A recent court case wherein it was decided that seller's have the right not to pay the buyer's agent (well DUH!) created a lot of furor. The truth is this has been well-established in law and precedent for I don't know how many years. But having the right not to pay them doesn't mean it's smart.
Let's go back to first principles and the way things work. A standard buyer's representation agreement says that they are due x% of the sales price, but that if there is a cooperating broker's fee (Cooperating Buyer's Broker, abbreviated CBB), then that is used to offset that fee. This is actually paid to the brokerage for which the agent works, and the agent only gets a percentage). I generally ask for 2%, because the average CBB in my area is two and a half to three percent, so I can mostly ignore the CBB unless it's below that or significantly above.
The CBB is determined by the seller and their listing agent. You don't have to offer a penny if you don't want to. I'll explain in a minute why this is foolish in many cases, but there's no law against being greedy to the point of stupidity. The buyer and their agent have no input in whether a Cooperating Buyer's Broker fee is offered at all, much less the amount. In fact, it is flatly against the law in California (and I suspect, most other states) to attempt to negotiate a higher CBB, or any CBB when none is offered. Nobody can make a home seller offer to pay the buyer's agent (in reality, their broker).
That said, why do you think sellers started doing it? Your grandparents weren't any more generous or altruistic in selling their homes than you. There was a reason why sellers started offering to pay the buyer's agent, and it still applies today, although you have to dig a little deeper than the surface to discover it.
The vast majority of buyers need a loan. Go ask any loan officer in the country what the most common failure point is in a viable loan. I'm not talking about people with horrible credit, or clearly insufficient income. Those get kicked out of the system in ten minutes, and these days, they usually can't even get the process started - as everyone they talk to wants to know about their qualification level. I'm talking about viable applicants who can actually afford real payments on a real loan that can otherwise be done. That failure point is buyer cash to cover the down payment and closing costs.
Buyer cash is difficult, because in general, it has to be saved dollar by dollar from their regular income stream, and it takes years. On a 700k property, five percent down is thirty-five thousand dollars. If saved $500 per month, that's six years. Most people can't put $500 away per month, and every little financial bump in the road extends it out. Unless they have access to a VA loan, 3.5% down payment for an FHA loan is the absolute minimum these days - and both of these loans require the seller to pay certain costs as they cannot be paid by borrowers and nobody else is going to pay them. Then they need closing costs of the loan on top of that, as well as various and sundry other closing costs. My area may be a little more costly than most, but 5% is a pretty minimal down payment. Adding another two percent or more significantly extends their need to save before they can get onto the property ownership train, and rational buyers know they want to get onto that train sooner rather than later. If they can't buy your property, they'll buy someone else's. Let's repeat that for clarity: If they can't buy your property, they will buy someone else's.
Buyer's may not be able to negotiate a higher CBB (or any CBB where none has been offered), but that doesn't mean they cannot or will not consider the effects of a low CBB (or none) upon their ability to buy a property. Let's repeat that for clarity and emphasis: Buyer's may not be able to negotiate a higher CBB, but that doesn't mean they cannot or will not consider the effects of a low CBB upon their ability to buy a particular property. In other words, by offering a below market CBB (or none), you have essentially removed your property from their consideration. You've essentially sold them someone else's property rather than your own. By the way, market level CBB is priced into what all your comparable properties are selling for. Any buyer's agent they have representing them will be aware of this.
By refusing to pay what every other seller around you is willing to pay for, you've removed your property from their consideration. You know, that's fine if someone with plenty of cash comes along ready to put an offer they're prepared to consummate on the table. But those buyers aren't your typical buyer - most buyers are struggling to find enough cash to make it happen, as soon as they can. Those with larger amounts of cash aren't looking to buy a place to live for themselves - they're investors. Being aware of all of this, they not only are prepared to drive a harder bargain than average, they know all about normal and customary costs and who pays them, and they are typically represented by buyer's agents who are a cut above average in terms of knowing the market and ability to negotiate. Investors in this category are absolute top of the list for being prepared to walk away rather than go above market value - and you being unwilling to offer a CBB knocks your property down in value by more than the cost of the CBB. Most investors are well aware of that, even if they don't have an agent representing them.
Finally, they may not be able to ask for a CBB directly, but buyers can certainly negotiate for 'non-recurring closing costs' as part of the sales price. You don't have to agree, but, again, they don't have to buy your property if you won't. They have this cost obligation, and no cash to meet it if you won't. Do you think you're going to get a consummated sale if you won't help meet it? You might get a contract - but that loan won't actually fund if they don't have every penny of the required cash to close. In case you're unaware, a negotiated contract that can't be consummated is the absolute worst position to be in as a seller. The property is tied up, you can't sell it to anyone else, and there's always the possibility that someone turns to lawyers and court action. When lawyers and judges and juries (oh my!) get involved, you never know what's going to shake out at the end - and while it's going on, the property sits unsold. If you're trying to sell, that's the exact opposite of everything you want. So what's likely to happen? I'll tell you what's likely to happen: After several months of impasse, your listing agent - who wants their commission - starts pressuring you to give in on the non-recurring closing costs. After all, to their way of thinking, they brought you this buyer who wants to buy the property, and there's this contract between you and them for the sale of that property. If it falls through, they have a court case for their commission to be due despite that falling through. So in order to avoid having to pay that commission without having consummated the sale, you agree.
So wouldn't it be better just to agree to pay a market level CBB in the first place, and avoid all that delay and all of those monthly carrying costs of the property - not to mention the hassle of whatever reason you decided you wanted to sell the property in the first place remaining unfulfilled?
There is no such thing as a free lunch, but lots of people will pretend there is.
It seems to me that many people consider compensation earned by real estate agents as paying some kind of toll. They think of it as admission to the world of MLS, to showings and writing offers. Kind of like a tollbooth on a road somewhere. If there's another place just down the road that offers the same access cheaper, it makes sense to pay your access fee there.
If you think of what an agent or loan officer makes as a toll, just a cost of getting into the arena, it makes sense to go cheap. If you realize it is a payment for knowledge, expertise, service, someone who not only helps you CYA and prevents major mistakes, but makes a positive difference to the result, a different dynamic emerges.
There are existing offices modeled after every level of service from basically nothing on up. It costs them nothing to say "Full service for a discount price," but that doesn't make it true. Like a certain ex-president who "did not have sex with that woman!" you have to consider what definition they're using in making that claim. If sitting in their office with MLS access and a fax machine is "full service" for them, by their lights they are providing "full service for a discount price." Amazing how slippery the concept of "full service" is, which is why you should ask for specifics on what services are and are not included.
Remember how in my loan article Questions You Should Ask Prospective Loan Providers, I listed a whole bunch of questions the intent of which was to nail down how much of the truth they were telling you, you want to ask prospective agents what services their fees cover. Among other things, this exposes the "full service for a discount price" claim to be yet another Great Lie on the level of "I gave at the office," "The check is in the mail," or "Yes, I'll respect you in the morning."
The bottom-most level is essentially a fax machine and MLS access. I've met some where the fax machine was purely a service that converted email to and from from fax. I've even met some where I suspect they didn't have MLS access and were working off one of the free public real estate sites. They never leave the office; all they are about is access. This level might be good for you if you know as much as a good agent, like say, you were a good agent but lost your renewal application in the mail. Otherwise, you're setting yourself up for an experience like my first purchase.
Above that is the level of service that actually help you with paperwork. They still never leave the office, but at least they've got access to WinForms and some kind of checklist for paperwork. They're still not helping you with your investigations or marketing, but at least you might get some kind of more or less complete list of the disclosures you're required to make as a seller, while as a buyer you're going to be quite firmly told to get an inspection. Not that they're going to be there for the inspection, or help you interpret it, or help you figure out if maybe you need something more. They may or may not be aware of a large percentage of traps for the unwary that lie in these documents and the inspection, but at least they help you with the most basic level of CYA.
Assistance in negotiation may or may not become an option at this level. Since the ones at this level never go out and look at property, they can't have any real clue as to its virtues and faults, especially as compared to whatever else has sold in the area in the last few months, but at least they have may have enough of a clue as to general market conditions to keep you from making or accepting the wrong kind of offer. This is the level of the CMA, or comparative market analysis, which takes somewhere between 5 and 20 minutes and about the intelligence of Mongo from Blazing Saddles. At least you shouldn't make an offer or accept an offer that is completely and totally off base for your type of property in your area. The higher up the ladder of service you go and the more involved with the specifics of your market and your property the agent is, the more valuable this service becomes. Top agents that know enough about the property and the "comparables" can potentially negotiate the other side ten to fifteen percent (or more, in a market that favors you) from the numbers that someone using a lesser agent might be stuck with. I know because I've seen it happen - I've made it happen or not happen, and in one case, seen the next buyer pay more than fifty thousand dollars more than the contracted price I negotiated for one buyer who suffered an attack of insanity at closing.
At the next level above paperwork, you've got the agent who may go out and visit the property. For a listing, they're going to measure your property, take some notes for the listing, and maybe give some advice as to how to stage it or put you in touch with a stager who pays them a referral fee. For a buyer, they're more or less willing to open the front door on properties you've told them you want to view. Both sorts will make the effort to sell the property, the listing party more than the door opener. The listing agent's client is only happy when the property sells while most buyers bristle at more than a certain level of sales talk. In both cases, however, they're trying to get that buyer to sign up with them, preferably (from their point of view) with an Exclusive Buyer's Agency Agreement, so the pressure won't be real high in either case. This is also the level at which open houses become something that agents really want to do, in order to snare buyers' business. It is to be noted that there are a lot of agents who think they really are providing as much service as any other agent with this level of service. They aren't. They're still clueless or nearly clueless as to how it compares with everything else on the market in the area, or that was on the market, because they haven't gone and visited any on their own.
