After 24 years in the mortgage business I have seen every mortgage scam, and been approached about every way to cut a corner, get a better deal, or pull one over on an underwriter.

But guess what? Underwriter’s know how to use Google now! It took a while, but they figured it out. Why does this matter? Well it only matters to the cheaters and corner cutters. If you are always honest in your loan application, don’t read any further (unless you want to be entertained).

One of the most common schemes by a mortgage borrower who is refinancing is to say they live in a property when they do not. They do this because they want to get the “owner occupied” interest rate, instead of the “investor” interest rate. But it is pretty easy for an underwriter to Google someone and see where their ‘real’ primary residence is. Or some underwriter’s have tools, like access to some IRS records which will show a true primary residence address, or some other private database that they have paid access to. It is really hard to pull one over on an underwriter, but people still try, even in the Internet Age.

Another of my favorites is when someone is selling a house and they want to buy a new one without selling theirs first. They figure it will sell quickly, they are not worried, and if they are in a competitive real estate marketplace making an offer contingent on the sale of your current home makes your offer unattractive. So they try and tell me the house they are currently living in is about to become a rental property, and they even have signed lease. I see their large house with a $3,800/month mortgage suddenly get rented for $4500. Imagine that, just enough to cover the mortgage, and show a little profit! But then the underwriter gets on Craigslist, sees that homes in this area are renting for $2900 at the most, they suddenly wonders if they are looking at a fake lease!

I recently had a business owner who did not want to submit 2 years of tax returns for their business, and also did not want to show their personal tax returns. They said they get a salary from the corporation, so they only want to submit W2’s and a pay stub. And I say that if you own over 25% of a corporation the Fannie Mae & Freddie Mac rules ask the borrower to submit the most recent tax returns (for personal and business returns) going back 2 years, as well as a Profit & Loss statement for the current year. Too much paperwork says “busy borrower”. I ask them to get online, Google themselves, and tell me what they see. I did this recently, and the first entry they saw was a link to the “Team Members” section of their company’s website, which showed them as the founder and current owner. I asked how long they thought it would take for the underwriter to find that. They sent the tax returns.

It goes on and on…

I had someone say that they live in MD and want to buy a property to occupy in MD full time, but they really work and live in Pittsburgh. They were really buying a rental property, and did not want to pay the higher investor rate. Google to the underwriter’s rescue!

I had a client who was selling his home, but wanted me to do an equity line so that he could get the cash to buy his next home without selling it first. The underwriter quickly accessed the local MLS (yes, underwriter’s usually have MLS access), saw the home listed for sale in MLS, and denied the equity line. You cannot get an equity line on a house that is on the market to be sold. “Hooray for the internet” says the underwriter.

I have buyers who swear the condition of a home is livable, good, or even great. Then the underwriter finds out it is a shell, either by doing a Google search, checking MLS, or other sources. This is a problem, because you cannot get a regular, market loan on a property in rough condition. That is what renovation/construction loans are for, or that is what paying cash is for. But people want the lower rates on a good mortgage.

I could go on and on, I have stories to last for dozens of blogs.

It is virtually impossible to pull one over the underwriter. Let’s just all figure that out, agree that underwriter’s know how to use Google now, and stop trying to pull a fast one.

I always felt like an “Interest Only” loan (where you pay no principal and are only making the interest payments on the loan) was like taking your house and putting it on a credit card. I was never a big fan of these loans, and as a result never did many because clients always sensed my unease, and ended up going to the competition who talked these loans up as a great way to “get in the market.”

I thought the Interest Only loan has been put to bed, and no one was doing them anymore. I did not think any client wanted them, nor did I think many banks offered them. But, I was surprised when an old client of mine said he was approached by a lender to refinance from his fixed rate mortgage to an Interest Only loan. Huh? Why take a loan (which was already at a decent rate, by the way) where you were paying the debt down, and put it on a credit card?! I was astonished. Here was the exchange:

“Brian, I’m at 5% on a 30 Year Fixed on about a $335K balance that you got me. House worth about $450K now per Zillow. Going to retire and move out in about 5 years. Another broker called to offer me an interest-only 7-year adjustable Interest Only at 4.5% or 10-year adj. IO at 4.75%, with about $5500 closing costs, including new escrows. What do you think about a 7 or 10-y adjustable
interest-only. I didn’t want to go any further without checking in with you for an honest opinion and a shot at a deal if it’s a good idea. I have a hunch that if it were a good idea you would have mentioned it already; so I’m suspicious of the offer from the other broker.”

