Nevada’s U.S. Attorney Daniel Bogden announced today the federal grand jury in Las Vegas indicted five people on mortgage fraud charges.  All five individuals were charged with conspiracy to commit bank fraud, mail fraud, wire fraud, (6) counts of bank fraud and criminal forfeiture.  Suzanne McAllister, an assistant escrow officer and notary at Lawyers Title, was one of the five indicted.

According to the Las Vegas Sun, The indictment lists 28 real property sales transactions involving 21 homes sold in Las Vegas between Aug. 25, 2005, and April 18, 2007. Seven of the homes were “flipped” or sold twice within short periods of time. A majority of the homes sold for more than $700,000, and the total value of the mortgages for the 28 transactions was $18.9 million.

If convicted, the defendants could face up to 30 years in prison and a $1 million fine on each count, and may be required to forfeit up to about $4.2 million.

The Southern Nevada Mortgage Fraud Task Force and U.S. Postal Investigation Service is handling the investigation.

While many experienced real estate agents have a general understanding of the mortgage approval process, there are a few important details that frequently get overlooked which may cause a purchase to be delayed or denied.

New regulation, updated disclosures, appraisal guidelines, mortgage rate pricing premiums, credit score, secondary approval layering, rescission deadlines, property type, HOA insurance requirements, title and property flip rules are just a few of the daily changes that can have a serious impact on a borrower’s home loan financing.

With today’s volatile lending environment, it’s obviously important for home buyers to get a full loan approval which clearly defines all contingencies they pertain to each unique home buyer’s scenario prior to spending any time looking at new homes with an agent.

Either way, we’ve listed a few of the top things your agent should keep in mind while showing you new properties:

Caution – Agents Beware:

Property Type –

High-Rise, Condo, Town House, Single Family Residence, Dome Home or Shoe House… all have specific lending guidelines that can influence down payment, credit score and mortgage insurance requirements.

Residence Type –

Need to sell one home before moving into another? Is a property considered a second home if it’s in the same city?  What if I’m buying a home for my children to live in, it is still considered an investment property?

These are just a few of several possible residence related questions that should be addressed by your agent and loan officer at the initial loan application.

Rates / Locks –

Mortgage Rates are typically locked for a 30 day period, and one of the only ways to get a new rate is to switch mortgage lenders.  Rates also have certain adjustments for property / residence type, credit score and down payment which could have a big impact on monthly payments and therefore approvals.

A 1% increase in rate could literally mean the difference between an approval or denial.

Headline News / Employment –

Underwriters watch the news as well.  Borrowers who work in a volatile industry during hard economic times may have to jump through a few extra hoops to prove that their employment and income is secure.

Job changes, periods of unemployment or property location in relation to the subject property are other things to consider that may cause a speed bump in the approval process.

Title / Property Flip –

A Flip is considered a property that has been purchased by an investor and quickly sold to a new buyer within a 30-90 day period.  Generally, an investor will do a little rehab work, fresh paint, landscaping…. and try to re-sell the property for a significant profit margin.

While it seems like a perfectly fair transaction, many lenders have strict guidelines in place that prevent borrowers from obtaining financing on properties that have a previous owner with less than 90 days of documented ownership.

These rules change frequently, and are specific to particular property types, so make sure your agent is aware of all the boundaries associated with your approval letter.

Homeowner’s Association Insurance –

Some lenders require Condos and Town House communities to have sufficient insurance and reserves coverage pertaining to specific ratios on units that are owner occupied vs rented.

It may also take a few weeks and cost up to $300 to receive an HOA Certification, so make sure your Due-Diligence period is set accordingly in the purchase contract.

Appraisal Ordering Procedures –

Appraisal ordering guidelines are changing quite frequently as regulators implement many new consumer protection laws created to prevent future foreclosure epidemics.

Unfortunately, some of the new appraisal regulations have proven to slow the home buying process down, as well as confuse lenders about the true estimate of neighborhood values.

VA, FHA and Conventional loans programs all have separate appraisal ordering policies, so make sure your agent is aware of which loan you’re approved for so that they document any anticipated delays in the purchase contract.

