Timing the Market, A Banker’s Viewpoint

September 1, 2008

Credit for this post really goes to 3 Oceans contributor Eric Trailer who sent me this content in a letter this week. My clients got it last week, and the blogoshpere can now benefit. We can assume that Eric has better things to do on Labor Day than blog. I’m guessing something involving his lovely wife and son . . .

To see current market data and price trends over the past year for local communities and confirm or refute Eric’s prognostications on the local market in Palo Alto and the surrounding communities,

CLICK HERE to see real-time market data, courtesy of our friends at Altos Research.

As you have likely been hearing, there continues to be more and more evidence that it will cost prospective home buyers more to purchase a home in select areas of the Bay Area as they allow time to go by.
Why? Let’s look at the basic reasons, then review an example:

1.        The median price across the board in Palo Alto and the surrounding communities has risen since the beginning of the year.

2.        On a national basis, the trough of the market was reached in April.

3.        The conforming loan limit will DECREASE over $100,000 in 2009 to $625,000.

4.        Rates have risen about .5% since the beginning of the year, despite the increase in the conforming loan limit to $729,750

5.        Loan qualifications are becoming more restrictive with each passing week.

6.        More restrictions on loans and a tighter supply of money forces rates to go up

7.        Because loans require more work to process them (requirements today are 4x what they were a year ago), rates will go up.

8.        Inflation is the number one concern of the Fed, and should be the number one concern for all of us.

Let’s say for a moment that you agree that rates are on the rise, but feel as though prices may come down on a $1mm property today; thus, you want to wait. Let’s further assume that you are right and the future price is $950,000, but rates have increased .5% at that future time. Using 20% down, waiting just cost you an ADDITIONAL $117 per month-over $1,400 per year.

But now let’s be more realistic given the appreciation rates of desirable areas of the Bay Area. If rates increase and the $1mm home appreciates to $1,050,000, you are looking at an ADDITIONAL $550 PER MONTH-OVER $6,000 PER YEAR!

What’s the take-away here?   Price matters much less than true cost… My motto has always been that it always pays off to buy sooner than later, provided your holding period is greater than four years. And to prove that I walk the walk, I am happy to share my personal situation written as an article titled, “How to Afford a Home in Palo Alto Without a Trust Fund.”

Kindest regards,

Eric

To call Eric on his walking the walk comment, and get a copy of his article, “How to Afford a Home in Palo Alto Without a Trust Fund.”, click on his pretty picture over there in the contributor column to send him an email.

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Written by Chris Iverson, Realtor · Filed Under * Type of Content, Altos Research, Articles, Buy vs. rent, Buyer and seller tips, Buyers, Companies and products, Consumer, Financing Process, For buyers, Home buying, Lenders, Market updates, Mortgage, Mortgages, Palo Alto, Personalities, Real estate, Strategy, Technology | Leave a Comment 

Eliot Spitzer and Making Sense of the New Conforming Loan Limits

March 18, 2008

If you’re Eliot Spitzer, probably three feelings come to mind: panic, disorientation and regret.  But if you’re a potential home buyer in the Peninsula region of California, you have good reason to feel excited, encouraged and confident!  Why?  If you read my last post last month, you know that the conforming loan limits for many California Counties are going up and that means cheaper mortgage rates on loan amounts between $417,001 and $729,750.  Now that HUD has made it official that ALL bay Area counties qualify for the revised maximum conforming loan limit, that means potentially big savings on mortgages for qualified applicants looking to purchase single-unit properties up to $810,000 with as little as 10% down!

We’ve all heard the cliche, “the devil’s in the details”, so what are the latest requirements to obtain a conforming loans between $417,001 and $729, 750?  Since I’ll provide you with a link to Fannie Mae website and announcement , I’ll provide you with some highlights that I think are most relevant and let you read further at your leisure:

1. Single-unit properties only

2. Purchase and “limited cash out” transactions only (i.e. no greater than $2,000 going into your pocket upon settlement)

3. If primary residence purchase, up to 90% loan-to-value (”LTV”) allowed if fixed-rate program is selected–700 minimum FICO(R) required; 80% LTV if an adjustable-rate loan is selected–660 minimum FICO(R) required; if refinance

4. If second home or investment property purchase, maximum 60% LTV allowed with minimum 660 FICO(R) regardless of eligible loan program selected

5. If refinance, regardless of type of eligible mortgage program, up to 75% LTV allowed, plus subordinate financing allowed in addition up to 20% LTV–660 minimum FICO(R) required

     a. SPECIAL NOTE, consolidating existing first mortgage and subordinate mortgage into one loan NOT eligible AND six  months of “seasoning” (six payments made on existing mortgage) required to refinance!

