Southern California Mortgage Blog

Tax Credit for Home Buyers Extended & Expanded: Obama To Sign Soon

11-6-09 The President signed it into law today. I believe that it is good use of public funds because most new home owners spend several thousand dollars in their first year of home ownership.

11-5-09, I jumped the gun, but it did pass today and President Obama is expected to sign it into law as early as Friday, 11-6-09.  Yay!!!

11-2-2009, I regret to report that my source for this legislation was incorrect. I typically look for two sources, in this case one was verbal and the other a news blog. I apologize for my error. The bill is still under review and in negotiation.

US News & World Report reports that the Tax Credit for 1^st time home buyers has been extended and expanded! (Subject to President Obama’s signature)

 

First time home buyers will be eligible for the tax credit as long sign a purchase contract by April 30, 2010 and close on the property before June 30, 2010.

Prepare For 1st Time Homebuyer Tax Rebate and Your IRS Audit

If you bought a home this year using the 1st Time Home Buyer tax credit for $8,000, be advised that due to some very questionable claims made by others before you, you could be in for a tax audit.

I found this great article in my reading and thought that the subject bears repeating. The Wall Street Journal reports that there are over 100,000 cases that have been filed that are considered "suspect" by the IRS. We all know what happens to suspicious minds.

No Up-Front Fee Loan Modifications

Part of the solutions needed for home owner help during the difficult times that we are in has unfortunately been misused or obtained a bad reputation.

One in 84 homes in the United States received foreclosure notices in the first half of 2009.

(RealtyTrac) That is a lot of families and a lot of uproar. Not all of those people want to do a Short Sale or go to foreclosure and not all of them should have to. Loan modifications need to be done more easily and yield better results.

Do Your Homework When Shopping for a Mortgage

You can save yourself thousands of dollars over the life of your mortgage if you spend an hour setting up your goals for the type of mortgage you want. Spend some time to consider the kind of loan you need and how long you will keep the property.  Listen to your inner voice; what does it tell you about the future of interest rates and home appreciation?

 

Ask your friends and family for referrals to loan officers who took good care of them.

 

Once you find a few, give each loan officer a call. While the loan officer is prequalifying you for a loan, I recommend that you prequalify the loan officer. This is no time to go without doing your homework and interviewing different loan officers. Trust your gut and go with the loan officer who listens to you. Ask all the questions that you have, be sure you understand their explanations about their recommendations. Don't hold back.

 

The average loan officer has only been in the business for five years. That means that most of them do not know how to deal with a difficult market like this. A promise of a better rate means nothing if the loan that they recommend to you will cost you more down the road. Going through hell to get the promised rate and then being declined or unhappy with the loan that is presented at closing is no savings at all. Appraisals that you have paid for only to find out later that your value is not sufficient to complete your refinance can be maddening.

 

I talk with so many homeowners who have been placed in terrible adjustable rate mortgages that become monsters at the first adjustment period. Ask what your loan will or will not do. Grill your loan officer with any concerns that you have. If he or she cannot answer your questions, move on to another loan officer.

 

When you do feel comfortable with a loan officer, move forward to obtaining your credit reports. Always assume that if you give someone your Social Security number and address you have pretty much given them permission to run your credit. Please do not do this casually; it could cost you thousands of dollars. Calculate the difference in interest rates based on a range of credit scores.

 

All of the big three credit repositories have their own different credit models and usually will come up with slightly different scores. At the present time, the score is the score. No adjustments are made for obvious errors on the report. What you see is what you get. You can, however, preview your credit report and take care of anything that might be pulling down your scores.

 

In the mortgage business, we look at all three scores and use the middle score as the number that determines what rate you can expect to be offered for a specific loan. Down payment or equity in the property is also considered.

 

Be aware that the credit report may be pulled an additional two or three times during the course of the loan being processed. If you are working with a broker, that broker will pull their own credit report and the lender that the loan is placed with will pull his or her own report.

 

If you are using one of the companies advertised on the Internet where your loan scenario is submitted to say, five or more lenders, please be aware that five different lenders will pull five different credit reports. All those inquiries can knock down your credit scores, if only a few points. A few points can mean the difference between 5.25% and 5.75% on the interest rate of your mortgage. It is awful to find out that your score dropped five or ten points because of inquiries. Those with scores below 620 will be especially hard hit by all those inquiries.

