Jack Lees - A STEP-BY-STEP GUIDE TO FINANCING HOMES

A STEP-BY-STEP GUIDE TO FINANCING HOMES

Jack Lees

Table Of Contents

Introduction

The Easiest Way To Protect Yourself From Bad Lenders

How The Loan Process Works From A To Z 9

Honest Pre-Approvals

Good Lenders Follow A Proven Process To Close On Time

Good Lenders Update You Throughout The Process

Good Lenders Can Close Difficult Loans

A Summary Of How I Can Make Your Business Easier & More Profitable

A Mortgage Terms Glossary

CHAPTER 1

Introduction It’s tough being a real estate agent. You have numerous deadlines to keep, clients to keep happy, homes to show, and leads to chase. Often it can feel like one thing going wrong could cause the house of cards to come tumbling down all over you. Sometimes that “one thing” that goes wrong is your mortgage lender. And when that goes wrong, it’s as useful to you as a leaf blower is to that house of cards you’ve been building. Have you ever been called by a loan officer the day before a closing because they need “just one more thing” before they can finalize the loan? And that “one thing” is currently on a moving truck with the rest of your client’s worldly possessions? Have you ever been told that a loan is as good as done, only to find out later that there are glaring errors in the paperwork which are now preventing the loan from going through? Any real estate agent who’s been in the business for enough time has had these problems. Maybe more than once. Maybe even worse ones that I can’t fathom because my imagination is not twisted enough. For example, let me tell you a story about a real estate agent who had worked diligently to obtain a desirable listing. He worked incredibly hard on behalf of his clients to stage and show the home, find a buyer, and negotiate a great deal.

The listing itself had come to the selling agent by referral of a former client, which meant even more leads might have grown out of this one. As you may have guessed, “might have” is the operative phrase here. The buyer’s lender blew it. The buyer was getting a loan to buy the house. The closing was set for the end of the month. Everything seemed to be going fine. The real estate agent ordered a survey of the home, just like he’d done for every other client who needed a home survey. Everything was on track.

Or so it seemed.

The loan program the buyer was using had a specific, non- standard survey requirement. A few days before closing, the lender surprised the real estate agent with this somehow- forgotten information. As a result, the real estate agent had to reorder the entire survey. The survey company had to go back out to the house (at an additional cost of $150) and do everything over again. The survey ended up pushing back the closing by 10 whole days.

In the end, no one was happy with how the sale turned out.

Even though this situation was the fault of the lender, not the agent, the agent’s reputation was still damaged. He did not get client referrals from the seller. Whatever business that may have come from that relationship was soured and gone. Has this (or something similar) happened to you? Have you lost time, lost money, or had your reputation tarnished because a lender did or did not do something that affected your sale?

Well, this book is written by a lender — me — who understands the frustrations that real estate agents have with people in my profession.

THIS BOOK CAN HELP YOU.

I can help you. I have intimate knowledge in the ways to defend yourself from bad lenders. Not only that, but I’ll teach you how to obtain (and keep!) the good ones. This book will help you cut through the B.S. surrounding the lending game. Contained in these pages is concrete, fact-based advice that will help you stop worrying about whether or not your lender is going to drop the ball, and instead focus more on doing what you actually do for a living: sell homes. I’m going to peel back the curtain and give you the tools that will help you never have to worry about something happening to you like what happened to that other real estate agent. I’ve also added some useful reference content: a glossary of mortgage industry terms, a sample Good Faith Estimate (loan estimate), and other helpful information.

This book can — and will — help you.

CHAPTER 2

The Easiest Way to Protect Yourself from Bad Lenders The best tool anyone has in life is knowledge. Whether you’re a real estate agent, a welder, a pilot, or an actor, the more knowledge you have about your industry the more successful you will be in that industry. As a real estate agent, it’s not enough to simply know how to sell a home. If all you had to do to be a successful agent was walk people through a house and get them to sign a piece of paper indicating their interest in purchasing it, anyone could be a real estate agent. As I’m sure you already know, that’s not all there is to being a great agent. You have to know how to chase leads, know how to read a market, know how to close a deal, and know how to promote yourself. Likewise, a great agent knows how the mortgage lending industry works. As we learned in this book’s introduction, the mortgage lending process may seem like it’s out of your wheelhouse — but it’s not. What happens in the lending phase also affects you and your standing as an agent. With that in mind, the more you know about mortgage lending, the better you’ll be at spotting the problems before they get out of hand.

Once you are educated on how the loan process works, when a lender tells you, “Everything is okay. The loan is on track. We’re golden.” You can ask, “What does that really mean?” Mortgage lenders brushing off an agent’s inquiries is a thing that happens frequently. You’ve worked hard to make a deal work. You’ve engaged with the lender and done all that is asked for. You call for status and the lender tells you, “Yes, everything’s on track; all is fine.” But it really isn’t. The lender has not completed everything that needs to be done to make the sale a success. They are behind and you don’t know it. Without direct communication from them on their progress, how could you know? Furthermore, how would you know where the loan stands if you don’t even know how the loan process works in the first place? You could ask some questions, but how would you understand the answers? How would you even know what questions to ask? Knowledge is the difference between being entirely dependent on another and having some control of the situation. In response to an “everything is on track” statement from a lender, the educated real estate agent can respond with, “Okay, that’s great. Does that mean the loan is completely approved, and all the conditions have been met? Which conditions have been met, and which have not? Exactly what does ‘on track’ mean?” Ask just that. Then shut up and wait. John Doe Lender will stutter, stammer, and not know what to say. Once the lender realizes that you know how the game works, the jig is up. They are left with no choice but to come clean and tell you exactly how things are really going.

