Dallas Fort Worth Area Homes and Real Estate

Home owners looking to refinance their mortgage may run into some stumbling blocks if they have more than one mortgage on their property.  That's because many lenders are now refusing to "resubordinate" second mortgages unless the home owner obtains the new mortgage through them directly.  

What is a resubordination?  It's an agreement from a lender who holds a second lien to keep that lien in second position once a first lien is refinanced and replaced with a new lien.  Why is that necessary?  Because by law, a lien in first position cannot be removed and replaced with a new first lien without the permission of the second lienholder.  The law is written this way to protect the junior lienholder's equity position.  When a first mortgage is refinanced, the lien is removed and a new lien with the new lender is created to take its place (which is often higher than the original first lien since many home owners choose to finance the closing costs into the new mortgage).  In order to complete a refinance transaction where two liens exist on a property, the holder of the second lien must agree in writing to remain subordinate to the first lien.   A few years ago, these agreements were relatively easy to obtain.  But many lenders concerned about their equity position and the increased risk of defaults have changed their rules. 

Here is an example of what can happen:

A client of mine recently contacted me to refinance his current mortgage.  He currently has an FHA loan and qualified for an FHA streamline refinance since he had made 12 consecutive on-time payments.  His mortgage history was good and the value of his property had not fallen.  But several months ago, he took out a home improvement loan to build a new pool for his family, which was secured by a second lien.  When I contacted them to inquire about obtaining a resubordination agreement, they responded with a copy of their internal policy, which was revised only a few months ago.  Basically it stated that he would have to refinance his first mortgage with them in order to obtain a resubordination agreement for the second mortgage.  The problem is that their rate was quite a bit higher than the rate I was able to offer at the time.  But there was nothing he could do because they controlled the outcome of the transaction by withholding that agreement.   

Over the last few months, I've discovered that several lenders have tightened their resubordination policies regarding second liens.  This could apply to home improvement loans like the one described above, or even second liens that were originally purchase money loans (combo loans, such as 80/20's and 80/15/5's). 

SOME ADVICE FOR HOMEOWNERS:

If you are considering a home equity or home improvement loan and have a first mortgage, look into the possibility of refinancing BEFORE taking out a second mortgage.  You may find that you're able to roll your entire first mortgage into a new home equity loan, obtain a lower rate AND still get enough cash back to achieve your goals without having to obtain a new second mortgage.  Texas allows a cash-out home equity loan on a primary residence AS LONG AS the total loan-to-value ratio is 80% or less. 

Even if your loan-to-value ratio exceeds 80%, you may still qualify for a home improvement loan.  However, if you have an above market rate on your first mortgage, consider refinancing it before taking out the second loan.  Once you take out an additional loan that creates a second lien on your home, you may find yourself at that lender's mercy if you try to refinance at a later date.   This is definitely something to consider before taking out a second mortgage.   

Most buyers genuinely enjoy looking for homes, but once the time comes to begin the negotiating process, many neglect to consider one important calculation that's important in understanding how a seller may view their offer on a particular home.

Of course, having good buyer representation from a competent real estate agent helps a lot, but I've encountered many buyers that become so overwhelmed with information while shopping for a home that they neglect to consider the bottom line of their offer. 

Quite often, buyers in this market are asking sellers to pay all or at least a big part of their closing costs.  Obviously 100% financing is not nearly as common as it was only a couple of years ago, so it seems that it's become even more common for buyers to ask the seller to pay all, or at least part, of their closing costs.  There's nothing wrong with doing that AS LONG AS buyers keep in mind the concept of NET OFFER PRICE.

The most important thing to consider from a price standpoint when negotiating an offer is the NET OFFER PRICE, not the actual contract sales price.  Far too many people focus solely on the price they are offering and neglect to factor closing costs into the big picture.  Unfortunately the seller and their agents never neglect this, so be mindful of this important calculation:

For example, let's say that three buyers are competitively bidding on a home listed at $150,000: 

• Buyer A offers $148,000, but asks the seller to pay 5% ($7,400) of the sales price towards closing costs. 
  
• Buyer B offers $145,000 but only asks the seller to pay 2% ($2,900) towards closing costs. 
  
• Buyer C offers $144,000 but doesn't ask the seller to pay ANY closing costs.

From the standpoint of money alone, which buyer submitted the best offer?  In order to determine that, all we have to do is deduct the amount of the closing costs from the offer price:

• Buyer A's NET OFFER is $140,600 ($148,000-$7,400).
• Buyer B's NET OFFER is $142,100 ($145,000-$2,900).
• Buyer C's NET OFFER is $144,000 ($144,000-$0).
  