Somewhere along about this level of service and above, the agents may actually be willing to get out of the office to meet the inspectors and appraiser. After all, they've now got a negotiated agreement and it's in their interest to further the transaction so that they can get paid. They may also help you interpret what all of these reports say. Not necessarily; but at least it starts being a possibility, rather than pushing all of this off onto the clients or the other agent. This is where a lot of lawsuits start, so many brokerages actually prohibit their agents from being present at inspections - at most they can open the door and leave. I'm not a lawyer, but if I'm presenting myself as being an expert at real estate, not being present for the inspection seems to be evidence of gross negligence, just on the face of it. On the other hand, if the clients are representing themselves as being competent in this area in order to receive discounted service, that's fine with me. I actually make more per hour of my time with less legal liability.
Above this level of service, the services provided by good listing agents and good buyer's agents diverge dramatically. So much so that they cannot even be meaningfully discussed at the same time. Since a listing agent is essentially a marketer while a buyer's agent is charged with analysis and comparison among alternatives, this shouldn't surprise anyone. They are different functions at the heart, and many agents who are very good at one are considerably less proficient at the other. Fact. I can point to great listing agents who are putrid on the buyer's side, and vice versa. Often, it's as simple as attitude. Some listing agents can't stop thinking like listing agents, while some buyer's agents can't stop thinking like buyer's agents, and they are completely different thought processes. It took me a while to learn this, and I can point to a lot of agents whom the evidence indicates have not yet done so.
For the listing agent, the question largely resolves to pricing, plus what degree of staging and precisely how much marketing they are going to do. Note that even the most exhaustive marketing campaign is not likely to get more than the property is worth, but it can mean you get top dollar instead of significantly less, particularly if you price it correctly and have the property ready for the market when it hits the market. Pricing too high to begin with "to see if you can get it," is the mark of an inferior agent "buying" the listing, as you won't be likely to get the higher price and it will almost certainly reduce the final sales price by more than any lucky windfall might be. Particularly in the buyer's market most of the country has right now. These are all obvious things of value - when that agent spends time and money marketing your property, they're spending their own resources, not yours. How to word an advertisement, when to run it, where to run it - all of these are expertise. Go check out how much marketers with far lower sales who don't use their own resources and who draw a salary get paid make in the corporate world before you make a snap judgment as to whether it is or is not worth the money. Here's one example, and keep in mind that this is only a part of what a good listing agent does.
On the buyer's agent side, the question is more singular: How much property scouting are they going to do? Are they going to wait until the client asks to check out a property or are they going to go check out every possibility in the market? Are they going to go out on their own to eliminate definite turkeys before telling you about the cream? Still more important is are they going to tell you about good and bad, reasons why it's good and why it may be deficient, on every property, but that's something you can only observe in action. This is the paramount and unanswerable reason why you shouldn't sign any exclusive buyer's representation agreements unless you are so certain of this agent that your spouse can tear your arm off and beat you to death with it if you're wrong. They need to cover what the property has and what it doesn't, and what it's going to take to bring it up to an acceptable level where it is deficient. Structural flaws, basic amenities, floor plan, lot layout, etcetera, not to mention location location location. Not just now, but for any future sale that you might later decide to make. This whole thing is so time intensive it can't profitably be done on any basis other than the complete combo package of buyer's agent services, and it requires a level of expertise and market knowledge that cannot be acquired on the fly, and aren't cost effective to learn for one transaction. You'd make maybe thirty cents per hour. I might believe fifty or even seventy-five cents per hour in a high cost area like mine. However, if you have an agent with this knowledge and the right attitude, there's nothing else that will make nearly so much difference, both in terms of price and in terms of final satisfaction with your purchase.
If you don't want "the full package", that's fine with me and every other agent I know of who's capable of the full package. As I said, we make more per hour with the lesser packages even if we get paid less. But we can also work with a lot more buyers wanting less intensive service, or a lot more sellers, and make more money overall. Furthermore, it's a lot easier for someone who makes a regular habit of doing "the full package" to perform lesser services than it is for someone who doesn't to perform greater. That market knowledge we get from the other clients we have? It doesn't magically disappear because this client isn't paying me to run around scouting properties. Usually I'm working with multiple clients in my area and while one wants the whole nine yards, another doesn't. Just because I'm not scouting for you doesn't mean I'm forgetting about all the stuff I scouted for someone else. But someone who doesn't make a habit of it is working from the same zero base I'd be working from outside San Diego County.
Somebody once asked me about Hourly pay instead of commission for agents. Just as you'd expect, agents can charge less if the client is going to pay an hourly rate for their time regardless of whether there is a transaction. That's called transaction risk, and is a real risk of this business - the chance that, if you're paid on commission, you can spend dozens to hundreds of hours with someone, as well as lots of money, and not make a thing. If the client chooses to bear the transaction risk, that's fine with me, and they'll at least have the opportunity to pay me less for a successful transaction - although they'll still pay the cash if there's not. As I just wrote, that's the risk they are choosing or not choosing to take. The cash alternative is potentially a lot less expensive, but I haven't met a whole lot of people who like the idea of writing me a check for actual dollars they earned and saved without any certainty of a happy outcome for them. When you get right down to it, most clients do not want to assume transaction risk. But neither agents nor clients can have it both ways.
Some agents have huge lists of what they do, specifying point by point all the services they provide, splitting the services up into the largest number describable to make it seem like more. Others lump them together by more general categories, and may do anything that belongs within the due diligence and responsibilities they agreed to, where the "splitter" figures since it wasn't covered, they aren't doing it. Nonetheless, either way is basically valid. A written representation that they perform specifically named services obligates them to do so, but there is rarely a significant difference between someone who does that and someone who lumps them into more generic categories. I suppose it's all a matter of whether you want someone with a detailed checklist and someone who goes around looking for something they might have missed even though it may not to be on a checklist - but it applies to your transaction.
There are also agents who want a full package price for discount service. Mostly they are working under a well-known chain nameplate and have an extensive advertising campaign telling the suckers how great they are. This procedure, especially when compared with what other agents are offering, will also help you find out about the money you'd waste with them before you sign their agreement.
You may have noticed that I haven't attached any specific numbers to any of this. That's because it's both variable by market and negotiable within a market. The more services you want, the more money the agent will want to make. Ditto with resources, both time and money, you ask them to invest. If you're determined to get the best bargain you can, you need to shop agents and compare their competence and their attitude as well as their price. If you want to negotiate pay with a professional negotiator, well I've got admiration for your chutzpah. Plus I have to admit that it's a fair test of those abilities. Even if those negotiations turn out bad for you, imagine where OJ Simpson would be today if he had a cheap lawyer. Or Bill Gates, the massiveness of whose fortune lies in one legal victory over IBM, as well as his lawyers outlasting the government anti-trust lawyers at a later date.
My service bundle is 100% negotiable, and not being a slave to NAR or the brokerage oligarchy that controls it, I'll fight any effort to change this. My understanding is that any such attempt to force us to conform is doomed under California law (at least), but I am not a lawyer and I'll defer to other expertise there if it wants to chime in.
But I do think it reasonable that agents and brokerages be forced to specify what services they do and do not offer, and what they are and are not responsible for in a given transaction, at least by category. Good full service agents do this now. The next dedicated discounter I see who does this will be the first. The very services which are most time consuming and lead to the largest liability are the very ones that dedicated discounters will not fulfill and will do their darnedest to pretend don't exist. But they're also the ones that make the most difference for most clients, and would rank as most important for those clients if they were asked to rank them.
Caveat Emptor
Original article here
We live in (A California city). In a 2 bedroom 1 bath home on approximately a 20,000 Sq. ft. lot. It is easily worth 500K to 600K with a current mortgage of $116,000. The mortgage/Title is in the name of my father and his wife 90% and myself and my wife with a 10% interest.My father who is 75 and retired wants to take out about $80,000 cash which would create a new loan of approximately $200,000. He currently has a very small income from investments and lives in a paid off home in (out of state).
He would like to gift this (California) home to us and we would like that also.
Based on your expertise what is the best way to transfer the property to my wife and I and at the same time obtain a cash out stated income loan. How will a lender expect this to be handled? Do we all qualify together and the lender then allows my father to transfer/gift title at the close of escrow?
I realize that whatever lender wants to make the loan they will want to have my wife and I qualified to be on title. Since we have a 10% interest I would assume that we could all be asked to show assets and income. This might be complicated. I am a realtor but I haven't made much money in the last two years because I've worked on a business startup currently breaking even with no income.
My wife has a terrific long term (16 yr) job with a law firm. Gross income $85,000. All of our expenses are very low and the last time I looked our credit was a 785 FICO score. When I do the front end ratio 28 with only my wife's income it appears to be no problem at all. When I do the backend it's a little more snug but definitely doable. I've racked up some credit card debt funding the startup business. I can pay it off but I would like to retain working capital handy for my business.
I believe a stated income loan would be the best way to go.
Here are the assets and documentation I would be willing to show, and the lenders exposure to the property.
1. We would have approx. a 36% LTV at the end of the transaction. 300k+ equity
2. Assets in a 401K of $200,000 +
3. Approx. $30,000 in savings accounts
4. Approx. $40,000 in negotiable stocks
5. I will of course provide credit reports.
6. Employment documentation for my wife only.I believe my father and his wife have approximately $200,000 in mutual funds plus social security and she has a part time job doing a water district's billing.
This one is fairly complex on the surface. Issues that I see right off:
-family transfer
-documenting current interest
-structure of transaction
-Will your father be selling you some of his interest as part of this transaction?
-likely the cash out quitclaim issue
-Who is going to be primarily or completely responsible for new loan
-verification of rent/mortgage
You say that you are already on title of record, and that the desired end state is to have you and your wife owning the property outright.
The best way to structure this is probably as an actual sale transaction. Your father selling you and your wife a larger interest. Because this is a family transfer, you still would likely qualify to continue having it taxed based upon original acquisition price, but that needs to be checked, either through the county or your title insurance company for the transaction. You also need to scrutinize the current owner's policy of title insurance to see if it will continue coverage. There have been changes in the industry since the property was bought. If it doesn't, you're going to want to buy a new policy.