My reply:

“Wow, I did not know lenders are that hard up out there. That is a guy who is on a fishing expedition, that is all. And shame on him. He is probably one of those “list buyers” and your name is on a list of people that have between 5% and 6% mortgages. And they use different strategies at different rate levels to try and convince people to refi. At 5%, they know your rate is not that bad, so they trot out ARM’s and Interest Only loans.

There are brokers out there who are trying to create deals out of thin air, by convincing people (and sometimes it is an easy pitch in this very tough economy) to refi off of their fixed rate loans to an Interest Only loan. The lower payment sounds great, but why would you put your house on a credit card, which is effectively what you are doing with an Interest Only. You are only reducing your payment by stopping the payment of principal.

And taking a regular, amortized ARM may make sense, if there was enough savings, but there is not. I would have already crunched those #’s. If you are at a 5% Fixed Rate now, and he is offering you an ARM at 4.75%, there are no savings in interest. If the monthly payment is going down that is only because you are starting the clock over again on a new 30 year loan, and using the lower balance that you have paid down to, as the new starting point. That is called robbing Peter to pay Paul.

If you want to take a risk, and gamble that you’ll be gone in 5 years, I’d do a regular amortizing 5 Year ARM. I have a regular 5 year ARM at 3.875% with 0 points. So you’d have 3.875% for 5 years, and then a possible adjustment. Going from 5% to 3.875% would save “real” money, however there would still be some “robbing Peter to pay Paul affect”. But, if you really want to save cash flow, its a thought. But don’t do an Interest Only loan, if anything, consider an amortizing 5 year ARM.

I ran the #’s and this would drop your payment a good bit, keep yourself on an amortizing loan, and give you 5 years of fixed rate at 3.875%. But are you sure you want to trade away a fixed rate for monthly savings and an ARM? I am pretty conservative, so I usually don’t think to talk to people about ARM’s, but if you are sure you’ll be gone in 5 years, maybe the risk is limited?”

His last reply:

“No, I am conservative too. I already take enough risk in the stock market, there is no need to take risk on my mortgage. I’ll keep my great 5% 30 year fixed rate mortgage, and keep paying the debt down. And who knows, I may not be able to retire in 5 years the way things are going, so your reply is the right one. Thanks for talking it through, I can always count on you for an honest assessment.”

There “may” be times when refinancing to an “alternative’ mortgage makes sense, but for the most part when I go through someone’s scenario, I find that the discussion of an ARM or an Interest Only loan was caused solely because some lender who was trying to “make a sale” and not because they had the best interests of the client in mind.

I saw a house recently that was priced at $659,000. This house had been on the market for 60 days, with no offers, at $659,000. I noticed that they did a price reduction of $10,000 to $649,000 after they were on the market for 60 days. And this begs the question, “is a ‘1.5% OFF SALE’ going to draw buyers into the store?”

I believe a $10,000 price reduction is a slap in the face to the marketplace, to potential buyers, and to logic. If the house was not worth $659,000, guess what, it ain’t worth $649,000!

Now, if you got some offers at $659,000 that you were not happy with, but they were around the $620’s or $630’s, then a $10,000 reduction from $659k to $649k may be a good strategic move to signal to the potential buyers that you were willing to come down some, if they are willing to come up some. But if you have not even had offers after 60 days, clearly the market is signaling to you that the house is more vastly over priced than 1.5%!

