 to $256,000 - you saved $91,514 in interest charges by paying $200 per month early.

If, as is far more likely, you refinance after 2 years, instead of owing $292,404, you'll only owe $287,284, a savings of $5120, which means you owe $5120 less on your refinance, and might get better terms because of it. Or you have $5120 more in your pocket if you sell. So it's only a 7.5% rate of return - it is guaranteed. If this mortgage outlasts 95% of all loans and makes it to five years - sixty months - you'll only own $265,114 instead of $279,163, a difference of $14,049. This is money in your pocket or money you don't owe on the refinance, which you're not paying fees on, and which might get you a better deal. Or it's $14,049 more from the sale of your property to buy another one. It's a 17 percent overall return on every penny in you added in five years, including the last payment you made. That's better than you'll do with CDs with the first month's money.

Suppose you only make one extra payment, once. Let's say you make the first payment at the end of the month when you buy or refinance instead keeping the money in your checking account until the end of that month. Making that one payment saves you more than five months at the end of your mortgage if you keep it the full thirty years. Let's say you just pay $200 extra once, that first month that you actually make a payment. You owe $225 less after 24 months, $270 less after 5 years, and $1207 less in the last month of your loan.

Furthermore, the higher your interest rate, the more difference these payments make. Right now rates are still historically quite low.

Your second question, about paying your mortgage twice a month, is trickier, and here's why: What most people who do this are doing is actually making payments every two weeks, not every half month, which means you're making an extra payment per year in pure principal. To separate the two phenomena, let's drag the calculator out. Cut the interest rate in half, cut the payment in half, and double the number of payments. Punch in n=720, i=3%, and let's see what happens. The payment comes out to $898.92. Double this to $1797.85. This is about 81 cents per month difference. If you pay half of the $1798.65 twice per month, you shave less than half a month off of your payment schedule.

On the other hand, make 13 payments in 12 months, and (to make things simple for a simple calculator) that's roughtly equal to making payments of $1948.54 per month, which has you done in the 295th month - almost five and a half years early.

So you see, the twice a month schedule really does comparatively little for you - it's the fact that you are making an extra payment per year that really helps in this case.

So with some banks charging hundreds of dollars to sign you up for things like this (I know of lenders who charge $400 and up just to sign up), I'd suggest instead to instead spend the sign-up money on a direct pay-down of your mortgage (providing you don't have one of those "one extra dollar" prepayment penalties), and keep making those monthly payment with a little extra on the side instead.

This "service" banks provide for their customers is nothing more than a cash-cow fee to pad their own bottom line.

And for the rest of you out there, I say the same thing I said to this person "Please ask if you have further questions you'd like answered"

Caveat Emptor!

No matter which provider, no matter what type of loan you get, nobody is going to loan you money without the appropriate documentation. The more documentation you have that you are a good risk, the better the rate you are going to get, and the lower your costs are going to be.

Everybody hates filling out forms and providing documentation. There's a billboard two blocks from my house advertising, "Stress free loans." Actually, these signs are all over. And I'll bet they bring in a lot of business. Low documentation loans are easy money - I could do them all day and all night, and make more money, and make the lender more money, while doing less work, than I can by hunkering down and actually serving my clients best interests. Those billboards say "stress free loans" which three words look like an English sentence meaning this will be easy, but the real translation to English reads, "Hello, I am a lowlife scum who wants to take advantage of lazy people who are too ignorant to know better by making a lot of money providing loans at higher interest rates and less favorable terms than they could obtain elsewhere."

The fact is, that for something dealing with this much money, if there is documentation you can produce to prove that you are a better risk and gets you a better rate, you should be eager to present it. If I can spend half an hour instead of fifteen minutes filling out forms and as a reward I save $40 or more every month until the next time I decide to refinance, I want to fill out the extra papers. If I refinance every two years, I have essentially been paid $960 for a quarter hour of work. That works out to $3840 per hour. I don't know about you, the reader, but even when I'm completely inundated with clients, I don't make that kind of money per hour. I don't know any job that pays that much, unless you want to include wealthy investor. And let me tell you, the wealthy investors I've dealt with are eager to spend the extra time filling out said forms. It really is a "Rich Dad, Poor Dad" situation. They know it will Save Them Money, and don't have to be sweet talked into filling out one more form or providing a little more documentation. They've got it already copied for me, and if I want their business, I'd better buckle down and get to work on finding the loan with the best terms possible. If you, the reader, wish to be wealthy, you could do worse than emulate their example.

There are, when you get right down do it, three different levels of documentation. The lowest level of documentation is NINA, which is short for "No Income, No Assets." There are other names for it ("No Ratio" being the most common). This is a loan where the rate you get is purely driven by your credit score (as well as other factors, such as the equity in your home or down payment you're making, but those are constants endemic to the situation, not variables about which I am talking). You're not even documenting that you have a source of income. You're basically saying, "Here I am! Gotta love me!" to the bank, and they really do love you because you're filling their coffers by paying the highest rates for your loan. Guess what? You're still filling out all the forms (or somebody is doing so on your behalf, which they can do to the same extent on other loan types!), and you're still providing all the documentation on the property - how much it's worth, proving you own it, proving the taxes are current, etcetera. Owing to identity theft laws, you can expect to have to provide two things that basically show that you are you. You can expect to deal with problems if the county doesn't show the taxes as current, your landlord or current mortgage holder shows you as being behind or that you have a history of being behind or the county doesn't show you officially in title of record, or any of a host of other potential problems, but hey, at least you didn't have to show that you've got a source of income!

The next level of documentation is a "Stated Income" loan. This is where you document that you've got a source of income, but not that said income is sufficient to justify the loan, so you tell the bank you make that much, and they agree not to verify the actual numbers. This is going to require two additional items: verification of employment, or a testimonial letter if you are self-employed, and reserves. Reserves are quickest to explain. Industry standard is money sufficient to pay the loan, your taxes, and your homeowner's insurance for six months, in a form that is sufficiently liquid such that the money can be accessed, for a long enough period that the bank will believe it isn't borrowed - and the bank will require documentation of its availability if it's in an account type such as 401k where access may be restricted. Verification of your employment is somebody in the HR department filling out a form on your behalf and verifying it over the phone. The testimonial letter for self-employed borrowers comes from your lawyer, accountant, or tax preparer on their letterhead saying that you really do have a legitimate business. It basically reads: "To whom it may concern. John Smith is self-employed as the owner of business X. He has been doing this for Y years. Based upon information provided to me, he will earn the same amount of money this year as last year." The person providing the testimonial must sign the letter. It really is only three sentences, but that person is putting their business on the line for you if it's not true. So they tend to require evidence if you're coming to them for the first time to get this letter written and signed.