There is a standard policy with every lender I've ever done business with. If someone is brought onto title via quitclaim, you can't get cash out for six months after that date. This prevents several sorts of fraud. I am going to presume that you've been on title longer than six months.
There are three ways that suggest themselves to structure this transaction. Each have their potential advantages and disadvantages. First though, we need to take a look at another issue.
In all real estate transactions, and for all loans, the method of evaluating the property is the so-called LCM, or "Lesser of Cost or Market," method. Market is what similar properties around yours have sold for within the past twelve months, and that is what it is, and is computed by the appraiser.
Cost is the purchase price. In refinances, there is usually no purchase to consider, because the value has changed since purchase. In purchases, there usually is.
Whichever of these two numbers is less determines the value of the property, as far as the lender is concerned. It doesn't matter if similar properties are selling for four million dollars - if you buy yours for one hundred thousand dollars, the lender will loan as if the value was $100,000. It can't be any higher than that, because the seller willingly sold to you for that amount. If the property was worth more, they would have required you to pay more.
For family transfers (and indeed, any related party) this presumption goes out the window. Parents do all kinds of stuff for their kids that they wouldn't do for anyone else, and vice versa. Lenders still won't loan money based upon a number above nominal purchase cost, however.
Furthermore, there have been a sufficient number of scams over the years that they will take additional measures to protect themselves. The presumption of willing buyer and willing seller is violated on both ends of these transactions, and many times it has been A selling the property to B for an overinflated price for the purpose of getting a loan and departing at midnight, leaving the lender holding the bag. Remember, I told you in my very first article here, is that because the dollar values are so large on real estate transactions, every single one is heavily scrutinized for fraud. There's a reason for that. These additional measures differ from lender to lender, and some lenders will not undertake related party transactions at all. When I'm getting loan quotes from lenders, if it's a related party transaction, then words to that effect are the first words out of my mouth. It saves a lot of time and effort.
Now, I mentioned there being three ways I can see that make sense to approach the transaction?
The first is a full price sale with upfront gift of equity. You buy the property for $600,000. They sell it to you for $600,000, but give you $340,000 in equity in addition to the $60,000 you already own. You get a loan for $200,000 (actually a bit more to pay for costs), the old loan gets paid off, your father gets his $80,000. This has the advantage of being a true picture of what's going on. The problems are that to the lender, this screams fraud. They're not likely to be too worried that its for below market value, but $340,000 is a lot of money. They are going to want to see evidence that there's not some loan going on under the table between you and your father, because that would affect whether or not you qualified for their loan. Furthermore, estate tax is back to where it started over a decade ago due to the law sunsetting, and this would have significant estate tax implications.
The second is full sale price with subsequent gifts of equity. Sell it for full price, from you and your wife as ten percent and your father and his wife as ninety, to you and your wife as twenty-five percent and your father and his wife as seventy-five. They can then give you a gift in accordance with IRS annual gifting rules (at this update, $17k per year from each donor to each recipient, so potentially $60k per year). You can even combine this with the initial sale, making your interest thirty percent, which might make the loan easier. In this case, you are all four probably going to be on the new loan to get the best rates, as $200,000 is about thirty-three percent of $600,000 - a larger amount than the equity you and your wife currently have under this scenario. There is a further major difficulty with this lies in the possibility that the complete equity may not be gifted in your father's lifetime.
The third way is to sell the full property at a reduced sale price. Approximately $300,000 would probably be sufficient. Everything here is like the full price sale, but they're only giving you about $40,000 in equity upfront - which is within the IRS single year limits (two donors, two recipients). The bank has less difficulty believing that (although they're still going to want a letter stating that it is a gift!). The downside is that it's still a family transfer, and the fact that if you wanted to refinance within a year there would be appreciation issues on whether or not the bank would believe you.
All three ways have their bumps and walls which you very well might run into. Each lender has their own anti-fraud measures, and sometimes, what might otherwise have been the best way to structure the transaction will fall afoul of them.
As to the loan itself, I have good news and bad news. I'm going to start with the bad. Verification of Rent/Mortgage is going to rear its ugly head no matter what you do. The bank is going to want to see some kind of evidence that you and your wife have been making rent or mortgage payments every month, and from all that I can see in the email, there's no evidence to support this. The only person who appears to be in a position to verify that is your dad - unless you've been writing the checks for the mortgage and can prove it. The lenders may or may not accept your father's word for it, and they are going to want evidence. If you're actually on the current mortgage, this would be extremely helpful.
The good news is that with an income of $85,000 per year which your wife alone makes and you should be able to document, you have a monthly income of about $7083. This means that the back end you'd qualify for on A paper, thirty year fixed rate basis, is about $3180 (about $2690 if we're talking about an A paper ARM). Picking a random A paper lender, I get about 6.25 percent rate thirty years fixed full documentation (rates are much lower at this update) , which translates to a monthly principal and interest payment of a little less than $1232. With the yield curve right now, the five year ARM isn't much lower, meaning there's probably insufficient reason to do that instead.
Take $1232. Add $600 per month, which is about the worst case scenario for property taxes that I see (as I said earlier, you can probably preserve the current tax basis). Add another $150 per month for homeowner's insurance, which is a high estimate for most urban locales. This is still less than $2000 per month, leaving you almost $1200 of other allowable payments before you would not qualify full documentation. When this was first written, they could have done stated income if they'd wanted, but that'd have been giving the bank money they didn't need to.
Because of the multiple concerns, of which the most important are family transfer and verification of mortgage/rent, there are many reasons why the best way to approach this might change, but when you separate it all out, it certainly looks doable.
Caveat Emptor (and Vendor)
Original here
For a period of several months when the market started imploding, I got mass messages from basically every lender I do business with, saying it's time to "get back to basics". My favorite A paper lender became the last to do so. This is a company that to the best of my knowledge, never offered a negative amortization loan, never had a stated income loan for 100% of value, and was steadfast about avoiding all the problem loans that the rest of the industry dived headfirst into. As a result, not only could they offer beautifully clean underwriting and rates that varied from pretty darned good to absolutely unbeatable, but still rock solid today, The differences to their bottom line since market peak are all attributable to declining values that are a background to the industry rather than loose loan practices on their part.
My response to each and every one of these messages, however, has been, "What do you mean, back to basics?"
The dynamics of how to create a happy customer never changed. Oh, you can make them happy right now by getting them into the beautiful McMansion they have no prayer of really affording. But debt to income ratio isn't just for the lender's protection. If you use one of the many tricks available to circumvent it, you can video-record them jumping up and down with excitement and crying for joy on move-in day, but they'll also remember you all through the long process of losing the property, and by the time it comes to move-out because of short sale or foreclosure day, they'll know that you failed to do your real job. What do you think the prospects of referrals and repeat business are? Well, maybe referrals to attorneys and repeat business from the FBI fraud unit, but those aren't things most of us want.
Many people, sometimes surprisingly sophisticated people who should have known better, were ignoring critical factors about finance and economics because after six to ten years of the housing markets going crazy, it must have seemed as if the laws of economics had been somehow repealed. Nope. Not ever going to happen. They're a bit more complex than physics such as gravity, and they are subject to distortion through mass psychology in the short run, but the bottom of that canyon is still waiting, no matter when Wile E. Coyote looks down. You'd think people would learn something through experience after a few repetitions.
Yes, most people want the huge mansion on 64,000 acres. People want hot and cold running servants and manna from heaven, too, but very few people get it. But there are reasons things like that are beyond the means of the average person, particularly in high demand urban areas where all the jobs are. Most of us have budgets that won't stretch to any of the above, and we're better off understanding this fact from the start. As real estate agents and loan officers, it's part of that fiduciary duty we learn about getting licensed to make them aware of these facts as they pertain to real estate and mortgage loans, not encourage them to stretch beyond their means for a property and a loan they can't really afford.
During the era of make-believe loans, it became possible to pretend that somebody was able to afford a bigger, more expensive home than they really could. Many alleged professionals, both agent and loan officer, became aware that they could make the easy sale and a much higher commission check by fudging a number here and a key fact there. They made quite a good living by doing so, rationalizing that if they didn't, somebody else would. Those agents and loan officers who stayed on the right side of things lost a lot of business to people who didn't. It's always possible to talk a "bigger better deal", but what actually gets delivered is a whole different issue. The last few years have taught those of us who don't talk like that how to deal with those miscreants. But whether you believe in karma or not, stuff like that will come back around to bite you. It's one of those laws of economics that can't be repealed by the legislature. One way or another, their time of reckoning is coming. We all know what happens to those hogs at the trough.
So it's not "back to basics." Basics have always been there. Basics has always been the way to make the clients happy, not only on move-in day, but for the rest of their lives - long after the neighbor who didn't pay attention to basics has lost their home and their financial future to the foreclosure process. Basics, and explaining how they benefit the client, is how you build a real book of business, instead of one-time scores that are going to have you fighting lawsuits from jail. This has never changed, and it never will. Basics are the world we all live in, and when you understand them, you understand why.
Caveat Emptor
Original article here
At a very young age, my parents bought me a book of Aesop's Tales. Aesop has gone out of style, probably because these are stories with a moral lesson, and it seems the modern society is actively averse to moral lessons. But one of the ones that has stuck with me was the tale of the dog with a bone and the reflection in the water.
It happened that a Dog had got a piece of meat and was carrying it home in his mouth to eat it in peace. Now on his way home he had to cross a plank lying across a running brook. As he crossed, he looked down and saw his own shadow reflected in the water beneath. Thinking it was another dog with another piece of meat, he made up his mind to have that also. So he made a snap at the shadow in the water, but as he opened his mouth the piece of meat fell out, dropped into the water and was never seen more.
