Rick Schwartz: High Definition Real Estate

I wrote recently about how the "mortgage approval pendulum" has been swinging as far from the 2003-2005 position as it possibly can.  This has slowed down the process considerably. 

Well - it's swinging even further and it could very well slow down the process even more.

It is called the Mortgage Disclosure Information Act and it will be effective on July 30, 2009. I'll give you some details below but for those of you who want the bottom line first - here's the deal.

There is a new time line going into effect, designed to give borrowers increased opportunity to read the Truth In Lending Disclosure (TIL) statement that your lender will send you.

The TIL statement is a document that lenders send to borrowers after the loan application is completed. It is not a mortgage commitment - it merely give you all the details of the loan that you applied for.  provides you with information such as:

• APR (Annual Percentage Rate): Not to be confused with INTEREST RATE - read the difference here
• Finance Charge
• Amount Financed
• Total Payments

and some other information which you should read and ask about if you do not understand it.

The TIL statement is not new.  What's new is the time line which provides a specific number of days from application to the sending of the statement and from your receipt of the statement until the earliest possible closing date

GOOD THING OR BAD THING?

I can guarantee that there will be a lot of debating on this issue.  There's no question that it will in some cases impede the process. The idea of getting a quick closing is pretty much dead. On the other side, the argument is to make sure that borrowers have enough time to read, ask questions and understand exactly what they are agreeing to do when borrowing money.

For me - I'm not going to venture my opinion here.  If you're a regular reader of mine, you'll know that I try not to waste time on things that are basically irrelevant.  Like it or not, as of right now, these changes are going into effect in about a week. So, the most important thing is to know the rules and plan accordingly.

THE DETAILS

First of all this applies to loans for all owner-occupied dwellings. It applies to purchases and re-finances.

It will not apply to:

• Home Equity Lines of Credit
• Construction-only Loans
• Bridge Loans
• Reverse Mortgages
• Investment Properties

So for everything else here's what to expect

*  The lender must mail the TIL no later than 3 business days after the loan application is completed.

*   The closing may not occur until at least 7 Days after the lender mails the TIL or 3 Days after the          borrower receives it.  Whichever is the LATER date will be the soonest you can close.

IS  THAT IT?

Not exactly.  Sometimes, between a TIL being issued and the closing date, some of the closing costs may change.  This can happen for a few different reasons - attorney costs, pre-paid interest amounts and a few other things.

So here's the wrinkle

Since closing costs impact the APR, it follows that if closing costs increase above the estimate, the APR will go up. Makes sense, right?

*   If the APR increases by more than .125% on a fixed loan or .25% on a variable, the lender needs to issue a new TIL statement to the lender.

*   If a new TIL needs to be issued, the closing cannot occur until 6 days after it is issued or 3 days after the borrower signs it.

TOO MUCH DETAIL FOR YOU?

Not trying to make your eyes blur.  It isn't necessary for you to memorize the dates and details. The net effect is that that these new rules, make planning ahead more important than ever.

• Select a lender before you find a house
• Get a Pre-Approval done as early as possible
• Sit with the Lender and make sure he goes over all the critical dates with you so that you can set your expectations properly.
  

When you are shopping for a home loan you will usually see rates quoted in two columns.  The first will say INTEREST RATE and the second will say APR - which stands for Annual Percentage Rate.

What's up with that?  Shouldn't the interest rate BE the Annual Percentage Rate? In a perfect world it would seem so - but, alas it is not.

The challenge is that this is one of those questions where if not explained simply, the answer can seem more confusing than the question.  At the end of the day, I really believe that it's one of those great mysteries of life that "they" will never share with us - the regular people.

I do not claim to understand all the math  but what I can do is explain to you the theory behind why there are two figures and how you can look at both numbers in a way that can help you make a decision about where to get your mortgage.

INTEREST RATE

This is the percentage that is used to calculate your monthly mortgage payments.  So if you have a $250,000 mortgage and a rate of 5%, - the annual interest will be 5% of $250,000 or $12,500. 

The $12,500 is then divided by 12 to determine the amount of interest you'll be paying monthly - about $1040.

The monthly interest payment will be added to the monthly principal payment to complete the calculation of your mortgage payment.   There will likely be taxes and insurance added to that but that is not money that ultimately goes to your lender so it is not relevant for this discussion.

ANNUAL PERCENTAGE RATE

This is the "Cost " of your mortgage calculated as an annual figure.  It includes not only the interest, but also points and some of your closing costs.  So it will be likely always be higher than the interest rate  This number is the true cost of your loan.

SO - WHY DO I CARE AND HOW DO I USE THIS INFORMATION?

What you need to look for when comparing loans is the "spread" between the two figures.

LOAN #1:  5% Interest Rate with an APR of 5.25%

LOAN #2   5% Interest Rate with an APR of 5.65%  

In Loan 1 the spread is .25%   In Loan 2 the spread is .65%   Loan two is a more expensive loan.

DOES THIS MEAN I CHOOSE LENDER 1?

