Beginner's Information: November 2007 Archives

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

Every once in a while I get someone who is unhappy with required paperwork for privacy reasons. There are three forms that are the driving force behind this.

The first is the standard form for a mortgage loan application, known in the business as the 1003. Admittedly, the form does ask for rather a lot of information. It's comprehensive, and intended to paint your complete financial picture, so they can make a decision on whether or not to grant the loan. It also asks for irrelevant items like ethnicity so that the government can track whether the lender is discriminating (and they are dead serious about requiring ethnicity. If you decline to state, whoever takes the application has to take a guess). This also means it asks for a lot of information that a lot of people would, justifiably, rather not give out. Plus it's a pain to fill out. So some people don't want to, and quite frankly, I understand where they are coming from. Unfortunately, this is a government mandated form, designed to collect not only the necessary financial position data but also additional government mandated information. If you want a real estate loan, filling one out is is a legal requirement. There are only two ways to avoid filling out this form completely and accurately. In order to avoid filling it out completely and accurately, you must either 1) Lie or 2) Buy the property without a loan from any regulated entity. Lying is not recommended. It is a very bad idea. Lying on a 1003 is perjury, and there's likely to be a charge of fraud added into it. You are told point blank on the form that the information required to make a decision on your request for a loan. Misrepresenting your financial position in order to induce someone to lend you money is pretty much textbook fraud. Or you could do without a loan - buy the property for cash, by trade, for services rendered, etcetera. There really are all sorts of possibilities, but even if you put all of them together I don't think they amount to one percent of all transactions. Finally, you could get a loan from an unregulated entity. Basically, this means individuals. Borrow the money from Mom, from the mafia, or from a hard money lender. Unfortunately, even if Mom has the money, she may not lend it to you. And the latter two possibilities charge a lot more interest than the regulated banks, as well as other potential problems.

The second form that often become the issue is form 4506. This is the one that says your lender has a right to look at your tax returns. Many people think that this means they are violating the terms of a so-called "Stated Income" loan whereby they say what their income is, and the bank agrees not to verify the amount, but only the fact of the source of income. Well, the lender always has the right to insist on tax forms for documentation of income, and sometimes they do. But they don't often use this form for it, and it isn't to your advantage to force them to use it. As the form states, the IRS typically takes 60 days to respond to this request, and loans need to be done within 30. You want it done within 30 days if you have a rate lock, and if you don't have a rate lock, whatever you were quoted isn't real because it's gone now - the rates have changed. If the lender wants your information, they're going to require it whether you've signed this form or not. In either case, if they want the information, it's better for you to furnish it directly and immediately.

What they really use this form for is when they get ready to sell the loan. Since all lenders want to able to do this whether or not they make a habit of it, and they get a better price for the loan if they can verify that your income qualifies, they want you to sign the form. If they pull it and you qualify, they get a better price for the loan. If they pull it and you don't, they tried. If you refuse to sign the form, they are well within their rights to deny the loan. So they are going to require you to sign the form as a condition of getting the loan. I can commiserate with you all you want, but it wouldn't make any difference. Options to get around this are basically the same as for the Loan Application: Friends, family, or Lenny the Loan Shark.

The final form that causes resistance is the Statement of Information. Like the Loan Application, this form has a lot of detailed information, and sometimes people don't remember all of it. This form has nonetheless become a routine requirement, but of title companies, not of lenders. The reason for this is fairly easy. Let's say your name is John Smith. Let's say you live in Los Angeles County. There are going to be a large number of documents in the public database in which John Smith or some close variant (e.g Jack Schmidt, Eoin Smythe, or Jon Smitt, among others). Any one of these could have an effect upon the title transaction. Some of them, like a child welfare lien, never go away. Back when I worked for title companies, I could tell you about having to go back forty years, and in some cases further, looking for documents which might pertain to the person in the transaction. In populous counties, the list of documents alone can go to a hundred pages of single spaced stuff, and the title company has to be certain that 1) it isn't you, or 2) it doesn't effect the transaction for some reason, before they agree to issue the policy of title insurance. Guess what? The reason the document list is so long is because of the commonality of the name, so the long lists come up a lot more often than the short ones. Even if your name is something truly unusual (mine is uncommon), they've got to check out all close variants, anglicizations, and whatnot. So to toss out as many documents as they can, as quickly as they can, the title company requires a Statement of Information. Without that, it can be prohibitive to even run through the preliminary check. These people they are paying to do these searches rapidly become skilled and fairly high paid employees, even if they start out cheap. So the title companies want you to fill out the Statement of Information. It's one of those forms you don't want to lie on or conceal information on as well.