It is precisely this mistake that I'm writing about, and it applies to all real estate transactions. The dog's mistake wasn't that he wanted more. That's normal and natural, and I've certainly never done business with anyone who didn't. The dog's mistake was wanting the other benefit as well as his own, and not realizing he placed the benefit he thought he already had on the line in order to obtain it. But, as he discovered, the goodie that the dog in the water had was only a reflection of his own goodie. In order for the dog to have his own goodie, the dog in the water had to receive his. The same applies to the benefits the seller and buyer believe themselves to be getting. They are mirror images of the same thing, and one cannot exist without the other.
A lot of what gets written alleging to be good financial advice violates this very simple lesson.
Some things are a cost of doing business. If I don't pay for all the things that enable me to serve my clients, I'm out of the real estate business. Yes, they cost money, but if I didn't spend that money, my income would be zero. For consumers, this includes things like property taxes and HOA dues and Mello-Roos. If you want that property, they are inseparably attached. It is correct to include them in calculations as to whether a property is worth acquiring or worth keeping; it is not only pointless but counterproductive to try and get out of paying them.
This applies to the costs of acquisition and selling, as well. Be certain you understand the real costs involved. They may be large, or seem large, but doing without any of the professional services that have evolved is likely to end up being a lot more expensive in the end. If one is cheaper than another, there is a reason. Find out why; and while it may be that someone is just comfortable making less money, other explanations are such as they do not provide important services that really do make a difference are more likely to be closer to the truth. Don't expect them to tell you this, though, especially since most people will just believe fairy tales like "full service - discount price", and won't investigate why prices or loan quotes are lower. It shouldn't surprise any adult that sometimes it's worth paying extra. If this were not true, none of us would have our own cars, let alone seven seat luxury model vehicles. Cars are about the most expensive mode of transportation there is, but the vast majority of all adults in this country own and drive at least one. Including me. The reason is because the abilities they convey are more valuable than the costs they entail. if you don't pay the cost, you don't get the benefit, and yet many people will fool themselves into trying.
Most importantly, though, the lesson applies to negotiations for the sale of real estate. There's nothing wrong with making the best deal you can, but once you have the contract, honor your end of the bargain. Negotiate issues revealed later reasonably, and in good faith, based upon their own merits. It sometimes happens you find out the other side is getting something fantastic out of the deal. That's not a problem. It's a benefit. Insurance they're going to carry through with their end of the deal, which is a good thing because you wouldn't have signed off on it unless you thought you were getting about the best deal possible, right?. Real estate transactions are based upon making both sides happy with their side of the deal. You can't force someone to sell a property to you or buy it from you. Even attempting that is a felony. There can be circumstances that make it more likely someone will accept a proposal that they might not in other circumstances they would not, and very few people have unlimited time, money, or energy for a transaction to happen. But whatever the other person - other people - in the transaction are getting out of it, those benefits belong to them, and if it appears as if those benefits are in jeopardy, the other side can usually get out of a purchase contract. It may cost them something in some instances, such as the deposit, but successful suits for specific performance are rare, and more so where there's a competent agent involved on that side. Not to mention all those court costs.
The practical upshot of all this is that if you fail to act in good faith, that good deal that you thought you were getting is completely gone, and there's a significant chance you'll end up spending thousands of dollars on legal action as well. All voluntary transactions flow from perceived mutual benefit. The other side has to believe they are getting a benefit in order to want to consummate the sale. Figure that if the other side wants out, they can get out. In fact, many over-aggressive later negotiations give the other side grounds to exit the contract without penalty. Nobody's going to buy a property where they can't run the water or flush the toilets, but once the sellers agree to fix that problem in an acceptable manner, don't try to get anything extra out of them. If the septic system is bad, they can either install a new one, (maybe) fix the existing one, or hook the property up to the sewer. Asking them to re-plumb the entire house is not (usually) reasonable, and asking them to re-wire the entire house on top of that is, in the immortal words of Monty Python (Book of Armanents, chapter two, verses nine through twenty one), right out - and going that far has the same effects as holding onto the Holy Hand Grenade too long. If you find out you're not getting such a great deal, then you're likely to be the one looking to exit the contract, and if they fail to give you satisfaction with a newly discovered issue, maybe you should want to. There's nothing wrong with exercising the inspection and appraisal contingencies, assuming you have them in the contract, or forcing the buyer to consummate the transaction or get out of the way of someone who will, or getting the lender to deliver the loan they said they would.
Greed envy is one of the banes of a successful transaction, and if you don't have a successful transaction, you don't have anything positive, and you quite likely have significant extra expenses. To go back to the dog and the bone, a failed real estate transaction is worse, because not only have you lost your bone, you've lost everything you spent in obtaining it, and you still don't have what you wanted, whether it is your new property or cash for your property or new financing. If you make your initial choices based upon the benefits to you, the fact that someone else is getting a benefit as well is not something to cause you heartburn and make you want to take it away from them. That way lies disaster. Instead, think of it as insurance that you're going to be getting that benefit that you wanted enough to sign the contract or loan application in the first place. And if you're not going to be getting the benefit you thought you were, maybe you're the one who's going to want out.
Caveat Emptor
Original article here
One of the most true sayings in the mortgage business is, "If you can't lock it right now, it's not real."
But many mortgage providers will play a game of wait and hope. They tell you they have a certain loan when they in fact do not, hoping the rates go down to where they do. Or they'll tell you about a rate they actually have, but wait to lock it hoping the rates will go down so they can make more money because when the rates go down, the rebate for a given rate goes up or the cost goes down, and they can make more money.
Sometimes the rate/cost trade-off does go down, and they can deliver. But sometimes the rates go up, too. When this happens, the mortgage provider playing the "wait and hope" game has three choices. They can make less money, charge more for the loan, or punt by playing for time. I shouldn't have to draw adults a picture as their relative likelihoods.
Many times one side effect is a delayed loan. This is probably the number one reason for delayed loans, and one of the strongest reasons I keep telling you that if a provider can't do it in thirty days, they probably can't do it on the terms indicated. Many times they bet on rates going down, when rates actually go up, so they end up with a loan that they can't make any money by doing, so they delay it day by day, week by week hoping the market will move. Note, please, that they usually have zero intention of finishing your loan if the market doesn't move downwards enough. Whether it's National Megabank with a million offices, or Joe Anonymous working out of their home, their motivation is to do what it takes so they make money, and they will keep sweet talking you as long as they possibly can. They're certainly not going to work for free, and many of them will not do it at all rather than compromise their usual loan margin. If you allow them to play this game, when you finally give up in disgust, they still have several weeks after you apply with someone else where they're the only ones that can possibly have the loan done, and if the market moves down during those weeks, they're covered. If you could have gotten a better loan during that period, you likely would. But because you were quoted a price that didn't exist and believed it, they've got what looks to a consumer to be a competitive advantage. And if they call after you've "canceled" their loan and say that they can close the loan now when the new provider you just contracted with isn't ready yet, most people will go ahead and sign the papers because This Loan Is Ready Now.
There are honest mortgage providers who lock every loan at the time you tell them you want it. But there is no way for a consumer to verify that any given loan provider is among them. All of the paper I can put in front of you as regards a loan rate lock can be easily faked. Which brings us back to one of the standard refrains of the site: Apply for a back up loan.
At this update, there have been changes to the loan market. No loan officer can lock a loan quite so nonchalantly any longer. The penalties to the loan officer and all of their future clients for failing to deliver a locked loan to the lender have become too severe. As I said in Shopping For The Best Loan In The Changed Lending Environment, this is bad for consumers but it is a fact of life we have to deal with. If I lock a loan that doesn't close, all of my future loans get hit with additional charges, making my loans less competitive and hurting those clients who want me to do their loans in the future. I would very much like to go back to the other way, but it's not under my control.
Another change is that loans take longer now. This is due to regulatory changes and the need for CYA on the part of the lenders. Before the rules got changed in 2008, my average time between application and being ready to fund a loan was about 16 calendar days. Since then, that average has gone up to the low forties. Just a fact of life. There are a minimum of 3 weeks in new regulatory delays built into the new procedure. Oh, the government doesn't call them regulatory delays but they penalize the hell out of anyone who doesn't meet them and saddle that lender with large potential fines and unlimited liability for "misleading consumers". Net result: 3 weeks in new regulatory delays.
There is another issue with regard to rate locks. They are all for a certain set period in calendar (not working!) days, usually measured from the time you say you want it to the time the loan actually funds (not until you sign documents). Assuming your loan is actually locked when you say you want it, this means that there is a DEADLINE. Due to regulatory changes, loans are taking about 30 days longer than they used to. Also a fact.
This means that once you tell someone you want the loan, give the loan provider every scrap of documentation they ask for right away, not a week later. The loan provider is not going to pay for the delay, you are. Many banks will not even look at an incomplete loan package, so it is crucial to have the paperwork organized quickly. If that loan goes beyond the initial lock period, you can pretty much count on paying an extension. Some banks charge one tenth of a point for up to five days, some a quarter of a point for up to fifteen days of extension, some even more, but it's always charged in full from the first day of an extension. Occasionally the lender will give an extension for free if it was obviously their fault, but not very often. More likely, whether it was your fault, their fault or nobody's fault, the extension will be charged. Lenders have no sympathy for going over the lock period, and neither do most brokers. The lenders have set a large sum of money aside for your use, and they aren't earning interest on it. They want some kind of compensation, and when you think about it, this is not unreasonable.
Common rate locks are done for 15, 30, 45 and now 60 days, but they are available in 15 day increments for almost any length of time out to about nine months. However, there is a cost. The longer the lock period, the costlier the loan - as in the tradeoff between rate and cost gets shifted upwards. "Par rate" becomes higher with a longer lock period. You pay more in points, or get less in rebate for the same type of loan at the same rate. The reason for this is simple. The bank is setting all of this money aside for your use, and not getting any interest in compensation. They are doing you the favor, and they will charge you extension fees if you go past the lock period. I'm looking at a rate sheet right now that was valid a couple of days ago from a medium size lender. For a thirty year fixed rate loan, the discount points go up one eighth of a point between the fifteen and the thirty day lock, and another quarter of a point for a forty-five day lock.
