Monica McNamara's Ocean City Blog

Buyers, make sure you qualify for the mortgage loan you will be obtaining to purchase your home or condominium. The rules to qualify seem to be changing almost daily.

When you apply for a mortgage, most (if not all) lenders will sell your loan to the secondary mortgage market (a/k/a Fannie Mae or Freddie Mac). In order for you to be approved to borrow monies, there are debt to income ratios (as well as other things) that are used to determine your ability to repay. Today we are talking about changes to these ratios.

In the past, there had been some leniency in Fannie Mae's debt to income ratio. Fannie Mae is making changes that will affect your borrowing power. They had been allowing up to a 55% total debt to income ratio.  Effective sometime this week (week of 12/7/09, they love to keep us guessing), they will be changing this ratio to reflect a total debt to income not to exceed 45% for almost all scenarios.

What does this mean to you the borrower? Well, the obvious is that you will either have to earn more money or have less existing debt in order to qualify for the same amount of a mortgage that you did as recent as last week.

If you had been pre-approved for a mortgage loan and have not yet secured your loan, you will want to contact your real estate agent and your lender and have them re-evaluate your qualifying criteria to make sure that you can still borrow the same amount of money.

Stay tuned. There is probably more change in store in the wonderful world of banking.

As an aside, don't let this newest information be a deterent in making your property purchase.  The overall benefits of owning a primary, secondary or investment property, far out weigh some of the push ups we now have to go through to obtain that goal.

What is the current interest rate?  I am asked that question many, many times during the course of my day.

Thanks to wonderful fellow professionals like Paul Soule of Coldwell Banker Home Loans, I get the best information possible.

Check out the blog post I did today about our interest forecast for the week.

There are a lot of terms thrown around in a real estate transaction. For most, it’s when you get to the settlement table do you notice there are many differences.

A note (or promissory note) is a where a party agrees to pay a certain sum of money to another party. The note spells out the terms of repayment. In a real estate transaction, it is usually the buyer agreeing to make predetermined payments on a monthly basis to the lender.  Many do not realize that the note has nothing to do with the property they are buying. A note can exist without any collateral. If the party borrowing the money does not pay as specified under the terms of the note, the lender can sue for breaching the contract.

There are differences between a mortgage and a deed of trust. I am going to talk about a mortgage. A mortgage is giving the lender an interest in the property that you are buying.  A mortgage is linked to the debt created by the note, although it is not a promise to pay.  It really isn’t a promise to do anything. It gives the lender the right to take the property back if the borrower defaults and doesn’t pay according to the agreements made in the note.

The key differences are that a note is signed by the person or people who agree to pay the debt.  The mortgage is signed by those who own the property being mortgaged.  In most residential real estate transactions, the signers are the same. This differs in many commercial transfers.

The mortgage is recorded in the seat of the county or city government and becomes public record. The note does not. The note is held by the lender.

A big difference you will notice at the settlement table is that the mortgage is a very long document with many pages, and a note is a much smaller agreement with far less pages.

Thank you to Mid-Atlantic Settlement Services for their ongoing source of references to assist buyers, sellers, real estate agents and mortgage loan professionals with accurate information.

 

There has been a lot of confusion lately on second homes and condominiums and what down payment is required. Many agents are telling customers that if they are buying a second home condominium that they will need 25% or more down. The reality is that most lenders can still do loans with 20% down and even in many cases with 10% down. There are some restrictions, and you need to realize as an agent or purchaser, that anything less than 25% down will have a cost attached to it. Second homes that are not a condominium are also ok.

 

The rates for a 20% down condominium are about 1/4% higher than the best rate a lender will offer.   The 10% down option is about 1% higher in rate, but this has the PMI (Private Mortgage Insurance) built in so they have no PMI, just a higher rate. This allows it to be tax deductible. All of these are for conforming loan amounts up to a $417,000.  Anything higher is a jumbo loan and will always require 20% down.

 

Clear as mud???  Call or email me anytime and I’ll answer any questions that you may have.

 

I participated in a round table think tank discussion this morning that was comprised of lenders, appraisers, real estate agents and a representative of our local Board of REALTORS (Coastal Association of REALTORS - CAR).  The focus of our meeting was the many financing and appraisal obstacles we are all facing as Fannie Mae and Freddie Mac has continued to make their underwriting guidelines more and more difficult. In other words, buyers are having difficult and sometimes impossible outcomes in obtaining loans. Our group of professional’s work in a very heavily populated condominium market.  For those properties that are held within a condominium or homeowner’s association regime, the lending, appraising and underwriting process has become a nightmare.

