For Loan Seekers, Preparation Is More Important Than Ever

By Ilyce Glink and Samuel J. Tamkin
Saturday, May 3, 2008

One of the reasons many subprime loans have failed is because of weak underwriting, a new study suggests.

Underwriting is the process by which a lender decides whether a borrower is a good risk. It involves looking carefully at the paperwork provided by the borrower, including the signed loan application, bank account statements, paycheck stubs, tax returns, and profit-and-loss statements if the borrower is self-employed, and reviewing the property appraisal obtained by the bank.

The underwriting also includes a process called "verifications." The loan officer is supposed to call your bank and verify how much cash you have in your account. He or she is supposed to call your employer to verify your employment history and income information. If the facts you've put down in your application can't be verified, the loan officer is supposed to reject the application.

This isn't what happened in the subprime market. In some cases over the past several years, if a borrower's information couldn't be verified, the loan became a "stated income" or "no doc" loan. The borrower simply paid a higher interest rate and fees, and limited or no verifications were performed.

As a borrower, you want the lender to be sure you're qualified to borrow the amount you have in mind. You want to know exactly how much you'll owe each month, and for how long.

Underwriting the loan is arguably the most important thing a mortgage lender can do, and we've all seen the results of poor underwriting: a high rate of foreclosures and defaults.

When choosing a mortgage lender, whether you choose a broker or a banker, you'll want someone who can do the job right. Finding a lender who will take the time to make sure you understand the different loan programs being offered and will help you decide which best meets your needs is key to having a smooth closing.

How do you find a good lender? As with finding a good real estate agent, start by gathering recommendations from your friends, relatives and colleagues. If you are working with a real estate lawyer, he or she should have the names of loan officers who do a good job for their clients. Your real estate agent, if he or she is a pro, will have a list of mortgage lenders with which the company does business.

Beware of real estate agents who refer only one mortgage broker or lender, particularly if that lender is an in-house mortgage broker. The in-house lender may not be bad, but you need to make sure you find the best lender for your circumstances and needs, not the lender that may yield the greatest benefit to the real estate agent's company.

You should also consider a credit union, if you belong to one or can join one. Credit unions typically offer some of the least expensive loan programs, whether you're looking for a mortgage or a car loan.

Once you compile your list, do some research to make sure that the loan officers and mortgage companies are in good standing in your state and that there are no outstanding complaints against them through the Better Business Bureau ( http://www.bbbonline.org).

Next, start calling the loan officers to chat about how long they've been in the business, how many mortgages they're working on and your own situation.

By now, you should have in hand a current copy of your credit history and credit score, which you can buy for $15.95 at MyFico.com, or free for a copy of your credit history through AnnualCreditReport.com. Ask the loan officer to assume that you have this particular credit score for purposes of your initial consultation so your credit history isn't tapped unnecessarily.

You can ask each lender to give you a best-price offer for the loan program in which you're interested. So, if you want a quote on a 30-year, fixed-rate loan and you're putting down 10 percent, ask for that price quote. If you haven't decided between a 30-year, fixed-rate mortgage and a 5/1 adjustable-rate mortgage, then ask for both. Ask for a detailed list of fees that will be charged for each type of loan.

These fees can differ greatly between lenders. One lender may have $800 of additional fees, while another may charge double that for the same loan and interest rate.

At the end of the conversation, you should feel comfortable with the loan officer and the program offered. If you get a feeling that something isn't quite right, it's time to do more research.

What about online lenders? Mortgage companies have collectively spent hundreds of millions of dollars creating fancy Web sites designed to attract borrowers. There's nothing wrong with doing some research online and perhaps even applying for a loan online.

But you want to know that the company you're doing business with is real.

If you're choosing a lender such as Bank of America, CitiMortgage or SunTrust, you won't necessarily get a lower price by applying online, and it will take away some of the opportunity to have a personal experience, which I think is important in this, the single biggest purchase of your life.

