Pre-Qual vs Pre-Approval

People don’t understand how knowing the difference between pre-qualification and pre-approval can make a huge difference in an offer being accepted, and how the right choice can make them a stronger buyer. It’s extremely important! Luckily, my friend Jay Vorhees at JVM Lending broke it down for us:

Image: meyerpottsproperties.com

Panicked Borrower on Verge of Losing Deposit

We had a borrower in contract come to us a few weeks ago in panic mode. The reason? He was on the verge of losing his earnest money deposit b/c his loan had just blown up at America’s largest mortgage lender.

The loan officer had only done a “pre-qualification” and had missed a major issue with the borrower’s commision income. We were able to salvage the deal and still close on time, but the risk to the borrower was enormous.

Pre-Qualification vs. Pre-Approval

Most lenders only “pre-qualify” borrowers. Pre-qualifications consist only of a perfunctory glance at a credit report and a few income documents. Most lenders do not do full pre-approvals b/c they require so much more work.

Why Pre-Approvals?

We do full pre-approvals b/c they are absolutely necessary. Full pre-approvals (1) allow our borrowers to make non-contingent offers; (2) ensure there are no major issues missed; and (3) allow us to close in 14 days b/c we do all the work on the front end.

In other words, full pre-approvals make our clients’ offers far more competitive, and they eliminate stress for everyone – buyers, sellers, Realtors, escrow and us :).

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Image: Masonknowsmortgages.com

Full pre-approvals can take several hours, requiring us to review income, asset, employment and credit documents with a fine-toothed comb. But experience has shown that they are well worth the effort. 

Issues that can be missed with only a “pre-qualification” include the following:

  • missed 2106 expenses; 
  • unexplained and unusable deposits; 
  • side businesses with losses; 
  • K1 and partnership losses;
  • spousal and child support obligations;
  • lack of employment seasoning;
  • lack of bonus seasoning; 
  • lack of commission seasoning; 
  • debts not on credit reports

A major source of our business includes transactions that blow up at other lenders b/c the loan officers only did pre-qualifications. Realtors come to us b/c they know we can make the deals work and also b/c we can usually still close within the remaining contract time.

Compare and contrast: VA vs. FHA

VA and FHA loans are both backed or insured by the Federal Government, so realtors often confuse the guidelines between the two types of loans. There are a lot of differences, however, and my friend Jay Vorhees at JVM Lending has the scoop below:

Image result for FHA loan

Appraisals: Similar

We’ll just let this blog, by JVM’s Appraisal Manager, do the talking.  I, Kristin added a few thoughts in brackets afterwards.

Appraisers: Different

The VA loan forces people to use “VA approved appraisers,” which they assign. That often makes the quality worse. The FHA allows us to pick appraisers from whomever we want.

Property Condition: Different

The VA requires clear Section I termite reports, and clear Section II if the items are health and safety risks. FHA allows for “as is” transactions, and does not require a clear Section I.  (There have been some recent changes regarding this, but not every lender is aware of them)

Closing Periods: Different

For VA loans, you need 21 days to close them because appraisal turn times are slower, and it’s generally just a more cumbersome process. For FHA, we can close the loans in about 14 days.  (Note these are amazing turn times, most lenders need 30 days or more)

Rates: Similar

Both types of loans have lower rates than your typical conventional loans. Lower rates are a major advantage for both.

Mortgage Insurance: Different

VA has no mortgage insurance, which is one of the reasons this type of financing is such a great opportunity for veterans. The FHA, on the other hand, has a mortgage insurance of 0.85 percent for most loans, with less than 5 percent down.

Image result for va logo

Up-Front Fees: Similar

The VA has a “funding fee” of 2.15 percent with 0 percent down that decreases with larger down payments. The FHA has an “up-front mortgage insurance premium” of 1.75 percent.

Down Payment: Different

The VA loan allows for 100 percent financing (0 percent down), whereas the FHA requires a minimum of 3.5 percent down.

