January 2011 Seminar To South Bay Assocation Of Realtors
Brian Martucci: We are going to formally get started. As I said before, I am Brian Martucci, mortgage professional, 25 years in the business.
As I also said before, anybody that walked in a few minutes late that didn’t hear, please raise your hand and stop me if there’s something that I’m talking about that I’m going too fast or you’ve got a situation right now or in the past that maybe relates to what we’re talking about or you’d like to question something separate from what we’re talking about. We will be telling stories and stopping and starting the whole process. I want to engage everybody. It’s the only way to learn so you don’t walk out of here after three hours doing a head nod [snoring sound]. It’s not nap time, it’s learning time. We will be taking 5-10 minute breaks every hour, just so you know.
Before we jump into the material, I want to start with some stories because, to me, these stories will illustrate why I think we’re here and this why I want to take my time to come out here and teach and educate and help the marketplace. Not just all of you; I want this to leak out to your cohorts and managers and friends in the business because I’m tired of being part of deals, whether it’s the lender, the lister, whatever part of the transaction or a difficult buyer that doesn’t get it.
There was an agent that told me about a year ago that back in the boom market, in the 2000’s, the sellers had the gold. The sellers had the gold. The inventory was the gold, so it would sell. Nothing else really mattered. And then, maybe in ’07, ’08, he said the realtors had the gold. You really needed a good realtor and things were transitioning and he really felt like the realtors had the bag of gold.
Well, now he says the lenders have the gold because it is so difficult to get a loan, and you’ll learn a little bit more about the whys as I tell some of these stories. So, a couple of quick one and then we’ll jump into the material, but these will be really illustrative. These are all very recent, in the past two or three months.
I had a loan where the husband and wife were relocating from the east coast to out here. They had taken off about seven weeks, partly to travel across the country to have some fun and partly because the wife, not the husband, had been laid off apparently. She quickly secured a new job on the west coast and he was relocating within a large company, so it was all good. Well, they get here. They buy a home. They come to me for a loan. I know because I know, been 25 years in the business, a gap in employment is important. But Fannie Mae and Freddie Mac say – I went right to the manual which is online, so it’s up to date. It says, “Only a gap over 60 days should be addressed.” Even then, it’s not an obstacle; it just needs to be addressed. Well, I figure I’ve got seven weeks, she’s got a new job, it’s within her same field, same salary range, no problem.
Well, the loan gets put into suspense and the underwriter makes a big deal of it. I point out that Fannie Mae and Freddie Mac don’t care unless it’s eight weeks. Well, she cares and she’s right. She said that banks are allowed to have their own interpretation of the rules. So we had to jump through hoops. Settlement got delayed a few days. The loan still went to closing, but that’s one illustration. I’m within the guidelines and had a problem and had to delay a closing, and I’m sure everybody knows what delayed closings are all about. It seems like half the closings are delayed nowadays.
Here’s one that was unbelievable. I had a client with 25% down, conventional loan, 785 credit score and he had maybe ten pieces of credit, most of it old. He was not a heavy credit user, but had two prior mortgages, car loans, paid off, had been a renter for a couple of years. The only active piece of credit he had was an American Express. That was the only credit that he used. So, we submit the loan and not only is it a problem, the loan is rejected. How do you reject a loan with 25% down on a conventional loan with a 785 credit score with lots of cash reserves? The guy has $300,000. His 25% down payment was maybe $200,000. Plenty of money left.
Their interpretation was, “Well, we like to see clients have three pieces of active credit. If you look at his credit report, his America Express says date of last activity, December of 2010.” The next most recent credit card went back to ’07. The guy just wasn’t a heavy credit user, so kill him. What’s the big deal?
So, I scrambled, I called around, I switched gears to another lender and I found a lender who said, “That sounds fine to us,” and the loan closed and that one closed on time. But these are the things that I’m 25 years in the business and I’m learning as I go how strict they are becoming and making their own interpretations. I have a hypothesis why which we’ll talk about later.
I have two more stories. This one is unbelievable. They get worse. This one is a big bank that shall remain nameless. This is being videoed and I don’t want to get sued, so I won’t say the name of the bank. Submitted a clean loan, it came back and it had been about ten days and I thought, wow, what’s taking so long? Finally, it comes back rejected. Now, I know there is nothing wrong with this loan. I defy them to find something wrong with this loan. What’s going on? I call the underwriter directly and he says, “Well, you missed a checkbox.” “Okay, where did I miss a checkbox?” “You missed the checkbox on the good faith estimate. There’s a checkbox that says, ‘Do youâ€¦'” Now, this is speaking to the client. “Do you accept escrows or not accept escrows,” and the client is supposed to check that. Actually, in the software that we used to prep the disclosures to the client I checked that for him. But this bank – and I wish I could say their name – said the loan is rejected.
Well, my response was, “Why would you reject it? This is not material to the loan. It has nothing to do with debt ratios, the appraisal, the loan to value or the credit score. It’s a checkbox. Why would you reject the loan over a checkbox?” I’ll share my hypothesis why.
The bad part about this was – I mean, the loan was rejected. They cancelled the lock-in out of the system. I had a jumbo fixed rate mortgage locked in at I think 5% with no points. Ten days later, when they tell me the loan is rejected, rates had went up, thankfully, just a smidge, 5 1/8%. Well, it’s not the client’s fault that a checkbox wasn’t checked or maybe something happened with the software system. Who knows, but it’s not his fault. So I ate the difference to make him whole and make sure the client got 5%. I checked the checkbox and I sent the loan back and they approved it and we went to closing. Why wouldn’t they contact the borrower or me and say, “Hey, can you initial that you missed this checkbox?” Have it notarized. Get a note from him mom. I don’t care. A checkbox.
Okay, last story. This one is almost equally as bad. Another loan had a debt ratio at 41.08%. The maximum debt ratio for this particular bank, which is actually the same bank as the checkbox bank, is 41%. I’ve never, ever – .08% on his incomes which plays out into debts ratios, it would be equal to a $35 a month credit card debt. How can that matter? Loan rejected.
So I had to go back to the client and we looked at everything. There’s always an answer. Should he pay down another credit card? Should he pay off his car loan that has two payments left? We did something and the debt ratio went down to 39.98% and the loan got approved, but these are things.
So, here’s my hypothesis and then we’ll jump into all the data. I really believe that banks don’t want to make loans, but politically how can you say, “I’ll take your deposit. I’ll lend you money on your credit card at 13%. I’ll give you a car loan at 8%. I really don’t want to make a home loan.” I mean, the [INAUDIBLE] up in front of the senate subcommittee is getting creamed. I don’t know if it’s that they fear another double dip and a 20% down loan becomes a 90% loan to value because properties drop another 10%. If that’s your feeling, get out of this business and let people that want to make loans stay in the business and they’re out there.
This is another part of why you’re here. You want to find the right lending partners and then you want to be armed with all this data that I’m going to give in my little speeches and in these notes and in my stories to make sure that you’re dealing with the people that actually want to make loans and whose guidelines are not as insane as the checkbox lender.
So, we’re going to go ahead and dive in and I’m going to jump around just a little bit, but I’ll tell where I’m going first. I’m going to right to page 1 and a lot of this is really perfunctory and I’m not going to sit here and assume you’ve been one week in the business. If you have, great, welcome to our crazy industry, but I’m not going to insult your intelligence and say, “The maximum conforming loan limit is $417,000.” If you don’t know some of this stuff, it’s right here. I really want to get into some of the meat and potatoes that I think will teach you.
I’m going to go to FHA on page 1 and I’m going to talk a little bit about FHA. Before I start, I want to solicit some opinions about FHA because I know a lot of the realtors that I work with cringe when they hear FHA, cringe when they get an FHA offer. So somebody throw up your hand and tell me what you think about FHA financing and when you get an FHA offer if you’ve got a listing. Anybody? Don’t make me tell another story.
All right, I’ll have to tell you another story. The feedback that I get is that FHA is difficult. Mr. and Mrs. Seller, don’t take an offer with FHA financing. Now, let’s look at that with a crooked eye because fill in the blank reason. The appraisals are a little more stringent, and they are. On the last FHA deal I did, they wanted the shed, which is detached from the home, repainted because it had peeling paint and that has to do with FHA being pretty big lead-based paint hazards and peeling paint and children eating paint. Fix a broken step that led from the kitchen off the back to the backyard, one board, hammer a few nails in.
It’s $800 or $900 of repairs that the seller didn’t want to do, however I don’t know that that buyer would have been created without FHA financing. So, what I really want to say is – and we’ll go into it a little bit – I think FHA, right now, is your friend. In the boom market, I might have done one or two FHAs a year and now I bet a third or more or my business is FHA.
FHA compared to conventional, here are some of the interesting comparisons. FHA will take a credit score as low as 640. A lot of lenders went 660, but some will go down to 640. Well, right now on a conventional loan – a conventional loan gets a little complicated.
You can get a conventional loan with a credit score of I think 660, but they have what’s called an add-on. A lot of conventional loans have add-ons for different reasons and add-ons are just points. They tack onto the loan. So if a market rate right now for a $400,000 conforming loan is 4.875% with no points, if you’ve got a 680 credit score you might pay 4.875% with two points. That’s $8000. If you’ve got a 710 credit score, you might have a half point add-on that’s $2000.
So, the latest that I’ve seen, Fannie Mae and Freddie Mac have gone to you have to have, if you want no add-on on a conventional loan, a 740 credit score and 20% down. I mean, how many clients are walking around out there with 20% down and a 740 credit score? So, FHA, from a credit acceptance standpoint, is very liberal. It’s 3.5% down. The minimum for a conventional loan is 5% down and those loans are tough to get because PMI really 10% down and 20% down.
Debt ratios. FHA will go to 41 is what is written in the FHA manual, but I’ve seen them go to 45, 50, low 50’s all day long with compensating factors. Conventional, that gets really tough.
Audience Question: I’m sorry. What was an add-on again? What was an add-on?
Brian Martucci: An add-on is points. So, if I’m looking at a rate sheet and it says it’s a one point add-on for – a lot of people don’t realize, there’s an –
Audience Question: An add-on to either lower your interest rate or just cost of loan?
Brian Martucci: A cost of loan. So, if the interest rate is 4.875% with no points and you’re in a category where you get hit with an add-on, it’s going to be 4.875% with a half a point, a point or two points. I’ll give you an example and nobody really knows this one and I find this unbelievable. This just happened a little over a year ago. Fannie Mae and Freddie Mac – and I’m going to talk about them a lot because they are who writes all the rules for everybody. There’s really no other outlet besides Fannie Mae, Freddie Mac and FHA. Fannie Mae and Freddie Mac are in federal receiverships, so government is the only source for lending right now.
So, Fannie Mae and Freddie Mac said, sometime last year, that all condominium loans over 75% loan to value, regardless of credit score, have a three quarter point add-on. Wow. So, you could have 20% down and an 800 credit score – as I said, credit score doesn’t matter – if it’s a condo, because they’ve been creamed across the nation doing condo loans, even though maybe not every market has been overbuilt, enough loans have gone bad in the condo sector that now all loans, anywhere across the country, condo, over 75% loan to value, three quarter point add-on. When I talk to a client who is really clean and has 20% down and when they’re looking at my website or looking at some online website or talking to other lenders, getting competing rates, and they’re expecting 4.875% with no points because when you look at a website, it will always have the lowest available quote, but it might now pertain to your scenario. If you’re a condo, it’s 4.875% with three quarters of a point. So, when I say 4.875% with three quarters of a point to a condo buyer they look at me like I’m crazy.
Audience Question: Are there add-ons for a condominium sale where the renter to owner ratio was kind of high or –
Brian Martucci: No and that’s a really good question. I know I encouraged you to ask questions, but I’m going to pass on that one real quick because I talk about that later. There is one new change for the good from Fannie Mae and Freddie Mac that relates to high investor level condos. I’ll touch on that, but the answer is no. There’s no add-on for that and there’s other good news there.
There are add-ons for rental property, big add-ons. Fannie Mae and Freddie Mac – no bank has ever been big fans of the investor, so they are big add-ons, a point and a half, two points, for rental property. So there are a lot of add-ons in a lot of scenarios that people aren’t aware of.
Getting back to FHA, small down payment and all of your down payment is allowed to be from gift money. Not so on conventional. You have to have 5% of the purchase price into the deal, 5% of your own funds into the deal. So if you’ve got a young couple, newly married, no money then go FHA. Don’t be scared of FHA, otherwise with conventional you’ll have to wait until they save up 5% of whatever their price range plus closing costs unless you can negotiate that the seller pay the closing costs. FHA, liberal credit scores, low down payment, all the down payment can be a gift, high debt ratio acceptance and the only penalty that you pay is they might be a little bit strict on property condition.
So, if you are looking negatively at FHA offers – yes?
Audience Question: Are there special appraisers that have to be used for FHAs?
Brian Martucci: No. That’s a good question. I’ll talk about that next. Appraisals are a really big issue right now. Everybody but VA – FHA and conventional are all part of the HVCC, Home Valuation Code of Conduct. What that was, a couple years ago, Congress passed because they think that everybody in this room, you and myself, are evil and that we bring undue influence over the appraiser on the outcome of the appraisal. Granted, I’m sure it happened maybe a couple of times out of a hundred, maybe five or ten. I don’t know. But I think instead of throwing the baby out with the bath water, which is what the HVCC did, there could have been a better solution.
HVCC says, and this applies to FHA or conventional, everything but VA – and I think VA will go this was as well, if not already. When you go to a bank or – and there’s not just banks that lend money. It’s insurance companies, there are credit unions, and there are all kinds of lenders. They have to, through an appraisal management company, order the appraisal. The appraisal management company will order the appraisal. Most of them are round robin. Whoever is next in line or they’ll put it out to bid.
For example, let’s say Wells Fargo would be a good illustration. If you go to Wells Fargo, whether it’s through a broker or direct, their appraisal management company is huge because they’re huge. There might be 200 appraisers within this appraisal management company at Wells Fargo and they may send out an email blast, “We’ve got an appraisal in Gardena.” It might be a $450 fee which is what the buyer is getting charged, but they farm it out for – “Who will do it for $225?” because the appraisal management company takes a hunk.
