Many a home buyer cannot truthfully answer that question. While there are many “experts” out there who will give potential home buyers all sorts of strategies for preparing to take on the burden of a home mortgage, I personally prefer a very simple and straight forward approach to taking on this issue. This approach has been summed up in 6 simple little words:

“Debt is dumb, cash is king”.

No I did not come up with that ...

Oftentimes a subject of some debate is the reality of what is a renovation or “rehab” loan.  Simply put, a rehab loan is a specialty loan program that allows the borrower to purchase a run-down home and to finance an additional amount of money above and beyond the sales price to use in renovating or “rehabbing” that home. In some cases the loan may also allow the borrower to finance the closing costs, so that he/she comes to the closing table with very little, if any, money out of pocket. This makes the program ideal for many real estate investors who wish to put as little of their own money as possible into their rehab projects. Terms and conditions for these rehab loans will vary widely from one lender to the next, from very short term, high interest loans to more conventional long term, low interest loans. Things that are usually taken into consideration during the underwriting process for these loans include: the borrower’s personal credit and finances, the size of the proposed renovation or “rehab”, the condition of the home being financed, the area where that home is located, and the borrower’s plans for repayment of the “rehab” loan.

What a rehab loan is not is a “hard money” loan (although the terminology is used interchangeably across the industry). “Hard money” loans are very short term, high interest loans used to help struggling homeowners  try and avoid foreclosure. These loans are usually underwritten based more on a borrower’s character and situation rather than their personal credit.

It is important that borrowers understand this difference so that they do not walk into a potential loan situation with the wrong idea of what to expect. While some rehab loans may have similar terms to a “hard money” loan, they are not used for the same purpose and therefore will be underwritten differently.

A borrower for a “hard money” loan is someone who is usually facing the foreclosure process on their own home. Their credit is most likely in pretty bad shape and they will usually have next to no savings in the bank. 

On the flip side of things, a borrower for a rehab loan is a businessman. Regardless of the terms and conditions offered for the loan program, it is expected that the borrower will have very good or excellent personal credit and that they will have at least a minimum amount liquid cash reserves in the bank with which to run their business.

Knowing and understanding these differences can make your next rehab loan experience a more smooth and efficient transaction.

There has been a lot of talk in recent months about the number of people in this country who are now losing their homes to foreclosure. These home owners usually have some sort of "short term Fixed ARM" (these are adjustable rate mortgages where the starting interest rate is fixed for the first 2, 3, 5, or 7 years) or some sort of "Option ARM." These home owners are finding that their interest rate is now beginning to adjust and that they can no longer afford the monthly payment. They also find that refinancing their mortgage is not an option due to poor personal credit/rising credit standards, lack of equity, etc, and as such they fall behind on their payments and, are in time, foreclosed on.

Now as often happens when something hits the open market that bites consumers in their backsides, there are many calling for increased government control over the mortgage industry. These calls are from people who want the government to protect home owners from unethical mortgage brokers and loan officers who supposedly "forced home owners into mortgage programs that were not beneficial to the home owner." Now while I completely agree that there needs to be a universal licensing standard for mortgage brokers and loan officers (similar to the way real estate appraisers are licensed), I cannot, in good faith, agree with any more government involvement beyond that point. The reason behind this (for me at least) is two fold. First is my personal belief that government cannot be effective in running just about anything and the less involvement government has in our daily lives, the better.

Second and most importantly, is that further government rules and regulations in the mortgage industry will not solve the problem. The problem being that many people are currently in mortgage programs that are not the best for their financial needs and situations.

The sad truth of the matter is that mortgage brokers and loan officers who want to scam or mislead home owners are always going to find a way to do so regardless of whatever new rules and regulations are put into place.

So who is the ultimate person responsible for a home owner's financial needs? Who is the first and best line of defense against those who would scam and mislead home owners into making bad decisions about their mortgage?

The answer to these questions is, of course, the home owner.

The only real way to solve this growing problem of people losing their homes and putting these unethical scam artists out of business for good is to create a better educated and more informed clientele base. In short, we've got to get back to teaching the people of this country basic economics and then once they have that knowledge the people of this country have to take it upon themselves to learn a little financial responsibility.

The fact that this forgotten subject of economics is no longer taught in many of our schools has produced a population where as many as 6 or 7 out of every 10 adults cannot even perform the simple task of balancing their check books. Many adults have no concept of financial responsibility or don't understand how to balance their household budget, the seriousness of terms in repaying a debt, or the principals of supply and demand. Is it any wonder that these people allowed themselves to take on mortgages where they didn't understand the terms or that they could be taken in by scam artists looking to make a quick buck. And for many adults, this lack of knowledge is not something they are doing on purpose. It is simply due to the fact that these basic economic concepts have never been introduced into their lives.