(Final note:  most condo complexes are not FHA approved as they have not gone through the approval process which has to be updated periodically, I have not found that issue for the most part with VA because usually the complexes get VA approved at the time of building and it stays with the property)

Interest rates remain a gift

Recently, we’ve talked a lot about the rising interest rates. Everyone seems to be in panic mode over it, and my friend Jay Vorhees of JVM Lending is here to explain – in a historical context – why the reaction is overblown. He says the only people who should really be worried are businesses and companies that focus only on refinancing.

We’ve already touched on why higher interest rates are good, but an interest rate under 6 percent is amazing when put in a historical context, and should be treated as such. Here is a graph from Freddie Mac that shows an in-depth breakdown of interest rates over the past 30 years, but we’ve also shared JVM’s table on interest rates:

DATE                                      RATE                      COST
 
March of 2017                    4.2%                     0.5 Points

April of 2014                      4.34%                   0.6 Points

2008 (entire year)           6.03%                   0.6 Points

2000                                      8.05%                   1.0 Point

1995                                      7.93%                   1.8 Points

1990                                     10.13%                  2.1 Points

1985                                     12.43%                  2.5 Points

This shows that not only are rates much lower than they have been at the highest points of the market, but that loans are also much lower than usual – yes, I know our prices are higher than most of the country, but higher interest rates, always hurt you in the pocket book more than higher prices.  Anytime you can lock in a rate below 6 percent, you are doing quite well. So maybe now is the time to get into the market!

Why higher interest rates are good

This may surprise you, but higher interest rates aren’t always bad! In fact, sometimes they can be really good for the real estate market. Jay Vorhees at JVM Lending gives us some good reasons why. I’ve summarized those points below with commentary.

After the most recent presidential election, interest rates went up 3/8-1/2%, and the real estate market seemed to come to a standstill. It scared everyone into thinking that higher rates would severely impact the market overall. But, it was really just “uncertainty” that kept everyone on the sidelines, and not the higher rates.

Rates might continue to rise, but that’s a good thing, and here’s why:

  1. Slowly climbing rates often push would-be home-buyers off the fence. Higher interest rates heat up the market by pushing people to buy sooner, rather than later.
  2. Higher rates give the Fed “ammo” for the next recession. One of the Fed’s most powerful recession-fighting tools is lowering rates. But, if rates are already low, that tool becomes worthless. To restore the power of this, we need higher rates.
  3. Retirees and savers get higher returns. Artificially low rates that benefit big banks and borrowers hurt savers who live off of their savings. The higher the rates, the better for retirees and savers.
  4. Banks lend more money with high interest rates. There is a much better incentive to lend when rates are higher. More economic growth, higher wages and more home-buyers result from higher rates, too.
  5. Stronger dollar and continued tamed inflation. A stronger dollar makes traveling abroad cheaper, investing in the U.S. more appealing, and importing goods cheaper. Higher rates also keep inflation in check for a variety of reasons.

Higher rates hurt mortgage companies that rely on refinance business instead of purchases, and it hurts home-buyers to the extent that their payments will increase.

But the payment factor is often overstated. A rate increase of 1/2% might push a payment up about $150 for a $500,000 loan. That is real money, but it won’t break the bank for most of our borrowers whose income is well into the six-figure range.

What are your thoughts and how would higher rates affect you directly?

How to get your offer accepted in a crowded market

Our friends at JVM Lending shared a Redfin link recently that had a ton of great information on how to get an offer accepted. I currently have two homes on the market and the amount of offers on each are on opposite ends of the spectrum; I have one with 21 offers, and the other with 6. It’s funny to see that disparity between the two, and strategies to get an offer accepted and/or a house sold, can vary greatly because of it.