Don't want to do it? The title company will tell you they don't want your business. No policy of title insurance, either owners or lenders. That's your choice if you don't need a loan on the property and you're willing to take the seller's word that they really do own it and that there are no title issues. I wouldn't be. I've dealt with too many properties where there were known title issues. Nor are lenders nearly so glib about it. In order to get the loan, they require a lender's policy of title insurance, and whether it's a purchase or a refinance, you need a lender's policy of title insurance. If you're dealing with Lenny the Loan Shark, he doesn't care that you've lost the property to the forgotten first wife (via a three day marriage) of Mr. Jones, three owners before you, whose brother apparently inherited and sold the property in 1976 but then the former Mrs. Jones just found out about it and sued for possession. If she (or her heirs) can prove her claim, she's going to be awarded the property. So you want title insurance.

Now, there are some protections you have under law. In California, I cannot use information obtained by real estate loan applications to sell your information to third parties. Once the loan is closed, however, the lender can share your information with sister companies. Heck, I've had lenders take the information I've gathered and call the client to offer them a direct deal. Cancel the transaction with me, they say, and they'll give the client what they think is likely to be a better deal. Pretty sweet, huh? Steal my payment for the client I spent my time, money, and effort to find, and then brought to them. Unfortunately for these lowlifes, I do loans cheaper than they usually expect, and instead of canceling, the client reports it to me. Needless to say, these lenders don't get any more business from me. Title and escrow companies can similarly share information for marketing purposes. I always tell people who are concerned to write that they opt out of all marketing on the first form the title or escrow company wants them to sign or fill out. That puts the onus on them not to share your information.

Caveat Emptor

I found this article by Ken Harney in the paper.

WASHINGTON - Call it funny money for the housing boom: Now you don't need actual cash in the bank to buy a house. All you need is somebody who says you've got money in the bank.



Need a hundred grand on deposit to convince a lender that you deserve a million-dollar mortgage? You've got it . . . even though you haven't really got it because you "rented" it from a company in Nevada for an upfront fee of 5 percent - $5,000.



Sound bizarre? Welcome to the wonder world of "asset rentals" now being investigated by bank and mortgage industry fraud experts. It works like this: Say your loan officer discovers that you lack the financial wherewithal needed to qualify for the mortgage you want. Rather than lose your business, however, the loan officer turns to a service that offers "asset rentals." For a flat fee of 5 percent of the amount you need, the service will verify to anyone who asks that the $100,000, $500,000 or $1 million in bank deposits you've claimed on your loan application documents are yours indeed.

I am sorry to say that this is not the first time I've encountered said phenomenon. Nor lenders. This is why assets require seasoning or sourcing. In other words, the lender requires you to show that you've had it and built it up over a period of time, or they want to know where and how you got it.



Most loans should not require a large amount of assets - A paper loans, the best loans of all, want one to two months Principal, Interest, Taxes, and Insurance (PITI) for full documentation (and I can usually get it reduced), or six months PITI for stated income loans. Neither of these is a large number if you're really making the money, and they can be in a variety of places.



Some sub-prime lenders, however, will take large amounts of money in an account somewhere as evidence that you can afford the loan. These loans usually end up looking more like a propagandized No Income, No Asset loan than anything else. They don't get the best rates and terms, even for sub-prime, and there's likely to be a nastily long pre-payment penalty on them as a GOTCHA! The loan provider, be it broker or lender, is likely to make a lot of money on them - In California there is a thing called section 32 limiting total loan compensation to six points, which on a $400,000 loan is $24,000, and many so-called "discount" real estate agents turn around and require their clients to do the loan with them. It doesn't do you a bit of good to save a couple thousand on the sale or purchase in order to get ripped for twenty on the loan, where it's easier to conceal it. I can point you to many of these so-called "discount" houses who do these loans all day, but they are not loans you should want. If a friend came to me and asked for one, I'd try my best to talk them out of it.



But wait! It gets better!

This and other e-mail pitches, copies of which were provided to me by mortgage industry recipients, carried the sender name of Loren Gastwirth, identified on the e-mail as vice president-marketing for Morgan Sheridan Inc. of Mesquite, Nev. The asset rental attachment carried the name Independent Global Financial Services Ltd., with an address in Las Vegas.



... to a Zexxis Co., with the same Mesquite, Nev., address on Loren Gastwirth's Morgan Sheridan card. When I called the number listed for Gastwirth, I received no reply, but instead heard back from a person identifying himself as Allen Paule. Paule is listed in corporate filings with the Nevada secretary of state as the "registered agent" for Morgan Sheridan, Independent Global Financial Services, and Zexxis Corp.