Based on this net offer price alone, which offer would you accept if you were the seller?  Obviously the SALES PRICE is not as important as the NET OFFER PRICE to a seller. Assuming the seller was choosing the best offer on NET PRICE ALONE, Buyer C's offer would clearly be the better offer, despite the fact that the sales price Buyer A offered was $4,000 higher.

In reality, it's important to note that sellers and their agents often consider other factors besides just the net offer price when determining whether or not to accept an offer.  Those might include (but not be limited to) variables such as the closing date, type of financing the borrower is securing, any repairs the buyer may be asking the seller to complete, as well as a host of other factors that will vary from one transaction to the next.  However, this blog is merely addressing the SELLER'S NET from the standpoint of total sales price minus closing costs.  Regardless of whether or not it's the ONLY factor a seller may be considering, it's certainly important. 

And it's also worth noting that this NET OFFER PRICE doesn't take into account other costs a seller will have to pay, such as agent commission, prorated taxes, title policy and other seller closing costs that are typical.  However, in the majority of cases, those will more than likely be the same unless the buyer chooses to pay their own title policy.  In other words, seller's actual net will be less than the examples above.  This is only meant to illustrate how seller's evaluate individual offers taking both sales price and seller paid closing costs into account.

It's a pretty simple concept really.  If a buyer offers $150,000 and asks the seller to pay $5,000 in closing costs, it's the same thing as offering $145,000.  This "NET OFFER PRICE" is what's important to the seller, not necessarily the asking price itself.

Of course, sometimes buyers who ask for a large amount of closing costs actually offer MORE than the asking price of a home.  In certain cases, this may cause a seller to decline or counter an offer because they may fear the home will not appraise for the higher price.  Every situation is different.

So buyers, keep this in mind when deciding what price to offer on a home if you're asking the seller to pay closing costs.  Sometimes sellers may counter the offer with a higher price, and sometimes they may counter by offering to pay less in closing costs (or both).  Understanding this basic concept will help you to better understand the process and possibly make better decisions.  You have to see things from the seller's perspective in order to really understand the numbers.  It's certainly not uncommon to ask a seller to pay closing costs, especially on homes priced under $200,000 in the D/FW market, but all buyers should realize this is how a seller will view the net price of the offer.

Please note that I am not a licensed realtor and do not directly participate in the negotiating process.  However, I have found that most buyers who understand this concept tend to fare better when negotiating offers with sellers.  Every buyer should take advice from their realtor when considering what price to offer on a particular home, just keep this in mind when doing so.

If you have student loans in default or ones that are currently past due, you need to take quick action to avoid these becoming a potential problem for the rest of your life.  The consequences of a defaulted student loan are worse than that of, say, an electric or utility bill that goes into collection, or even a credit card.  However, there is some help available to those that wish to remedy the past due student loans.

There are many types of student loans available to people looking to borrow money to finance education expenses.  The vast majority (around 78%) of student loans are guaranteed under the Federal Family Education Loan Program through Sallie Mae.  This means the government does not actually loan the money, they just provide a guarantee to the lender in case of default.  The remainder of student loans are made as direct loans from the government under the Direct Federal Loan Program, which is mainly comprised of subsidized and unsubsidized loans, and many states also guarantee student loans.  Those programs vary from state to state.  There are also a variety of student grants available.  

WHAT SHOULD YOU DO IF YOU CAN'T PAY YOUR STUDENT LOAN?

• Find out if you qualify for a forbearance.  A forbearance allows you to stop making payments for a specific length of time, although interest will still accrue.  They are usually granted for periods of one year, and may extend longer in certain circumstances.  The most common reasons lenders and/or the government allow forbearances are health problems, unforseen personal circumstances, inability to pay within the terms of the loan and excessive debt ratio of student loan payments (meaning the payments are 20% or more of income).  And in some cases, forbearances are allowed on loans already in default. 
• Find out if you qualify for a deferrment.  Deferrments are typically harder to get than forbearances, but other reasons, such as returning to school, may be considered.  Lenders will typically not allow deferrments on student loans that are already in default. 
• Look into the possibility of consolidating multiple student loans into one loan under the Direct Loan Consolidation Program.   In some cases, they allow defaulted loans to be included in this program, and the terms and payments are often less.  You may qualify for a consolidation loan under this program if your original student loan was through the Direct Federal Loan Program.  In some cases, you may be able to consolidate loans under the FFELP program if you were turned down for another consolidation loan. 
• See if you qualify for loan forgiveness.  The government has special programs that may allow forgiveness of all or part of the pricipal amount of a student loan, but these typically require you to perform volunteer work, perform military service, teach or practice medicine in certain low income communities or meet certain other requirements of each individual program. 
• If none of these options work AND your student loan is already in default, student loan rehabilitation may be an option.  The terms of repayment will vary depending on the type of student loan.  The program removes the loan from default status once a specified number of payments are made on time (between 9 and 12 monthly payments), which may qualify you for additional student loans.

