Further credit tightening coming in 5 weeks

Although the housing market seems to be stabilizing according to most measures (one could fairly argue that this is a near-term phenomenon subject to government stimulus) lenders continue to tighten underwriting guidelines making it harder for homebuyers to qualify for financing.

Yesterday I blogged about tighter guidelines for FHA refinances and today I am reporting tighter guidelines for conventional mortgages.  I came across this news in the Pipeline Press blog which is a great resource for mortgage industry related news.

It states that beginning in 5 weeks Fannie Mae will issue a new version of their automated underwriting engine.  In the new version borrowers will not be able to obtain an approval with debt-to-income ratios > 45% unless they have sufficient compensating factors (i.e. large down payment, lots of money in the bank, high credit scores, etc.).  Currently we are able to obtain approvals on loans with DTI’s in excess of 55%.

This may seem like a prudent requirement, after all, homebuyers shouldn’t be buying a home which carries a monthly payment in excess of 50% of their monthly gross income.  However, keep in mind that often times homebuyer’s qualifying income is much less than their actual income/ cash flow.  This is because underwriter’s take a “worst-case” approach to averaging annual bonuses, commissions, self-employment income, etc.  In my mind this requirement will negatively effect qualified buyers.

Furthermore, applicants will need a credit score of at least 620 in order to obtain an approval even if they have favorable compensating factors.

New mortgage rules could delay closings

Beginning July 30, 2009 all mortgage applications must comply with the Mortgage Disclosure Improvement Act (MDIA) which was passed into law as a part of the Housing and Economic Recovery Act of 2008.

The objective of MDIA is to protect consumers & improve the consistency of the Truth-in-Lending disclosures (TIL) that applicants get from lenders at the outset of a new loan application.

However, there are provisions embedded within this law that real estate professionals & consumers should be aware of because they may end up delaying scheduled closings if the lender is not adhering to the requirements.

Here are the highlights of this new law along with a brief explanation of the potential impacts and recommended solutions so that they don’t impact your transactions:

1) Cannot order appraisal until TIL has been signed: Under the new law lenders must receive back a signed initial TIL before they can order an appraisal.

Potential Impacts:  Even if the lender sends the initial TIL within the required 3-day time frame, they may not be able to proceed with the processing of the loan if the applicant does not return the signed disclosure promptly. This coupled with the impact of the HVCC appraisal rules create an even longer turn time for receiving appraisals back.  Furthermore, this requirement will prevent applicants from switching lenders once they’ve begun the process of applying for a mortgage because if the applicant tries to switch lenders the clock restarts.

Recommended solution: If the applicant meets with the lender at the outset of the application in a face-to-face meeting and signs the initial TIL then the lender may order the appraisal immediately.

2) 7-Day Waiting Period Before Closing: Under the new rule, the loan cannot close earlier than the 7th business day after the initial TIL is delivered or placed in the mail to the borrowers.

Potential Impacts: This prohibits from lenders conducting “quick closes”.  Currently, in some instances a mortgage broker may transfer a loan application from one lender to another at the last minute to achieve a better interest rate for the applicant OR because the new lender has an underwriting flexibility that the applicant needs in order to be approved for the loan.  Anymore, the applicant will have to wait at least 7 business days from the moment that the new lender sends out their initial TIL to close on their loan.

Recommended solution: It is now even more important that borrowers work with true mortgage professionals who are knowledgeable and thorough so that any potential “red flags” are identified and resolved at the outset of the application.  Otherwise, the mortgage is almost certain to be delayed.

3) APR Change Outside Tolerance/Corrected Disclosures: If the APR disclosed on the initial TIL later increases or decreases by more than .125%, a corrected TIL must be RECEIVED by the borrower no later than 3 business days before the date of the closing. If the corrected TIL is mailed the lender must allow 6 business days to pass for the borrower to review, before closing.

Potential Impacts: From the moment the initial application is taken to the closing table there can be variables that change which can also impact the APR (i.e. closing date, locked interest rate, percentage of down payment).  Should any of these variables change and the lender neglect to send out a new TIL, the transaction will be delayed by at least 3 business days for the new TIL to be reviewed by the applicant.