Paule said the asset rental and employment pitches - including downloadable attachments and forms carried on Morgan Sheridan's Web site - were not connected to his firms. He said, "somebody hijacked our Web site." He confirmed that a Loren Gastwirth works for Morgan Sheridan. And he also confirmed that Independent Global Financial Services, Morgan Sheridan and Zexxis Corp. have overlapping ownership and management. According to Nevada corporate records, a Paul Gastwirth is listed as president and director of Morgan Sheridan.



The Web site of Vault Financial Services Inc. of Las Vegas lists Paul Gastwirth as CEO of that firm, and president of Independent Global Financial Services, "a company specializing in asset rentals and enhanced credit facilities for individuals and companies worldwide."

In other words, they are playing a Nevada Corporation shell game. A long head swallowing tail chain of corporations, each of which is likely to be a shell set up to insulate criminals from the consequences of their actions. The stuff about "somebody hijacked our web site" is almost certainly bogus.



but it gets better yet!

That's where the asset rental service's "VOE" (verification of employment) program comes in. Essentially you indicate on a faxed form what annual or monthly income you or a home buyer client needs to qualify for a mortgage, and the asset rental company will verify to anyone who asks that you have been paid those amounts.



The cost: just 1 percent of the claimed annual income. "For example," says the pitch, "$100,000 of annual income - cost of $1,000. Minimum is $50,000." The e-mail came with attachments that directed payments for asset rentals and employment verifications to an account number at Wachovia Bank in Roanoke, Va

In other words, they're also volunteering to help you circumvent one of the most basic protections to the whole process, making sure for both the lender and the borrower that the borrower can afford the loan. If you cannot afford the loan, you are probably better off without it, although many people don't realize that this requirement is partially for their own protection. If you can't make the payments, you're going to get foreclosed on. If you get foreclosed on, you're likely to lose everything you put into the house and get socked with a 1099 form which the IRS will use to go after you for taxes as well.



Lest you not have realized this by now, all of this is FRAUD. Serious, felony level FRAUD. Lose your home and go to jail FRAUD.



I'm going to share a little secret with you, widely known within the industry but not in the general public. That real estate agent or loan officer getting you your house or your loan may not be the brightest financial lightbulb in the world. Many loan companies and real estate offices select for this, usually by only hiring people who have never been in the industry before. Some of them are even among the biggest names in the business. They select for sales ability and "make sales" attitude, not the knowledge (and more importantly, willingness) to say, "Wait a minute! Something is not right here!" Especially when it may cost them a commission. And hey, if the companies involved lose a few low-level sacrificial victims to lawsuits and the regulators, that's no skin off the owners' noses and they still get commissions out of it. These schemes are pitched to the agents and loan officers as a way to "save" a client. Sounds like it's in your best interest when you put it that way, right? It is not. The bank discovers this (and Nevada Corporations, among others, are a red flag that loan underwriters look very hard at) Most of these deceptions are discovered before the loan gets funded - meaning that the client they were helping to commit FRAUD wasted their money, and they have a case against the agent and employing broker, whose insurance will probably not cover the issue.



The ones that do get funded are even worse. When the bank discovers the FRAUD, they have a right to call the loan. This means you have a few days to repay the loan, or they take the house. All of those wonderful consumer protections the federal and state governments have enacted become mostly null and void, because you committed FRAUD. You can count upon losing all of your equity in the home, and getting thrown out with nothing. Furthermore, depending upon company policy of the lender, you may find yourself sued in court, and possibly even under criminal indictment. Judgements for FRAUD are nasty, and they don't go away. Convictions for FRAUD can really mess up your life completely and forever, not just in applying for credit, but in employment and other ways as well. If your loan is sold to another lender before the discovery happens, the probability rises even further, because the new lender is going to sue the old lender, who is going to take action against you as part of a defense that says they were acting in good faith. The shell corporations that pretended you worked for them or had deposits with them will be long gone (or untouchable) of course. You may have a claim against the agent, loan officer, broker or possibly even original lender, but if someone else beat you to it or they are out of business for some other reason, good luck in actually collecting.



In short, relying upon an agent or loan officer as an expert without doing your own due diligence is likely to get you in hot water. As good rules of thumb: Never lie. Never allow someone to lie on your behalf. No matter how desperate you are, it's likely to buy a lot more trouble than it's worth.



Caveat Emptor

For all of the rants I post about bad business practices, there are a lot of things the mortgage industry gets right. One of these looks like a red flag not to do business with them, and may seem like a cruel trick, but it is neither.



With every single loan that is done, you, the client, will get a package in the mail from the actual lender. It looks very official, and in fact it is.



Depending upon lender policy, it usually contains intentional mistakes on things such as the loan type, rate of the loan, or the points involved.



