By NICK TIMIRAOS And MAURICE TAMMAN

The percentage of mortgage applications rejected by the nation’s largest lenders increased last year, spotlighting how banks’ cautious lending practices are hampering the nascent housing market recovery.

In all, the nation’s 10 largest mortgage lenders denied 26.8% of loan applications in 2010, an increase from 23.5% in 2009, according to an analysis by The Wall Street Journal of mortgage data filed with banking regulators.

Although lenders were expected to pull back from the freewheeling conditions that helped inflate the housing bubble, some economists argue they are now too conservative, and say that with the U.S. economy still wobbly, mortgages need to be easier to obtain for qualified borrowers, not harder.

“As the noose on credit availability tightens, credit is being choked off at a time when the housing market is extremely fragile,” says Laurie Goodman, senior managing director at Amherst Securities Group LP.

Christopher Thornberg, a housing economist at Beacon Economics in Los Angeles, counters that “banks are doing what they need to do” to change lending standards in the wake of a “crazy bubble. ”

He adds, “You had decades where credit standards were tougher than they are even now.”

Among the would-be borrowers having a harder time are those who have seen their incomes fall or interrupted by a period of unemployment, scenarios that have become increasingly common in recent years. Some self-employed applicants are also hitting barriers to loans—hurdles they didn’t face in the past.

Lending standards are still tight in part because government entities Fannie Mae, Freddie Mac, and the Federal Housing Administration, which collectively account for more than nine in 10 loans being made today, are under heavy pressure to avoid any losses.

Those firms don’t make loans directly but instead purchase or guarantee mortgages that meet their standards, and so have significant influence over which loans banks are willing to approve.

Lou Barnes, a third-generation mortgage banker in Boulder, Colo., says lenders have grown too cautious.

Fannie and Freddie, in particular, “are behaving like a hurricane insurance company that won’t write any policies within 200 miles of an ocean.”

Fannie Mae, for its part, says tighter loan restrictions, while painful for the housing market, are necessary to correct past excesses.

“Clearly we got too loose. This is a return to historical standards,” says Doug Duncan, Fannie’s chief economist. “When markets were stable and these standards were applied, you didn’t hear the same complaints.”

On Tuesday, Mr. Barnes told Amy Menell that his bank wouldn’t be able to approve her for a loan even though she has a credit score above 800, no debt and is willing to put down more than 50% on a $400,000 house in Boulder, Colo. Ms. Menell, a mother of three who is finalizing a divorce and receiving a cash settlement of $400,000, wants to take advantage of low interest rates and the depressed housing market to buy a home.

But Ms. Menell works as a real estate agent and had little income in 2009, when the housing market slowed.

That has left her without the two years of documented income the bank wants for her loan application, even though she says business has picked up over the last year.

“I know the housing market inside and out here, and believed that with a significant enough down payment and more assets behind you, that you could get a loan,” she says.

Mr. Barnes says that in ordinary times, Ms. Menell would have had no difficulty getting a loan. “Going back as far as there has been banking, if somebody walked in the door with a 50% down payment, good credit, cash in reserve, they’d walk out with a loan,” he says.

To be sure, the rejection rates have been higher than they are now, and reached 32.5% at the height of the housing bubble in 2007. That was driven, in part, by brokers and loan officers testing the limits to see just how loose banks were willing to go.

The mortgage data analyzed by The Wall Street Journal included loan applications filed by consumers who wanted to refinance existing mortgages as well as those planning to buy a home. Among home-purchase applications, lenders denied 19.9% of applications, up from 18.2% in the previous year, while 27.2% of refinance applications were denied, up from 24.4%.

Recent surveys by regulators show no sign of credit easing so far this year. Nearly four in 10 banks reported tighter mortgage lending conditions for the 12-months ended in February, according to a survey published this week by the government’s Office of the Comptroller of the Currency. Just 8% said that standards had loosened.