The problem with 15 and (now) 30-day locks is that they are useless as an "upfront" lock, when the application is initially made. Especially with refinancing, where you lose a week by law between signing documents and funding the loan, there just is no way to reliably get it done within this time frame. Even purchases are chancy with the best of cooperation from everybody involved. 15-day locks are primarily a tool of those providers who play the "wait and hope" game mentioned above, and they lock just before printing final loan documents. The fact that they are planning a shorter lock period allows them the illusion of quoting something lower, but even if they tell you what the rates are today, they are quoting you a rate that may or may not exist when the loan is actually ready. On the other hand with regulatory changes that "helped" consumers changing things, I've become a lot more willing to wait to lock until just before I order final loan documents - provided the client agrees with my reasoning. I never did these while I had a realistic upfront lock option, but now that things have changed, they've become a lot more common for me. Unless there's a preponderance of evidence that rates are likely to go up, there's a lot less reason to pay for a longer lock. But since at least a week of the new regulatory delays happen after the loan is locked, everything has to be perfect for a 15 day lock to work without extensions.
A 30-day lock was most common lock period for those loan originators who lock the loan immediately. Until the regulatory changes "helping" consumers, if both you and the provider are organized, it was enough to reliably do all the paperwork and miscellaneous other projects, get final approval, and get the loan funded. It sounds like a lot of time, but it wasn't. On refinances, you lose a week due to legal and system requirements. Let's say you sign the final paperwork on a Monday. By federal law, you have three days to change your mind, and they're not going to fund the loan before that period expires. Monday doesn't count, so Tuesday, Wednesday, and Thursday go by before anything can be done. Good escrow officers don't usually request funds on Friday, because when they request funding is when the new loan starts accruing interest. Monday they fund the loan, and the bank has up to two days to provide the funds, then the escrow officer has up to two days to pay off the old loan before the documents record and the transaction is essentially complete. This takes us to potentially to Thursday or Friday of the following week, and that's just the time between you signing the actual Note and Trust Deed and actual consummation of the loan, when the Trust Deed is recorded. Now, with "helpful" regulations delaying loans, 30 days has become the standard "lock when you're ready to draw final documents" period.
If you want an upfront lock now (assuming you can even get one, which has become increasingly unlikely) you need a minimum of 60 days thanks to a clueless Congress in 2008. The 30 day purchase escrow is not reliably doable if there's a loan involved. A buyer's agent should not allow less than a 45 day purchase escrow at an absolute minimum if there's a loan involved, and 60 is much better.
On purchases, there is no three day Right of Rescission, but if the escrow officer begins funding a loan on Tuesday you are still talking about potentially hanging over until Monday of the next week. Funding doesn't usually take this long, but it does happen.
75, 90 day and longer locks are primarily useful for purchases where there is something external holding the loan back. Only rarely do the market conditions become such that longer locks than 60 days become necessary on refinances. Otherwise, they are most often used only when the actual purchase contract says that the purchase can't close until further out. There is a tradeoff here, and I may occasionally counsel people to wait if the construction on the house isn't scheduled to be complete for ninety days or longer. This makes for a risk that rates may move in the meantime, but rates generally don't go up in huge jumps, but rather incrementally higher from day to day, and past ninety days you may be risking less by waiting than by locking. There's no reason to pay more for a lock than you have to.
Many things have changed in the mortgage business in the last few years, but this hasn't: Even a legitimate and complete quote is fairy gold until it is actually locked. A bank can withdraw its loan pricing at any time. Sometimes this happens right when I'm in the middle of the locking process, and when this happens, the client gets the new pricing. Period. End of story (some banks will give you 30 minutes to complete locks already in process, but this is subject to limitations). Some lenders and loan providers attempt to hide this - and they call it "Consumer transparency." You may hoot in derision if you so desire. A better name would be something like their "Consumer Ignorance is Bliss" policy. "Don't you go worrying your poor little head about that, ma'am!". Until the lock process is complete, you don't have a right to those rates, and you won't get them if the lender changes the rates first.
Caveat Emptor
Original here
Our home isn't worth what we owe. So say you were just an average person selling and buying a house, meaning you put your house up for sale, get a contract to purchase on it then go put in offer in on a new house. Then you generally get a pre-approval, then the loan from a lender for the new house prior to closing on the old house. You then go to the closing sign the papers for your old house and then afterwards sign the papers for the new house. How would the lender giving you the new loan know that you were short selling the old house when everything happens the same day? It's not going to show up on my credit for at least 30 days and by that time I will already own the new house. Get it? Is this possible?
This is not the first time such a scam has been tried.
The loan application asks you about what property you own now. Falsify it, and you're likely going to spend a few years in Club Fed. Since it's unlikely you'll make mortgage payments there, this will compound the problem (Just try this on the judge: "I couldn't pay because I was in jail for lying about my financial situation, so it's not my fault!")
Furthermore, the current mortgage is going to show up on your credit.
The condition the underwriter is going to put on the new loan approval is going to go something like "Show property has been sold and debt paid in full"
Believe me, they're going to investigate. They're going to want a copy of the purchase contract and a payoff on the loan for it. Since the debt isn't going to be paid in full, they're going to figure out that you've got a short sale going on. It's not going to happen "same day" if there's a short sale. They're going to want to verify that the other lender is not going to pursue a deficiency judgment. If you're still going to owe the other lender money, the payments are going to hit your debt to income ratio (DTI).
All that said, if you come clean about the situation starting with your loan application with the new lender, it's possible you'll still be approved - just not the same day you close on your sale. They're going to want something that says your current lender isn't going to pursue the deficiency, but it is possible. Theoretically speaking. They're also going to want to figure out what you're going to owe the IRS, and how you're going to pay it. Then they're going to take that into account in underwriting the new loan.
(NB: With HR 3648, the Mortgage Forgiveness Debt Relief Act of 2007, now expired, there was a time when this might have been zero on the federal level but there were still be consequences on the state and local level. As I said, this 'get out of tax obligation' formerly existed but is no longer valid. Check with your CPA or EA for more information)
But trying to hide the situation is pretty much going to be a guaranteed rejection. Furthermore, whether or not you intended fraud, if you'll look up the legal definition of fraud, what you were asking about falls well within that definition, as you are deliberately attempting to conceal relevant financial information. I wouldn't be surprised to find the FBI paying you a visit. In fact, I'd be surprised if they didn't. Banking fraud having to do with amounts at risk large enough to finance real estate is a serious felony. ALWAYS tell the truth, the whole truth, and nothing but the truth on a loan application. Better to be rejected based upon the truth than accepted based upon fraud.
If you wait until the short sale is consummated to apply for a new loan, there are 13 questions on page 4 of the standard form 1003, the Federal Loan Application. At a minimum, questions a, d, and f (having to do with judgments, lawsuits, and delinquencies) are going to have interesting possibilities, but there is no question that directly asks about a short sale. It does shows up on your credit report for 10 years, as debt not paid in full. Mortgage debt not paid in full, amplifying the failure in the eyes of mortgage lenders. If there's a deficiency judgment, that will show up as well, for ten years from the date of the judgment. I can't recall ever having dealt with someone in this situation; but it's definitely a factor a reasonable person might want to consider in deciding whether to grant you additional credit. If your worthless brother-in-law wanted to borrow $1000 despite having stiffed you on other debts in the past, you'd be within reason to consider that fact in your decision as to whether or not to loan the money. Particularly if the purpose of this loan was directly in line with the purpose of prior defaults. The situation is no different with mortgage lenders.
From personal observation, it generally takes two years - as in 24 months, not as in the second New Year's Day afterwards - after a short sale before lenders are willing to seriously consider a mortgage application from you. You're still going to have to explain what went wrong, but if you're responsible with credit, pay your rent on time (which they are going to be very particular about), and your debt to income, loan to value. and cash to close as well as credit score are all within parameters, you've got a pretty decent shot at that point. I'm not going to kid you: saving the money in 24 months for a down payment plus cash to close isn't easy, no easier than it was the first time you bought. But doing so will reward itself.
Caveat Emptor
Original article here
I am currently living with my parents and they wish to deed of gift their house to me but they still have a remaining mortgage on it. Is it possible to do this or do they have to pay off the mortgage first? Thanks
They can gift the house to you without paying off the mortgage. However, the mortgage still has a valid lien on the property, and must be paid or the lender can and will foreclose.
The mortgage will still be in the names of the people who signed the paperwork (your parents) and therefore any credit benefit or dings will also belong to them. You could find yourself in the unenviable position of being unable to refinance, despite having made the payment for however long, because you're not getting credit for making those payments. Read the contract: it is possible that the loan is assumable. Even if it isn't, it's possible the lender will agree to add you to the list of those responsible (This can only help the lender; they're not letting your parents off unless/until you do a full refinance. Of course, adding you to the loan doesn't earn anyone a commission, so they might tell you that you need to refinance as it gets them paid, or helps them make a quota)
Quitclaiming is both legal and extremely simple, but has potentially severe tax consequences. Please check with an accountant in your area first. I'd also tell you to check with a lawyer, because each state has its own laws about the effects of how property is held. Nor will quitclaiming the property help if the purpose is to shelter assets from legal action, and if this is to enable your parents to qualify for Medicaid, all fifty states have "lookback" periods of at least thirty months (sixty months is most common), where the state will recover the value of any assets disposed of in that time frame.