For example, if an appraisal takes three weeks and the average time for an approval is two weeks, then it probably isn’t smart to write a purchase contract with a four week close of escrow.

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Related Articles – Home Buying Process:

• Home Buying Process
• First-Time Home Buyer Credit Checklist
• Seven Things Your Agent Should Know About Your Mortgage Approval
• Important Factors To Consider When Getting Financing On A Foreclosure, Short Sale or New Construction
• Where Does My Earnest Money Go?
• HOA Hurdles to be Aware of When Looking at New Properties
• What You Need To Know About The Home Inspection Process

Simply checking online for today’s posted rate may not lead to your expected outcome due to the many factors that can cause each individual rate and closing cost scenario to fluctuate.

We can preach communication, service and education all day long, but it’s our ultimate goal to earn your trust so that you can be confident in our ability to successfully lead you through this complex mortgage process.

While mortgage rates can change several times a day, the following questions will help you qualify whether or your lender truly knows what to look for so that they can provide you with the best rate once you’re in a position of locking in your loan:

Who determines mortgage rates, and what are they tied to?

Mortgage interest rates are determined by the pricing of Mortgage Backed Securities or Mortgage Bonds. The media often implies mortgage rates are based off the 10-year Treasury Note, which is incorrect.

While the 10-year Treasury Note has been known to trend in the same direction as Mortgage Bonds, it is not unusual to see them move in completely opposite directions.

How often do mortgage rates change?

Mortgage rates may change throughout the day, however they only change on days when the Bond markets are trading securities since mortgage rates are based on Mortgage Bond prices.

Think of a Mortgage Bond’s sales price similar to that of a Stock that trades up and down during the course of a day.

For example, the FNMA 30-Year 4.50% coupon is selling for $100.50. The price is 50 basis points lower from the previous day’s closing price of $101.00. In simple terms, the borrower would have to pay an additional .50% of their loan amount to have the same rate today that they could have locked in the previous day. Alternatively, the borrower would also have the option of increasing their rate by an average of .125%.

What causes mortgage rates to change?

Mortgage Bonds are largely effected by various market forces that influence the changing demand for bonds within the market. Some of the key economic factors that have the greatest impact are unemployment percentages, inflationary fears, economic strength and the overall movement of money in and out of the markets.

Like stocks, most fluctuation is caused by consumer and investor emotions.

What do you use to monitor mortgage rates?

There are several great subscription based services available to monitor Mortgage Bond pricing.

The key is to make sure the lender is aware they should be monitoring Mortgage Bond pricing, such as the Fannie Mae 30-Year 4.50% coupon, and not the 10-Year Treasury Note or the news media.

When the Fed changes rates, why do mortgage rates move in the opposite direction?

It is a common misconception that when the Federal Reserve implements a rate cut it is immediately correlated to a reduction in mortgage rates.

The Federal Reserve policy influences short term rates known as the Fed Funds Rate (“FFR”). Lowering the FFR helps to stimulate the economy and increasing the FFR helps to slow the economy down. Effectively, cutting interest rates (FFR specifically) will cause the stock market to rally, driving money out of bonds and creating potential for inflation.

Mortgage Bond holders need to obtain a higher rate of return on their money if inflation is increasing, thus driving up mortgage rates. With the Federal Reserve Board meeting every six weeks, this is an important question to ask. If your lender does not have a firm understanding of this relationship, they may leave your rate unprotected costing you thousands of dollars over the life of your mortgage.

Do different programs have different interest rates?

Conventional, FHA and VA loans can all carry different rates on a 30-Year fixed mortgage. FHA and VA loans are insured by the Federal Government in the event of defaults. Conventional mortgages are insured by private mortgage insurance companies, if insurance is required.

Typically, FHA and VA loans carry a lower rate because the investor views the government backing as less of a risk. While rates are usually different for each program, it may be more important to compare the monthly and overall cost during the life of the loan to determine which program best suits your needs.

Why is an Adjustable Rate Mortgage (ARM) rate lower than a fixed rate mortgage?