 

If you have had a long escrow, credit reports may also be run at the end of the process. If your scores are between 500 and 680, you will be hit will a drop in your score if there are many credit inquires obtained.  

 

Before you allow any mortgage company to run your credit, be aware that if your report contains any collections you will not be able to negotiate with the collection agency as to paying only part of the balance due. Your report is tagged as a mortgage inquiry and the collection agencies will not budge because they now believe you are house shopping. I do believe that paying off the collection for the entire amount due will reward you with much better rates on all types of credit.

 

Tell your loan officer if you think you may have collections. Unfortunately, most loan officers are not aware of the problem they can create when running your credit report without first discussing collections and charge-offs.

 

The next step to preparing for a new mortgage is to gather your income tax returns with the W-2s and your paycheck stubs for the past month. You will need those for all of the borrowers. You will also need bank statements from all of your checking and savings accounts for the past 90 days. Investment statements and any credit card bills and statements for car loans are also a good idea. Write down the name, phone and fax number for your homeowners insurance. This is a simple list of what might be needed on a conventional loan. Additional information may be needed for your personal situation.

 

I hope that your loan officer will get 90% of what is needed at your initial loan application. It is not uncommon for a lender to ask for additional bank statements and such if your loan process goes on for over 60 days. You can do the actual loan application on the phone, on the lender's website, by mail, or with a visit to your loan officer's office. In complicated cases, it is sometimes wise to make the appointment to meet face to face.

 

I hope this will give you a good start on getting ready for a new mortgage. A good, experienced, and ethical loan officer will place you in a loan that can ultimately save you thousands of dollars.

 

What A Credit Score Is For & What It Means

In the last posting, I let the reader know that your credit score is made up of thousands of factors that are broken down into five main categories.

They are:

35% of the score is the person’s credit history

30% is based on what this person owes

15% of the score is the length of time the person has had credit

10% is based on inquiries and new accounts and, finally,

10% of the score is the mix of types of available & open credit on the profile.

Given the current state of the mortgage industry, rates may be low, but the add-ons for low credit scores are getting higher everyday.

Make no mistake; no one cares about your credit more than you do.

You are the one who must foot the bill for bad credit so it is in your best interest to listen up and take action.

Because human beings input this information into the system and because all three credit bureaus (CRAs) have various servers across the country both good and bad information can pop up on your credit report.  

Thankfully, most of that information is correct. Some of that information is incorrect or true, but negative. Depending on who you speak with, up to 72% of all credit reports contain errors. This is why you need to practice routine maintenance of your credit report; because items do pop up again after they have been removed. It can be maddening until you learn how to handle the situation and use it to benefit yourself.

In my business as a loan officer, I have been an expert witness in several court actions because creditors have injured a person’s credit profile.

One of my clients was awarded over $250,000 in cash and at least another $100,000 in benefit for the refinance of their home. All this because we paid attention and fought for the rights that we are all entitled to under the Fair Credit Reporting Act.  

To sum things up, all of the credit repositories must have a completely accurate reporting of an item or they are required by law to delete the item. You can use this to your advantage.  

Credit scoring has been around for years and years. Car dealers and insurance companies have used them for decades. When mortgage lenders began using them for making loans in the early 90’s it set in motion the mortgage banking and portfolio lenders ability to make loans based on “credit risk factors”.  

That means that the credit score told the lender a lot of what they needed to know in determining whether a borrower would make their payments on time.

 

The entire purpose of credit scoring is to determine whether a borrower will have a 90 day late on any account within the next 24 months.

 

That’s it; plain and simple. By knowing whether that borrower is at risk, it enabled mortgage and home loan underwriters the ability to make a “bare facts” decision out of the loan approval. It leveled the playing field.

You will still need to prove your income and assets with most types of borrowing, but the higher your credit scores, the better the price will be for that borrowing.

 

The Hit That Your Credit Score Takes When You Lose Your House (Or Not)

Many people have called or written to me regarding the impact of a short sale on a credit report and how long it will stay there.

When negotiating with a Short Sale Lender, one of the things up for negotiation is how the mortgage account will be reported. The instrument (legal document) for the mortgage will also make a difference.