And every so often, I get a panicked phone call because I forgot to warn the client the package was coming.



The point of this particular package is not what it appears to be.



You see, every so often, some criminal wanders into some loan office and applies for a loan on a property they don't own. Sometimes loan brokers actually go out and meet the client in their home, but other sorts of loan providers sit in their office and business comes to them. So the bank has really no way of knowing if this is the actually the person who owns or even lives in the property. So they mail a loan package to the property.



The idea is that if you haven't applied for a loan, you're going to speak up. You're going to call the bank, the broker, and everyone else asking, "What the heck is going on? Is somebody else trying to get a loan on my property?"



This is the point of the particular package. It's an anti-fraud measure. And it has just worked.

Working with a borrower all day today. Truly ugly situation because he doesn't have a long history of credit, and this is the major obstacle to getting the loan done. He actually makes the money, and has a sufficient history of making the money to justify the loan "full documentation". But: He only has one usable line of credit, and it is only 9 months old. Most lenders require a minimum of three tradelines, at least one of which must be open for 24 months.

On the other hand, there exists a method to help this person. What he is going to do is approach close relatives with long term stable, paid up lines of credit, and ask if he can be added to one of their revolving accounts as a co-user. He does not have to get a charge card, or actual access to the account, he just needs to be added to the account as a co-borrower, and he will get the benefit of however long the trade-line has been open. He doesn't even have to know the account number (and the credit report omits several digits, so he doesn't get it there, either).

This has two effects. First, he will get the benefit of the length of the trade lines, and second, he will get the benefit of the tradelines being paid promptly and on time for however long. Preferably, these are low limit and low to zero balance accounts, because he will be dinged for any necessary payments on his debt-to-income ratio. But it will likely raise his credit score significantly (I would guesstimate at least sixty points) by giving him a several year history of on-time payments, as well as giving him an adequate history of tradelines.

Nor is this fraudulent in any way, shape or form. This is being done in full consultation with the lender. The lender has been notified in writing and approved of this. It may seem like I'm always going off about fraud, but in this case something that may appear a little shady actually turns out to be something that both the bank and the regulators can live with. So if you're thinking that loans are always about NO NO NO, here's a very strong YES to go along with it.

Caveat Emptor

UPDATE: As articles like this illustrate, 'Piggybacking' Roils Credit Industry, this is starting to be seen as a problem. It certainly is not a silver bullet. Indeed, it's something to avoid if there are other alternatives. Two major drawbacks apply: First, the payments hit your debt to income ratio. Second, if your "benefactor" has a late payment, that hits your credit also. Since neither of these are under your control, this makes this trick something to avoid if there are better alternatives.

One of the things I hear a lot is that people are getting cash in their pocket from a refinance rate where there is no rebate. "I'm not paying any closing costs!" they proudly tell me, "The bank is putting money in my pocket."



Chances are that's not what's going on. In fact, when the client gives me the chance to investigate, I find out that they are paying huge fees, which are all being added to the balance of the mortgage. But what they remembered was that the lender was also going to give them $1200 or $1500 in cash and add that to the balance on top of everything else.



For "A Paper" loans, Fannie Mae and Freddie Mac define the difference between a cash out and rate/term refinance. On a rate/term refinance, a client can have all costs of the loan covered, both points if any and closing costs. A client can have an impound account set up to pay property taxes and homeowner's insurance out of the proceeds. They can have all due property taxes and insurance paid. The client can have all interest paid for 30 or 60 days. And the client can get up to one percent of the loan amount or $2000, whichever is less, in their pocket. In addition to this, if the old lender had an impound account, the client will receive the contents in about 30 days.



Let's say you have a $270,000 loan on a $300,000 home - small for most parts of California and some other places, but large for most places in the country.



Here in California, yearly property taxes would be about $3600 on that. Insurance is about $1000 per year, monthly interest is $1237.50. I'm writing this in September, so if you finish your refinance today, your first payment would be November 1. You'll make five payments before both halves of your property tax are due, and they want a two month reserve, so 12 months plus 2 months is fourteen months minus five months is nine months reserves they will want in property taxes. $3600 divided by twelve times nine months is $2700. Let's say Insurance is due in April, so they'll want eight months of that. $1000 divided by twelve times eight months is $666.67. Plus two points and $4500 in closing costs the lender charges, and they actually may have told you about it, but they emphasized the cash you are getting in your pocket so that is what a lot of people remember.