An Adjustable Rate Mortgage (ARM) is usually fixed for a specific period of time. The period is typically 6 months, 1 year, 3 years, 5 years or 7 years. The shorter time period the rate is fixed, the lower the interest rate tends to be initially.

This is due to the borrower taking the future risk of increasing interest rates. The only instance where this would not be true is when there is an inverted yield curve where short-term rates are higher than long-term rates.

Why are rates higher for different property residence types?

Mortgage interest rates are based on risk-based pricing. Risk-based pricing allows adjustments to par pricing for risk factors such as; FICO scores, loan-to-value percentages, property type (SFR, Condo, 2-4 Units), occupancy (Primary, Vacation or Investment) and mortgage type (Interest Only, Adjustable Rate etc).

This allows the investors who lend their money for mortgages to receive additional compensation for taking additional risk. An example is if the borrower encounters a financial hardship, are they more likely to make the payment on the home they live in or the one they rent?

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How can a fully approved loan get denied for funding after the borrower has signed loan docs?

Simple, the underwriter pulls an updated credit report to verify that there hasn’t been any new activity since original approval was issued, and the new findings kill the loan.

This generally won’t happen in a 30 day time-frame, but borrowers should anticipate a new credit report being pulled if the time from an original credit report to funding is more than 60 days.

Purchase transactions involving short sales or foreclosures tend to drag on for several months, so this approval / denial scenario is common.

It’s An Ugly Cycle:

1. First-Time Home Buyer receives an approval
2. Thinks everything is OK
3. Makes a credit impacting decision (new car, furniture, run up credit card balance)
4. Funder pulls new credit report and denies the loan

In the hopes of stemming the senseless slaughter of perfectly acceptable approvals,we’ve developed a “Ten credit do’s and don’ts” list to help ensure an smoother loan process.

These tips don’t encompass everything a borrower can do prior to and after the Pre-Approval process, however they’re a good representation of the things most likely to help and hurt an approval.

Ten Credit Do’s and Don’ts:

DO continue making your mortgage or rent payments

Remember, you’re trying to buy or refinance your home – one of the first places a lender looks for responsible patters is at your current rent and/or loan history.

Even if you plan on closing in the middle of the month, or if you’ve already given notice, continue paying that rent until you’ve signed your final loan documents.

It’s always better to be safe than sorry.

DO stay current on all accounts

Much like the first item, the same goes for your other types of accounts (student loans, credit cards, etc).

Nothing can derail a loan approval faster than a late payment coming in the middle of the loan process.

DON’T make a major purchase (car, boat, big-screen TV, etc…)

This one gets borrowers in trouble more than any other item.

A simple tip: wait until the loan is closed before buying that new car, boat, or TV.

DON’T buy any furniture

This is similar to the previous, but deserves it’s own category as it gets many borrowers in trouble (especially First-Time Home Buyers).

Remember, you’ll have plenty of time to decorate your new home (or spend on your line of credit) AFTER the loan closes.

DON’T open a new credit card

Opening a new credit card dings your credit by adding an additional inquiry to your score, and it may change the mix of credit types within your report (i.e. credit cards, student loans, etc).

Both of these can have a negative impact on your score, and could result in a denial if things are already tight.

DON’T close any credit card accounts

The reverse of the previous item is also true. Closing accounts can have a negative impact on your score (for one – it decreases your capacity which accounts for 30% of your score).

DON’T open a new cell phone account

Cell phone companies pull your credit when you open a new account. If you’re on the border credit-wise, that inquiry could drop your score enough to impact your rate or cause a denial.

DON’T consolidate your debt onto 1 or 2 cards

We’ve already established that additional credit inquiries will hurt your score, but consolidating your credit will also diminish your capacity (the amount of credit you have available), resulting in another hit to your credit.

DON’T pay off collections

Sometimes a lender will require you to pay of a collection prior to closing your loan; other times they will not.

The best rule of thumb is to only pay off collections if absolutely necessary to ensure a loan approval. Otherwise, needlessly paying off collections could have a negative impact on your score.