If you are the party quitclaiming a property on which there is a mortgage, be advised that you are still responsible for payment of that mortgage. The lender has your signature on a contract that says, "I agree to pay" They may or may not have other signatures, but if they do all it means to you is that other people will join in your misery if the payments aren't made on time. This happens all the time. Husband and wife divorce, one keeps the property, the other quitclaims but is still on the mortgage. Time goes by, and the ex-spouse who retained the property and the mortgage fails to make all of the payments on time. Bad consequences ensue for the "innocent" ex-spouse. I have seen this feature used maliciously by vengeful ex-spouses. I would advise requiring a spouse who retains the property to refinance solely in their own name, and if they are unable to qualify, requiring the property be sold. The other spouse is also entitled to a share of equity in many states.
If the property ends up being sold through a Short Payoff, the lender is almost certainly going to drag the "innocent" ex-spouse (whose signature is still on the dotted line) back into the situation. Basically like being an Alabama fieldhand prior to the Civil War or a male whose girlfriend decides to have the child and walk away (Admittedly she puts up with nine months of pregnancy, but thereafter puts the child up adoption and walks away - while he has no such choice and gets hit with a lien for child support from the county for 18 years). Despite not having lived in or owned the property for years, the non-resident ex-spouse is still tied to that property by that piece of paper they signed. The ex-spouse wasn't the owner, so they had no ability to control or influence the sale, but they're still on the mortgage, so the lender can get their money out of them.
Finally, for as long as you remain responsible the mortgage, it will hit your debt to income ratio. This can mean that you will not be able to qualify for another mortgage. In my experience, it is rare that it does not. You are obligated to make those payments, so it's a part of your credit-worthiness. Especially considered in conjunction with likely alimony and child support in the case of a divorce, you may have difficulty qualifying for another property, even ones that would have been well within your means before. It is possible to have them realize that you're not the one making the payments (and might therefore be approved for loans on that basis), but you are still responsible if something happens to one or more of the people who are making the payments.
For these reasons, it is simple self-protection to require that the people you quitclaim to refinance the property to remove you from responsibility for paying the mortgage, and if they cannot do so, require that the property be sold.
Caveat Emptor
Original article here
I sold my house in (state) in august 2001 I hired a title attorney whose (local company X) acted as a agent for (national company Y). The facts are that there were errors and omissions which led to negligence in the performance at the closing of the property. The property taxes for the year 2000 were not paid. The title company did not do their duty and gave clear title to the buyer. Now, more than 5 years later Company Y is claiming I owe them these back taxes plus accrued costs. I would kindly appreciate some feedback
Yes, you owe the money.
The title insurance policy you bought insures the person who bought the property. Property taxes are part and parcel of all land ownership. A reasonable person should have paid those taxes. But they didn't get paid.
This doesn't mean that someone didn't screw up. Every title search needs to include a search for unpaid liens that includes property taxes. That's just the facts of the matter.
However, this does not relieve you of your duty to pay those taxes in full and on time. If it was an obscure mechanics lien recorded against your property erroneously for work that was never done, you'd have a great case. If it was for stuff that you paid, and had reason to think you paid in full even though you were short, you might have a case. But not stuff that every reasonable property owner knows has to be paid, and didn't get paid at all.
Let us consider what would have happened if you still owned the property. The county would be sending a law enforcement official around with delinquency notices, which would include interest and penalties for late payment. If those weren't paid, they'd send law enforcement around another time with a tax foreclosure sale notice. You would have to pay those taxes.
It's no different because you sold. Because property taxes are a valid existing lien on the property, albeit one they missed during title search, they paid it to clear the buyer's title, as the policy requires them to do. On the other hand, when an insurance company pays a bill like this, and title insurance is insurance, they acquire the right to collect payment via subrogation. This fancy word just means they paid the damage on behalf of someone, and now they have the right to collect payment, just like auto insurers who pay for the damage to your vehicle and go sue the party at fault, for which that person's liability insurer usually pays. In this case, the person with the liability to pay that property tax bill is you. I'm not an attorney, so I don't know, but there might be a case you can build against the person who did the title search for the interest and penalties that have accrued since the search. Before that, the bill was all yours, and given that it was for 2000, should have been paid before August 2001. On the other hand, that title company might not have had a duty of care to you, despite the fact that you were the one who paid the bill, as the insured was your buyer, not you. Furthermore, the cost of paying the attorney can often go to several times the cost of paying the taxes and penalties. You'd need to talk to an attorney for more information. You might want to call company Y and ask if they'll settle for the bill as of the sale date, because they don't want to pay for an attorney any more than you do, and they did screw up, and if they hadn't, you would have paid the bill back then, right? Company Y can then recover the balance from their agent, company X.
Any lien that exists before the sale, discovered or not, is your responsibility. The only time that I think you are going to get off the hook is if you are dead and your estate probated and distributed before the lien is discovered. Basically, you've got to die to get away with it. Perhaps intervening bankruptcy might do it as well. I don't think so, but I'm not a lawyer. If you had died, the title company would still have paid, as the policy requires to protect the buyer, but would have had no choice but to eat whatever amount they paid, because there would be nobody alive who they would have a valid claim against.
Caveat Emptor
Original here
I've gotten several emails to articles recently having to do with straw buyers, and more search hits. Straw buyer fraud is popular because people want a better loan and many don't see anything wrong with it since "we intend to repay the lender". However, they are intentionally deceiving the system that lenders have evolved that prices loans in accordance with the risk involved in a given borrower and situation. Furthermore, straw buyer activity opens you up to potentially unlimited legal liability. All of those wonderful consumer protections that our government is so happy to enforce go out the window if you commit this or any other kind of FRAUD. Furthermore, straw buyer scams are one of the biggest potential "stings" in schemes perpetrated by scamsters. You can trivially find yourself liable for much more than the property you have a mortgage on is worth.
A "straw buyer" is someone whose credit is used to purchase a property and secure financing, but whom isn't actually going to own the property. Sometimes they cooperate willingly and sometimes they are victims of identity theft, but it's always illegal. It is also, as these two cases illustrate, hazardous to your financial health.
The most common scenario is Person A wants to buy a property, but convinces person B to step in as a "straw buyer" to obtain terms that Person A could not. Alternatively, person A steals person B's identity, and forges all of their information on the purchase and loan papers. In both cases, person B is not the person really purchasing the property, but their name is on the mortgage. In the first case, person B is fully responsible for the loan and everything else that goes on, as well as having committed FRAUD. In the second case, they've got a long hard row to hoe to convince everyone that they weren't involved, because with hundreds of thousands of dollars on the line, it is worth the lender's while to be as hard-nosed as possible. The lender does not particularly care about justice in this case; what they want is the money they loaned out to get repaid.
The closest thing to benign that happens in straw buyers is when one relative, let's call him Junior, convinces another relative, call her Mom, to use her good credit so that Junior can afford the payments on a house he really does want to live in. Please note that this is still fraud - you are deceiving the lender for the purpose of getting a better loan than you would be able to obtain if you told the truth. Good agents and good loan officers want no part of this, because it doesn't matter how benign the intent, the fact of the matter is that it is still fraud. The lender discovers it, or if payments get missed, that agent or loan officer is legally toast. Note that this is different from Mom buying Junior a property for Junior to live in, or helping Junior afford property Junior wants to buy. There is sometimes a thin but always bright line between legal and illegal activity, and starting to deceive people - telling anything less than the whole truth and nothing but the truth - is always a sign you have stepped over the line.
Once you get away from this most nearly benign straw buyer scenario, things degenerate quickly and there are many scams and frauds that can be pulled. Many of them involve appraisal fraud. Most common is that someone persuades you to allow them to apply for a loan on your behalf to buy a property for them, which has supposedly appraised for $700,000. You end up responsible for a $700,000 loan on a $400,000 property, and the people who pull this scam walk away with $300,000 (or more) free and clear.
There are also all kinds of scams involved with people that want someone else on the mortgage, but themselves on title. If you quitclaim off of title, this does not absolve you from the mortgage. In general, the only way to absolve yourself from the mortgage is for those remaining to refinance in their own name without you, and since they are claiming they couldn't do this, that just isn't going to happen. It's one thing for one spouse to qualify for the mortgage on their own but legally quitclaim it themselves and their spouse, husband and wife as joint tenants with rights of survivorship. It is something else entirely to quitclaim it to Joe Blow (or Jane Blow), but allow yourself to remain on the mortgage. If Mr. or Mrs. Blow does not pay the mortgage, guess who is liable?
I get hits on this site every day asking, "How do I remove myself from a mortgage?" The answer is that you don't. The lender has your signature on the dotted line that says "I agree to pay..." The only way they are going to let you off is if the people remaining qualify for the loan without you - by which I mean a refinance. Even most loan assumptions (for loans where assumption is possible and approved) are subject to recourse for at least two years, usually longer. This is one reason that for divorcing couples, it needs to be part of the dissolution agreement that the property will be sold or mortgage refinanced before the dissolution is final to protect the spouse that isn't keeping the property (they're often entitled to some cash from the equity, as well).
There are good and strong reasons why straw buyers are illegal, reasons that start at fraud and run through confidence games of all sorts, which are also fraud, albeit with a personal as opposed to corporate victim. The games that can be played on you when you cooperate with a straw buyer request start at major financial disaster, and often include felony jail time.
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Original here
No, I'm not turning into a country western singer. Just got a search for "no closing costs no points loan cheapest rates loan". The visit (to this article) lasted less than a full second. The obvious implication was that it wasn't what that person was looking for.
One of the reasons consumers get mercilessly taken advantage of in mortgage and real estate is because they assume they know everything they need to. Unfortunately, the vast majority don't know everything they need to. Most of the time there are gaps in their knowledge that the unscrupulous can sail the Queen Mary through - sideways. Hence the fundamental dishonesty of almost all mortgage advertising.
As I have said before on many occasions, lowest rates do not go with no points or no closing costs loans. Period. One of these things does not go with the others. Rate and total cost of the loan are always a tradeoff. Nobody is going to give you money, of all things, for less than the cost of money.