I think if buyers and seller thought more in terms of percentages, and less in terms of dollars, real estate would sell more quickly. I know $10,000 sounds like a lot of money, but relative to a $659,000 asset, a $10,000 price move is insignificant. And this is why in a healthy real estate market, buyers need to get over making their offers $10,000 or $20,000 higher on a large asset, since it only amounts to 1%-2% of the overall asset price. We all have to do what we have to do in order to make deals happen. I know dollars are hard to come by, but a $50,000 price drop that a Realtor advertises as “significant” on a $1,800,000 house, is not as significant as it sounds. I know $50,000 is a lot of money, and can buy lots of things, but its not a significant price drop. We all need to take a harder look at percentages.

If you owned a $1,000,000 home that sat on the market for 2 months would you drop the price $15,000 to $985,000 and expect it to attract offers? Really?

If you were selling $2 lemonade on the corner in a tough economy, and people were passing you by to instead go home and drink tap water, would you think a price drop to $1.97 will suddenly make people want to open their wallets?

If you were selling $5,000 wedding dresses in a down economy, would you really expect a new price of $4,925 to make people buy?

These are all 1.5% price drops, and I hope it makes the point of how silly it is to drop a price of something you are selling 1.5%, when there was no interest at the original price.

And this theory also works the other way too, where buyers have to realize making slightly higher offers to outbid someone else, if there is competition for a home they are interested in, is not the end of the world.

I have heard more and more clients tell me that some nameless, faceless mortgage people or “friends” have told them they should refinance from a Conventional loan to an FHA loan. Huh? Usually the smart advice giver is giving the advice because they know the client has had a hard time getting a sufficient appraisal to refinance as a Conventional loan, and that FHA requires much less equity.

Wow, I am surprised that such incredibly expensive advice is still being passed out.

Here is why I find that advice silly, and if you have a friend who is refinancing off of a Conventional loan with no PMI and onto an FHA loan you need to beg him/her to NOT do that.

The maximum FHA loan is $729,000 in a high cost area. Let’s assume you owe around that amount.

All FHA loans, regardless of LTV and equity position, have mortgage insurance. The up front FHA MIP (Mortgage Insurance Premium) is currently 1.75% and is scheduled to go to 2.25%. The latest FHA rule changes were passed weeks ago, so I am unsure when new FHA loans will be subjected to the increase. Let’s assume we could sneak you in at the 1.75%, that is $12,757 in mortgage insurance premium. You can either pay that out of pocket or finance it into the loan, 99% of FHA loans finance it into the loan, which effectively raises the cost over time since you’ll be paying interest on it. That interest is about $70/month at today’s rates.

There is also monthly FHA mortgage insurance, which is .55% of the loan divided by 12 (this is also schedule to rise slightly). This would be $334/month.

So you have already paid an increase of $404 a month for the FHA mortgage insurance plan.

And you have artificially raised your loan amount by $12,757 to finance in the FHA MIP. This is on top of approximately $4,000 in title and lender closing costs.

So the ultimate total cost to refi the loan is enormous:

$12,757 in up front PMI
$4,000 in closing costs
$404 a month in extra payments, $4800 annually, $24,000 over 5 years, etc.

I have people who complain down to a few hundred dollars when I quote them $4000 in costs to the title company, lender and appraiser, why you’d spend the enormous sums above I am not sure. A refi is supposed to be about saving money, not spending it.

I know some people are in an utter state of panic over the future, and I am concerned to a degree. But for banks and lenders to take advantage of people’s fear and sell them an expensive FHA loan, I believe, is negligent.

An FHA loan is for someone who is low-moderately qualified, with weaker credit scores, and little assets. I know people use this loan for purposes it was not intended, but I feel this is a BIG stretch if you are well qualified, and it is too expensive if you currently have a Conventional loan.

And no matter what your loan amount, even if you owe much less than the $729,250 maximum FHA loan amount, when you take 1.75% to 2.25% of it for the up front Mortgage Insurance Premium, and then you take .55% and divide by 12 for the monthly mortgage insurance payments, it creates way too much cost to make a refinance make sense.

If you currently have an FHA loan then this is a different story. An FHA-to-FHA refinance can be done more cheaply, might be able to be done as a “streamline refinance”, and the homeowners is already paying mortgage insurance so there is no adjustment.