Consult your loan professional prior to paying off any accounts.

DON’T take out a new loan

This goes for car loans, student loans, additional credit cards, lines of credit, and any other type of loan.

Taking out a new loan can have a negative impact on your credit, but also looks bad to underwriters and investors alike.

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Follow these Do’s and Don’ts for a smoother mortgage approval and funding process.

Just remember the simple tip: wait until AFTER the loan closes for any major purchases, loans, consolidations, and new accounts.

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Related Credit / Identity Articles:

• Understanding Credit
• Ten Things You Can Do To Protect Your Identity
• Is There A Rule-Of-Thumb Regarding The Number Of Credit Lines To Have Open?
• Alternate Sources For Establishing Credit

By including title insurance when purchasing property, your title insurer takes on accountability for legal expenses to defend your property title, should it ever be challenged.

Many different occurrences can come into play to warrant the need for title insurance.

The title company responsible will then take on the legal expenses to defend the property for as long as you are in possession of an interest in the property under the title.

If the defense is not successful, you will be reimbursed for any loss of value of the property.

Common Things Title Insurance Covers:

1. UNDISCLOSED HEIRS FORGED DEEDS, MORTGAGE, WILLS, RELEASES AND OTHER DOCUMENTS
2. FALSE IMPRISONMENT OF THE TRUE LAND OWNER
3. DEEDS BY MINORS
4. DOCUMENTS EXECUTED BY A REVOKED OR EXPIRED POWER OF ATTORNEY
5. PROBATE MATTERS
6. FRAUD
7. DEEDS AND WILLS BY PERSON OF UNSOUND MIND
8. CONVEYANCES BY UNDISCLOSED DIVORCED SPOUSES
9. RIGHTS OF DIVORCED PARTIES
10. ADVERSE POSSESSION
11. DEFECTIVE ACKNOWLEDGEMENTS DUE TO IMPROPER OR EXPIRED NOTARIZATION
12. FORFEITURES OF REAL PROPERTY DUE TO CRIMINAL ACTS
13. MISTAKES AND OMISSIONS RESULTING IN IMPROPER ABSTRACTING
14. ERRORS IN TAX RECORDS

A title insurance policy takes the responsibility for legal expenses to the title company, rather than the property owner.

Many different issues may arise that create a need for insurance.

This insurance continues for as long you are in possession of the interest in the property under the title.

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Related Articles – Closing Process / Costs

• Closing Process – Overview
• Closing Costs – Overview
• Talk the Talk – Know the Mortgage Lingo at Closing
• Making Sure Your Cash-To-Close Comes From The Proper Source
• Where Does My Earnest Money Go?

The FHA Mortgage Insurance Premium is an important part of every FHA loan.

There are actually two types of Mortgage Insurance Premiums associated with FHA loans:

1.  Up Front Mortgage Insurance Premium (UFMIP) – financed into the total loan amount at the initial time of funding

2.  Monthly Mortgage Insurance Premium – paid monthly along with Principal, Interest, Taxes and Insurance

Conventional loans that are higher than 80% Loan-to-Value also require mortgage insurance, but at a relatively higher rate than FHA Mortgage Insurance Premiums.

Mortgage Insurance is a very important part of every FHA loan since a loan that only requires a 3.5% down payment is generally viewed by lenders as a risky proposition.

Without FHA around to insure the lender against a loss if a default occurs, high LTV loan programs such as FHA would not exist.

Calculating FHA Mortgage Insurance Premiums:

Up Front Mortgage Insurance Premium (UFMIP)

UFMIP varies based on the term of the loan and Loan-to-Value.

For most FHA loans, the UFMIP is equal to 2.25%  of the Base FHA Loan amount (effective April 5, 2010).