The bank is basically looking for two years in the same line of work or at the same company to approve this one. Sub prime lenders may take a year or even six months, although their terms will not be as favorable. What the bank is looking for is evidence that you can really afford the loan. The thinking goes like this: "He's got a source of income, He's got a good credit score, he's making all his payments, he's got money in the bank, okay, we think he's living with his means and can afford to pay us back. We'll lend him the money." There are variants on stated income of which "stated income, stated assets" is the most common, but these carry higher rates, higher charges, or both, in many cases actually end up looking more like a heavily propagandized NINA loan than anything else.

I've heard Stated Income (and NINA) commonly referred to as "liars loans", and they are often used for such, but that is not their intended use. As a matter of fact, people get in a lot of trouble with these loans, and many times it comes back on an unscrupulous loan officer or real estate agent trying to push something through for which their clients really aren't qualified. If you can't afford the payment, am I really doing you a favor by qualifying you for the loan? I submit that I most emphatically am not. I'll admit to having used the loans for that purpose in the past, but an ethical loan officer using it for this purpose should sit down, tell the people what the real payment is going to be, and make certain they can afford it - sometimes they're renting and their effective cost of housing is going to go down! And in that case, I submit that I probably am helping them if I push the loan through. On the other hand, if you're doing Stated Income or NINA (especially on a purchase) and the loan officer doesn't sit you down and cover what the payment is going to be within a couple dollars per month, and make certain you're okay paying it, this is a red flag in no uncertain terms!

What Stated Income is meant for is self employed people and people working on commission who really do make the money, but have write-offs such that their taxes aren't going to show enough income. Or people who had a bad year, or large losses or high write offs one year, but are still basically solid.

The highest form of documentation is Full Documentation (almost everyone says "full doc" because the unabbreviated phrase is a mouthful). This does not necessarily mean I've got to prove to the bank that you make every penny you actually make, but only that you make enough to justify the loan. The proof the bank will accept is very straightforward. Self-employed borrowers are still going to need that testimonial letter from stated income. They will additionally be asked for their federal income tax packet. This is all of the forms, front and back, that you sent to the IRS last April 15th, and perhaps the April 15th before that, too. It's got to be a signed copy, and it must include copies of any w-2s or 1099s that you get. People in the construction profession, as well as those who may be w-2 employees but work on commission will also need to furnish their taxes, and the bank's underwriter can always require it of anyone. It is to be noted that banks do not have to accept your loan on a stated income basis - they can require that you furnish full documentation.

Those people who are hourly or salaried employees of a company can usually get by the full documentation of income requirement with just w-2 forms. If you are a company employee, the last 30 days worth of pay stubs will also be required.

The basic rationale for this is simple. Very few people tell the IRS that they make more money than they do, because the consequence is higher taxes. So the bank is willing to use tax forms to prove your income. In the case of a w-2 employee, the company is telling the IRS that those are the wages it paid you, and therefore wants a deduction for, and you went and paid taxes on it, so the bank will usually accept that. Similarly, your pay stubs should have year to date pay on them. Here the bank will accept the word, metaphorically speaking, of a third party without a stake in the outcome of the loan.

A subset of the full documentation loan is the streamline refinance. As the name indicates, it is available on refinances only, not purchases. There are a lot of limits on these loans, but when I get to do one it is the easiest of all loans. Basically, it's a case where the same lender is now offering better rates, and no equity is being taken out of the home, and they'll allow you to do it because otherwise you'll take this client elsewhere. 90 percent of a loaf is much better to them than none.

Within the sub-prime mortgage world, they will often take the deposits from 12 consecutive months of bank statements (sometimes 6 or 24), usually discounted by a certain amount, and accept that as proof of income. This is called Lite or EZ doc, although there's nothing easy about it and as a matter of experience there are more fights with the underwriter and jumping through hoops here than with any other type of loan documentation. The rates are somewhat higher than for full documentation, but not nearly the rates for stated income. Mind you, sub-prime rates are higher in the first place as well. Furthermore, many of these sub-prime lenders will advertise the fact that "EZ doc rates same as full doc!" I shouldn't have to explain to adults that this translates to English as they don't give the lower rates to true full documentation loans, now should I?

So, on the subject of documentation, I think you should be able to tell that the higher the quality of your income documentation, the lower the rate that you are going to get from a given lender. If you can qualify, a full documentation loan is probably going to save you more than enough money to pay you to do the extra paperwork, which is marginal anyway. The only reason not to do one is if you can't supply requisite proof.

And as one final warning: If a loan officer requires originals not only of the forms they ask you to sign (A couple of the standard forms require original signatures - really!), but of your own documentation, it is a BIG RED FLAG. I can't think of any document that lenders will not accept copies of. The only reason to require your originals is that loan provider does not want you able to apply for a loan with someone else, so they're putting an end to your shopping, and once they've got them, good luck trying to get them back (at least until the loan is done so they get paid). A good loan officer needs good readable copies - not your originals.

Caveat Emptor!

What to look for at Loan Closing


I've said upon more than one occasion that the factors at closing are all in the loan provider's favor. Unless they signed up for multiple loans, the typical consumer has no leverage to get the loan provider to play it straight at closing, and actually deliver what they said they would back when you signed the application. Many people never notice that their lender has taken advantage of them until they get the first payment notice, which is far too late to do anything about it. Furthermore, others never notice at all, and of the ones who do notice something is wrong in a timely fashion, eight to nine out of ten are so fed up with the loan process that they sign the documents anyway. I keep hearing sworn oaths from people who signed up with my competitors that they won't sign the documents at closing if they're not what they were promised, yet when I follow up the vast majority of them did. I can only conclude that these people actually enjoy being lead on like the rats by Pied Piper of Hamlin.

Assuming that you are not one of those people who enjoys being treated like a disposable rat by someone who's making a goodly sum of money from your business, what can you do? The first thing is apply for a back up loan. As I say elsewhere, if you've got a back up loan lined up, you've got leverage. Your options are not limited to sign these documents or don't. You can sign the other provider's set of documents, and the person who lied makes zero. Or you can use the existence of an alternative to get both companies, if need be, to give you the loan you were promised in the first place.

But how can you tell if you've been treated right by the loan officer? There are dozens of pieces of paper that get pushed in front of you at signing. Disclosures for this and disclosures for that. Truth in lending statements. Yet more disclosures. Certificates good for a discount here and a discount there. This is partially legal requirement, partially intentional on the part of loan providers. There really is a legal requirement for most of these disclosure documents, but the loan provider likes that they are there because they all distract your attention from where it needs to be focused.

There are three documents at the heart of every loan closing. They are the Trust Deed, Note, and Department of Housing and Urban Development form 1 (HUD 1). I advise reading everything, especially any title transferring documents, so the lender cannot easily throw a curve in amongst the auxiliary documents. But most don't bother trying. The three main documents are where you should be focusing your attention.

Sometimes, the Note is included in the Trust Deed, but most of the time they are stand-alone documents. The Trust Deed gets recorded with the county, while the Note usually does not. Some states that I haven't worked in may use other systems (A Mortgage Note, for instance, which needs an actual court action in order to foreclose, and which California along with most other states have gotten away from because it is more costly).