 

On an earlier post, I discussed how a short sale, foreclosure, or deed in lieu of foreclosure all has the same impact on a credit score. Even though I wrote my authority on this as being MyFICO.com, the owners of the Fair Isaac Company, people still want to argue with me about it. There is still much more that is unknown about credit scoring than is known, so I take the info on MyFICO.com seriously.

 

A lot of times what they are arguing about is another aspect of why one would do a short sale over going with a foreclosure. There can be a number of reasons, an important one being the perception of a foreclosure to the homeowner or the expertise of the advice that they take. My expertise is in California where I hold a real estate license.

If a Short Sale is selected or has already occurred, the actual reporting of the mortgage account will have different time lengths for being reported on a person’s credit.

If the reporting is “Settled For Less Than Agreed”, then the credit reporting will be included on a person’s credit report for 7 years. The impact on the credit scores will be great, with the most impact over the first two years.

If there were late payments on the mortgage, those late payments will be reported on the credit report for seven years and will also have an additional hit to the credit scores for each late payment.

If a “Notice of Default” has been filed, the credit report may include a notation that “Foreclosure Started” even if the foreclosure is not completed. In California, for instance, the late mortgage payments after three months of no payments can generate a “Notice of Default” which is a document that is recorded and appears in the public record. Those types of documents stay on a person’s credit report for ten years.

It is possible to sell the property at a Short Sale and also already have late mortgage payments and a Notice of Default filed against the property. If that is the case, then the “Foreclosure Started” comment can appear on the credit report and remain for ten years. If you sold at the Short Sale, you could then have the double whammy of the Notice of Default and the account with reporting that states “Paid for Less Than Agreed”. That would shred a person’s credit scores for a minimum of two years unless the person took steps to rebuild the credit profile.

 

It is also possible to have two or three mortgage late payments and negotiate in the Short Sale for the account to be reported without the late payment history and the mortgage to be reported with “Paid As Agreed”. I stress the word possible because I have counseled with many home owners who tried to negotiate for this wording into the reporting of the mortgage. Typically the lender will want a very larger sum of money for this. The homeowner would need to pay into what is short on the sale and participate with the lender in the loss that is taken on the property.

One of my clients agreed to pay $125,000 on his loan and the attorney was still not able to get the reporting to come in as “Paid As Agreed”. He is still paying on that loan after the escrow closed. I am not sure how typical that is, but I believe that the credit scoring models will be changed to mitigate that.

 

I believe that all of the Short Sales, Foreclosures, and Deed In Lieu of Foreclosure will likely all be re-worked into the credit scoring systems used by the big three credit repositories. I have heard of different ways of Short Sales being reported, but I have not yet seen an actual report that deviates from what I have stated above.

The bottom line when asked, “How long will a Short Sale appear on my credit report?” is the answer “It all depends on how it will be or is being reported by the lender. It is possible to negotiate that reporting prior to the Short Sale and very unlikely after the sale."

In my next posting, I will discuss the lender's point of view as it affects the credit score point of view.

What Makes Up A Credit Score

Credit scoring is made up of a complex mathematical formula. There are many, many variable bits of information that go into a score.

A lot more is known about what does not go into a score than what actually does.

The score is only reflective of the information contained in it. It does not consider ethnic group, gender, religion, marital status or nationality. It does not consider your sexual orientation, medical history, or nationality. These are, in fact, prohibited from use in scoring by United States federal laws.

It does not include how much money you make, what your interest rates are on any of your credit cards, installment loans, or home loans.

If the credit bureau does not have credit information, then that information is not included in that company’s credit scoring.  This is one reason the different companies may have varying scores. 

A person’s overall credit profile will determine the importance of the following factors:

Thirty-five percent (35%) of a borrower’s score is determined by their track record. The Payment History shows how they have handled credit in the past, if they have paid promptly or slowly, and if there are any judgments, tax liens, collections, wage attachments, etc. 

30% of the score is based on how much the borrower owes. How much is too much? Owing a great deal of money on many accounts may indicate that a person is overextended and this can lead to slow payments or no payments. 

15% of the score is based on the length a borrower’s credit history can be documented. Consumers who have had use of credit for only 10 years or less are considered “newbies”. 

10% of the score is based on the recent activity and new accounts. Inquiries occur if new accounts have been added, if you have applied for new credit, or if you are “shopping” different companies for credit. 

