By Melissa Dittmann Tracey
Mortgage expert Tracey Rumsey, author of Saving the Deal (AMACOM, 2008), responds to your questions about how you can avoid potential transaction deal killers.
What’s the most common deal killer in a transaction that you’ve seen in the mortgage business?
RUMSEY: I’m seeing a lot of problems with home inspection issues, especially with the buyer’s market environment we’re in now. Buyer’s are much more demanding when inventory is high. Sellers who don’t want to comply are seeing buyer’s walk away without a backward glance to move on to the next house. Real estate practitioners who prepare their sellers for this attitude and help them be proactive by offering them a pre-listing checklist of maintenance/repair items will come out ahead.
The ideal solution is to convince your seller to have a professional home inspector go though the home immediately so that issues can be addressed now. What a boost to the buyer’s confidence in the property when they can view a report, and then be shown the repair items and how they were remedied. My favorite icing on the cake is when a practitioner offers, as part of the listing agreement, to pay for a home warranty for the buyer. The practitioner only pays when a sale is successful and the property becomes even more attractive in a competitive market.
Can incentives that sellers are offering to buyers — such as buying down points on a mortgage or even adding other temptations — affect an appraisal later on?
RUMSEY: Yes in some cases. Some costs, such as normal closing costs and prepaid items of the buyer, can be paid by the seller without affecting the appraisal (as long as they are within underwriting guidelines for that loan program). Contributions in excess of underwriting guidelines must be considered a sales concession and deducted from the value. Another good example of a sales concession problem is selling a home fully furnished. Contract language must be very specific to avoid problems.
FHA (Federal Housing Administration) and VA (Veterans Affairs) loans are being touted because of recent increases to their loan limits. In the past, there have been some problems because the loans’ interest rate lock expired or changed negating a rate lock during a transaction. No one has mentioned the words “discount” or “rate lock” recently with these loans. Is the process still the same with these programs?
RUMSEY: FHA and VA loans now work exactly the same way as a regular conventional loan when it comes to locking in an interest rate. This is a huge plus since these programs are becoming more and more popular as other low or no-down programs are eliminated or experiencing major credit-tightening over hauls.
Can an ARM with a locked in interest rate for a certain amount of years still be a good solution for certain buyers or are ARMs too risky in this market?
RUMSEY: Adjustable Rate Mortgages (ARMs) can be a great alternative in the right market for the right borrower. If a borrower knows that he will most likely only have the mortgage for a short period of time due to large additional income in the near future (inheritance, bonuses, etc) or re-location, an ARM loan could be a money saving alternative.
It also makes sense that the risk should be balanced by the gain incurred. In other words, the interest rate should be significantly lower than a regular fixed rate loan to justify taking the risk in the first place. In some markets, the interest rate difference is so slight that there is no point. In a slow or declining-value market, ARM’s carry an additional risk because there is less certainty that the borrower will be able to sell the home and get out from under the mortgage in the time-frame necessary to avoid the impending interest rate adjustment.
The biggest problem with ARM loans are that they have been misused for a purpose they were not intended for. Loan officers used the lower interest rates to help borrowers qualify for higher priced homes. Borrowers were too focused on getting the house of their dreams and loan officers weren’t focused enough on fully explaining the consequences.
Are buyers required to take a class in homebuying before they can close escrow with VA loans? Is this something new?
RUMSEY: VA does not have any kind of home buyer education class requirement. However, if you do a VA loan through your state housing agency program the state may have a buyer education requirement. Many states have dropped this requirement, but not all. It is my understanding that buyers can take the state class as early as they like in the process, but you would want to check with your specific agency.
Have lenders gotten more careful in writing pre-approval letters because of all of the problems recently with people getting into loans they couldn’t afford? How can practitioners know for sure that their client with a pre-approval letter can really afford the property and even get a loan?
RUMSEY: I wish I could tell you that the current mortgage crisis has created a better loan officer. It hasn’t. You now have hungrier loan officers, not smarter ones. This means you have to be smarter now. Then to make things worse, even those of us who take every precaution to provide competent service to our borrower find ourselves in a mine field of loan program changes. We can write a pre-approval letter today only to discover that (for example) due to a change in minimum credit score requirements our client no longer qualifies for that program 30 days later. Ahhhhhhhh!!!!!
With the mortgage market we are in today, there is no way to avoid these unforseen problems. Hopefully the program change is announced with enough advance warning that the loan officer can advise their clients and a settlement can happen before the change becomes effective. When you receive a pre-approval letter I highly recommend reviewing it for the following information:
- Does the letter state the sales price of the home the borrowers are pre-approved to purchase?
- Does the letter state that the credit, income and assets of the borrower have been verified?
- Does the letter state that the loan has been pre-approved through an automated underwriting system?
If the letter doesn’t have this information it’s well worth your while to get the loan officer on the phone and get some answers. None of these questions will violate the financial privacy of the client, but they will offer a better understanding of the quality of the letter you have in your hands.
What can a buyer’s agent do to make sure the title won’t cause a problem in closing?
RUMSEY: Carefully review the title report ASAP and ask questions! Don’t assume anything! Your buyer could be wasting their time on a property that cannot close because the seller has a large judgment that must be cleared in order to sell. Some quick math and a few questions could help you and your client move on faster.
What can buyers do (except prequalification) to avoid losing a home because they can’t get a loan?
RUMSEY: In some cases sellers may allow a lease with an option to buy if it looks like the buyer’s qualifying problem could likely be resolved with time, i.e. credit scores too low but income is good. They would enter into a contract stating a lease period (usually at least one year), a sales price, and a monthly lease amount. It’s important to know that only amounts paid over and above market rent can be applied toward a borrower’s down payment during this lease period.
In your book you talk about the importance of talking with your clients about HOA rules. What have been some possible deal killers that have come about from HOAs that we should be aware of?
RUMSEY: The ugliest one is the special assessment. This happens when a maintenance project needs to be funded and there isn’t money available. A special assessment is levied against the members, usually by increasing the monthly HOA fee temporarily. Some assessments must be paid in full upon demand. This assessment may be “in the works” but has not been finalized. The only way you could know about this is to ask for the minutes of past meetings of the board and the association. Review them carefully. Always get copies of the governing documents (bylaws, etc.) and let your client review them.
If the association has a newsletter, ask for back copies of that as well. I also recommend talking to some or all of the board members to get a better picture of what you are getting your client into. Poorly run HOA’s are common, and you don’t want your client to associate you with a bad experience.
What options can a mortgage lender offer to a seller who owes more on their mortgage than what they can actually sell their home for now? Are more considering short sales or trying other work-out solutions?
RUMSEY: Sellers will have to contact their loan servicers to see if they will accept a short sale. This is where having a real estate practitioner experienced in short sales can be invaluable. The lender will want to see that the home is listed with an agent, and I have seen many agents do a fantastic job helping sellers out of a tight spot. With the current market conditions, short sales are becoming more and more common.