The Deed of Trust is simple enough. Look over the Deed of Trust enough to see that it properly references and does not contradict the Note.

The Note requires more attention, and cross referencing between it and the HUD-1. Is the amount borrowed consistent with what you were lead to believe? Is the rate correct? Is it fixed for the correct amount of time? Is there a prepayment penalty, and if so, for how long? Check out the repayment terms, and make certain there are the payments are what you were lead to believe. The Note is what you are agreeing to by signing all of this paperwork. Make certain it reads the way it is supposed to. Take your time, read it over, do not allow yourself to be rushed. Do not think to yourself, "I've got three days to call it off" because once you are done signing the odds are long that you will not think about your loan further until your first payment becomes due, and that is too late. Read it now. If there is anything that you do not understand, ask for a clarification. Good clarifications start from a point of the wording that's on the paper, and make easy sense in English. Do not accept a clarification that you do not understand. Do not sign hoping to get a better clarification later. Do not sign period if you aren't certain you understand.

Check out the HUD-1. I'm working on a separate post to cover all of the issues there, but make certain the costs are what you were led to believe, and that it all adds up correctly. The numbers should start with the Old Loan (if Refinance) or purchase price, plus costs, plus reserves if you're doing an impound account, plus prepaid interest, minus any money you're bringing in (down payment, etcetera) or the seller or your broker is crediting you, and that should be the balance of the new loan. Take your time with the HUD-1 and the Note, and do not allow yourself to be rushed. Do not sign until you are certain that you understand and agree. If this takes a little longer than the signing agent planned for, tough. Many loan providers are adept at distracting you with this disclosure or that disclosure. Some companies actually provide them with training in how to distract you, and how to gloss over thousands of dollars that you didn't agree to. Stick to your guns. The Note is what you are agreeing to, the Trust Deed is there to enforce it, and the HUD-1 is the only form accounting for your money that is actually required to be accurate. The Note, Deed of Trust and HUD 1 are what the lender is going to force you to comply with in a court of law. Make certain that they are what you agreed to before you sign them. If they're not, well that's why you applied for a back up loan, right?

Caveat emptor

There are actually several distinct marketplaces consumers can obtain their funds from, and several types of providers. John the wealthy highly salaried person with great credit and a substantial down payment should not and usually does not obtain his mortgage from the same funds providers as his twin brother Jim, the self-employed, always-broke person with terrible credit and no down payment. They may deal with the same employee at the same business, but the funds and parameters for using those funds, are entirely different.

In order to make sense later on, I've first got to acquaint you with two concepts: yield spread and pre-payment penalty. The yield spread is what then lender pays the person or company who does the paperwork for your loan in order to give them an incentive to choose that lender, loan type, and rate, as well as any of several other reasons. The yield spread is based upon the rate of the loan, the type of the loan, and other factors as well.

Prepayment penalty is a penalty you agree to pay if you sell your home or refinance before a certain period of time has passed. Industry standard is six months interest, with some lenders making this 80 percent of six months interest. Usually (not always) they will let you pay a certain amount over the normal, agreed upon principal per year without triggering the penalty, but if you sell or refinance out of their loan, the penalty is always triggered for the duration of the penalty. Some lenders will actually phase it out in stages, although this is not common.

Lest it be not plain to you, a prepayment penalty is a thing to avoid if you reasonably can. Let's say you get transferred and need to sell the house in six months, and that you have a $200,000 loan at 6%. That's six thousand dollars less that you will receive from the sale of your home, not to mention that the average person refinances every two years, which is typically the shortest pre-payment penalty. If you need to refinance within two years, that's six thousand dollars of your equity gone for no good purpose. Mind you, if you need the loan, and it gets you the loan, so be it. It's still a thing to avoid.

The top of the food chain from the point of view of consumers are the so-called A paper lenders. This market is controlled by the two federally chartered giants, Fannie Mae and Freddie Mac. Lenders who participate in these markets lend in full accordance with Fannie Mae and Freddie Mac rules, because they want to be able to sell the loan to them. In many cases, they actually do sell them seamlessly by retaining the servicing rights, and the consumer never knows they have done it. In others, they retain the loans entire, and in still others, they sell them off entire. They do this for many reasons, but mostly to raise cash so they can do more loans. In any case, the only difference it should make to you, the consumer, is where to address the check and who to make it out to. Unlike the other markets, if the lender pays a yield spread in this market it does not automatically mean that there will be a pre-payment penalty. Although they will pay a higher yield spread if the loan officer sticks the client with a pre-payment penalty (and the longer the prepayment penalty is, the more they will pay). WARNING! Many loan officers will not tell you about it unless asked ("Why bring up a reason not to choose your loan?" is a direct quote I've heard any number of times) and some will flat out lie even if you ask. This is not ethical, but they know they can almost certainly get away with it. There really is no reason why an A paper loan should have a prepayment penalty, except that a loan officer wanted to get paid more.

It is not difficult to qualify for an A paper loan. As long as you're not taking equity out of the home, they can go through with credit scores as low as 620 (full documentation) or 660 (stated income), although there are caveats. Despite what you read in Internet pop-ups, according to National Mortgage Reporting a 660 credit score is more than forty points below the national average. So even someone with modestly below average credit can still qualify for an A paper loan. There are minimum equity requirements, however. And it doesn't matter if you are King Midas who has never failed to pay a bill immediately in full or someone who barely staggers over the line into qualification by the computer models put out by Fannie Mae and Freddie Mac. This is it. The top. You all have the exact same rate choices. There is nothing better.

The next market below A paper is called A minus. The rates are a little bit higher, and there are prepayment penalties anytime the lender pays a yield spread. Then comes the so-called Alt A, which are typically loans for fairly unusual circumstances. The credit scores here go down to about 580, although there is less standardization. The worst, most dangerous, absolutely awful loan in the world comes from the "Alt A" world. There are all kinds of friendly sounding names for it, like "Option ARM", "pick a pay", and such things, but they are all negative amortization loans at their heart - you end up owing more than you borrow. They sound benign: "pick your monthly payment!" But in fact most people choose the minimum monthly payment which capitalizes and then amortizes more money into your loan every month. Every single one I've ever heard about carries a prepayment penalty. I see adds for these abominations every day all over the internet. If anybody quotes you a mortgage rate below 3%, or a payment that seems too low to be true, I will bet you millions to milliamps they are trying to sell you one of these (despite the fact that there are other loans out there below 3% right now). There are still loan providers out there that do nothing but these - they're easy to sell to unsuspecting victims because the minimum payment is so small, and most people shop for a home loan based upon payment. There really isn't space here to go over everything that's wrong with them (or where they may be appropriate), but except in certain special circumstances, RUN AWAY! And do not do business with that person! They have just proven themselves unworthy of your business.