Even without the cash out, this works out to a new loan amount of $270,000 plus $2700 plus $666.67 plus $1237.50 plus $4500 plus two points which works out to $284,800 as your new balance without a penny in your pocket. If they gave you $1500, your new balance becomes $286,330 (remember the two points apply to the $1500 also!) which will probably be rounded to $286,350. Subtract $270,000, and they have added $16,350 to your mortgage balance but hey, you got to skip a month's payment and got $1500 in your pocket!



As I have said elsewhere, however, money added to your balance tends to stick around a long time, and you are paying interest on it the whole time. Furthermore, lenders love this because their compensation is based upon the loan amount. All because you allowed yourself to get distracted by the cash in your pocket. This is fine if it is what you want to do and you go in with your eyes open, but chances are if someone were to tell you "I'm going to add $16350 to your mortgage balance to put $1500 in your pocket and allow you to skip writing a check for one month!" you wouldn't agree to do it. Even if the rate is getting cut so your payment is $75 per month less.



For loans lower down the food chain (A minus, Alt A, subprime and hard money) the lenders set their own guidelines on what is and is not cash out, but Fannie and Freddie's definition is more strict than the vast majority.



So when somebody tells you they are going to put money in your pocket as part of the closing cost, ask them precisely how much is going to be added to your mortgage balance. Print out the list of questions in this, and ask every single one. Because chances are, they are trying to pull a fast one, and once you are signed up, they figure they have you.

Caveat Emptor

Most people tend to shop for a mortgage based upon the payment. They figure the lowest payment will be the cheapest loan.



This is the way most people make banks rich. Because they are looking for the loan with the lowest rate and the lowest payment, they choose the loan with two or three points that's going to take twelve years to pay for its costs, and then after they've sunk all those costs into the front end of the loan, refinance within two years and sink a whole new set of costs into the loan. The bank gets all this lovely money, and then the consumer lets them off the hook by refinancing, and the bank doesn't have to carry through on the full amount of their end of the bargain.



In point of fact, when shopping for a mortgage loan, there are at least four factors the consumer should consider. The best loan for a given consumer in a given situation at a given time is based upon all of these factors. Each varies in importance from loan to loan.



These factors are:



The monthly payment

The monthly interest charges

The costs that are sunk into the loan in order to get it

How long you're likely to keep the loan.



This is not to say that only these factors are of importance. For example, the possibility of "back end" costs when you refinance is likely to be a critical factor when considering a loan that has a prepayment penalty. If you know there's a good chance you're going to get hit with an $8000 charge for paying it off too early, that needs to be added into the likely costs of the loan.



The monthly payment is important for obvious reasons. If this is not something you're comfortable paying every month for month after month and year after year, then getting this loan is probably not something you should do. The costs of getting behind in your mortgage are significant, and the costs of going into default are enormous, and both may likely continue even after you have dealt with them. I talk with people all of the time who say, "We've got to buy something now, before it gets even worse!" Many agents and loan officers will happily put someone who says this into a home, with a loan payment that looks affordable on the surface, but isn't. If you don't examine the situation carefully, you're likely to be getting into something you cannot afford, and is likely to have huge costs and ramifications for years down the line. Neither of these people is your friend. They are each making thousands, often tens of thousands of dollars, by putting you into a situation that is not stable, and that you're going to have to deal with down the line, while they're long gone and putting some other trusting person who doesn't know any better into the same situation as you. If the situation is not both stable and affordable, pass it by.



With that said, the monthly payment is usually the LEAST important of these four factors. As long as it's something you can afford, do not charge straight ahead, distracted by the Big Red Cape of "Low Payment" while you are being bled to death by other things. Many of these Matadors (which means killers in Spanish) will bleed you to death while acting like your friend by distracting you with the "affordable low payment". Due to lack of a real financial education in the licensing process, a disturbingly large number do not realize they are bleeding people, but that doesn't help their victims. A loan payment that is higher but still affordable may be a better loan for you - and in fact this is more likely true than not.



The three other factors are each far more important than payment. Payment is important. People who are unable to make their payments are called insolvent. Many of them file bankruptcy, have liens placed upon them, wage garnishments, suffer for years because of bad credit ratings, etcetera. But just because the cash flow is better right now does not mean the situation is better - that way lies the Ponzi scheme, Enron, and many other famous wrecks in the financial graveyard.



There is no universal ranking of which of the remaining three is the most important. They must be compared as a group in the light of a given situation: YOUR situation.



The monthly interest charges are simple. Principle balance times interest rate. This starts at the amount of the new loan contract (with all the costs added in, of course) times the interest rate.



The costs sunk into the loan shouldn't be any more difficult to compute, but they are. As I have gone over elsewhere, it is an unfortunate fact that rarely does a mortgage provider tell the entire truth about the costs of the loan until it's too late to do anything about it. If you have an ethical loan provider, the amount on the Good Faith Estimate (or Mortgage Loan Disclosure Statement here in California) should match what shows on your HUD 1 at the end of the process. Please remember to note any prepayment penalty or other back end charges as a separate dollar amount.