Maybe nobody replies. “That’s not enough for me. I’m not going to bite on that.” Maybe nobody does. They send it out again the next day. “Who will do it for $250?” Well, you know, you’re getting low man on the totem pole and you’re going to get somebody coming from some faraway market. I’ve had people come from two hours away to do appraisals in this local market and you know what happens then. So, there’s got to be a better way, but FHA is subject to that, conventional is subject to that.
That’s a good segue into finishing up the discussion about the HVCC appraisal and that can lead into picking lenders and what the pros and cons are of the different sorts of lenders. Let’s jump to that now and that is going to be on page 3, which is section number 5, Difference Between Lenders.
I’m going to talk a little bit about this. I’m not going to read this verbatim. If you want to make any notes about what we’re talking about, this maybe would be the section to put them in. HVCC and this round robin appraisal thing is a big problem. One of the ways that I overcome it is I only work with – at the moment. This may change. I only work with smaller lenders. They’re lenders you probably never heard of. Sierra Pacific Mortgage, who’s heard of them? You’ve heard of Well Fargo, Bank of America, Union Bank, US Bank, but Sierra Pacific Mortgage, Century Lending, those are the ones I use now because they’re appraisal management company pools are smaller. So, you have less likelihood of getting an appraiser coming from San Diego or Riverside – that seriously happened – to come and appraise in a local market.
We use a small credit union. Has anybody ever heard of Kinecta Federal Credit Union? We’ve done so much good business with them that we have our own in-house underwriter and we’re just engaged with them so much now because of what small brings to the transaction. It brings control. We have our own underwriting team, our own loan closer and a small pool of appraisers within that appraisal management company. You don’t have to deal with the insanity. I hate to say it because there are some good things about some of the big banks, but you don’t have to deal with the insanity of pot luck with a 200 person appraisal pool at the large lenders.
So, I want to stop myself for a second and ask, is there a general opinion about the large lenders out there? Does anybody have a thought on, “Oh, I tell my clients, don’t go there. Go direct lender, go mortgage banker, go small broker, go small local credit union.” Does anybody have any thoughts on that?
Okay, I’ll just have to break another story out.
Audience Question: There’s a company here and I guess since you’re taping this I won’t say who it is. It might be the same one. In the bigger companies, you just get lost. They don’t even – there was one place I was banking at. I’ve been going there since ’81 and they still don’t know my name.
Brian Martucci: Right. Yeah, that’s my general opinion and that’s what I hear. I won’t say the name but, those four stories – big bank, big bank, big bank and medium bank. Yeah, big banks, you do get lost in the shuffle. You’re dealing with large appraisal management companies. You’re dealing with underwriters who, because of their size and their ability to market, the teams are just getting deluged with hundreds of files a week and the underwriters have files stacked up literally this high, or if they’re paperless, in their system they’re just a couple dozen deep. When another one comes in it goes in the back of the pile. For it to come up – that’s why sometimes I would hear, “Yeah, we’re on an 18 day turn time for underwriting.” Eighteen days? Well, it doesn’t take 18 days to underwrite a loan, it takes 18 days for it to come through the queue.
I learned a whole new language about queue management and I wouldn’t even lock a loan in before asking, “What’s your turn time on underwriting? What your turn time on condition review?” Every loan approval has conditions and that’s something we’re going to talk about later because it’s really interesting. “What’s your turn time on preparation of closing docs? What’s your turn time on funding?” Turn time is so important. Well, now it has become less important because I’ve learned, the hard way, to make better decisions on using smaller entities to – I mean, I still ask turn time, but to make sure the turn times are two days instead of 18 days and one day instead of five day on all those different things.
So, I really think that right now – now, I got in the business in 1986 and back then large lenders were the place to be. Then it changed to mortgage bankers. Then it changed to brokers and I would kind of change with it. Now it’s brokers and mortgage bankers I think are the place to be, so we broker to big banks, little banks, mortgage bankers, credit unions and I stay in the middle with the credit unions and the mortgage bankers and I don’t tend to go anywhere else for right now. It will probably change again in the future, but it could be a couple of years. I think we’re in for a long haul and underwriting, in the process, will be difficult for quite a while because the banks are scared. Until they don’t get scared and they get some confidence again, all of this stuff with hopefully be really important. Any questions?
So again, my opinion, if somebody has anything to the contrary I’d love to hear it. I think and I hear from a lot of the realtors that I deal with, stay away from the big banks. Even credit unions can be a little hit and miss too. Some of the credit unions are big enough. I think Kinecta is pretty small, community feel. They really strive to serve their base. What’s a big credit union? Well, Navy Federal Credit Union, USAA. I mean, there are some big credit unions. They’re big entities and some of those we don’t broker to by the way. Actually, it’s rare for a credit union to allow anybody to broker to them.
If you’ve got a client who is looking all over the board, “I’m talking to lendingtree.com.” Wow, look out on Lending Tree. I’ve never heard of anything – actually, Lending Tree has been good to me because I save a lot of deals. If I get a call from a realtor, “Well, a client went off the range and called Lending Tree and was talking to a bunch of online lenders and we’re eight days from settlement and we’re in big trouble.” Big banks, online lenders and I’m really here to speak the truth. I mean, I’m a mortgage broker saying go to a mortgage banker or go to a broker that deals with some mortgage bankers. I hope there’s a day when I can say something different and I can say, “Go to Wells Fargo.” Maybe I’ll switch gears and go to work again for a big bank. I worked for Wachovia, Well Fargo, for a while. I’m in and out of where the place to be is and to me it’s not there right now.
Online lenders, I love the concept. Honestly, I’d like to be an online lender. I’ve got a great website that lends itself to online lending. My website is not my company’s website, GetLoans.com®. What a great name for an online lender. It’s a better name than QuickenLoans.com. It’s a better name than LendingTree.com. I’d love to sit home in my PJs and do loans, but online lenders are not efficient because they have to spend so much money to market. Their marketing costs are enormous to draw eyeballs to their website. They don’t have a lot left over for support.
You hear these horror stories, “Well, they were great on the intake, taking me in the door, but now I can’t get them on the phone or they don’t seem to know what they’re doing or the turn times are slow or they use an appraiser from who knows where.” That’s my take right now on lenders.
I would like to talk a little bit next about preapprovals. This is where it all starts. This is really, really, really important. This is an interesting story. I just had my first phone call from a listing agent just last week. I hope it’s a result of my couple of seminars that I’ve done. He called me and said, “Brian, I’m in receipt of your very thorough preapproval letter. Thank you.” “Okay, well, why are you calling me?” And boom, he hit me with some really good questions that sounded like they came right off my checklist that I’ll make sure everybody gets if they want it. You should be asking questions like – and he asked me, “Is your preapproval letter based on a one bureau credit report or a three bureau credit report?”
Wow, how does he know that? That’s a great question because I’ll tell you what most lenders do and what I used to do because it was cheap and I’m cheap. A one bureau credit report is $3. A three bureau credit report, which is what a formal underwriting decision that an underwriter will make is actually based on, and those range from $12-$18. That’s four or five fold and I do hundreds or credit reports all year long. So I thought, well, it’s just a preapproval, so I’ll start with the one bureau, issue a preapproval letter and here’s what I had happen once and here’s what I’m afraid happens quite a bit. If listing agents that are accepts these preapproval letters based on a one bureau credit report, here’s what happens and here’s what happened to me.
Many, many years ago of course, I’m too seasoned now to make this mistake, I pulled a one bureau credit report and the credit score was 721. Well, on a three bureau credit report you’re pulling from all three bureaus, Equifax, Experian and TRW. So, maybe I got an Equifax at 721. Then they ratified a contract. I better pull the three bureau. It was a 643, a 671 and 721 was the high score. Well, you take the middle score. Now I thought I’m dealing with somebody who’s right over the bubble for a conventional loan and their middle credit score is 671. Now I’ve got to tell them they can get a conventional loan, but there’s an add-on or we can go FHA. Another negative I just thought about with FHA is the mortgage insurance cost is really steep on FHA. They just changed that. But, if you have to go FHA, you have to go FHA.
That is question number one on a preapproval letter. What is this based on? I don’t know if you guys see a lot of credit scores in a preapproval letter. I always put credit scores in my preapproval letter unless they’re weak. Then I’ll just put something like, “Credit is satisfactory.” So now it’s a tipoff. If any of us ever do a deal together you know if say credit is satisfactory, you better ask me what it is. Otherwise, I put it. Credit is 749. Credit is 789.
Yes, do you have a question?
Audience Question: I noticed here while you’re on credit scores that I’m in the middle of a refine and I guess I need to know what I’m doing here with these people. But I noticed here you have a 780+ there may be a reduction in points. How can I push that because mine is, like, 810?
Brian Martucci: There is – and it’s pretty rare. There are some lenders, if you go over 780 is usually the magic number, and it’s a smidge, they’ll give you a credit of usually a quarter point. But, if you’ve got a $400,000 loan and they’re going to give you a quarter point credit, that’s $1000 credit which can be applied to your closing costs. The answer to your question is you just have to ask. If you know your credit score, and this goes to everybody here personally or a client, if you know your credit score and you should ask your lender, “What was my credit score?” Just don’t let them say, “It was really good.” “What was it?” If it’s super high, if it’s 780 or higher, you should be asking lenders, you should be asking me, “Is there any help from that? Am I going to get any little benefit from that? Is my client going to get any extra rebate it’s called? Any rebate from that?” It’s a good question.
So, back to the preapproval letter, that is the one important question. Then you should be asking – and this realtor proceeded to ask me some really hard questions. Well, I know that they had a home for sale. Is it sold? Great question. Yes, it is. Have you seen the settlement sheets? I mean, I was just blown away. Yeah, I have it. I was expecting him to say, “Can you send it to me?” which I really couldn’t because that’s a person financial document of the client, but most realtors are not asking me in depth, “Hey, it says he’s preapproved. Good enough for me.”
This realtor, I should say, was representing a bank on a short sale and I’ve noticed – no offense to those of us that maybe don’t do short sales or don’t know, but like I said, this is the first time in 25 years I had somebody pressing this hard on a preapproval letter. I think that he’s been trained by the bank because the bank has probably been burned enough and the banks are a business and it’s a bottom line. You should be asking these questions. I’ve got that in my checklist by the way, so when you guys take off you’ll be armed with these question. We’re just chatting about them now.
He went on to ask, “I noticed one of them is self-employed.” It was a husband and wife. “Yes, they are.” “Have you seen tax returns?” Wow, yes I have. And this went on and on. “Have you documented their assets?” because I promise you, so many preapproval letters are based on a conversation and maybe a credit report, maybe a one bureau. You call up your lender that referred by your realtor, maybe one you know, and, “Hey, I make $100,000 a year and I want to buy a $400,000 place. I want to put 10% down and I’ve got a good credit score.” Lender checked the credit score real quick on a one bureau and says, “Good enough for me.” I could do those numbers in my head. Sure, $100,000 a year should get you a $360,000 loan on a 10% down on a $400,000 purchase pretty handily. But, are you just going to take his word that he makes $100,000 a year?
Then you find out he’s self-employed or he’s commissioned and he doesn’t make $100,000 a year; he grosses $100,000 a year and his bottom line says – this is also in the notes – his bottom line might be $40,000 because he writes off everything plus the kitchen sink and good for him come tax time, but if you’re going to tell the federal government that you make $40,000 a year net, that’s what you make. You don’t qualify for a $360,000 loan on $40,000 net income.
Audience Question: So then should you be getting people prequalified ahead of time rather than the preapproval which could then not qualify?
Brian Martucci: Exactly. Absolutely.
Audience Question: Do you recommend [INAUDIBLE] into the process to qualify?
Brian Martucci: Yes and some of it is semantics. What’s the difference between prequalified and preapproved? I mean, I’ve seen commitment letters from an underwriter that says “Conditional Commitment Letter” and there’s a laundry list of conditions. So what does that mean? It doesn’t mean you’re getting a loan yet until you answer the underwriter’s questions and all these conditions.
So, to me, forget the semantics. Whether you’re getting a prequalification letter, a preapproval letter and if you’re getting a commitment letter from a bank with the bank’s letterhead on it, you better read that commitment letter. Don’t be lazy. Read it because you’ll be astonished at what’s in there. So, on the preapproval, ask – as you learn, everything we’re going to talk about and, you know, look at page 1. It talks about income and down payment. Page 2 I think talks about debt ratios. You should be asking all of these questions.
Audience Question: [INAUDIBLE] to prequalify customers before you have [INAUDIBLE]?
Brian Martucci: No. They prefer it. They prefer it because otherwise you’re going to get yourself in a position, whether it’s the loan officer, the broker, the bank rep at the bank. You’re going to get yourself in trouble by throwing out numbers without doing the hard work. Absolutely. Almost everybody and if they don’t, I wouldn’t want to work with them if I was you. I wouldn’t want my client to work with someone like that who is too lazy to do the hard work up front. And I will tell you, I’ve lost clients over wanting to do the hard work up front and prequalify them or pre-approve them or whatever.
A pretty good friend of mine who called me a couple of weeks ago – and he’s self-employed, he owns a lawn mower manufacturing company and really complicated tax returns. It took me a couple of days to get his tax returns out of him, but then he’s got a half million dollar loss last year and needed to know if that was a one time event or is it going to happen again. What’s going on? I started asking him for profit and loss statements and a letter from him accountant to address this and that and he just – I’m sure he was overwhelmed and he went away. My friend Kevin who I play volleyball with, I can’t get him on the phone. I’m certain that Kevin – and I’m sure he feels really bad about it – is talking to other lenders who are going to take the easy path.
“Wow, man, you’ve got one good year on your tax, ’08 was a doozy. You’ve got a big loss in ’09. How does ’10 look? It’s going to be pretty good? Okay, well, I wouldn’t worry about it.” Well, he hasn’t filed ’10 and ’09 had a half million dollar loss. You can’t throw out – and lenders are throwing out preapproval letters based on nothing better than a hunch. So as a realtor, to me, especially if you’re representing a seller, but even if you’re a buyer’s agent, you’ve got an obligation to ask these questions. To me, it stinks. I’m basically asking you to or your clients would be asking you to or expecting you to become a lender and I think that’s the hard part about your business.
