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MORTGAGE RULES & BASICS (rules may not apply in all scenarios)

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1). LOAN LIMITS & DOWN PAYMENTS:

Conforming Conventional

• $417,000 1 unit (single family home, condo, townhouse)
• $533,850 2 unit (duplex)
• $645,300 3 unit (triplex)
• $801,950 4 unit (fourplex)

*Anything that is a 5 unit building or more, is considered a commercial loan, which is a whole different set of mortgage rules entirely.

Conforming-Jumbo Conventional
On a 1 unit $417,001 to $625,500 is considered a Conforming-Jumbo loan in high cost areas. 10% down minimum.
Two-Unit properties: $533,851-$800,775. 25% down minimum.
Three-Unit properties: $645,301-$967,950. 25% down minimum.
Four-Unit properties: $801,951-$1,202,925. 25% down minimum.

Jumbo Loans:
Anything over the above $625,500 on a Single Family is considered a Jumbo loan.
There are many different limits and requirements for Jumbo loans depending on the lender. I have seen 20% down to as little as an $850,000 loan and I have seen 20% down to as high as a $2,000,000. To get to $3mm and $4mm or higher loan amounts usually requires much larger down payments, 25% to 35% down, possibly more.

FHA Conforming (in high cost areas)

• $417,000 1 unit (single family home, condo, townhouse)
• $533,850 2 unit (duplex)
• $645,300 3 unit (triplex)
• $801,950 4 unit (fourplex)
  FHA loan limits by county: FHA Loan Limits.

FHA High Balance (in high cost areas)

• $417,001-$729,750 1 unit (single family home, condo, townhouse)
• $533,851-$934,200 2 unit (duplex)
• $645,301-$1,129,250 3 unit (triplex)
• $801,951-$1,403,400 4 unit (fourplex)

*Anything over $729,750 on a Single Family is considered a Jumbo loan and can’t go FHA.

**Anything that is a 5 unit building or above, is considered a commercial loan, which is a whole different set of mortgage rules entirely and is not eligible for a residential loan.

VA (Veterans Administration) loans: For VA loan limits see VA Loan Limits.

2). DEBT RATIOS:

Debt ratios: Debt ratios are not exact, they are guided largely by credit scores now. It used to be you could not spend more than 28-33% of your gross monthly income on a mortgage payment. Now, you need to plug all the buyer’s financials into the “automated underwriting” system, and simply see if the system approves the loan or not. I have seen loans get approved with 40%, 45% and even higher debt ratios.

Income:

1. Salaried borrowers would just use their gross salary. However, if there is a gap in employment they may need 60 days on the new job, a big gap like 1-2 years may require 6 months back on a new job before they’ll allow that person to use that income to get a loan.
2. Commissioned borrowers would use a 2-year average of their “net income.”
3. Self-employed borrowers would also use a 2-year average of their “net income.”
4. If a borrower has Overtime or Bonuses you use a 2-year average.

Automated Underwriting: most loans are underwritten by a software program now, with a human underwriter reviewing the paperwork. Many times automated underwriting (AU) will allow for higher debt ratios than a human would have, and all in all has been a net benefit to the mortgage business. Make sure you always push for a loan officer to check and see if your clients have been approved by AU as early as possible, sometimes its valuable even during pre-approval. Many times a pre-approval is simply a loan officer’s guesswork or opinion, next time ask if they base their pre-approvals on AU.

Portfolio loans/underwriting: There are very few portfolio lenders left. Well over 95% of all loans go through a government backed loan, such as FNMA, FHLMC or FHA and VA. However, a lender like ING underwrites according to their own rules, which in some cases can be beneficial and sometimes hurtful. If you have a client with creative needs you’ll need to find a lending source that is non-FNMA, but even then it may not help.

3). PRE-APPROVALS:

The key things to ask about when you are reviewing pre-approval letters are:

• Is the pre-approval based on a “1 bureau” or a “3 bureau” credit report? It needs to be 3 to know what the middle score is, since this is ultimately what underwriters use.
• Have all the income and assets been documented and reviewed?
• Has the loan been run through any automated underwriting system? The pre-approval is more valid if it has been.

4). CREDIT SCORES:

Minimum credit scores: Credit scores have changed the way lenders look at the loan package. More emphasis is on credit scores than debt ratios. The average range for conventional loans is 680 to 740. A score below 680 may not go conventional. FHA will do loans with credit scores around 640-660. Anything above 740 is excellent. I have gotten some loans approved with debt ratios of 55%, but with credit scores of 780 or higher. So, a lot of emphasis is put on credit scores.

