What is APR on a Mortgage?

Caller:  “Can you tell me what your APR is?”

Me:  “Sure.  Can you tell me what APR is?”

Caller:  “Uhhhh…”

So this really happened.  Many times, in fact.  This is your garden variety, otherwise-intelligent consumer trying to shop for a mortgage.  This is someone earnestly trying to figure out the best deal on a home loan.  And yet, most often, they have absolutely no idea what they are doing when it comes to the annual percentage rate, or APR, on a mortgage.  But I don’t blame them.  The point of this blog is not to make anyone look or feel stupid.  In fact, it’s the opposite.  APR was meant to help, but I have experienced that our regulators and our industry have done a poor job of explaining how it works and how one calculates it.  If we reduce it to plain language and easy examples, APR starts to makes sense and, most importantly, can be put in its rightful place in the shopping process.  Spoiler alert — APR is not the be all, end all of mortgage research.  As we’ll see, it’s just a numeric representation of costs —- costs hat can be deduced elsewhere in the loan documentation you’ll receive.  But let’s get started on APR.  It is worth understanding.

Tip #1

APR is the “price per pound” (PPP) of the money you are borrowing.  If you go into a supermarket with the lofty objective of buying sugared breakfast cereal at the lowest price possible, you might just come across boxes of different sizes (and prices).  How will you determine the best deal?  You will reduce the cereal to “price per pound,” or in this case, the price per ounce.  If a 32oz. box costs $5.99 and a 24oz. box costs $4.99, some basic math tells us that the per ounce cost for the 32oz. box is $.19,  For the 24oz. box it is $.21 per ounce.  You’d be better off buying the larger box.

Now let’s say that you’ve decided to step up your game from frosted flakes to four bedrooms.  You need a mortgage and Lender A tells you that you can get $400K 30-year fixed rate mortgage at a rate of 4.000% with a cost of $3000.  Lender B says you can get a loan of the same size for 3.875% at a cost of $7000.  How do you determine the better deal?

Tip #2

APR is a lot like triangles.  Remember in high school algebra (sorry for the flashback…) we learned that the angles of a triangle must always equal 180 degrees?  Remember how we were told that if one angle decreases, so too must another increase?  Well, this is APR.  Let’s go back to our example above:

  • Note Rate:  4.000%
  • Loan Amount:  $400,000
  • Payment:  $1910

Follow me so far?  Good.  Now let’s introduce cost.  If it costs you $3000 to get $400K, then the “net” funds that change hands will really be $397K (yes, you still get a loan of $400K…).  But since you have a fixed rate loan and a payment of $1910 that cannot change, what would your rate need to be to produce a payment of $1910 at a loan amount of $397K?  The answer is your APR, and in this case it is about 4.07%.  Now, what about our other option from Lender B?  Will APR be higher or lower?

  • Note Rate:  3.875%
  • Loan Amount:  $400,000
  • Payment:  $1881

Again, let’s do our “net” math.  You have $393K changing hands ($400K – $7000) and a fixed payment of $1881, so your APR is 4.02%.  If you are looking for the lower APR, you found it.  But if you are looking for the loan with less costs, the 4.000% Note Rate is perhaps the better fit.

Tip #3

You always make your mortgage payment based on your Note Rate (the actual rate) and not the APR.  I think this one confuses a lot of would-be borrowers.  APR is an aid in the shopping process.  It is never the basis for your monthly payment.

Tip #4

Trying to determine the APR on an ARM loan is an exercise in futility.  By definition, ARM loans will have a period of time where the interest rate is subject to a combination of the index plus a margin.  The index will change during that time.  Because of this, creating a static APR calculation with accuracy is impossible.  If you are weighing an ARM loan versus a fixed program, you will have to review a cost itemization or Loan Estimate to calculate total costs for each option.  There is no shortcut.  While on the topic of things that can skew APR, PMI is another one.  If you’re weighing two loans with PMI, or one with and one without, know that PMI can wildly increase APR to the point where it ceases to be an effective shopping tool.

Tip #5

Don’t lose sight of what you’re attempting to do with APR.  Namely, seeking to determine how much it costs to get any interest rate on any loan.  If you review all of the above and still don’t feel confident, you are not alone.  To make matters worse, there is no real uniformity in what costs and fees get included in APR.  One lender to the next, you’ll see some variation.  But here too, a rule of thumb should be that a lender should include any fee in the APR that could not otherwise be avoided if the borrower paid cash for the home.  For example, an appraisal.  You need that for a mortgage process, you do not if you pay cash.  So an appraisal fee should be included in APR, etc.

We’re here to help with any questions about Note Rates, APR and the costs and components that impact your mortgage pricing.  Smart shopping is always a good idea.  Thinking that APR accomplishes that goal alone is not.