You are everything. You are psychologist, taxi driver, realtor, lender, title expert. I mean, you have to be everything, but sorry, you have to be everything to some degree and I think that’s why you’re here. I don’t think you could ever – I swear I work 12 hour days, 25 years and I can barely keep up with it, so you’re never going to get to level where you really are a lender. But I just want you to have some basic knowledge so that you know, is this a three bureau credit report? My client is self-employed. Did you see tax returns? Did you really look at them? Have they been run by an underwriter or did you just look at them? It’s no good if – even me, with 25 years in the business, my buddy’s tax return, they were this thick each year and I couldn’t read those things. I couldn’t analyze those. I had to send them to an underwriter for her to tell me what – and that we had a problem ’09, but not in ’08 and we’d better get a profit and loss statement for 2010.
If you’ve got a complicated self-employed, you really should ask if an underwriter has seen these tax returns. Now, if it’s Joe and Sally salaried and they’re easy, breezy salary, it’s simple. Honestly, there are many cases – I mean, I don’t think any of us probably deal with clients that are liars. I’m not going to have someone tell me they make $120,000 a year salary and they make $80,000. If someone tells me, “I make $120,000 a year salary. I work for Raytheon and I do XYZ,” and I pull the credit report and they send me some bank statements, honestly, that’s good enough for me. In 25 years I’ve never been burned on a salary [INAUDIBLE] and people just don’t like about their salary.
If you start getting into self-employed people or us commissioned people which everybody in this room is, you better make sure someone has looked at their tax returns. You really need to become a lender on a preapproval letter and ask about the credit report, the income and the assets. So many lenders just take people for their word. Now assets, I would never take somebody for their word. Then I found out, “Well, there was an inheritance,” and I could tell you stories all day long about assets. That’s the one wild card.
“I talked to the lawyer and we were going to get our money in two weeks, but now there’s a problem and some distant cousin is contesting things and it’s going to be six month.” “I sent out a preapproval letter based on the fact that you said you had $200,000. Well, what do you have?” “I have $4000 in checking and I’ve got a 401k, but I really don’t want to borrow against it.” So assets are important. Income, if it’s self-employed or commissioned is important. Any income that varies I should say. I’ve had people that are salaried but have substantial bonuses and they say, “Yeah, I make $100,000 a year and I get $50,000 a year in bonuses,” and then I find out this is job that they just started and they have $100,000 a year salary, but they haven’t got bonus one yet.
Well, Fannie Mae and Freddie Mac say you have to have a two-year history of any income that varies so they can take an average. Well, it was $40,000 in ’08. It was $60,000 in ’09. That’s a $50,000 a year bonus average. It’s going to be $50,000 in August of 2011, so you have a zero bonus average. You don’t have an average if you don’t have two years. Any income that varies, I should say, is to be questioned and documented and asked about. Credit should be asked about. Assets should be asked about.
I can almost guarantee you, and I won’t ask the crowd because I don’t want to embarrass you and you guys don’t like to tell stories as much as me anyway, but I can bet most of you don’t ask to the depth of – I hear my realtor friends complain, “I just got a preapproval letter from – I don’t know this lender. I hope it’s okay.” Well, why don’t you ask? Ask what it’s based on? Ask about the three bureau. Ask if things have been documented. Don’t just hope. It’s almost negligent to take a seller’s property off the market – yeah, maybe you can take backup offers – for 30 days or 45 days and then the loan gets rejected. That’s just a pet peeve.
So, I frontload everything to day one and I do lose clients that way because people just don’t want to deal with it. Well, you’re going to have to deal with it anyway, let’s just deal with it now. I had somebody that was looking at $1 million price range and they owned some Subway sub shops. They bought three new ones last year and their income just tanked. He bit off more than he could chew, no pun intended. I’ve got him qualified for a $300,000 condo now and he was running this realtor around for a month looking at $1 million homes. That’s no way to run a business.
Front load it. I wouldn’t take people out until they had been prequalified or preapproved. But whatever works –
Audience Question: Might as well go to [INAUDIBLE].
Brian Martucci: Right. Pre- whatever you want to call it, but just so that it’s real and based on real data and real documentation and a three bureau credit report.
Any questions on preapprovals? Anybody have a good preapproval story? I have one good one. I want to tell you one more preapproval before we take a break. I had some clients come to me and they were denied for a loan. They had a $50,000 earnest money deposit up and this was day 38 on a 45 day closing, so they had seven days left. Loan rejected, loan rejected, loan rejected. They tried other avenues.
So, I sat down with them one night and they’re literally almost in tears. Well, he had just started a commission job six months ago. No two-year history. I mean, you can’t get a loan. But I worked it out. We were two weeks late for closing. We had to get a father to cosign and the three of them, the husband and wife and the father bought it as an investment. Unfortunately, an investment property has a higher interest rate, but they got the loan and didn’t lose their $50,000 deposit. But wouldn’t it have been nice for them to have had bad news frontloaded. “Wow, so we have to pay that rate and we have to do 20% down,” and actually now I think investment property is 25% down. Well, maybe they would have said no. Maybe they would have waited a year and a half until they had a two-year job history instead of a six month job history. They didn’t have that option. They had $50,000 on the hook.
So, whose fault is that? It’s the lender’s, but the realtor didn’t ask about the preapproval letter, not the listing agent, not the selling agent. The lender clearly didn’t do his due diligence on the front end. How negligent is that to put this young couple’s $50,000 earnest money deposit on the hook? That is absolute financial – and I’m sure there would have been a lawsuit if they lost that deposit if I didn’t come and help them get a loan.
So, let’s take no more than a ten minute break. If you want to come back faster, that’s great. Thanks very much.
I think we’re all back, so let’s go ahead and jump back in. I want to go ahead and jump to page 2 and talk a little bit about underwriting. Underwriting has changed quite a bit.
Audience Question: I just have a question. [INAUDIBLE] a buyer is looking for a preapproval letter. Once [INAUDIBLE] that how long [INAUDIBLE]?
Brian Martucci: A preapproval letter is usually as good for as long as the special report that it’s based on is good for which is usually 120 days. Some might be 90 days. After that all you have to do is update the credit report and you should probably ask the buyer if anything has changed on their assets. Whether you want to trust them or ask for updated bank statements. But with a couple of updates and an updated credit report, you can just keep rolling it over three or four months at a time.
Anybody else have any question that thought of before we dive in on underwriting?
So, underwriting – and this change isn’t really recent. Underwriting went automated a long time ago, five, six, seven, eight years. Automated underwriting is where the loan processor will input everything into the computer such as credit score, income, assets and now at this point everything, of course, has been thoroughly documented so you know what’s going into the computer is accurate and then you hit the button. Most loans really are underwritten by computer, by software, automated underwriting, AU.
Now, there are still human underwriters because there are times when you need to do a manual underwrite. Every loan that is underwritten as an AU, automated underwriting, is reviewed manually. So, although the loan processor input $48,000 in assets, $80,000 a year income, someone is still going to look at that documentation that’s behind those numbers to make sure that the loan processor didn’t input things incorrectly.
Automated underwriting actually was a boon to mortgages because it turned out surprisingly that it’s more liberally than a human underwriter. I mean, I can remember years ago having conversations with underwriters. The maximum debt ratio used to be 36%, hard and fast, and you could go a little bit over if you had compensating factors. I can remember sitting down with an underwriter and saying, back when underwriters were usually in house, “Amy, come on, let’s go to lunch. It’s 37.9%, 38%, it’s a couple percentage points over. What’s the big deal?” And we’d go to lunch and [INAUDIBLE] really old school, old fashioned, talking the underwriter into the loan as much as maybe I thought I did, I’m sure she was looking at, well, they’ve got a good credit score, they’ve got good cash reserves. It’s Brian and I like Brian. Sure. That kind of stuff really happened.
Now, I’ve seen loans get approve, even today in this strict environment, the computer is totally bias free. Now, I don’t know what all the formulas and things that go into the automated approvals are, but I know I’ve seen loan approvals come with a 53% – I saw one with a 60% debt ratio. The 60% debt ratio got approved. Why? How? That means that 60% of the borrower’s gross income is going towards the mortgage payment and other debt. That leaves 40% for taxes and you’re done right there. You’re living on pork and beans right there after taxes and 60% debt ratio. Utilities, Christmas gifts, gas, I mean, all of it. How did that loan get approved? I imagine it had something to do with – there were probably substantial assets and they figured if somebody’s got $3 million, they can be short $1000 every month and live on the assets.
So the computer is making loans approved that I personally don’t think ever would have gotten approved before. So although it is really strict right now, you don’t have to go in and cajole the underwriter and convince them we think that there’s a good loan because – and you have all these stories. If there’s a credit issue you get the client to write a credit explanation letter and they go into this long, two page explanation about it.
One of my favorite ones is my dog jumped through a window and I had to rush him to the hospital and ended up needing $8000 in surgeries over X amount of time and I just wasn’t paying attention to my bill and that’s truly a sad story because I love dogs, but what’s the underwriter supposed to say to that? Your bills are showing up in the mailbox. Pay the bill.
So automated underwriting is actually good and I think the point for you to know about automated underwriting and stretching debt ratios is this. I would never, ever give up on a client until you run them through a loan officer who’s really doing the work and really looking at a three bureau credit report and tax returns and W-2’s or whatever it is they need to look at and put them in the system. Run them through the system. So many times I’ve looked at a client’s financials and thought, “That won’t work.” I call up my loan processor, “Jeanine, go ahead and plug it in the system,” and she’s thinking, “Oh, you’re wasting my time.” She’s got 8000 other things to do and it comes back loan approved.
Or you can tweak it and maybe you need to scrounge up some extra assets. Maybe you need to get a gift letter. Maybe you just need to work with them on their credit because my processor might – let’s say the credit score is 719 and it gets rejected because maybe this is a really tough program and a really tough lender that wants a 720, period, end of story. Well, maybe she puts in a 720. Now, the middle credit score is a 719, but she overrides it, puts in a 720 and the loan is approved.
Well, let’s not give up on this borrower for one point, even if it’s a 713 and she puts in a 720. That just tells me I’ve got some work to do on the borrower’s credit score and helping them get their credit score up. This might not be a client you’re going to write on that night or that weekend, but why would they give up on it? I’ve been with people for years, I mean, years and helped the realtor sell them a house two, three, four, five years later. Why would you ever give up on money? That’s like seeing a case of $1000 bills on the side of the road and just waving bye-bye at it.
So, unless it’s just blatantly – somebody is just going bankrupt, they’ve got no money. I really think it’s worth the time, plus I think it looks good to the potential client. “Wow, they really went to bat for me. This realtor pushed this lender to do all this work. We just couldn’t make it,” but the lender has now told me to do these things and the realtor, if they were smart – I know I do. I have a whole drip system and I’m not just talking about sending the potential client dripped listings that are in their price range. Check in. “How you doing? Are you doing what Brian said? Are you working on your credit score? Did you pay off that credit card? Did you close that card out?” Whatever it is. Respect people and I think they’ll respect you back. I really give up on almost nobody. It would have to be extreme for me to give up on somebody. That is my point with automated underwriting.
The next thing down you’ll see is portfolio underwriting. Now, someone from the group had just asked me a question about what is a portfolio underwriter? Who is a portfolio underwriter? I put in the notes there that ING is a portfolio lender. We’re approved with ING and I use them quite a bit because they are a portfolio lender. What does that mean? Being a portfolio lender means you’re a non Fannie Mae and Freddie Mac lender. You’re underwriting more according to your own rules.
I’m fascinated by this stuff. Here’s how fascinating that is. For many years, ING just changed this recently, but it’s a good illustration of portfolio lending. ING’s policy was not to verify assets. Let me say that again; not to verify assets. So if you had a situation where [INAUDIBLE] somebody sold a collection of antique guitars and they did it in cash and believe that they did it. I think that they sold antique guitars. He was a guitarist. I don’t think he sold drugs; I think he sold antique guitars, but there were no invoices, there were no receipts. The paper trail was muddy. Well, let’s go ING.
ING recently started to verify assets just a couple of months ago, but that’s an interesting illustration of ING didn’t stop not verifying assets in ’07 or ’08 when the market turned and the economy went on the brink. It just did this a couple of weeks or a month ago. So there are still other things that they do. I had a client who was very complicated producers. Both his tax returns and his income and his personality and that’s definitely another story. But boy, just so complicated. One of those six inch thick tax returns. I could barely make heads or tails of what he really made. He did reality TV shows. Every reality TV show he did he would incorporate another company for that show’s income. Just a mess.
I submitted that loan to ING and it came back with no income conditions. They asked not one income condition question. A couple of updated bank statements, really simple stuff. There are actually not many portfolio lenders around, but they tend to be a little more liberal because they’re not underwriting to the checkbox school of underwriting that is Fannie Mae and Freddie Mac who is currently broke and in federal receivership. What broke business really can be in business? Of course if the federal government’s behind them – what business like that is going to be in business? What business like that is going to keep their old liberal rules? They are ratcheting down and it’s a result of politics and the money involved and these people’s balance sheets are just slaughtered, Fannie Mae and Freddie Mac.
So they make it really difficult and I should say, to defend the underwriters and the banks and the bank reps, I should be clear because I hear a lot of realtors who bash, “That underwriter. That’s our underwriter.” Well, the underwriter is the messenger and then they give the bad news to me and then I’m the messenger and then I get yelled at. But if you want to yell at somebody, yell at your representative. Yell at your senator because they’re the ones that are affecting the changes. I guess there’s really no changes right now except we’re getting stricter and right now they’re thinking about how to make changes. Are they going to privatize it? Are they going to partially privatize it? Should they remove the government guarantee? But, Fannie Mae and Freddie Mac write the rules.
I’ve had conversations with underwriters where they say, “Brian, I’m really sorry. I know just a couple of years ago I would have signed off on this loan with no conditions, but you’re not going to like me.” And I look and there are really two pages of conditions. I have to meet Fannie Mae and Freddie Mac guidelines or the loan is an unsalable loan to Fannie and Freddie. Now this gets a little bit beyond me and you don’t need to know this, but loans are sold off as mortgage-backed securities and they get cut up in [INAUDIBLE] and all kinds of stuff that I don’t care about. It’s all based on Fannie Mae and Freddie Mac.