Title insurance is insurance against defects in title to real property. It is meant to protect an owner’s or lender’s financial interest in property against loss due to title defects, liens or other matter of public record. It will defend against a lawsuit attacking the title, or reimburse the insured for the actual monetary loss incurred, up to the dollar amount of insurance provided by the policy.

Just as lenders require fire insurance and other types of insurance coverage to protect their investment, nearly all institutional lenders also require title insurance to protect their interest in the collateral of loans secured by real estate.

Title insurance differs in several respects from other types of insurance. Where most insurance is a contract where the insurer guarantees another party against a possible specific type of loss (such as an accident or death) at a future date, title insurance attempts to detect, prevent, and eliminate risks and losses caused by title problems which have their source in past events. Title companies attempt to achieve this by searching public records to develop and document the chain of title and to detect whether there are any adverse claims on the subject property. If liens or encumbrances are found, the insurer may take steps to fix them (for example, by obtaining a release of an old mortgage or deed of trust that has been paid off) before issuing the title policy.

Standardized forms of title insurance exist for owners, lenders, and for construction loans.

The owner’s policy insures a purchaser that the title to the property is free from defects (liens and encumbrances), except those which are listed as exceptions in the policy. It covers losses and damages suffered if the title is unmarketable (i.e., if the title can not be legally sold and conveyed to another party or if the property is “unmarketable”), for example if an interest in the property is found to belong to someone else, if there is no access to the land, or if there is some other defect on the title. The policy also contains various standard exclusions to coverage and also specific exceptions to coverage, based on documents that have been recorded against the property at some point in the past, that the title company is unwilling to insure.

The policy limits of the owner’s policy is typically the purchase price paid for the property. Consumers should inquire about the cost of title insurance as soon as possible. Title insurance coverage lasts as long as the insured retains an interest in the land insured and typically no additional premium is paid after the policy is issued.

The lender’s policy is separate from the owner’s policy. The lender’s policy protects the lender for the amount of money lent against the property. When you get a mortgage it is mandatory to get a ‘lender’s policy’ but its only optional to get an ‘owner’s policy.’ Coverage under the lender’s policy lasts as long as the loan secured by the mortgage or deed of trust has a balance. The title insurer’s risk under a lender’s policy is generally less than that of an owner’s policy; as a result, insurers typically charge lower premiums for a lender’s policy than would be charged for the same dollar amount of coverage on an owner’s policy.

In many states, separate policies exist for construction loans.

In the United States, the American Land Title Association (ALTA) is a national trade association of title insurers. ALTA has created standard forms of title insurance policy “jackets” (standard terms and conditions) for Owner’s, Lender’s and Construction Loan policies. ALTA forms are used in most, but not all, U.S. states. ALTA also offers special endorsement forms for the various policies; endorsements amend and typically broaden the coverage given under a basic title insurance policy. ALTA does not issue title insurance; they provide the policy forms that title insurers issue.

Title insurance is extremely important when purchasing a house or piece of property. Yet many consumers are unsure about what title insurance is and what it protects against. Here are some answers to the more common questions about title insurance.

* How Am I Protected?
* I’m refinancing, why do I need new title insurance?
* I’m buying a newly built home, do I need title insurance?

How Am I Protected?

In order to issue title insurance, the title company must search public land records for matters affecting that title. Many search the “chain” of title back 50 years. Twenty-five percent of title searches find a title problem that is fixed before the insurance is issued. Some examples of items that can cause a problem are: deeds, wills and trust that contain improper information; outstanding judgments or tax liens against the property; and easements. Title companies fix the problems then issue the title insurance.

Occasionally, in spite of an exhaustive title search, hidden hazards can emerge after closing. Things such as mistakes in the public record, previously undisclosed heirs claiming to own the property; or forged deeds could cloud the title. Owner’s title insurance offers financial protection against these by negotiating with third-parties, and paying claims and the legal fees involved in defending the title.
Refinancing.