This is not to say that one loan with no closing costs may not be cheaper than another loan with no closing costs. The point is that there will be lower rates available with some closing costs, progressively more so as you get higher closing costs. Then if you start paying points, there will be still lower rates available. There is a reason why they are paying all of your closing costs - you're choosing a loan with a higher rate than you otherwise could have gotten.
No cost loans can be and often are the smart thing to do (Unfortunately, the Congress of 2009-10 effectively outlawed the loans by requiring yield spread to be treated as a cost, which it isn't (not to consumers), and said yield spread was the only funding mechanism for it) . Because they are the only loans where there are no costs to to be recovered, they are the only loan that can possibly put you ahead from day one. Consider the zero cost loan as a baseline, and compute what lower rates will cost you in closing costs. Consider: If the zero cost loan is 6.75 percent and you currently owe $270,000, your new balance should be $270,000. If you can get 6.5 at par with closing costs of $3500, your new balance is $273,500. Your monthly interest in the first instance is $1518.75 to start. Your interest charges in the second case are 1481.46. The lower rate cost you $3500, but saves you 37.29 per month. Divide the cost by the savings, and you break even in the ninety-fourth month - not quite eight years. So in this example, if you think you're likely to refinance or sell within eight years (in other words, practically everyone), you'll be ahead with the zero cost loan.
If the loan has a fixed period of less than the break even time (any loan that goes adjustable in less than 94 months in this example), you also know that the costs are not a good investment. If this loan were only fixed for five or seven years the rates go to precisely the same rate after adjustment, underlying index plus the same margin. If you haven't broken even by then, you never will, even if you decide you want to keep the loan.
So whereas a true zero cost loan is often the best and smartest way to go, it will never be the lowest rate available. You need to choose carefully where on the spectrum you choose, because there's no going back once the loan has funded. All of the up-front costs are sunk, and you don't get your money back just because you don't keep the loan long enough to break even.
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Original here
I saw your article on on Searchlight Crusade about exclusive buyers agents and I have a couple follow up questions pertaining to my own situation that I am hoping you could shed some light on.I don't have any buyers agent (currently). However I have spotted 2 houses in an area that I think I would like to make an offer on. Both of these houses are listed by real estate agents. I am obviously eager to save as much money as I can and think it would be great to try and save on the agent undefined if at all possible (I have bought FSBO before, so I am familiar with the process and I don't see much value add with an agent since I have already found the properties).
However I just don't get it - if I make an offer on the property by working with the sellers agent then the sellers agent gets both commissions? Is there a way to just take the buyers agent commission off the sales price? If there isn't then I guess there is no reason not to go and find a buyers agent to assist me? Seems like a waste of money.
I have found an buyers agent that who said he will give me 50% of the commission if I sign an exclusive buyers agent contract with him however I am worried that my hands are tied if I don't end up purchasing one of these properties I have already identified (ie I could end up paying 1/2 his typical commission if I found a FSBO).
Any insight you could provide would be of great help - I love reading your stuff.
Thanks,
The first thing I need to clear up here is the nature of listing agreements. The standard listing contract form gives the listing agent the full commission for both buying and selling, and if someone other than them represents the buyer, then they agree to pay the buyer's agent a portion of that. If there is no buyer's agent, they keep it. Since you have to make your offer through the listing agent, the listing agent gets that commission, and that is as it should be. Note that I believe it is stupid to act as agent for both parties in the same transaction because seller's interests and buyer's interests are often at impasse, and when you're acting as agent for both sides, there are many potential issues which, if they happen, are lawsuit material one way or the other no matter what the agent does. If I find a buyer for my own listing, I'll find another agent I trust to do a good job or have them sign a non-agency agreement, and that way there is no conflict of interest. But greed is a powerful motivator, as you yourself are illustrating. The fact is that if the listing agent wants the full commission, they will probably end up with it, and justifiably so, as they found the owner a buyer, didn't they? That's what the contract says the seller's commission is for. You saw their sign, you saw the house they listed, you made an offer through them, the house got sold through their efforts. According to the terms of the listing contract, they found you, whether you realized it before now or not. The buyer's agent commission is for an agent who has a buyer who sells them that property, as opposed to the one down the street.
Many agents make side agreements to rebate part of their commission in certain circumstances. But that potential rebate contract in this case is with the seller, not you, and is none of your business. Unless the agent has a release to discuss it with you in writing, they are violating confidentiality to do so. The seller may sell to you cheaper because of such a clause, but they are under no obligation to do so.
Now before you dismiss this with, "That's Stupid!" or something worse, because it appears that things are stacked to cost you money, consider that this has evolved over many years as the best and cheapest way to preserve everybody's best interests. Without these forms, there would be a lot more lawsuits filed over commissions, with the side effect that the lawyers get rich, and the money ends up getting paid anyway on top of the lawyer's fees. The listing agent commission is partially a hold over from the old single listing days of half a century ago. Over time, the buyer's agent commission evolved as a way to open the system up, so that homes sold faster and those agents and offices without a large, pre-built client base could break into the business. But it's still intentionally structured that way as a way to motivate that listing agent to advertise the property far and wide and especially in all of the most effective venues. It costs money for that sign in the yard. It costs money for MLS access. It costs money for advertisements in the paper. It costs money for all the trappings that enabled someone to go find that agent and list the property in the first place. It costs that agent money just to stay in business whether they have any clients or not. It costs the agent money for the advertising to attract clients in the first place. And chances are, if they hadn't spent that money, you wouldn't have found that property, and the owner wouldn't have sold it. Consider also the liability issue, which is huge and real. Are you volunteering to give up any legal rights for a complaint? Didn't think so. Which means they have to go through all of the disclosures, and they're still liable if they make a mistake. How many people do you know that do major work in their occupation for free, even though they're still going to be liable for potentially hundreds of thousands of dollars if something isn't perfect?
People think agents are making money hand over fist, when the reality is that unless they're putting in the long hours and hard work to make multiple transactions happen every month, they're just barely scraping by. Most of the successful agents I know put in sixty hours or more per week, and if they are putting in less than forty, I'll bet money on no other data that they'll be out of business in a year. This is not a cheap business to be in, or an easy one. I don't blame you for wanting to economize - it is a lot of money. If you don't think about what it's getting you, and what you're getting, and what agents are giving you, and the liability they're assuming, and what they have to spend to stay in business, and you just look at the check the brokerage is getting, it seems like a lot of money.
Put yourself in the shoes of a seller. You have a property, but you want cash. Real estate is not liquid, a property interchangeable with billions of other shares in Planet Earth that you can call a broker and sell over the phone because there's a ready market for shares in Planet Earth which are all interchangeable. Instead, each and every property is unique. This means it is bought and sold on the basis of those unique individual characteristics. You want results, you want your property sold for the highest possible price, you don't want it coming back to haunt you if there was something wrong you didn't know about, and it costs money and it takes work to make buyers want to buy your property.
Sometimes the agent gets lucky of the market is hot and it sells quick. Sometimes the agent works hard - and they really do work - for months with no offers despite all of it. There are times where a monkey could have sold a residential property within a week for more than the asking price, and there are times when no matter how good the agent is, you still need luck. This requires an adjustment in thinking if you're going to do well. Average total commission paid is up locally in the last few months, from five to six percent. Particularly in a rough market, if the seller tries to sell it themselves, it will statistically take longer, and they will statistically net less money from the sale, not to mention what they spent on the property in the meantime. Some few get lucky. People win lotteries and casino jackpots, too. Betting that you'll be one of them is a sucker's game. Any number of studies and statistics show this fact, and many brokers make a good living buying FSBOs to then resell for a hefty profit. The last broker I worked for is one example. In one month, we sold four properties he bought from FSBOs, all for a substantial profit, even in a down market. Sellers tried to think like you do, and it cost them over $150,000 net of commissions, and these were all fairly quick sales. Had we tried harder to get maximum value for his money, we could likely have gotten more, but he's not complaining.
Before we go any further, let's look at what a buyer's agent really does. It isn't just pop you into the house and watch you wander around. While you're oohing and aging over the beautiful kitchen and the brand new carpet, I'm looking for foundation cracks. I'm analyzing floor plan. I'm looking at location and real condition of the structure and how good a design the property is and whether I can see issues that are going to cost you money down the road and considering eventual resale value and comparing it to other nearby properties I've seen. I have talked buyers out of superficially attractive properties on each and every one of those points in the last month or so, saving them a lot of money and headache down the road. The listing agent is working for the seller, and it would be a violation of fiduciary duty for them to say anything about any of these negatives.
Now, with that said, let's look at your current situation. I've already covered the fact that the listing agent is entitled to that commission. Now let's put you on the other side of the table from a guy whose responsibility it is to get the best possible price for the property, and his commission depends upon how good a job he does. He does this constantly, for a living. He's set up with information to ensure that he gets the highest price. It's cost effective for him, in a way that it isn't if you aren't doing it constantly. Betting that you're better at his profession than he is would be like him betting he's better at your profession than you are. My money is on "you end up paying more than you have to."
Here's a dead giveaway that an agent's job is trickier than you think it is: That you're even talking about an exclusive buyer's agent contract in this situation. So long as you already have the property in mind, there is comparatively little risk and a lesser amount of work for him in the situation. He's not going to have to drive you around to four million properties over the next twelve months to maybe find one you want. This is a buyer's agent's dream situation - cut straight to the bargaining, without any of the preliminary work that takes so long. If this one falls through, he can either look for more or blow you off, depending upon what he has time for. Offer him a general non-exclusive buyer's agent agreement with a fifty percent rebate if you find the property yourself, as you did in this situation. This motivates him to do his best bargaining and looking out for your interests without sabotaging the transaction. If this one falls apart, he's still got motivation to find you something on your terms, and you're not bound to him unless he introduces you to the property or you use him for negotiations, etcetera. You get a negotiator who knows your market and should know most of the tricks and is working on your behalf, and if this one falls through you have someone who's motivated to find your something with better tools and more relevant skills at his disposal than you have. He gets a commission which, if smaller, is also easier and walked its own self in the door rather than him having to go out and spend time and money to drag it in. Everybody wins. If he won't do it, find someone else in your area who will.