(Every so often, a representative from a new lender walks into my office. I'm always glad to talk to them so long as they answer my questions in a straightforward way, but I have one inflexible rule. If the first thing they talk about is a Negative Am loan - no matter the happy sounding name they call it by, I throw them out and do not allow them to return. I think it indicative of the state of things in the Negative Am world that the one time I had a client who would actually benefit from this thing, and I took the time to tell him exactly where all of the traps I knew about were, give him strategies to turn it to maximum benefit, and he agreed that he wanted to do it - not one of the five companies I tried would actually approve the loan.)

The final niche that comes from regular lenders is called sub prime. And in the world of sub prime lending you can do a lot of things that higher rungs on the ladder will not allow you to do. As in A minus or Alt A, anytime the lender pays a yield spread there will be a pre-payment penalty, and I think I've run across exactly one sub prime loan that didn't have a prepayment penalty in my whole time as a loan officer. However, the people who subsidize sub prime lenders just don't have a whole lot of choice. This is typically the only way they're actually getting a home loan, be it because of low credit, low equity, or what have you. The rates are high, but it's that or nothing. Sub prime loans are very lucrative - the average lender or broker specializing in them usually makes about 5 points - 5 percent of the loan amount - on each and every loan. I've had people thank me so profusely I was almost embarrassed when I got them a loan on something more closely resembling a typical margin from higher niches. The lines between A minus, Alt A, and sub prime are blurring more and more as time goes on. It is to the point now where if someone says they do sub prime, that usually means Alt A and A minus as well - it's just a matter of where on the spectrum a given client sits.

The final niche is Hard Money. These are not typical lenders, in fact, they have almost nothing in common with traditional lenders. They are agents for individual investors, sometimes even loaning you their own personal money. The rates for this start an absolute rock bottom of about 13 percent, and go up from there. Typically there will be a front-end charge of about 5 percent of the loan amount, and a prepayment penalty of about 7%. These are loans for people with sub 500 credit scores, people with homes that have been damaged in some way and must make repairs before a regular lender will touch the property, and so on and so forth. The equity requirements are large - 75 percent of the value of the home based upon a conservative appraisal is about the highest a hard money lender will go, and most are less. Lenders in markets higher up the chain are in the business of making loans, and are likely to cut you as much slack as practical if you have some difficulty making payments, as they are not in the business of foreclosures. A hard money lender has no such constraint. They will foreclose on your home immediately and without a second thought. One way or another, they will get their money back and then some. WARNING! It is common practice on the part of hard money lenders to have you sign the Note and Deed of Trust "conditional" upon them finding an investor. The person signing the documents thinks the loan is done, and that their situation (usually a time critical one) is resolved, and everything is all roses now, but it isn't. They may still want you to pay for multiple appraisals, jump through multitudinous hoops, and still not give you the loan in the end. This is just their way of binding you to them so that you don't or can't go elsewhere. Not that this is completely unknown in the higher niches (in fact, some lenders market their services to real estate agents and brokers based upon this practice - people who are true loan officers learn that this is not a good idea), but it's not common, as it is here.

There are three main types of places to go to get a loan. The first is a regular lender. The second is what I call a "packaging house", although in practical terms it is very similar to a regular lender. The third is a broker. Each has their advantages and disadvantages.

A regular lender is what you think of when you think of a bank. Most of the big names are regular lenders. They typically have their own offices, often mingled with other banking functions. They have their own funds, wherever they've gotten them from, and they have executives and such that put together their own loan programs, complete with criteria for approving or not approving a given loan. These people do loans with at least the possibility of keeping them in mind, and some do keep every loan they do, while others sell almost every loan. The good news is that they'll typically be slightly more willing to make exceptions around the edges (whether or not the loan is a good one for you!). The bad news, from the consumer point of view, is that they consider you a captive from the moment you walk in the door. Even if they know of another lender with better pricing or a program that suits your needs better, they're still going to keep you "in-house". And their loan pricing is such that it's going to pay for all of the salaries and benefits for all of the people in the office, and the beautiful office itself and all of its contents.

A "packaging house" is like a regular lender except that they do their loans with the explicit intention of selling off every single one, either immediately or a few months down the line. Practical difference to consumer: there's a 100% chance you're going to end up making payments to someone else. In other words, no big deal. Packaging houses are lending their own money - they are not brokers. The difference is that a traditional lender is at least set up for long term servicing - the packaging house is not. Some sell immediately, some wait for one payment (better price in the secondary market), some wait three payments, as this gets them an even better price when they sell the loan. This is nothing to fear. The original lender recently sold my own home loan. The only difference is that now I write the check to company B instead of company A, and mail it to place X instead of place Y. California has stronger consumer mortgage protection laws than the federal government, but there are laws in place nationwide for the consumer's protection that avoid payments being unjustly marked late because your mortgage was sold.

A broker is not lending their own money, but is being paid instead to put the loan together and get it to the point where it is funded, at which point they are out of the picture. A packaging house could, in theory, decide to keep a particular loan - there is no legal impediment. They just don't do it. A broker doesn't have this option - it's not their money being loaned, but instead that of a regular lender or a packaging house. On the down side, a broker has somewhat less leverage to get underwriters to make exceptions to the rules (although the difference is academic for those outside this narrow range). There is also a lot of variation on quality. You'll find the very best loan officers in the country working as loan brokers - and the very worst, as well. On the up side, a broker always has at least the ability to get you a lower price than the other alternatives, although they may not have the willingness.

The first reason for this is that a good broker shops many different lenders to find the program that's priced best for you. This is less important but still very noticeable at the A paper level (A paper had pretty standardized rules) then it is for borrowers whose situations (either through credit, or through needing to do something A paper doesn't support) need to go to markets lower down on the totem pole. A traditional lender or packaging house puts you in the program they have that they feel is the best fit - they won't go outside the company. A broker may shop fifty lenders or more to find the one program at the one lender that fits you best. Second, I (as a broker) get better pricing from the lenders, either regular or packaging house, than their own loan officers. Why? Partially because they're not paying my support expenses - office rent, furnishings, support staff salaries, etcetera. Mostly because it's my customer, and I can and will take my customer elsewhere if they don't give me the best possible deal. As a broker, I am never held captive by any single lender, and they know it, and they know I know it, where once a member of the public walks into their office, they consider you "captive" business, whereas at any point in the process, I can take my paperwork back from the lender and take you to someone else. Most times, I don't even need you to fill out anything new. So they give me better pricing than they give you, and they don't play games because I've got more business every week that they want, whereas they're not going to see you again for a couple years, if ever. The upshot is: every week when I do the family shopping, I hit three or four supermarkets all competing for my business withing a mile and a half from my home. Because of this competition, I can save pretty good money buying the things that each market has good sales on, and if the quality at one market isn't so hot on some sale merchandise, I will get a pretty good price at one of the others. Mortgage brokers work on the same principle. I do the running around and quality check for you, and because this is what I do for a living, I can spot the bad stuff a lot easier than you can. When I do my shopping, I always make a point of checking what the banks in the supermarkets are offering on their mortgage deals, and I always smile because I'm always getting somebody a better price on the same loan from that same lender.