When you refinance you are obtaining a new loan, even if you stay with your original lender. Your lender will require lender’s title insurance to protect their investment in the property. You will not need to purchase a new owner’s title policy; the one you bought at closing is good for as long as you and your heirs have an interest in the property. So you may end up getting the existing title policy “re-issued”, in which you case you would pay a much lower reissue rate.

Even if you recently purchased or refinanced your home, there are some problems that could arise with the title. For instance, you might have incurred a mechanics lien from a contractor who claims he/she has not been paid. Or you might have a judgment placed on your house due to unpaid taxes, homeowner dues, or child support for instance. The lender needs reassurance that the title to the property they are financing is clear.

If it has been no more than 10 years since you bought your house or refinanced, ask for a reissue or discount rate. They are not available in every state, and you might have to meet some criteria to be eligible, so be sure to ask.

I’m buying a newly built home, do I need title insurance?

Construction of a new home raises special title problems for the lender and owner. You may think you are the first owner when constructing a home on a purchased lot. However, there were most likely many prior owners of the unimproved land. A title search will uncover any existing liens and a survey will determine the boundaries of the property being purchased. In addition, builders routinely fail to pay subcontractors and suppliers. This could result in the subcontractor or supplier placing a lien on your property. Again, lenders want to be sure the property has clear title, and they are insuring the correct property. Purchasing owner’s title insurance will protect you against these potential problems and pay for any legal fees involved in defending a claim.

Buying distressed properties, whether they are in foreclosure or are a short sale, can be difficult. I am going to cut and paste an email from a prior client in relation to this topic, and my reply, as an example of how difficult it can be to buy distressed properties:

“Hi Brian,
I found myself doing initial legwork for a home purchase and found myself posting the following to a forum. I’d like to hear your recommendations, as someone who is in the business. Thanks
________
In this day of browsing for your home, I do not see why Redfin cannot represent buyers for homes below their target price, or foreclosed homes for that matter. If there is an expense issue, buyers like myself may be willing to pay the regular commission just to facilitate property purchase.  There is much opportunity there. I find a property that is outside Redfin’s purview and search for the listing agent and/or actually visit the property and write down a posted number. Somehow, I cannot get anyone to either call me back, or follow up with initial contact. I can’t believe this. I saw one house in foreclosure that I was willing to pay cash for due to location, land etc. and willing to accept other conditions. I call the agent, leave a message, and nobody returns my call. House sits on the market for a few more weeks. Then its price drops! WTF?

Second case, I find another property that a local says is on the market. The empty looking house has no signs on the lawn, no listing in Redfin.com, Homesdatabase.com, or Google Real Estate. A few weeks pass. The other day I drive by and BINGO – brand new sign with agent contact info. I call the number and get my call returned promptly (unusual) only to tell me that the property is under contract. That property was so ideal, I would have been willing to engage in competitive bidding to acquire it. Now I can only hope that their financing falls flat. 

I don’t understand what I am doing wrong, other than the fact that I should probably not represent myself without a broker, which I want to avoid!. Now that my time has been wasted finding out about this chaotic process, I am forced to find broker representation elsewhere unless Redfin can fill the niche presented by loan free buyers.

Any advice?”

And my reply:

“Interesting post. I have heard similar stories. In fact, I have seen some Realtors say they flat out will not work with anyone interested in foreclosures and short sales, because the banks and listing Realtors are so difficult to work with. Most people feel buying these properties is difficult to impossible. Many Realtors feel it takes too many hours and their time will be more rewarded in regular resale’s.

I don’t know if its due to them being inundated with interest that they are unable to handle? Think about it, if you are a bank and just want inventory off your books, and you are a large out of control organization, not unlike government, do you care about getting top dollar or being efficient? So if a foreclosed property gets 34 calls, and half go unreturned, and the 17 parties that got called back bid the property up to the right number the bank was looking for, do you think the bank and the Realtor care about the other 17 people who did not get calls back who all insist they would have bid “a little bit more.” My guess is it just a sloppy inefficient process, the banks are probably leaving some money on the table and are too inefficient to know it, and I think buying these properties is like finding a needle in a haystack.