The Journal obtained the data from individual lenders in accordance with the Home Mortgage Disclosure Act, which requires lenders to report such figures. The top 10 lenders accounted for more than 70% of loan originations last year, though a substantial percentage of those loans were obtained by the lenders immediately after smaller firms had approved the loans.

The analysis showed that denials increased in every state except Delaware and in all but nine of the top 100 metropolitan areas. Denial rates were highest in Miami, Detroit, and New Orleans, and lowest in Raleigh, N.C.; Bethesda, Md.; and San Jose, Calif.

In Miami, where home prices are down by 50% from their 2006 peak, nearly 44% of loan applications were rejected last year.

The market relies heavily on buyers with cash: In April, nearly 63% of home sales were all-cash deals, according to the Miami Association of Realtors.

There are some limits to what the data can show. Loan officers say that many borrowers are being dissuaded from even applying in the first place, out of fear they won’t meet stringent guidelines.

In past economic cycles, lending standards tended to ease within the first year of an economic recovery, and the OCC survey showed that banks have eased underwriting standards for commercial loans over the 12-month period ended in February.

But in the current cycle, lenders have kept standards tight for home loans even though the economy is growing. “There’s no question that accessible credit is a problem,” says David Stevens, chief executive of the Mortgage Bankers Association, an industry group.

Mr. Stevens, who headed the Federal Housing Administration for two years until March, says a key factor in banks’ reluctance to lend more freely is the aggressive effort by Fannie and Freddie to force banks to repurchase loans if they go bad.

In a measure of more-rigid lending standards—and, banks argue, proof they are acting more responsibly—the Federal Housing Finance Agency says that just 0.3% of loans backed by Fannie and Freddie in 2009 have ever recorded three consecutive missed payments, down from 2.6% in 2000.

Refinance loans are harder for many borrowers to get because home values have fallen so sharply over the past four years, leaving many borrowers with much less equity than they thought they had.

The Journal analysis found that insufficient collateral was the most common denial code flagged by lenders when they rejected loan applications.

Other top denial reasons included inadequate debt-to-income ratios and poor credit histories.

Adam Bauer, who says his family is pressed for space in its two-bedroom home in Belmont, Calif., has found new hurdles in getting a loan, even though he obtained a mortgage for his current home without difficulty in 2004. Tax returns for the 47-year old information-technology consultant show that his income declined in 2009 due to losses on a start-up business.

Mr. Bauer and his wife have always tried to maintain a stellar credit profile because even before deciding to purchase a new home, they expected to refinance their current adjustable-rate mortgage. They each have a credit score of at least 780, have no credit-card debt, and have more than 20% equity in their home. “We’ve been preparing for this for years, and we’re really surprised we’re not having an easier go,” he says.

He says one loan officer said that based on the income shown on his tax returns, he wouldn’t qualify today for the $537,000 loan he already has on his current property, let alone the $900,000 loan he is seeking to buy a larger house.

Lenders continue to tighten their mortgage lending criteria in response to record foreclosures, but the negative publicity is scaring many qualified homebuyers away.

Every week it seems we get a call or email from a referral who doesn’t think they can get a mortgage – and they turn out to be well qualified Michigan homebuyers.

While it’s all well and good that the lending industry has brought sanity back to lending after the 2002-2006 period of “have a pulse, get a loan”, the pendulum has just about swung too far in the other direction.

What’s worse is the media’s negative hype and exaggeration about current lending standards that’s causing many potential Michigan homebuyers to think they have very little chance of qualifying for a mortgage!

Here’s some recent statements we’ve heard from referrals:

“I don’t have 20% down, but I’m hoping you have a program for 10% down.”

“My credit score is under 700, what do I need to do to get it higher to qualify for a mortgage?”

“Don’t I have to pay off all my debts to qualify for a mortgage?”

“I’ve only been on my job for 2 years…”

All of these referrals ended up qualifying for a mortgage fairly easily!

How many potential Michigan homebuyers though, think this way and don’t even speak with a lender or Realtor to get the facts?