Caveat Emptor.

do your property taxes go up in California when you refinance your property

This is one of those urban legends. People are concerned that because the house is appraised by the lender, the assessor is somehow going to find out that their property is worth more and send their tax bill soaring.

However, thanks to Proposition 13 in California, the formula for property taxes has little to do with what the home is really worth. The formula is based upon the purchase price plus two percent per year, compounded. If you can document that your home is worth less than this amount, contact your county assessor's office. But if it's worth more, they cannot increase it beyond this number.

Indeed, certain family transfers can preserve this lower tax basis. Mom and dad deed it to the kids, and the kids keep paying taxes on it based upon a purchase price of perhaps $60,000 (Plus thirty-odd years of compounding at two percent, so maybe $115,000) when comparable homes may be selling for $600,000.

There are two major exceptions. First, a sale. If you sell it to someone else, then repurchase, you don't get the old tax basis back. Second, improvements. If you take out a building permit, the assessor will add the current value of your improvements to your tax bill. This can, in situations like the previous paragraph, result in a tax bill that literally doubles if you add a room. Indeed, this is one of the main reasons for the growth of the unlicensed contractor industry, because licensed ones have to make certain the permits are in order, and homeowners are trying to sneak one over on the county. This is why a very large proportion of properties in MLS have the notation that "this addition may not have been permitted." They know good and well that the addition wasn't permitted, and quite likely isn't to code, either. If it's built to code, subsequent owners can get forgiveness as innocent beneficiaries who bought the house like that, and so the purchase price included the value of that room (and occasionally, the state finds it worth its while to go after the previous owner for back taxes and possible penalties, and I believe that the incidence of this will likely increase dramatically in the next couple of years). If it's not built to code, however (an offense unlicensed contractors often commit), the subsequent owner can be looking at a large mandatory repair bill, or perhaps even demolishing the addition they paid for if the county inspector deems it unsound. You want to be very careful about properties with the "addition may not have been permitted" disclosure.

Other states, by and large, still follow the assessment model California used to follow, pre-Proposition 13. They have county records of the property characteristics, and evaluate the home based upon those characteristics, whence comes your assessment, and hence, your property tax bill. This still encourages unlicensed contractors and working without required permits, with effects much the same as the previous paragraph, which is definitely not good, but in this case subsequent owners have nothing but incentive to keep improvements off the county books, where in California, subsequent owners have motivation to want improvements updated into county records. I am not aware of any state which follows a model whereby refinancing will alter your tax bill.

Caveat Emptor

I recently went to a "direct from the providers" seminar on credit reports and credit scores.

Some of this information has changed from previous information, and some of it will change in the future. Credit Reporting, FICO scores, and related items are an evolving knowledge, as they figure out how to more perfectly predict future performance of potential debtors.

A FICO score is nothing more or less than a prediction of the likelihood of a particular consumer having a 90 day late in the next 24 months. It is a snapshot, based upon your position and your balances as reported at the exact moment it was run.

I learned a bit more about the various other credit reports besides mortgage. They emphasize different things (naturally) and score differently. Auto scores go to 900, where mortgages range 300 to 850. Landlord tenant screens are different from a mortgage score. Revolving credit screens are different than mortgage screens. Finally, and most important, the "Consumer Screen" reports you get on yourself will always have a higher credit score than the ones mortgage providers run.

Inquiries are 10 percent of your credit score. They only go back twelve months. Whereas I've been informed in the past that additional inquiries will get you zonked, that is not the case currently. Depending upon your length of credit history, after three to five "hard" inquiries in the last twelve months, they quit counting. now. A hard inquiry is done at your request for reasons of granting credit. Fewer is better. Longer history of credit means they will allow you more inquiries.

Mortgage inquiries, if done within the correct time frames, still only count as one, no matter how many. Automobile inquiries also count differently than other inquiries.

Types of credit used is 10%. They're looking for a reasonable balance between types. The absolute worst type of account to have is from one of those zero interest finance companies. You know the ones, "Buy this sofa now and no payments and no interest for twelve months." People who are broke but need or want stuff now do this, and that's why the hit happens. They are deferring payment. You suffer guilt by association.

15 percent is length of credit history. How long you have had revolving accounts divided by the number of revolving accounts you have had. You have three cards that have all been going for thirty years, that's a better picture than five cards of which four are brand new.

I've been telling people not to close open accounts. This is confirmed as not a good thing to do. Closing an open account can cause your credit to drop by as much as 80 points in some circumstances. If it doesn't cost you anything, don't close it.

Balances is thirty percent of your score. There are significant hits at fifty and seventy five percent of your credit limit on each card. Significantly, a small balance is a little bit better than zero, even. This is one reason you want to charge something you'd buy anyway to your credit card, just make sure you pay it off when the bill comes. Some credit cards (specifically charge cards in particular, not to mention any specific names of charge card companies where the balance is due in full every month) will report your high balance as being your limit, which can have the effect that you appear to the reporting agency as "maxed out" if you've charged something big. So make certain your credit limit is being accurately reported. If your balance is incorrectly reported, in general the only way to correct it quickly is with a letter from the provider, signed and on their letterhead, saying "Your balance as of (date)is $X"

Payment history is 35 percent of your score. This is divided into three categories: 0-6 months, 7 to 23 months, and 24 months or older. If you have had a delinquent credit reported within 6 months, you are getting the full impact in terms of lowering of credit score. Between 7 and 23 months is a lesser impact. Over 24 months is still less impact.

Important: DO NOT PAY OFF OLD COLLECTION ACCOUNTS! It can cause a 100 point drop in your score. Here's why. You owed $X to company A, and five years ago they sent it out for collection. Now you go back and pay it off, and the date it's marked with is TODAY. It's gone from being over two years old to being current as of now, bringing the full impact to bear once more. The one exception to this is a deletion letter. If you get a deletion letter on their letterhead signed by them saying "Please delete this account," you can make it vanish off your credit report as if it never was. Note that you may still have to pay off collection accounts, but do it as a part of escrow, where the loan is done before your credit is hit.

There are tools out there that can be used to analyze and tell you how to improve your score or how best to improve it with a given amount of money.

Bankruptcy: Three things determine what kind of credit score you'll have coming out of bankruptcy. 1) Percentage of trade lines you include in the bankruptcy. More is worse, lower is better. Including half your trade lines will not hurt you nearly so bad as including all your trade lines. 2) Number of inquiries. If you've still got one or two open lines you didn't include, you may not need more after discharge and you won't go apply for more. The poor schmuck who includes everything needs more to start a credit history, and is dinged HARD for each turndown inquiry. 3) Post bankruptcy payment history: if you included everything in the bankruptcy, you have no history until you get more credit. Can you say, "Vicious Circle," boys and girls? Knew you could. No payment history is even worse than a bad payment history, but any reports of delinquencies after bankruptcy hits you much harder than if you were never bankrupt and had a late.