I am not sure getting a Realtor to help you will improve your odds, but I’d be interested to hear how that goes if you go that route. In other words, I am not sure a Realtor is going to return another Realtor’s call and faster than they would return your own call. I just think the process is a mess. I have done financing for a few foreclosures, and can see why people don’t want to work with them. It takes weeks or months to get a reply from a bank on a simple question pertaining to the loan of the buyer, or the settlement date, or a change to the sales contract. Good luck”

To finish the discussion, I just had a Realtor friend of mine finish my sentence. I said, “I am blogging about how hard it seems to be to buy foreclosed/distressed real estate for the…” and he stopped me and said “for the average consumer.” And I said yes, how did you know!? And he responded that regular consumers are getting beaten out by investors who are paying cash. He said, “its a waste of time for someone who wants to buy a foreclosed home and live in it, because they usually have financing contingencies, take too long to settle, and want home inspections!” Further, “investors come in and offer above asking, with no contingencies, pay cash, and settle fast, then they fix them up and flip them.” So it seems the bottom line is that if you want to buy a distressed/foreclosed home, you need to have all cash, settle fast, and maybe even say you are an investor!

I almost feel like there is no more PMI (Private Mortgage Insurance) on condos! But that is not true, there is PMI availability for condos, but it is getting harder to get. Most people know by now that PMI is needed on a Conventional loan if you have less than 20% down payment. I recently had a client who wanted to put 10% down on the purchase of a $600,000 condo. I first found out that on a loan that size ($540,000), which is a Conforming-Jumbo loan, that you cannot do a maximum LTV (loan-to-value) loan in a “declining market”, which most banks are still defining DC and most of Northern VA as. So the buyers have to put another 5% down, and do a 15% down payment, or 85% LTV. This loan size ($510,000) is still a Conforming-Jumbo loan (which is defined as all loans from $417,001 to $729,250), and I found that no one will do PMI on condos that have Conforming-Jumbo loan amounts.

It seems you can only get PMI on condos that have Conforming loans (those which are $417,000 or less), and if those loans are in a declining market you cannot do maximum LTV financing (which is 95% LTV), so you’d need 10% down (or 90% LTV).

So it seems if you want to buy a condo in DC or Northern VA (or any market defined as a declining market) and need to borrow between $417,001 and $729,250, the only loan you can get is a 20% down payment Conventional loan or possibly an FHA loan.

And if you want to buy a condo and borrow $417,000 or less, you need a 10% down payment Conventional loan, or you can possibly go with an FHA loan for this too.

I am sure this will be changing moving forward, but it may take a while for the banks and PMI companies to loosen up.

It seems any banks that are still doing home equity lines of credit (also known as a HELOC) have limited them to an 80% combined loan-to-value (LTV). This means that the existing 1st trust mortgage and any equity line cannot exceed 80% of the current appraised value. For example:

$1,000,000 appraisal
$600,000 current mortgage
80% of $1,000,000 = $800,000
$800,000 – $600,000 mortgage = $200,000 maximum equity line

I had this reinforced recently by a refinance I was attempting for a client. I am refinancing this client’s first trust mortgage, which is currently $603,000. The appraisal came in at $1,000,000. However he has an existing equity line of $245,000, and the existing equity line lender told the client he’d have to drop his equity line to $190,000 if he wanted to refinance.

We had to accept the mandate of the equity line lender because we needed them to subordinate to the new 1st trust mortgage we were refinancing.

A subordination agreement is something that shows the 2nd trust/equity line lender will ’subordinate’, or stay in 2nd trust place, when the 1st trust refinance takes place.

When a 1st trust is paid off, the 2nd trust automatically goes into 1st trust position. Of course the new lender that is paying off the old lender mandates that it retains 1st trust position. Hence, the need for the ’subordination agreement’ which shows the 2nd trust lender will stay in 2nd trust position.

Since the equity line lender had the client over a barrel and could stop his refinance if he did not lower his equity line (which he only owed $50,000 on, by the way), the client had no choice.