Get all three credit scores! Do not trust a pre-approval based on just one score. If the three scores are 606, 632 and 684, and the lender has pulled only 1 bureau which is the 684 score, the real middle score is 632 and that loan would be rejected as an FHA or a Conventional, although you may find a pre-approval was granted because the lender or loan officer did not pull a 3 bureau credit report.

What a higher credit score gets you, and what a lower score gets you:
In general a higher credit scores makes it easier to get through underwriting. And a lower credit score makes underwriting harder, and it may also cost you. On a Conventional loan there may be an “add-on” to the discount points. For example, if a credit score is:

• 660-679 there may be a 2.50 point add-on.
• 680-699 there may be a 2 point add-on.
• 700-719 there may be a 1 point add-on.
• 720-739 there may be a 0.50 add-on.
• 740-779 no add-on.
• 780+ there may be a reduction in points, by a 0.25 point.

5). DIFFERENCES BETWEEN LENDERS:

Banks, large and small: Banks can be more bureaucratic and slow due to their size, especially the large ones. However, it depends on what channel your client goes through and what individual they deal with. In general I have seen the banks take weeks to do functions that take other lenders days. However, I have seen loans go through a large bank very quickly through a mortgage broker, for example, if the broker is a “Tier 1“� broker with the bank, which means their loans get special treatment, preferred pricing, and fast turn times. And, I have seen loans get through a bank quickly that go through a retail loan officer at the bank that does a lot of volume and carries a lot of clout. On the negative side, trying to get a loan through a bank’s branch network, or 800# call center, or a low to middle producing loan officer can be painful. On appraisals the banks use their own Appraisal Management Companies (AMC) that are quite large, and assign appraiser randomly in a round robin style or by putting appraisals up for bid. When you have hundreds of appraisals in an AMC whether you get assigned a random appraiser, or an appraiser that gets the work by low-balling the bid, the results may be questionable.

Credit Unions: Credit unions are a wild card. I have seen some do a great job and have great rates, and I have seen some credit unions that are picky, slow and have mediocre rates. With appraisals they also draw from their own AMC, and may have poor results similar to a big bank. Again, with appraisals as with rates and performance, credit unions can be a wild card.

Mortgage brokers: Mortgage brokerage firms seem to be mostly about the individual broker. If you have a mortgage broker who hustles, is creative and works fast, you’ll likely have a good transaction. The upside of mortgage brokers is creativity and ability to shop rates for the client. The downside is that each deal is subject to the whims of the AMC of the institution the broker chooses to go to. There are some lenders that broker to big banks, small banks, insurance companies, credit unions, private banks and more. It is hard to beat that kind of choice.

Mortgage bankers: A good mortgage banking firm can be a worthwhile contact right now. A mortgage banker is usually set up to underwrite and close loans in-house, which means faster turn times and more control. And some mortgage bankers have their own AMC, populated by a smaller pool of self selected appraisers they know well, which can make for the best results for a tight appraisal situation you may be worried about.

Online lenders: In my opinion, there are only two words for this type of lender for the Realtor community and purchase loans, “stay away.“� Online lenders are big, faceless entities, with no knowledge of the local market, and are subject to the whim of large AMC’s. They can also be slow, understaffed and inept. If a client wants to take a leap of faith and refinance with an online lender, good luck to them. But with a purchase there is a deposit, contract and relationships are at stake, I would not risk going with an online lender with a purchase loan.

6). APPRAISALS

HVCC appraisal rules: HVCC is the Homeowners Valuation Code of Conduct. This is what caused the problems we are all familiar with now, which is the lender’s inability to pick the appraiser. The Feds thought that would erase any undue influence that Realtors and lenders may apply to an appraiser. All it has done is raise the cost of appraisals, slowed turn times, and brought about faulty appraising by appraisers coming into a marketplace they do not know.

How to get a faster appraisal: Ask the lender if there is an option to pay for a “rush“� and what the rush fee is. Also, as I mentioned earlier, a mortgage banker may be able to get a faster appraisal than anyone else if speed is important.

Appraisal Management companies: An AMC is a company set up separate from the bank, which the bank uses to order appraisals from. The AMC’s assign their appraisals by round robin process, or by bid, which is what has caused the problems with appraisals we experience today. The AMC’s, who I am sure lobbied Congress to get where they are today, take 15% to as much as half the appraisal fee and give the rest to the appraiser. So appraiser’s who used to earn $400 and work for a continued good relationship with the referring lender, now gets 85% to half the fee, are pressured to do more volume to make up for lost revenue, which creates sloppier and slower work.

