I wanted a quick post to really point to this link. I hope that this would obtain some news coverage, but it may not in Houston. Frequently mortgage fraud involves appraisers. The basic idea in many of these schemes is to inflate the value of a property to create a fake higher value that can be accessed in some way. Appraisers are often involved, since they are setting the home’s value. New rules are helping to prevent pressures on appraisers to falsify their reports; however, these will not stop the bad seeds from attempting to take advantage of the system. The Texas Appraiser Licensing and Certification Board (TALCB) was involved in the investigation into dishonest appraisers. I am glad to know that they are on the job. Here is the press release about this investigation..
    Wow, a short post from me feels unnatural. May I take this moment to state that the appraisers which I have met are conscientious individuals, and you have the right to choose your own appraiser.

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Lately, I have experienced some problems with my bank, that I feel is a mark of poor customer service. Some issues may be that the bank is trying to increase their earnings. Like many people, I guess that I am on edge about my finances , and I am concerned about the economy. When I obtained a bill for a mortgage payment that I had already made, I was wondering what happened to my payment. Was I going to have to pay again? What would happen if the original payment was then cashed?
    I discovered that my original payment was taken out of my account on the first of the month. I had never received a bill like this previously, so I was thrown from my normal. Did the mortgage company intend for me to feel this way? I could have rushed out another check. I mentioned this to a friend, and he related an issue that arose with his own mortgage. He really did fall behind by a month, and he was under pressure to pay. He worked out a payment option where he would pay an extra three hundred dollars per month to pay the missing payment. After a while, he found that he could not pay this extra payment, so he called the lender to see what the ramifications would be. Nothing, he had already paid back the missing payment; the lender kept adding the extra payment though. He worked out that it should be removed, but this did not happen until he called.
    I had the situation where I incurred an overdraft charge on my account. The problem: my account had not been short of funds, so why would I be charged? When I called the bank, the representative immediately agreed that the charge should not be there, but my call is the reason for the charge being removed. My point to you, dear reader, is not that lenders are big bad businesses. Rather that your financial health is in your own hands. You have to monitor your accounts and question that which you do not understand. I think most of these charges from lenders/banks are done by automatic programs when they are triggered. No one is really monitoring if the charge is necessary.
   The basics of financial knowledge are not hard, but maybe we are not teaching them anymore. I remember once when the computer system went down nation wide at a firm where I was working, I was the only manager in the entire country to turn in my inventory report. No one else knew how to do a manual inventory. The process was not hard; it was out of the norm. I feel that this is happening to many homeowners when dealing with their own finances. If you see something that you do not understand, ask why. Sure, there could be a bank representative who will give you a hard time (try using online chat to resolve a problem- that never works for me), but in general, they will help.

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I have touched upon this topic before in my Delving into Paperwork posts, yet this idea of paying down a mortgage is not too common. It really is so basic that people overlook it. I have even heard of it referred to as a “secret”.

   First, you have to understand how your morgage works. This technique works with a standard fixed rate mortgage. You borrow money from the bank. They come to an agreement with you over the terms of the loan. It could be 6% interest over thirty years. They tell you what your payment will be per month. Those are the primary numbers most of us study when comparing mortgage offers. Sometimes there will be a penalty if you pay off early, so you will need to ask about this when applying for the loan, or check your paperwork if you have the loan already.

    We know the amount of the mortgage payment each month; however, we may not look at how it is applied. Your payment could stayed fixed over the life of the loan (not likely, but for this thought experiment we will assume that it does). You might assume that a set amount of money goes towards the principal, the interest, and other items. For example, if the payment is $1000, we could say that $150 goes to the other items; $200 to the interest; and the remainder towards the principal. In reality, the amount going to the principal and the interest is always changing. When you fist obtain your loan, you could be $650 towards the interest, and only $200 towards the principal. Yes, ladies and gentleman, the bank collects interest on the loan first. Surprised?

    If you pay what ever you can afford towards the principal, you reduce that amount. Reducing that amount means you pay less interest. Paying less interest means you pay off the loan faster. As a reminder, the lender may have a penalty in place if you pay off the loan early. There should be no rule against you paying towards the principal each month. It really is simple math, and it is a bit like making compound interest work for you. You know that reinvesting the earnings from your stocks and savings helps you over the long run. By paying down the principal, you get a similar effect over the long run. That is the big secret, which is no secret at all.You end up paying less money on your mortgage, because you pay less on the interest.

    Ido not think that most mortgage companies are out to get you. They are businesses who work off a certain model. The majority or borrowers never intend to pay off their mortgages early, so the lender makes the money coming to them anyway, available to them earlier.Find a mortgage broker or lender who explains the process to you, and you will find that you can work within those boundaries.