For Example:

>> If John purchases a home for $100,000 with 3.5% down, his base FHA loan amount would be $96,500

>> The UFMIP of 2.25% is multiplied by $96,500, equaling $2,171

>> This amount is added to the base loan, for a total FHA loan of $98,671

Monthly Mortgage Insurance (MMI):

• Equal to .55% of the loan amount divided by 12 – when the Loan-to-Value is greater than 95% and the term is greater than 15 years
• Equal to .50% of the loan amount divided by 12 – when the Loan-to-Value is less than or equal to 95%, and the term is greater than 15 years
• Equal to .25% of the loan amount divided by 12 – when the Loan-to-Value is between 80% – 90%, and the term is greater than 15 years
• No MMI when the loan to value is less than 90% on a 15 year term

The Monthly Mortgage Insurance Premium is not a permanent part of the loan, and it will drop off over time.

For mortgages with terms greater than 15 years, the MMI will be canceled when the Loan-to-Value reaches 78%, as long as the borrower has been making payments for at least 5 years.

For mortgages with terms 15 years or less and a Loan -to-Value loan to value ratios 90% or greater, the MMI will be canceled when the loan to value reaches 78%.  *There is not a 5 year requirement like there is for longer term loans.

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Related Articles – Mortgage Approval Process:

• Mortgage Payment Basics
• Who Owns My Home If I Have A Mortgage?
• Why Do I Need Mortgage Insurance?
• Understanding An Amortization Schedule
• Shopping For A Hazard Insurance Policy
• Understanding the FHA Mortgage Insurance Premium (MIP)
• Do I Have To Continue Making My Mortgage Payment If My Lender Goes Bankrupt?

Getting a new mortgage for a First-Time Home Buyer can be a little overwhelming with all of the important details, guidelines and potential speed bumps.

Since there are so many rules and steps to follow, here is a simple list of Do’s and Don’ts to keep in mind throughout the mortgage approval process:

DO:

• Continue working at your current job
• Stay current on all your accounts
• Keep making your house or rent payments
• Keep your insurance payments current
• Continue to maintain your credit as usual
• Call us if you have any questions

DON’T

• Make any major purchases (Car, Boat, Jet Ski, Home Theater…)
• Apply for new credit
• Open new credit cards
• Transfer any balances from one credit or bank acct to another
• Pay off any charge-off accts or collections
• Take out furniture loans
• Close any credit cards
• Max out your credit cards
• Consolidate credit debt

Basically, while you are in the process of getting a new mortgage, keep your financial status as stable as possible until the loan is funded and recorded.

Any number of minor changes could easily raise a red flag or cause a negative impact on a credit score that may result in a denied loan.

Most importantly, check with your loan officer on even the most simple questions to make sure your loan approval is successful.

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Related Articles – Home Buying Process:

• Home Buying Process
• Assembling Your Home Buying Team – Knowing The Players
• Seven Things Your Agent Should Know About Your Mortgage Approval
• Important Factors To Consider When Getting Financing On A Foreclosure, Short Sale or New Construction
• Where Does My Earnest Money Go?
• HOA Hurdles to be Aware of When Looking at New Properties
• What You Need To Know About The Home Inspection Process

For homeowners interested in making some property improvements without tapping into their savings or investment accounts, the two main options are to either take out a Home Equity Line of Credit (HELOC), or do a cash-out refinance.

A Home Equity Loan is similar to the Line of Credit, except there is a lump sum given to the borrower at the time of funding and the payment terms are generally fixed. Both a Line of Credit and Home Equity Loan hold a subordinate position to the first loan on title, and are typically referred to as a “Second Mortgage”. Since second mortgages are paid after the first lien holder in the event of default foreclosure or short sale, interest rates are higher in order to justify the risk and attract investors.

Measuring The Different Between HELOC vs Cash-Out Refinance:

There are three variables to consider when answering this question:

1.  Timeline
2.  Costs or Fees to obtain the loan
3.  Interest Rate

1. Timeline –

This is a key factor to look at first, and arguably the most important. Before you look at the interest rates, you need to consider your time line or the length of time you’ll be keeping your home.  This will determine how long of a period you’ll need in order to pay back the borrowed money.

Are you looking to finally make those dreaded deferred home improvements in order to sell at top dollar? Or, are you adding that bedroom and family room addition that will finally turn your cozy bungalow into your glorious palace?