6. Loans are eligible for origination NOW 

7. Eligible programs include 30-year fixed, 15-year fixed, LIBOR-based 5/1 ARM (amortized and interest-only payments allowed for this program)– more programs may become available

8. Sufficient employment, income and assets must be verified and each file will require manual underwriting– automated underwriting engines not allowed at this time

Again, I do encourage you to read the Fannie Mae announcement from the 6th of March for all the details, but the above are the top highlights.

So what will pricing look like on these “new” conforming mortgages?  Well, pricing has just recently been released by only a few institutions, but it looks like the 30-year fixed is running at about 6.375% and the 15-year fixed is running at about 6.25%.  The 5/1 ARM pricing is expected to be released next month.  What I do think is that pricing may actually get a little better in the short term as more institutions post pricing and auctions are successful with Fannie Mae and Freddie Mac. 

What’s right for you as a would be home buyer on the Peninsula?  That depends of course on your specific situation, and I do encourage you to consult with your trusted mortgage and financial consultant before placing an offer on a home or refinancing your mortgage.  What I can say is that the majority of our clients who are buying or refinancing today are selecting a jumbo 5-year ARM in the mid-5% range due to its balance of savings, security and flexibility.

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Written by Eric Trailer, Mortgage Banker, Absolute Mortgage Banking · Filed Under * Type of Content, Buyer, Buyers, Consumer, Industry | 5 Comments 

Relief Ahead For Troubled Areas of the Housing Market? If This Law Passes, Your $750K Home Could Cost You $500 Less Per Month

January 24, 2008

Several changes are afoot that may give some breathing room to the troubled parts of the housing market — which includes much of the country, even some areas here in the Peninsula. The Fed’s surprise 75-basis point rate drop a few days ago may lead to lower mortgage rates, and some of those with soon-to-reset adjustable rate mortgages may also be breathing easier.

The news today is that the House of Representatives has signed off on at least a temporary increase in the conforming loan limit, from its current level of $417,000 (more than enough for much of the country, almost irrelevant here) to $625,000, and perhaps as high as $700,000 in high-cost states. Now if the Senate and W. sign off on it, we could have ourselves a deal!

Currently, conforming loans (those which are guaranteed and resold by Fannie Mae and Freddie Mac) are limited to $417,000 in most states, but are about 50% higher in “high-cost” states like Hawaii and Alaska. By some twisted government logic, California is not included as a “high-cost” state.

What impact would raising the limit from $417,000 to $625,000 have on our local market? As a non-mortgage professional, here’s my take on it… (I’m hoping that a local mortgage expert or two may chime in here.)

First, if you’re buying a $1.5M home and putting $300K down — ie you’re borrowing $1.2M — nothing would change for you. Since you’re borrowing more than the limit, your loan can’t and won’t be resold and guaranteed by Fannie and Freddie, and the risk premium for this has increased dramatically over the last year. A quick check over at bankrate.com shows a full 1.16% price difference between a conforming 30-year mortgage at 5.25% and a jumbo 30-year mortgage at 6.41%. Sorry, you’re stuck in the 6.41% camp.

However, if you’re buying a less expensive home — or putting down a lot more money — this could help dramatically. Say you’re buying a $750,000 home and you’re planning on putting $125,000 down — ie you’re getting a $625,000 loan.

Currently, that’s above the conforming loan limit, so with today’s rates you’d be paying (click click click on my calculator) $3914 per month. If the bill passes, you could get that same $625,000 loan for for 5.25% (click click click) or $3451 per month. That’s a handy pre-tax savings of a tad over $500/month, hardly chump change.