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Why did Fannie Mae and Freddie Mac end up under governmental control?

I believed that the two mortgage giants would weather this financial storm. As the gust of fears blew their stock prices down, and I worried over the amount of capital that they had decreasing, but I relied on the reports which indicated that they had the reserves to meet any of their needs. I had not expected the winds to batter sound houses, but as revelations of their accounting practices come to light, I find that the houses were not built so soundly.

The news today is that Mr. Lockhart will announce the new receivership status of these institutions. I had not heard of the new accounting irregularities; I thought that concerns expressed where based upon older practices, which were said to be corrected. Although it seems no accounting rules were broken, they were bent. The reserves were not there. The firms could not have met growing problems.

Although it seems many corporations complain about Sarbannes-Oxley, I think we might need even further standards to define what is appropriate if it can cause the consumer harm because of the action of such large firms. I thought that these two mortgage giants would have been more cautious, but this appears not to be the case. If investors cannot have confidence in their acquisitions, our market cannot move forward. As an investor, it bothers me that I cannot trust that my interests as an owner is not as important as the interest of the CEO. I feel that too many of us are looking at the short term results instead of long term gains.

In times of crisis, we easily accept measures which would prevent such issues from arising again, but we do not want to go to an extreme. Acceptable accounting standards seem reasonable to me. Letting people understand how financial figures are arrived at is the simplest start. If you tell me that you have $5, then I trust that you have that money. However, if you owe ten dollars to someone else, then you are in debt for $5. If that information is kept from me, there is no way for me to understand your financial situation. This is what occurred with Fannie and Freddie. They kept their debts hidden, so their money in hand was not really there. I realize that stating how a number was arrived at is easier said than done, but it really should not be so difficult, and it may cause firms to be more honest in their affairs.

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By Rich Dansereau of Home America Mortgage and part of the Thornton Team

I am certainly fortunate that a well respected mortgage industry professional such as Rich agreed to do a guest blog. Rich is an active blogger who writes about many topics, but he is great at what he does. You can find out more about his writing and his service by going to the Thornton Team’s mortgage website. Unfortuantely for me they are not in Texas, but look at the bottom of the post to see where they do work. You should check them out.

One of the first steps you will be asked to do after choosing a lender is to complete the Uniform Residential Loan Application, also referred to in real estate parlance as the 1003. Most loan originators/officers will complete this on their computer with the information you provide while talking the phone, or direct you to a secure website where one can be completed. The 1003 is required for all mortgage loans and contains most of borrower’s important information. The information contained on the 1003 is initially unverified but can be changed as it is verified. Many companies will provide a pre-qualification letter based on this unverified information.

Most realtors prefer that a borrower be pre-approved prior to doing all the preparation work required to show potential homes to prospective buyers. In order to get pre-approved, which is a time sensitive commitment, based on verified information, that the lender is prepared to write a home loan, there are often underwriting conditions that must be cleared prior to final approval. These conditions will vary based on individual circumstances but there are several items that will invariably be requested for a full documetation loan (full documentation, a.k.a. full doc, loans will generally garner better pricing as they are less risky for the lender). Some of the most requested documents are:

• Two
  most recent detailed (show withholdings) paystubs – these will be
  compared with the income and employment information supplied at the
  time of application.

• Previous
  two years W-2 or tax returns (all pages – individual filings only)

• Other
  income documentation – pension award letter, social security award
  letter, disability award letter, etc.

• Two
  most recent month’s bank statements (checking and/or saving accounts
  - all pages) – these will be used to verify asset information,
  receipt of governmental and/or employer awards, and reserves (money
  on hand) supplied at the time of application.

• Other
  asset documentation given at the time of application to qualify for
  the loan – 401k statements, IRA statement, stock statements, mutual
  fund statements

• If
  you have declared bankruptcy, gotten divorced, lost a property due
  to foreclosure, or any other major event for which documentation is
  provided, these items will be necessary

Home America Mortgage holds licenses in Georgia, Alabama, Tennessee, Florida, South Carolina, Missouri and Colorado.

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The City of Houston has a website which provides assistance to people who wish to own a home. The site may not be for you, but it does have useful information on it. One downloadable file has a list of affordable lenders for home mortgages in the Houston area. Below is a list of terminology connected with mortgage loans. I found good information on the internet about lenders and mortgages, but two sites that are worth a mention are Wikipedia and About.com. They have various articles concerning this topic. I would like to stress asking a lot of questions when obtaining a loan, so you understand what is happening. Some questions you should ask are the following:

1. What expenses will the escrow account cover, and how much will you be required to put into it each month? Your property taxes and home owner’s insurance are typically paid out of this account, but you need to know. I thought my insurance was going to be paid by one lender through this account, only to find out that I had to pay for it myself.