The thing that is most difficult to determine is how long you intend to keep the loan. Most people have no reliable crystal ball to gaze into the future.



The obvious answer to this dilemma is to compute a break even point. This completely falls short with regards to higher costs incurred after disposing of the loan as a result of having a higher balance, but it's a start. If one loan has lower costs and a lower interest rate, there's no need to go through the computations. But if as is common, one loan has a higher sunk cost and the other has a higher monthly interest charge, divide the difference in sunk costs by the difference in interest charges per month. This gives a figure in months that is a break even point. Don't forget to add in any possibility of a prepayment penalty.



With this breakeven figure in months, you can calculate which is likely to be the better loan for you, using your own situation as a guide. If the breakeven is 54 months and you're being transferred in 36, the answer is obvious. If you've refinanced at intervals of twenty-four months your whole life, a 54 month breakeven is not likely to be beneficial. If you're going to need to sell in two and a half years when mom retires, that's a clue, too. And if you're a first time homebuyer starting out, remember that 50% of all homes are sold or refinanced within two years, so unless you have some reason to suspect that you are likely to be different, take that into account. Far too many people waste thousands of dollars regularly by paying the up-front costs for loans that they will not keep long enough to break even.



Caveat Emptor.

Minorities get higher rates.

They add that the fact minorities are more likely to borrow from institutions specializing in high-priced loans could mean they are being steered to such lenders or that some lenders are unwilling or unable to serve minority neighborhoods.

What they describe is called redlining. It is illegal. HUD really gets their panties in a bunch over it, too. Mostly what actually happens is that the lenders simply aren't chasing certain kinds of business. If any comes to them, they deal with it like anyone else. This is standard marketing procedure. Figure out who you're trying hardest to serve, and really chase that segment. If anyone else wants to come to you, that's wonderful and you serve them the same as any other customer, but they're still not someone you're going out of your way to attract.



One thing that the article explicitly said: This does not include/compensate for credit scores. Working with people in the flesh, I have experienced the fact that there is a difference between how various groups handle credit. Often, the urban poor have some difficulty in meeting the requirements for open and existing lines of credit. They are more likely to have failed to make the connection between credit reporting and future qualifications for credit, having at some point made a decision not to pay a creditor. Often, they are more pooly educated about their options or think they're a tough loan when they're not. This extends into the general population, although it's less prevalent. I have a friend I went to high school with. He and his wife make over $160,000 per year between them in very secure jobs they have held for over a decade each. Their credit score is about 760. The loan officer they were originally working with told them they were a tough loan to try and scare them into not shopping with anyone else. The reality is that the only question is what loan is best for them because they easily qualify for anything reasonable. This is far more common than most people think. The current standard is that if you have two or three open lines of credit and your credit score is above 640 - sixty plus points below national average - I can get 100 percent financing, and the possibility doesn't disappear completely until you go below 560 (whether it's smart is a question for the individual situation, but I can get a loan done if it is). With increasing equity, I can usually get a loan done even for credit scores below 500 (two hundred points below national average!). Now, the better your situation, the better your loan (e.g. rate, terms, closing costs, etc.) will be, but the question is not usually "Can I do a loan for these folks?" but "Can I find them better terms than anyone else?" and "Should I do this loan or is it really putting them in a worse situation than they're in?"



Quite often, the loan provider that urban poor go to is the one who advertises where they see it - basically, the lender who chases their business, usually by advertising in that area or in that language. Every other lender is still available to them, but they go to the place whose advertising they see. They think "This guy wants my business. He does business with people like me all the time. He can get me the loan." The problem is that all too often, this loan provider has chosen to chase this market precisely because the people in it, most often urban poor, do not understand they've got other choices, and do not understand effective loan shopping, and so this loan provider makes six percent (the legal limit in California) on every loan plus kickbacks and arrangements under the table. They make more on one loan than I do on half a dozen for roughly the same amount of work, and the loan they do are not as good for their client as others that can easily be found.



Most people are better loan candidates than they think they are, and qualify for better loans than they think they do. It's more often the property they have chosen that creates an untouchable situation than the people themselves. Even then, there are usually options available.



(I got a ten minute lecture a while back from a nice young couple telling me they "deserved" a rate of four to five percent on a 100% loan for a manufactured home sitting on a rented space, because it was "the same rate everyone else is getting". Well, if it had been on a regular house sitting on owned land I could have gotten them that loan on very desirable terms, but nobody does 100 percent on manufactured homes, and if there's no ownership interest in the actual land involved then it's a loan secured by personal property, not real estate, and it becomes a personal loan, for which the rates are much higher.)