Here are some pro tips from the Redfin piece:

Nearly 1 in 4 (23.6%) homes that sold in 2017 went for over asking price, up from 21.8% in 2016. This means that buying a home has become more difficult and expensive in a hot, crowded market. You can’t simply offer the highest price and expect to be selected by the seller. Instead, try other strategies like offering all cash, waiving the inspection, or writing a personal cover letter to the homeowner. Above all, make sure you talk to your agent to create the right combination of strategies for the home you’re bidding on, or for the seller you’re trying to woo.

Here is some information from the Redfin article that breaks down data on thousands of offers written over the last two years, to see how effective these other strategies can be in improving a buyer’s chance at winning a bidding war:

Rank Strategy Improves a Competitive Offer’s Likelihood of Success by… Improves a Competitive Offer’s Likelihood of Success in the Luxury Market (Top 10% by List Price) by…
#1 All-Cash Offer 97% 438%
#2 Waived Financing Contingency 58% 76%
#3 Personal Cover Letter 52% No Significant Gain
#5 Pre-Inspection No Significant Gain No Significant Gain
#6 Waived Inspection Contingency No Significant Gain No Significant Gain

Cash is king, as you can see above. That’s because it allows for smooth, fast transactions without the hassle of loans or appraisals. If you don’t have the means to make an all-cash offer, you can always waive your financial contingency, which means you won’t have to wait for a loan approval. That will still increase your odds by 58%, according to Redfin! However, I find that the cash offers – especially if they are investors – will not be the highest price. On the home that had 21 offers, the key to the winning bid was who removed a portion of their appraisal contingency as the offer was so high we all knew it wouldn’t appraise, but that means the buyer has to have extra cash. That can be tough when it is an entry-level condo.

All this said, sometimes it just takes a personal touch to win over a seller. Writing a letter to the seller can be effective and increase your odds in a bidding war. Fortunately for most buyers, cash is not the only way into a seller’s heart.  Often these letters can forge a powerful connection between the buyer and seller, highlighting shared hobbies or interests, earning a seller’s compassion or trust, or ensuring that the home will be loved and cared for in the years to come.

So, whether you are offering all cash, waiving contingencies, writing a personal letter, or trying any number of other strategies to win the bidding war on the house of your dreams – especially in a saturated market like the Bay Area – always remember to consult your realtor first. He or she will have great insight into the market and what extra touches it might take to get the home, but at the end of the day the buyer has to be comfortble with the offer they are making!

Applying for a Home Loan? See JVM Lending’s “Don’t” List!

Once you’re pre-approved, the last thing you want to do is knock yourself out of qualifying range. My friend Jay Vorhees at JVM Lending is a great source on this issue, as he’s seen hundreds of borrowers in this situation. Now, he sends them a list of “actions to avoid” with every pre-approval letter. Heeding his advice will help you at least prevent delays and extra paperwork. Take a look!

1. Do not make large deposits that can’t be explained. When you are trying to qualify, any large deposit – think $500 for a new mattress, or all-cash payments – must be explained. Otherwise, an entire account can become invalid and unusable for qualifying. Always keep a paper trail to make large deposit explanations easier!

2. Do not take on new debt. If you increase your credit card balances, finance a vehicle, or take on debt in another way, your ratios will be impacted and it will reduce your maximum purchase price.

3. Do not take vacation days if you’re paid hourly. A single day off work can push you out of qualifying range if your debt ratios are high and approaching your limit.

4. Do not spend liquid assets. Pre-approval software relies on specific liquid asset levels. So, pre-approval amounts can change if liquid assets are significantly reduced.

5. Do not miss payments on any debts reporting on a credit report. This one is pretty obvious, and you should avoid missing payments anyway, but missing monthly payments that reduce your credit score may also reduce your qualification amount!

6. Do not co-sign for someone else’s debts. That’s a dangerous maneuver anyway, but even if you’re just a co-signer, the debt will show up on your credit report. That makes you responsible for the debt and the payments.