Don’t know much about algebra, 

 

Robert J. Spinosa
Vice President of Mortgage Lending
Guaranteed Rate
NMLS: 22343
Cell/Text: 415-367-5959
rob.spinosa@rate.com

Marin Office:  324 Sir Francis Drake Blvd., San Anselmo, CA  94960
Berkeley Office:  1400 Shattuck Ave., Suite 1, Berkeley, CA  94709

*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate.  In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate’s Human Resources Department.

Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood Chicago, IL 60613 – (866) 934-7283

Qualifying for a Mortgage? Don’t Step in a Large Deposit Mess

By far, one of the most confounding experiences when one goes to obtain a mortgage is the sourcing of “large deposits” on a bank statement.  This is our industry’s gift that keeps giving.  However, there are some ways to avoid inadvertently stepping into trouble and like with most things in life, an ounce of prevention is worth a pound of cure.

What Is a Large Deposit?

Most of the time a mortgage lender will define a large deposit as a non-payroll deposit that exceeds 50% of your gross monthly income.  So, let’s say you provide a bank statement to us.  We see an ATM or teller deposit for $6175 and your gross monthly income is $10K.  You can expect we will ask to know what the deposit is and where it came from.  Different lenders and different programs may have different thresholds, and there is subjectivity to this as well.  With a borrower who makes $10K a month, it’s not unreasonable to think an underwriter might ask to know about a non-payroll deposit of $4750.  It’s happened before…

What’s the Big Deal with Large Deposits?

Remember, at the end of the day, your lender is assessing your creditworthiness and your ability to repay the loan.  If the money you plan to use as a down payment is not derived from savings with a documentable history, your lender will want to know if the money coming into your accounts is from a legitimate source.  Or, is it a loan?  If the latter, does it now require a monthly payment we must factor into the debt-to-income (DTI) ratio?  The large deposit test creates a firewall for the lender where a buyer who otherwise could not afford to buy gets “propped up” by family, friends or undisclosed creditors just prior to purchasing the home.  And it’s precisely these question marks that create the additional risk for the lender.

Reality Sets In

Let’s face it, if you’re planning to buy a home, you should be planning.  If you’re going to be moving money to your accounts from other sources that you know will invite questions, it is best to allow these funds to “season” in your account for a period of time that exceeds the lender’s documentation requirements (usually two months).  After all, I’m not going to assume all large, non-payroll deposits are illicit drug deals.  There can be a lot of honest bank activity that is almost impossible to source.  If you know that you’re going to be relying on this kind of funds to close escrow, get it into your accounts long before you plan to make a mortgage application.

What About Gifts?

Gift funds are allowed in most transactions and within guidelines, but practically every mortgage lender will ONLY recognize gift funds from a family member.  Where large deposits that are “gifts” get into difficulty is not necessarily the sourcing, but the source.  Sometimes, the family relationship is not there.  How do we know who is the donor?  Simple, we require a gift letter that will outline the relationship.

In the mortgage industry, two, clean months of bank statements with no large deposits are our equivalent of Eureka.  I’m convinced that if every potential buyer or borrower knew this in advance, we’d drastically cut down on the number of bad customer experiences.  The worst outcome for our clients is, of course, that when we source a large deposit from another bank account, that origin account also has large deposits, and so on.  You can see how this would get less and less fun…quickly.  So, understand this basic concept and call with any questions.  If we can help you plan for a smoother transaction, we’re happy to be of service.

Where’s the beef, 

Robert J. Spinosa
Vice President of Mortgage Lending
Guaranteed Rate
NMLS: 22343
Cell/Text: 415-367-5959
rob.spinosa@rate.com

Marin Office:  324 Sir Francis Drake Blvd., San Anselmo, CA  94960
Berkeley Office:  1400 Shattuck Ave., Suite 1, Berkeley, CA  94709

*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate.  In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate’s Human Resources Department.

Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood Chicago, IL 60613 – (866) 934-7283

The Haunted Loan Process

As we wind our way closer to Halloween, I wanted to cover a few of the graveyard variety hobgoblins of the mortgage process.  You know, the things our clients don’t tell us at the start and that later come back to haunt their home loan transaction like so many nightmares on Friday the 13th.  The goal here is not to scare the prospective borrower, but instead to provide fair warning about the actions you can take or avoid at the start of your application that will help you close your loan on time and without undue stress.  Let’s peek-a-boo at some of the most common loan zombies that come out when the moon is full:

