New Lingo in the Mortgage World

Closing costs are hard enough to understand without lenders adding to the confusion.  There are many different terms thrown about, and I find daily that clients are confused by disclosures and terms that sound similar but have different meanings.  Here comes help...

First off, two super-useful, old-school terms that will be most helpful:

Closing costs:  These are the one-time, transactional costs or fees associated with getting the loan.  It should be all inclusive, and may or may not include “discount points” or “points”, which are related to the interest rate.  In many cases, your costs and points are not dictated, but a matter of your choice. 

Prepaid expenses:  These “prepaids” are prorated/recurring charges that are NOT a cost of getting the loan, but ongoing expenses.  Primarily property taxes, homeowners’ insurance premium and/or dues, and some prorated daily interest for the odd days at the month-end when you close. 

Plus a few new ones added by recent regulation, just to add to the excitement:
NOTE: Added or highlighted in 2010, when HUD (the Department of Housing and Urban Development) changed the old one-page Good Faith Estimate into a new unrecognizable 3 page document, and added new terms.  You may or may not find them useful. 

Total Settlement Charges:  total of all closing costs and prepaid expenses

Origination Charge:  subtotal of only the fees that the lender receives, without other third party fees/costs or prepaids

Adjusted Origination Charges: subtotal of “Origination Charge, plus or minus “Points” (see below).  It is much clearer to look at “Closing Costs”, since that’s more inclusive. 

And a few more to be super clear:

Interest rate: the rate at which interest accrues day by day on your loan…the true rate. 

APR:  “Annual Percentage Rate”, a less useful figure, promoted as a shopping tool for consumers, but one that has major problems.  Attempts to show the total annualized rate (cost as a percentage) of borrowing.  Like: “if you do exactly such and such, and finish in so many years, the annual cost was X.”  Not the same as interest rate. 

Points or “Discount Points”:  One "point"  = 1% of the loan amount.  Either positive or negative…a fee you either pay or finance at closing for a lower rate, “positive points”; or what I call “negative points”, a lender credit to reduce your closing costs.  Either one is possible with most loans, and it’s partly a matter of your choice. 

“Prepaid Finance Charge”:  A subtotal of only SOME of the closing costs specified by the law to calculate APR.

“Amount Financed”: This is the loan amount LESS the prepaid finance charge, used only to calculate APR.

P&I:  “Principal and Interest” payment.  This is the monthly payment for just the mortgage, without taxes, insurance, etc.  This is what pays the interest as it accrues, plus a portion to reduce loan balance over time. 

PITI:  “Principal, Interest, Taxes and Insurance” payment.  This is the total payment (sometimes shown to include homeowner’s dues, and mortgage insurance if applicable).  Used by underwriters in qualifying you.  You’ll see this on many disclosures whether you pay your taxes and insurance in the monthly payment or not.

Is Mortgage Qualifying Too Tight???

It feels like a very twisty road to closing loans these days, and there's a notion out there that "banks aren't lending", but it's far from true.  Some kinds of transactions are much harder to finance, but money is flowing.  You might be surprised to hear me say that standards are arguably still "loose".   No doubt, banks have found some sanity again, and refuse to lend to Jane who is without verifiable income, or Joe who has years of spotty credit.  But reasonably-well-qualified Jack, who has decent credit and income can get a loan.  And he can still get away with a high debt to income ratio (DTI), by historical standards.

The way it was
Years ago, the maximum DTI was in the range of 33 to 36%. That means about a third of your gross monthly pay could go to servicing the house payment (and any other debt service like car, student loan, credit card payments).  From the late 1970s until 2005, DTI standards continued to get looser and looser. Eventually, even those with sketchy credit records could get a mortgage regardless of DTI.  Today banks hold the line around 45% DTI.  That's an improvement, but think about it...

That's 45% of your gross monthly pay. Once you have had withholdings for taxes (30% or so), health insurance (5-15%), etc., and you have 45% going to debt service, there is very little left to live on.  If that's not immediately clear, try it with your own gross household monthly income... how do you feel about a house payment that's 45% of gross?  Make you crazy?  A bank might still approve it today.