The lesson? If this bill passes, and the numbers work out such that the home you’ve been eying would require a loan between $417,000 and $625,000, here’s what you need to do:

  • Scramble, beg, borrow, steal — do whatever you need to do in order to get enough of a downpayment to bring your loan in under $625,000.
  • Work with your mortgage person to get a big enough second mortgage so that your first comes in under $625,000

Further coverage:

Caveat: I am not a mortgage broker or banker. In particular, I am not your mortgage broker or banker. The above represents my layman’s understanding of the issue. Don’t make any kind of home purchasing decision based solely on the above. Talk to your mortgage professional. ‘Nuff said.

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Written by Kevin · Filed Under Buyers, Consumer, Mortgage, Real estate | 7 Comments 

A Dirty Little Secret About Subprime Mortgages

January 14, 2008

Being a mortgage banker , I’ve done my fair share of researching the impact of the current “Mortgage Meltdown”, but what I haven’t seen publicly written is one very dirty little secret about the way most subprime mortgages were structured. So I’ve come to share. Hats off to Chris Iverson of the Ventoux Real Estate Group, by the way, for doing a superb job on his Mortgage Mania series.

I will never forget the first subprime mortgage solution that I originated. It was about three years ago, the mirror was officially fogged by the client, and the terms looked something like this:

–first mortgage for $400,000 at 80% loan-to-value, 30-year period, fixed for two years at 8.00%, interest-only payments allowed, 2% discount fee, with a three-year prepayment penalty at six months interest

–second mortgage for $100,000 at 20% loan-to-value, 15-year term, fixed for 15 years at 12%, amortized payments, 1% discount fee, no prepayment penalty

What a minute, a mortgage fixed for two years, but the prepayment penalty lasts for three years? Wait another minute, don’t the payments on that first mortgage double in the third year? Yes and yes.

I wasn’t aware that the first mortgage had a prepayment penalty beyond the fixed-rate period until the final loan documents were prepared. As you may imagine, after reading the documents I made an immediate phonecall to the lender that I had brokered the deal to (oh, and yes, that company is BK) and re-negotiated the prepayment penalty to two years without any additional cost.

The truth is, as I further investigated subprime lending, I discoverd that most of those loans were structured that way, and most were not re-negotiated…

So if borrowers were essentially set up for failure, doesn’t that have a domino effect to the lender that issued the paper and the investor that bought that paper? Yes. And that’s why we’re here today. That’s also why we originated as few of these loans as practical.

The reality was that modern subprime lending (modern in that it used to be called “hard money” and the loan-to value requirements were 65%-70% of property value) actually seemed like a win:win in the beginning. Think about it for a moment. To those who were willing to buy, but had serious financial difficulties, subprime lending was a great financing vehicle to own the American Dream or maybe begin investing in real estate . To the investor, it was a low-risk, secured investment that would earn a hefty 11+% yield. Oooops, maybe it wasn’t so obvious a win:win.

We can blame whomever we wish for the current mortgage mess: the rating agencies, Wall Street, big banks, small banks, mortgage banks, mortgage brokers, real estate professionals, borrowers, etc. My feeling is that all of the above share in the blame since it allowed all parties to get greedy. And might we all agree that greed can be a very dangerous motivation?

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Written by Eric Trailer, Mortgage Banker, Absolute Mortgage Banking · Filed Under Consumer, Industry | 3 Comments 

Mortgage Mania Part 16 - The Hits Just Keep On Coming

December 11, 2007

Ben And The Boys (aka the FOMC) cut short-term interests rates by .25% earlier today in an attempt to:

1) Soften the mortgage industry landing from a smoking hole in the ground, to more of a smoldering skid mark. Don’t tell Washington Mutual who announced 3000 employees were getting pink slips in their stockings, and the bank is setting aside up to $1.6 Billion for losses in the 4th quarter.

2) Generate some consumer confidence this Holiday Shopping Season, since 2/3 of our economy is driven by consumer spending. Uncle Sam wants you to buy a Ford and / or Chevy.

3) Address concerns that “information suggests that economic growth is slowing,”

4) Give me somethnig to rant about (Thanks, guys!)