  1. Amending a tax return.  It can be such an innocent mistake.  You file a tax return and later amend it for some reason.  When we ask you for your tax records, you provide us with your Forms 1040, but forget there is a 1040X out there as well.  We order an IRS transcript (Form 4506T) and our numbers on the tax return don’t match the numbers on the 4506T.  Now, you’re not in trouble with us or the IRS, but we do have to underwrite to the amended return.
  2. Beginning or not disclosing ongoing work on the property.  Open walls, torn up flooring, room additions underway, no fixtures in a bathroom, an empty swimming pool, etc.  This is not a complete list, of course, but always tell your lender if your home is in any way undergoing work (or will be) when an appraiser comes out.  In general, you will not be able to fund your loan until all work is complete and a reinspection by the appraiser confirms such.
  3. Changing or leaving jobs, or giving notice.  Expect that every lender will complete a prior-to-funding (PTF) verification of employment.  If you are no longer on the job just before close, or if you’ve signaled your intent to leave the job, we may have a major issue.  In short, the employment by which you qualify for the loan is the one that needs to be in place when you close.
  4. Co-signing on a debt for someone else.  Most often, co-signed debts will show up on the credit report, but if they are new or unreported to the credit repositories, we often have to factor them into the debt ratio (DTI) at that time.  The conventional wisdom is to never co-sign for anything.  In reality, life is more complicated than that and it happens.  Where it does, tell us up front.
  5. Disputing a credit item.  It may seem like the right thing to do and it may make you feel better about sticking it to a creditor who’s done you wrong, but disputing a credit item while in the loan process can take on a ghoulish character.  The advice here is don’t do it until we’re funded, but at the bare minimum, let us know when you’re thinking about it.
  6. Failing to disclose a property you own.  Our borrowers often believe that if they own a property free and clear, there’s no way we’d know about it (and more importantly, why would it matter?).  But remember that real property ownership means there’s county records and we can find those.  And about the fact that it’s free and clear?  Good for you but it still doesn’t address property taxes and insurance?  Those go in your DTI too.
  7. Moving unsourced money into your bank accounts.  This one has stopped more purchases of brick and mortar than Amazon.  When you go to buy a home, know that we will look back at least two months (via bank statements) to confirm that all of the money for your down payment, closing costs and reserves is accounted for and meets guidelines.  If you try to move money into your account, we will often question the deposit.  So it’s essential we identify, reveal and document how you plan to close the transaction when it comes to your money.
  8. Not making a mortgage payment when refinancing.  “But I thought we would close by then…”  Famous last words.  Remember, when you are in the loan process, you are not done until you have keys in your hand or, in the case of a refinance, your new loan is funded and recorded and the old loan has been officially released.  During that time, it’s imperative you continue to make your regular mortgage payments.  “If there is any doubt, there is no doubt,” goes the old mountaineer’s saying.  Keep your existing mortgage current at all times.
  9. Recurring payments for a loan or other obligation.  If you have undisclosed debts or payments and we see a recurring withdrawal from your bank accounts, expect that we will ask.  If the item is discretionary, it’s likely no issue, but if it is an obligation we will want to consider it in your debt ratio.  The sooner we find out about it, the better.  So let us know at the outset.
  10. Taking on new debt before closing escrow on your purchase.  Early in my career I had a young, homebuying couple sign their loan documents on a Friday afternoon.  Jubilant with their new purchase, they spent the weekend shopping for furniture and outfitting their new home, including opening a store credit card where they proceeded to take advantage of the new customer discount on their large purchases.  On Monday, when confronted with the question of whether they took on any new obligations over the weekend, they said yes.  Their rationale?  “Oh, we closed when we signed on Friday.”  The lesson here is that it’s not entirely their fault.  Our industry can do a better job of explaining the closing process and when borrowers are “all clear.”  I learned a lot from that experience and have used the lessons ever since.  On a purchase transaction, you are not closed until you are signed, funded and the deed is recorded with the county.

Look, some of the above may seem funny or obvious.  But the reason I’ve listed them is because they happen.  Over and over and over.  We’ve dealt with each and if you find yourself in a bind as a result of any of them, don’t hesitate to get in touch.  We don’t stand in judgment of how things happened and instead we focus on solutions.  Let me know if I can be of service today.

Trick or treat, 

Robert J. Spinosa
Vice President of Mortgage Lending
Guaranteed Rate
NMLS: 22343
Cell/Text: 415-367-5959
rob.spinosa@rate.com

Marin Office:  324 Sir Francis Drake Blvd., San Anselmo, CA  94960
Berkeley Office:  1400 Shattuck Ave., Suite 1, Berkeley, CA  94709

*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate.  In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate’s Human Resources Department.

Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood Chicago, IL 60613 – (866) 934-7283

When Are Marin County Property Tax Bills Due?

As I write this in October of 2019, my very own Marin County property tax bills just arrived. Well, allow me to reframe that. It is widely understood that our real estate tax bills are issued “sometime in October,” but when you actually receive them in the mail on October 1, it says all you need to know about our Assessor’s intent to get the point across. So with the same procrastination exhibited by most fellow Marin County property owners who will join me in actually paying the bill a few days before a penalty is assessed, I thought it was a ripe opportunity to share some basics on how, when and where to pay our real estate taxes and at the same time avoid the consequences of late payments.