7. Do not file taxes with a tax liability owing, or with less income than in previous years. This mostly applies to self-employed borrowers (especially during tax season). The most recently filed tax returns will be what the qualifying income is based on, and all tax liabilities must be proven paid. JVM recommends that borrowers file an extension when possible if they are making offers during tax season.

What to know about the new tax bill limits in 2018

The GOP finally pushed through its tax package, and the reaction has been interesting to say the least. While some seem to love it (The Wall Street Journal said the bill is the best thing to ever happen to our economy), many others hate it. Regardless of how you feel about the bill, it is signed in now and it’s time to see how it affects you, as a homeowner, seller or buyer.
My friend Jay Vorhees at JVM Lending put together a blog detailing some main points about the GOP tax bill and how it may affect real estate. Here are the main thoughts:
1. Current homeowners will be grandfathered in and still allowed to deduct interest against $1 million of mortgage debt. In 2018, buyers will be limited to $750,000 and interest against home equity lines will not be deductible.
2. State and local tax deductions will be capped at $10,000. This will be difficult for people in California.
3. Standard deductions are doubling to $12,000 for single filers and to $24,000 for married filers, so many homeowners won’t have to deduct their interest and property taxes anymore.
4. We have no idea what exactly the bill will do for the market when all is said and done, but for now, we can expect the low-inventory, high-demand market to suffer in high-end areas down the road, while remaining neutral in the short term.
5. To fully understand the bill’s impact on you, see a CPA. Defer your commissions. And if you’re planning an out-of-state move, consider relocating to a low-tax state like Florida, Texas or Nevada.
I’d like to expand on #5 quickly – as Jay mentioned, there will be a new $10,000 cap on tax deductions starting in 2018. If you paid off your property taxes before January, you should be able to save thousands of dollars on that by avoiding the new rule for a year. And if you are planning a move out of the Bay Area to another part of California or another state, you should be consulting a realtor or a CPA to see what kind of savings you can get!

Why rates went down after 4th Fed increase?

My friend Jay Vorhees at JVM Lending wrote another interesting end-of-year blog recently, regarding rates. Despite the Fed increasing rates for the 4th time in 2017, they are still down. Why is that, and how does it affect you?

In Jay’s blog, he notes that 30-year fixed rates have fallen 1/4 percent over the last year even though the Fed has done four increases. On that note, he asks why the Fed’s rate increases don’t push up mortgage rates?

In response, Jay gives two main reasons:

  1. Short-term rates don’t always affect long-term rates
  2. Many factors (besides the Fed) influence rates

Inflation, geopolitical strife, economic news and demand for credit and bank loans are the other main factors named by Jay. Most of those are very relevant in today’s societal and political climate. Basically, the Fed helps influence rates, but isn’t the sole influencer – if investors are pushed out of stocks or bonds into the other, due to war, a poor week on the stock market, etc., rates will change just as rapidly.

So, what does this mean for you?   Rates are going to continue to fluctuate. They are still low, so if you are considering buying, it might be a good time to get off the fence and make a move in 2018!

Why it may be a really good time to be a borrower

You may have heard of the wild events at the Consumer Financial Protection Bureau (CFPB) recently. My friend Jay Vorhees of JVM Lending had a few words to say about it on his blog, the main points of which are summarized below:

The departing director of the CFPB, Richard Condray, named his deputy, Leandra English, to be his successor. President Trump named his own acting director, Mick Mulvaney. Both claimed to be head of the CFPB, and English sued to nullify Trump’s appointment, but lost.

So, from a real estate perspective, this is what it means for the industry. The CFPB is extremely powerful and was created by the Dodd-Frank Legislation in 2010. It is funded by the Fed and mostly outside the control of Congress. So, the CFPB is well known for being aggressive in auditing and fining, even when offenses had no effect on borrowers.

