Beginner's Information: March 2008 Archives

>broker incurred 19 inquires in 1 week dropping my score.


I'd go the full Penn and Teller on this one if I wasn't trying to stay family friendly. The law is clear on this one, and practice is fully compliant with the law. I've seen thousands of credit reports, sometimes with dozens of recent mortgage inquiries. It could be 1, 19 or 19,000 inquiries. As long as they are all mortgage inquiries, all inquiries within thirty days count as one one inquiry. And the credit reporters and credit modelers I'm familiar with all comply.

Now, the best and the worst loan officers are brokers, who shop your loan around to multiple lenders. But you don't even have to stick with one broker, and you are silly to do so. Shop your loan with half a dozen at least, and apply for two or more. As long as you control the appraisal, the most you'll pay is a retyping fee, and you can play them off one against the other to see which delivers the most of what you want the fastest.

This used to be a real issue. Years ago, there would be a game as each inquiry was a hit to your credit, so prospective mortgage providers would run your credit again and again, until they drove your score under some noteworthy creditworthiness break-point. They could still use their original report, but since anybody who ran your report after that would see a 678 instead of a 686, or a 572 instead of 588, it would be unlikely that they could provide as good a loan.

However, a few years ago the National Association of Mortgage Brokers sponsored legislation in Congress to change this. It was hardly altruistic of them, people not having their score hurt by multiple inquiries means that they are more willing to allow brokers a chance to compete. Nonetheless, this was a major benefit for anyone who wants to be able to shop around for a mortgage like they might want to for any major purchase, and mortgages are the second biggest purchases most people make in their lifetime (the biggest being the property the mortgage loan secures!). No matter how selfish the motive, however, they still did you a major favor, as someone who might want to have a mortgage someday even if you don't now. Tell your mortgage broker thank you for that.

Now there is a limitation to this, and ironically it affects credit reports run at banks and credit unions, although not brokers. Because in order to qualify for this, the inquiry has to be run under a provider code that says, "inquiry for mortgage." Mortgage broker inquiry codes all say "inquiry for mortgage," because that's the only type of credit they've got. But banks and credit unions give loans for other purposes also, so they have a minimum of two inquiry codes, one that says "mortgage inquiry," and one that says, "general inquiry." If you are talking to a loan officer at a bank, who does car loans and credit cards also, sometimes they use the wrong inquiry code, and it counts as another inquiry. Talk to four banks, potentially four inquiries. Talk to four brokers, unless you space them out by 30 days or more, it's never more than one inquiry.

So anybody who tells you not to let other mortgage providers run your credit because they might drive your score down is either unaware of the law, or simply trying to scare you because they are frightened of having to compete. Incompetent or a liar, one or the other - maybe both. When you get right down to it, they are really telling you that their loans aren't very good. Because so long as they are done within a few days, the fact is that any number of mortgage inquiries all count as precisely one inquiry.

Caveat Emptor

People sometimes ask, "Why should the lender care where I got the money for the down payment? I earned it, it's mine - cash is cash!"

They're right as far as they go. In general, the lender doesn't care whether you got your cash. It could have been by selling off your first-born child, moonlighting as a drug dealer, or embezzling the funds from your employer. It's not usually a good idea to get a real estate loan if you're facing criminal charges (and you must disclose it if you are), but if you aren't facing charges, the lenders don't really care.

What they do care about is money appearing for no known reason just prior to purchasing real estate. Quite often that money is an undisclosed loan, on which you are going to have to make payments, which are going to influence the debt to income ratio under which you qualified for the loan you want them to issue you. Debt to income ratio is the most critical measure of loan qualification. If you're going to be making payments of $400 to pay back the person who loaned you that money, the lender is required to consider whether the money you are making is going to enable you to pay back that loan as well as their own.

So the lender is going to want to know where any sudden influx of money in the last few months came from. This is called "sourcing" the money. They want to know where it came from. Did you sell another property? Then they want evidence, in the form of a HUD 1 that shows that money. Did you get a bonus? Let's see the remittance advisory. Did you sell stock? Did you sell your collection of rare Roman gold coins? Each of these has paperwork to attest to the fact, and the lender will want to see it.

If some friend or family member wants to make an actual gift, that's fine also. What the lender will require is a letter from that person stating that this money is a gift and comes with no strings attached. What they're looking for is an explanation that doesn't involve the money being obtained through a loan.

If you've had the money for a while, or have been building it up over time, your account statements will demonstrate that fact. Six months ago, you had $100,000. Since then, you've saved another $3000, earned another $5000, and your balance is now $108,000. This is called "seasoning" the funds. Nobody wants to have a loan sitting around longer than necessary - particularly not a loan for a significant amount of money. Seasoning the funds reassures the lender that this is not an undisclosed loan.

