Archive for: Underwriting Guidelines

Seven Things Your Agent Should Know About Your Bay Area Mortgage Approval

01 April 2010 / Home Buying Process / 0 Comment

While many experienced Bay Area 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 Bay Area 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 that 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 in the Bay Area:

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. Bay Area 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 Bay Area 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 Bay Area 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 loan 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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Ten Credit Do's and Don'ts To Bear In Mind Prior To Getting Your Mortgage Loan in Bay Area

01 April 2010 / Mortgage Approval Process / 0 Comment

How can a fully approved Bay Area Mortgage 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 Bay Area 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 a smoother loan process.

These tips don't encompass everything a Bay Area 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 things a lender looks for is responsible payment patterns on your current housing situation.

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 Bay Area 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) in the Bay Area.

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 Bay Area 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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Do I Need To Sell My Home Before I Can Qualify For A New Mortgage On Another Property in Bay Area?

01 April 2010 / Blog, Mortgage Approval Process / 0 Comment

Although every situation is unique, it is not uncommon for homebuyers to qualify for a mortgage on a new home while still living in their primary residence in the Bay Area.

Perhaps you are outgrowing your current house, or have been forced to relocate due to a job transfer? Regardless of the motivation for keeping one property while purchasing another, let’s address this question with the mortgage approval in mind:

So, Do I Have To Sell?

Yes. No. Maybe. It depends.

Welcome to the wonderful world of mortgage lending. Only in this industry can one simple question elicit four answers…and all of them may be right.

If you are in a financial position where you qualify to afford both your current residence and the proposed payment on your new house, then the simple answer is Yes!

Qualifying based on your Debt-to-Income Ratio is one thing, but remember to budget for the additional expenses of maintaining multiple properties. Everything from mortgage payments, increased property taxes and hazard insurance to unexpected repairs should be factored into your final decision.

What If I Rent My Current Property?

This scenario presents the “maybe” and the “it depends” answers to the question.

If you're not quite qualified to carry both mortgages, you may have to rent the other property in order to offset the mortgage payment.

In that scenario, the Bay Area lender will typically only count 75% of the monthly rent you are proposing to receive.

So if you are going to receive $1000 a month in rent and your current payment is $1500, the lender is going to factor in an additional $750 of monthly liabilities in your overall Debt-to-Income Ratios.

Another detail that can present a huge hurdle is the reserve requirement and equity ratio most lenders have. In some cases, if you are going to rent out your current home, you will need to have at least 25% equity in order to offset your payment with the proposed rent you will receive.

Without that hefty amount of equity, you will have to qualify to afford BOTH mortgage payments. You will also need some significant cash in the bank.

Generally, lenders will require six months reserve on the old property, as well as six month reserves on the new property.

For example, if you have a $1500 payment on your old house and are buying a home with a $2000 monthly payment, you will need over $21,000 in the bank.

Keep in mind, this reserve requirement is incremental to your down payment on the new property in the Bay Area.

What If I Can't Qualify Based On Both Mortgage Payments?

This answer is pretty straightforward, and doesn't require a financial calculator to figure out.

If you are in this situation, then you will have to sell your current home before buying a new one.

If you aren’t sure of the value of the home or how your Bay Area local market is performing, give us a ring and we'll happily refer you to a great real estate agent that is in tune with property values in your neighborhood.

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As you can tell, purchasing one home in the Bay Area while living in another can be a very complicated transaction. Please feel free to contact us anytime so we can review your specific situation and suggest the proper action plan.

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Understanding the Bay Area FHA Mortgage Insurance Premium (MIP)

28 March 2010 / Mortgage Programs / 0 Comment

* Disclaimer – all information in this article is accurate as of the date this article was written *

The FHA Mortgage Insurance Premium is an important part of every Bay Area 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 Bay Area 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 1.00% of the Base FHA Loan amount (effective October, 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 1.00% is multiplied by $96,500, equaling $965.00

>> This amount is added to the base loan, for a total FHA loan of $97,465

Monthly Mortgage Insurance (MMI):
- Equal to .90% 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 .85% 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
- 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 Bay Area 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 Bay Area 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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Making Sure Your Cash-To-Close For Your Bay Area Home Comes From The Proper Source

28 March 2010 / Mortgage Closing Process / 0 Comment

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

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 to make sure the loan officer for your Bay Area Mortgage 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 for your Bay Area Mortgage.

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 for your property in the Bay Area

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