Q I'm trying to sell a condo for my mother, who has moved to a retirement home. The first real estate agent did very little, so when the listing period expired, I switched to a new one. (Both agents had been recommended.) I told the new agent that I wanted frequent updates about various items. She has now had the listing for more than a month and has communicated little, despite my frequent phone calls and e-mails asking questions. If I leave a message, she does not call back. Most recently, I sent her an e-mail asking for the following information: a list of multiple-listing services where this unit has been posted, along with posting dates; copies of all ads that have been placed, whether as fliers or in newspapers; a list of groups to whom mailings have been sent, and a copy of the letter or material; and a summary of sales of any units in the building or comparable units nearby since this listing began. I asked her to provide this information by the following Friday, which has passed, but have had no response at all, not even an e-mail asking for more time.

When I signed the listing agreement, I changed it to make the time period shorter but did not change the text provided. The document does not seem to obligate her to do anything. Did I have to add language stating the work I expected? Would that have been enforceable anyway? What are my options now? Is this nonperformance? Would it make sense to offer an extra incentive to try to get the place sold? I realize the real estate market is not good. I don't know if I could find anyone better, and I am 800 miles away.

AIt's hard to be a long-distance seller, as you're finding out. I don't think your expectations are unreasonable, but it seems as though you've found two agents who aren't making you happy.

The good news is that that's what managing brokers are for. The managing broker of a real estate office is in charge of making sure the real estate agents are doing their job and to assist when problems arise with customers.

Call the managing broker who leads the office that employs your agent. Let the broker know you're unhappy with the service being provided to you. Explain that the agent doesn't provide you with updates and doesn't communicate at the level you require.

Tell the managing broker that you are 800 miles away and need these updates about the selling process. You are not at the house or even nearby and need to stay informed. The market may be slow, but you would like to know exactly what your agent is doing to sell the home.

You should list your requirements, talk about the e-mail you sent and ask the managing broker to speak to your agent to see if she's up to the task. If your agent decides she really isn't up to working with an out-of-state client, then you should ask the managing broker to find someone else familiar with the neighborhood and building who would be willing to give you regular updates.

Maintain a polite tone of voice, but be clear with the managing broker that you expect something to happen within the next day or two. You don't want to let this sit and fester.

If nothing happens, then it would be appropriate to ask the managing broker to find someone else who is more willing to work with you for the remainder of the listing. Or the managing broker can simply cancel your listing agreement, and you can change brokerage companies.

When it comes to selling condominiums, I've found that there are usually one or two agents who typically "work" a big condo development. If your mother's condo is in a large development where one or two agents control most of the sales, these agents represent many of the owners who decide to sell. If this is the case for your mother's condo, you would be wise to find out who these agents are and talk with them.

I have two primary homes but would like to buy another. A friend wants to live in one of my primary homes and pay me rent. How do I structure this in order to deduct taxes and interest on all three homes? I was thinking of setting up a sole proprietorship on my current home that's to be leased out to my friend. Also, if the homeowners association does not allow tenants, can I get in trouble with the law if I rent out the property?

No one can have two "primary" homes. The word "primary" means first. The home in which you live most of the time is considered your primary residence. The other house you own is your second home, or perhaps a vacation home.

The IRS permits taxpayers to deduct the interest they pay on up to $1 million in mortgages ($500,000 if married and filing separately) and $100,000 in home equity loans ($50,000 if married, filing separately) on your primary and secondary residences, with some restrictions. Likewise, real estate taxes paid on a primary and secondary residence are generally deductible.

So now you want to buy a third "primary" home. There is no provision in the IRS code for deducting the interest and taxes on a third "primary" residence. In fact, it sounds as if you are about to start being an investor in real estate. If your friend pays you rent, you can claim that property as an investment. You'll be able to write off the expenses of owning the property (mortgage interest, insurance, taxes, maintenance, etc. along with other investment benefits) against the income you receive from your tenant.

You may run into a problem with your homeowners association. If the association does not allow rentals and you rent out your home, you run the risk of being fined by the association, or worse. It could sue you for violating association rules. You don't want to go there.

I recommend that you sit down with a knowledgeable real estate lawyer who can discuss these issues with you in detail and provide a workable structure for what you're trying to do. For more details on tax deductions, please go to http://www.IRS.gov and read Publication 936, "Home Mortgage Interest Deduction," and Tax Topic 505, "Interest Expense." You may also find Publication 530, "Tax Information for First-Time Homeowners," of interest as well.