Appraisal rules for comparables & other misc. appraisal rules:

1. It is required that comps are no more than 6 months old.
2. And I know it goes without saying, but, it is important that they are actually “comparable“�. I recently saw a Realtor comp a single family that has not been renovated for 20 years with no parking, with a newly renovated duplex with a garage. I have seen people leap over 2 neighboring communities to pull a comp from 3 communities and 8 miles away. I have seen new construction compared with resale.
3. On condos it is required, unless impossible, to have 2 of 3 comps be from within the subject property’s building. If there are none, then the appraiser is allowed to go to nearby competing condos for comps.
4. Watch out for functional obsolescence. I got caught on a 2 BR/1BA where the bath was upstairs in a bedroom. Having guests go all the way upstairs, and through a bedroom, to get to a bathroom, is considered functional obsolescence. I fixed this by going to a portfolio lender who was willing to understand that this was common for the area, but the deal almost fell apart.
5. A property that is very rough, a shell, or uninhabitable will not get through a traditional mortgage process.
6. On an FHA loan it is very likely you’ll have some repair items, at least minor ones. FHA is infamous for requiring the scraping and repainting of peeling and flaking paint, for example.

7). CONDO LOANS:

FHA condo loans: To see if a condo is FHA approved go to: FHA Condo Lookup Tool.

There are no more FHA “spot approvals”, either an FHA condo is on the FHA approved list, or you work with a lender that can get it FHA approved. Getting an FHA approval can cost a lot of time and money. FHA is a great loan because it allows for a lesser owner occupancy level (51% or higher is all that is required) on a high loan-to-value loan. If you take a listing in a condo it may be worth approaching the board to see if they’ll spend the time and money to get an FHA approval and spread the cost out amongst the unit owners, which makes the building more marketable for all. The costs are in the low thousands, not much when spread out over multiple unit owners.

Investor level: Investor level (the # of units owned by investors who rent them out) is important, and should be the very first question you ask when listing or showing a condo.

However, if your buyer has 20% down, a recent change on Conventional Conforming loans (this does not include Jumbo loans) has brought much less attention to investor levels, and in some cases, there is no analysis of investor level at all. If you have a 20% down deal, in an established condo, where the HOA has been turned over to the unit owners, they will not turn down a loan based on a high investor level.

Getting PMI on a condo: If you have a buyer who only has 5% or 10% down payment this loan will require PMI (Private Mortgage Insurance). Then, you need to make sure you or your lender ask a lot of questions about the condo, in advance of writing an offer, such as:

• investor level (hopefully its 30% or less, maybe 35% or 40% OK).
• how many units are owned by one investor (should be no more than 10%).
• is the condo undergoing any litigation?
• are any unit owners behind on dues, if so, how many?
• how long has the HOA been turned over to the unit owners?

8). MISC. UNDERWRITING RULES

Seller concessions: The following are the seller concessions that the seller can pay on top of splitting the transfer & recordation taxes.

Conventional: Sellers may pay up to 3% of the sale price towards borrowers closing costs, prepaids, and escrows on a 5% down payment. Sellers can pay up to 6% of the sale price to the borrower’s closing costs, prepaids and escrows on a 10% or 20% down payment.
On an investment property the maximum credit is usually 2% of the sales price.
FHA: the seller can pay 3% of the sales price towards closing costs.
VA: the seller may pay all of the buyer’s closing costs, pre-paids and escrows.

Termite inspection requirements:
FHA: always need a termite inspection.
Conventional: usually a lender will not require a termite inspection on a Conventional loan unless it’s required per the sales contract. If it is stricken from the sales contract and initialed by all parties then it will not be required.

Co-Signers, Help Or Not?
Some people think that getting a cosigner on a mortgage loan is a cure-all, and will automatically make someone qualify for the loan they seek. This is not so.

First, the cosigners will need to be scrutinized for their own income and debt load, and the qualifying numbers and debt ratios will still need to make sense. For example, if you have a cosigner that has a large mortgage of their own, two car loans, credit card debt, and student loans, I would doubt that their income is going to help in any cosigning situation.

Another important thing to note is that cosigning may not even be allowed on some loans, or may have a diminished benefit on others. For example, on an FHA loan a non-occupant cosigner is allowable. But on most conventional loans a non-occupant cosigner is either not allowed, or the bank will still require that the primary occupant qualifies for the bulk of the loan, allowing the non-occupant cosigner only to help qualify for a smaller part.