Suppose the money in your checking account that suddenly appeared two weeks ago is a loan? That isn't necessarily insurmountable. Let's get the loan paperwork out there where the lender can see it, examine the repayment schedule, figure out what it does to your ability to make the payments on this new real estate loan you want. If you qualify by debt to income ratio with these payments included, it's pretty likely your loan will be approved. There are exceptions, but I'm going to let those go uncovered, because I'm not real big on telling the general public how to get fraudulent loans accepted. There might be politicians reading this, and letting them know all the answers to that would be irresponsible of me.

The main reason why we have to source and season cash in every transaction is quite simply so people aren't able to hide the fact that they've recently gotten a loan. It seems paranoid at first, but it isn't paranoia if people are out to get you, and lenders have gotten burned many thousands of times over this point. People quite often don't even think it's wrong to keep silent, even though it is fraud. So if they don't require sourcing and seasoning of funds, the lender grants the loan based upon known information, only to later discover that the borrower is unable to make payments due to also needing to make payments on an undisclosed personal loan.

Caveat Emptor

Ken Harney has some welcome news on Move afoot to end uninvited mortgage pitches

To a certain extent, these are a good thing for consumers. However, it gets way overdone.

What happens is this. Let's say I get a client into my office, they apply for a mortgage, and I run their credit. The three credit bureaus, Experian, TransUnion, and Equifax, then turn around and sell the fact that this person has just had their credit run under a mortgage inquiry code, together with some of their more easily obtainable information.

Result? My clients are besieged with mortgage pitches. For months, every time they answer the phone it's likely to be someone else who has paid the money for a red hot mortgage lead.

Needless to say, my clients aren't happy. I have had several clients come out and accuse me of selling their information to telemarketers. Now, the fact that I encourage folks who come here to shop their mortgage around notwithstanding, it would be shooting myself in the head to sell their information to other providers. I know what I've got, I know what I quoted them, and I know I intend to deliver. The only thing that will stop me is if they do not, in fact, qualify for that loan. If someone is satisfied with what I intend to deliver, far be it from me to tell them to shop around because they might be able to do better. My family and I do have to live, you know. I won't stop or prevent or hinder them from shopping their loan around (which alone sets me apart from 90 percent plus of the loan providers out there), but telling them to do so is just not part of my job description at that point in time. It's like expecting the mechanic as he starts working on your car to tell you that you might be able to get a better deal somewhere else.

Indeed, if I had the option of paying extra for that credit report so my clients aren't besieged by unsolicited offers, I would take it every time. Not only would my clients be less harassed, but the prospective providers who pay for that sort of information are not precisely known for their sterling character, if you know what I mean. I've had clients tell me stories of people determined to sell them negative amortization loans without informing them of the drawbacks. I've had clients tell me of people determined to get their business that they told them of loans that do not exist, often with conspiratorial pitches like, "This is the loan they won't tell you about! You have to ask for it!" Well then, why are you offering it? By all means, put it out there on the table and let's compare the two loans by cranking the numbers, but the vast majority of the time it turns out the reason you have to ask for that sort of loan is that it's a piece of garbage and no self-respecting loan professional would expect you to accept such awful terms.

Now let me tell you about the numbers of such pitches. Because each of the big three credit bureaus is innocent of the actions of the others, it starts in three places, each of which pitches to the prospective providers that it sells the information no more than four places. I don't know why the number four became magic, but it seems to pop up everywhere in the mortgage leads industry. So each of them sells to four, and there are three of them. That's twelve people you're going to be getting a phone call from right there, and never mind that you're on the "Do not call" list. They've got the information from someone you're doing business with - the credit bureau.

But what's going to happen the majority of the time is that somewhere around ten of those who initially buy the information are resellers. They pay sixty bucks a pop, and turn around and sell the information to four other folks at twenty-five bucks a pop. Some of these places are in turn resellers; indeed, some of them got this information directly, which is all that keeps the whole process from snowballing until people are besieged by what seems like every last person with a valid mortgage license for the area. So twelve, forty-eight, hundred forty four, four hundred thirty two wannabe mortgage providers swarm each person I run credit on. I try to remember to warn them, but there is nothing I can do to stop it from happening, however much I might want to.

Now do not get me wrong. It is a good idea to shop your mortgage and I have even repeatedly told people who come here that they should actually sign up with at least two prospective providers, a main and a backup, because at the end of the process the power is all in the loan provider's hands and it is often abused. Having two loans ready to go defuses most of the potential for abuse, leaving aside the issue that I guarantee my quotes in writing when the client decides they want it and gets me enough information to lock the loan.