Last individual points:

Rate on credit card does not affect FICO score.

Nor does salary, occupation, employment history, title, or employer.

Credit Repair Services cost a lot of money for things you can do for free.

If you are disputing a medical collection (only) it doesn't count on your score.

Finally, a note about a likely coming change. If you are a regular around here, you may realize what a hole negative amortization loans can be. There is a high likelihood that in the near future the fact that you possess a negative amortization loan will be counted heavily against you, score-wise. The reasons this change is coming is obvious: Your payment every month is not covering your interest charges. This is not a situation that can go on indefinitely, and it is indicative of someone who is likely to be in over their head.

Caveat Emptor

For Sale By Owner


I've been taking a long look at the world of For Sale By Owner and similar concepts lately. With the digital revolution, you always want to be watching the tide to figure out if you're in a business that's about to go the way of milk delivery and diaper service - a few left, but only a tiny fraction of the size they were. Since blogs and online magazines replacing or at least greatly supplementing mainstream journalism is one thing I'm constantly reading about, it might be good information to know if my real career is about to go the way of journalism.

At this point, I'm not worried about needing to change professions. The world of For Sale By Owner (FSBO) does seem to be figuring out the legal ramifications fairly well. There are resources available to get most, if not all, of the legally required disclosures for sellers to avoid future liability to the buyers. I'm going to go on record as believing from the things that I have read that they are not as assiduously practiced as they are by people with real estate agents working for them. Reading the groups, I am seeing all kinds of whining about "Do I have to disclose X?" "Do I really have to disclose Y?" Sometimes, the stuff is minor and inconsequential (leaky toilet, drippy faucet), but a lot of times it's pretty major as well (water leak in/under slab, lead based paint, asbestos, "minor" cracks in the slab). Mind you, I've heard similar whining from real estate agents, particularly new ones. But the real estate agents at least want to be in business (and not sued) for a long professional career with many transactions every year, and so have motivation to disclose everything they find out about, lest one transaction cost them their license. Many individual owners, it seems, even the ones who have been made aware of the legal requirement to disclose, are hoping to get through the one transaction unscathed. After all, they hope they're going to be long gone when the problem crops up. To this, I say, don't count on it, and failure to disclose can often make your legal liability worse than it needs to be.

Needless to say, this is a big "let the buyer beware," when dealing with FSBO properties. You're standing across the table from someone with an immediate motivation to not tell you about whatever metaphorical bodies are buried in the property because once told you may not still want to buy, and most particularly you may wish to reduce your offering price. They have only a hazy motivation to tell you - the indefinite threat of perhaps some legal action sometime in the future. If it doesn't make you uneasy, something is wrong.

One area FSBO is falling short in is picking an appropriate asking price. By the evidence, this is not only lack of information but also homeowner ego speaking here. Some people are not aware of what their home is really worth, or if they are aware then they are ignoring the evidence. Speaking from personal experience in the current market, persuading people to put an appropriate asking price on their property is one of the most difficult parts of the listing interview. They are still mentally in the seller's market we had last year, where they could automatically expect to get more than their neighbor got a couple of months ago. Also significantly, in the long seller's market just concluded, many real estate professionals were making a lot of money buying "For Sale By Owner" properties that were under-priced, and immediately "flipping" them for $30,000 to $50,000 profit, often more. Here's the math for a property that sells for $460,000 but should have sold for $500,000: In the latter case, assuming you pay a standard 5%, you paid a $25,000 commission, split between the buying and selling brokers. But you come away with a net that's $15,000 higher. I personally know of several sales where an agent purchasing a FSBO property then sold it again before escrow was even completed for profit of $75,000 or more.

There is still some of that going on, but the problem right now with most FSBO properties seems to be over-pricing the market, rather than under. Their neighbors house sold for $500,000, and by god they are going to get $525,000. Never mind that the neighbor house has an extra bedroom, an extra bathroom, 800 more square feet, sits on a corner lot that's twice the size, and most importantly, sold when demand was high and supply was low. They are going to get that price, come hell or high water. So they put that out as the asking price, and they wonder why the one or two people to express an interest vanish as soon as they've seen it. The reason is simple: They've priced themselves out of the market. There are better homes to be had for less money. In the past few years, this was a survivable defect. When prices are rising as fast as they were, the market would catch up to anything that was vaguely reasonable. That has changed now. It's bad enough with people who have a real estate agent for their listing. Two of the hardest fights with listing clients in this market are keeping the property priced to the market, and getting them to accept what in today's market is a good offer rather than hoping for last year's "bigger fool." Seems that most people who don't have an agent are just in denial. There's a FSBO two doors down the block from a corner listing we had where I held an open house. Even with me drawing the traffic to him, he didn't get a single offer because his asking price was too high. That's fine if you would be happy and able to stay if the property doesn't sell. If you're not in that situation, it's not.

Another area where FSBO properties are falling short is in marketing. They've got an internet advertisement and a sign in the yard. Maybe they've got an advertisement in the paper (usually the wrong one), and maybe they are holding open houses. All of these are nice. None of these are optimal. First thing is that internet advertisement you have is often on one site where even internet savvy buyers don't necessarily see it. Even if that is free, it's probably worth money to list on a co-operating network of sites. For Sale By Owner signs in the yard are more bait for agents than a prospective buyer. I'll put a sign out there when I get a listing also - it does catch a few people, and a sign with an agent or broker's name on it keeps other agents from bothering you. But it's a long shot at actually selling the property.

There are places to advertise your property to actually sell it, and there are places where agents advertise their business to attract new clients. Most of the FSBO ads I see seem to be in the latter sort of place. I don't think I recall a "For Sale By Owner" ad in the places where I'd expect it to generate significant actual interest in buying that particular property. There are reasons for this. The ones that are likely to generate interest require more lead time. I don't mind spending the money (especially amalgamating my listing with other listings in the office). Even if it sells before then, it helps the office generate more clients we're going to go out and show similar properties with, and I get a certain proportion of those. But For Sale By Owners tend to balk, as they are thinking one transaction. There are also resources that make an Open House effective, but are not cost effective for somebody looking to sell one house.

Number one resource for actually selling the property is the Multiple Listing Service (MLS). Put it out there where the agents who the buyers come to will see it. My primary specialty is buyer's agent. I know they are ready, willing and able to buy a property. Do I even take them to look at "For Sale By Owner" properties? Not unless I know ahead of time that the seller will pay my commission. Nor does any other buyer's agent I know of. Before you "For Sale By Owner" types start cursing us, remember first, we've got to make a living so we'll be there for the next buyer. Second, we're actually living up to our fiduciary responsibility when we do this, as I've got their signature on a piece of paper that says they'll pay me if you don't. So unless your property is priced far enough under the market to justify the expense on my client's part, your property is not a contender, and I'd better be prepared to justify the expense on my client's part in court, so your under-pricing the market has got to be by more than my commission. Furthermore, going back to legal requirements, I've got to figure that there is a higher than usual chance that the seller will not make all the necessary disclosures, or perhaps won't tell the complete truth and nothing but the truth on them. This puts my clients, and through them, me in a bind: Sure my clients can and will sue you, but if you don't have the money my insurance is likely going to end up paying out, because even though I've done everything I reasonably could have done, you didn't have an agent.

