15 Home-Buying Myths, Busted

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I stumbled upon this Zillow article a little while back and thought it would make for an interesting rundown of things I sometimes see clients struggling with. Some of these things are simply not true. Others are exaggerated. Either way, buyers and sellers need to unlearn certain things about the real estate process before engaging in it. Read on for more.

MYTH: You need a 20% down payment. This hasn’t been required for decades! In fact, you can put as little as 3% down, depending on the loan or the location of the home.

MYTH: Your pre-approval rate is the rate you’ll get when you close. Interest rates adjust every day. So, what you see at pre-approval is based on current market conditions and other factors, and it can’t be “locked in” until you sign a purchase contract with the seller.

MYTH: You should wait to buy a home until prices are lower. Buying a home after prices go up can be risky, but so can waiting. In popular neighborhoods (like many in the Bay Area), it’s often better to go for it and not wait.

MYTH: Buying a home is always cheaper and a better investment than renting. Renting a home can be cheaper than buying in many places! The benefit to owning a home, of course, is that it will appreciate over time and build generational wealth.

MYTH: You should find a home before you apply for a home loan. It’s smart to get pre-qualified for a loan. It will give you more information to shop with.

MYTH: Buying a fixer-upper will save you money. Sure, maybe on the sticker price. But fixer-uppers need a lot more than just a fresh coat of paint. Generally, there are major issues that need to be tackled, not all of which are visible up front.

MYTH: You have to get your loan from the lender who pre-approves you. No, you have no obligation to stay with the lender you start with. Shop competitive offers and find the best fit before you go under contract.

MYTH: You shouldn’t buy until you can afford your ‘forever’ home. Selling a home can be costly, but if you wait to buy until you can afford that dream home rather than invest in a starter home, you may never buy at all.

MYTH: A 30-year, fixed-rate mortgage is always the best choice. Adjustable-rate mortgages (ARMs) can save thousands of dollars of interest over the life of the loan. That’s one example. There are other options!

MYTH: You can’t buy a home if you have student loans. Actually, those loans can hurt OR help your chances of buying a home – it can boost your credit scores but it can also raise your debt-to-income ratio for approvals. Consider every angle.

MYTH: You have to pay the seller’s asking price to buy a home. Definitely not. The seller’s asking price is simply what he or she hopes you’ll pay. Offers and counter-offers will bring you to a point of agreement in the end.

MYTH: You need excellent credit to buy a home. It’s good to have good credit, but there are great home loans and rates available for people with less-than-perfect credit too.

MYTH: Fall and winter are bad times to buy a home. It can actually work to your advantage to buy a home in seasons when most shoppers think it’s “bad.”

MYTH: You cannot buy a home if you are self-employed. The rules for getting a mortgage may be different for those who receive a W-2 from their employers, versus a 1099-NEC for being a gig or freelance worker. But it won’t stop you from buying!

MYTH: All lenders are the same when buying a home. You don’t just shop houses and rates when buying a home. There are also significant differences among lenders and you should find the best fit for you!

Happy House hunting an buying a home you love. We are currently seeing many price reductions, inventory is still low, but rates have come down. Thus if you have been on the fence, now may be a great time to buy with hopefully further rate drops and you can refi at that point. When I bought the home I am currently in, the rate was 8.5%. I ended up refinancing more than 8 times and currently have a 2.75% rate. Call me if you would like to chat about buying a home.

Why I only refer clients to lenders I trust!

I won’t be pasting the entirety of Jay Vorhees of JVM Lending’s blog about this here. I’ll just hit the major points. But this is a perfect example of why I only refer clients to lenders I trust. Read on:

Last week, a borrower came to us to discuss her refinancing because she had lost trust with the lender she was working with (America’s largest non-bank lender). She was trying to refinance the house she lived in but it was owned by her Dad and she was not on the title, so a refinancing was impossible.

In any case, she was trying to refinance the house she lived in but it was owned by her Dad and she was not on title. So a refi was impossible – something the other loan officer failed to comprehend – and it had to be structured as a purchase.