This is a very important question to ask because the two types of loans will achieve the same result – CASH — but they each serve different and distinct purposes.

A home equity line of credit, commonly called a HELOC, is better suited for short term goals and typically involves adjustable rates that can change monthly. The HELOC will often come with a tempting feature of interest only on the monthly payment resulting in a temporary lower payment. But, perhaps the largest risk of a HELOC can be the varying interest rate from month to month. You may have a low payment today, but can you afford a higher one tomorrow?

Alternatively, a cash-out refinance of your mortgage may be better suited for securing long term financing, especially if the new payment is lower than the new first and second mortgage, should you choose a HELOC. Refinancing into one new low rate can lower your risk of payment fluctuation over time.

2. Costs / Fees –

What are the closing costs for each loan?  This also goes hand-in-hand with the above time line considerations. Both loans have charges associated with them, however, a HELOC will typically cost less than a full refinance.

It’s important to compare the short-term closing costs with the long-term total of monthly payments.  Keep in mind the risk factors associated with an adjustable rate line of credit.

3. Interest Rate –

The first thing most borrowers look at is the interest rate. Everyone wants to feel that they’ve locked in the lowest rate possible. The reality is, for home improvements, the interest rate may not be as important as the consideration of the risk level that you are accepting.

If your current loan is at 4.875%, and you only need the money for 4-6 months until you get your bonus, it’s not as important if the HELOC rate is 5%, 8%, or even 10%. This is because the majority of your mortgage debt is still fixed at 4.875%.

Conversely, if you need the money for long term and your current loan is at 4.875%, it may not make financial sense to pass up an offer on a blended rate of 5.75% with a new  30-year fixed mortgage.  There would be a considerable savings over several years if variable interest rates went up for a long period of time.

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Choosing between a full refinance and a HELOC basically depends on the level of risk you are willing to accept over the period of time that you need money.

A simple spreadsheet comparing all of the costs and payments associated with both options will help highlight the total net benefit.

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Related Article – Refinance Process:

• Refinance Process Overview
• Mortgage Approval Process
• Calculating The Net Benefit Of A Refinance
• Should I Refinance Or Get A Home Equity Loan To Make Improvements?
• What Do Appraisers Look For When Determining A Property’s Value?
• Understanding The Difference Between Appraised Value vs Neighborhood Listing Comps
• Five Myths About Home Values

Calculating the net benefit of refinancing can be a challenging task if you do not understand what to calculate. We are going to focus on the net benefits of refinancing from the standpoint of lowering your interest rate.

Although there are several reasons to refinance, lowering your mortgage rate to save on interest payments over the term of the loan is the most popular.

Calculating the actual savings can be a tricky chore unless you know the difference between cash flow savings and interest savings. If your refinance objective is to only save on the interest by lowering your rate, then the interest savings should be done with the calculations below.

Calculating Interest Savings:

(Loan Amount x Interest Rate) / Months in year = Interest paid per month

($200,000 x 6% or .06) / 12 = $1,000.00

*Remember to do the calculation in the parentheses first*

We now know that you are paying $1,000.00 per month in interest. You should take the new interest rate you are getting with your refinance and calculate what your new interest payment will be.

($200,000 x 5% or .05) / 12 = $833.34

Now we need to find out the difference between the two interest rates.

Current Interest Payment – Proposed Interest Payment = Interest Savings

$1,000.00 – $833.34 = $166.66

Now you have figured out that by dropping your interest rate 1% on $200,000 you will be saving $166.66 per month or about $2,000 per year.

Awesome!

Anyone would want to save $2,000 per year, where do I sign… right? Not so fast, you’ll want to calculate the break-even point to find out how you will benefit after your closing costs.

Net Benefit Formula (Break-Even):

(Closing Costs – Escrows) / Interest Savings = Month of Break-Even

($6,000 – $1,000) / $166.66 = 30 Months

In other words, it will take 30 months for you to recoup the cost of your refinance. If you plan to keep your mortgage for at least 30 months then you might want to consider this deal.

Okay, now we can calculate your net benefit for refinancing with one more calculation.