Interestingly, Wall Street, which has been on the rise over the last two weeks, had apparently priced in a bigger cut, so it responded by pummeling the Dow, lwhich lost 294 points on the day. Ouch! Maybe some retail therapy is in order . . .

Mortgage rates weren’t significantly affected by the rate cut. The Fed Funds rate is a short-term rate, and mortgage rates are long term. Mortgage rates are still at two-year lows, and it’s a Neutral or Buyer’s Market everywhere but Palo Alto.

Apparently, Palo Altans stayed awake in Econ 101 during the lecture on how relative Supply and Demand affects Prices. Although Demand in Palo Alto has dropped in recent months, Supply has dropped equally or more, maintaining or increasing Prices. Adam Smith would be proud.

Bueller, Bueller . . .

For an actual news article on today’s rate cut by an actual journalist, as opposed to a caffeineated Realtor, click here.

 Thanks for reading.

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Written by Chris Iverson, Realtor · Filed Under Analysis, Buyer and seller tips, For buyers, Real estate | 1 Comment 

Mortgage Mania - Part 3

April 11, 2007

Last week I mentioned an article written by friend and colleague, Rachel Van Emon at OPES Advisors on the ripple effects of the sub-prime lending crisis and impending changes in lending guidelines.

Things move quickly in this market and industry, so I wanted to draw your attention to a recent article in the San Jose Mercury News saying that the impact will be minimal in the local market, except for some first - time buyers. The sky isn’t falling.

However, the article goes on to note that lenders have changed their guidelines, and that highly leveraged loans that are the bread and butter of first-time homebuyers are going away.

Quote: “He cited a recent young client with a credit score of just over 660 but a relatively short credit history, who is looking to buy her first condominium using 100 percent financing.

“With the guidelines changing, now some of the lenders who would have taken that three weeks ago … can’t do it today,” he said.”

Assuming this young buyer has good cash flow and a salary-based job, she should be a pretty good credit risk for a mortgage. That is how I bought my first home. Local prices are sky-high already, and this could be another barrier to entry for many.

It’s not only first-time buyers who are short on savings and didn’t pick their parents well who are affected. Bay Area buyers are financially sophisticated, and have used interest-only and other non-traditional loans to allow them to divert cash that would be spent on traditional mortgages into higher return investments. Reducing their ability to do that could dampen some of the enthusiam that is contributing to the currently hot market.

Thank for reading, and I welcome your comments.

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Written by Chris Iverson, Realtor · Filed Under Real estate | 2 Comments 

Subprime loans - Should Palo Altans care?

March 29, 2007

If you are a reader of The San Jose Mercury News, or any other paper or media outlet, you know that there is a growing issue associated with home buyers who purchased their homes using subprime loans and are now facing foreclosure as they are unable to keep up with their payments when their rates adjust.

On Sunday, March 17, the San Jose Mercury News ran an article describing how an agent and lender with Century 21 Su Casa Realty violated a number of lending laws and ethical guidelines to get people to purchase homes which are now in foreclosure, in some case because the buyers couldn’t even afford the first payment.

While it is a stain on the already tarnished image of Realtors, it is easy for us in Palo Alto to say ‘what a shame, it won’t happen here’, or words to that effect. But, what is the effect of this issue on homebuyers in Palo Alto and the surrounding communities?

Rachel Van Emon with OPES Advisors, a financial services firm with offices in Palo Alto and San Mateo, recently sent me an article that discusses the effects of impending legislation and revised lending guidelines that will affect the ability of buyers to qualify for products like the interest only loans that so many of us use to buy our million dollar teardowns in Palo Alto and surrounding communities.

The highlights are:

  • The Department of the Treasury has issued a Guidance on Guidance on “Nontraditional Mortgage Product Risks.”
  • The Guidance specifies “nontraditional” as those loans allowing the deferment of principal and/or interest payments – not just sub-prime loans.
  • The Guidance states that borrowers for these products are to be qualified at the “fully amortizing and fully indexed payments.” This means that qualifying payments will be bigger, and it will take more income to qualify.
  • The new guidelines are to be in effect by 9/07. Some lenders have already adopted them, and many more will do so in the coming months.
  • Virtually all lenders have cancelled their programs allowing 100% financing on a Stated Income basis.
  • Guidelines have tightened around lending when other “risk factors” are present such as 100% financing, low reserves, high debt-to-income ratios and condo properties.