Now this is not to say that the mortgage industry doesn't share a large chuck of the blame. The average loan officer will never once think to take the time to educate a borrower on the terms of a mortgage program or explain (in dollars and cents) what it will mean for that borrower's budget. Likewise, the sheer numbers of sub-prime lenders who were writing loans for borrowers that they knew could not afford those loans are to be given a lot of the blame. When I hear of another sub-prime lender who has closed their doors, I find that I can't feel sorry for them because they have brought on themselves. Another problem the mortgage industry has to deal with is the fact that many states do not require anything to become a loan officer. Nor do many brokers provide any kind of training for these loans officers who are hired off of the street with no experience or knowledge about the mortgage business.

Bottom line is that there are problems to overcome in dealing with increased foreclosure rate in this country, but the answers are easy to see. First put a universal licensing requirement in place for the mortgage industry so that all mortgage brokers and loan officers across the country have to adhere to the same standard. Secondly and most importantly, we have to start teaching economics 101 again. Making sure that the people of this country have the basic knowledge of balancing and living on a budget, supply and demand, the value of a dollar, etc, is the only way for customers to be protected from costly financial scams and mistakes.
                                                                                                                                                            
                                                                                                                                                                John Worley
                                                                                                                                                   www.rtlgeorgia.com

1. Distance From Subject Property – in most major cities, you want to pull comps located within a ½ mile radius of the subject property. If you are in an area with little market activity, then pulling comps from a 1 mile radius is ok. However, unless you’re dealing in rural properties or 3 and 4 unit properties that may not be in abundance in the subject neighborhood, then you don’t want to pull anything outside of a 1 mile radius.
2. Date of Sale of Comp. – Same story here, in most major cities, you want to pull comp sales that have taken place within the last 6 months. If you are in a slow market area, than going out to 12 months is acceptable, however nothing beyond 12 months.
3. Construction - if the subject is an all brick house, then pull comps that are all brick houses; if it is a wood or vinyl siding house then pull comps that are wood or vinyl siding.
4. Condition – if the subject property is a dump, pull comps that are dumps; if the subject is new, pull comps that are new. This is where trying to figure out a "subject to" value or ARV can be tricky. When trying to determine the after repair market value of your rehab property, it is important to take into account the condition of the property after the work is completed. Then try to pull comps in the neighborhood that have also been rehabbed to similar condition. Most importantly, remember one cardinal rule: A rehabbed property will never be in the same market condition as a new home. Always remember that even if you completely overhaul a 50 yr old home, it is still a 50 yr old home. Comparing it with new homes will never give you a realistic market value.
5. Age – pull comps that are the same age as the subject. Try to keep within about 5 years older or younger to the subject. And again never compare rehabbed homes with new homes.
6. Gross Living Area/Sq Footage - pull comps with the same approximate sq. footage as the subject property. Try to keep it within 100 sq. ft and no more than 200 sq ft, if at all possible.
7. Bath Room Count - pull comps with the same bath room count as the subject, or as close as possible. A typical appraisal value adjustment for a full bathroom is only a few thousand dollars. So if your subject is a 2 bath home and all you can find for comps are 1 bath homes, than they can still be reasonably good comps provided that the bath count is the only major difference between comp and subject
8. Basement – If the subject is on a crawl space or slab, then pull comps on crawl spaces and slabs; likewise if the subject is on a basement, then pull comps on basements. Try to keep the sq. footage of the basements as close as possible (same as above), within 100 sq. feet is ideal, but no more than 200 sq. feet, if at all possible.
9. Garage or Carport - again pull same for same.
10. Lot Size – again pull with similar size lots as the subject property

In the previous two posts, we've been discussing the first five sections of the universal loan application. Today we'll cover the last five sections.

This section should be fairly self explanatory, let’s talk a moment about the kind of assets that are important. There are two types of assets that you can list:

1. Liquid Assets (cash on hand, checking, savings, money market accounts, stocks/bonds, etc.)
2. Passive Assets (real estate owned, automobiles owned, antiques, etc.)

While passive assets will help make your net worth appear higher, it is liquid assets that really make an impression on an underwriter. Being able to show a fair amount of ready to spend cash to put toward the down payment and closing costs, and more importantly to get toward monthly payment reserves, will go a long way toward convincing an underwriter that you can afford to obtain and keep the mortgage that you are applying for. Even if you are purchasing a home with no down payment and the seller is paying for most of the closing costs, it is still important to show as much cash on hand as possible for the monthly payment reserves. Show the underwriter that you have a little safety cushion under you (for a few months) should something happen and you are unable to work.

It was once said that this section looks a little like an income tax form. However it’s not nearly as complex as that. Most of the boxes should be fairly easy to understand.