Lastly, 10% of the score is reflective of the types of credit in use. A healthy mix would be a real estate loan, car loan, and a few credit cards with remaining credit available on the accounts.

People who know the rules of credit will get better rates and service. Most of us need to perform regular maintenance on our reports. As necessary as regular exercise for your body, it is also essential for good credit fitness. In today’s credit market, you will save thousands and thousands of dollars on your home loans and other borrowing options.

Short Sale vs Foreclosure: Impact on Credit Scores

This is an updated version of a post that I sent out earlier in the year:

I have gotten the impression from many real estate agents that they are unaware of the effect of a Short Sale on their clients' credit report. The common belief is that a Short Sale isn't as bad as Foreclosure or Deed In Lieu of Foreclosure.

I have argued with people about this and there is a lot of information out there with claims to the contrary. It scares me because I see a lot of lawsuits in the future regarding this.

Short Sales, Deed in Lieu of Foreclosure, or full blown Foreclosure are all weighted the same in determining credit score computations. This information comes directly from MyFICO.com. MyFICO.com is operated by the Fair Issac Corporation, the inventors of credit scoring. I have not stated this without extensive research. This is "straight from the horse's mouth."

Earlier this year, FNMA announced that a record of foreclosure on a credit report will require that three years must pass prior to placing a borrower into a FNMA insured loan. At the beginning of June 2008, that time frame was extended to five years. That is five years from the sale date.

Remember, that the home owner does have redemption periods after default and because of this, the sale date is the actual date of the foreclosure.  An owner wouldn't necessarily know this without researching the actual date.

The Mortgage Bankers Association announced that one in every 200 homes with mortgages is facing foreclosure.  That is a lot of bad news to many families. This information was announced in June of 2008 and the news has become much worse as I write this in October of 2008.

The "Bail Out" bill now being reviewed again by the House of Representatives will give some "bite" to those of us who renegotiate for Loan Modifications. Loan mods are done for a home owner cannot keep up with the current terms of the mortgage. Changes can be negotiated and will keep you in your home.

I am bragging, but 18 months ago, I correctly predicted that short-refis would exist. They do now.....it is called Loan Modification or a "Loan Mod". A new FHA loan to reduce the balance on home loans and make the payments easier was announced yesterday.

I have been able to help quite a few homeowners' mortgages with awesome results! This new bill being passed will bring some order to the process and make it easier to accomplish.

If I had my home on the market because of a bad loan, but felt I needed to sell when I really wanted to stay. If I found out that my agent said a short sale wouldn't hurt me as badly as foreclosure the I would have me gunning for someone to pay.

I would rather it wouldn't be you. You the seller or You the agent who passed on information that will cause serious harm.

Thanks for reading.

Castles of Southern California by Guest Blogger

The following post was contributed by Sarah Scrafford:

California is famed as much for its long coastline, beaches and sunshine as for its celebrity homes, some of which are similar to castles because of their size and/or opulence. Celebrities are big spenders, opting at times for style over substance and size over convenience. Even though these homes are not the primary residences of many of their owners, they’re still huge buildings set in palatial estates. Here’s a list of Southern California’s better known “castles” and the celebrities who own them:

·        Oprah Winfrey: Set on a sprawling area of 42 acres in Santa Barbara, the house itself spans 23,000 square feet and comprises six bedrooms, fourteen bathrooms and ten fireplaces. The surrounding area is landscaped to perfection with the crowning glory being the manmade lake and the rare fish its home to. Oprah prides herself on being the owner of the home that has the most amount of green space in Santa Barbara.

·        Michael Jackson: Neverland Valley Ranch in Santa Barbara County has been in the news more for all the wrong reasons than the right ones. The flailing fortunes of its owner Michael Jackson and the controversial pedophilia cases that centered around this 2800 acre estate have kept Neverland in the public eye.Jackson purchased this huge space and converted it into more of an amusement park than a home – with its zoo and theme park, the estate was aptly named Neverland after the place where children never grow up in the Peter Pan books. It’s closed down now, and the exotic animals that once attracted celebrity guests from far and wide have now been sold to zoos and private investors over the world to help fund the aging pop star’s extravagant habits.

·        Aaron Spelling: Larger than most luxury hotels, this home sits on 56,000 square feet of prime property in Los Angeles. Housing an unbelievable 123 rooms, one of which is a bowling alley, this building is now home to one person – Aaron’s widow Candy Spelling. The successful producer of television shows allegedly purchased Bing Crosby’s home and tore it down completely to build this monstrosity that looks more like Richie Rich’s home than something out of real life.