So, if you’re not meeting those guidelines to the letter – because I don’t think Fannie Mae and Freddie Mac want the loans – they’re going to kick the loan back to the bank. It’s called a buyback, and you lose tens of thousands of dollars, no revenue. So that is why the banks tell their underwriters to letter of the law, to the checkbox.
So I didn’t really blame the underwriter. I don’t really blame those big, evil banks. I do somewhat. It’s Fannie Mae and Freddie Mac. Keep your eye on the news because what they do with Fannie Mae and Freddie Mac will affect underwriting which will affect all of us. A little aside there, but I think it’s pretty interesting.
So, that’s a little bit about underwriting. I want to go back on appraisals which I think is the fourth page. The top of the page says “How to get a Faster Appraisal”. We’re going to talk a little bit about appraisal rules, which may sound silly to some of you. I’ve got stories for you and I think we need to know a little bit about – I learned things about appraisals that are shocking and I’m sure that everybody here could use a little bit of an education, but I’m going to start with how to get a faster appraisal.
Well, I’ve already alluded to the fact that right now, if you work with a smaller lender, a direct lender, a broker that goes to a direct lender, a credit union, you’ve got a smaller appraisal pool. These are people that might have nine appraisers in their appraisal pool and there’s more accountability. The appraisers know the lenders and there’s relationship involved. There’s accountability. Going to that sort of lender will get you a faster turn time. The most important part of going to that type of lender is just a higher quality appraisal and somebody who is going to be coming from five or ten miles and not two hours away.
What I really want to talk about when it comes to appraisals are [sounds like] appraisals. Something I learned just recently that’s not on here. You’ve got all this data in front of you on my sheet. I’m going to tell you a few stories that will be really interesting things to know. Real life examples that I’ve just been through and the most recent one was last week in Santa Monica. It was a massive, beautiful, stunning, modern renovation that was out of this world on 24th street. The client tells me it’s worth $1.8 million easy. The general contractor, the design build guy who I know personally, says, “Well, that’s pretty optimistic. It’s $1.5 million maybe, $1,450,000.” It’s a refinance. I get started. All I need to make this deal work is $1.4 million for what they want, so I figure I’m okay.
The appraisal comes back at $1,260,000. I’m $150,000-$200,000 off and the client is beside himself. I mean, screaming and yelling and words that I can’t use because we’re being videotaped and I’m the manager. So, I said, “Okay, relax. I’m going to try and fix this. What we’ll do is an appraisal challenge.”
Now, I’ll just go ahead and tell you the ending. No appraisal challenge ever works for the reasons I just told you. They don’t care. If it’s a lower appraisal, it’s less risk for them because it’s a lower loan amount they’re lending based on a lower appraisal. I’m quite certain they’ve been told – they being the underwriters and the review appraisers who take and field these appraisal challenges. The appraiser doesn’t look at it, which is fair, a separate one does to see if the comps that I send in are better than the ones that the appraiser uses. I’ve never won one. One that I won was a very slight degree. A small couple 2-3%. It wasn’t enough to help.
So this one, I send it in and I talk to a realtor in the area who has been in that Santa Monica area for decades. I get comps. I mean, I’m a lender. I don’t really know. They look good to me. Now, they are more modern and contemporary and done as the subject property is. The comps that the appraiser used are dogs. They’re similar in square footage, but they’re tired. They’re not renovated. He made some adjustments for condition. He gave us some credit for a brand new, stunning renovation, but it’s $1,260,000. You guys probably know. You don’t even need to live there to know, really, a $1,260,000? I mean, a stunning renovation. It can’t be.
So, these comps that I got from this realtor are $1.5-$2 million and I write up a little narrative about why we think these comps are better and send it in. Two days later, appraisal challenge denied and here’s why, here’s the interesting rule. The comps that they gave me were a lot bigger, 1000 square feet bigger, 1400 square feet bigger, and I think the magic number – I can’t remember. It’s either 25% or 30%. But, one of the comments – it was a very formal rebuttal to my appraisal challenge. They topped out all my comps was the bottom line because they’re over – “Your comps would require over a 30% adjustment to GLA,” Gross Living Area. In other words, these comps are so far out there in square footage, they’re really not comparable and they were five or six blocks from the ocean where the subject property is on 24th Street.
So, looking at the comps that the appraiser used, they were further out, which is more comparable. They were similar square footage, which is more comparable. I don’t think he made enough adjustment on condition, but I lose and he wins.
To fix it, I went out and found two lenders, out of the gazillion that I use, that will give me a higher loan to value. This particular lender that I was using tapped out – it was cash out refinance – at 65% loan to value. Well, 65% of $1.4 million would have worked; 65% of $1,260,000 just didn’t get near enough cash out to do what they needed to do.
So, I found a lender to go 75% loan to value. I’m going to get them almost all the cash out they were looking at simply by using a lender with a higher loan to value. We’ll use this low appraisal that the buyers are livid over, but we can move on and do almost all of what we wanted and the rate is a little bit higher too. So he’s not happy from several standpoints, but that was a new one me. If you use you a 10,000 square foot property, can’t you just kind of extrapolate backwards and make a square footage adjustment? Well, apparently not and the number is somewhere right around 25% or 30%.
Another interesting one that I never knew of. This one happened ten years. I think the rule, I wouldn’t say that it went away, but I think underwriters got more liberal with it in the boom. I’m sure Fannie Mae and Freddie Mac weren’t looking as hard when they were looking at loans to buy them and there as many, if any, buybacks. This rule has existed all the way through; they’ve just started to reinforce it now.
This rule is below grade square footage, below grade GLA, gross living area, not a basement, but finished square footage, below grade square footage. Poof, it doesn’t exist. You can’t count it. You can count it as basement. I had a property. It was in, I don’t know, maybe it was in the hill section of Manhattan Beach, which, you know, the hill section is hilly and wavy. Well the bottom level, which was finished – I mean, it was stunning. There was a bedroom, there was a full bathroom, there was closet space, there was a little rec room and there was an entryway. There was a foyer. The back of the house, the back of that first level, I’d say 1/3 of it was below grade.
So I get the appraisal, which was low, and it say that the house is 2400 square feet, not 3400 square feet or whatever the number was if you would have counted the below grade square footage. So I learned, ten years ago, below grade square footage doesn’t count. It’s a basement, but it’s not finished.
Audience Question: If the windows are above the level of the ground is it still below grade? I mean, is it still –
Brian Martucci: If any of it is below grade.
Audience Question: Any of it –
Brian Martucci: How did I work that one out? I talked to them about we were going to go down this path and they were actually going to – because it was only 1/3 of the house. Most of the windows were above grade on this. Maybe one was partial. They were going to dig out and re-landscape that whole 1/3 and that wasn’t going to be cheap. And re-landscape, it’s nice, it was a nice house – to make it look like it fit the rest of the lot. They were going to spend all that money to refinance.
I can’t remember what the solution was. Maybe, back then, ten years ago, it was loose enough that I just talked to lender after lender after lender until I found somebody that had a different interpretation. Now that doesn’t really happen because everything is universal. It’s Fannie Mae, it’s Freddie Mac, it’s FHA. Everybody is so fearful of buybacks that the interpretation is narrow and strict across the board. I may still call – call after call after call, just to go through the exercise. It’s usually a waste of my time. I know that if I don’t meet every little checkbox that loan is going to get rejected.
I know now, if I’ve got a property like that, we need to have a discussion. I don’t know how many times that happens, but that’s another interesting rule that people don’t know about.
Here are some more common ones, but as you see where it says, “Appraisal rules for comparables and other miscellaneous appraisal rules” – these might sound offensive to you like, “I know that.” But I’ve got to go through them and you know I’ll have a couple good stories along the way. I’ll start with one.
I had a refine and there was no realtors involved of course, but this owner asked his realtor who had sold him the place what the place should appraise for. This is on the east coast. I’ll at least say the first name, crazy Mario – I’m licensed in DC, Maryland and Virginia as well as California, so this happens on Capitol Hill. It’s 4th and East Capitol Street. It’s four blocks back from the capitol, great location. Crazy Mario says, “It’s worth at least $2 million.”
All right. I only needed not much. It was a small $300,000 loan. I would have been fine with $500,000 or $600,000. So it really doesn’t matter but it illustrates my point. The appraisal came back at $980,000. Well, the owner, his expectations were not met. He thinks $2 million; it’s $980,000. So he calls me and he’s screaming and upset. He calls Mario. Crazy Mario calls me up and says, “Brian, that’s impossible. Blah, blah, blah.” “Well Mario, give me some comps. We’ll do an appraisal challenge.”
His first comp is this duplex, two unit, stunning, recently renovated, five bedrooms, finished basement, two-car garage, off street, wow, $2 million. Okay. The subject property is single family, on slab, no basement, no parking, street parking, hasn’t been renovated in 20 years. I just had dinner with Mario a couple of weeks ago. I fly back and forth quite a bit. I love crazy Mario, so how do I – you have to be careful. “Mario, this isn’t really comparable.” I mean, everybody in this room knows. Mario has been in the business for 30 years. We all know that. That ain’t comp.
“Well, what else have you got?” “Oh, C Street, right around the corner.” The appraiser was right. He might have been a little bit low. The bottom line is it didn’t matter. It’s a small loan. Let’s just all move on. But, what’s comparable? That’s an extreme example, but it you’re getting down to something like that place in Santa Monica. And this is what I told the [INAUDIBLE] and this is an important point to know. I don’t think there’s a lack of value. I know that market pretty well. It’s $1.5 million. I know it is. I think what we have is not a lack of value. We have a lack of data.
In a market where things aren’t turning over a lot, you don’t have units, you don’t have data, you don’t have the number. So I explained to the client, unfortunately, right now in this marketplace, the middle is missing. We’ve got the unfinished similar square footage. They’re horrible, but on the low end and we’ve got the stunning and big on the high end. We don’t have anything in the middle of your range to say we can hang our hat on this as a comp. It’s $1.5 million.
It is $1.5 million. The data just isn’t there. So, could we try again in three months and how that the spring market and the next quarter bring some more data and some more units? Maybe that’s the choice. He chose to take the higher interest rate and the lender that had a higher loan to value and we’re moving on. But, sometimes it’s a lack of data.
What constitutes a valid comp? I’m assuming everybody may know this one, but I’ve seen other examples. Comps, at least according to Fannie Mae and Freddie Mac, are supposed to be no more than six months old. I’ve seen appraisers go over who are supposed to know the Fannie Mae and Freddie Mac guideline, but they’ll explain it in their narrative. “Comps numbers two, three and four,” because sometimes they’ll give you six or seven comps in an appraisal. Sometimes they’ll give me listings in an appraisal because they know there’s little data, so they’ll throw any data they can in.
You really can’t use listings. I mean, it’s not data until it sells, right? But, they’re desperate. So, maybe he says, “Comps two, three and four, the appraiser acknowledges are outside of six months or eight months, nine months, but it’s all that’s out there,” and he does what’s a called a time adjustment. In this appraiser’s opinion the market has gone down 6% in the last year. That is, whatever it is, 0.5% a month. It’s been eight months since these old comps, so he makes a 4% adjustment based on the sale price from the eight month old comps. Maybe it’s there, maybe it’s not, but preferably comps are inside of six months and, of course, hopefully comps are comparable, unlike crazy Mario’s example. As much as you can get.
An appraiser can adjust for everything, so you’re certainly welcome to bring on – I have one right now. It’s a metal house in a neighborhood of traditional. There’s no other – not even a contemporary, let alone a metal contemporary. I don’t know how we’re going to fall on this one, but the appraiser is going to have to make an adjustment for the style. An appraiser is going to have to make an adjustment for the lot size because the subject property is on a pretty big lot compared to the rest of the neighborhood.
Truth be told, had he talked to somebody in the know, a lender or a really smart realtor, somebody would have said, “You’re going have a problem with this down the line, getting your purchase financing,” he bought the lot and built this metal thing. Selling it. The marketability to sell it when it’s in a neighborhood of traditional, with what you’re trying to sell, here’s why there’s going to be no comps. You might be looking at an all cash buyer. You might be looking at somebody with a really big down payment because if the appraisal comes in really low, if you’ve got a 50% loan to value, well maybe that becomes a 75% on a low appraisal and you’re still okay because maybe the program only requires 20% or 25% equity.
There are so many things that you need to watch and I’m surprised at the things, again, we’ll throw out crazy Mario’s example. Trying to comp a five bedroom, 3000 square foot with a three bedroom, and one and half bath. There’s a point where you just have to say, “Wow, this is going to be tough because this just isn’t a comp.”
So you really have to dig deep and think about timing, how old the comps are, obviously all the obvious things that you guys do when you’re looking at taking a listing or making an offering trying to justify the price that your client wants to offer and maybe you’re trying to tell them, “You’re way low or you’re a little high. You need to be more aggressive and cut your offer and here’s why.” Whatever you’re doing.
Another important thing on comps to know is on condos. Now again, here’s the Fannie Mae requirement. Maybe it’s a [INAUDIBLE] out there and you have to get creative. You meaning maybe you taking a listing or you meaning maybe an appraiser who’s trying to appraise this condo, but Fannie Mae and Freddie Mac require that two out of the three comps are from within the building. What if it’s a 12 unit building and nothing has sold in the last year or longer? You’ve got to go outside the building to a competing building down the street or as close as possible and do your best. But know that if you’ve got a fairly big building or even if it’s a smaller building and you’ve got some recent sales, you can’t go outside the building and try to comp it with something else. You’ve got to look inside the building first.
Audience Question: Is there one those that they give more weight to because you’re saying it’s required that comps are no more than six months old, yet two or three of them have to come from the same building. So what if those two things don’t match up? Would they prefer going back further in that same building or would they prefer within six months [INAUDIBLE] outside.