Property Tax Bill Information and Due Dates

Secured property tax bills are mailed in October and payable in two installments:

  • First installment due date: November 1
  • Second installment due date: February 1

“Now hold on a minute!” you say. “I was told I could pay in December and April!” Well, technically, you can.  The late dates for the installments are December 10 and April 10, respectively. And what I’ve noticed after a long career in home finance is that most county residents pay just before these late dates. In fact, if you really want to people watch at the post office and you can’t make it on any given April 15, your next best viewing opportunity is very likely December 10. Late penalties are 10% of the installment amount, so it’s not just a slap on the wrist. State law extends the deadlines above to the following Monday if December 10 or April 10 fall on a weekend, but postmark determines the payment date. If you’re late and don’t include the penalty, the county will send back your original payment.

What About an Impound Account?

If you have an escrow or impound account through which your mortgage lender pays your taxes, your property tax bill will state, “a copy of this bill was sent to a paying agent at their request.” If you are unsure of whether or not your lender has paid your tax installment, you should clarify this with your servicer. They are the folks who send you your monthly mortgage statement. I always advise my clients to let me know if they need help with this — I just feel it’s a service any good mortgage professional should provide, and we handle the “straightening out” of countless, anxiety-inducing property tax questions throughout the course of any year. Note that if you pay your mortgage in full or refinance during the course of any year, you may become responsible for your tax payments even if you’ve impounded all along. Again, call us if we can assist.

How to Pay

Payments may be made via any of the methods below and partial payments are NOT accepted by the Marin County’s Assessor’s office.

  • Online:  www.marincounty.org/Taxbillonline. You will need the parcel number (APN) from your bill.
  • Phone: 1-800-985-7277 using your bill number.
  • Mail: Marin County Tax Collector, PO Box 4220, San Rafael, CA 94913-4220
  • Office: 3501 Civic Center Drive, Room 202, San Rafael, CA 94903 (Mon/Fri, 9am to 4:30pm)

Remember that if you’re in the loan process and you need to document payment of any installment (which can occasionally be a requirement), you’ll probably need to obtain a receipt by paying at the window.

What About Supplemental Tax Bills?

Great question! The County issues a supplemental assessment when a change in ownership occurs. This bill reflects the difference between the seller’s basis and your new and ongoing basis and you’ll only receive it in that first year of the purchase. Afterwards, the correct tax amount is entirely reflected on your regular bill. The Assessor’s office provides owners with new, previous and supplemental values and you can always call them directly at 415-473-7215.

Every day I work to help people buy and refinance real estate in Marin. Often it’s a challenge for them, mostly due to lack of inventory and high home prices. As the rest of us grouse and grumble about writing our checks to the county, let’s remember that it’s also a privilege to do so.

Read my lips, 

 

Robert J. Spinosa
Vice President of Mortgage Lending
Guaranteed Rate
NMLS: 22343
Cell/Text: 415-367-5959
rob.spinosa@rate.com

Marin Office: 324 Sir Francis Drake Blvd., San Anselmo, CA 94960
Berkeley Office: 1400 Shattuck Ave., Suite 1, Berkeley, CA 94709

*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate. In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate’s Human Resources Department.

Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood Chicago, IL 60613 – (866) 934-7283

What Happens When My Appraisal Comes in Low (or High!)?

You’re in the process of buying a home, and so far things have been going pretty smoothly.  Your lender has pre-approved you, your Realtor has found you the perfect home, and with a bit of luck, the seller accepted your offer and now you’re in contract.  It’s very likely that early on in your loan process — usually within the first few days of having your offer accepted — your lender ordered an appraisal.  From there, a licensed appraiser went out to the property and then turned in a completed appraisal report (which, at its core, is a professional opinion of value).  Of course, you know the dollar amount you’re paying for the home because that figure is on your contract.  But what happens if the appraisal doesn’t support that price?  What happens if the appraisal comes in low, or for that matter, high?  Let’s take a look.

My Appraisal Came in Low

I’m in California and I like to use round numbers, so let’s say you’re buying a home for a cool $1,000,000.  You are putting 20% down ($200,000), and you are getting a loan for $800,000.  We would say your loan-to-value (LTV) is 80%.  When your lender pre-approved your loan, he probably structured most of the important aspects of your financing, such as program selection, approval guidelines, interest rate, etc., on the assumption you would have an LTV of 80% or less.  Let’s say the appraiser goes out to the home, does the best job she can and after all comparable properties (“comps”) are analyzed, can only support a value for the home of $975K. How does the lender react to this information?  For conventional mortgages, the lender will use the lesser of the purchase price or appraised value to determine the LTV.  This is the key concept and we’ll come back to it in a minute and in a different scenario, but for now, let’s go to the chalkboard and do the math:

Before appraisal:

  • $1,000,000             Contract price
  • ($1,000,000)          Assumption of value
  • $800,000                Loan amount
  • 80%                        Loan-to-Value

After appraisal:

  • $1,000,000             Contract price
  • $975,000                Appraised value
  • $800,000                Loan amount
  • 82%                        Loan-to-Value