Recommended solution: Work with reputable lenders who are upfront, honest, and knowledgeable about the industryNow more than ever honest upfront disclosures will literally make the escrow process go smoother.

Click this link to watch a 7:00 minute movie summarizing the new rules.

HVCC gets Jack’d up

For professionals in the housing industry (mortgage, appraisal, & real estate) the new appraisal rules known as the Home Valuation Code of Conduct (HVCC) is a hot topic these days.  These rules which became effective May 1st were designed to improve the accuracy and integrity of appraisals.  However, as many professionals is the housing industry will testify there are many problems with the execution of these rules.  Syndicated columnist Jack Guttentag wrote a good summary of these problems which was featured in the Sunday Oregonian.

Jack Guttentag

Here are some talking points from the article:

*Jack’s definition of an appraisal: “Appraisals are informed judgments regarding the value of specific properties.” – I like this definition because it is a reminder that appraisals ARE subjective.

*Objective of HVCC: “The objective of the code was to insulate the appraisal process from influence by any of the parties with an interest in the outcome.”

*Problems with the rule: “The problem with this well-intentioned rule is that it was issued….squarely in the middle of the worst housing market since the 1930s….Many deals are not getting done because appraisals are coming in too low, and HVCC is seriously aggravating the problem.

*Why the bad appraisals?: “…more appraisals are being done by appraisers who are not familiar with the local market.

*Many appraisers under HVCC “are also paid less per appraisal than (before), which may induce them to invest less time.

*The article goes onto explain that under HVCC the turn around time on appraisals has increased by approximately one week which has put closing dates and buyer’s interest rate locks in jeopardy.

*HVCC prevents loan officers from keeping “clients informed about the status of an appraisal.

*HVCC also limits “access to to informal value opinions from the appraisers…Such opinions allowed them to abort house purchases and refinances that clearly would not fly because of inadequate property value.

*”HVCC has also pretty much eliminated the ability of a borrower to use the same appraisal with multiple loan providers.”  If a deal falls through with one lender “borrowers often have to pay for more than one appraisal.

Further tightening of credit guidelines

For those of us who have been hoping for the credit markets to show signs of stabilization we can keep on waiting.

Freddie Mac announced last week that they would no longer issue or accept underwriting approvals knows as “accept plus” approvals.  These approvals, which were mostly earned by borrowers with high credit scores and large down payments, featured little to no income documentation requirements.  In essence, these were almost like “stated income” loans because the borrower would not have to provide any income documents to confirm the income they listed on their application.

For example, we would expect that an applicant buying a primary residence with a credit score> 740 and >30% down would likely receive an “accept plus” approval.

Freddie Mac’s move to eliminate “accept plus” approvals is another sign that lenders are acting with extreme caution.  Unfortunately this move will also negatively impact many more applicants ability to buy.  However, I would expect that this will also create a niche for a private institution to

You can read the announcement at this link.

Every home purchase is 100% financed

Although many home-buyers do not realize it every home they buy has been bought with 100% financing.  How can that be you may ask?  The last home I bought I put 20% down.

It may be true that you took an 80% mortgage and used your own funds for a 20% down payment but what you may not realize is that the funds you used for a down payment was “borrowed” from your asset base that could otherwise have been used to earn a return on investment.  Economists call this “opportunity cost”.

If cash-flow were not an issue then every home-buyer would be left to decide the optimal level of down payment and mortgage based on the return on investment they think they could earn versus the cost of borrowing the funds.

To demonstrate this concept lets assume that a family is buying a home for $250,000 and is deciding whether to put $50,000 down (20%) or $100,000 (40%).

-If they put $50,000 down they will take out a mortgage for $200,000 at 7.00% with interest-only payments of $1,166.67 (net after tax payment of $793).  With the $50,000 that was not used for the down-payment they will invest the funds into an account that will earn 7.00% annually.

-If they decide to put $100,000 down they will take out a mortgage for $150,000 at 7.00% with interest-only payments of $875 (net after tax payment of $595).  We’ll assume that they will use the difference in their net after tax payment ($198) to invest into an account that would earn 7.00% annually.