Brian Martucci: I think that’s interpretive. That’s a good question. My guess would be that they would give more credence to the comps inside the building because think about it. The comp inside the building speaks to the view. Another building is going to have a whole different view. It speaks to the – maybe they’re stamping out three, four or five different types of units in that building so that the square footage and the layout of the unit is similar to those within the building units. The parking, the street presence, all that stuff is similar from those inside the building comps.
If you’re looking at a time adjustment on an old comp, okay. I’m think an underwriter is probably going to give more validity to the old comp, older comp, with a time adjustment than something that’s three months old, but it’s four streets over, ten buildings down. That’s a totally different product and a totally different piece of inventory. Unless you get lucky and it happens to be maybe with the same builder who rubber stamped the same thing and got the same view overlooking wherever, then maybe that’s a different story.
Audience Question: So they’d rather account for the time? It just seems like the market is just not the same market from one year to the next [INAUDIBLE].
Brian Martucci: You’re right; it’s not and that’s why they preferably want to have within six months. Sometimes you do what you have to do and I just think that they’re first going to what’s the most pertinent data that’s inside the building. Let’s go ahead and deal with the adjustment and then we’ll look and see what kind of adjustments can be made for different square footage, different view, different everything on this other one and they just kind of weave it into the bottom line number. It’s very subjective unfortunately.
Audience Question: How do they arrive at a time adjustment usually?
Brian Martucci: Time adjustment is usually they’ll take – different appraisers will use different sources, but they’re not pulling it out of thin area. They’ll find a source somewhere. There’s an index. Has anybody heard of the Case-Shiller Index? You’ll frequently hear the Case-Shiller Index which is a couple of economists that create – you can actually go short or go long the housing market in about a dozen different cities via this index. It’s pretty interesting. Some people will cite the Case-Shiller Index and say, “In San Diego, in 2010, the market was down 4%,” which is point three something percent a month and maybe if you’re into January 2011, the appraiser may use that 0.3% a month decline to do his time adjustment. There are different indexes that they’ll look up and use.
The same thing to the – when times were good and the market was booming. I remember seeing appraisals that said, “The market’s up 18% in this area for 2002,” so in January ’03 they’re making almost 2% a month adjustment upward. Time adjustments are pretty important and you have to remember – this is interesting. To me, this is a good date because this I think is the hardest job you guys probably have. Listing and telling people – who doesn’t overvalue their listing? All of you that own homes think your homes are worth more. That’s just human nature.
Trying to sit down and tell somebody, “No, your place isn’t worth $699,000,” and you’re thinking in your head it’s $619,000 at best, so maybe I’ll tell them $649,000 [INAUDIBLE]. How do you handle that emotionally? That’s where the psychology comes into play and this is where you need to say – and I say this sometimes. Mostly to refinance clients because now I’m also the realtor in that case and I’m saying, “I know. I know your neighbor sold 14 months ago and it was right next door,” and he thinks it’s great data. But the market is down X percent, so that’s 6% a year and now we’re into the second year. That’s a 7.5% decline on this million dollar asset. So, when something sells and you guys know this talking on the listing presentation.
They take that number. They’ve got it right here in their head and that’s all they’re hanging on. “My house is pretty similar.” No, it isn’t. What two houses are that much alike? Maybe the neighbor was in renovation and maybe they didn’t like each other and he was never in the house. He never saw that it was a fantastic renovation. Maybe it was 14 months old, but he’s hanging this million dollar number in his head. He’s not doing time adjustments. He was never in the house or he was in the house so long ago he really forgot. He didn’t know that there was a bedroom in the attic that they refinished. Just so many things that I would hate to do if I was you guys on a listing presentation because it’s so sensitive, but maybe that one more bow and arrow in your quiver when you’re talking to clients.
Start talking about time adjustments on – I was talking to this crazy lender at this seminar and he’s talking about time adjustments. Maybe weave that into your discussion on listing presentations.
Another thing, I don’t know how much it happens in this marketplace. I’ve seen it happen a wee bit. It happens quite a bit in DC because DC is an oddball market. The properties are so old and they’re former grocery stores converted into – I mean, old Korean markets that were row homes in the 1800’s. Then they were a Korean grocery store for 100 years and then they were converted and it was a real botch job. So I run across things like I just one happen. I’m speaking to number four, watch out for functional obsolescence. This particular instance, functional obsolescence is when something exists in this home, the subject property, and it isn’t really present or common for the market.
This particular story I’m going to tell you, I actually won this argument with the appraiser which is a rare one. It was a two bedroom, one bath home and they have those on Capitol Hill. These small and narrow little homes. This home was 12 feet wide. The appraisal came in fine. The value came in fine, but the underwriter wanted to deny the loan based on functional obsolescence. The one bathroom was upstairs – two-level home and on slab – in a bedroom. So the functional obsolescence is, well, your dinner guests have to go upstairs through your dirty clothes on the floor, through your bedroom, to get to the bathroom and in a marketplace where, yes, Ms. Underwriter, you’re right. There are homes, three bedroom, two and half bath, four bedroom, three bath and it looks odd according to that. But I can show you that this is common for the marketplace and I did. I said, “You can call this functional obsolescence in name and in theory, but in practice, on Capitol Hill, you cannot.”
I don’t know how that would translate the functional obsolescence here. There are people that have tried to argue a certain view out the back of the house and onto a commercial parking lot, they call it view functional obsolescence. Nobody looks on the back of a parking lot. That’s really going hinder marketing. They either want to reduce the value or just deny the loan for functional obsolescence. So if you’re looking at a property for a client, the buyer agent or if you’re looking at taking on a listing, think of it. If you see anything odd you might want to talk to a lender or have a lender talk to an appraiser and say, “Do we have a problem with functional obsolescence?”
Some of these things are going to be one in 100, but I think it’s good to get you thinking in general. Take any listing you can get in my book if it’s priced right, but think about it. Think about everything now. Unfortunately we have to be thinkers. You have to be lenders, you have to be lawyers, and you have to be escrow people. You have to think about that preapproval letter. You have to think about the listing that you’re taking. Think about every step of the transaction.
Audience Question: What if you take a listing that’s an older home on an older foundation. Is that an issue that you wouldn’t be able to get a loan on if it’s [INAUDIBLE] foundation?
Brian Martucci: It depends on the interpretation of the appraiser. Now, of course, since HVCC appraising came along, that’s potluck. I can’t do like I used to do and call my buddy-buddy appraiser of 20 years and go, “Hey Jay, can you go by XYZ address? The place is a little old and there might be some foundation issues. How would you write this up in a report? What would your take on this be?” Jay goes by and he says, “Brian, I’ve got to sayâ€¦” On the appraisals there are condition boxes and I think they are superior, average or below average. If you’ve got an appraisal that’s below average, you’re in trouble and the underwriting might start snooping around and, “Can I look at the structural inspection? Can I get a structural inspection if one wasn’t done?” They might start to ask questions.
Now, maybe the appraiser said, “Don’t worry. It’s really heavily cosmetic. There are a lot of cosmetic issues, but nothing I’d be concerned about, so I’m not going to report it to the underwriter. I’m not going to report it in my appraisal.” And the appraisal is the eyes of the underwriter.
Now I can’t have that conversation. I can’t call the appraiser because I’m evil because I will bring undue influence on outcome of the appraisal. So, now it’s potluck. How would I handle that? Maybe I just pay for an appraisal. Maybe I say to the seller, “I know you don’t want to do this, but let’s spend money on an appraisal and see what they say and let’s spend money on a structural inspection and see what they say and then maybe that’s ammunition to the underwriter if they make it an issue.” Or maybe the appraiser gives you good new and maybe the structural inspector gives you good news and at least you spend that money to show potential buyers – I think that’s the question where you have to do some legwork, but I do know that condition is another thing that we’ll talk about on appraisals.
It used to be as long as it was cosmetic it was no problem, but now one of the things that Fannie Mae and Freddie Mac and even banks more and more individually ask for are interior photos. It was never that way. It was always three photos. One front shot, one street scene down the street and one rear shot. That was it. Now they want interior photos. They got smart.
I had one recently where I wouldn’t say it was a shell, I wouldn’t say it was a tear down by any means, but was it livable? I wouldn’t live there. I mean, there was water stains from water damage. There was roof damage. There were a couple of appliances missing in the kitchen. One of the toilets didn’t flush. It was a massive renovation. Now, in the old days, no problem. It’s not a tear down. It’s going to look good from the photos on the outside. Let’s run with it. The appraiser might say, “Who’s your buyer? I don’t want to get in trouble. Do they have a good down payment? Do they have the cash to renovate this place?” “Jay, they have every intention of renovating this place. Don’t worry. Nobody’s going to get in trouble on this one.”
Well, now they’re looking at interior photos, they’re going to see water stains. They’re going to see missing appliances, so on this particular one I’m thinking of, the buyer has to make a decision. You’ve got three choices here. You can go all cash. Well, how many people have all cash? Not many. You can get a construction to renovation loan which are a nightmare, but a construction renovation loan is a good bet just to get a rough property through. It’s passable in that type of financing because they expect rough property. That’s what the money is for, is to fix up the property. They’re more worried about the plans and specs and they will appraise the property based on the plans.
The reason it’s a nightmare is imagine it’s your listing and you’ve got a seller and you get an offer and you see if they’ve got a construction renovation loan. You remember from seminar where Brian said, “Here’s what they need to get that construction renovation loan.” Now, unless they’ve done all the work up front, unless it’s front loaded, you need plans and specs. To get plans done, I’ve heard for one home it was two months for plans and I think that’s pretty typical, six weeks, two months. The architect is not going to drop everything to do your plans because you’ve got a loan to make the seller happy.
You’ve got to have a general contractor. That general contractor has to be approved with the lender. The borrower cannot act as his or her own general contractor. They don’t trust it. They won’t allow it. You want a construction renovation loan, you have to have a special contractor, licensed. Last one of these I did – honestly I tend to stay away from them. They’re so complicated. The contractor got rejected, not the borrower. The contractor, I don’t know if it’s him or his business entity, had bad credit. They rejected him. They told the borrower to get another contractor and that contractor was irate.
You can get a construction renovation loan, but they’re lengthy. It takes at least a couple of month, maybe longer because who knows how long it’s going to take to get the plans and specs on the front end. Who knows how long it’s going to take. Contractors are not known for their efficiently, at least not with stuff like paperwork. So you need a whole list of all their licenses and you’ve got to get a credit report on their business. You’ve got all kinds of stuff. It’s a difficult loan. Most sellers aren’t going to wait for it.
So, can you go all cash? Can you get a construction renovation loan or can you get a regular loan? And I think what my client had decided is they’re going to go ahead and go for it. They’re going to get this loan. We’re going to let the appraiser loose in this property and we’re probably going to count on – and the buyer is willing to do this out of her own pocket, which is their decision. I don’t know if I would counsel this, but we’re going to do it after loan approval.
After loan approval, it will come back and say, “Loan approved contingent on blah, blah, blah.” One of them will be “these repairs”. Maybe there’s going to be a roof repair. Maybe there’s going to be a drywall repair where the underwriter sees it’s water stained. A couple of appliances, make sure the toilet’s running. I know the electricity or that the heat’s off. Something’s off.
My buyer, because they really want this house because it’s got potential, is going to pay for all these repairs after loan approval, but before settlement, and then I can go back and go final inspection. The appraiser goes back out [INAUDIBLE] now I can strike all these off the appraisal. They are not in deficient capacity. These are great. Good. And they let it go to closing.
So all those things, all cash offer, okay. Construction renovation loan, difficult. Just get a loan and will the buyer front load some of these repairs? It’s certainly doable, but none of those are perfect. So I would pay attention to condition and you may, now more than ever, if you’ve got a property that’s a little rough – and I’m not saying if somebody has a shell. That something you might as well put in the multiple list, bring your all cash offers. You’re not getting financing on this. Not now.
And I’ve done financing on some shells before, but not in this market, not in this environment. Do you have a question?
Audience Question: Will they do lot value [INAUDIBLE] lot value, especially [INAUDIBLE]?
Brian Martucci: No, not to get a traditional Fannie Mae/Freddie Mac home loan. The underwriter would say, “Brian, we’re doing home loans here, not lot loans.” Now, you could go to a bank and maybe talk about getting a lot loan or maybe a construction renovation loan, but it’s the same problem. Will the seller wait for you to get a construction renovation loan or is your client substantial enough that maybe, if you get them financing for the lot, maybe they’re going to scrape the house anyway, maybe they can pay cash for the renovation, finance the lot, get the thing under contract that way and then come back with somebody like me and do a cash out refinance on the finished property, pay off the lot loan and get some of that money back.
That’s an answer, but there are not a lot of banks that make lot loans. I don’t do them. I could probably refer them out somewhere, but if you find a bank that says, “If you’re going to scrape that thing, yeah, there’s $600,000 of lot loan easily. We’ll give you 70% under value.” If your client is good with a $420,000 loan, they can afford that down payment and can then afford to pay the renovation in cash. Or maybe he gets the lot with the lot loan and then he gets the construction renovation loan because now you’re not keeping the seller waiting, you’re just keeping yourself waiting, and then he comes back and refinances it with me and refinances the lot loan and the construction renovation loan.
There are different ways to cut a scenario like that up, but that’s an extreme one. If they’re talking about something that’s kind of on the bubble and if it’s just a little bit rough, I think now you’re going to start to have conversations with – especially if you want to entertain FHA offers. It’s faster if you want to entertain FHA which you really should be. Maybe you’d have to have a conversation with your seller. I know nobody wants to do it. Everybody wants to put ‘as is’ because they don’t want to do anything, but look, due to the $5000 in work and it’s really going to save us a lot and it just makes the property more marketable. I don’t know how much of that money you’re going to get back, but now it opens us up to easier financing.
FHA, in high cost areas, goes to $729,750. With the minimum down, which is 3.5% – I think I have it in here somewhere – that gets you up to a little over $750,000 I think. Now, maybe not on certain [INAUDIBLE] but there’s plenty of inventory out there that $750,000 and down, can go FHA and if you do a little spruce up, it’ll easily be passable on an FHA deal. I’d be having that conversation with my clients who have property that, yeah, they’re not a shell. They’re just a little cosmetically rough, but I’m telling you, scraping and peeling paint is a big thing on FHA. Might as well just do it now.