So keep this in mind if and when you're in the market for a real estate loan, and shop multiple lenders, and shop hard. Remember that all of the times your credit is run in a two week period for mortgage purposes only counts as one inquiry, whether it is just once or whether it's five dozen times. A loan provider does not have to run credit themselves to get a quote, but the information must be complete, accurate, and in a form they can use.



Keep in mind that the loan market changes constantly. A quote that's good today almost certainly will not be good tomorrow. If it's not locked, it's not real, and a thirty day lock is not valid unless extended on the thirty-first day, for which you will pay an extension fee if necessary. So shop hard, with a real sense of urgency, get it done quick, and make your loan provider get it done quick. Any additional stress will more than pay for itself (and the longer the loan takes, the greater the opportunity for stress, too). Apply for a back-up loan, and if it's ready first, it's probably a good idea to go with your backup. Sight unseen, I will bet money that a loan done in thirty days or less from the time you say that you want it is a better loan than the loan that takes sixty days or more.



Caveat Emptor.

A reader named Terri at Educating the Wheelers sent me an email giving me a heads up on the antics of the state of Illinois. here is the link. Here is the original article at blackprof. The link to the original source is broken, but here is the Illinois Department of Financial and Professional Regulation, here is the full text of HB4050, their new state law, here is a synopsis, among other things, and here are enforcement regulations.



Critical sections:

Based on information submitted to the Department by the originator, requires the Department to make a determination as to whether credit counseling is recommended to the borrower. Requires the Department to notify each borrower for which it recommends counseling of all HUD-certified counseling agencies located within the State and direct the borrower to interview with a counselor associated with one of those agencies. Requires the borrower to select an agency from the notice and to interview with a counselor associated with that agency within 10 days after receipt of the notice. Prohibits the borrower from waiving the recommended credit counseling. Requires the title insurance company or closing agent to record simultaneously with the mortgage a certificate of its compliance with database reporting requirements and, if it fails to do so, provides that the mortgage is not recordable

and

Changes the definition of "pilot program area" to all areas designated by the Department of Financial and Professional Regulation because of high foreclosure rates due to predatory lending practices. Deletes a requirement that a broker or originator provide each borrower with a notice disclosing the names of at least 3 lenders and comparing the rates and terms of those lenders (emphasis mine). Provides that nothing in the predatory lending database provisions is intended to prevent a borrower from making his or her own decision as to whether to proceed with a transaction.

blackprof's take:

Nevertheless, Tuesday was a key moment in African-American History. On Tuesday, in addition to Mrs. King's passing and Justice Alito's elevation, the State of Illinois enacted a law that requires all mortgage applications within nine Chicago zip codes to undergo a process of review by the state's Department of Financial and Professional Regulation. The department's review process determines whether mortgage applicants in these neighborhoods must undergo compulsory credit counseling. If they must, then the mortgage lender must pay the cost of the counseling.



Anyone familiar with Chicago geography and demography knows these nine zip codes. They are all neighborhoods on the South and Southwest side of Chicago. They are predominantly African-American neighborhoods. These neighborhoods are some of the most impoverished in the City of Chicago, and indeed, the nation. On Tuesday, they suddenly became much poorer.



Although the legislators responsible for the new law were motivated by good intentions, they failed to consider the inevitable consequences of their bill. They wanted to protect poor homeowners in certain neighborhoods from high interest rates and predatory lending practices. The new law, however, necessarily increases the costs, time and uncertainty associated with mortgage applications in these black neighborhoods. The cost of credit counseling will be born by and charged to mortgage applicants. This, in turn, will necessarily decrease the price that new home-buyers can afford to pay for homes in these neighborhoods. If they can choose to buy in other neighborhoods, where housing money is more affordable, they, on the margin, will. Furthermore, recent studies of credit counseling programs suggest that these programs have little effect on borrower behavior. The end result is that homeowners in these poor black neighborhoods suddenly have less equity in their homes than they had on Monday.



Legislation like this is often motivated by an unspoken belief that poor black people are incapable of making important decisions for themselves. We see this belief reflected in the protection of failed public schools, and now with respect to personal finances. But the very people for whom such a law was enacted were responsible and wise enough to save to make the down payments necessary to buy these homes in the first place. Suddenly, these same people must have their choices reviewed and second-guessed by state bureaucrats who have no stake in the outcome, or accountability for incorrect or unresponsive decisions. It is hard to imagine the fate of a similar but broader law imposing credit counseling upon all Illinois residents, including white professionals residing in the Chicago suburbs of Evanston, Winnetka, or Kennilworth. Would there have been enough votes in Springfield to impose these "benefits" on everyone, rather than just the residents of the Southwest side of Chicago?