In short, it’s going to be harder to pay for that million dollar teardown in Palo Alto starting now, and especially in September.

The big question is whether these changes in lending laws will cool the red hot housing market we are currently enjoying, or if the Valley’s amazing ability to generate disposable incomes and wealth will overcome another hurdle to home ownership. Stay tuned . . .

The entire article is posted for your reading pleasure. Click here to view it.

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Written by Chris Iverson, Realtor · Filed Under Bad Realtors, Crooked realtors, Financing Process, Loan Application, Mortgages, Negative Amortization, No Documentation (ND), No Income No Assets (NINA), No Ratio (NR), Option ARMs, Real estate, Realtors who give the business a bad name, Stated Income Stated Assets (SISA) | 5 Comments 

The Alphabet Soup of Today’s Financing – FD, SIVA, SISA, NR, NINA, ND

March 7, 2007

Yikes! What do all these acronyms mean, and which one is the best type of financing for your? For most homebuyers (and their realtors), they don’t care how the loan gets done, they just want it done – with as little work and hassle as possible. Behind the scenes, lenders are actually getting very creative in the types of documentation programs that they require (or waive). Some of these variants may make a difference on the pricing, speed and riskiness of the transaction, so it’s a good idea for all parties to become at least a little bit familiar with these strange acronyms.

GLOSSARY:

FD – Full documentation. The crème-de-la-crème of real estate financing, and the most traditional documentation type. Borrower provides full income documentation (2 pay stubs, 2 W2s or 2 years tax forms for all borrowers) and full asset documentation (2 months full statements of all accounts used to qualify assets). Traditionally this is the documentation format with the best pricing.

Minimum/Reduced Documentation types:

SIVA – Stated income verified assets. This has become one of the most popular documentation formats, especially in cases where a fast escrow is needed. Borrower states his/her income but does not have to provide any documentation. Asset document is still needed, but only to show a set amount of reserves. This format is popular among hi-tech executives because of the variable components of their income – bonus, patent pay, ESPP, stock pay, etc. – most of which are highly variable and changes each year, so it’s difficult to document it without inviting unnecessary underwriter scrutiny. While it is technically one step down from FD, most A paper lenders have exceptions where if the borrower’s credit score is high enough, they will accept SIVA documentation and still offer FD pricing. Hey, you CAN have your cake and eat it too!

SISA – Stated income stated assets. You guessed it, in this format, the borrower simply states the income and asset on the loan application, and off it goes. No documentation needed! This makes everyone’s job easy – borrowers, agents, brokers, lenders. Again, this type of reduced documentation usually comes at a slight rate penalty, but with a high enough credit score, I have a number of lenders who can and will waive these penalties. So, for someone with good credit, they can zip through the entire loan process with a SISA submission, and still get the lowest rates on the market. The only thing to be careful about is that SISA guidelines are more conservative when it comes to the amount of money that you can borrow. So, as you approach the higher purchase price (over $1M), super-jumbo loans (loan amounts >$1M) and/or high CLTV (combined loan-to-value of over 85%), SISA loan types may place limitations that FD loan types don’t have.

NR – No Ratio. This reduced documentation type actually fits between SIVA and SIVA. In this program, you don’t provide any income information; you don’t even state a number on the loan application. However, you do provide asset documentation. As you know, in the loan business, cash is king. So, if you have good credit and enough reserves in the bank, underwriters may not care what your income is. So, instead of exaggerating and trying to state an income that is simply not true, it is much safer to go the route of No Ratio. In fact, stated income have been so abused by so many brokers that lenders are cracking down on stated loans and starting to look carefully at the income stated and job type. They will do a sanity check and if the numbers don’t make sense, the loan WILL NOT GO THROUGH. No Ratio is becoming popular because it allows the real estate team to close a transaction as fast as a stated loan, without the increasing risk with the underwriters. Even though the borrower normally has to a pay a small premium for a No Ratio loan, this is a small price to pay when compared to fraud and the risk of losing the escrow deposit when the loan doesn’t come through under another program type. Make sure you discuss with your financing advisor the pros/cons of using stated vs. no ratio on your loan program. As a realtor, you should also be sure that your financing partner is up to speed on the recent mortgage market developments, and not prone to forcing a loan through a stated program where it will ultimately fail and result in avoidable risk and agony to your hard-won transaction!