We are looking to consolidate our debt. Our mortgage lender turned us down for a home-equity line of credit. What are our other options? We have only been in our home for 1 1/2 years, so there is not much equity. We applied for other loans from the same lender and have been denied. Should we try other lenders?

No. You're done for the moment. Every time you apply for credit and are denied, you hurt your credit history and your credit score goes down. The lower your credit score, the less likely you will be approved by another lender.

If you've been turned down for a loan, you're entitled to see a copy of your credit history and credit score to find out why. However, it sounds as though you're trying to get blood from a stone.

If you don't have any equity in your property, you cannot refinance to consolidate debt. Mortgage lenders are getting picky about how much cash you can borrow against your equity. These days, they're not doing 100 percent loans or anything close to that. If you're in a declining market where home prices are falling, they might not refinance if you have less than 5 or even 10 percent equity in your home.

Because you're out of refinancing options for the time being, if you want to get your debt under control, you'll have to do it the old-fashioned way: Stop spending and find a way to bring in more income each month, even if it means taking a second or third job.

I am purchasing a home with a seller-financed contract. The seller still has a mortgage through the bank. I received a notice in the mail addressed to the seller that he is behind in payments and to contact them to avoid foreclosure. I left him a phone message regarding this notice but have not had a response.

It has been two months, and now a notice was left on my door from a field inspector for the mortgage company. It appears the house is in foreclosure. Should I stop making my payments to him (I am completely current), or should I file some type of lawsuit? Please tell me what to do.

Get to a lawyer as quickly as possible. It appears your seller is taking your money but has stopped paying his lender. If the lender forecloses on the property, you may stand to lose everything you have put down so far.

When you buy real estate on contract, you need to make sure that any lender on the property receives prompt payment of any amounts owed under the mortgage, that the insurance on the home is paid and that the real estate taxes are paid on time. Failure to have any of these taken care of can be a disaster for both the contract seller and the contract buyer.

Your purchase contract may have language to guide you. You may be able to make your payments to the lender instead of to the seller. But if the property is in foreclosure, you first need to find out how many months your seller is behind on the mortgage. It may be worth it to you to pay what is owed to protect your own interests in the property.

You need a lot more information and will need to do some investigation. If you know that what your seller pays on his mortgage is less than your payment to him, you might be able to make those payments. If his payments are way higher than your payments to him, you may be in a difficult spot.

You may come out fine if you have caught this early enough. Depending on the circumstances, you may be able to negotiate with the lender, and if you are prepared to buy the home now, you may be able to exercise your rights under the installment contract and close on the house early. Because installment contracts can have varying terms and provisions, it is difficult to tell you what path to take.

I own a condo unit. I paid my association fee late by one day, so I was charged the late fee of $50. The following month, I paid my association fee on time but forgot to pay the $50 fee. The only thing unpaid was the $50 late fee, but I was still charged $50 every month after the first month. I read and reread the governing documents, and there is only the statement about a $50 late fee if the payment is late. It says nothing at all concerning fines for missing a "late fee." Can they charge a late fee for an unpaid late fee when all regular payments are on time?

You have fallen into the late fee trap. A payment will be considered paid on time when it is paid in full. When you were late on that first payment, your account had an obligation due equal to the amount of your monthly payment plus $50. The following month you paid your monthly payment, but your account was still short by $50. Because the account was short and not paid in full, you did not pay the full amount owed on time. In some circumstances, you can get the association to waive that second late fee, and you certainly should try. They would not be obligated to waive the second fee, but they might.

Otherwise, you need to pay down your condominium bill in full so that the account falls to zero.

Ilyce R. Glink is an author and nationally syndicated columnist. Her latest book is "100 Questions Every First-Time Home Buyer Should Ask." Samuel J. Tamkin is a real estate lawyer in Chicago. If you have questions for them, write Real Estate Matters Syndicate, P.O. Box 366, Glencoe, Ill. 60022, or contact them through Glink's Web sites,http://www.thinkglink.comandhttp://www.expertrealestatetips.net.

© 2008 Ilyce R. Glink and Samuel J. Tamkin

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