What’s it Really Take to Qualify for Mortgage?

It’s true lending standards have tightened and it’s tougher to get a mortgage now than it was 5 years ago, but it’s still easier now than it was 20 years ago!

This is not the venue to get involved in all the fringe areas of qualifying for a mortgage, but here are the “mainstream” requirements for FHA:

Credit – have 2 out of 3 FICO scores 640+, no bankruptcy in the last 2 years, no foreclosures in the last 3.

Income – have a fairly consistent employment history for the last 2 years and be able to prove income.

Cash to Close - On FHA, everything can be gifted!  A minimum 3.5% down payment is required.  A seller’s contribution of 6% of the sales price can be applied towards closing costs, escrows & prorations.  Depending on property taxes, the 3.5% down + seller’s contribution usually covers all required funds for properties above $100,000.

Do these requiements really seem that tough to meet?

Of course, we still get lots of inquiries about zero-down programs (which there are only 2 options – VA & RDA) and the occasional inquiry from those with FICO scores under 600.  We can’t help in most of these situations, but we do try to point these contacts in the right direction.

Getting the Correct Message to Potential Michigan Homebuyers

If you’re a homeowner, a real estate professional or you just care about our economy, we need to get the correct message to those thinking about buying a home. 

For better or worse, home ownership is one of the foundations of the U.S. economy.  So, we’ve got to fix the housing market to see a rebound in the economy.

Make an effort to get the word out – forward this blog post to family & friends, write something similar if you have a blog, post it on Facebook, Tweet it, do something to make a difference!

Michigan, Mortgage, Expert, Birmingham, Bloomfield, Detroit, Rochester, Royal Oak, Troy

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You’ve applied for your mortgage to buy a home or to refinance, signed the application and turned in all the requested documentation.  Now, you wait and wait wondering what’s going on.

When will you be approved so you can schedule the movers?  Are you going to get approved & closed before that low interest rate goes away?  What did the home appraise for?

Tired of waiting, you call, get voicemail so you leave a message.  Then you’re back to waiting, waiting, waiting.

Real estate agents go through this same thing, waiting to hear from lenders about the status of the deal they put together.  Will it get approved and close so they can collect their commission check and pay their bills?

Over and over again , the number one complaint in the process of getting a mortgage is lack of communication.

Borrowers buying a home or refinancing AND real estate agents are always complaining that they have to contact the mortgage lender and then wait for a call back – if it ever comes.

As a professional, the one thing I stress to my Team is that one of the few things we really have control over is communication.  We can’t control appraised values, interest rate movements, requireed repairs or the numerous other issues that pop up during the loan approval process.  We can pick up the phone or send an email at any time to alleviate apprehension and frustration.

There are two ways to communicate - proactively and reactively.

I’d estimate that around 80% of communication in a real estate and/or mortgage transaction is reactionary.  Someone calls or sends an email (even text messages these days) and it’s responded to.

Not a very effective way to exceed expectations!

It’s so much better to proactively communicate.  It’s difficult to do though without a system and discipline.  Try to do it otherwise and you’ll soon end up in reaction mode again.

It’s funny that I’ve never been asked by a client how often our Team will communicate with them throughout the application process.  Everyone wants that low rate in the beginning, only worrying about being kept in the loop once they’re well into the approval process.

Even if you do ask about the level of communication to expect, how likely do you think it is that you’ll get an honest answer?  Ask about a communication plan and watch the curious looks you’ll get – it’ll be as if you’re speaking a foreign language.

That’s because most mortgage lenders don’t have a formal communication process!

If this is a concern to you, maybe we should talk.  We do have a formal system of communication.

It all starts with our Weekly Status Reports.   We email these out religiously every week.  We also send them out whenever we get a conditional or full approval.

What’s more, they’re designed to keep everyone involved in the transaction on the same page.  If there are real estate agents involved in a purchase, they get added to the email distribution list.  Get us the email address of the seller or title company and we’ll add them to the distribution list.

