What’s Negotiable on a Good Faith Estimate?
September 15, 2008
A beautiful question I found in the list of keywords that people searched on and found my site for today:
What is negotiable on a Good Faith Estimate?
First - what’s a good faith estimate? It’s an estimate of costs that your lender prepares so that you can better anticipate closing costs and more easily compare loans. A ‘GFE’, we we call it, details out lender costs, estimated title and escrow costs, recording costs, and whatnot.
So when your lender presents you with this good faith estimate, what parts are negotiable?
Well - lots of it. At least, the parts that your lender has control over. Your lender isn’t in charge of the title and escrow and recording costs, they’re just providing those estimates to you more or less as a courtesy. So your lender can’t do much for you with those.
But what they can negotiate are their own fees and rates. Tom Vanderwell of Straight Talk About Mortgages has this to say:
When you are shopping for a mortgage lender, you need to look at the entire package, fees and rate. If you find two lenders who are at the same rate, but one has $200 more in fees, that’s when you have to either decide to go with the other one or negotiate it down to match the fees.
Just remember - when you get a home loan, you’re paying your lender to perform a service for you. And it matters whether that person has expertise or not - if they can get the money to escrow on time, if they can help you select the right loan based on your needs, if they can reduce your stress during the entire process. Those things have value too.
Fannie Mae, Freddie Mac Takeover
September 15, 2008
Yesterday, the government announced that they were taking over Fannie Mae and Freddie Mac. There are lots of people in the mortgage industry that have covered this news much better than I could do alone, so I’m going to let you peruse some of these on your own. I may add to this list as the day goes on. We’ll get to the promised market stats tomorrow.
There’s lots of rather technical jargon in these links, so let’s do the quick and dirty overview so we can understand some terms and the players involved:
Let’s start here: the company that gives you a home loan just gave you their money. Now they need more money to make more loans. So they take your loan - your paper - and sell it to someone else, so the loan origination company gets their money back and can make more loans. When the loan origination company sells their loans, they are selling it in the secondary mortgage market, which is where Fannie Mae and Freddie Mac work. Fannie Mae was invented back in 1938 as part of the New Deal, to help money flow more easily, and then later was spun-off as a private corporation, and became a Government Sponsored Entity, or GSE. Freddie Mac - similar deal.
So Fannie and Freddie take these loans that they bought from the originators, and repackage them into “mortgage backed securities,” which investors can purchase on the open market. So then when people stop paying their mortgages, there’s no money going into Fannie Mae/Freddie Mac, no money to pass on to those investors.
Now, the person that helps you originate your home loan wants to be able to sell that loan to someone like Fannie Mae, so the originator can free up their money again to make more loans, but Fannie Mae has guidelines for the types of loans that they’ll buy - the loans have to conform to certain standards. So changes to Fannie Mae can impact the loan originators, which can impact you. Not to mention that interest rates are heavily influenced by this secondary mortgage market.
You with me? If not, ask.
Here we go.
Let’s start with the Daily Mortgage Report, where Dan Green explains what the takeover could mean to rates in the most clear language of these links.
Lenderama goes a little more in depth, with Robert Ashby’s take on the takeover.
AgentGenius looks at the potential upside, where Jeff Corbett explains the ‘makeover.’
Tom Vanderwell over at the Bloodhound Blog hits the high points and probable outcomes.
And in the sideways video view, Mike Mueller lays on his driveway in the middle of the night and compares the takeover to his Porsche.
Local reaction from Phaedra Wilson of Sunstreet Mortgage:
This should be positive for buyers and sellers. This should improve public perception since there is no more fear that Fannie and Freddie will fail and the government won’t bail them out. My hope and their goal, is to see interest rates decline and see housing prices stabilize sooner.
The Lender Works For You.
September 15, 2008
I met with a nice woman today, a long-term reader of the blog, looking to buy her first home. With my first time home buyers, I find that if I can help them be more comfortable with the whole money and lending aspect of a home purchase, then the rest of the transaction is so much easier because the money is what tends to make people most anxious.
I don’t know how many times I’ve said it, but I’ll say it again and again until the world sings it with me:
The lender works for you.
When you go and talk to different lenders, they are interviewing for a job. You will be paying them to help you get a loan. And while in Arizona, your lender does not have fiduciary duties towards you, they should still be dealing with you honestly and ethically.
Therefore, since you are paying for this service, since you are hiring this person to help you:
- You have every right to demand the type of service you prefer, and
- You have every right to know exactly how much you’re paying, and what you’re getting in return.
So pick carefully. I’m happy to provide recommendations.
And have a happy Labor Day!
House Didn’t Appraise? Now What?
September 15, 2008
Most often, with the contracts my Buyers and I negotiate, the homes appraise easily for the sales price. However, every once in a while, a low appraisal comes in.
In Tucson real estate, using the typical resale contract, once we find out that the home didn’t appraise, it starts a 5 day clock, within which the Buyer can walk away from the deal with their earnest money.