Sure, there are cases where the DTI can be high because of extenuating circumstances, but the average household with stable income at 45%?  Not so much.  It would barely leave room for paying the bills, let alone saving for a rainy day or retirement.

High Hurdles
Now, to distinguish qualifying standards from regulatory hurdles.  Regulatory hurdles aren't about what it takes to qualify, but the required process to get to funding.  Today, those hurdles and our processes are beyond insane.  We have to deal with pointless but mandated timeframes to adhere to, checkboxes ad nauseum, and even more disclosures than a seasoned borrower can imagine.  The process is more expensive and slower, and no more consumer-friendly, 180 degrees opposite to what the regulators intended.  In that sense, lending is stupid-tight today.
 
The Future
Going forward, two things must change, although the change may come slowly. 

1. Near term, we're seeing even more regulation (a la the 2300 page Dodd-Frank monstrosity, for example) and then a prolonged fight to lessen the regulatory hurdles back to something more reasonable...and make them truly serve borrowers and lenders, rather than impede smart lending and smart borrowing.  There's no other way. 
2. We'll also see debt ratio guidelines tighten further, back toward the historical standards of 25/33 or 28/36.  They must as well. 

 

NOAA's Ark Revisited

Your humble correspondent following up for far flung friends wondering, "What's it really like in Oregon?".  And continuing my mild and brief rant over NOAA's brilliant graphics people who bring us dark, dark images on http://www.weather.com/.  (See the inspiring graphic in my prior post, An Ark in Every Driveway?)

Anyway, here's the real deal while we wait impatiently for our first flirt with a sunburn...

Contrary to the NOAA graphic, last week western Oregon didn't wash away in a deluge.  Yes, we had sprinkles, showers, a foggy morning, and a warm afternoon (with actual sun, requiring actual AC in the car).  The short and sweet... we had gray punctuated with sun and shadows, color in the garden, and lots of green things growing.  Otherwise, I'll let the pictures speak for themselves... and yes, it'll be 90 soon. 

 

"Free" is a Great Price...But You Can Do Better.

A "free" credit report is often worth exactly what you pay for it.  Not much.  A new client called me today, aware that she had some credit issues, and wanting to set a game plan to buy a home in the next year or so.  She had a variety of questions, one of which was how to get a free credit report.  But as one question turned into 5 or 10 questions, she quickly realized it wasn't so much the report that she needed, as the advice that would (or wouldn't) come with it.  So it's not just a matter of signing up for something or ordering something and that's it. 

Caution

There's some heavy lifting involved in managing your credit, and yes, you can injure yourself doing it.  This is true whether you have stellar credit and you're trying for small incremental improvement, or you're recovering from major trouble.  I've seen people harm their scores by pulling their own credit and then taking certain action at the wrong time.  This means opening accounts, closing accounts, disputing accounts, paying something off, charging something up, transferring balances, consolidating balances, and moving to a "no interest" deal.  Much of the trouble is surprising and counterintuitive.  Here's my most fundamental and most valuable advice.  Do NOTHING with your credit, until you get good advice from a seasoned mortgage pro.   

You can really get "Free"...if you know how
One of my other bits of advice to this new client was not to use some online outfit that advertises on TV and screams "free" or has it in their name.   Instead, I recommended she use the officially sanctioned site from the Federal Trade Commission. 

There are other options, but this is the safest way to really get your reports for free. If you stagger them (each bureau annually but not all at once...one three times a yearin say January, May and September), then you get a peek at your credit every 4 months.  Just understand the three main limitations of these reports:

1. You can have just one free report per year per bureau.
2. You will NOT get your scores...just the underlying data, one bureau at a time. 
3. You will not get any interpretation about what it all means and advice about what steps to take...you'll have to get that separately.  A good loan officer...ahem...can provide that...ahem...if you know one. ;) 

Or if you like brain damage, risk and uncertainty, skip the interpretation and advice. 

An Ark in Every Driveway?

