Laguna Beach Real Estate

A few weeks back we wrote about one frustrating Laguna Beach home purchase where the buyer was inundated with last minute underwriting conditions resulting in what we called the “loan approval decathlon” and a delay in the closing of the home. What was made clear with lending in our current credit climate is…”it ain’t over ‘till it’s over!”

The situation was frustrating for all parties. Including, it seems, the lender.

Tips that we took away from that experience were to avoid, if possible, removing any contingencies relating to your loan from the purchase contract. For example:

• We know that lenders have ordered second appraisals, even after the first one has been approved. Therefore, try to keep your appraisal contingency on the purchase contract until the loan has funded;
• We know that they could pull a second credit report right before the loan funds; therefore, be certain that there are no changes to your credit. If they do pull a second report, you want the credit profile to look similar. No new accounts, no major increases in your loan or credit card balances, etc. Now, you will probably not be able to avoid removing this one since you do have control over your credit history…just keep it clean!
• We know that they may re-verify your down payment and reserves. Be sure that your paper trail is accurate, and that you keep the documentation proving these assets. Again, keep it clean – you have control over this.

Now, we have some additional information from our associate over at Bank of America. This information is very helpful. It is a lender’s perspective as to why loans seem so hard to get. Read on…

A Lender’s Perspective

Compliments of Kevin Budde, Bank of America

One of the most regular comments we hear from agents and borrowers is that they believe lenders don’t want to make loans. It has become common place for many last minute underwriting conditions to be added to loans. We are even hearing about lenders who have issued written loan approvals only to have the approval pulled back days later. Sometimes, even after the buyer has removed loan contingencies, the approval is rescinded. What is going on and why is it so hard to get loans through the system?

There is a war going on between the U.S. government and the lending industry. Due to the financial collapse of FNMA and FHLMC the government was required to step in and take over these two housing giants. FNMA just required an additional $11.8 billion dollars of new capital to keep them afloat. The U.S. government is trying to stem these losses by making all of the lenders buy back loans that were sold to these two agencies. If government auditors can find any discrepancy in the file they issue a repurchase agreement to the lender who in turn needs to use their capital to buy the loan back. In response to the increased buyback requests from the government lending institutions are pressuring their underwriters to make sure not one piece of documentation is missing from a loan file prior to the closing of the loan. This often results in conditions that don’t make any sense to the borrowers and agents and can cause major upset prior to closing not to mention closing delays.

In 2009 Bank of America was requested to buy back $425 billion of home loans from FNMA and FHLMC. In 2010 the number is supposed to double. In the first quarter of 2010 Wells Fargo set aside $2.6 billion in reserves just to pay the legal bill for fighting the government and their buyback requests. The pendulum has swung from lenders making practically every loan four years ago to the extreme opposite making getting a home loan a very harrowing experience for the buyers, to say the least.

Is there anything you as agents can do to help make the borrower’s experience less daunting? Absolutely there is. Have all of your clients be thoroughly pre-approved prior to putting them in your car. Unfortunately there are many versions of what a pre-approval entails. Every day we cross pre-approve borrowers for REO and short sale properties. We see regularly the poor job and lack of documentation that made up the pre-approval. We ask for supporting documentation from the buyer only to find out they don’t qualify at all. Had we not been asked to step in and cross qualify the client that escrow would have collapsed shortly.

So what can be done to make sure the very best of efforts is being put forth? One, call the lender that issued the pre-approval letter and ask, “Did you collect income and asset documentation and review it with an underwriter to determine the accuracy of the qualification?” Two, allow time for the lender to take these steps in order to better prepare everyone. We are still asked to write pre-approval letters by talking to the client on the phone when the purchase contract is being written as everyone is in a hurry. This process doesn’t cut it in today’s difficult lending environment. Remember, if the borrower did not submit income and asset documentation to the lender for review then the pre-approval letter in your hand isn’t worth the paper it is written on.

Are you one of the many sellers whose home has not yet sold, but you are excited to close escrow on your next purchase?