Given that the Multiple Listing Service is far and away the best tool for selling any given property, if you're not on it, you're missing out on buyers. If you don't have a selling agent's commission listed on Multiple Listing Service that is at least what is specified in the default Buyer's Agent Agreement in your area, you are missing out on buyers. If you don't have an agent at all, you are missing more buyers. Because I, like other buyer's agents, want to be certain we're not wasting our time. I've done a real pre-qualification or even a preapproval on my buyers (if the transaction doesn't actually go through, I don't get paid by anyone). Compare that with Mr. P, whom I sent away the night before I finished this essay. He's out there looking at houses he wants to buy, but the fact is that given the situation he should continue renting. A competent loan officer such as myself who was less ethical could maybe get him the loan anyway, or maybe not. It would certainly be an uphill fight. So he's out low-balling "For Sale By Owner" properties on his own today. The one who's desperate enough to sell at that price needs the transaction done with the first buyer who comes along, and is going to spend at least a month finding out there's only a small chance of the transaction actually going through, a month that they likely don't have to spare. The other For Sale By Owners are likely to get mightily annoyed with him, but he's the customer they're most likely to get.

Caveat Emptor (and Vendor)

Just a quick note in explanation. I fell on Saturday, and while I initially thought I was fine, by Sunday morning it had become obvious that was not the case. I went to urgent care and was told I had separated my right shoulder. No broken bones - just hurts - but one of the things that hurts is trying to use a computer. Therefore, I'm going to be re-running old articles until this at least gets a little less painful.

Why You Should Ignore APR


One of the things you get with every mortgage loan quote is an APR, or Annual Percentage Rate. There is even its own special form, the federal Truth-In-Lending (TILA) form.

This was mandated by congress back in the early 1970s as a way to give consumers some way to compare between competing loans of equal rate, and it is governed by Federal Reserve Regulation Z.

The problems with APR are threefold. First off, it is computed from numbers on the Mortgage Loan Disclosure Statement, which are often intentionally and legally under-stated. "Mis-underestimated," to use President Bush's famous phrase in an entirely different context where it is not a good thing. If the numbers on the Good Faith Estimate are incorrect, the computations that result in the APR will be similarly incorrect.

Here is a routine example, from an unfortunate soul I encountered awhile ago. They told him they were going to do his $230,000 loan for 3/8ths of a point and $1895, which works out to about $3400 total, APR was listed as 6.136 on a 6% loan when he signed up. But when the final documents were ready, the interest rate was 1/4 percent higher, the points were 2.25 points, and the closing costs were actually over $4000. Total cost: $9400 added to his mortgage, and the APR on final documents was 6.568 on a 6.25% loan. It stands out in my memory because I had been competing for his business, and offered to do a back up loan because I was certain the first quote wasn't real. He didn't want to do the paperwork for a back-up loan, but he came back to me during his three day right of rescission. Unfortunately, rates had moved up and by that point I couldn't do anything he liked better, so he rewarded the company who misquoted his loan (to use technical parlance, lied) by getting them paid. Unfortunately, you can't go backwards in time with what you learn at the end of the process. You need to be right the first time.

The second reason to ignore APR is that it is an attempt to compress what is fundamentally at least a two-dimensional number into a one dimensional number. Remember back in school when you learned graphing on a "number line" and then a Cartesian Plane? Which of them contains more information? The Cartesian Plane, of course. APR is an attempt to force a Cartesian Plane onto number line. In order to do it, you need to make some assumptions, and you still lose a lot of information.

The third, most important reason to ignore APR is that the assumptions that Congress and the Federal Reserve mandate were reasonably based on the reality of the 1960s, which has now changed. Back then, people bought homes they were going to live in for the rest of their lives, and re-financing was much less common. People are now living in homes about nine years on the average, and refinancing about every two years. But the regulation still reads that the costs of doing the loan, which are included in the APR calculation, are assumed to be spread out over the entire term of the loan, even with ARMs and hybrid ARMs, which almost nobody keeps after the initial fixed period. With the term of most loans being 30 years (some 40 now), and the average person refinancing about every two years, this computation makes absolutely no sense as it exists today. The costs of the loan should be spread over the period that the person getting the loan is likely to keep it, not the entire theoretical term of the loan.

Let us look at the earlier example in this light. Let's assume that it's a five year ARM, and compute APR as if he's going to keep it the full five years of the fixed period, rather than the thirty years he theoretically could keep it. The APR would have been listed as 7.067% on the final documents.

Let us go a step further and assume that instead of keeping his loan 5 full years, like less than 5 percent of the population, he keeps it for something close to the national median of two years, and compute APR based upon that. His final documents would have listed an APR of 8.293 percent.

To offer a better strategy: At the time, I could have done the loan at zero total cost to him - literally nothing. Zero added to his mortgage, he pays for the appraisal but is reimbursed when the loan funds - at 6.75%, APR 6.750 no matter how you compute. Yes, the payment is $17.75 per month higher than what he ended up with. But he wouldn't have added $9400 to his mortgage balance. Let's compare these two loans five years out, when 95 percent of the population has sold or refinanced and is no longer reaping the benefits of that payment that's lower by $17.75 per month. If he has the zero total cost loan I could have put him into his balance is $215,914.00, and he has paid $89,506 in payments. The loan he ended up with, he's going to owe $223,449, and he's paid $88,441 in payments. Okay, he's save $17.75 per month, about $1065 total, in payments. But he owes $7535 more. If he sells the property and puts it all in a savings account, he would have been permanently ahead by $6470 if he initially choses the higher rate, higher payment, but lower cost loan. Not to mention that he would get $7535 extra all at once, as opposed to little dribbles of $17.75 per month that most people would never notice. If he buys another house, or if he keeps this home but refinances, he owes $7535 less with the zero cost loan. Let's say he gets a really great loan next time, with a thirty year fixed rate of 5%. That $17.75 per month he "saved" on his payment for five years is still going to cost him $376.75 per year, $31.40 per month for as long as he keeps the new loan. This is what comes from relying upon APR as a valid measurement of a loan.

This is not nitpicking. The so-called 2/28 and 2/38 are the most common subprime loans nationwide. They are subprime hybrid ARMS with an initial two year fixed period. People get into them because they don't have the money for a down payment. With a dozen agents in my office, I can't tell you when the last time I saw a first time buyer who had the money for a down payment. Considering that they're all straining to buy as much house as they possibly can get a loan for, this means they're in the subprime market. According to SANDICOR figures I saw a while back, something like 40% of all purchase money loans locally in the last year being negative amortization loans which have no truly fixed period and are practically impossible to keep longer than five years with the best will in the world. Another thirty percent plus, according to SANDICOR, were interest only, so my estimate is that subprime lenders have at least eighty percent of the purchase money market locally, and probably fifty percent or more of the refinance market. With the vast majority of these loans being of the short-term variety as illustrated above, APR is worthless as a measure of a loan.

