Tuesday, February 17, 2015

What's Involved in Getting a Mortgage

Many of my readers have asked me about the mortgage process and what they can expect.  As part of my banking career, I spent 6 years in Chase's Mortgage Division, among other roles I worked as a loan officer and underwriter in Chase's Wealth and Affluent Segment closing over $750MM in mortgage loans or about $1B in real estate transactions.  Oddly, I am not licensed as a mortgage broker because when you work for a big company, you don't need a license.  As opposed to most brokers, I was not in sales but did the actual financial statement analysis, bureau, appraisal, etc review to determine if an applicant could qualify.  I think it makes me a good resource as a counterpoint to your mortgage provider.  I can cut through the jargon and give you answers from someone who is indifferent on which product you take or whether or not you pay discount or origination points (one you can write off as interest which they can't take into income immediately.  The other is a basically a fee ie not interest that they get to book immediately.  Ask me if you want to know more.)

I was able to get a Good Faith Estimate and HUD1 from a very good broker here in town - Marc Kleinman of Bank of America.  I have his contact info and bio below.  This is an actual Good Faith Estimate (GFE) and HUD1 from a transaction here in Hoboken (with all personal data removed of course).  It shows the actual fees on what you can expect for a $620K mortgage transaction ($775K purchase price).

The GFE gives you the estimate of charges that you can expect while the HUD1 is the actual settlement document that has the exact charges.  The HUD1 is one of your closing documents.

At a high level the mortgage process is as follows:

1.  Pre-Approval - Get pre-approved so that you know what can afford in terms of both a purchase price and monthly mortgage payment.  This will be helpful when bidding as if there is more than one bid, the seller will want to know that you actually have the means to purchase the property.  Getting a mortgage is a typical contingency of the sale and the owner doesn't want to accept an offer from someone who ultimately can't go through with the deal.

Pre-qualifying is different from pre-approval in that pre-qualifying is when you give a loan officer or input information online to a calculator where it accepts your word from your income, debt, assets, etc. as is.

A pre-approval means that they have at least pull your credit bureau so they will know exactly what your debt burden is and your credit score.  Some institutions will also ask for a pay stub and a W-2 to verify your income before giving a pre-approval letter so that both your debt and income are documented.

With these two pieces, the bank can calculate your "Debt to Income" (D/I) ratio.  It's a measure of how much debt you can handle.  Your FICO (Fair Isaacs Company - company that invented the algorithm) score from your bureau tells the bank who well you have paid on existing debts as an indicator of how well you will pay on the new mortgage.  We all know the higher the score the lower the rate.  Since the mortgage meltdown, generally, scores over 700 are considered "A" credit.  Qualifying Debt to Income ratios have also come down as a result of the crisis.  It used to be 33% Housing debt to income and 38% overall debt to income ratio were the standard.  These ratios are often referred to as front end and back end D/I ratios.  The credit bureau fee was $35.

This step is where you, the borrower, are approved.  Sometimes there is an app fee and sometimes not.  In this loan they paid $715 "Origination Fee" which is a basically an app fee based on the size of the loan, ie a percentage of the loan.  Again, if it was a discount point, it would be on the HUD1 as pre-paid interest and would be tax deductible (consult your tax advisor). 

2.  The next step is finding the home - making an offer and Attorney Review.  When you put in a bid on a home the realtor will help you complete a purchase sale agreement.  All Realtors have access to a state approved form that we can complete.  This document contains your offer amount and any contingencies such as the ability to get a mortgage and getting a satisfactory inspection.  Once the bid is accepted by the seller by signing and returning the purchase sale agreement, the contract goes into Attorney Review.

Information provided by Donna Antonucci
Weichert Realtors
Hudson Real Estate Monitor.com, Hoboken Real Estate Donna Antonucci
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I have attorneys here in town that I can recommend and they charge anywhere from $800 to $1800 depending on the size of the transactions, whether it's a condo, short sale or house.  The HUD1 below is for a refinance so it does not have lawyers fees.

It's in this phase that the attorney can ask for any special conditions that are particular for the specific transaction.  In addition to demanding a copy of the prospectus (on a condo), condo financials, mortgage and inspection contingency which are fairly common, a property specific condition might be getting leases for tenants and a legal rent calculation from City Hall on a multi-family house.  These additions to the purchase sale agreement go in what we call a Rider.

There are some instances like on new construction where the developer wants to use his contract.  These can require more work.  On some of the newer buildings in Hoboken, the garage may not be deeded but licensed with a monthly maintenance fee.  Some of these contracts won't allow for a final walk-through with anyone but the purchasers.  The lawyers need to propose what will make you comfortable yet what is agreeable to the sellers. 