But that’s not what typically happens. Usually, in those 5 days, we go back and negotiate with the Seller, try to strike a new deal before the 5 days expires.
As a Seller, you can hold firm, wait for that Buyer to walk away, and hope the next offer is at least as high and that the next appraisal will come in at the sales price. Or, you can try to hold on to the deal at hand and reduce your price.
Of course, remember that a low appraisal doesn’t mean that the Buyer has to walk away. It’s their choice, certainly. But if a Buyer is putting down enough money, if the loan to value ratio is low enough, then some banks won’t care if the appraisal is slightly lower than the sales price.
Buying a Tucson Home With Little Or No Money Down
September 15, 2008
Speaking of FHA loans… There are still Buyers out there purchasing homes with basically no money down - or very little money, anyway.
You can do that with an FHA loan - a typical FHA loan is at 97% of value, or 97% LTV. This means that the Buyer has to come up with a 3% down payment, plus another 2-3% typically in closing costs.
But - it’s possible in this market to negotiate an offer where the Seller pays for the closing costs AND the down payment by using a 3rd party gift program, usually a program like AmeriDream or Nehemiah.
Using a program like AmeriDream, the Seller ‘donates’ 3% of the sales price to the AmeriDream program, who then ‘gifts’ it back to the Buyer as their down payment. The Seller can then also contribute towards the Buyer’s closing costs - typically, we’ll ask for about 3% for that too.
The AmeriDream type programs are being contested by HUD, the people who insure FHA loans, because “data clearly demonstrates that FHA loans made to borrowers relying on seller-funded downpayment assistance go to foreclosure at three times the rate of loans made to borrowers who make their own downpayments,” as the commissioner of HUD said in a speech. But for the moment, assistance programs are still available.
Couple of things to bear in mind - a few cautions:
- Homes bought with FHA loans have to be in reasonably good condition. Don’t expect to buy a fix-up home with an FHA loan.
- You might not be negotiating too much on the sales price, as you’ll be getting a 6% discount because of the Seller contributions, even if you pay full price.
- And forgive me for being a bit blunt here, but for some, not being able to save any money for down payment and closing costs is a sign that they’re not ready for the financial responsibility of owning a home.
- Especially in a soft or declining market, plan to stay in the house for several years, as you’ll need a good bit of time to build equity so that when you go to sell the house, there’s enough equity to cover the loans and costs, and still have enough left over to use as a down payment on the next home.
Changes to FHA Loans – What It Means For Tucson Homebuyers
September 15, 2008
Today, July 14th, changes go into effect regarding FHA financing.
Before today, there was a flat up-front fee when you got an FHA loan - called the mortgage insurance premium (UFMIP - UpFront Mortage Insurance Premium). It was set at 1.5% of the loan amount, and most people just added that on top of the loan amount, they financed the MIP.
Also before today, there was a monthly charge, at 0.5% annually, called mortgage insurance (or MI) that an FHA home buyer paid. So on a $200,000 loan: 0.5% of that is $1000, then divide by twelve as that’s an annual figure, and we get an $83.33 MI payment per month, added to your monthly mortgage payment.
This is not the case anymore. As of today, pricing will be risk-based. That means the bigger risk you are as a borrower, the worse your credit is, the more you’ll pay. Because people that are bigger risks tend to default on the loans more, so they get charged more to get a loan.
Now, the up-front MIP will range from 1.25% to 2.25% - remember, that’s the one time fee paid at closing that most people just roll into the loan amount. On a $200,000 loan, that means the up-front MIP would range from $2500 to $4500.
The monthly mortgage insurance will vary to, ranging between 0.5% and 0.55%. That amount will be determined by the loan to value ratio - that is, it will be determined by how big your down payment is.
My friend Shailesh is a lender up in the Phoenix area and has a good explanation of the new FHA guidelines, as well as more information on how first time buyers can get a reduction in the amount of up-front MIP they have to pay.
So what does that mean for the local Tucson home buyer? Well, if you’re getting an FHA loan, it may cost you more to buy a home, depending on your credit score. If you’ve been approved for an FHA loan in the past couple months, it may be time to head back in for another chat with the lender, to see what kind of pricing you’ll have for that FHA loan.
Who The Appraiser Works For
September 15, 2008
Two people found this blog today by searching for appraisal related terms. One person was searching for “neutral appraiser” and the other was “buyer request independent appraiser.”
I’m a little curious what that second situation might be.
But regardless, let’s talk about appraisers.
If you’re getting a home loan, and the lender orders an appraisal, then the lender is the client of the appraiser, not the borrower. Even though the borrower might be the one paying for the appraisal. It’s just a cost that the lender is passing on to you, the home buyer.
However, if you go out on your own, and hire an appraiser, outside of who the lender hires, then you’re the client of the appraisal, you pay for it, you have all rights to the appraisal report.