Now you may think we’re making all this up just to try to get your business.  I encourage you to look below at our Weekly Status Report Template that we use.

Then I challenge you to find a competitor that has something similar.

With the world’s largest bond fund PIMCO stating there’s a 25% chance of deflation, the Federal Reserve announces new measures to spur the U.S. economy.

The Federal Reserve met yesterday and the markets held their collective breath to see what actions the Fed would take.

Citing continued concerns about the economy, the Fed left rates where they were as expected.

All the signs and statements point to the Fed being more & more concerned about deflation and the resulting contraction of the economy.  The Federal Reserve Press Release published after the meeting pointed out:

Bank lending has continued to contract.

and:

To help support the economic recovery in a context of price stability, the Committee will keep constant the Federal Reserve’s holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities.¹ The Committee will continue to roll over the Federal Reserve’s holdings of Treasury securities as they mature.

That last part is very good news for the housing industry.

The Fed reinvesting into more bonds means they’ll still be effectively subsidizing interest rates.

Don’t celebrate too soon though.  The Fed also remarked:

Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit.

These factors are all working against many potential buyers taking the plunge into home ownership along with the contracted lending policies of the banking system.

Deflation will also work against the housing market.  You’ve probably already witnessed a deflationary mindset and didn’t recognize it.  Many potential home buyers have waited to buy a home believing that prices will continue to fall.  Think about a significant portion of consumers taking that attitude with cars, electronics, etc.  The whole economy goes into a tailspin that’s not easy to get out of.

When can we expect to see a sustained recovery in the housing market?

Look to the employment numbers.

I don’t mean the unemployment numbers!  Those are now skewed by the numbers of people that have given up on looking for a job.

When people start going back to work and getting raises, they’ll start buying houses.

In the mean time, those that can afford to buy will realize the best deals.

Michigan, Mortgage, Expert, Birmingham, Bloomfield, Detroit, Rochester, Royal Oak, Troy

September 7th, 2010 HUD is changing the MIP fees it charges borrowers for FHA mortgages.

The changes are expected o generate an additional $300 million per MONTH for HUD’s FHA insurance program.

That’s an extra $3.6 billion per year.

Here are the changes:

First, HUD is lowering the upfront MIP from its current 2.25% to 1.0%.  This is the amount that can be financed on top of the loan amount.

Simultaneously, HUD is raising the monthly MIP amount:

• For loans with less than 5% down – from 0.55% to 0.85%.
• For loans with more than 5% down – from 0.50% to 0.90%

Now technically these changes only affect loans of more than 15 years, but in reality most FHA mortgages are 30 year loans.

How Do These Changes Affect Borrowers?

Let’s compare some different purchase price amounts to see what HUD done to homebuyers:

Note: all the examples below assume a 4.5% mortgage rate on a 30 fixed loan with the minimum 3.5% down.

Notice that at every purchase price amount the monthly cost has gone up!

This means that for any given monthly payment a buyer will now qualify for less of a purchase price due to the higher corresponding payment.

Just be glad HUD didn’t implement a FICO credit score pricing matrix as they have discussed numerous times.  Just be forewarned – if FHA foreclosures don’t improve soon, that may still be implemented.

Are there any borrower benefits at all in this change?

There is if you can pay off your FHA loan quicker.  Notice in the above chart that the actual financed amount & payment are lower under the new program.  This is because of the lower upfront MIP amount.

For example, for a $75,000 purchase price the old plan had a principal & interest payment of $374.97 versus $370.38 under the new plan.  That’s a savings of $4.59/month.

The easiest way to pay off an FHA mortgage would be to refinance to a FNMA or FHLMC conforming mortgage.  But you’d need at least 10% equity to do so and FNMA/FHLMC have price adjustments for FICO credit scores, so you’d have to be careful and consult with a true expert mortgage professional about this.

