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THE NEW GOOD FAITH ESTIMATE: PART 1
In theory, the GOOD FAITH ESTIMATE (GFE) is an important and helpful document. In theory. This post had me thinking and wondering if the new GFE is a positive step for the industry.
The main purpose is to give borrowers, at the beginning of the loan process, when they are figuring out their budget to purchase or refinance a home, a sense of their total cost. So a borrower could look at the GFE and evalutate the bank, title, and other fees, as an estimate, that are associated with their loan. You would think that this is–has been–a great document.
In the past, lenders had the ability to tell their clients that, for example, bank fees are going to be (say) $500, and then at the closing charge the borrowers $1500. At the closing table borrowers could either close and eat the additional fees, or they could decline to close and either try to sue the lender or find a loan with another lender. Any scenario is painful. And rightfully so. This is the “inspiration” for the new GFE.
Now, as I will discuss in upcoming posts, the lender must write, in separate boxes, total bank charges, total bank credits (to the borrower), or total bank discount points. At the top of the second page the loan officer must clearly indicate:
- the bank’s total orgination fees that usually include bank and/or origination fees.
- if the bank is offering and interest rate with no other fees.
- if the bank is offering any credit to the borrower.
- if the bank is charging discount points to lower the interest rate.
Theoretically, then, borrowers can compare–the old apple to apple comparison–lenders cost to cost. It’s not a bad idea, and seems simple enough. But as the article that I have referenced explains, these numbers cannot change unless the borrower requests a change, and if the loan officer makes changes without the borrower asking for the changes, the lender will have to pay for the difference. So in my initial example, a borrower showing up at closing with a settlement statement that is $1000 higher than the GFE will not have to eat the difference. The lender will be forced to pay the difference Though this is a good thing for the borrower, to protect them for predatory lenders, it can be an unfair practice against many lenders. Now lenders are forced to wait until borrowers have a contract before issuing a GFE. And so borrowers can only receive and estimate (an estimate for the Estimate?) of what their GFE will be. Sound a little wacky?
Stay tuned for some more thoughts on the new document.
IS IT EASY TO OBTAIN A MORTGAGE?
According to this writer it is a one, two, three step process.
True? Maybe, but in general not so much. A good, knowledgeable realtor could be a good referral source in finding a good loan officer. The key word is good. Check.
Having a “decent” salary and good credit is pretty relative. And it’s relative to the other risk factors when a loan officer considers your ability to qualify for a loan: income, assets and reserves, credit score and history, appraisal, loan to value, etc. He is correct, though, that you will have to provide documentation to verify the various factors that will qualify you: pay stubs, W-2s, tax returns (maybe), full, complete statements of your assets accounts, and maybe more. I cover all this in my book.
In the end, it’s not a big deal. For some, I know, who may not be as organized with their current statements and records, it may be a little frustrating. Nevertheless, it’s all required.
The mortgage process is not a five paragraph process. Take your time. Think about what’s important. And seek qualified help.
TWO VERSIONS OF A MORTGAGE REFINANCE
Had a thought regarding a recent post. Something I always like to point out to borrowers who inquire about refinancing.
Let’s look at my perspective. If we assume a loan amount of $300,000 and a current rate at 6.00%. The principal and interest payment would be $1,799. Principal and interest. Principal, assuming value stays the same or increases, will become equity. An amount that you own. Interest is a cost. You pay it, and lose it. Anyway, if you were to refi with a 5.00% rate, your new principal and interest payment would be $1,610. Lowering your monthly payment $189 per month. $2,268 per year. $11,340 for 5 years. Not bad.
And…to me, more importantly, you lower your cost. At 6.00% your yearly interest that you pay is $18,000. At 5.00%, it’s $15,000. In this scenario, you’d be saving $3,000 per year ($250 per month)! Pure cost. Over five years, you’d be saving $15,000.
Remember, there’s two payments to keep in mind: monthly payment as well as cost (interest).