Further complicating things was a “gift of equity” down payment, the need for “cash out” for improvements, and the need to avoid capital gains taxes for the seller – all issues that the other loan officer had zero understanding of.

In any case, one of our Mortgage Analysts quickly figured out how to structure the loan and then re-locked the same borrower with the same lender via our correspondent relationship but at a 1/2 percent lower rate.

I share this story not to make JVM the hero but to once again warn buyers away from the big call center mortgage companies. The call centers stuff bodies into cubicles to do nothing but sell.

Those “bodies” often do not have the skill to close transactions when there is even a small amount of complexity, and…their rates are way higher to boot.

That’s Jay’s horror story about call centers. It does a great job of explaining why I prefer to refer specific lenders I know who will always get the job done. It creates a smoother process for everyone that way. Most banks or Quickens of the world don’t fully underwrite upfront; it requires a lot of paperwork initially, but it creates a very smooth process to closing. This way the buyers are aware of any potential issues before you ever write an offer. They also don’t tell you that once you are in contract, you are handed off to loan processor who you have never spoken with and many loan agents are on to the next approval and are no longer in the immediate loop. Communication often falls apart at this point. Your loan officer may be local, but the processor could be in a different state.

I currently have a new home buyer who is shopping three different lenders looking for the best rate. With two of them, I expect possible delays and a questionable overall experience for my buyers. One is fantastic, but a first-time home-buyer doesn’t understand those nuances far outweigh an eighth of a point difference in an interest rate. Hopefully whoever they choose will do right by them and it will be smooth sailing.

I just closed on a house (blog to come on Thursday). When we first met, they were talking to one of the largest non-bank lenders. I recommended they speak to JVM and just compare the experience and decide who they would like to work with. They closed with JVM and when I handed them the keys, they remarked at how smooth the overall process was for them and when compared to their friends who recently purchased and had a loan with one of the big banks, they said their lending experience was horrible.

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:

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 :).

prequal-vs-preapprove-02 — 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.

How do appraisers value a property?

Our friend Jay Vorhees at JVM Lending has posted another great blog recently about appraisers. I have taken some liberty with his original blog and modified it to some of my personal experiences. Check it out below!

Lenders are not ever allowed to communicate directly with appraisers. They are only allowed to order appraisals through an Appraisal Management Company, which in turn contacts the appraiser. This arose out of the mortgage meltdown in the efforts to prevent fraud. Overall, I think it hurt the buyer because the cost of appraisals rose.

Realtors, however, can communicate directly with appraisers and I highly recommend that they do so. I meet the appraiser at the home, provide them with the comps I used to come up with the list price and let them know how many offers I had and the offer price of them. It is important to be nice, and not tell them ‘how’ to do their job, but provide them with data that they may not have.

Below is the criteria appraisers use for Comparable Sales Data guidelines.

1. Size: Comps need to be within 20% of the size of the subject property. For example, they usually cannot use a 1,300 square foot comp for a 1,000 square foot subject property. Likewise, they cannot use a 700 square foot comp for a 1,000 square foot property.

2. Distance: Comps need to be within one mile of the subject property, and not over any major barriers like a freeway or a river.

3. Same Town/City: Comps need to be in the same city as the subject property in most cases, even if the comp is less than a block from the subject property.

4. Closed: Comps need to have closed in the last 90 days. Pending sales and listings are not acceptable.

5. Lot Size: Lot sizes must be accounted for too. If the subject property is on a small lot of 6,000 square feet, for example, a comp and a 12,000 square foot lot will have to be downwardly adjusted significantly in most cases.

6. Adverse Influences: If the subject is on a busy street or abuts a school, a freeway or an industrial area, valid comps will need to have similar adverse influences or they will make adjustments to equalize the value.

7. Bracketing Comps: Valid comps need to “bracket” the appraised value. Hence, at least one comp needs to be priced higher than the appraised value, and one should be priced lower.