(Monthly Savings * Months you plan to keep mortgage) – (Closing Costs –Escrows) = Net Savings

($166.66 * 120 months) – ($6,000 – $1,000) = $14,999.20

If you kept the mortgage for 120 months (10 years) you would save $15,000.

Okay, now you can find out where to sign.

Calculating the net benefits of a refinance is crucial in determining if it is strategic for you to refinance. Keep in mind that each mortgage is slightly different and you may need to adjust calculations accordingly.

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Frequently Asked Questions:

Q:  I heard that I should only refinance if I drop 1% on my mortgage is that true?

Some people say ½ % , 1% to never. Every mortgage is different.

For Example: A no cost loan can have a 1 month break-even point with only a .25% drop in interest rate. Now that you know how to calculate your net benefit, you are able to figure out what may be best for your situation.

Q:  Why can’t I just compare my current payment to the proposed payment and figure out my net benefit?

You could just compare just the two payments if you wanted to find out your cash flow savings, but the current and proposed loans may have two different amortizations.

Let’s assume you currently have a 15 year mortgage and you’re comparing it to a 30 year mortgage. If both loans have the same interest rate and loan amount but the amortization is different, your interest savings per month would be $0. However, you are going to show a cash flow savings with the 30 year mortgage because of the longer amortization.

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Related Article – Refinance Process:

• Refinance Process Overview
• Mortgage Approval Process
• Calculating The Net Benefit Of A Refinance
• Should I Refinance Or Get A Home Equity Loan To Make Improvements?
• What Do Appraisers Look For When Determining A Property’s Value?
• Understanding The Difference Between Appraised Value vs Neighborhood Listing Comps
• Five Myths About Home Values

Why is there such a difference between what my appraised value is and the price similar homes are selling for on my street?

It’s a great question, and you don’t have to be a mortgage professional or a real estate agent to understand the answer. The distinction lies in the purpose of the two valuations and who is responsible for creating them.

Appraisals:

The purpose of an appraisal is to make sure that an independent non-interested third party verifies the “most likely” sale price based on the market value and condition of the home.

Appraisals are meant to be a realistic determination of the value of a home if it were to sell in the current market, in its current condition.

In addition, appraisers are governed by rules intended to standardize the subjective process of determining a home’s value.

Some of the key factors appraisers look at are: Location, above ground size, room count, bathroom count, style of home, condition of property, amenities, and market conditions such as how long it takes for home to sell and if values are increasing, decreasing or steady.

Appraisers are also asked to look only at comparable sales within a certain distance, usually one mile except in rural areas, and within a specified period of time, which is 3 months in the current market.

Listing Prices:

Listing prices on the other hand are influenced by the real estate agent, and but set by interested and often emotional sellers.

Sellers are not held by any rules when they list a home. In some cases, sellers take what they paid for the house, add what they have spent on improvements and even add amount for profit.

Often times, sellers will list their home based on the amount needed to pay for the real estate agent, closing costs and cover the amount of the mortgages.

Extra low prices are generally the result of an extra motivated seller that has to sell and move in a rush, so they’ll list their property below market comps in order to be the most competitive.

Throw in bank owned homes (foreclosed properties), and listing prices may be all over the place without a logical explanation due to an asset manager making decisions from another part of the country.

The Verdict:

While list price is never a good indication of what a home in your neighborhood is worth, appraisals are not an exact science that will determine the true value of your home either.

Some will argue that a home is worth what people will pay for it, so there’s obviously a little room for personal interpretation.  Either way, the bank securing that piece of real estate for a mortgage loan generally always has the final opinion that matters the most.

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Related Appraisal Articles:

• Mortgage 101 – Appraisal Basics
• What Do Appraisers Look For When Determining A Property’s Value?
• Five Myths About Home Values
• How Do Mortgage Companies Value A Property That Hasn’t Been Built Yet?

Providing proper asset documentation and the actual source of the funds is a critical element of the loan closing process.

There’s nothing worse in a real estate purchase than making it all the way through the hoops and hurdles just to have a loan denied after the final documents have been signed due to the borrower using the wrong checking account for the down payment.

