Underwriting guidelines change all the time, and one of the things that Landmark Advisors spend their time on is monitoring those changes. But interestingly, one thing that is somewhat constant is the amount of down payment due at the closing table. Many borrowers find, however, that coming up with the cash for the down payment has perhaps been the biggest obstacle to homeownership.
Seventy-five years ago, banks would only loan money to buy a house if the homebuyer had 30 percent or more of the sales price for the down payment. Even in 1935 when the average price of a home in the United States was $3,400, coming up with $1,000 for a down payment was a challenge. After all, the average income of a worker was just $1,500 per year. But in the 1930s the government decided to step in and help Americans buy their homes, and the Federal Housing Administration (FHA) was created to offer prospective homeowners the opportunity to buy a home with a small down payment and a stable 30 year fixed rate loan.
Today, our government, through the FHA, insures lenders, such as Landmark, who offer FHA loans. These loans have many benefits but probably the most noteworthy is that FHA insured loans allow a homebuyer to buy a home with as little as 3.5 percent down and to borrow as much as $729,750 (in a high-priced housing market) at a competitive 30-year fixed rate. FHA loans are typically more lenient on credit and allow a borrower to spend more of their monthly income on their house payment than conventional loans. They also allow a borrower to receive all of the down payment as a gift.
But FHA-insured loans also have their downsides. For example, FHA loans require mortgage insurance on every loan, despite the size of the down payment, and that mortgage insurance effectively adds up to 1.35 percent to the note rate. In other words, if the 30-year fixed rate today were 3.25 percent, the effective rate for an FHA loan would be over 4.5 percent.
Alternatively, the conventional financing offered by Freddie Mac and Fannie Mae requires the borrower to pay for mortgage insurance only if there is less than 20 percent for the down payment. Mortgage insurance may be paid either on a monthly basis or as a lump sum at the close of escrow. The precise payment options are dependent on the loan to value ratio, the loan amount and the credit score. Unlike with the current FHA loans, mortgage insurance on conventional loans does not continue throughout the life of the loan. Check with your Landmark Advisor on the best combination of down payment, mortgage insurance, and rate!
Once in a while, or every day, Landmark Advisors are asked about rate lock period. This is dependent on a variety of reasons such as documentation requirements, appraisals, constant guideline changes, type of financing, and a lender's current volume.
It is important for our clients to know why lock periods are as long as they are. We rely on the borrower to return the required documents within a few days of the request. Sometimes they are good about this, sometimes not – but it is important.
By federal regulations, a lender cannot request documentation or payment for the appraisal until the borrower gives us their intent to continue with the loan application. The regulations allow the borrower up to 10 days from application to make up their mind on which lender they intend to use, if they happen to be shopping. All of this usually means the appraisal cannot be ordered on the same day the contract is received. Once the appraisal is ordered, receiving the completed report can easily take five to seven business days, sometimes longer, depending on the complexity of the report. Once the file goes to underwriting for review, there may or may not be additional documentation required from the borrower, a required change/correction to the appraisal, or sometimes an issue comes up where we have to change loan programs in order to keep the client qualified.
Once the loan is fully approved, the file moves on to the closing department. This preparation takes a few days, then another day or so for the title agent to get the HUD-1 prepared and approved by the lender. Then, if the property is a short sale or foreclosure, the seller generally needs two to three days to get the settlement statement approved by the selling authority. So, all of these closing details require a fully approved loan at least a week before the scheduled closing date. Ask your Advisor for the latest time frames!
The industry is always looking for ways to streamline and finesse the mortgage loan process, and ideally, lenders should start with the very first step—pre-approval. Landmark Mortgage Advisors are very involved with many of their borrowers before the loan process even starts.
For borrowers, it really does pay to work with a lender who asks the right questions and procures all the appropriate documents, as they're less likely to make a misstep and stall the process.
A common lender mistake is simply not doing enough research. Even if a buyer has a pre-approval letter from an esteemed mortgage lender, the loan application will be declined if the lender hasn't looked into tax returns and credit reports sufficiently to find out that the borrower has, for example, already financed the maximum number of properties as dictated by Fannie and Freddie. At Landmark, we know this, and do our utmost to prevent it from happening.
Self-employed borrowers also pose problems when it comes to income, as institutions won't issue a loan based only on assets. If a borrower isn't able to demonstrate any income—he or she is starting a new business, for example—the application will be declined, even if the borrower has several million in the bank and a pre-approval letter from a well-regarded lender.
Oversights like these leave everyone with a bad taste in their mouth—the seller loses time in selling the property, and the buyer loses time in searching for a property and has to cover the cost of the appraisal, at the minimum. Time and energy is wasted by all, and the mistakes are entirely preventable if lenders are diligent throughout the pre-approval process. Talk to your Advisor about more tips on making sure your loan sales through!
Landmark Mortgage Group is a division of Opes Advisors and licensed by the CA Dept. of Real Estate, Real Estate Broker license 01458652 and NMLS 235584. Equal Opportunity Lender.