Five New Rules for Getting the Right Mortgage

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1. The better your credit score, the lower your interest rate
There was never a tiered price range with mortgages before the Big Bang in the mortgage industry. If your mortgage was approved, you got the same rate as everyone else. Under the new mortgage rules, the better your credit score, the lower your interest rate. Your interest rate is calculated based on your FICO score and your mortgage loan to value. You are subject to price levels, which should be the same with most lenders, but ask to be sure. No matter how much equity you have in your home, a low credit score will affect your interest rate!

2. Cash reserves are just as important as FICO scores!
The rules have changed when it comes to money and how much you do or don’t have. Borrowers used to need only show enough money to close; now they need to show more than enough.

Previous mortgage guidelines required only the down payment, closing costs, and two months’ house payments in reserve after closing. The new rules require a higher down payment, closing costs, and payments of six to twelve months on post-closing reserves.

The more reserves you have left after closing, the better you can continue to make payments if you lose your job or have financial problems. Lenders now also look at total debt vs. liquidity. So if you owe $25,000 on credit cards and you have $40,000 in the bank, you could pay it all off if you had to. I used to ask borrowers to verify just enough money to make the deal work. Now I tell them to show me the money and ask them for all the bills they have.

3. Fraudulent appraisals and the loan process
The problem is that a review is an opinion based on subjective research by a single person. The value may vary from person to person and is therefore somewhat arbitrary. The dilemma has been compounded by the fact that the appraisal industry has been booming, with many people starting new careers thinking they could make a lot of money on volume alone. The appraisers hired inexperienced people to do the actual inspections and never visited the houses. They then hired other inexperienced people to do the research and didn’t always review it as carefully as they should have. Business was booming and they had to keep up with volume and response time.

Mortgage companies and real estate agents would drop them in a minute if they couldn’t change jobs in a matter of days. A rush was considered same day delivery. It was a crazy time, and everyone wanted a piece of the action.

The lenders, who also hired green people from the street, could not adequately train staff to read and review appraisals. So the insurers were just giving them the go-ahead to review all the files.

This whole situation led to manipulation. This process became a spiral of exacerbation of the false inflation of values. You can’t tell me that something that was worth $250,000 in 2004 was worth $400,000 in 2006. It’s impossible and unreasonable. Then the market started to lose steam and inventory started to build up. As more homes remained on the market, buyers had more to choose from and could question prices.

Values ​​were easily inflated during the housing boom, which in turn increased loan amounts much more than they should have been. As values ​​go down, appraisals go down and loans go backwards. When a loan is reversed, the borrower owes more than the house is worth. These situations will prevent both the refinancing and the sale. Unless the buyer must sell and can make up the difference out of pocket, they stay where they are.

As part of the evaluation, the sales history of the last five years is included. It will show how many times the property was sold and for how much. I suggest you ask the real estate agent for this information before proceeding. You’ll see if you’ve transferred multiple times or if the seller is trying to make an offer on an alternative deal.

4. Falling Market Values
If home values ​​in a given area have declined by 10-15% year over year, then that area is considered a declining market. The geographic area can be a state, county, or city. Year-over-year is measured by comparing current prices to the same period last year. This information is derived from Realtors Board data on sales and listings.

The appraiser will include this information in the appraisal and the lender will reference the data it has on the site. If the home is in a declining marker value area, the lender has the right to take 5% off the maximum value and base the loan on that value, which means the mortgage will be less than you think.

Richard is buying a house in Bronx, New York for $300,000 and is applying for a mortgage of $270,000, which is 90% loan to value. This county is listed as a declining market, and the lender chooses to reduce the appraisal by 5%, bringing the value to $285,000. This will reduce Richard’s loan amount to $256,500, so he will have to pay the difference. If he can’t, the deal will die.

To avoid falling into this situation, ask your real estate agent:

o The last two sales of the house, date and price
o A list of recent sales in the area, similar to your home, also known as “comps”
o Whether this home is in a “declining market value area”
Getting information like this helps you negotiate a price and give you a comfort level with values.

5. For sale: no refinancing allowed
Most banks will not allow a refinance or cash refinance on any home that has been listed for sale in the last 12 months. The premise is that the house could not be sold and now they are taking the equity out of the house, and if a buyer comes along, they will sell it. Originating mortgages is expensive and banks are not looking for short-term investments.

The time starts from the listing date or the date the listing was removed, depending on the bank. They will want proof that the listing is distinguished and an explanation of why the borrowers changed their minds and intent to stay.

Remember, if the listing has been removed, it will remain on the listings that banks and appraisers use to research home values. The appraiser is required to state that the house was for sale in the last five years, so there is no way to hide it. They think of everything you can do!

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