1. "Purchase price" is for of course, the price on your sales contract, if you are purchasing a home.
2. "Refinance" would the pay off amount of your current mortgage.
3. "Estimated Prepaid items" and "Estimated Closing Costs" can be found on your Good Faith Estimate.

1. "PMI and MIP Funding Fee" apply to FHA loans and, if applicable, can be found on the Truth in Lending Statement.
2. "Discount" refers to any discount or buy-down points that you may be willing to get a lower interest rate.
3. "Total Costs", Box I, refers to the total cost associated with the loan (the total of box A through H).
4. "Subordinate Financing" will show the amount of your 2nd mortgage, if you are obtaining a combo mortgage.
5. "Closing Costs (CC) paid by seller" – pretty self explanatory.
6. "Other credits" will include things such as any earnest money that you put down on your sales contract or any costs being paid for by your loan officer or mortgage broker.
7. "Loan amount (excluding PMI/MIP fee being financed)", Box M – amount of the mortgage that you are applying for.
8. "PMI/MIP fee being financed", Box N – if any of the PMI/MIP fee from box G is being financed into the loan, then enter that amount here.
9. "Total Loan Amount", Box O – Add the figures from Box M and Box N and enter the total here.
10. "Cash to/from Borrower" – Subtract the figure in Box O from the figure in Box I ("Total Costs") and enter the amount here. This is the amount that the borrower will either need to bring to closing or the amount of cash out that the borrower will receive at the closing table.

Read this carefully before you sign and date it. Some of the high points that you are agreeing to include:

• Everything you have stated in the loan application is the truth

• You will occupy the property in the manner that you stated in the "Declarations".

• If the mortgage payments become delinquent, then the lender has the right to report this to the credit bureaus and/or foreclose on the mortgage.

• That the property that you are buying will not be used for anything illegal.

Good old Uncle Sam. He always to know who is doing what and where and the mortgage industry is no different. The information requested in this section is pretty basic and completely voluntary. You are not required to fill it out if you do not want to. Simply mark the box labeled "I do not wish to furnish this information."

Well that’s it, the entire universal loan application from start to finish. Hopefully you now have a better understanding of this, sometimes rather frightening, document. Just always remember, if you do not understand a particular section, always go back and ask your loan officer or mortgage broker. After all, making sure that you understand and are comfortable with the mortgage process is one of the things that they are getting paid for. 

                                                                                                                                                                 John Worley
                                                                                                                                                    www.rtlgeorgia.com

• Say you made $50,000 in 2005 and $52,000 in 2006 on your W2s and that on your pay stub dated for the end of September, you have made $40,000 YTD.
• Add these figures together and you get a total of $142,000. The W2s represent 24 months of work and your pay stub covers the first 9 months of this years, so you have earned this $142,000 over the course of 33 months.
• Divide $142,000 by 33 and you come to a monthly income of $4,303. This is your gross monthly income and what you need to put in the Monthly Income section of the loan application.

The Fannie Mae Form 1003, the Universal Loan Application. This form, known more commonly around the mortgage industry as simply a "1003" (ten-o-3), is perhaps one of the intimidating forms a home buyer can face. While much of this form is pretty self explanatory, many people do not fully understand how to fill it out properly. So let’s go through the universal loan application section by section.

First up is the legal agreement listed on the very top of page 1 of the Universal Loan Application

Long winded isn’t it. Let’s break this thing up so we can understand it.

In a nutshell, this means that if you (as borrower) live in a state with community property laws and your spouse or partner has legal community property rights in your relationship, then you may have to disclose your spouse or partner’s debts and liabilities to the lender in consideration of your loan. If this is required by your state’s laws, then you would have to disclose the extra debts even if you are not using your spouse or partner’s income and assets to qualify for the loan. If you happen to live in a state where this would happen, then you have to include all of your spouse or partner’s information on the loan application, just the same as you would your information.

Now let’s go through the rest of the application, one section at a time, as they appear.

Input the full street address (including zip code) of the property being financed.

1. Primary Residence – a house that you are going to live in.
2. Secondary Home – a house that you will live in for only 3 or 4 months out of the year.
3. Investment Property – a house that you will not live in and will rent out to a tenant.

1. Year Lot Acquired – What year did you acquire the land that you will build on?
2. Original Cost – How much did you originally pay for the land that you will build on?
3. Amount of Existing Liens – If there are currently any loans held against this land, what is the total amount of those loans?
4. Present Value of Lot – where is the current market of the land as-is.
5. Costs of improvements – the costs of the materials needed to build on the land.
6. (a+b) Total - Should be self explanatory.