More Information

If you’d like more information on this change you can click on the links below:

FHA letter from David H. Stevens

HUD Press Release

Michigan, Mortgage, Expert, Birmingham, Bloomfield, Detroit, Rochester, Royal Oak, Troy

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Contact him for The Lending Edge
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Both the House & Senate approved a bill to allow homebuyers with purchase contracts dated by April 30, 2010 to close on their transactions until September 30, 2010.  The bill is now on its way to President Obama to be signed into law.

Why the extra time?

According to the National Association of Realtors, approximately 180,000 homebuyers would lose out on the credit as they can’t close by the current June 30th deadline.

NAR blames backed up lenders, delays in Flood Insurance and the Rural Development programs and new construction issues as the primary reasons homebuyers can’t close.

Here’s NAR’s 180,000 list broken down by state:

Alabama, 2,590; Alaska, 830; Arizona, 5,440; Arkansas, 2,090; California, 17,700; Colorado, 3,390; Connecticut, 1,770; Delaware, 400; District of Columbia, 300; Florida, 14,830; Georgia, 6,270; Hawaii, 710; Idaho, 1,270; Illinois, 7,030; Indiana, 3,560; Iowa, 2, 030; Kansas, 1,840; Kentucky, 2,540; Louisiana,1,800; Maine, 840; Maryland, 2,630; Massachusetts, 3,930; Michigan, 6,470; Minnesota, 3,760; Mississippi, 1,530; Missouri, 3,600; Montana, 760; Nebraska, 1,110; Nevada, 3,800; New Hampshire, 690; New Jersey, 4,300; New Mexico, 1,160; New York, 9,190; North Carolina, 4,890; North Dakota, 460; Ohio, 8,510; Oklahoma, 2,760; Oregon, 2,090; Pennsylvania, 5,830; Rhode Island, 500; South Carolina, 2,460; South Dakota, 500; Tennessee, 3,910; Texas, 15,340; Utah, 1,130; Vermont, 400; Virginia, 3,890; Washington, 3,190; West Virginia, 940; Wisconsin, 2,690; and Wyoming, 390.

What about all the buyers that have contracts on short sales? 

Short sale can easily take 4 months or longer to close.  So, if a homebuyer entered into a purchase contract in April, there’s a very low chance they would be able to close by the current June 30th deadline. 

A good portion of short sales will be lucky to be able to close by the soon-to-be extended deadline of September 30th.

Now if only Congress could get its act together on the Flood Insurance issue…

MORTGAGE, EXPERT, MICHIGAN, BIRMINGHAM, BLOOMFIELD, DETROIT, ROCHESTER, ROYAL OAK, TROY

They’ve touched on record lows.  Take a look at this graph of Mortgage Backed Security prices – where higher prices mean lower rates:

The chart above shows the market over the last 2 years.  Michigan Mortgage Rates for borrowers have pretty much hit record lows again, subject to daily fluctuations.

So where are all the homebuyers?

Mortgage applications have dropped for three straight weeks and housing sales have turned down a bit.

Michigan Homebuyers may have been spoiled by the Homebuyer Tax Credit, but might want to get past it.

Figure out a monthly payment you can comfortably afford, as now is not the time to stretch your budget. 

Then go out a find a house!  With record low mortgage rates and the drop in housing prices, you may never find a time homes are more affordable than today!

So, what’s your excuse now?

The issue – the agent had told them that because mortgage interest is tax deductible, their $1,000 rent payment compared to a $1500 house payment.

MORTGAGE, EXPERT, MICHIGAN, BIRMINGHAM, BLOOMFIELD, DETROIT, ROCHESTER, ROYAL OAK, TROY

I can only assume the agent was implying that they were in a 33% tax bracket to make that claim.  The buyers were never asked that information.

The bigger issue though was that the agent clearly had no understanding about how the mortgage interest tax deduction works.  They were just abusing a sales technique they’d picked up somewhere and never really learned about.

What did I have to clear up?  Well let’s take a look.