Here is a look at how these choices would perform over 30 years:

Amount invested $ 198 $ 50,000
Return: 7.00% 7.00%
Term (years): 30 30
Growth: $ 241,554 $ 380,613

As you can see the decision to invest the money upfront would net this family almost $140,000 more after 30 years.

FHA follows suit on tightening underwriting guidelines

A few weeks ago I blogged about tighter underwriting guidelines pertaining to conventional loans for home-buyers who are seeking to close on a new home prior to selling their existing home.

Today we got notification from HUD indicating that FHA loans would also adopt similar guidelines (click this link to view the announcement for yourself).

Essentially, the new guidelines make it harder for home-buyers who have yet to sell their existing home to take out a new mortgage to buy a new home.

What does this mean for home-buyers?

It means that home-buyers who want to buy a new home without selling their existing home either must show enough income to reasonably afford both mortgage payments or plan on selling their existing home before or concurrently with their existing home.

Are there any exceptions?

Yes, if a home-buyer is being relocated for their job and can provide a legitimate rental contract they may use rental income to offset the mortgage payment on the existing home.

Or, if the home that is being vacated has a loan that is no more than 75% of the value of that home then the home-buyer may also use a legitimate source of rental income.

Fannie Mae continues to tighten qualifying standards

This morning Fannie Mae released updated guideline changes for conforming mortgages.  This is a sign that we can continue to expect tightening in the area of loan approval guidelines which will make it more difficult for borrowers to qualify for loans in the future. I don’t think these changes will drastically impact most real estate & mortgage professionals core business but for those who tend work with investors and borrwers with less than favorable credit this is not good news.

Here is a summary of the most important changes in my opinion:

-Loan-to-value restrictions for cash-out: Fannie Mae is limiting cash-out refinances on owner-occupied homes to 85% (currently is 90%, FHA still allows borrowers to go to 95%).

-Loan-to-value restrictions for purchase and refinance of investment property: Fannie Mae is restricting maximum financing for purchase of an investment property to 75% (currently 90%).

-Investment property interest rates to increase: Fannie Mae is increasing the margin on investment property loans compared to owner-occupied interest rates.  The margin gets increasingly larger with the loan-to-value but currently investment property purchases carry a rate that is approximately .375%-.625% higher and it looks like the new margins will be closer to .75%-1.50%.

-Maximum number of properties financed: Currently Fannie Mae will allow a borrower to own only 10 financed properties if they want to take out a new mortgage to buy a 2nd home or investment property.  Moving forward this will be restricted to 4.  If the borrower is buying a primary residence then this guideline doesn’t apply although many banks have overriding guidelines that supersede this change.

-Higher minimum credit scores: In the announcement Fannie Mae also said they would be raising the minimum credit scores required to qualify for various loan scenarios.  There are too many to go into detail here but the bottom line is borrowers will have to have better credit in order to qualify for higher loan-to-value loans, investment property loans, & 2nd home loans than before.

Click this link to review the entire announcement.  The timing in which these changes will take affect have yet to be determined but we know it will be no later than December 1, 2008 and probably even sooner depending on the lender.

‘Tis the season to include tax holdbacks!

It’s that time of year again in Oregon where lenders will begin collecting real estate tax holdbacks for transactions closing in September & October where the first payment of the new mortgage is in November or December.  Every year tax holdbacks end up being the source of frustration for many homebuyers who end up having to bring in much more money than they had anticipated for closing.  Why? 

Typically because their lender “forgot” to include the escrow holdback on their initial good faith estimates (GFE’s).  It’s important to know that tax holdbacks are required by all lenders and apply to all loans even if the buyer has elected to pay their taxes and insurance separate from their monthly mortgage payment.  If an applicant does not see it on their GFE it is probably because the lender has neglected to include it.  Don’t get burned by an inexperienced mortgage professional!

Here are some answers to some FAQ’s about tax holdbacks:

What is a tax holdback?

A tax holdback is when the escrow company collects a lump sum of money from the homebuyer & seller as a part of the settlement charges at closing in order to hold the money in an escrow account until they can satisfy the annual property tax bill when it is released for the subject property (usually near the end of October or beginning of November).