Why Refinance Your Mortgage? Lower Payments?
Here is a post that demonstrates one reason to refinance: lower the monthly payment. If you compare the monthly payment (assuming the loan amount were the same, which it is not because, as we know, over time, the loan amount is being paid down), with a new, lower interest rate, the principal and interest payment would be lower.
In the example that is presented, where we do not know the loan amount, the borrower is spelling out that the monthly tax and insurance payment has increased, which it would anyway, but the P & I payment would be lowered by $144 per month. Not bad. And the net closing costs were around $2,000.
Is it worth $2000 to refinance? A couple things. First, it is accurate that a borrower can pay the closing costs at closing or can role this amount into the loan (add it to the current loan amount). This, then, means they are paying interest on the additional $2000. Here, they are paying an additional $100 per year in interest on the $2000 amount added to the loan amount. Good thing or bad thing? A small thing, but something to think about. In five years that’s $500. My thinking, if you have the $2000, why not pay it at closing and save the money that would be paid on interest. The whole point of refinancing.
Also, this borrower brings up an important point to remember. When refinancing, you will have to re-establish a tax and insurance escrow account. Unfortunately we can’t roll the old account into the new one, so the borrower will have to bring money for the new account, and then the current lender will reimburse the borrower for the money that is being held in the old escrow account, usually within a few weeks of closing. In addition, the borrower will pay the accrued interest for the current loan to the current lender, and will then pay prepaid interest (paying the interest that will accrue, for the new loan, usually through the end of the new month, just as you would do in a purchase), and then you will skip a month for the new, first month’s payment.
But wait: was it work paying $2000 in closing costs? Look at it this way, from a payment perspective, if you divide the monthly lower payment amount ($144) into the cost ($2000), it will take just under 14 months to break even, and then these borrowers are truly saving their $144 per month. Sound good to you?
Last, they are also paying more than the required minimum, as part of their goal is to pay down their loan faster to pay less interest for the life of the loan. To me, neither bad nor good. It makes them comfortable and happy. That’s the important thing. I like happy people.
CONDO’S SEEING A LIFELINE
It’s been no secret that condominium complexes have been a sinking ship. In addition to a dearth of buyers, lenders have been running away from condos (mostly because of…a dearth of homebuyers).
Now that (hopefully) the housing market is starting to show signs of improvement, condo lending should also improve. Slowly.
Fannie Mae recently reported that they will now review the condo market, particularly in Florida, one of the hardest hit states. It’s important to note that not all loans for condos require a 25% down payment. In fact, there are still lenders offering products, for a Fannie/Freddie loan, on a condo with less than 25% down payment. The other issue to keep in mind, however, is mortgage insurance. Remember, for most conforming loans with less than 20% down payment, the borrower is either going to require a first mortgage with no more than 80% LTV and then a second mortgage for the balance of the loan (something very difficult to find these days) or going to require mortgage insurance. The mortgage insurance companies are perhaps even more conservative when it comes to condominiums.
Hopefully guidelines will loosen up sooner and lenders and the secondary market will continue to help the condo complexes that have been suffering the most.
Getting a Mortgage with No Credit
For younger borrowers, a lack of credit (history) can hurt.
When a loan officer reviews a borrower’s history, the first, and most important, factor is credit. I recently read an article that focused on this question. Even if a borrower had no credit cards, no automobile payment history, and/or other history regarding credit that would appear on a credit report, there are loans still available.
Basically, the loan officer would build a credit history, with items like rental history, utilities, cell phone, etc, and would send the documents to a credit report company that would confirm the positive payment history. Then, the credit report company would complete a report, without credit scores, and send it back to the loan officer to review.
Several lenders, per Fannie Mae and Freddie Mac guidelines, and including FHA guidelines, still allow a manual review of credit history.
So those who are afraid of not being able to obtain a loan because of a lack of credit history should simply collect documentation, for the monthly payments that they do make, and set an appointment with a qualified loan officer. You may be qualified.