Lenders want to set the monthly rate for this account for more than the expenses, so they will have any changes in cost covered, but they are only allowed to keep so much money in the account for next year.

2. How much will the PMI or borrower’s insurance be? When can you stop paying it? Lenders want to insure that you will be able to make loan payments, so they require that you purchase an insurance to cover the payments if something happens to you. In most cases, this insurance benefits the lender more than you, so when you have the opportunity, you may want to cancel this cost.

3. Are their any penalties for paying off the loan early? Some lenders do not want you to pay down the principal of your loan, since this will lower their profit by lowering the interest that you will need to pay. By paying a little towards the principal each month, you will save money in the long run. Usually, your loan payments will be balanced more to paying the interest than the actual amount borrowed (the principal), when you start making payments.

Look at different lenders, and find out on what items they are willing to negotiate; you may save yourself a good deal of money. Read the section below about credit scores to understand how this number will effect your mortgage payment and your insurance cost.

Types of Mortgages

Conventional fixed-rate mortgage- allows you to make a fixed monthly payment at a fixed interest rate for the life of the loan (mortgage). This type of loan offers you stability and long-term tax advantages. Interest rates are usually higher than other loans.

Variable rate mortgage (Adjustable rate mortgage)- your payment is fixed, but your interest rate floats. This is good if the rates are high and you expect them to fall soon. The changes in the rate could possibly cause changes in the monthly payment amount, the loan term, and the principal. Some plans have rate or payment caps.

Renegotiable Rate Mortgage- your interest rate and principal payments are constant for several years, and then could be renegotiated.

Balloon Mortgage- your monthly payments are based on a usually short-term fixed interest rate. The payments may cover only the interest payments, so that the principal is due at the end of the term of the loan. Offers low monthly payments, but little or no equity in your home.

Reverse Mortgage- this is a loan for people who have paid for their homes, and they wish to use their equity in the home to give them an income, so this mortgage is not for home buyers.

Interest Only Mortgages- this is where you only pay on the interest of a loan, but not the principal. You will have no equity in the house. If you are planning to sell the house soon (or live in it for a short time), and you are not concerned with building up your equity, this loan may be good for you.

Terms

Amortization- the amount of time it will you take you to pay off the loan. The longer you pay, the lower your monthly payments will be.

Annual percentage rate (APR)- the cost of borrowing, expressed as a yearly rate.

Cap- a limit on the amount the interest rate is allowed to climb on an adjustable rate mortgage, either over the life of the loan or at each rate adjustment.

Closing costs- Fees associated with the buying and selling of property and the setting up of the mortgage. These costs can be negotiated within reason.

Escrow account- an account where money is held to pay certain expenses, such as taxes and insurance. When setting up your loan, find out what will be paid from this account, so you will be prepared for an expense not covered by this account. The down payment for a property is held in this type of account.

Loan origination fee (loan application fee)- a charge from the lender to cover costs in preparing the paperwork for the mortgage.

PITI (principal, interest, taxes, and insurance)- the four components that can be included in your mortgage payment.

Points- a charge that is designed to increase the bank’s profit on your mortgage and cover closing costs.

Title charges- a title insurance required by lenders to protect them against someone making a claim to the property.

Pre-approval/Pre-qualification- If you pre-qualify for a loan, the lender has taken a general look at your credit, and they think you might be some one they could loan too. If you pre-approve for a loan, the lender has taken a close look at your credit to determine that they will lend you the money for a home.

Private mortgage insurance (PMI)- an insurance which protects the lender if you default on the loan. After you have at least twenty percent equity in your property, you can ask your lender to cancel this insurance.

Appraisal fee- a lender can require you to pay for an appraisal of the property to determine if it is worth less than what you are asking for in the loan.

Survey fee- a lender can require that a survey of the land be prepared to determine what the title to the land includes.

Property insurance- the lender will require to see proof that your house is insured. This is to ensure that if something happens to the property, it will (or could be) repaired.

Prepaid taxes or utilities- money owed to the seller if he has paid taxes or utilities beyond the closing date.

Services charges- fees connected with connecting the property services such as phone, cable, utilities.

Attorney’s fees- if you use an attorney to help with the purchase or selling of the home, you will have to negotiate their fees. An attorney is not always involved in this process.

Real estate fees- fees paid to the broker, which is built into the price of the home.

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