At the end of the day. Appraisals are still subjective based on the appraiser’s interpretation and experience. Most of the time they are trying to do their best, and as markets shift, they have to adjust. They do not always have some inside information about a neighboring sale or a credit and if you can make their job a bit easier, I find everybody’s job becomes a bit easier.

I should also note that Mortgage Bankers have AMC – Appraisal Management Companies, where they can cherry pick the appraisers that are in the pool, even though they can’t talk to them about value. These are usually much better than the big banks and that is a whole other story that only frustrates me….

The problem with large AMC’s for lenders and clients

Our friend Jay Vorhees at JVM Lending wrote a blog recently about Apprisal Management Companies (AMC’s) that I found really interesting. Jay wrote about the mess that usually comes out of a broker-lender relationship due to appraisal issues.

After the mortgage melt down the laws changed that required lenders to use AMCs instead of cherry picking their appraisers directly. This past practice created an opportunity for dishonest practices. However, creation of AMC’s created a separate list of issues and caused the cost of appraisals to increase. The AMC’s usually paid the appraisers too little and decreased motivation by appraisers to do a good job or they hired inexperienced appraisers because the seasoned appraisers got out of the business as their salary decreased. Initially there was no parameters in place for the appraiser you got. Many times, I got an appraiser from Sacramento appraising a property in the Walnut Creek School District and would get a low value because the comps they pulled were parts of Walnut Creek not in the school district. As you can imagine, this led to some huge problems

As time passed, mortgage brokers such as JVM have moved to a “mortgage banking channel” to avoid using AMC’s and now utilize their own internal AMC that is still compliant but staffed by competent, local, highly-skilled appraisers of JVM’s choosing. The lender still can’t talk to the appraiser, but at least they have control of the quality of appraisers and know the area they are appraising.

For more information about this topic, see this Washington Post article Jay quoted in his blog. You can visit JVM Lending here.

Tips for preparing to buy a home

It takes a lot of preparation to buy a home. I know, I know, thank you Captain Obvious, right? But if you’re going to be searching for a home in 2017, I want you to be ready for what is headed your way!

From our friends at Bank of the West, here is a list of great tips for preparing yourself to buy a home. See my summary below:

1. Fix Your Credit

Your credit is one of the first things a lender will look at when approving you for a mortgage loan. You can get a free credit report once every 12 months from each of the three credit bureaus: Equifax, Experian and TransUnion at annualcreditreport.com. Make sure to check for mistakes and file a dispute with the business in question, as well as the credit agency, if you find any inaccuracies. They must investigate within 30-45 days.

2. Maintain Your Credit Score

Your FICO score is the most common number used by mortgage lenders to rate your creditworthiness. You can get your credit report with a FICO score for free, or for a small fee. Anything above a 740 FICO score will help you secure better interest rates. If your score is lower, you may still qualify for a mortgage, just with a higher interest rate attached. Your first instinct may be to find ways to boost that credit score. Here are two things NOT to do:

– Don’t close lines of credit – it may indicate credit risk and actually hurt your score

– Don’t open new lines of credit – the uncertainty of your spending habits with a new card might indicate risk and cause your score to tick up

3. Get a Big Down Payment

You’ll get a better interest rate on a mortgage if you have a larger down payment because lenders will think you’re less likely to default on your loan. Aim for a down payment of at least 20 percent of the selling price. This will also protect you from paying private mortgage insurance (PMI), which protects lenders if you default on a loan.

4. Get Pre-Approved

Meet with a mortgage specialist before you start shopping. They can help you determine an accurate budget and decide what kind of home you can realistically afford. Get a pre-approval letter and add it to a good credit report, income verification and a maximum allowable loan, and home sellers will take you most seriously among the suitors.

5. Keep Track of Your Money

You’ll have lots of documents, bank statements, etc. during the pre-approval and underwriting processes. These will be examined closely to verify income and expenses. If your records show unusual activity, you’ll be asked to explain it and you’ll have to jump that hurdle before continuing the approval process.

If you need a recommendation for outstanding mortgage brokers. I have a few that I highly regard.