But there is a major difference between that and setting this pack of wild ravening prospective mortgage providers on my clients, willing to promise the sun, the moon, and all of the stars and planets if my clients will simply drop me and sign up with them instead. There is a major difference between agreeing that shopping the loan is a good idea, and throwing my clients to a pack of hundreds of telemarketers who call for months - sometimes as long as two years, so that they seem to be part of the next wave the next time those folks need a real estate loan - and bulk mailers who are almost singlehandedly responsible for global deforestation and accelerated filling of our urban landfills. If it does happen, I will be pleased to see it end.

I'm also gratified to see National Association of Mortgage Brokers on the correct side of this:

But the National Association of Mortgage Brokers doesn't agree. When credit bureaus sell overnight trigger lists to third-party lead generators, the brokers argue, they fail to comply with a key provision of the Fair Credit Reporting Act: that anyone receiving consumers' personal information must be in the position to make a "firm offer of credit" or have previously received permission from the consumer to obtain credit file data. Third-party lead generators obtain no permission and are in no position to make any credit offers, firm or otherwise.

There is a world of difference between suggesting you shop your mortgage and making certain you shop hundreds of providers, whether you want to or not.

I would suggest contacting your congresscritter to register your support for this proposal.

Caveat Emptor

P.S. In the meantime you can stop it from happening to yourself at or by calling (888) 567-8688.

If Your Loan Falls Through

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"What do I do when the loan falls through"
That depends upon when it falls through and what situation you're in. If you're in a refinance situation, you generally keep making payments on your old loan until and unless you can find a refinance that is better that you qualify for. There is one exception to this: balloon loans. Balloon loans must be paid off in full on thus and such a date. These dates are known at least five years in advance, but some people insist upon leaving it to the last possible instant.

If you're unable to refinance your balloon in time, lenders whom you ask for forbearance will generally will give you at least some time in extension of the old loan, but at a higher interest rate. This is very kind of the lenders because they don't have to give you an extra minute. The agreement ran out last week and you didn't pay them; they are entitled to foreclose if they want to. Good thing that the lender usually doesn't want to.

If you're doing a purchase, and the loan falls out any time with more than two weeks to go in escrow, that's usually time to rush another purchase loan through, although you won't be able to shop the new loan as much, and it's unlikely to be as good. See why I tell you to apply for a back up? I've gotten purchase money loans done in two business days or less - loan approved, and documents for signing in the hand of the notary.

However, loan providers will generally not admit that loans fell apart before the last minute, even if they were rejected out of hand back on day three. Actually, that's a trick they pull quite often; tell you about loan A intending to deliver loan B, and then at the last minute tell you that you don't qualify for A but you can have B. This keeps you from having time to shop around after you discover what a rotten loan they really have for you. They knew about what loan you would and would not qualify for within a week unless they are hopelessly incompetent, but their percentage lies in keeping mum until you have no choice but to accept loan B. In another amazing coincidence, loan B usually has a long prepayment penalty, and buying it off - if you can - costs two percent on the rate, and they'd have to send it all the way back to underwriting to see in you qualify, and that will take weeks, so why don't you just sign for this loan right now. They may even say, "We'll fix it later." Yes, they will volunteer to get paid again after you've spent several thousand dollars on that prepayment penalty. I had a guy come to me quite recently, trying to fix one of those after the original company failed to do so. Unfortunately, the coals he'd been raked over, and with his credit score, there was nothing I could do and he lost the property.

So it's now day thirty-one of a thirty day escrow, you've got a $10,000 deposit on the line, as your loan contingency expired back on day eighteen. Aren't you glad you applied for a back up loan? You didn't? Well, the situation isn't necessarily lost.

First, call your seller, or have your agent call their agent, and find out if they'll extend escrow. If it's a hot seller's market and they won't, you're hosed, but in a buyer's market like this, they will if they're smart. Most sellers, even in this market, will want you to pay extension fees and that is to be expected. The reason escrows are usually limited to thirty days is so they don't have to keep spending money on you if you can't qualify, and they do spend money on the transaction. This may cost you an extra $100 per day for up to ten days, but when the alternative is losing $10,000, that's very worthwhile.

Purchase money loans can be done fast if you are in fact qualified and your loan officer knows what they're doing. Forty eight hours is often very doable. Three to four days is much easier. Ten days is almost easy if all of the supporting work has been done. The loan provider will charge more of a margin than you usually would, but this guy is likely putting everything else on hold in order to deal with your problem. That's reasonable. Perhaps this time you'll heed me when I tell you to apply for a backup loan?

Loan providers who admit in the first week after you've given them standard qualifying information that you're not going to qualify for the loan they initially told you about are probably honest, and likely thought you really would qualify. But the longer it goes, the less likely it is they intended to deliver the original loan. I might believe someone like that in the second week - but I wouldn't believe that story from anyone in the third week after applying, even if they were backed up by everyone from Diogenes to George Washington.