I'm just a nuts and bolts guy. I see some issues here:



First, by increasing the cost of doing business in the relevant zip codes, the law is increasing the lender's cost of doing business. It is not plain how the lenders will pass this on to the consumers, but pass it on they will. This has the effect of making loans more expensive. I can see two methods: either requiring everyone on the state of Illinois to pay more, or requiring only those owners actually within the area to pay it. If they require only those within the area to pay, an excellent case can be made that higher loan costs makes for functional redlining, and the federal courts can intervene, and almost certainly will, possibly invalidating the law. If they require that everyone pay the extra costs, this functionally raises the cost of doing business everywhere in Illinois. This will also make it harder to qualify for loans in the requisite areas, as lenders will have incentive to throw roadblocks in the way of potential clients from those areas. Due to redlining regulations, I'm not certain how far that lenders will go, but it certainly won't make loans easier to get or cheaper.



Second issue: no matter the intent, no matter who pays, this will cause loans to take longer and cost more, in addition to previously discussed costs of the program. For previous work as to why, see my essay on Mortgage Loan Rate Locks. The point, however, is that the State of Illinois is going to take some unknown period of time to consider the case. Then the client is potentially going to have to go to a credit counselor, who is going to have to get paid before providing the necessary legal blessing to the transaction. Furthermore, if the credit counselor wants more work at the expense of delaying the transaction, they can apparently make it happen by my reading of the law. All rate locks are for a specified period of time. Given this, there are three alternatives. One, float the rate (don't lock) and hope that rates don't rise. Second, lock for a longer period, which costs more. Third, pay an extension. Since the outcome when you don't lock for long enough or don't pay extensions is pretty much universally "worst case pricing" (i.e. the worse of rates when you locked or current rates), this means significantly higher loan costs, loan rate, or (most likely) both.



Third, as I said before, since this is going to motivate lenders to not want to do business there, and makes it harder to get loans in the effected areas, and quite likely increase the rates and costs of loans in the area as a consequence. This directly restricts how much of a house, price-wise, people in the area can qualify for, which in turn will have the net effect of decreasing sales prices in the area, further hurting current residents.



There are probably further detrimental aspects to new requirements, but the Illinois legislature deleted an existing requirement that, while apparently weak and subject to abuse in that a prospective loan provider was free to provide a prospective client with information only on loans that are worse than the first proposal, at the very least gave the client some further information as to alternative loans.



In short, the actions of the Illinois Legislature in this instance could, according to my understanding, basically be taken from a manual on "How To Hurt Poor People Even More".



Caveat Emptor (and Caveat Voter).

What is a good interest rate for a house that is for someone with low income?

Well, if you make enough to afford the property, your income isn't a factor on the interest rate you get! You either qualify or you don't. Banks may charge a fee for low loan amounts, but your income is not the issue, except as to whether or not you qualify for the loan as it is submitted. The lender does not care if you just barely scrape through, or if you have a hundred times the minimum income to qualify. Kind of like there's no such thing as "a little bit pregnant." You either are or you aren't. Same thing with loans: You either qualify or you don't. It's possible you might qualify for a better program than you got, or that you might qualify with another program where you don't qualify with this one, but those aren't questions that the underwriter or the underwriting process are going to address. They're questions your loan officer needs to get right before the loan is submitted.

There may be programs you are eligible for, such as Mortgage Credit Certificate or a locally based first time buyer assistance program. These programs can make it easier to qualify, in that they effectively raise your take home pay, they keep you from having to borrow so much, or even that the save you from the choice of PMI or splitting your loan. However, be aware that every single one of these programs requires full documentation qualification for a loan that's fixed for at least three years and fully amortized, or fixed and interest only for at least five years. Stated Income and negative amortization loans are not permitted with any of these programs that I am aware of. The idea is that you buy a property you can afford and stay in it for a long time, not a property you cannot afford, and get foreclosed upon. These programs also have income limits that many people might not consider "low." Up to $96,000 per year here locally can still qualify, and the big concern is whether there's money still left in the budget for these programs.

There is no special magic wand that enables low income people to stretch beyond their normal means in purchasing a home. There's a lot of unscrupulous people who have gotten paid a lot of money pretending that there is, but there isn't. Nobody is really going to give you money at a lower interest rate than someone else, just because your income is lower. If this means you have to settle for a condo when you want a single family detached property, or a less expensive home than you would like, well, that's what everyone else has to do.

Caveat Emptor