I think I’m done on appraisals and we’re going to go ahead and take another ten minute break. We’re break for lunch, but before we go are there any questions on anything, appraising, underwriting, anything? Okay, ten minutes and no more.
I’m going to jump back on page 1 of your notes. I want talk a little bit about loan amounts because somebody just asked me and I thought I want to mention this briefly and just make sure people are clear on this because it’s important. In 2008, when the economy and the world seemed to be falling apart, Congress decided, in high cost areas, to increase the maximum conforming loan limit to $729,750 from $417,000. That doesn’t mean that everything between zero and $729,750 is conforming. There are three classes of loans now. They just added one. There used to be two and now there are three.
So, a conforming loan is up to $417,000. Anything between $417,001 and $729,750 is now called a conforming-jumbo. Some people call it conforming high balance; some people call it conforming plus. Conforming-jumbo, that’s the middle class, and it was supposedly temporary.
Now, as Congress is want to do, and all of us in this room should be thankful so far, continues to roll it over. It’s rolled over again for this year, but supposedly it’s temporary and they could talk it away and we would go back to the old system which was anything over $417,000 is a jumbo loan, which in some of the markets we operate in is ludicrous, but if you want to get a Fannie Mae/Freddie Mac loan, we’re making this loan for kind of the median of the country, it’s $417,000.
Now it’s $417,000 for conforming, $417,000-$729,750 is a conforming-jumbo and then over $729,750 is a jumbo. A non-conforming, true jumbo loan. I’ll give you this just so you can get a little idea of the differences. Right now the difference in interest rates between those three, and this is as of yesterday. Rates change fast, but just a loose example. A conforming loan, $417,000 and below, was 4.75% with no points. Now, that obviously – you know because you’re all smart enough to know now, that varies. If it’s a condo, it’s not 4.75% with no points. If it’s an investor property, there’s an add-on. It’s not 4.75% with no points. If you’ve got a 660 credit score, it’s not 4.75% with no points. So I’m speaking in an optimal scenario, it was 4.75% with no points.
A conforming-jumbo loan was 5% with no points. So, a little bit of a premium, but nothing spectacular. As I said, thankfully for us, I think it’s probably propped up that middle market, $600,000-$800,000 homes, if you’ve got 10% down, you can get a $720,000 loan at 5% on a conforming-jumbo loan. Whereas before, $720,000 was jumbo and today’s rate – there’s a lot more variables with jumbo. I’ll just say, generically, it’s probably around 5.625% with no points, so you can see it really jumps up for jumbo.
That subsidy, if you will, that Congress passed for that middle loan category, the conforming-jumbo, has really helped out a lot of people in that kind of middle market. Of course, some of the markets that we operate in, $600,000, $700,000 is still bottom market and $1.5 million is middle market. If I was a realtor right now, I mean, you kind of have to go where the money is. Well, right now the financing money, to me, is – that $500,000, $600,000, $700,000, $800,000 price range, because you can still get people in with 10% down, it’s $750,000 and under because you’ve got FHA at 3.5% down. Get a high cost, $729,000 FHA loan for 3.5% down. It’s amazing. And that can be a gift because essentially, when you think about that, I would be out there as the realtor advertising. I mean, you want to be honest and above board and I don’t know how you word this, the potential for a no money down loan and when your phone rings, you can do an FHA loan. Can you get a gift?
I mean, who can’t bug some family members for 3.5% down to help somebody get into their first home? I think this is the loan that helps to create buyers and it’s a market rate. FHA is not 5.5% when the rest of the market is at 5%. A $729,000 FHA loan is just like a conventional loan of that size. It’s a great loan. The mortgage insurance is more costly, but for somebody that has no options, whether they have their own 3.5% down or they don’t and you can say, “Get a gift.” “Oh, you’re right. My uncle, he’s loaded.” The good thing about an FHA is you can get a gift from a non-family member. Not so on a conventional. Another little [INAUDIBLE] point on FHA loans.
So, I’m going to be out there with FHA in that middle market all day long because that’s where the financing is. Now great, if you happen to know people that are in the $1 million, $2 million or $5 million price range and they’ve got half down, wonderful. Financing is pretty easy for that stuff with big down payments and jumbo loans, but if you’re working a different segment, I would be advertising FHA and talking to people into getting gifts and going no money down essentially on FHA and getting the down payment in the form of a gift.
I wanted to make those three loan categories clear. Those three separate loans and on FHA, you’ve got the conforming. FHA conforming is up to $417,000. FHA jumbo is $417,000 to $729,000. There is no jumbo FHA. You can’t do a $2 million FHA loan, so FHA has the two classes and conventional has the three. It would be good for you to be educated and there are some things that, again, right on the very first page, the very first subject, I put the minimum down payment.
Another good thing to know, and this is kind of cursory knowledge, I don’t think that this is requiring that you be as smart as a loan officer, but you’ll notice that 5% down on a one unit conforming, which is up to $417,000, the minimum down payment on $417,000 and lower is 5% down. 10% down is the minimum down payment if you’re in the $500,000-$800,000 price range and you have a client that wants to do a conforming-jumbo loan.
I have had people say to me, “Oh, I’m conforming. I’m in the conforming price range, so I can go 5% down.” “No, you’re thinking of a regular conforming. If you want to buy a $700,000 house, you need 10% down.” That’s important stuff to know.
Something else that we haven’t talked about and I don’t even know if I have in here – I don’t. So let’s talk about this and you might want to scratch notes on this on the last page under 8, Miscellaneous Underwriting Rules, maybe at the bottom. We’re talking about gifts and FHA and you can get a gift for the 3.5% down payment on FHA which is essentially a no money down loan to the buyer. It’s important to note on gifts, on an FHA loan you can have the gift money come from anybody. It can be a friend. I mean, there’s got to be a real relationship there and the underwriter may or may not ask, but why these guys make note of this is that on a conventional loan, not only do you have to have 5% of your own funds into the deal – so you can’t do a 95% conforming loan and have gift money because your first 5% is gift. If you’ve got no money and you’re getting gift for 5% down, you’re stuck. If you have 5% of your own money and you’re going to get a gift for another 5% down to go 10% down, that’s acceptable.
But, on a conventional loan, the gift has got to come from an immediate relative within the nuclear family, mother, father, brother. Uncle Joe can’t do it and a friend can’t do it, so conventional is much stricter in that sense regarding gifts. That’s another reason FHA is just so great. If you’ve got a friend who maybe, unbeknownst to us behind the scene, friend number one already owns property, but he would like to take some sort of interest in more. Friend number two is going to go get an FHA loan. It’s his first purchase. And by the way, you can only have one FHA loan at a time. You can’t use them to buy another property, rent the first one out, go 3.5% down again [INAUDIBLE] and people have tried that one and it doesn’t work.
But if you’ve got friend number two who wants to buy his first place and he really has no money, but friend number one will give him the 3.5% down. They have some sort of agreement for the equity split when friend number two sells the place. That’s allowed on FHA. A friend can give a friend a gift. Not so on a conventional loan, so there are a lot of good reasons to use FHA.
Another one, I’ll just bring a point to – and I think you guys should probably all skim through this later because some of this I’m going to bring out now and another one I want to bring out now is piggybacks off of the FHA gift thing is cosigners. Let’s just talk about this now.
You’ll see at the bottom of page 8 it says “Cosigners, Help or Not?” Well, the answer is no, unless it’s an FHA loan. Conventional, years ago, disallowed a non-occupant cosigner, which is what a cosigner is. They’re not going to live there. Mom and Dad have their own place. They’re not going to move in with their son in his little condo. Most cosigners are not occupant cosigners.
Conventional, I wouldn’t say disallows them, but they changed the rules so much that it effectively disallowed them. What they said is that the primary occupant has to carry the bulk of the debt ratio on his own and the non-occupant cosigning parent’s income can be used for a little bit. Well, most of those scenarios are the son just got out of college. He’s got a job making $30,000. That doesn’t really buy anything. He wants to buy a $300,000 condo that he doesn’t qualify for, but Mom or Dad will cosign.
Well, that really isn’t going to work because $30,000 isn’t going to get you – let’s say they’re going to put 20% down. $30,000 in income is not going to qualify you for a $240,000 loan, even though they’ll let you use some of the income, it’s a tiny slice, to help on the $240,000 loan, ratio [INAUDIBLE] the numbers never work. Effectively, non-occupant cosigners on a conventional loan, it’s a nonstarter.
There are two ways to do cosigners. One is FHA. So I would cancel that family and go FHA. FHA allows non-occupant cosigners. Brilliant. FHA also allows, not unlike the gift, a non-family cosigner, an uncle, a friend. Again, way more liberal.
The other way to do this on a conventional loan, it’s kind of a game of semantics. I wouldn’t necessarily call it a cosigner. This is how I fixed that problem with the couple that had the $50,000 deposit up. Their first retort to the first lender they went to, “How about a cosigner?” That lender, because they really didn’t seem to know the guidelines very well, obviously started to take them down that path. But then I got involved and I said, “You’re wasting your time. It’s not like you can cosign. You can use a little bit of their income to help you. You’ve got six months on a commission job. You can use none of your income and a tiny bit of theirs. It’s not going to work.”
“How do we work it?” I said, “Let’s call your mom and dad non-occupant cosigners. Let’s say that the three of you together are investors.” So the downside is they had to pay an investor rate. The upside is this guy with almost no job history was able to – the couple was able to buy the home. They had to do it as an investor, that’s all.
So, cosigning, go FHA or maybe get the three of them, the kid and the parents, to do it as an investor, but then they pay a higher rate. That’s the whole interesting note on cosigning and gifts, both of which FHA lends itself to much, much better.
I think we’re done talking about loan amounts. Let’s jump onto page 4. Page 4, number 7, Condo Loans. I want to get to where it says Investor Level. Here’s the one thing that has gotten easier. I have no idea why. In the past couple of years, where all other aspects of underwriting have gotten incredibly tight, this is a rule that, embarrassingly to me, a client brought to my attention. He lived in a 12 unit condo, new construction, about a year old, and there were maybe five sold, six unsold. Of the five sold, he was the only one that was there as a primary resident.
So, half of it’s empty, most of it’s investor occupied with tenants and he’s the one owner occupant there. My first thought was I have to get this guy off the phone because I’ve got deals to do and he’s not getting a loan. He educated me and said – he had a friend that worked at Fannie Mae and this is kind of just being released and I don’t think I had even seen the memo yet, but still embarrassing. “Fannie Mae and Freddie Mac have made a change, Brian. On an existing condoâ€¦” and their rule on existing condos is pretty liberal. 90% complete – I can’t remember. I thought of an existing condo as it’s fully sold, it’s been around for two years or more, the homeowner’s association is turned over. It’s an old building. An existing condo, their definition is pretty loose. 90% complete, I think they did want the homeowner’s association to have been turned over, which astonishingly somehow it was with half the building still empty. I don’t know how the association was turned over, but he just met the definition of what they consider an existing condo. There are many, I think, what we all know [INAUDIBLE] many existing condos. Really existing condos.
The rule is if it’s an existing condo, there is no analysis needed of the investor level. Now, this guy’s investor level is through the charts. It’s not that they don’t document it. They document it mind you, but they don’t analyze it. So I documented it, I contacted the property management company, I got what they call a condo questionnaire which everyone one here will send out on every condo which ask 100 questions. How many units? How many units are owned by owner occupants? How many units are owned by investors? Is the condo undergoing any litigation? They want to see a copy of the budget. What are the reserves like? What percentage of the unit owners are late on their fees? If it’s over 15%, they won’t lend in the building. Condo is a whole different discussion and we’ll have a little bit more of it as [INAUDIBLE].
If you’ve got an existing condo, you need a 20% down buyer. You’re not going to mortgage insurance in this scenario. But if you’ve got an existing condo and a 20% down or greater buyer, investor level doesn’t matter. So, here I’ve got this – they count empty units as investors, so this thing is 86% investor occupied. The loan was approved and I’ve done more now subsequent to my knowledge of this new rule. I’ve actually gone out and advertised it. People – I don’t know why. Maybe people are just – we’re human and human beings are naturally – why do today what you can put off until tomorrow? Nobody in my marketplace is talking about this and I’m out there trying to become the high investor level condo expert. But you’ve got to get a buyer with 20% down.
So I’m out there educating listing agents who are getting these units that they’re dreading taking a risk in on this high investor condo or maybe they’re not even going to consider it. “I’m not going to take this thing and spend marketing dollars for the next six months when I don’t think I can get a loan,” and they think I’m a genius. Not really. I didn’t know it right off the bat.
Maybe that’s a niche for somebody. Go into a condo building and either talk to the property management company or – and I don’t know how you go. Maybe do a mailing instead – you probably can’t put flyers under their doors or anything, but maybe target that building and get the addresses and maybe you squeeze a couple of listings a year out of that building saying, “Really worried about your investor level? Didn’t think you could get your listing sold? You can and here’s why.” Maybe that’s a nice little niche of business for you guys to go out and target a condo or two.
Audience Question: Do you know anything about the reserve levels that they require for condos?
Brian Martucci: I used to be a condo expert. I think it’s 10% of the budget. I’m guessing here, but if you’ve got a big condo and they’ve got a million dollar budget, I think you need $100,000 in reserves.
What I would say on a condo – and let me think about some other things that are important. If you’ve got – I just had a loan where 18% of the unit owners were delinquent on their dues and I said, “You’re not going to get a loan. You’re going to get an all cash buyer or you’re not going to get a loan.” That issue is mutually exclusive from the investor level issue, so you could tell me, which is what this client did, “Well, the investor level is really low and the owner occupancy level is really high.” Doesn’t matter. You’ve got 18% of your unit owners behind on dues; you’re not getting a loan, not even with a 20% down buyer, not with a high credit score.
So, he went out and actively campaigned the property manager, the board, his fellow unit owners and called me up three months later and said, “We’re at 14%,” and we went through and did his deal.