·        Will Smith: Having had to shell out more than $20 million and wait for longer than seven years to move into this house, Will and Jada Pinkett Smith and their children were forced to pack their bags and leave following a bushfire threat in 2005. Known as Calabasas Castle, this piece of property comes complete with a lake, a basketball court, a tennis court and a golf course.

·        George Lucas: Skywalker Ranch earned some sort of notoriety when the then president Ronald Reagan was denied permission to visit – that’s how much filmmaker and brain behind the Star Wars movies George Lucas values his privacy. Rumored to have cost up to $100 million, this 4700 acre estate is more of a retreat for Lucas rather than a primary home and comprises a barn for his menagerie of animals, vineyards, a fruit and vegetable garden, a manmade lake, an outdoor pool, a hilltop observatory, a theater that seats 300, multiple screening rooms, a fitness center with racquetball courts, and its own fire station. 

By-line:

This article is contributed by Sarah Scrafford, who regularly writes on the topic of luxury homes. She invites your questions, comments and freelancing job inquiries at her email address: sarah.scrafford25@gmail.com

History and the "Mortgage Crisis"

Wow! What a week, this past one, the third week of September 2008!

So much has gone on, and frankly, it is very difficult for me to understand a lot of it.

One article that I have read used the phrase, “the credit market has seized up and has made it impossible for anyone to get mortgage loans, etc. (sic).” That pretty much summed it up for me and my business.

Any time that I have a problem getting a loan for a man with 817 middle credit score and 45% down, on the purchase of a single family home in San Diego means that things have gone beyond “hinky”.

With each loan application I take, I summarize with this apology: “I’m sorry. Though I have asked you for everything that my experience tells me we will need, the times are challenging. It is very possible that things that have never had to have been documented before will be asked for before we finish. I believe that we will present a very good loan package. We can get this done if we work together. Please don’t take any additional requests personally. It is simply the need for the underwriter to cover all the bases because he or she fears their own job loss.”

I was very saddened, and then relieved, that the Treasury Dept. had taken over Fannie and Freddie because I believe that those two businesses will become much more predictable as to the standards that must be met for a “good loan”. FHA loans have always made it easier for 1^st time homebuyers to invest in the American Dream and I believe the new standards that will be set for FNMA and Freddie will do the same for all loan programs.

So many people have asked me, “How did all of this happen in the mortgage industry?” I am not qualified to answer that on anything more than my experience in real estate for 26 years and good business sense, but here is my answer:

During the boom there were many nights when I worked very late at the office to keep my loan pipeline on track. I remember thinking many times that “how will these credit scores hold up if a borrower with a 680 credit score buys a home with no money down and loses his job?” If you can’t make the payments, you can’t make the payments regardless of your credit scores.

I also knew that any market that white-hot was going to cool. Sadly, I also knew that many loan officers and real estate agents only look at the “deal” and not how the transaction will play out in their client’s lives.

Then, there is the issue of so many negative amortization loans that were funded where even the loan officer didn’t understand them well enough to explain them to their borrower. I am a proponent of neg-am loans; they definitely have their place. Many, many homeowners, me included, have been able to buy homes and keep them because of this type of loan. As long as the borrower has owned property before and understands how the loan will work, they are good loans.

The final big reason that I could see was that all of the different types of loans that were introduced went far beyond common sense. In terms of the loan programs and the underwriting and approval of those loans, many of this was simply bad business and without common sense. I am and have always been very proud to work with General Mortgage in San Diego. Their level of professionalism has always been superior.

Human nature and/or capitalism will exploit every avenue until it proves harmful and then regulation will bring it back into balance.

In the coming years, I believe that the standard of education for the client and the loan officer and real estate agent will improve. It has to! The price is too high to fail and I am not just talking about money. Our clients trust us with their financial lives which directly affects their quality of life.

The need to prepare the clients’ credit report, carefully consider the loan program being offered, and understand the entire process and teach that will be the professional’s duty to obtain the best results for the client.

I challenge anyone, still in the business, to bring the level of their education up on an ongoing basis. I promise, it will be expected.

Mary Supinger

Copyright 2008 All rights reserved