There are many different factors you may use when choosing a lender.  This is just one of them.  It's one of my general life rules that the least expensive product does not make it the best.  Understanding what something is costing you, though is critical. 

  We hear a lot in the news about programs to help homeowners who have fallen behind on their mortgages.  Sometimes  it's from job loss, sometimes it's because the adjustable loan just adjusted and the payment has gone up dramatically. Believe it or not, the banks do not want to own any more foreclosures.  They'd much prefer to have homeowners stay in their homes and make the payments. 

Some banks are offering Loan Modifications to help homeowners back in line - either in interest or principal adjustments. The thing is that most of what you hear about is debt relief for folks that are imminently awaiting foreclosure

What about the multitude of people who are "upside down" (the value of the home has depreciated to less than what they owe)  but are diligently making their payments each month? Is there any help for these folks? Can you get relief on your mortgage even if you pay on time?  It only seems fair, right?  Why should you not be able to avail yourself of assistance because you haven't fallen behind? Is there such a program? 

The answer is a definitive "maybe!" - and might be worth checking out. There are a few avenues that might prove fruitful. Both of these can researched by contacting your lender.

Directly from your Lender

If your mortgage is backed by Fannie Mae or Freddie Mac, there is a program available to lenders enabling them to work with borrowers on loan modifications that will bring the principal amount of the mortgage within the confines of the current market value of the home. It is up to the individual lenders to utilize this program or not and to set the basic eligibility. There is no assurance that your lender will do this but - some are doing it and it could be worth your time to contact your lender to find out how this might apply to you.

Another option is PMI

The second option that could come into play depends on whether or not you have PMI (Private Mortgage Insurance) on your loan. It also depends on which PMI company your lender uses.  Some PMI companies are offering homeowners a program that will help them out in a situation where they owe more than the value of their home.  There are a few different ways they can help but - again, it will depend on the specific PMI company that you have.  You can find this information out by contacting your lender.

Federal Government Assistance

There may also be some relief available from the Federal Government as part of the "Road To Stability" plan.  You can find out more about this by going to their website.

Please keep in mind that eligibility for any of these assistance programs can only be determined at the individual level. It never hurts to investigate though.

Roger Miller had a hit song in the 1960s called England Swings Like a Pendulum Do. I know I'm dating myself with this reference but if I'm getting old it's fine. Better than the alternative.

Well most things swing like pendulums, don't they?  Right now the ability to get a mortgage has swung as far away from a few years ago as it can.

Allegedly, not too long ago, the primary qualification for a consumer being approved for a loan, it seems, was a mirror test.  If you held a mirror up to the face of the borrower and steam formed, they got the loan.

OK - that's a little extreme but let's face it, getting credit was a breeze. There was in fact, a loan known as NINA which stood for No Income No Asset.

As far as the house they were buying, there are folks claiming today, whether it's true or not it is being said, that appraisals were, for the most part matching the negotiated selling price.  

Neither of those points is meant to be a knock to lenders or appraisers.   My point is not so much whether loans should have been granted or not, but the perception that has driven the pendulum.

So, given the media coverage of sub-prime loans and "over zealous" appraisals, the lending industry has swung completely in the opposite direction.

There are some folks today who will have a more difficult time getting a mortgage.  For example, in some areas, the new "rule of thumb" for minimum FICO scores on a loan up to $417,000 is 660.  It goes even higher on bigger loans.

Every possible precaution that can be taken to insure credit-worthiness is being taken.  This will, without a doubt eliminate some borrowers who might have been included a few years ago. 

Same with appraisals.  Tighter requirements for "comps" are in place. Remember, an appraised value is not the same as the assessed value.  Sometimes the appraisers are not finding any valid comps and have to rely on other formulations to come up with the right price.  Some houses are not appraising for the sale price.

Even if the house appraises as you hope and even if the borrower gets approved, the fact is that the typical time for completing this process is likely to be longer than we may be used to.  What once took 4 - 6 weeks might, in some cases take 8 - 10 weeks or more.  Maybe not  - sometimes the stars align and things go quickly and smoothly - but be prepared.

One of the things that causes agita in Real Estate transactions is an unexpected delay. Trust me, there's nothing quite as aggravating for a seller or a buyer, than getting a phone call 5 weeks into the process that this or that hasn't been done, or more information is needed or that there's a backlog in processing.  There's a dozen different reasons but the end result is the same -  you can't move when you thought you could. 

These factors will vary from region to region and from specific transaction to specific transaction - talk to your Realtor and your Mortgage Professional to find out how things are going in your area.

My advice is to go into a home transaction - as a buyer or a seller - with the idea that it is NOT going to be as quick or as smooth as you want it to be - or what you might have experienced the last time around.

As a Realtor, my responsibility is to to stay in close touch with all the various players on an ongoing basis until the moment that we all walk out of the closing room smiling.  The most important thing I can do for you, is to help you set accurate expectations.   Disappointment, is always caused by inaccurate expectations.