Sellers in this quandry often face the decision of using their personal savings to meet the minimum required down payment in order to close the new purchase, and then refinancing after their existing home sells in order to replenish their savings and reduce their mortgage payment. The problem with this has been that the cost of refinancing could run into the thousands.

The other option is to wait on the new purchase until their home sells. In this market, that could take a few months depending on several factors. And, for those that are looking at all of the great inventory choices for Laguna Beach Homes for Sale, you may not want to risk missing out on that perfect home that has just hit the market.

Now, according to information from Kevin Budde from Bank of America, there is a third option. 

If you are able to use your savings to close your new purchase now, you could possibly recast that loan once your present home sells. Depending on the amount used, your payment could be lower.

Let’s see how this could work:

If you were purchasing a home at the price of $500,000 and had an amount in savings equal to 10%, or $50,000, you may be able to close your new purchase (depending on lender guidelines, etc.) with a loan of $450,000.

Then, when you sell your existing home, lets say that your proceeds were $100,000. You could use $50,000 of this amount to replenish the money that you used from savings, then apply the additional $50,000 to your mortgage through a recast, reducing that balance to $400,000 and thus reducing your monthly mortgage payment.

This is just another option to consider. If you believe that you could benefit from this, be sure to check with your lender to get all the details in relation to your personal financial scenario.

Here is the full information from Kevin Budde of Bank of America:

Recasting of Amortizing Loans  

A recast is a modification of a loan that can be completed when a large sum of money is applied to principal. A recast occurs when the principal balance of a loan is reduced and the subsequent payments are calculated using the lower principal balance. The recast does not shorten the term of the loan; however, it does lower the amount of the payment and the principal balance of the loan.

As an example, if a buyer who’s existing home hasn’t sold and was using the proceeds for the down payment, may choose to close escrow on his new purchase using funds from savings. Once his home for sale closes he will want to replenish his savings and use the rest of the proceeds to lower the principal balance to the originally planned loan amount. Most borrowers are under the belief they will need to refinance the existing loan and apply the additional proceeds in order to lower the monthly payment. This is where recasting becomes the solution.

If the borrower were to refinance they would incur thousands of dollars of costs. In addition, the interest rates may be higher which would also be a problem. By requesting a recast from the servicer of the loan the borrower is able to lower his monthly payment and not have to be concerned with costs or higher interest rates.

Recasts are permitted on FNMA and FHLMC loans. Recasting is not permitted on FHA or VA loans. Typically, one recast is allowed per year and no minimum principal reduction amount is required.

With new underwriting criteria for home loans when purchasing a house, or shall I say, returning to underwriting criteria from the times before “easy credit”, many are left to wonder what they can do after a financial event that has affected their credit. Kevin Budde, from Bank of America, offers the following tips:

“When it comes to repairing credit and applying for a home loan the underwriting philosophy can be summed up in one phrase. “A period of financial difficulty in the past does not necessarily make the risk unacceptable if a good payment record has been maintained since”. The key after going through financial hardships is to establish new credit and to maintain it. This can’t be stressed enough.

Government agencies that underwrite and insure loans have timelines after a specific credit altering event before a potential homebuyer can be approved for a home loan. As an example, with foreclosures, died-in-lieu and short sales the time frame with FHA is 3 years. For bankruptcies the timeframe is 2 years. Conventional loans are 2 to 3 years longer in most cases. There are extenuating circumstances that would allow the borrower to be approved in a shorter time period but those approvals are very difficult to come by.

Sometimes borrowers do not have any credit which also can make getting a home loan challenging. The standard industry guidelines request everyone to have a minimum of 12 months of credit history on three traditional credit references. These would be auto and student loans along with credit cards. When a borrower does not meet the minimum standard then FHA allows lenders to establish a nontraditional credit history.

If the borrower does not have any revolving or installment debt on their credit report the lender is required to substantiate payments to other credit references. These may include: rental housing, gas company, electricity, water, landline home telephone service and cable TV. 12 months of cancelled checks are generally requested. In addition, insurance bills, furniture payments, medical bills and cell phone services may also be utilized.

Establishing and maintaining good credit has become more important than ever before when applying for a home loan.”

Until next time….

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