After you come out of attorney review you have a binding contract with only the specific caveats that can kill the deal.

3.  Now it's time to "approve the property" - Inspection and Appraisal.  

The inspection is done by a licensed building inspector to ensure that the property is structural sound.  In existing home sales, there are usually some minor things - outdated outlets, maybe some window problems, etc.  Those should be expected on the purchase of an existing home and are assumed when making a bid.  The kinds of things that kill a deal from the inspection would be:  a roof left in disrepair for so long it allowed water damage well below, termites, oil tank remediation issues.  Inspections range from $200 - $700 depending on whether it's a condo or a house.

The appraisal is done to make sure that the Loan to Value (LTV) is there where giving you a loan leaves enough equity in the house so that in the event you default, the bank can foreclose, in theory, without losing money.  Conventional mortgages require 20% down.  When the market was still slipping, some banks required more.  Did you know that on average a bank still loses money on a foreclosure if the property only has 20% equity?  Historically, it's more like 25% where the bank recoups all of the court costs, maintenance and operational costs of foreclosing on a property.  In addition to an appraisal the bank will typically want an inspection to make sure the home is structurally sound.   The appraisal was $510.  This was a refinance so it doesn't have an inspection fee.

4. Flood certification and insurance - The bank will pay a service to determine if the property is in a flood zone.  If so, you will have to purchase flood insurance.  By the way, it's a great deal backed by the US Government.  It's relatively cheap for something that has a reasonable chance of occurring.  It may not appear cheap but it is.  Remember Katrina.  If you are in a flood zone, happily pay the insurance. The flood certification was $26.

5.  Title Search and Insurance - The bank will also want title insurance.  This insurance protects you and the bank from any claims made on the property that would supersede the bank's lien and your ownership.  This may seem far fetched but in Hoboken and the east it can be very important.  A) Hoboken was a marsh and there are old streams on the original Hoboken landscape within 100 years.  There is something called Riparian rights which states that no person can own a waterway.  You need to make sure, especially in new construction, that your building is not built over one of these.  Taxes are always in first lien position, then mechanics liens.  B) A mechanics lien is when a contractor legally performed work on property and wasn't paid.  They go to court and put a lien on the property.  This type of lien goes before any mortgage.  You and the bank want to make sure the property is clear.  A property can also have income tax liens and personal judgements.  All of these would come up on a title search.  The search fee is for the search for liens and the Title Insurance is to indemnify you if the title insurance company misses something.  As a loan officer, I witnessed a title insurance company go out of business because they missed a judgement on one property.  The title company was able to pay the claim but it put them out of business.  If it weren't for that insurance, the owner would have lost it all.

The search and insurance was $2,395 together.  
6.  Recording Fees - The mortgage company wants to record the change of title on a purchase and the mortgage both on purchases and refinances to mark it's place in the lien position right after the taxes.  They have a loan with you on that property which is why it's important to the bank that the change of title is recorded.  They have no claim on property that their borrower doesn't own and they want to record that they are the mortgagee as of the date of the recording.  That was $323.  

NJ is a lien state by the way.  What this means is as you pay your loan down the mortgage company's lien goes down.  Some states like Texas are mortgage states.  An owner could default on the last $10K of a $500K house and the mortgage company can foreclose and keep all the equity.  In NJ, the lender would have to give the owner all proceeds after the loan and expenses have been paid. 

7.  Tax Service - Most banks will require that you allow them to pay the property taxes.  Remember that property taxes are in first lien position.  In a foreclosure, the property taxes will be paid first so the mortgage company really wants to know the property taxes are paid on time.  In most cases, it's a condition of taking the loan that you allow the bank to pay on your behalf.  On the HUD1, you will see  a tax service fee of $84.  This fee pays to set up that service that monitors and pays your taxes. 

Other things on the HUD1.  It looks like the lender gave the borrower a $215 credit to reduce the loan origination fee to $500.  There is also something called "odd days interest".  Odd days interest is pre-paid interest from the date of the closing to the end of the month so that the loan payments can be put on a typical 1st day of the month payment schedule.  For example, if you have a closing on the 20th of a 30 day month, you will see a charge on the HUD1 for 10 days of odd days interest ((loan amount x annual interest rate)/360 x 10). 

The total fees not including prepaid interest totaled:  $3,158.

Please consult your tax advisor and your attorney on your specific tax and home purchase/refinance situation. 
Sample GFE, HUD

Information provided by Donna Antonucci
Weichert Realtors

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