Caveat Emptor

P.S. Just as a parting shot, let us consider the above situation in the context of a fifteen year loan that, to be insanely generous to the $9400 closing cost loan, the gentleman will keep until he pays it off completely. APR for the $9400 closing cost loan: 6.779 percent. APR for the zero closing cost loan remains 6.750. That's not a typo, the loan with the higher rate has the lower APR. Payment for the $9400 in closing costs loan: $2052.67. Payment for the loan with higher rate but zero closing costs: $2035.29. That's not a typo, either. The higher rate loan has a payment that's $17.38 per month lower, because you didn't add $9400 to the loan balance that you've got to pay back.

Got this search:

"should I get a buyer's agent if I've already found a house"

The answer is almost certainly yes, but I am going to examine both the pros and cons. Full disclosure: This is what I do for a living.

The con is fairly simple. If the seller isn't paying a buyer's agent, they may be willing to sell more cheaply. Then again, they may not. One of the reasons people sell For Sale By Owner is that they're a little too greedy. Even if they have a seller's agent, their listing contract may call for them to keep the buyer's agent's commission if the selling agent sells the property without a buyer's agent involved, and this may cause them to be willing to sell more cheaply. They are under no obligation to do so, however.

Many think the buyer's agent's job is to say, "Here is the living room." That's like saying the president's job is to look impressive. Sure, most presidents do look impressive and I do say "here is the living room," where it's applicable and my buyer may not have figured it out for themselves. Nor is it about looking in the MLS and my connections to find my buyer a property they like. It's not even about making showing appointments with listing agents and occupants.

My real job as a buyer's agent is to find you the best property for your needs under your constraints and get you the best possible bargain on it while making certain that the seller and their agent aren't hiding anything.

Many folks call the seller's agents and use them as their agent. This is what is known as a mistake. That seller's agent has a listing agreement telling them and the seller what the responsibilities of the agent are to the seller. They may or may not sign a representation agreement with the buyer. If they don't sign one, all of their explicit legal responsibilities are to the seller. They are working for the seller, not for you, and they have a contractual obligation to sell that property at the highest possible price. The buyer's interests do not enter into it. Perhaps they do an excellent job of representing your interests anyway, but the odds are against it. Their legal responsibilities are essentially limited to "don't tell any lies and don't practice law without a license." While I was working for the FAA, we found out about an agent who had made a real good living for a while as a seller's agent and how he had done it: By telling everybody he showed a house in the area to that the airport was going to close. Ladies and Gentlemen of the jury, that airport land was dedicated solely to aviation usages by an Act of Congress, and if the county had wanted to close the airport (they didn't; they were making enough money to pay for every airport in the county there, and socking up a huge fund if they ever figured out something else aviation related to spend it on), they would have had to have paid back tens of billions of dollars to the federal government. We got a call from one of his victims one busy Saturday, who asked, "When is this airport scheduled to close?" We advised him that any proposed closure was news to us, and explained the preceding to the gentleman.

Even if the seller's agent does sign a representation agreement with you, in approximately thirty percent of transactions (from my experience) a situation arises where the best interests of the buyer and the best interests of the seller collide. When this happens, no matter what they do, an agent representing both sides is stuck on the horns of a dilemma. If they do A for the seller, they are violating the best interests of the buyer. If they do B for the buyer, they are violating the best interests of the seller. Here's a hint as to which way they are going to jump in the event of conflicting interests: If they violate the seller's interests, they don't have a transaction at all. If you don't buy, they can always sell it to someone else, but if they lose the listing agreement, they are completely out in the cold.

Before I even point a property out to you, or if you find it surf the internet and ask, "What do you think?" I am evaluating the property for fitness, suitability, affordability, how it stacks up to other properties on offer, how many other properties are on offer, and what the details of the property likely mean in the way of potential problem issues. Just a for minor example, a property built in 1975 has to be concerned about both lead-based paint and asbestos; a property built in 1990 still has those worries but to a far lesser extent, as most building stocks with those concerns were long gone, and a property built in 2005 is more likely built over Jimmy Hoffa's final resting place than a repository for asbestos and lead based paint (it could happen, but the odds are long against it). I am not an inspector or a tester, but I can and do alert my clients to safety and environmental issues, potential repair bills, and all sorts of other items before we've made an initial offer. "Best thing you could do with this building is 'accidentally' run a bulldozer through it," is something I told a client in a few weeks ago, in the context of telling him the value, if any, was the land less the cost of demolition and haul-away. Initially built almost 100 years ago and haphazardly added to as well as obviously not in compliance with code, my client would have been facing the possibility of the county condemning the building as unsafe, and quite frankly, I didn't think anyone would insure it outside FAIR requirements. You're not likely to get that kind of talk from a seller's agent. Instead you get words like "charming," "funky!" and the ever popular phrase "needs a little TLC!"

When it comes to the offer, a seller's agent is looking to get the highest possible price. Period. They don't care if you could buy a better property for less elsewhere, their responsibility to the seller and desire for a larger paycheck are in perfect alignment. A buyer's agent is responsible to you, and whereas buyer's agents get paid based upon the sales price, same as the seller's agents, they at least have a legal responsibility to do their best for you. If there are any complaints, a seller's agent can take refuge in the fact that it is their primary duty to get the best possible terms (i.e. highest possible price) for the property. The buyer's agent has no such shelter. Which would you rather have as your representative?

Buyer's Agents do not usually cost you, the buyer, any extra money. I'm sure there are exceptions, but I've never run into one. Both the Exclusive and Nonexclusive Buyer's Agent Agreements used by California Association of Realtors state, in the absence of additional agreement, that any commissions paid out of the "cooperating brokers" amount on the MLS count against the buyer's obligation to the representing agent. This is typically agreed to be two percent in California, and I don't know the last time I saw a residential MLS listing offering less than that to the buyer's agent. The way the transaction is structured is that the selling agent gets the entire commission, but agrees via the listing contract and MLS to share a certain portion with the buyer's agent, if the buyer has one. Good buyer's agents typically beat the price down significantly more than two percent, especially in the current market. I am equipped to do value battle with that seller's agent in ways that members of the general public are not, and whereas it's true they don't have to negotiate with my clients, they've got to sell the property to someone. It's not like the real estate fairy is magically going to convert this property to cash.

Finally, if there's something you should know about a property, the buyer's agent makes certain the question gets asked and the answer disclosed to you. This eliminates a lot of potential surprises down the road.

In short, buyer's agents are the professional on your side, they typically do not cost you any additional money, they can save you a significant chunk on negotiations, and you're more likely to find out about potential problems with the property if you engage a buyer's agent.

Caveat Emptor.


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