Audience Question: Do the HOA fees affect the value [INAUDIBLE] as far as being too high or two low or –
Brian Martucci: You know, the only time I’ve seen HOA fees affect the value is in the following scenario. HOA fee was $800 a month and it wasn’t $1 million a unit and up building. It was $400,000-$700,000. I started to dig into that because somebody asking me to prepare some open house flyers for that building. That’s a lot. I don’t even know if I can [INAUDIBLE] providing the financing. I found out that there was some issue with the roof. It was a [INAUDIBLE] development and they did a special assessment to pay for some multi-million dollar roof thing. There were lawsuits going on. It just turned out that – and I had talked to an appraiser friend of mine. “Do you know this building? The fee is so high becauseâ€¦” and I told him the story after I did my research.
He said, “Yeah. Brian my comps are going to have $300 to maybe $600 fees.” You’re up at $800 [INAUDIBLE]. That’s going affect marketability and that’s going affect your price. But that’s kind of a rare scenario.
I’m trying to think what else would affect – proper reserves, delinquent over 15% on dues, investor level may or may not be an issue. It depends on the type of loan you’re doing. If it’s a 20% down conventional, again, I’m not going to say not to worry about it. Ask, double check, see what it is. Talk to the lender because I’ve gotten business from lenders that don’t know about this rule and I’ll get calls from a realtor whom I’ve educated and said, “Don’t worry.” They’ll call me and say, “I have a client who applied at XYZ bank and they’re denying because of the investor level. He’s 25% down, conventional. I don’t understand.”
I don’t know. I’ll talk to the lender and try to educate them. I’ll do what I can to help, but I hate for you to switch gears because it’s only to delay [INAUDIBLE] delayed and I don’t want to get business that way. Nobody would hear me. So this lender lost business and I took it in and I got it closed. So, ask about investor level. Always ask about all this stuff, reserves, and litigation. I mean, I know it sounds like a silly question and you think somebody would volunteer it. It’s like somebody who’s been self-employed for six month and says, “I make $200,000 a year,” and he’s only got a six month track record. You’ve got to ask the question.
I ask so many questions I feel like a parent with a little child. I’m single, no children and I feel like an idiot when I talk to clients now because I frontload everything. “How long have you been self-employed now? Are you in a business that has a business license? I’d like to see a copy of it.” I mean, I have to ask all this stuff and I lose business.
So in a listing, I’m afraid you have to ask, “Can I see a copy of your condo docs? Can I see the budget? Do you know what the budget is? Do you know if there’s any lawsuit pending against the condominium?” And if they don’t know – and most unit owners don’t this stuff – call the property manager. It’s a lot of work, but getting a loan is difficult. Getting a condo loan approved is difficult. I’m afraid that there’s more to listing a condo that almost nobody does, but you really need to do. You should be asking all these questions.
Those are really the big ones. I can’t really think of any other ones and I think in reading the condo docs, there might be some other stuff that jumps out at you that I’m not thinking of, but those are the big ones.
Audience Question: Are you talking about a condo that you could [INAUDIBLE].
Brian Martucci: No. A townhouse development is usually a PUD, Plan Unit Development, with an HOA fee, $40-$100 a month. That is a separate type of development than a condo. So these specific rules I’m talking about are only for condo. Most PUDs, believe it or not, are pretty simple. They don’t follow a lot of these rules where they’re asking how many are rented and how many are owner occupant and budgets. A lot of PUDs I deal with are just easy-breezy. Almost like a single family. It’s pretty rare – sometimes I’ll have a lender who will have a quirky thing and they’ll want to analyze a PUD and they’ll make me get all these budgets and things, but that’s pretty rare. It’s a condo specifically that this applies to.
I also want to say, before we jump onto the next thing, FHA condos have changed drastically. I’m sitting here preaching about FHA, but I don’t think I would preach FHA on – I wouldn’t use FHA for a condo because it went from years ago, you could do what was called an FHA spot loan. A spot loan was if a building wasn’t FHA approved, you submit a bunch of the condo docs and the budget and stuff that you’d probably be getting anyway as a lender, to the underwriter and she’d read through it [INAUDIBLE]. It meets what FHA would require if it was FHA approved. FHA loan approved. I could FHA spot condo loans, spot approval. It was great.
FHA condos only require 51% owner occupancy, 3.5% down and you can have up to 49% investor level. But then it changed. Last year, FHA spot condos went away and now they’ve made it even harder and all FHA condos that were FHA approved, the date just passed. I don’t know if it was early 2011 or late 2010, but there was some date where FHA – they’re just trying to make everybody go back to the process because they probably have a bunch of old buildings, so they haven’t really looked at them much lately.
Now they’ve just arbitrarily said, “All FHA condo approvals have expired and you’ve got to reapply.” So, that’s another thing that could be a little niche for you. Look up – and I have somewhere – here it is under number 7. You see that URL, I’ve got the link there. That’s the FHA approved list. Go and check for buildings that used to be FHA approved. Maybe you approach the board of directors, property manager, and say, “Listen, I don’t know if you guys have realized. You don’t have FHA approval anymore. It’s expired. I can put you in touch with a lender. I can counsel you to take the steps to renew your FHA approval. You should do it because your unit owners are going to love you because FHA is great for marketability.” 3.5% down, 51% owner occupancy, all the great things that I’ve told you about today that liberal about an FHA [INAUDIBLE].
If I own a condo in a building that was FHA approved, I want them to renew it and I guarantee that 80-90% of them either don’t know about this or are too lazy to do it. So, if you guys are either known as the condo realtor at XYZ building or you don’t mind doing the legwork to being that person, I think there’s another niche. There’s the high investor niche and there’s the, “Hey, let’s go get this thing FHA approved.”
FHA approvals, I just did one. It’s a nightmare. They’ll tell you it takes 60 days and it took four or five months. Some lenders will charge me a fee. Surprisingly, I took this one through – MetLife approved this one for me for no fee, but that’s pretty rare. Most banks [INAUDIBLE] they’re significant, $2000 or $3000 potentially. So then, if you convince the board, then you’ve got to convince them, “We need that money out of your budget because I’m not going to pay for it. I’ll be happy to educate you guys on this and I’d be happy to take some listing and help make this building more marketable by helping you get FHA approval, but I’m not paying $3000.”
That’s your next hurdle, convincing them to budget for the approval if the lender is going to charge for it which most will because it’s tedious and it’s a lot of paperwork. [INAUDIBLE] great stuff on FHA condo.
Audience Question: What did you say it costs to do this?
Brian Martucci: It can be $2000 or $3000.
Audience Question: If you had fees to pay, you can spread it out over the unit owners.
Brian Martucci: Exactly. I mean, if you’ve got even as little as a 20 unit building, it’s $100 a unit over a year is $8 a month. That’s not bad.
Audience Question: No, that’s good.
Brian Martucci: Yeah. Where did I want to go next? We talked about cosigners, we talked about gifts, condo, investor level. Let’s go ahead and talk about this checklist. That’s one thing that I neglected to have them make copies of, so you don’t have this checklist. Let’s talk a little bit about it and if you want it, leave me a card and email you a Word document which is probably a better format to have it anyway.
It’s everything that we’ve talked about so far. Here’s a little bit about – I’m just going breeze through this and read it to you since you don’t have this in front of you. Here are some of the questions that you would ask a lender. I don’t care if you’re the listing agent or the buyer’s agent. I would be asking these questions and this is where, if there was another lender besides me, you’d be cringing, “Oh, no. You just made all this extra work for me. I have to answer questions that I’ve never answered before and I have to answer to two parties.”
Some of these sound silly, but you have to ask. “Has my buyer made loan application and gotten me all the paperwork? If not, what’s missing? Why? What’s going on?” I mean, I have buyers – now, I’m pretty rigid. I’m military. I don’t give people any slack because I know if I’ve got – I mean, I’m just tired of and I’ve refused to subject myself and certainly my clients and my realtor connections to the old, we’re sitting at the table waiting for the papers and they’re two hours late. Oh, settlement’s going to happen in two days. Sorry. Not going to do it. So I’m militant on the frontend and I tell people that I don’t think a lot lenders are. Again, it’s just a human nature thing. I’m not great. I’ve got plenty of faults, but I will tell people on day two when to make loan app.
We’ve got – 45 days sounds like an eternity. It’s not. When somebody – even a fast turnaround time in underwriting is five days for this, three days for loan conditions, two days for preparation of closing docs and if there are those loan conditions, which there always are, how long is it going to take the buyer to get them? We need two weeks to turn things around and that’s – then there’s the process of getting the appraisal, etc. 45 days is five minutes. We need to go and we need to go now.
So then I’ll tell people, “Okay [INAUDIBLE] this weekend.” Sure. When you’re sitting at the closing table and you’re cursing my very name because the papers are two hours late and you’ve got a busy schedule and closing is supposed to happen at noon and you’re sitting there at 2:30 with no papers, here’s why.
This is part of why I’m educating people. My big thing is transparency and education. I can be transparent and make myself held accountable. It only helps me because if you guys get on the client because you’re asking me, “Has the buyer made loan application and if not, why? What do you need? Is the paperwork in?” You’re going to call them. I know my realtors want to know that. If I go ten days and I’ve done very little, that’s my fault and the realtor has the right to yell at me. If he calls me up on day ten because he’s not doing his job, using his checkbook – and I do think it’s partly your job – and says, “Hey, Brian. How’s it going?” “Oh, man. The guy hasn’t even written me a check yet for the appraisal. I asked him for a credit card [INAUDIBLE] appraisal yet.” “What?” That’s my fault. It’s the buyer’s fault.
It’s a team thing. It’s everybody. It’s the realtor fault for not – I mean, you don’t have to use my checklist, but have some sort of organization to the transaction and check. You guys are the lender, the escrow person, the realtor, the psychologist, the movers, the taxi drivers. I am the credit bureau, the loan processor, the loan officer, the realtor, the escrow person. I’m everything too because although my processor is great, she misses things every now and again and she’ll tease me and I’ll usually email her. It’s efficient that way. “Did you, did you, did you? Did you do this? Did you do this?”
Well, every now and again she’ll get pissed and she’ll say, “How many times are you going to ask me, did I order title? How many times are you going to ask me, did I pull the credit and what were the scores?” Okay, Heather or Jeanine, two processors. How about the one time I don’t ask? Because it happened. There are times that I’m not on my game and I’m not using my own checklist.
I had one once where had submitted a loan at a big bank. It was a loan that they prefer to have their loans uploaded in their system, so it’s all electronic. Something happened with the upload and it didn’t take. There was a hiccup. The loan never got there two weeks later. “Gosh, Heather, it’s been an awful long time. What’s going on with those whatever, the Johnson loan?” “You’re right, I don’t know.” “We don’t have a Johnson loan.”
I was irate at myself, at my loan processor, at the bank. And whose fault is it [INAUDIBLE] the bank’s fault. Maybe they should have something built into their system where, I don’t know. All I know is how do you go – I had locked in this loan 30 days ago. It took me two weeks to get it together and now we’ve got another two weeks that it’s supposedly sitting in underwriting. I’m thinking if I was a bank, I would have some sort of system where I blast out automated emails that said, “You’re 15 days away from lock in expiration. We don’t have your loans submitted yet. We’re ten days away from lock in expiration.” That’s what I would do and as a loan officer, I should be using a checklist. As a loan processor, Heather and Jeanine should be using a checklist.
So, we are all all roles. We all really should be. So I said, “Move on.” Have you – now, I’m speaking – this is you as a realtor. You’re reading this as a realtor to your client or sometimes to me. “Have you warned the buyer not to make any large purchases or credit card transactions during the process?” I’ve had people who are right on the bubble with their credit score. I just had this happen where a couple made once in a lifetime plans to go to vacation somewhere in Russia who were Russian American. It was a $20,000 trip and their American Express balance that was $3000 or $4000 a month pretty regular, was $20,000-something. I have a good tidbit for you now. Even though the rule from AMEX is that you pay it off every month, Fannie Mae and Freddie Mac changed their guidelines. Whatever your AMEX balance is, they count 5% of that against you in your debt ratios as a payment.
Well, 5% of $23,000 is $1150. That’s a massive car lease. That’s a half a mortgage on a smaller mortgage. That’s a big ding on your debt ratios. So we jumped through hoops. I convinced the underwriter to let us pay it off and close it out which is a miracle because you’re not supposed to be allowed to pay off revolving debt because you can just go out and get a new card the next day. I don’t know how I talked her into this one. But automated underwriting, this is all automated underwriting; it’s supposed to keep guys like me from talking underwriters into anything. I don’t know how I got away with it.
So I said, “Look guys, just pay it down and close it off. You pay it off every month anyway and after closing get another one.” Well, there was one hitch and we dealt with it. They have a million air miles or something on this card. AMEX lets you cash them in for cash, so they didn’t really want to, but they took it for cash, closed the account, blah, blah, blah. There’s an important thing – I’m sure none of you – I barely ask this question and now I put it with all of my instructions on the front end. Don’t go out and make any large purchases or have a big credit card transaction during this process.
But, maybe you’re not working with me. Maybe you work with somebody that is disorganized. You should be telling people, don’t do that. Like I said, [INAUDIBLE] emails to you, take notes or not, but I’ll get this to you. This one is to me, to the lender, “May I have all of your contact information?” I want all of your contact information. If I was a realtor, I want fax, I want your home phone, I want your cell phone, and I want your office address. If I have to show up and talk to you in person, unless it’s an online lender and you’re not going to fly to Nebraska. I want all your contact information and your processor. The lender disappears right where there’s a problem and you hear that the loan is going to be a week late. As a courtesy, you should at least know why, but then you can’t get a hold of the lender.
Sounds silly, but, “Has the appraisal been ordered? What’s the expected date of completion of the appraisal?” If working with a broker, “What bank or institution is the loan be brokered to? Is this a bank you use frequently? Do you have experience with this institution’s appraisal management company?” If you hear, “Yeah, it’s Wells Fargo. I use them a lot and don’t worry, we use this appraisal management company a lot. It’s fine,” I don’t know. I’d be a little skeptical. And maybe it is all fine. Maybe that’s his experience, but maybe he hasn’t done enough transactions. Maybe it’s three and so far he’s three for three on three good ones, but I’m telling you. Big banks, appraisal management company, I want know all these questions. And there’s more, but I don’t want to go through all of it.