Who determines if a tax holdback is required for a specific transaction? 

It’s the lender’s decision.  They will instruct the escrow company to conduct an escrow holdback for all loans originated from early September until the property tax bills are released near the end of October when the first payment date on the new loan is in November or December.

Who determines how much is collected for the tax holdback?

The escrow company is the entity that determines how much is collected.  Most escrow companies that we’ve worked with will collect 110%-120% of the previous year’s property tax bill.  For example, if the previous year’s tax bill was $3,000 and the escrow company’s policy is to collect 115% then they will set aside $3,450 ($3,000 * 115%).  In addition, they will also have a one-time escrow holdback fee of $50-$150. 

If the subject property is new construction and there is no history of property taxes then typically the escrow company will use the mileage rate and apply it to the purchase price then take 110-120% of that figure.

Who pays for the tax holdback?

The escrow company will prorate the amount collected from the homebuyer and seller based on the number of days each will own the property in the current tax year.  For example, if the close date for a home purchase is October 1st then the seller will be responsible for paying for the first 3 months of the real estate tax year (July 1-September 30 or 25%) and the homebuyer will be charged for the last 9 months (October 1-June 30 or 75%).  However, it’s important to note here that the seller’s contribution (25% in the aforementioned example) is based on last year’s tax bill only without the 110%-120% cushion. 

What if there is an overpayment into the tax holdback?

Typically 110-120% of the previous year’s tax bill is more than enough to cover the amount shown on the new tax assessment.  If that is the case then any difference between the amount collected in the escrow holdback and the actual amount needed to pay the tax bill will be refunded to the homebuyer.

Did you find this posting helpful?  Please feel free to pass this link to another person you know who might benefit.  In addition, comments are always appreciated.  Simply click the ‘comments’ buttom below to post a comment!

Multiple inquiries on credit are not as bad as you think

Often times our customers are hesitant to grant us permission to access a new credit report for them because of concerns that it will hurt their credit score.  The problem with not reviewing a client’s credit history and credit score is that we end up proposing mortgage options that may change once we do pull a credit report.  When we’re unable to deliver on our proposal it is not only frustrating for our clients but also ourselves because we try to take great care of our reputation.


I came across an article on Inman News by Dian Hymer in which she helps explain why for most people allowing multiple lenders to pull a credit report WILL NOT impact their credit score to the point where it will adversely impact the terms they are receiving on the loan.


Among her points that I like:

  • “The FICO credit-scoring model ignores all mortgage inquiries made within the last 30 days, so they will have no impact on your score.”
  • The number of new inquiries is counted towards the “new credit” factor in determining your credit score.  The “new credit” factor makes up ONLY 10% of the equation. 


You may view the article yourself by visiting this link.

“Appraisals: 101” crash-course

The final piece of a mortgage application that a bank is interested in reviewing is the property itself. After all, if a borrower fails to make their monthly payments then the bank will take the house back and sell it in order to recoup the money that they loaned against it.

The value of a home will generally be determined by a professional appraiser’s appraisal report.  There are multiple methodologies for determining the value of a home. The two that show up in an appraisal report are the “cost approach” and the “sales comparison approach”.

The “cost approach” determines the value of a home based on the value to rebuild or replicate the property from scratch. This analysis will take into consideration the value of the land that the home is built on and add the cost to rebuild the improvements based on the square footage and amenities (i.e. basements, garages, etc.). The “cost approach” is less relevant to a bank because they never intend on rebuilding the property. However, they may review this in determining if the homeowner’s insurance policy provides enough coverage.

The “sales comparison approach” is the most relevant to lenders in determining the value of the collateral property. With this approach an appraiser will find what they consider to be the 3-6 most comparable properties that have sold near (usually within 1 mile) the subject property within the past few months.

The appraiser will then make adjustments to the value of the subject property by comparing various features of the home. Among the factors that can impact the adjustments are square footage, view, quality of construction, built in amenities/ upgrades, number of bedroom and bathrooms, heating cooling systems, etc.

The value as determined by the sales analysis approach is the most important in determining the value for the home in the lender’s perspective.