In ANY case, MAKE SURE you receive written conformation of acceptance into any of these special programs to delay or cancel repayment of the loan.  The government and some student loan lenders are notorious for misreporting loans as late to the credit bureaus even after a deferrment or forbearance is granted.  I've seen this destroy many people's credit, but the situation can easily be remedied if the borrower has proper documentation. 

CAN  A STUDENT LOAN BE SETTLED FOR LESS THAN THE BALANCE OWED?

Maybe less than the amount of the collection, but usually not less than the principal amount of the loan.  Keep in mind that the current balance of the collection may be higher than the amount owed when the loan went into default.  Once a student loan is assigned to a collection agency, they will typically add on additional fees.  For example, if you defaulted on a $1000 student loan, the collection agency that the account was assigned to may add fees, court costs (in the case of a judgment) and additional interest.  This $1000 balance could easily be over $2000, depending on the laws of the state in which you reside.  And they will typically NOT settle the account for less than the principal balance of the loan. 

WHAT IF YOU WANT TO GO BACK TO SCHOOL AND NEED ANOTHER LOAN?

Then you must, at the very least, make arrangements to pay the delinquent balance, consolidate the loan, receive a forbearance or deferrment or qualify for loan rehabilitation.  The government will not loan or guarantee another student loan for you if you currently have a loan in default. 

HOW CAN YOU GET INFORMATION ON PAST STUDENT LOANS IN DEFAULT?

You should start by accessing a free copy of your credit report either though the government-mandated site that allows access to your credit report once per year for free OR a service that provides a free credit report and score with a trial membership.  This will show you what damage has been done to your credit and will also provide you with contact information to both the original lender and the collection agent, if one is involved. You should also retrieve your loan information from the National Student Loan Data System, which is a repository of student loan data kept by the Federal Government.  This system will allow you to access your past student loans, as well as any current data on past due or current loans.  A PIN number is required to access this system, and may be obtained or changed at the Department of Education PIN Registration Web site using the option "Change Pin".

HOW WILL A STUDENT LOAN DEFAULT AFFECT YOUR LIFE?

There are many possible repercussions of student loan defaults:

• Your credit will suffer.  Late payments and collections will be reported, and they will both negatively affect your credit score and credit rating. 
• You will be unable to get another student loan without addressing the defaulted loan.
• Some schools may withhold transcripts. 
• Your state and/or federal tax return may be garnished. 
• In some states, your wages may be garnished. 
• Some employers may not hire you if you owe money to the government and/or have a bad credit rating.  And close to 35% of employers pull credit reports on current and perspective employees, so your job could literally be at risk. 
• You will be ineligible for almost any other type of direct Federal or Federally insured loan.  This includes home loans like FHA and VA loans. 

Defaulting on a government loan is not something that will go away overnight.  And even if the collection drops off your credit report after seven years, the government will still keep a record of the default in their database.  In other words, simply removing the loan from your credit report will not make it disappear.  It must be paid, settled or remedied by using one of the methods or programs described above.

Many perspective homeowners find themselves asking "When Is The Right Time To Get Preapproved For  A Mortgage?"  Getting pre-approved for a mortgage is something that many buyers put off until the last possible minute when it should actually be something that's done far in advance of looking for a new home.   Unless you're planning to pay cash for a home and don't need a loan, the pre-approval process is inevitable.   The earlier you consult with a lender in the process, the lower the chances of having a problem.  However, many people are reluctant to do this, and here are some of the main reasons why:

• FEAR THAT A CREDIT INQUIRY WILL DESTROY THEIR CREDIT SCORE OR HURT THEIR CHANCES OF QUALIFYING FOR A LOAN: This is perhaps the biggest misguided fear that I encounter as a loan officer.   Although credit inquiries do count against the credit score, that factor is given the LEAST AMOUNT of weight in determining the score.  Furthermore, mortgage inquiries do not deduct as many points as other inquries, such as those for credit cards and finance accounts.  The credit bureaus are not in business to destroy peoples' chances of getting a loan just because they apply for one.  They are looking for multiple inquiries from credit card companies and high interest finance lenders that may indicate desperation to obtain credit to pay for living expenses.  Those are the inquiries that can do the most damage.  Mortgage inquiries are almost completely a non-factor.
• THEY KNOW THEIR CREDIT SCORE IS GOOD AND ASSUME THIS MEANS THEY WILL AUTOMATICALLY BE APPROVED FOR A LOAN.  There are many complex factors that lenders consider when making a loan decision.  Good credit is one, but other factors are becoming much more important since the mortgage crisis is forcing a return to underwriting principles that put more weight on other factors.   For example, cash reserves can have a greater positive impact than a large down payment in some cases.  And high debt-to-income ratios are getting very hard to approve.  
• THE BELIEF THAT THEY SHOULD FIND A HOUSE FIRST BEFORE GETTING PRE-APPROVED.   Why look for a house if you don't know for sure that you qualify for a loan?  And even if you know your credit is perfect, what about knowing the right price range to look in based on your payment goals?  Is it a good idea for a buyer to look at  $200,000 homes when they only want a payment of $1,000 per month?  That would be looking about $80,000 above the correct price range.  So why waste that kind of time?  Many people also put way too much faith and trust in mortgage calculators found on the internet.  Although these can sometimes be helpful, many lenders leave out certain important variables, such as taxes, insurance and PMI to make the payment look artificially lower.  Taxes, insurance and PMI can sometimes make up more than 40% of the total monthly payment, so it's important to know what the TOTAL PITI payment will be, regardless of whether some of those items will be paid seperately.   