On that note, Mulvaney – Trump’s appointment – has been openly anti-CFPB, and will likely try to roll back some of the agency’s enforcement efforts. If this holds true, there are two takeaways, or perspectives:

  1. A strong CFPB is necessary to keep the mortgage industry in check and avoid another meltdown like in 2008. It can be countered by pointing out that there are already other factors in place to prevent those abuses, including scrutiny from agencies such as HUD and state agencies.
  2. Lenders and loan officers spend an inordinate amount of time and money to make sure they never endure a CFPB investigation. These efforts often do little to help consumers, and only increase the overall costs of obtaining financing.

A weaker CFPB could result in more free time for lenders and loan officers, and lower borrowing costs for consumers.

Fannie Mae and Freddie Mac also announced their 2018 loan limits, which went up significantly. The “Low Balance” limit for a one-unit property jumped from $424,100 to $453,100 and the “High Balance” limit increased from $636,150 to $679,650.

These jumps allow more borrowers to take advantage of conforming loan guidelines when buying properties in areas with increasing home prices. Combine this with the CFPB appointment, and we may be looking at an incredibly good time to be a borrower!

Also, note the Fed is most likely going to raise interest rates on the 13th and then again in the first quarter of 2018. The market has already taken it into account, and we might see rates drop slightly after the 13th.

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How the tax bill potentially will affect homeowners

This past weekend, the GOP passed its tax plan along party lines, despite heavy opposition against it in CA. I was wondering how the new plan might affect homeowners, and my friend Jay Vorhees at JVM Lending had the perfect answer. See his summary below!

The bill has a provision to cap the mortgage interest deduction to loan amounts of $500,000 or less. To be clear, borrowers will not be ineligible for the mortgage interest deduction if they owe more than $500,000; borrowers will only be able to deduct interest that accrues against $500,000 of their mortgage, no matter how large it is. Here are some observations:

1. Only 5% of all mortgages are over $500,000. And the vast majority of them are in California. Hence, it is unlikely that we Californians will get a lot of sympathy from middle America. But this also explains why there is so much concern in California.

2. How much will it actually hurt borrowers? For a $1 million home (not a lot in coastal California) with 20% down, a borrower will have an $800,000 mortgage. This means that $300,000 of that debt will be ineligible for the mortgage interest tax deduction. If the interest rate is 4%, the borrower will not be able to deduct $12,000 of interest from his or her income for tax purposes. If that same borrower is in a 40.5% combined tax bracket (33% Federal, and 7.5% State), he or she will lose $4,860 in direct tax savings. That is real money for anyone.

3. Current borrowers will be grandfathered, meaning they will be able to continue to deduct interest against a $1 million mortgage (or $1.1 million if they have an equity line). This provision will likely hurt inventory, as this will create another disincentive to sell. 

4. Standard Deduction Doubling: This is the bigger issue for real estate in general, as most lenders and Realtors aggressively sell the tax benefits from buying a house. If the Standard Deduction for married couples doubles to $24,000, most taxpayers will not be eligible to take advantage of the mortgage interest deduction (it would only make sense if their mortgage interest and other itemized items exceeded $24,000; a $500,000 loan at 4% would only accrue $20,000 of interest). 

5. The real estate lobby is extremely powerful. This is the biggest factor of all. The real estate lobby (that includes builders) is exceptionally powerful, and most of the lobby is opposed to the above-referenced provisions.

I always find Jay’s perspectives insightful with helpful information. Jay wrote this prior to the bill being passed by the Senate. Now that it has been passed, here are a few of my own observations:

  1.  There is a lot of jockeying of blame between the two parties (status quo).
  2.  If it was so negative, why did the Senate Bill get passed so quickly?
  3. The Senate and House will now go back and forth on all the details to get final approval before it goes to President Trump. Changes can still be made or it could possibly fall apart.
  4. Back to Jay’s last point – there is a very strong lobby that still can push change.
  5. I see this continues creating a disincentive for people to sell. It used to be that on average people moved every 7 years; that number has now increased to approximately every 20 years, thus the continued low inventory.

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