Everything said, is said by someone.  The kernel in that saying is that everyone has their own perspective, and it can't ever be completely removed from the equation of human communication.  Like the weather forecast from this morning... 

That's from http://www.weather.gov/, the "official" weather site for this great country, courtesy of NOAA or the National Oceanic and Atmospheric Administration.  What I want to say is "Please come to where we live and see what the weather really looks like." 

But I won't say that.  Instead I'll say, trying to mask my devious smile,"Yep, that's Oregon".  Admittedly this has been a tough winter/spring...but isn't it nice when people who live elsewhere have the impression that we live under a dark, dark cloud.  And that there's an Ark in every driveway.  NOAA's Ark perhaps?  One thing's certain.  It's nice that we don't have 10 or 20 million people living here.  I'm afraid that would be the case if the word got out that it's not all gloom.  Sure it rains, but...does NOAA represent what it's like to live here?  Hmmm... 

How about a bit of live theater, then?  From now 'til Sunday, I'll take a series of pix, day and evening in my front yard and you can compare them with what you see above.  Maybe my little weather observation station will wash away in the dark deluge...and maybe not.  Stay tuned.  :) 

Marvel #4: Worthy of Anyone's Bucket List

Awesome Trees

Friends and clients from other parts of the country or world often remark about our majestic big trees, and of course Oregon's state tree is the Douglas Fir, which grows to massive size.  But if you really want to put something worthy on your bucket list, go lie down on your back on a soft bed of redwood duff and gaze upward at a 300 foot tall giant swaying, moving, living and reaching to the sky.  It's truly unforgettable, even for a jaded and fortunate Oregonian.

These trees simply define "big".  Not counting the fascinating fungus that grow hundreds of acres large under a forest floor, Sequoia Gigantia grow to be the largest living thing on earth by volume, and Coastal Redwoods grow to be the tallest. 

So...I highly recommend that you and your family pick one of these and put a visit in your summer calendar...

This summer!

• Big Basin State Park near San Jose/Santa Cruz
• The largest tree by volume in the world, the General Sherman Tree in Sequoia National Park
• The famous and oddly shaped Grizzly Giant tree in Yosemite National Park
• or within a shorter day's drive, in the northwestern corner of California, off Highway 101...a special place known as the Avenue of the Giants where yes, you really can see a road built through a tree.

For real tree lovers, I know you'll also enjoy this great photoessay by a couple trekking through redwood forest country.    

I've been called worse things...

Discussing a rate lock, I often hear from clients, "You watch the markets more than I do."  Hmmm.  It is true.  I confess daily monitoring rates, the Fed, and graphs like this one of Fannie Mae mortgage backed securities or MBS (think "bonds"), even if it makes me a little...nerdy. 

A green tide carries a message

This 90 day chart shows the past twelve consecutive days are all up-days in MBS/bond prices (meaning = toward lower rates).  Twelve green days or red days a row is like rolling a 7 on the dice twelve times in a row...tough.  The green "candlesticks" are up in price (and down in rate) for the day.  Down days are in red.  Such graphs let us watch the technicals for short term trends.  Right now, the "techs" say we're due for a correction.  The coming days should be more red and downward in price, moving toward higher rates. 

In addition to current techs saying that we're due for some red, today's fundamentals also say the same, and that rates will move higher.  The fundamentals are what drives the market in bigger, longer term trends, like the tide going in or out.  The tide's been out for a long time (years now) and there's growing pressure for it turn because Treasury borrowing and dollar weakness are creating inflationary pressure.  That will weaken bonds and drive rates higher.  It's the fundamental (red) tide returning. 

Every case is different, but for most borrowers, I believe the message is that it's time to lock if you can.  Time to buy.  Time to refinance if you haven't already.

No need to be a nerd

When clients call me for help with a mortgage, I do lots of things.  It's not just about taking an application or "selling" something.  One of my roles is to watch and assess the market for trends and anomalies, and find opportunities to lock at an advantageous time.  Yes, it's a little nerdy, but I have the tools and do it pretty well.  I'm happy to be the nerd...so you don't have to!