No Documentation Types:

NINA – No Income No Asset. In this documentation type, borrower provides no documentation, and leaves the income and asset sections blank on the loan application. In other words, borrower discloses absolutely no information about himself/herself except for his/her credit history. The one thing that lenders will verify verbally is employment. They will call the company if the borrower is a W2 employee, and will require a CPA letter if the borrower has been a self-employed individual for at least two years. Other than this, the entire loan decision is made on credit-worthiness. Obviously, pricing will be quite a bit higher than FD or the stated programs. Again, cash is king; so if you are putting enough money down, say at least 35-40% down payment, then your pricing would likely be similar to a FD loan!

ND – No Documentation, or No Income No Asset No Employment. This loan type is generally geared towards retired individuals, or borrowers in between jobs, or just starting out on their own business. Nothing is provided and nothing is considered by the lender except for the credit report. Normally, there is a ceiling on how high the loan amount can go, and how high the LTV (loan-to-value) can be, as these types of loans are perceived to be most risky for the lender. This generally will require a healthy down payment to ensure that the borrower has enough equity at stake and most likely will not default on the loan.

********

Now, you ready for the quiz? In reality, the only person who needs to know all these formats cold is the mortgage specialist. A good mortgage specialist will know exactly which format, or formats, would best fit his/her client’s situation right after the initial discovery interview. S/he will use this information to help guide the pricing and initial preapproval process, and guide his/her clients to prepare the proper documentations on time. Neither the client nor the agent really need to know about the various loan types. What they need to be sure is that they have a mortgage specialist knowledgeable of all of the new and old documentation types so that the loan can be packaged in a way for minimum underwriting risk and maximum speed to close. Also, if you are an agent who tends to work with busy executives, or families with small children, it also helps to work with a mortgage specialist who is experienced enough to obtain a SIVA or SISA approvals without any pricing penalties to save your clients valuable time – who wants to spend time collecting statements and other documentation when they could be shopping for their next house?

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Written by Christine Kani, Mortgage Broker, Equitas Capital · Filed Under Buyer and seller tips, Documentation, Financing Process, For buyers, Full Documentation (FD), Loan Application, Mortgages, No Documentation (ND), No Income No Assets (NINA), No Ratio (NR), Preapproval, Real estate, Stated Income Stated Assets (SISA), Stated Income Verified Assets (SIVA) | Leave a Comment 

To Preapprove or not to preapprove…that is the question

February 8, 2007

Well, nowadays, and at least in the Bay Area, that is no longer the question. Bay Area buyers have become accustomed to hearing agents, and their friends, emphasize the importance of being “preapproved”. But like many overused and underexplained topic, few people actually fully understand the power of a properly executed preapproval, and how to distinguish it from its more commonplace cousin, a prequalification.

If you are in the market for to buy a home, especially in some of the more competitive neighborhoods of the Bay Area (such as Palo Alto, Menlo Park, Los Altos, Mountain View and San Carlos), your agent – if he or she is any good – will ask you to meet with a qualified mortgage advisor as soon as possible to get prequalified or preapproved. This will serve two main purposes: 1) the agent will be able to serve you best by understanding the range of your affordability and not waste anyone’s time, and 2) you will be able to focus your search on what you know you can comfortably afford and not fall in love with something that was not meant to be. The purpose of the initial meeting with the mortgage specialist is to get “prequalified”; however, you can also get preapproved at the same time. So what’s the difference, and who cares?