Seasoning of the down payment money is just as important as the source, which is why underwriters typically require at least two months bank / asset statements in the initial mortgage approval process.

A Few Acceptable Sources Of Down Payment Include:

• Bank Accounts – checking / savings
• Investment Accounts – money market, mutual funds
• Retirement Funds – keep in mind that borrowing against a 401K plan will require a repayment, which will be calculated in the Debt-to-Income Ratio
• Life Insurance – Cash value and face amount
• Gifts – Family members can gift down payment funds with certain restrictions
• Inheritance / Trust Funds
• Government Grants – Many state, county and city agencies offer special down payment assistance programs

It is extremely important is to make sure your loan officer is aware of the exact source of your down payment as early in the process as possible so that all necessary questions, documentation and explanations can be reviewed / approved by an underwriter.

A good rule-of-thumb to remember is that whatever funds you’re using as a down payment have to be pre-approved by an underwriter at the beginning of the mortgage approval process.

Basically, if you accidentally forget to deposit money in your checking account on the way to the closing appointment, it is not acceptable to get a cashier’s check from a friend’s account until you have a chance to pay them back later.

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Frequently Asked Questions:

Q:  What if I don’t have a bank account and cannot properly source my funds to close?

Cash on hand is an acceptable source of funds for some loan programs, but make sure you bring that detail up at the application stage

Q:  Can I use a bonus from my employer for my down payment?

Yes, but generally this needs to be a bonus you regularly receive

Q:  Can I borrow the money from a friend?

No, any money that needs to be repaid is typically an unacceptable source of funds

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Related Articles – Closing Process / Costs

• Closing Process – Overview
• Closing Costs – Overview
• Talk the Talk – Know the Mortgage Lingo at Closing
• Where Does My Earnest Money Go?

What the heck are they talking about?

Many borrowers go through the closing process in a haze, nodding, smiling, and signing through a bunch of noise that sounds like Greek.

Even though you may have put your trust in your real estate and mortgage team, it helps to understand some of the terminology so that you can pay attention to specific details that may impact the decisions you need to make.

Common Closing Terms / Process:

1. Docs Sent –

Buyers sit on pins and needles through the approval process, waiting to find out if they meet the lender’s qualification requirements (which include items such as total expense to income, maximum loan amounts, loan-to-value ratios, credit, etc).

The term “docs sent” generally means you made it!! The lender’s closing department has sent the approved loan paperwork to the closing agent, which is usually an attorney or title company.

Keep in mind that there may be some prior to funding conditions the underwriter will need to verify before the deal can be considered fully approved.

2. Docs Signed –

Just what it implies.  All documentation is signed, including the paperwork between the borrower and the lender which details the terms of the loan, the contracts between the seller and buyer of the property.

This usually occurs at closing in the presence of the closing agent, bank representative, buyer and seller.

3. Funded –

Show me the money!

The actual funds are transferred from the lender to the closing agent, along with all applicable disclosures.

For a home purchase, if the closing occurs in the morning, the funds are generally sent the same day. If the closing occurs in the afternoon, the funds are usually transferred the next day.

The timing is different for refinancing transactions due to the right of rescission. This is the right (given automatically by law to the borrower) to back out of the transaction within three days of signing the loan documents. As a result, funds are not transferred until after the rescission period in a refinancing transaction, and are generally received on the fourth day after the paperwork is signed.

(Note – Saturdays are counted in the three day period, while Sundays are not). The right of rescission only applies to a property the borrower will live in, not investment properties.

4. Recorded –

Let’s make it official. The recording of the deed transfers title (legal ownership) of the property to the buyer. The title company or the attorney records the transaction in the county register of the town where the property is located, usually immediately after closing.

There you have it – an official translation of closing lingo.

As with any other important financial transaction, there are many steps, some of which dictated by law, which must be followed.

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Related Articles – Closing Process / Costs

• Closing Process – Overview
• Closing Costs – Overview
• Making Sure Your Cash-To-Close Comes From The Proper Source
• Where Does My Earnest Money Go?