So now the client owes $603,000 on a new 1st trust mortgage that we are refinancing, and will have a new equity line capped out at $190,000. The total of those two loans is $793,000, and is a 79.3% combined loan-to-value. This is less than 80% LTV, and the equity line lender is willing to accept this.

Is it fair that since the equity line lender would have previously lent up to 90% LTV, and now has changed its guidelines to 80% that they can hijack a client’s refinance? I don’t know what fair is anymore in the banking industry, so I cannot answer.

So ask a lot of questions if you want an equity line, or if you have one currently and are thinking of refinancing your 1st trust mortgage. You need to know what the equity line lender’s combined LTV limit is.

It used to be that you could borrow 90% LTV. And actually, for a few years at the peak of the real estate boom around 2002-2004, you could borrow up to 100% LTV, and in some cases 125% LTV! You could actually borrow more than the house was worth! But that insanity deserves a separate blog post.

I would say 80% is more of a historic norm for equity line LTV’s. So if your house is worth $500,000 and you owe $400,000 on the 1st trust mortgage, you are already at 80% LTV and are likely not eligible to get any equity line.

You have to have a LOT of equity to get an equity line these days.

It used to be simple to get an FHA condo loan. Lenders could do an FHA “Spot Condo Approval”, which meant that the condo did not need to be on the FHA Approved Condo List, and all we lenders needed to do was verify that the condo met certain FHA requirements (51% owner occupancy, no litigation against the condo, no more than 10% of the unit owners behind in their condo fees, etc). Now the condo approval process is more centralized, and more complicated.

There will be two methods of FHA condo approval:

1. HUD Review and Approval Process (HRAP). This means you have to have FHA approve the condo. Nightmare.

2. Direct Endorsement Lender Review and Approval Process (DELRAP). This option is only available to lenders who have unconditional Direct Endorsement authority and staff with knowledge and expertise in reviewing and approving condominium projects. So you have to deal with a lender who has their DE, and knows what they are doing.

I will spare you what goes into an FHA condo approval, whether it is being done through FHA or a lender with their DE. The guidelines are 21 mind numbing pages long, so suffice it to say that it will be complicated, and extra time will need to be allowed for FHA financing to get through the approval process. It is not to be feared or avoided, but all parties need to know it will be complicated and require more time.

Getting a condo loan approved seems to get harder and harder each day. Below are the loan approval conditions I got on a recent loan submission for a condo purchase:

1. Buyer to get 20% HO6 dwelling coverage.

2. Statement from the property management company about the cleaning services in the condo’s budget. What type of cleaning services are they?

3. Statement from the appraiser on whether having no parking in the project has an effect on the value.

4. The certificate of insurance needs the deductible to be shown.

5. Fidelity coverage of $251,887.

Let’s review the absurdity of these.

1. You can read more about this in a recent blog post I did, click here.

2. Huh? Seriously? The underwriter wants me to waste my efforts in finding out what kind of cleaning company the condo has budgeted for? How is this pertinent at all? It is not like the underwriter is questioning a large, special assessment for a roof replacement. I could see the budgetary impact of that. This was a small line item in the budget, for CLEANING!

3. Of course not having parking affects value, doesn’t every rookie underwriter know that? But don’t they also know that this would ALREADY BE REFLECTED IN THE APPRAISED VALUE?! If the unit appraised for the purchase price without having parking, then the loan is safe, let’s move on!

4. I guess it is important for the underwriter to know if the condo has a $500 deductible or a $1000 deductible? Why? Not sure…

5. Fidelity insurance protects organizations from loss of money, securities, or inventory resulting from crime. Common Fidelity claims allege employee dishonesty, embezzlement, forgery, robbery, safe burglary, computer fraud, wire transfer fraud, counterfeiting, and other criminal acts. This condo had $200,000 of fidelity insurance coverage. How and why the underwriter came up with her arbitrary number, based on some arbitrary formula I am sure, I have no idea.

Astonishingly, I got simple answers to all these, and although it took a few days, I got the underwriter all she wanted, the loan was approved, and we went to settlement.

This is just one more example of modern day banking. It’s not so modern, is it?