Houston, we have a problem.  If your loan approval has rested on the assumption that you have an LTV of 80% of less, we can see that this is no longer the case.  This buyer might pursue these options to remedy the matter:

  1. Use a different loan program that might accommodate the higher loan-to-value.  This might mean taking PMI (private mortgage insurance), or using a piggyback loan, for example.
  2. “Making up the difference in cash.”  To produce an 80% LTV against a value of $975K, the loan amount would be $780K.  Assuming the purchase price stays at $1MM, this buyer, who would have previously made a down payment of $200K, will now need to make a down payment of $220K.
  3. Renegotiate the contract.  Often, we’ll see the buyer go back to the seller and ask for some concession on the price.  Maybe the seller will be willing to reduce the price slightly to keep the transaction moving forward, instead of falling out of contract and starting over with a new buyer.
  4. Rebut the appraisal.  Perhaps factual error or oversight of a strong comp caused the appraised value to be lower than it might be otherwise.  Buyers can opt to have their lender pursue a reconsideration of value.  Word to the wise, many rebuttals come back with no change.  In other words, they uphold the original appraisal.  But most also chew up a lot of contractual time.  Pursuing a reconsideration can be a gamble with a low probability of success.
  5. Try a new appraisal?  Hold on a second — this is not a valid option, but I bring it up because we do get the question.  So long as you stay with the lender who performed the original appraisal, ordering a new appraisal to “value fish” is not permitted.

The last important point about a low appraisal value is that it may only matter to the buyer whose loan is near an important loan threshold or guideline.  In our example above, the reason the low appraisal triggered significant changes is because the 80% LTV threshold is important in conventional lending.  And there are others like it you may not recognize, but that your lender can explain.  However, let’s say our buyer above was putting $500K down on a purchase of $1MM (50% LTV) and the appraisal comes back at $975K.  Now the LTV is 51%.  Big deal.  No key lending thresholds are crossed and this borrower very likely sees zero change to his terms.

What Happens If My Appraisal Comes in High?

Well, this paragraph is going to be a lot shorter.  In conventional lending, and for a purchase transaction, you cannot “monetize” an appraisal value that comes in above the purchase price.  Again, we use the lesser of the purchase price or appraised value to determine LTV.  Still, it’s great news.  You are getting a deal on the home, but in terms of making a smaller down payment or otherwise leveraging the higher value, there are “no dice” here.  Yes, down the road that higher value might allow you to refinance with greater ease and/or better interest rates, but practically speaking an appraisal that comes in higher than contract price is really just a vote of confidence.

If you’re reading this post and find yourself in a bind because your appraisal just came in low, don’t hesitate to get in touch.  We have a large selection of mortgage programs that grant more flexibility with LTV, and we have a lot of experience navigating the loan process together with the intricacies of fulfilling requirements of your contract.  We’re here to help with your mortgage needs whether your appraised value comes in high, low or right on the money.

Thing of value, 

 

Robert J. Spinosa
Vice President of Mortgage Lending
Guaranteed Rate
NMLS: 22343
Cell/Text: 415-367-5959
rob.spinosa@rate.com

Marin Office:  324 Sir Francis Drake Blvd., San Anselmo, CA  94960
Berkeley Office:  1400 Shattuck Ave., Suite 1, Berkeley, CA  94709

*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate.  In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate’s Human Resources Department.

Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood Chicago, IL 60613 – (866) 934-7283

Your Debt-to-Income Ratio Is High and It Will Be Alright

You might have been lured into reading this blog post under the false assumption that I’d be discussing the controversial subject of financing cannabis-related businesses and property.  Well, you can let that notion go up in smoke.  Instead, we’re going to talk about the ways you can get a great jumbo mortgage in California if your debt-to-income ratio (also known as “DTI”) is higher than Jeff Spicoli at 4:20pm.  OK, dude, not really, but we are going to address the ways you can get a decent home loan with a very competitive rate if your DTI exceeds 43% — the maximum amount specified for a qualified mortgage, or “QM.”  Let’s get together and review a little background first.

Your debt-to-income ratio is determined by dividing your gross monthly income into your housing debt(we use the total monthly housing payment or “PITI”) to determine the “front end” or “housing” ratio, and then we use gross income divided into your total obligations for your “back end” or “total” DTI.  Remember to let us do the calculations to precision, but certainly feel free to use these examples as a guide.  Let’s say our borrower earns $10,000 gross per month and will have a housing payment of $3000.  This would produce a 30% housing ratio.  Now let’s also say that this borrower has $1000 per month in other expenses (auto payments, student loans, credit card minimum payments, etc.).  Our $4000 in total monthly debts, once combined with the housing payment, produces a total DTI of 40% ($4000 / $10,000 = .40).