Prequalified means that the mortgage specialist has taken a detailed discovery interview of your financial and credit background, along with your housing goals. Based on the information collected, s/he should be able to make a professional decision (based on his/her years of experience and the guidelines published by the lenders) whether or not you are “qualified” to get a loan and approximately how much you can qualify for. Let me stress that this is a decision that the mortgage specialist will make, NOT the person/organization who will ultimately lend you the money. Needless to say, the prequalification has the following weaknesses:

Question Mark

- There is no assurance whether you will actually get a loan or not

Preapproval, when done properly, is much more powerful. It is a prequalification taken to the next step. Preapprovals can take 2 forms:

CONFORMING LOANS ($417K and under)
For conforming loan amounts, the mortgage specialist can actually upload your file information into one of two national approval engines (Fannie Mae or Freddie Mac sponsored), and within minutes, obtain a printed formal approval of your loan amount and any pertaining conditions. This approval, because it is governed by a set of approval criteria that is universally accepted by all lenders, can then be submitted along with the hardcopy of your loan file to your lender of choice. That lender’s underwriting department will in turn accept and adopt the findings generated by this online engine. Hence, once you received an Approved from this online engine, you can be fully confident that your loan is essentially approved. The reason that mortgage specialist don’t automatically do this is because (sadly) most people in the industry are not properly trained financial advisors and simply don’t know how to use this application, or are not even aware of it! Those who are aware are often deterred by the extra work and/or upfront cost, and so simply downgrade their clients’ to a “prequalification,” assuming that they won’t know the difference anyways.

NON-CONFIRMING (AKA JUMBO) LOANS (Over $417K)

For Jumbo (non-confirming) loans, preapprovals are a bit more complicated, and controversial. Since the national (Fannie Mae or Freddie Mac) engines that are uniformly accepted by all the lenders approve up to $417K – the conforming loan amount limit – many loan agents simply treat jumbo loan preapprovals like prequalifications. That is to say, they use their judgement to see whether a loan would be approved. In most cases, and especially if the agent is seasoned and dependable, the preapproval will not be at risk. But, if time permits and the agent has access to underwriters, it is always safer to discuss the actual loan package with a specific underwriter and obtain a verbal approval. In this case, the loan is not only in good shape according to the agent, but actually considered “approved” according to the person who would ultimately be granting the funds. This “preapproval” is very important – basically, as long as the borrowers can subsequently provide the required documentation (according to loan type) to support what was disclosed to the underwriter, than the written approval would be provided almost immediately upon submission.

Preapprovals, when executed properly, provide buyers with peace of mind when they need to go in with an aggressive offer, such as bypassing finance contingencies. If a loan is preapproved, either through the automated engine or verbally with an underwriter, buyers can be assured that their financing is confirmed within the payment terms of their comfort level, subject to slight market movements prior to locking a loan. However, if a preapproval was not done properly, and the buyers waived finance contingencies, they could be in a sticky situation. I have inherited many clients who have learned this lesson the hard way, having had to back out of a beloved house they won through multiple offers due to a prequalification error, and risking their deposit in the process.
Lastly, while it’s a hard sell, what people don’t realize is that a strong preapproval from a reputable mortgage specialist should placed the buyers in a more desirable position than even a 100% cash buyer. The sellers have no control over what a cash buyer will do with their money between offer acceptance and close of escrow. While not probable, it is possible that the purchase money could go down the drain through a big Vegas visit, or disappear through a bad stock day. Conversely, if the bulk of purchase money is coming from a reputable lender, and the lender has already preapproved, then sellers can have the comfort of knowing that the money is not going anywhere and not accessible to the buyers for any purpose except to buy the house. As a seller, I would much rather to see a strong preapproval than an all cash buyer.

SUMMARY:

- Make sure you know whether you are getting a prequalification or a preapproval (hint, latter is better!) If the person you’re speaking to can’t explain the difference to you – SWITCH!

- If you are getting a preapproval, ask which lenders you have been preapproved with (and why those were chosen)

- Before you waive finance contingencies, make sure that the person doing your preapproval has verified your credit, your cash reserves, and your household income


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Written by Christine Kani, Mortgage Broker, Equitas Capital · Filed Under Financing Process, For buyers, Good realtors, Home buying, Loan Application, Menlo Park, Mortgages, Mountain View, Multiple offers, Palo Alto, Preapproval, Prequalification, Real estate, Willows | 3 Comments