“Has the loan been run through an automated underwriting system with satisfactory results?” Here’s an interesting one. “If AU, automated underwriting, was run, was there any PIW?” PIW stands for – this is usually only on conforming loans. I mean true conforming, $417,000 or less, it’s good to note.
Audience Question: What did you say that [INAUDIBLE] PIW?
Brian Martucci: PIW stands for Property Inspection Waiver. Surprisingly, when I’ve got 20% down or more, fairly high credit score, conforming loan, I get a PIW, Property Inspection Waiver. What it means is they’ve done an e-appraisal or it’s checked a number of databases and tax assessments and things and they think, you know, 20% down, high credit score, we don’t need an appraisal. That’s astonishing, but that’s what Fannie Mae has set up.
And it should be. If you’ve got a clean buyer with 20% down, you’ve vetted the deal, the buyer knows the market, you know the market. You know you’re not over paying by an extreme amount. Why would you waste money on an appraisal? One or two out of ten conforming deals, I get a PIW and you’d be surprised how many loan officers don’t ask their processor, “Did we get a PIW?” Or maybe the processor put – when you get your automated underwriting results back, it’s two or three pages of stuff. Maybe they’re going too fast and they’re not reading it and we miss the fact that we could have saved an appraisal. You’re going to ask that.
“Is a termite inspection required for this loan? If so, how many days before settlement?” Usually you can’t have them be more than 30 days old. Now, keep in mind that this is going along a certain timeline, so this isn’t all happening on day one. So here’s one that you’ve jumped ahead a little bit. “Are you ready to submit the loan for loan approval? Has the loan been thoroughly analyzed for acceptable credit scores?” The reason I put that in there is that if the loan is taking a little bit of time and you’re working off of a credit report that was pulled – even if it’s a three bureau that was pulled maybe three months ago as part of a preapproval, well it’s getting to the point where somebody should ask for that to be updated. So you’re basically saying, “Are we okay on the credit scores? Is it a current credit report? Is the bank going to pull an update?”
“Are there any large, unexplained deposits?” This one happens on half my loans. People move money around. Who has $100,000 sitting in a checking account just sitting there waiting to buy a house? You’re moving money around, you’re liquidating stocks, you get a gift. Money is going back and forth. I can guarantee you. The rule used to be if there’s any deposit over what looks like a paycheck, you’ve got to have it documented. They want to see the paper trail because they want to make sure you’re not borrowing money or cash advancing a credit card and popping it in your bank account because that’s a no-no.
“Are you getting a gift that we haven’t documented?” That’s a no-no. Any large deposit and they’re going to want it documented. [INAUDIBLE] telling you, your lender is going to fall over. I don’t think this is overkill. Half the loans I’ve seen run through our office, there are loan officer and loan processor team that aren’t analyzing bank statements and the problem is not that they’ve got money from sources that are evil or bad and we’re not going to be able to explain. You can usually explain most of it, but if you can’t, why wouldn’t you want to answer this up front? And if you can, why wouldn’t you ask for this up front? Because here’s what happens.
You’re the loan officer, you’re the realtor and you think, hey, we’ve got ten days before closing, easy-breezy. Three days later we get a loan approval, but it’s a conditional loan approval. Now we’ve got seven days on the clock and maybe it’s the evening of that day, so really it’s six days left on the clock. One of the conditions is, “Explain this deposit.” “Oh, Brian.” As the buyer I’d be thinking, “Why didn’t he ask me that before? Now it’s six days from closing. That was money from my mom and mom and dad just left on a three week trip to Tanzania.” I’ve had stuff like this happen before. I can’t get documentation from them to explain and show a paper trail that this came from them, so the loan is delayed.
Or, they’ve got to call Mom and Dad on a satellite phone and mom and dad have called maybe a private banker or who knows. Everybody has got to jump through hoops because the lender, the processor, the realtor – I’d be asking this stuff as a realtor. I really would. If there’s sufficient cash to close, just because we’ve seen bank statements and we’ve seen bank statements with no large deposits, doesn’t mean – sometimes it falls a little bit short. You need $89,000 to close and there’s $86,000 and that’s it. They’re tapped out, but maybe the closing costs were misrepresented to the buyer and they’re thinking $86,000 is enough. They’re even expecting $84,000. Well, it turns out to be $89,000 and they’re $3000 short. Ask questions all day long.
“Are there any odd deductions on the paystub?” There might be a 401(k) loan that nobody told me about that my processor missed and it’s $582 a month for – maybe they bought another house with a 401(k) loan. That needs to be addressed. On and on and on.
Once you get past the loan approval, then you’re going to start asking, “What is the estimated turn time for all of these things?” Things like underwriting, loan condition review, preparation of closing docs. Again, the lender is going to be blown away, but you’re running a business. You can’t not ask these questions. You’re going to know, when they’re done gasping for air, “Whoa, we’re seven days from closing. You need three days for condition review. You need two days for preparation of closing docs. That’s means the bank’s closing docs will be in escrow two days before closing.”
To me, that’s tight. You’re just begging for one hiccup and you’re going to be the one sitting there at the table waiting for papers for two hours or maybe it gets pushed a day or two. If you’re running a sharp, smart, controlled business, you’re asking this stuff all the way through and you’re not going to be the one getting any surprises. Honestly, I think some of the lenders will be impressed and maybe you have a better relationship with your lender because you’re pushing for some of this stuff and maybe it makes them a better lender. I don’t know.
When you hear the loan is approved, ask for a copy of the commitment letter. You’ve got the preapproval letter up front, you asked if it was based on a three bureau credit report. It was. They’re impressed you asked that. Now you want a copy of the commitment letter. “Oh yeah, it’s approved. Don’t worry.” “Yeah, I know. I just like to have a copy of the commitment letter for my file,” and representing the seller or the buyer [INAUDIBLE] “I need a copy of the commitment letter.” “Okay.”
The reason they don’t want to give it to you – there could be reasons, there are things that they were hiding that they feel that got under control and they’re going to address or they have addressed, but they don’t want to have you see it because he really never shared with them. Here you come 30 days down the pike and realize, “I didn’t know we had a cosigner. I didn’t know we had whatever.” There are a lot of things in the actual commitment letter from the bank, on bank letterhead. There are things in there that will tip you off to ask more questions that I don’t have in here.
You’ll ask questions like, “What are the standard loan approval conditions?” Every loan approval will say conditional commitment. There’s no such thing as something that is not conditional because maybe you don’t have the title work in, acceptable title work, acceptable homeowners insurance. Here’s one that’s always on there, even if you’ve got acceptable title and homeowners insurance. They probably call it the 4506, acceptable 4506 results.
4506 is an IRS form. Form 4506 is a form that the buyer signs up front at loan disclosure, which is the very start of the loan. It’s basically their release, their authorization for the lender to pull their tax returns upon underwriting and actually I think it’s upon loan approval. You can’t do it beforehand. Now, problems result from this in two areas. One, the 4506 can take a long time because it’s coming from the IRS. If you get a loan approval two days before settlement and you’ve got no conditions but simples one like hazard and title and the 4506, man, you better hope that the 4506 gets whizzed through really fast.
Number two, the reason they’re asking for them is a lot of people have things on their tax returns that they don’t report. A little side business that might be losing money and that counts against [INAUDIBLE]. If you show a $20,000 a year loss on whatever little side business you’re doing, that’s a loss. That’s a debt and you’ve got to count that in the ratios. The banks aren’t expecting people to volunteer stuff anymore. Every loan gets their tax returns checked, even if you’re salaried and traditionally you only submit W-2’s and paystubs, they’re pulling the tax return to see if there’s something you’re not reporting such as a rental property, a side business, whatever.
I’ve had people that haven’t reported things and it has affected their debt ratios by a smidge which causes a problem. My workaround on that is I will ask them up front. I want to see the first couple pages; I don’t need the whole return if you’re salaried. I want to see the first couple pages of your tax return. “Why? I’m salaried. I don’t have…” “[INAUDIBLE] the 4506. There might be things on there. I really need to see it. Trust me. I can save us a problem on the back end.” Nine times out of ten there’s nothing on there but their W-2 income and that’s it. But, one time out of ten I see something and now I can at least address it on the frontend and I have a shot at reworking the loan somehow or doing a different loan or different down payment or doing an ARM instead of a fixed. I can address it. So, you’re going to be asking about the 4506.
“Review all conditions with the lender to see which ones apply to your client, which are title conditions and which are internal to the lender and make sure understand what each one means.” Part of the reason they don’t want to show you the commitment letter is it is scary. There are always two or three pages of stuff and it freaks people out. But there might only be three conditions on there for your client. There might a couple on there for the title company. Some of them might be internal to the bank, but they’re important to note. It’s the reason I say make sure you understand what each one means.
For example, on certain loans, they will always, always, always ask you for a desk review which is a review of the appraisal. It’s not a second appraisal. It’s not a field review or second appraisal that is a drive-by. It’s a desk review. Most conforming-jumbo loans, your client’s borrowing $600,000-$700,000. It’s a conforming-jumbo. They’ll do a desk review. That loan has not been around that long, since ’08, and it’s still considered maybe a little risky. They’re going to do a desk review and double check that value.
A lot of jumbos, if you’re going to do a cash-out refine, most jumbos over a million – actually a lot of those even require two appraisals. They go past a desk review and they go to a full on second appraisal. But it’s important for you to know that if you see a desk review – and you’re going to know because I’m telling you – but there’s going to be things on there that I’m not going to tell you because we don’t have the time. We’ve got five or six minutes left. There are going to be things on there that you should ask about. If I didn’t tell you about the 4506 for example, you might be tempted to blow right by it. 4506? That’s sounds innocuous. Big deal. You better ask about it.
And it will be tedious because it’s two or three pages of stuff. But is it important to know what the 4506 is? I think it is now. Is it important to know if you see desk review on there or if you see something called a 216. The Fannie Mae 216 is a final inspection. Well, that means the property, maybe it was a new construction, maybe it was a renovation and it was incomplete when the appraiser saw it. You’ve got to do a final inspection. Those take time. If you’re two days from closing, you’re not getting a final inspection because, you know, let’s back up from the settlement date. We’re two days from closing. The loan just got approved. You probably need two days just to prepare closing docs, so unless they’re going to do a desk review or they’re going to do a final inspection, a 216, in 30 seconds, your closing is going to be delayed.
These are things that I would ask, I would demand the commitment letter and I would go through each one. Not in a paranoid fashion. If the lender is smart he’ll go, “Okay. Here it is,” and he’ll go through it. I’m trying to think of some ones that are innocuous and are internal to – verbal verification of employment. It is standard policy, Fannie Mae and the banks or the underwriter to call right before closing, after loan approval and before closing, basically to make sure they’re still employed because [INAUDIBLE] maybe one in 1000, but somebody gets laid off, somebody gets fired and they don’t say anything. “I’ll get a new job. It doesn’t matter. I’ll get another job real quick.”
Well, then they get in the house and three months later he hasn’t made a payment and there’s a foreclosure. So it’s one of gazillions of rules that they are doing to forestall a problem on the back end. Verbal verification of employment is innocuous unless you call up your client and he says, “I just got laid off, but don’t tell anybody.” Well, they’re going to find out because they’re going to call. There are certain things not to worry about because they’re innocuous, but if it was me and I was a realtor, I’d be going over every one of those.
Audience Question: The 4506 used to be put in the loan doc. They don’t put them in there anymore?
Brian Martucci: They do. They get the client to sign them up front, but I don’t know if it’s a federal rule or what the deal is, but – or maybe it’s the same policy. They don’t execute them until loan approval. And you think, why wouldn’t you just do that up front and save us the time? [INAUDIBLE] –
Audience Question: Yeah, they used to come with the loan docs. For many years they came with the loan docs.
Brian Martucci: Right, but now, it does come with the loan docs. That’s one of the disclosures. Out of 25 pages of disclosures I get signed, you get the client to sign it up front, but the bank won’t execute it and send it to the IRS until post-loan approval and pre-settlement. I don’t know if there’s some weird rule and they have to do it that way or if they just think – I imagine actually they do, 4506 costs money. It’s a cost saver. I imagine where, “If we traditionally reject 3-5% of our loans, why are we going to do 4506s on those on the frontend?” If they’re $21 each, you might be rejecting a couple hundred loans a year or more if you’re a large lender, so it probably has something to do with that.
To wrap this up, and then we’re going to take any questions and then we’ll finish. “Has my buyer gotten a satisfactory homeowner’s insurance policy?” I say satisfactory and I would push on the satisfactory. I’ve had clients that get – it’s an $800,000 place with a $600,000 loan amount and they get a policy for $400,000. Well, most lenders require that the loan amount be covered and you start digging into the appraisal and maybe the lot value is $250,000 and the home is valued at $550,000, so is $600,000 over-insuring it? Maybe you can argue it is, but thems [sic] that’s got the gold makes the rules, right? So if the lender says you’ve got to cover the loan amount to cover rear end, then that’s what you’ve got to do.
So, has my buyer got any satisfactory – [INAUDIBLE] insurance in because maybe one in 2000. You’ll get to the closing table and maybe everybody’s missed it. The lender, the loan processor, the loan closer at the bank who’s preparing the closing doc. It gets all the way to the table and maybe the title attorney or somebody goes, “That can’t be right.” The $200,000 insurance policy on a $600,000 loan on an $800,000 purchase price, that can’t be sufficient and I’m not going to get in trouble by missing it and then we have a problem at the settlement table. So, ask about satisfactory homeowners insurance.
“Has the title company gotten satisfactory title work?” And, you know, of course we all ask this one, right? “When can we expect closing docs to be prepared and sent to escrow?” So then you can start to hammer on the escrow company to prepare the HUD-1 settlement statement so you can take a look for your buyer and hope that the lender and yourself, if you’re getting closing cost estimates up front, were close and they’ve got the cash to close or if you’re representing a seller, checking how much cash they’re going to get, how much they’re going to write a check for maybe.
So that is it. Let’s finish up. If you’ve got any questions on anything, ask now, and if anybody wants this checklist, come give me a card and I’ll email it to you in Word or PDF format.