Conforming, FHA and VA loans have a temporary exemption in the eyes of our regulators.  These types of mortgages can have a debt to income ratio that exceeds 43% and STILL be considered a qualified mortgage.  But once the loan amount exceeds conforming loan limits (and sometimes even where it doesn’t), we now have a “jumbo” loan and we are held to the letter of the law.  This means that the DTI ratio cannot exceed 43%.  If it does, we have a “non-QM” loan.  With the non-QM status, the lender incurs additional risk.  Where the lender incurs additional risk, the borrower typically pays in interest rate.  In short, more risk, more rate.  But not all lenders address the risk piece identically and quite frankly, many of the largest jumbo lenders won’t go above 43% at all.  We’re different in two ways:

  1. We have competitively-priced mortgage options — on the jumbo side — that allow a DTI of 49.99%.  Another of our options will permit a 47% debt-to-income.  How about interest-only loans?  We have them too, and they allow a 45% DTI (using their formula for qualifying payment, which is not the interest-only payment).  Sometimes our strategy will involve using a home equity line of credit (HELOC) to bring the debt ratio in line.  There too, 45%.  Indeed, sometimes our wide credit box allows us to solve the issue just by way of a niche loan program.
  2. We often view the income and debt calculation more favorably than Lender B, or we bring in income from other sources, such as asset utilization.  In these cases, we keep the debt ratio under 43%, but we do so in a manner that again thinks outside of the QM box, though it often prices equivalent to a QM mortgage.

So if you’re looking for a jumbo mortgage in California and the usual banking suspects are telling you that you don’t qualify because your DTI is high, then I’m telling you to get up, stand up and connect with me today.  Let’s review your scenario free of cost and obligation and get you back into approval status for the home you love and the loan you need.

I shot the sheriff, 

Robert J. Spinosa
Vice President of Mortgage Lending
Guaranteed Rate
NMLS: 22343
Cell/Text: 415-367-5959
rob.spinosa@rate.com

Marin Office: 324 Sir Francis Drake Blvd., San Anselmo, CA 94960
Berkeley Office: 1400 Shattuck Ave., Suite 1, Berkeley, CA 94709

*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate. In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate’s Human Resources Department.

Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood Chicago, IL 60613 – (866) 934-7283

Can I Get a Mortgage If I Am Retired?

I live in an aging county. So if you ever find yourself vacationing in the lovely city of San Francisco, give this little exercise a try: Simply get in your Uber. Or rent one of those death trap three-wheelers at Fisherman’s Wharf. Or bundle up take it on the heel and toe and come across the iconic Golden Gate Bridge to magical Marin County. Now, did you feel yourself getting older in the process?

Even if not, Marin County’s residents, with their 46.1-year old median age, clean air, great schools and liberal politics, will welcome you to one of the most special places in the USA. I’m willing to bet it won’t be too long before one of our residents will tell you that our median home price, at least at the end of 2019, is hovering right around $1,200,000. So what happens when a retired person wants to buy a home in a high-cost area with a jumbo loan but without the income one would typically have from employment?

Lately, I’ve seen an increasing number of mortgage scenarios exploit a qualifying feature known as asset utilization (AU). Depending on the investor, this might also be known as asset depletion, asset amortization or an asset-based mortgage. This alternative qualification method can be a real benefit to a retired borrower or to a buyer/owner who is not of retirement age but who has amassed a sizable asset portfolio (stocks, bonds, mutual funds, cash equivalents, etc.). Regardless of what it’s called I’m going to demonstrate how thinking outside of the employment-based income box can open up a world of home loan possibilities.

How Does it Work?

First and foremost, an asset utilization loan is NOT a stated income loan. We’re not going to party like it’s 1999. This is also not a reverse mortgage. With AU, we’re going to look at a borrower’s total liquid assets and we’re going to apply a formula that will create a hypothetical income stream. Assets do not need to be liquidated, distributions do not need to be taken and money does not need to be pledged or moved. But we’ll take our allowable asset total, which discounts for reserves and risk of the asset class itself, and we’ll come up with an equivalent monthly income figure. This number can, in turn, be used to replace or supplement traditional employment-based income.

Who Can Use It?

Most of our AU programs are available to all borrowers, regardless of date of birth. However, depending upon age, certain assets may or may not be allowed in the calculation. It would be a safe assumption and example that for a 45-year old borrower, we would not be able to asset deplete a retirement account. However, for that same borrower, non-retirement investments would all be eligible for the AU formula. Let’s take the case of a tech entrepreneur who is between start-up gigs. She is in her late 30’s and has $2MM in stock and investments. We can’t qualify any salary or self-employed income but we certainly can look at the assets and derive a monthly income. And if it fits her scenario, she could be eligible to buy today, even without verifiable employment. More traditionally, let’s take our 69-year old retiree. He has $3MM “in the bank,” wants to buy a home worth $1.1MM and doesn’t want to pay cash, which would erode the value of his portfolio (the same one that will produce the income on which he’ll largely depend in years to come). Without liquidating anything other than the down payment and closing costs, the borrower can use an AU program and seek to qualify for a mortgage that meets his needs.