(Before anybody asks, I don't propose client contracts that I wouldn't accept)
Caveat Emptor
Original here
>broker incurred 19 inquires in 1 week dropping my score.
B.S.
I'd go the full Penn and Teller on this one if I wasn't trying to stay family friendly. The law is clear on this one, and practice is fully compliant with the law. I've seen thousands of credit reports, sometimes with dozens of recent mortgage inquiries. It could be 1, 19 or 19,000 inquiries. As long as they are all mortgage inquiries, all inquiries within thirty days count as one one inquiry. And the credit reporters and credit modelers I'm familiar with all comply.
The best and the worst loan officers are brokers, who shop your loan around to multiple lenders. But you don't have to stick with one broker, and you are silly to do so. Shop your loan with half a dozen at least. I used to tell people to apply for at least two loans, but changes in the lending industry make that a waste of time now. In all practicality, the dual application is dead due to regulatory and financial market changes meant to drive clients away from brokers and towards direct lenders and higher cost loans.
Credit Report scores falling with repeated inquiries used to be a real issue. Years ago, there would be a game as each inquiry was a hit to your credit, so prospective mortgage providers would run your credit again and again, until they drove your score under some noteworthy creditworthiness break-point. They could still use their original report, but since anybody who ran your report after that would see a 678 instead of a 686, or a 572 instead of 588, it would be unlikely that they could provide as good a loan.
However, several years ago the National Association of Mortgage Brokers sponsored legislation in Congress to change this. It was hardly altruistic of them, people not having their score hurt by multiple inquiries means that they are more willing to allow brokers a chance to compete. Nonetheless, this was a major benefit for anyone who wants to be able to shop around for a mortgage like they might want to for any major purchase, and mortgages are the second biggest purchases most people make in their lifetime (the biggest being the property the mortgage loan secures!). No matter how selfish the motive, however, they still did you a major favor, as someone who might want to have a mortgage someday even if you don't now. Tell your mortgage broker thank you for that.
There is a limitation to this, and ironically it affects credit reports run at banks and credit unions, although not brokers. Because in order to qualify for this, the inquiry has to be run under a provider code that says, "inquiry for mortgage." Mortgage broker inquiry codes all say "inquiry for mortgage," because that's the only type of credit they deal with. But banks and credit unions give loans for other purposes also, so they have a minimum of two inquiry codes, one that says "mortgage inquiry," and one that says, "general inquiry." If you are talking to a loan officer at a bank, who does car loans and credit cards also, sometimes they use the wrong inquiry code, and it counts as another inquiry. Talk to four banks, potentially four inquiries. Talk to four brokers, unless you space them out by 30 days or more, it's never more than one inquiry.
So anybody who tells you not to let other mortgage providers run your credit because they might drive your score down is either unaware of the law, or simply trying to scare you because they are frightened of having to compete. Incompetent or a liar, one or the other - maybe both. When you get right down to it, they are really telling you that their loans aren't very good. Because so long as they are done within a few days, the fact is that any number of mortgage inquiries all count as precisely one inquiry.
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Original here
For a while there, the forty year mortgage had started to make a comeback, and a few lenders started introducing the fifty year mortgage. The reason, straight from the horse's mouth, the lender's representatives, is lowered payments. In an uncertain and unstable market, investors are nervous about interest only financing, and so the lenders are tightening up on the standards of who is able to qualify for that, while looking for another way to compete on the basis of lower payments. Any fig leaf to be getting their premium and avoid competing upon real price. One way that they do this is the Option ARM, or negative amortization loan. However, to anyone who does even a minimal amount of investigation those loans are like cutting your own throat. A lot of people will still sign up for them, but after Business Week did a feature calling them "Nightmare mortgages" more and more people finally started picking up on the tremendous downsides to those loans (and they were finally all but banned, too late to do any good), but if they still want too much house and they've got to be able to qualify for, and make, the payment, they need an alternative. That is the forty and now the fifty year loan.
Note that nobody does forty year fixed rate mortgages, let alone fifty. They do two and three year fixed rate loans, called the 2/38 and 3/37. Some lenders will also do a loan that amortizes over forty years, but the remaining balance is due in thirty years. This so-called 40/30 balloon has a lot in common with a thirty year fixed rate loan - including the fact that almost nobody goes more than five years without refinancing, so that the thirty year balloon should be no big deal. All of the preceding forty year loans are sub-prime loans, by the way, with prepayment penalties and higher rates than A paper. A Paper lenders doing the forty year loan are few and far between. People get longer durations from sub-prime lenders; A paper competes for the best borrowers - the ones who can really afford their loans - on rate/cost trade-off and underwriting standards. For those lenders doing the fifty year loan, it is pretty much the same story. The fifty year amortization due in thirty, the 2/48 and the the 3/47.
Because the lender is risking their money for a longer time, and with less amortization and therefore more risk, most of the lenders - particularly the ones looking to compete on rate that you would prefer to do business with - charge a slightly higher rate for forty year loans than thirty, and a little higher still for a fifty. The difference is not huge, but it is there. Where a 2/28 might be at 7%, the corresponding 2/38 might be at 7.125, and the 2/48 at 7.25 for the same cost. Sometimes they'll say that the difference is as small as a quarter point of cost for the forty year amortization as opposed to the thirty - but that's an eighth of a percent on the rate, at subprime's usual 1 point equals half a percent trade-off.
In my opinion, these longer amortization loans are mostly a marketing gimmick to lower the payment - slightly - for those who do not qualify for interest only under lender's guidelines. The forty year amortization started making a comeback early in 2005, most as the 2/38, and the fifty year about March of 2006.
My initial perception was that refusing interest only to these borrowers is a figleaf tossed to nervous mortgage investors, and this has been borne out by subsequent events. It's not like fifty year amortization is really going to make a difference, as opposed to interest only, from the point of view of remaining principal. If a 100% loan gets foreclosed any time in the first five years, or if property values decline further, the difference is basically insignificant. Let's do some math.
Assume a $200,000 loan on a $250,000 purchase in California, just so I can do it in one loan without worrying about PMI.
| Amortization Period 30 40 50 | Interest Rate 7 7.125 7.25 | Loan Payment $1330.61 $1261.07 $1241.78 | Other costs $510.42 $510.42 $510.42 | Total monthly $1841.03 $1771.49 $1752.20 | Income to Qualify $3685 $3545 $3505 |
Unlike everyone else who has written on longer amortizing loans, I'm not going to obsess about "interest paid over the life of the loan," although if you keep them that observation is true. But that's almost irrelevant. These borrowers are going to refinance in a few years anyway, same as everyone else. That's just the way things are. But let's do look at the difference between interest paid in the first two years, the fixed period for most of these at the end of which people will refinance.
| Amortization period 30 40 50 | interest rate 7.000 7.125 7.250 | 1 month interest $1166.67 $1187.50 $1208.33 | 24 mos interest $27,724.41 $28,374.03 $28,941.66 | Remaining Balance $195,789.89 $198,108.53 $199,138.73 | Comparative Deficit $0 $2968.26 $4566.09 |
So under these conditions, the 40 year loan only saves $1668.96 in payments over the first two years, and the fifty $2131.92. So if we subtract these numbers off the deficit in the above table, we are left that the forty year loan costs us $1299.30 in net deficit as opposed to the thirty, and the fifty year loan costs us $2434.17 net of all savings. This on top of the fact that it really doesn't make that much difference in the income we need to qualify for the loan (which in my example is limited to cost of housing with no other payments). Just paying off a credit card that takes $100 payments per month will do more to help you qualify.
These numbers get worse, not better, in the bigger loans that the lenders are using them to justify. Let's assume a $400,000 loan on a $500,000 property instead:
| Amortization period 30 40 50 | interest rate 7 7.125 7.25 | Loan Payment $2661.21 $2522.13 $2483.58 | Other costs $630.83 $630.83 $630.83 | Total monthly $3292.04 $3152.96 $3114.41 | Income to Qualify $6585 $6310 $6230 |
| Amortization period 30 40 50 | interest rate 7.000 7.125 7.250 | 1 month interest $2333.33 $2375.00 $2416.67 | 24 mos interest $55,448.83 $56,748.07 $57,883.32 | Remaining Balance $391,579.79 $396,217.06 $398,277.46 | Comparative Deficit $0 $5937.30 $9132.95 |
Considering that over two years, the forty year payment saves $3339.92 in payments, it's still down by $2599.38 as opposed to the thirty year amortization, and the fifty is down by $4869.83 in just two years - never mind what happens if you have to do it again in two years, and once again, paying off a credit card probably will do more to help someone qualify full documentation.
I don't see anything particularly wrong with forty and fifty year mortgages, although a thirty year loan is better while making very little difference on the payments, I can see some benefits for those who lie in this income range. But pardon my lack of enthusiasm for something that makes very little difference to whether someone qualifies for the loan, while costing them far more than they save in terms of payments, even over the short term and disregarding the effects if the people do not refinance. Far better to just persuade someone not to buy quite so much house in the first place, even if it means you get less of a commission. But then if most real estate agents sold property on the basis of what people could afford rather than it's beautiful and they want it and therefore it's an easy sale and now let's figure out a way to get them the property even if they can't afford it, the southern California real estate market would not have been in the state it has been in these past several years.
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- Day by Day It is site policy to list the main page of every site I reference. Sometimes the real world intervenes and I haven't gotten to it yet, or one falls through the cracks on a long post with multiple references. It is also site policy to list the main page of every site that lists this one on their equivalent roll, as well as the main page of all sites that are members of any of the same groups this site is a member of. Please send me an email with a link to the main page of your site if I've overlooked you (dm at the domain name). For the clue-challenged, note that it is a requirement for your link to appear on every page of your site, just like mine does, and I will not link to spam sites.
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