We all agree that buyers and sellers need to understand this process.  But this process is changing daily because of the crisis we have experienced in the banking industry.  Sellers must know when they list their property for sale that the master association for their property must also qualify in order for a buyer to be able to get a loan.  The Rules and Regulations, By-Laws, budgets, insurance policies, everything, are subject to review by lending underwriters.  Many loans are not getting made because of deficiencies within the association. Think about this, you are trying to sell your property in a difficult market. Your real estate agent finds a financially qualified purchaser for your property. The buyer applies for a loan (note – it doesn’t matter if they put a very large down payment – the building will still have to qualify), the lender begins reviewing all of the condominium paperwork and Fannie Mae is looking for 100% replacement cost on their master insurance premium, and the building only has 80%....the loan will be denied.  You, as a seller, have to insist that your board of directors know about these things and take the adequate measures to insure that you will be able to effectively resell your property. Otherwise, the value of your unit, and every other one in the building will go down.  This is just one example of why a building could be turned down as  “qualified”.  The list of reasons goes on and on and it’s going to get worse before it gets better.

As a buyer, you need to know that most large institutional lenders can not make a loan on a condominium. They don’t portfolio their loans. They want to sell their loans, and the underwriting standards are so strict, in many circumstances, they can not sell these loans, so they will deny financing. Here’s a biggie that a buyer needs to understand.  When you see an advertisement for a very low  interest rate..…if it sounds too good to be true, it probably is. There are so many variables that are now used to determine the interest rate that a borrower is ultimately given.  These variables extend beyond the credit worthiness of the purchaser.  They extend to “what” the purchaser is buying. What you are buying will directly affect the interest rate you receive. Yet many lenders will not tell you that up front. They will tell you they can do the loan. You will get through the whole process, have invested time and money, and in some cases only days before the final settlement, the lender will tell you that underwriting turned your loan down based upon, again, qualifying factors relative to the property that you are buying.

Sound confusing… yes, it is. Here are some more questions that should all be discussed up front.

Common appraisal questions:

How far back are comparable sales being accepted?
Does the appraiser use “pending sales” data for his appraisal?
What if there are no comparable sales in the building? How does the appraiser make adjustments?
Does the appraiser address market conditions on the appraisal?
Are adjustments made for distress sales? (Short sales and foreclosures).
Will a local appraiser do my appraisal, or will someone who is not familiar with my local market be used by this bank?
How long will it take to do my appraisal?

Common Lender Questions:

How much down payment is required for a primary home? Secondary home? Investment property?
Are there investor loans available?
How is the interest rate affected with investor loans?
What constitutes an investor loan?
What are your predictions for interest rates?
How important is my credit score?
Can loans be secured for condos that have some time share in the project?
Can rental income be used to qualify?
Is there a list of Fannie Mae approved properties?
Will you require the full set of documents from the Condominium/Homeowner’s Association?
How do you determine which appraiser you will use?
Is full insurance replacement cost available for the property I am looking to purchase?
What is the effect if there is pending litigation within the project I am considering?
What if several owners in the building are delinquent on their dues? Will that affect my loan?

I am sure I have raised more questions then answers here. Our local group is going to work together to get these answers. We want to educate our sellers, buyers, condominium and homeowner’s associations, and management companies for these groups. We want the value of your property to be maintained, and all these factors, and more, are critical in achieving these goals.

  

It’s more important then ever to understand your financing options. In light of all the changes in the banking and mortgage industries, it is now equally important that WHAT you are buying is a “qualified” property, as well as your financial ability to buy that property.

If you are looking at property that is held in a condominium regime, it is essential that the entire building, and their Rules, Regulations, By Laws, etc.  have been approved by the lender.  Most lenders will sell the loans they make on the secondary mortgage market (Fannie Mae, Freddie Mac), and if the condominium documents have not been reviewed and approved, lenders will deny these loans based on the building, and not the credit worthiness of the borrower.

You need to work with an agent who understands the condominium market, and who can assist you with your financing. Many buyers have found they have gotten very deep into the buying process, to later learn that they can not obtain the loan they were looking for due to the condominium regime and how their By-Laws were written.

In Ocean City, Maryland, there is a list of pre-approved buildings that will meet Fannie and Freddie guidelines.  That doesn’t mean that you can not get a loan in a building that is not on the list, however, you need to work with someone who knows how to make that loan work.