What About the Math?

We have a handful of investors that offer AU qualifications and they all work slightly differently. Their programs will range from ARM to fixed and their formula for the generation of asset-based income will yield, for example, a monthly stream of between $3000 and $6000 per $1MM in assets. And remember, this income can be used in addition to other qualifiable income such as social security, pensions and regular employment’s wages or self-employed documented income. The key concept is that AU income can be used both ‘in place of’ and ‘in addition to.’ It’s a great feature in the hands of an expert loan advisor but not all lenders have these programs available and even of those who do, few loan originators take the time to master them.

So before I need a nap, remember that if you are retired from employment, but not necessarily from participating in the housing market, we have a mortgage program you may wish to consider. Call me today if I can be of service.

On golden pond, 

 

Robert J. Spinosa
Vice President of Mortgage Lending
Guaranteed Rate
NMLS: 22343
Cell/Text: 415-367-5959 Fax: 415-366-1590
rob.spinosa@rate.com
Marin Office: 324 Sir Francis Drake Blvd., San Anselmo, CA 94960
Berkeley Office: 1400 Shattuck Ave., Suite 1, Berkeley, CA 94709

*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate. In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate’s Human Resources Department.

Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood Chicago, IL 60613 – (866) 934-7283

Do Any Mortgage Lenders Work on the Weekend?

The fact of the matter is that a lot of real estate business gets done on Saturdays and Sundays. Prospective buyers go to open houses and buyers’ real estate agents often need to structure offers for their clients. Unfortunately, not all banks are open on the weekend even those that may take deposits and cash checks often do not have a home loan professional available to pre-approve a buyer or answer a complicated home loan question in an instant.

I’m different. Even though I’m generally not in the office on the weekend, I can always be reached and I have the full capacity to work through your scenario and give you an edge over your competition — those other bankers, brokers or lenders that may wait until Monday morning to get underway.

Let us know if we can help you today, whether that day is during the work week or the two days that follow, and that everybody’s been waiting for.

C’mon let it go! 

 

Robert J. Spinosa
Vice President of Mortgage Lending
Guaranteed Rate
NMLS: 22343
Cell/Text: 415-367-5959
rob.spinosa@rate.com

Marin Office: 324 Sir Francis Drake Blvd., San Anselmo, CA 94960
Berkeley Office: 1400 Shattuck Ave., Suite 1, Berkeley, CA 94709

*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate. In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate’s Human Resources Department.

Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood Chicago, IL 60613 – (866) 934-7283

Should I Refinance into a 15-Year Fixed Rate Mortgage?

With the Federal Reserve tongue-tied and twisted and an easy trade war time-tripping into the future, we find ourselves the beneficiaries of another very appealing low interest rate environment here in the second half of 2019. This stands to benefit many who have mortgages at higher rates and even some who may not fit that exact bill, but who are focused primarily on reducing the term of their loan and perhaps paying their entire balance off at a faster rate. We are seeing a number of homeowners who are seeking to determine if they should abandon their 30-year amortized loans and refinance into a 15-year fixed. What are the key concepts these individuals need to know before they make this leap?

  1. For the vast majority, the mortgage payment will go up.  A while back I did the research on this and came up with my “10 and 2” rule. Namely, if you are in a 30-year loan now and have been paying it down for 10 years, then you refinance into a 15-year fixed rate loan with at least a 2% rate reduction over your present loan, only then would you have a new payment that is the same or lower than your current payment. And that’s a reach. So for most, refinancing into a 15-year fixed means a higher monthly payment, safe in the knowledge that the additional amount is going to reduce your principal balance and not to additional interest.
  2. You save big long-term. The total finance charge (aka, interest) on a 15-year loan versus a 30-year loan is dramatic. For example, on a $400K loan at 4%, you will pay a total of $287,478 in interest over 30 years. On a 15-year fixed at 4%, you will pay $132,575. But there’s a silver lining for the 15. Often the rate on a 15-year fixed will be lower than for a 30, so not only do you save on interest because of the term, but you save on interest additionally because of the lower rate. The rich get richer.
  3. Be mindful of your credit capacity. If you refinance into a 15, you’ll have a higher payment reporting on your credit report. Other creditors who may examine your debt-to-income (DTI) as a function of your creditworthiness could limit your access to credit due to the higher payment. This may or may not be a factor for your financial future, but do take it into consideration before you take the 15-year plunge.
  4. It’s possible to be debt free but wealth poor. I realize this sounds funny, and paying off a home is a commendable financial goal, but realize that while you are doing it, most of us also need to meet concurrent objectives when it comes to our money. Having a “rainy day” fund, paying off any tax-disadvantaged higher-rate consumer debt, saving for college and retirement and investing outside of real estate are important and worthy objectives and if all of your discretionary income goes into a higher mortgage payment, you could find yourself debt-free but savings poor down the road. That would almost certainly force you to look into refinancing the home again and accessing the equity, likely with a 30-year loan or a HELOC. Don’t laugh, we’ve seen this movie before…

With rates lower, it might indeed be worth looking into a 15-year fixed rate mortgage. But keep the above points in mind as you do. Like in physics, all actions have opposite reactions and finance is no different. Getting a lower rate, paying less interest over term and paying off your home quicker are all enticing objectives. There is a price to entry, however, and any true loan professional can help you assess that cost. Let me know if you need my help at any point in your journey.