Assume the $1500 PITI breaks down like this:

P&I                             - $1,125
Property Tax         - $300
Home Insurance  – $75

This about works out for a 5% interest rate on a $210,000 loan.  Let’s ignore down payment & PMI for this example though.

Now intially this sounds like a fantastic deal.  Can’t you just hear the buyers, “wow honey, instead of paying $1,000 for this apartment, we can buy a $210,000 house for the same payment using the mortgage interest tax deduction!”

Well unfortunately, that’s not even close to the real story.

Here’s how the numbers actually work out.

The first year’s interest on the mortgage above would be approximately $10,430.  The annual property taxes would be $3600.

So the total ELIGIBLE for deducting on Schedule A of the 1040 would be $14,030. 

Now the agent in question would probably say that since the buyers were in a 33% tax bracket, they could write off, and thereby save, $14,030 x 33% = $4630.

Not true!

Look at the image of Page 2 of the 1040 tax return below:

Notice that the “Married Filing Jointly” Standard deduction in the left column of the page is $11,400.

Line 40 of the 1040 states, “ (from Schedule A) or your standard deduction Itemized deductions”.  So you would enter the higher number on line 40.

What this means is that the buyers get an $11,400 tax deduction whether they own a home or not!  

The only time you’d put your Schedule A total on line 40 would be if it exceeded $11,400.

So the couple’s actual benefit from owning the home in this example would only be:

                 $14,030 – $11,400 = $2,630 x 33% = $867

A drastic difference from what their agent had ignorantly misled them with.

I’ve seen mortgage people make a version of this mistake also by telling clients, “that 5% interest rate is really 3.35% after taking into account your 33% tax bracket.” (that’s 5% x (1-0.33))

Keep in mind that our example was based on a $210,000 mortgage.  I’ve heard agents using this same technique on deals under $100,000 – where the buyer wouldn’t realize any additional tax savings whatsoever.

The true professionals in our industry really need to know the facts about tax deductions to avoid making any misleading statements. 

The best way to handle this tax issue is for buyers to take the tax deduction savings issue up with their CPA.  If you don’t have a CPA, contact me for a referral!

There were several comments and questions on what affects buyers when they’re pursuing the purchase of a short sale.  As it’s a very important topic also, I did some research and have written this post.

MORTGAGE, EXPERT, MICHIGAN, BIRMINGHAM, BLOOMFIELD, DETROIT, ROCHESTER, ROYAL OAK, TROY 
Just about every buyer currently in the market for a home, seems to want to “steal a deal”.  With all the foreclosures and distressed sellers, it sometimes seems like buyers are in a frenzy to get a deal – just like sharks when there’s blood in the water.

While at first glance a short sale may seem like an easy way to buy a home at a great price, there are several issues that can turn a buyer’s dream into a nightmare.

Let’s take a look at some of the challenges short sale buyers should be aware of and what buyers can do to protect themselves:

•1.                  Short Sale transactions usually take 3-4 months to close – or longer.

It is not uncommon for a short sale transaction to fall apart because a buyer gets tired of waiting for a closing date.  The seller’s lender(s) don’t care about purchase contract dates and when a buyer wants to move.  They have little to no incentive to move faster than they want to.  It’s important to understand that not only is a seller negotiating with their lender(s) to accept less than what is owed, a seller may also be negotiating to avoid a deficiency amount or a 1099-C.  If the seller doesn’t get what they want, they may choose to go the foreclosure route instead of short sale.

SOLUTION:  Buyers should make sure they have a time-based out clause in their purchase contract so they can terminate the deal, with no penalties, if it drags on too long.
 

•2.                  Making an offer through the real estate agent representing the seller.

Many buyers see a property they like and contact the agent that has their name on the “for sale” sign.  Many buyers don’t realize that agent represents the interests of the seller, not the buyer.  Several states allow agents to represent both a seller and a buyer, called “dual agency”, but there’s little oversight of agents working in this capacity.  I’m also unsure of how an agent that has a commission at stake (paid by the seller), can effectively represent both sides of a transaction without leaning one way over the other.  It’d be like an attorney representing both the defendant and the plaintiff in a court case.  Would you trust an attorney to do that for you?

