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How to buy a home? April 30, 2008

Posted by shaferfinancial in Uncategorized.
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Since many people have asked, I decided to answer the questions of what the consumer can do to assure themselves a fair real estate transaction.

1.  Check your credit report now.  Fix problems and incorrect information as you find them.  This is a time consuming issue, so better to find out now and start fixing it if needed.  Check you credit report every 6 months thereafter to make sure it stays correct.  FICO scores are more important than ever before!

2.  Find a mortgage broker that will disclose all fee’s and points including yield spread  premium (YSP).  Banks don’t have to disclose these back-end expenses by law and most won’t even if you ask them.  Negotiate the total amount of fee’s and points the mortgage broker will make on your loan up front.  Then demand that the YSP be disclosed when the loan is locked (not 72 hrs. before closing as the law requires).  This keeps the loan officer honest and allows for him/her to actually work for you in finding the best program and rate for your individual situation since the loan officer knows how much they are making up front and is satisfied with it.  I suggest you find a local loan officer instead of one from a 1-800 number or the internet and have a personal sit down with her/him.  You will know if this person is professional and competent by the end of the interview.  Listen to your intuition, ask questions about their education and experience, and don’t be afraid to say I don’t feel comfortable doing business with you right now!  If they are suggesting that you purchase a home with a payment that scares you, find another mortgage originator.  They should have a full appreciation for your financial situation and give you advice on what is too much as well as what program would work the best for you.  Be prepared to accept bad news on how much house you can afford as well as when you will be best prepared financially to purchase a home.

3.  Find a real estate agent that is experienced and works full-time as an agent.  Hire them as a buyer’s agent.  Tell them exactly what you are looking for and when you are plan on buying.  Use the internet to search for properties and get a feel for the market.  When you see a home you like send it to your real estate agent.  This will allow them to better understand what you are looking for.  Don’t physically look at every house, it only gets confusing after a while.  Use the internet and your agent to cull the homes until you have a top 5.  Then talk to your agent about each home’s location, the good the bad and the ugly,  how each neighborhood is fairing in the current market, schools, etc.  Then go look at your top five.  I mean really look at the home, spend hours looking at every conceivable part of the property, ask questions as they pop into you head.  This is where a great agent should shine.  They should be able to honestly discuss all the details of the home with you.  If you feel you are not getting the honest answers fire your agent!

4. Never use the agent’s in-house mortgage guy.  Usually there is a business relationship between the lender and the real estate broker which allows the broker to share the profits of the loan.  This means the loan officer will have to add in unecessary fee’s/points to make up for having to share the proceeds.  Never use the associated title company for the same reason.  Ask if there are any business relationships between the real estate broker and all the other parties.  Part of the failure of the last few years is that there were too close of connections between all the parties in the real estate deal.  Talk to the appraiser before they appraise your home.  Tell them they work for you and you want to know what the real appraised value is, not what the loan officer, real estate agent, or seller thinks it is.  Hold the appraiser accountable for her/his work!  They are there to protect the lender and YOU from paying over market value.

5. Read all the paperwork.  I know for the most part it will read like gobbligook to you, but you would be surprised what you learn from reading it.

6.  Don’t be fee driven.  Many people shoot themselves in the foot by trying to use folks who charge less fee’s.  You get what you pay for.  You want to work with experienced professionals who will expect to be fairly compensated.  These folks are your best defense against making a bad decision, treat them fairly and they will help you immensely.

7. Choose several homes you would be happy to purchase.  Start with the one you like the best and negotiate hard with the seller.  Be willing to walk away if the seller won’t negotiate.  Move on to the next one on your list and start negotiating hard.  Repeat if necessary. 

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What’s all this about YIELD SPREAD PREMIUM November 30, 2007

Posted by shaferfinancial in Uncategorized.
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One of the items that has been argued about, discussed, and complained about, when it comes to pricing mortgages is “Yield Spread Premium.”  To put it simply, loan officers can manipulate interest rates in a way that can pay them a commission, or where they have to pay the lender, or where there is no money going either way.  In the hands of an honest and experienced loan officer this is a tremendous tool.

The recent legislation coming out of congress has addressed this issue by banning it for the sub-prime loans.  Consumer advocates hate it because they think it is a hidden charge consumers do not understand.  In Florida, YSP has to be disclosed by mortgage brokers and correspondent lenders 72 hours prior to closing.  Banks have no such requirement.  I think the crutch of the problem is that most consumers don’t really understand how mortgages are priced and probably will never take the time to learn.

The reality is that by being charged a slightly higher interest rate buyers can limit their closing costs.  In fact, this is how those “no cost” loans being advertised by lenders as diverse as Countrywide and Bank of America are structured.  By giving you a higher interest rate the lender is earning a healthy commission, which they partially use to pay for your closing costs.  Now for folks with limited cash to put into a deal, this makes the deal work.  However, for most this is not the best way to structure the deal.  Usually, it takes 2-4 years in excess monthly payments for the break even point to be reached.  In  other words, if you had paid for the costs of the loan up front and gotten a lower interest rate you would be better off as long as you keep the loan long enough to recoup the costs, which is 2-4 years.

The argument over hidden costs simply doesn’t hold water, with the exception of banks.  You will never know how much profit banks make on their loans, but for the rest it has to be disclosed by law.  I know there are a small percentage of consumers that are consumed by fees, needing to feel like they got a good deal because they limited the fees they paid.  However, the important thing should be not what amount of profit someone makes, but what it costs you.  I mean do Wal-Mart shoppers really want to know how much profits are being made on their purchases or are they more concerned with how much it cost.  In the mortgage business that translates into how much wealth is created by the mortgage.  I demonstrate to my customers the differing wealth that can be produced by real estate with different mortgage programs.  Mostly, they choose to go with the program that maximizes their wealth production, given their financial circumstances.  I have had only one customer argue about my fees, after I have demonstrated how to put an extra $100,000 into their pockets.

Finally, this search for absolute disclosure is really the wrong way to go about protecting consumers.  Because the real problem is not how much profit the loan officer is making, but what advice they are giving.  Yesterday, again, I talked to someone who was placed into an option arm loan.  They had been paying the least amount they were allowed, increasing their loan with each payment.  They wanted out, but aren’t able to because their loan to value has gone up to over 95% of their home’s value and they no longer qualified for a loan of that size.  Where did they get this loan?  Countrywide. They had called their 1-800 # and refinanced based on the advertising of a 1 1/2% payment rate.  They even “shopped” over the phone making sure they got a “great rate.”  Do consumer advocates really think that disclosing YSP would have stopped them from getting the loan?  Would they be better off if they had paid more for their loan, but were in a fixed rate or a variable rate loan with a five or seven year fixed period?

I know I preach this, but it is not the amount of fees in the loan that is important, it is whether it is structured in a way that maximizes the wealth building capacity of real estate.  In order to get the best loan for your individual circumstances, you must deal with someone that knows what they are doing.  I promise you, that anyone that knows what they are doing is not sitting in some “boiler room” waiting for people to call a 1-800 number.  I also promise you that no one discounts money.  The ironic thing is that those that advertise the most usually charge you the most to cover all that advertising.

Disclosing YSP, is not a bad idea, it just won’t solve the problem of people getting into loans that aren’t right for them.  Banning YSP, won’t solve the problem of rapidly escalating payments with short term variable rates; only keep some people from purchasing homes because they don’t have enough reserves to pay closing costs and the cost of the loan.