Free and clear, 

 

Robert J. Spinosa
Vice President of Mortgage Lending
Guaranteed Rate
NMLS: 22343
Cell/Text: 415-367-5959
rob.spinosa@rate.com

Marin Office: 324 Sir Francis Drake Blvd., San Anselmo, CA 94960
Berkeley Office: 1400 Shattuck Ave., Suite 1, Berkeley, CA 94709

*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate. In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate’s Human Resources Department.

Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood Chicago, IL 60613 – (866) 934-7283

Closing Costs on a Mortgage

When a homebuyer, or homeowner looking to refinance, obtains a mortgage, there are always associated costs. Even in the so-called “no cost” loan structures, trust me, you’re paying something. When a consumer does the research on what it will cost to get a loan, there are a few ways to categorize and better understand what’s being charged. Specific numbers will vary wildly depending on the nature of the transaction, the amount and where the settlement takes place. A key takeaway of this article will be to differentiate between a “cost” and a “settlement charge.” They are not the same, and how they interact plays a large part in the total amount of cash a borrower ends up bringing to the closing table. I have found that by using three broad categories, we can get a better sense of how things will play out, and as a result, feel less of a sense of shock about the total amount of any settlement. Let’s look at these “buckets” now:

Lender Costs and Fees

Most lenders will charge an “origination fee,” and that cost is usually intended to cover their overhead. What I see across the industry is that this fee will typically range from $500 to $1500, though it may be called something other than origination. Lenders might also charge separate fees for credit reports, appraisals, flood certs and tax service, for example. If you are paying any discount points to lower your rate, they will be listed in this section as well.

Title/Escrow/Closing Agent Fees

Two things you’ll likely need in your transaction will be a closing agent (this can be an escrow company, attorney or other, depending on the real estate practices in your area) and some form of title insurance. While your fees for the settlement services themselves and the title insurance policy(s) will be the largest costs in this category, you’ll also see smaller amounts such as document preparation, notary, recording and other costs associated with title and escrow.

Prepaid Items

If there’s a place where things get tricky and where a settlement can “blow up,” this is it. “Prepaids” are amounts of mortgage interest, property taxes, insurance (both homeowner’s and flood, if required) and other components of the total monthly housing payment that are collected in advance and that contribute to your settlement. Without going into the complex calculations, know that when you have an impound or escrow account and you close a purchase or refinance transaction, your lender will collect those amounts in multiples of months. If the timing of your close predicates that you must reserves six months of property taxes and your property taxes are $6000 per year ($500 per month) then at close the lender will collect $3000 in tax impound reserves. It should be noted that this is not a “cost” of getting the loan. Your property taxes are due once you are an owner, but how you pay them drives this calculation and adds to your settlement.

While in this category, let’s do a little refresher on how mortgage payments are made. You pay mortgage interest ‘in arrears,’ which means that you live in the house for one month and then you pay your mortgage payment on the first date of the next month. If you close a home transaction on July 15, for example, your first payment on your mortgage will be due on September 1, not August 1. But why? Because mortgage interest is paid in arrears. At this closing, you would pay prepaid interest from July 15 through the end of July. You would have no August 1 regular payment (sometimes called “skipping a payment”). Then, because you’d live in the home all of August, you would get a ‘regular’ mortgage statement on September 1 for that time. It is by this logic that we discourage our clients from financing the prepaid interest, which can amount to several thousand dollars. If your settlement statement shows this amount of closing costs, it may be financially wise to bite the bullet and pay it, as you will not have your regular mortgage payment coming right on the heels of the closing.

Understanding how closing costs work goes a long way to understanding the actual amount you’ll see on your settlement statement. In any transaction there will be a total settlement amount, of which only a part will be actual costs to get the loan. Still, there is always a bottom line and understanding that at the start can help avoid confusion and unwanted surprises with cash to close.  If you have questions or need my help, get in touch any time.

Coffee is for closers, 

 

Robert J. Spinosa
Vice President of Mortgage Lending
Guaranteed Rate
NMLS: 22343
Cell/Text: 415-367-5959
rob.spinosa@rate.com

Marin Office: 324 Sir Francis Drake Blvd., San Anselmo, CA 94960
Berkeley Office: 1400 Shattuck Ave., Suite 1, Berkeley, CA 94709

*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate. In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate’s Human Resources Department.

Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood Chicago, IL 60613 – (866) 934-7283