So now that we've covered the reasons why people don't get pre-approved early in the process, let's take a look at the reasons why people SHOULD get pre-approved well in advance:

• CREDIT SCORE ADVICE: A good mortgage consultant can offer many tips to increase credit scores within a few months.  Since the definition of "good credit" has changed for virtually every lender and lenders are requiring higher interest rates for many borrowers, the pre-approval process should include a counseling session about ways to optimize the credit score. 
• FIXING ERRORS AND MISTAKES: Identity theft and credit report errors are extremely common.   The vast majority of people don't discover credit report errors and identity theft until they are denied for a loan!  Unless they have monthly credit monitoring that notifies them of changes to their score or credit report data, there's no way to know for sure that their report is error-free.  Fixing an error on a credit report can sometimes take months, so it's better to get a head start on that process than wait until 30 days before closing. 
• BUDGETING AND EXPECTATIONS:  Knowing what to expect for closing costs, down payment, monthly payment and other cash that may be required as reserves is very important.  This also can give buyers a really good head start on browsing for homes in their price range on the internet way before it's time to buy, which can give them an advantage over other buyers who might make quick decisions because of poor planning.  Additionally, some buyers may want to reduce debt and monthly payments before buying, and mortgage professionals can help provide a game plan that will have the best outcome for both the credit score and the buyer's expectations.
• ESTABLISHING A RELATIONSHIP WITH AN EXPERT:  Establishing a relationship with a mortgage professional before starting the buying process can be very useful to buyers looking to keep track of trends, rates and changes in loan programs and guidelines.  Many buyers may choose to alter their game plan if they have specific knowledge of changes coming in the future.  Mortgage professionals aren't psychics, but can provide useful information to help with these decisions.  A good loan officer will make note of specific needs and keep in touch with their future prospects every couple of months to see if they have any new questions and provide information about changes in the market. 

It goes without saying that most buyers LOVE looking for a home, but despise the idea of getting pre-approved, or don't find it necessary.  Many pay a huge price in the form of higher loan rates, lowered expectations and sometimes a loan denial.  Putting off this process until the last minute can be a huge mistake, especially if their ideas and expectations they have don't jive with reality.  Ideally, buyers should begin talking to a loan officer about three to six months before they plan to buy, and twelve months or more if they suspect their credit is less than perfect or need advice on how to rebuild their credit.    Obviously their credit score can change, as well as mortgage rates, but it's a great way to have some reassurance that their credit, goals and expectations can be met when the time is right to buy a house.

BUT HOW LONG IS A PRE-APPROVAL GOOD FOR?

First, there are many aspects that lenders consider when making a loan decision.  Credit is important (arguably the most important), but employment, income, net worth and other factors also count.  A buyer must usually close within 60 days of the date the credit report was pulled.  However, employment, income and assets will be verified and updated statements must be provided in many cases, especially in situations where assets will be liquidated to show down payment and reserves. 

Additionally, every lender re-verifies employment on the day of closing since some buyers will occasionally quit their job after loan application thinking they are completely approved.  If this happens, the loan will be denied on the day of closing. 

With default rates rising, some lenders will pull an additional credit report once a loan goes to underwriting just to make sure the borrower did not take out any new, undisclosed loans or have any major credit problems.  Most lenders who do this have a policy that they will use the score from the initial credit report AS LONG AS there are no material differences in the report (such as a new car payment or account that is suddenly delinquent). 

But all of these things are going to happen regardless of when the pre-approval takes place.  The point of talking with a mortgage professional early in the process is much deeper than just getting "pre-approved" for the reasons i've stated above.  A good professional will serve all of these needs, and the process is not nearly as hard as most people think.