Loans fall apart all the time. Locally, the percentage of escrows that fall apart because the buyer cannot in fact qualify for the necessary financing is edging up towards forty percent. So take precautions to make certain that situation does not happen to you.

Caveat Emptor

Why doesn't real estate just sell for the asking price instead of having to go thru all the paper work...?

Wouldn't it be easier to just put a price on it and sell it for that price? We don't go thru all of that when purchasing cars or anything else. Where did this practice start?

Land is important, it is immovable, they are not making any more, and it is uniquely identifiable by location. It is used as a basis for taxation, and social status. Not too long ago, the vast majority of the population worked by farming land.

Precisely how much land goes with a parcel, and precisely what the boundaries and limitations are, is critically important. Taking just a few square feet away can mean that it cannot be used for a given purpose. Rights of easement are important to everybody served by that easement. Wars have been fought over simply the right to pass over a piece of land. Zoning disclosures are a real issue with at least twenty percent of all properties, as well as any number of their issues about the condition, permitted uses, boundaries, and appurtenances.

Because of its importance, its permanence, and its value, there has been a lot of fraud committed over land, therefore the systems of title and escrow. Add that to the fact that land is taxed by most governments, and you have the justification for public records systems.

Because of its permanent and immovable nature, banks will loan money against land on better terms than anything else. But since a fair number of people over the years have gotten money for land they don't own, or gotten more money for land than it is worth, the lenders have instituted safeguards such as the appraisal, inspection, and lenders title insurance. It still happens, by the way. Last week I looked a a property in a fantastic location, but really old and run down. By the market, I'd say it was maybe worth $600,000 - but the owners convinced someone to loan them $1.8 million dollars on it.

Every part of the process has a reason it is there. There is no need for anyone who is not a professional to learn them, but the reason those professionals exist is so that you don't have to know what they know - and that runs true for everyone from the escrow officer to the title officer to the agent, and trying to shortcut the process is a recipe for disaster. Just ask the people who got burned, and whose cases are the reasons for all that paperwork and hassle you have to go through to buy or sell a property. And people still get burned today. Most often, it's the people who try to shortcut the process to save a few dollars. "You don't need that appraisal! You're paying cash!" "You don't need that inspection! Solid as a rock!" "You don't need an agent! Trust me!"

There are good solid reasons why you don't want to cut any corners, and why you want a professional working for you every step of the way. Proper disclosure will save you from a lawsuit you wouldn't believe. Proper investigation will stop you from walking in to the problem in the first place, or at least get you some serious concessions if you have a good buyer's agent on your side. And if they fail to do their job properly, it gives you the right to go after their insurance and their broker's bond, and even to sue them to make you whole. By trying to "save money" and cut corners, you could easily find yourself out a much larger amount of money with zero recourse.

Caveat Emptor

Got an email alerting me to this fact. The e-mail was gobbledegook as far as making any sense but I went to the FHA home page and they had better information.

It appears as if the FHA, through OFHEO, has opted to maximally raise their limits, to 125% of the median sales price in their Metropolitan Statistical Area (MSA). For a very few MSAs, the limit is the legal maximum of $729,750.

For the first time, conforming loan limits are not going to be one number for the 48 contiguous states. This is a very welcome and long overdue development, even if it does make life more complicated. Go to the FHA Mortgage Limits page to find out how much the limits are going to be in your area.

I wrote an article about waiting for the limits and how Fannie and Freddie, and the FHA separately, are going to have to decide what they're actually going to fund. FHA's limits have now been announced, but we're still waiting for Fannie Mae and Freddie Mac are going to react. Keep in mind that they are 98% privately held corporations. They want to stay on Congress' good side because they do have some moral or historical claims on the taxpayer if they get in trouble doing what Congress wants them to do, but the final decision as to what they will fund belongs to them. Now that the FHA has made their announcement, I would look for Fannie and Freddie to be making their decisions as to what they will and will not fund fairly quickly, and that will set the limits as to what a conventional conforming loan is.

Caveat Emptor

UPDATE: I just went the the Credit Union, and not only they but the bank next door are doing something we used to call "Betting on the come" when I was a controller. They're advertising "Jumbo loans for Conforming Rates!" This is fundamentally dishonest. What they're doing is taking applications based upon what they think Fannie and Freddie will do. However, if they guess wrong, they're not going to actually fund the loan, especially given the two percent divergence between conforming and jumbo rates for A paper at the same price. Bottom line: They're trolling for clients with incredibly misleading advertising, and if Fannie and Freddie don't come through according to what these institutions expect, there's going to be a large number of very angry people.


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