SOLUTION:  A buyer should either hire their own real estate agent and make sure they sign a buyer’s agency disclosure or hire an attorney to review a purchase contract BEFORE they sign it.  A buyer could seek maximum protection and do both.
 

•3.                  Determining what to offer on a property listed for short sale.

Did you know that many short sales are still listed at too high of a price?  By default, many lenders require a seller to initially list their property at close to what is owed on it.  It doesn’t matter that the actual market value of the property may be substantially less.  The lender wants to make sure they recoup as much of their loan as possible.  Inexperienced and unprofessional real estate agents list properties at these high prices just to get business.  Eventually they know they’ll be able to reduce the price and get a sale. 

SOLUTION:  Buyers should work with a very savvy agent that knows the market and researches a property’s value before writing an offer to avoid overpaying.  The agent should also be able to go over their methodology and comparables for determining what to offer.  NOTE: if a buyer’s using a mortgage to acquire a property, the appraisal process will usually (but not always) protect the buyer from overpaying.  The problem – it may take months for the buyer to find that out.
 

•4.                  A Seller’s Disclosure Statement may be worthless on a short sale transaction.

Many states require a seller to attest in writing about the condition of their property.  This is meant to prevent sellers from lying about pre-existing conditions like mold, water leaks, plumbing problems, etc.  If a seller lies, they can be sued in court by the buyer to recover damages.  The problem on a short sale is that the seller is often desperate to sell and may not be entirely truthful.  A buyer could try to sue if they find an issue after closing, but most sellers of short sales have no assets to go after.

SOLUTION:  Be sure to get an inspection, contact the city about work done at the property, if possible, speak with the neighbors to see if they’re aware of any issues with the property. A home warranty may also be advisable, just make sure to go over exactly what it will & won’t cover.
 

•5.                  The condition of a short sale property is often questionable.

People sell properties on short sales because they either can’t afford them or the property is upside down.  In either case, a seller may often stop maintaining the property and let it deteriorate. 

SOLUTION:  Hire the best home inspector possible and don’t scrimp on inspection costs.  Be prepared for unpleasant surprises.
 

•6.                  The seller’s lender(s) may not allow them to pay normal transaction costs.

A seller usually pays for a title policy to guarantee to the buyer they’ll get the property free of any liens or encumbrances.  There may also be attorney fees, transfer taxes and more.  In an effort to recoup as much of their loan as possible, a lender may ask a buyer to sign an addendum requiring the buyer to pay these costs.

SOLUTION:  Make sure to read everything and ask your agent a lot of questions before signing a purchase contact or any addendums from a lender.  Consider hiring an attorney to review documents before signing them.
 

•7.                  Spending money on inspections, mortgage application fees & appraisals.

Once a purchase contract is signed, a buyer usually only has so many days to get the property inspected and start the mortgage application process.  A buyer could easily spend over $1,000 and then months later have the seller’s lender not approve the short sale amount.

SOLUTION:  Ultimately, there isn’t a good solution for this challenge.  Inspection fees have to be paid to protect a buyer from purchasing a “lemon”.  A buyer will have to apply for a mortgage to start that process.  The only item a buyer may be able to avoid throwing money away on is the appraisal.  A clause can be added to the purchase contract stating something like, “buyer will have 30 days to close transaction from approval date of seller’s lender(s)”.  This will allow the appraisal to be ordered only once the deal is approved.
 

•8.                  Many lenders (for the sellers) reserve the right to change their terms up until closing.

It’s not uncommon for a seller’s lender to have a clause in one of their addendums giving them the right to change the terms of their agreement at anytime up until the closing date.  They could ask for more money, change the closing date or ask the seller to sign a promissory note for the balance owed.