The whole idea behind getting an appraisal when you buy a home, at least how it usually happens, is that it mitigates risk on behalf of the lender. It has nothing to do with protecting you against over-paying for a home, although some see that as a side effect.
Any appraisers out there want to comment on whether they are neutral parties or not? I would say that appraisers have to justify, very thoroughly and carefully, their opinions of value, but I’m not sure if they have and to whom their duties lie, or if neutral is the right descriptor. Comments?
Will The Seller Carry Back A Second? – A Few Risk Assessment Scenarios
September 15, 2008
Seller carry back financing seems to be a hot idea lately - there’s a lot of folks throwing the concept around. It is a highly misunderstood and sometimes confusing topic.
A Seller carry back is basically when the seller is the lender - the seller typically has a lot of equity in their house, and a Buyer has a big enough down payment to cover the balance of the existing mortgage. The Seller can then sell their house to the Buyer, pay off the existing loan with the down payment money, and then carry back a loan from the Buyer, where the Seller gets paid according to the terms of the loan they make with the Buyer.
The seller can also potentially carry back a second loan on the property - in this case, the Buyer would get a traditional first loan from a lending institution, and the Seller would carry a smaller second loan. First you have to find a traditional lender that will allow a seller carried second this in the current lending market, which is a different story. Let’s just keep this theoretical.
In Arizona, the Seller would take a trust deed and note - a regular loan just like a bank, with all the rights of foreclosure and whatnot.
Also - please note that with carry back financing, the deed changes hands. The Seller no longer owns the property. He sells it. The Buyer gets the deed at the time of the sale.
So. Let’s look at this in broad overview.
Let’s say the Buyer purchases a house for $400,000, just to use some round numbers here. He gets a $300,000 loan from a bank, a $50,000 carry-back from the Seller, and puts down $50,000 as a down payment. The Bank has the 1st lien, the superior position. The Seller has the 2nd lien, the junior position.
Scenario One: The Buyer is happy, healthy, and wise and makes all of his loan payments as scheduled.
Excellent! The Seller is paid interest on his former equity, both Buyer and Seller are happy with the arrangement, every one lives happily ever after.
Scenario Two: The Buyer pays his first loan, but stops paying the Seller’s second loan.
All is not well. As a second lien holder, the Seller can foreclose. Here’s where people get confused. Foreclosure doesn’t mean you get to take back the property. Foreclosure ends with an auction, where you may or may not be the high bidder. Plus, the high bidder has to satisfy the first loan, or take it subject to the first loan. Who ever is in first place - doesn’t go away.
Scenario Three: The Buyer stops making payments to both you and the bank.
Now you’re in real trouble as the second lien holder, especially if the market value has dropped. The person with priority is the bank, and if they begin foreclosure proceedings, you can either cure the first guy’s default and foreclose yourself, or you roll along with their foreclosure, hope there’s enough proceeds at the auction for you to get something out of it. Because if the high bid at the auction only covers the first loan, you walk away with nada.
Seller carry backs are usually highly misunderstood, and if you find yourself considering carry back financing, either as seller or buyer, it’s a good idea to get some professional legal and tax advice. Please also note that there are a multitude of options and ‘other things’ that can happen with these scenarios that are not discussed here. If you find yourself in one of these positions, you need to go get your own legal and tax advice.
Timing the Appraisal
September 15, 2008
I’ve been having more discussions than usual with my clients about when to order the appraisal.
Usually, once the lender orders the appraisal, you need to pay for it, somewhere around $350-$400. That’s only fair, if the person does the work, they get paid for it, whether or not you buy the house.
A couple years ago, we wouldn’t order an appraisal until we were through inspections and repair negotiations - no sense in incurring the appraisal charge until we know if the house is in good shape and we know you’re going to buy it.
In today’s real estate market, however, sometimes appraisals are coming back marked as a declining market, which means you may have to pony up additional down payment. This is something we might want to know sooner rather than later.
More often than not, my clients are deciding to have the appraisal done during their inspection period. Yes, the incur that cost without having gone through repair negotiations, but at least they know sooner if the appraisal will come in fine or if it will cause problems.
Just like the cost of inspections, it’s what you pay as a home buyer, basically as risk mitigation. Better to pay a bit up front and find out for sure if the property is sound and that you can get appropriate financing, then not pay those things and end up with a lemon.
Infuriating A Lender
September 15, 2008
I believe I really infuriated a lender yesterday. It wasn’t my fault, really. If my clients bring me a Good Faith Estimate where the lender charges are twice what is typical with an unimpressive interest rate, you’ve got to expect me to challenge that. And when I send my clients go back to the first lender with a reasonable Good Faith Estimate from one of my lenders, and the first lender refuses to match it and insinuates my lender is going to add hidden fees at the closing table, starts using scare tactics, causing my clients leave the first lender to go to the second one… well, they didn’t like that much.
Too bad. My duties are first to my client, not to their lender. Don’t be charging my buyers crazy extra fees.
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