1. Year Acquired – when did you originally purchase the property you are refinancing?
2. Original Cost – how much did you originally pay for it?
3. Amount of Existing Liens - if there is another loan against the property, then what is the current balance of that loan.

1. Purpose of Loan – do you want to cash out some equity to do home improvements or pay off some debt? Do you simply want a lower interest rate than what you are currently paying? Input your answer here.
2. Description of Improvements – Have you made any improvements to the property or do you plan to make any improvements using the cash out from your refinance? Describe these improvements and the estimated costs involved.

Describe how you will fund your down payment and closing costs. Also if you are obtaining or already have a second mortgage on the subject property, describe that here as well.

Check back for my next post where we will go over sections 3, 4, and 5 of the universal loan application.
 
                                                                                                                                                                 John Worley
                                                                                                                                                     www.rtlgeorgia.com

What is a mortgage? It seems like a simple enough question, but oftentimes many people seem to be ignorant as to what they are actually agreeing to when accepting a mortgage. Webster’s Dictionary defines a mortgage as “a conveyance of or lien against property (as for securing a loan) that becomes void upon payment or performance according to stipulated terms.” In simpler terms, a mortgage is an agreement. The bank agrees to lend you an amount of money to purchase a home and you agree to pay that money back, with interest, over a certain period on months (usually 360 months or 30 years). The money that the bank lends you is secured by the home you are purchasing. This means that if you fail to make your monthly mortgage payments as you agreed to do, then the bank can foreclose on your mortgage and take your home away from you.

There are several different types of mortgages designed to offer borrowers a wide range of choices when structuring the terms of their loan. The first and most common type of mortgage is a Fixed Rate Mortgage. This mortgage has an interest rate that is fixed (remains the same) for the entire length of the loan (usually 15 or 30 years). This type of mortgage will allow the most stability for the borrower as their monthly mortgage will always be the same. The majority of home buyers will use a fixed rate mortgage.

A second type of mortgage is known as an Adjustable Rate Mortgage (ARM). This mortgage has an interest rate that adjusts or “recast”, meaning that it may increase or decrease depending upon what is going on in the financial market. These adjustments will occur at set points in time over the life of your mortgage, sometimes as often as every month, but more often every 6 or 12 months. An ARM will give a borrower a better starting interest rate than a fixed rate mortgage however it also offers less stability as the interest rate has the potential to raise higher than that of the fixed rate loan, often by several percent.

A common compromise between the fixed rate mortgage and the ARM is what is known as the Hybrid ARM. This is an adjustable rate mortgage where the starting interest rate is fixed for the first 2, 3, 5, 7, or 10 years and then adjusts either every 6 or 12 months thereafter. These ARMs are often referred to as 2/28, 3/1, or 5/6 ARMs. The numbers in these designations refer to the terms of the adjustments. For example, a 2/28 ARM is fixed for the first two years, adjust one time, and remains at the new adjusted rate for the remaining 28 years of the loan. A 3/1 ARM would have a fixed rate for the first 3 years and then adjust every 12 months (or 1 year) thereafter. Finally, a 5/6 ARM will have a fixed rate for the first 5 years and then adjust every 6 months after that. These types of ARMs can offer a borrower short term stability while also providing them with a lower starting rate than a normal fixed rate mortgage. They are ideal for borrowers who will not remain in a home for more than a few years.

Lastly there are Interest Only Mortgages. These mortgages can be fixed rate or ARMs and will have an extra monthly payment option. You can chose to pay the normal principal and interest mortgage payment or you can chose to pay only the interest on that month’s payment. This payment option can last for up to the first 10 years of your loan, depending upon the lender who you use. There are a few variations on this type of mortgage, including the Option ARM, which has received a lot of press these last few years. All types of Interest Only mortgages are designed for one reason. They are meant to give a money savvy home owner the ability to free up some extra cash from month to month to spend on other investments. These mortgages are not designed to allow a borrower to purchase more home than they can afford, although that is exactly how they have been misused over the last few years.

Education is the key to getting the most out of your home mortgage experience. Knowing how the mortgage industry works and what is available for you is the difference between getting the right mortgage for you and getting stuck in a mortgage that you cannot afford.

Here you will find posts and articles that address different aspects of the mortgage industry and the issues that borrowers will face when obtaining a mortgage. I hope you find the information here to be helpful and educational. 

I look forward to hearing everyone's thoughts and comments regarding the information I present here. Please feel free to subscribe to the blog and check back often. Please leave your comments and questions and I will answer them as best I can.  

And lastly, if you need a mortgage, please visit my main website at http://www.rtlgeorgia.com, where you can get more information about the mortgage products that I have available and fill out an application online 24 hours a day.

I look forward to speaking with everyone.
                                                                                                                                                            - John Worley