SOLUTION: There really is nothing that can be done to contractually bind a seller’s lender to terms for the buyer.  The buyer has no say in the negotiations between the seller and their lender(s).
 

•9.                  Obtaining proper title insurance and clearing up title issues.

Sellers not paying their mortgages, probably also stopped paying other housing related items.  Besides mortgage lien issues with the seller’s lender(s), there may also be liens from associations, contractors, back taxes, etc.  There may even be real estate investors on title.  There have been many instances of title companies working solely on behalf of a short sale agent or real estate investor.  Title insurance policies may be comprised in these cases.

SOLUTION: Make sure the title company is representing the buyer fairly.  Hiring an attorney may be a good idea for the buyer.  Many states also allow “split closings” where the buyer (or their agent) may select their own title company – which will assist in making sure the seller’s title company does what they’re supposed to.
 

•10.              Condition of the property upon possession.

In a more normal transaction, it’s not uncommon for the buyer to allow a seller to occupy a property for a period of time after the sale.  Seller funds are withheld to pay the buyer rent and to insure the seller turns the property over to the buyer in satisfactory condition.  On a short sale transaction though, the seller usually receives zero proceeds.  So, there are no funds to hold back for rent and damages.  What’s more, a seller may have little incentive to move out after the closing, requiring the buyer to take them to court to evict them.  The seller may also remove items from the property in violation of the sale terms.

SOLUTION:  The only real solution is to require the sellers to be out of the property before the closing of the transaction.  The buyer should then do a final walk-thru of the property before the closing. 

Short sales can be a way to get a great deal on a property if a buyer is careful and keeps the challenges in mind.  It only takes one of the above challenges to turn a buyer’s dream into a nightmare, so hire professionals and proceed cautiously. 

Readers, please comment on additional issues you know of that weren’t covered here that you may have personal experience with.
 

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Should Borrowers care also?

A recent article I read online at a real estate blogging site called ActiveRain, brought out some interesting comments.

I was shocked after reading all the comments that most of the agents commenting seemed to endorse buyers shopping for a mortgage solely by price.

A couple of brave Loan Originators pointed out that LO’s could do the same thing to agents and recommend buyers & sellers shop solely for the agent willing to work for the lowest commission.

I don’t really see the tit-for-tat thing being constructive for either side.

Here’s the comment I posted:

I find it interesting that not one Realtor mentioned the experience and knowledge of a loan officer over price!

Hmmm, it seems the collective thoughts, of some of the best agents in the industry, are of the opinion that price is all that matters.

I can’t put into words how disappointed I am if this is truly the thought process of the brightest Realtor minds in this business.

The next time any of you want to complain about one of your deals not going smoothly or blowing up due to lender issues, just remember – the buyer shopped and got the best price, so everyone involved got what they deserved.

Not a very constructive comment either.  I apologize as I was a bit steamed that the other half of our industry’s symbiotic relationship appears to think they could easily survive without experienced or knowledgeable LO’s.

That is the key to this debate.  We’re all in this together.  Each half needs the other to get paid.

I fully believe buyers should be shopping for the best deal.  Rates & fees are only a small part of what makes up the best deal.  The best rate & fees mean nothing if the deal doesn’t close due to incompetency.

So, do unto others as you would have them do unto you.

BTW – here’s a few of the responses by real estate agents to my post.  Borrowers should note that they all endorse experience over lowest price:

	Drew, I ALWAYS recommend the loan officers I KNOW and who are  the BEST and I don’t care what they charge. Of course they are competitive, but they get the job done. Just this year, three deals have risked being blown sky high due to incompetent or inexperienced loan officers and/or processors. Don’t get me started! I am totally on your side. My job is to recommend someone who will get the job done. What good is it to save a few dollars and lose the house?
Frank & Sharon Alters, CDPE-Short Sales Jacksonville-Orange Park-Fleming Island (Watson Realty ) Delete | Report a Concern		12:30pm • #4

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