Maybe you’ll discover that the loan really is on track. Maybe

you’ll discover that things are a complete mess. But either way, you’ll get the real answer and not just a patronizing brush-off. If you know the road, you can’t be sent down the wrong one. If you know the scam, you can’t be scammed. With knowledge, you can’t be misled. Ask the lender, “What step are we on? What is left undone? Where are we at? What does ‘on track’ mean?” However, there’s no point in asking those questions if you don’t know what the answers mean. If the lender responds with a bunch of industry acronyms and lender jargon that is foreign to you, their answers simply won’t make sense. In this case, it’s not enough to simply demand more details if the details are simply gobbledygook as far as you’re concerned. The next chapter is going to delve into how the loan process works so you can understand the different steps and moving parts. That way, when you’re talking or dealing with lenders as the listing agent or as the buyer’s agent, the lender will see that you are knowledgeable in the details and know what you’re talking about. If they see that you know your stuff, they are not going to make up stories to cover shoddy work. They will be more apt to give you honest answers and tell you exactly what’s happening with the loan. An educated consumer is always the best consumer. If you’re an educated consumer, you can obtain better results and you can make better decisions for yourself. Education will give you an upper hand when you’re dealing with lenders. It makes the process easier because you know what’s going on. You know what’s happening. You understand the terminology and what things mean. No one can get by with an “Oh, everything’s okay,” toss-off statement and expect you to go away. You’re going to ask for specifics.

Here’s the bottom line: if there are problems, you need to be prepared so you can make better decisions — and help your clients make better decisions, too. You need to be there for your clients to give them advice on whether they should move forward with a transaction, whether or not they should move forward with that particular lender, and what’s going to be the best outcome for them during the lending process.

CHAPTER 3

How the Loan Process Works from A to Z

Understanding the loan process from start-to-finish is the best way to ensure smooth sailing and issue-free closing. Knowing what must be done, when it must be done — and subsequently if it was done — is the best defense against lender obstacles and unexpected delays. The loan process comprises four phases: origination, processing, underwriting, and closing. Most lenders’ loan procedures go through this process or some version of it. The origination of a loan is pretty straightforward: a buyer decides to enter into a loan agreement with a particular lender. This is the origin of the loan, hence the term origination. Processing is also just what it sounds like: the loan is processed by the lender. Processing usually includes filling out lots of forms (and I mean lots of forms), answering questions, and providing various documents to the lender. Underwriting is the step of lending that some people don’t know much about. When a loan goes through underwriting, a specialist compares the processing stage results against the lender’s requirements and standards to decide whether to approve or deny the loan. In other words, underwriting is kind of like the spell-check of the loan process, where someone goes through the materials with a fine-toothed comb to make sure

everything is on the level. We’ll go more in-depth with underwriting later on in this book. Finally, we come to closing, where the loan is completed and funds are transferred to the agreed recipient. Almost all commercial loans go through this process, whether its mortgages, auto loans, or small business loans. After all, you don’t just walk into a bank, mortgage company, or mortgage broker and say, “I want a loan,” and immediately turn to closing. To the uninitiated, lending seems to be complex. But if you think of the whole process as these four simple steps, it doesn’t seem complicated at all. A loan originates from somewhere, it is processed, it’s underwritten, and then it’s closed. Simple. However, just because the main four steps are simple doesn’t mean that there isn’t plenty of room for things to go awry. This whole book is based on the idea that a lot can go wrong with a lender, so you have to be on your toes. With that in mind, let’s focus on the three main categories that make up a typical mortgage: rate, insurance, and size.

TYPES OF MORTGAGE RATES

Almost all mortgages are either “fixed-rate” mortgages or “adjustable-rate” mortgages. In a Fixed-Rate Mortgage (FRM), the interest rate is set for the entire term of the mortgage. An FRM is advantageous to borrowers because they’ll know exactly how much money they will pay back on the loan and also know exactly how much each payment will be from the first day to the last day.

However, an FRM is not as beneficial to lenders because a slight

turn of the economy could make a loan less lucrative in the long run for the organization. With that in mind, most FRMs have higher interest rates than other types of mortgages. For some folks, committing to paying a bit more in interest is worth it for the peace of mind that they have a fixed amount to pay for the duration of the loan. In that case, FRMs can be the ideal choice. However, if a borrower wants a lower interest rate at the beginning, a different type of mortgage is available. The interest rate on an adjustable-rate mortgage (ARM) is initially lower than the FRM rate, but it may change periodically. Usually, the interest rate is determined by a related economic index, such as the rate for Treasury securities. Depending on the loan, the rate could change unrelated to any index; in other words, the lender could simply decide to raise the borrower’s interest rate based on its own judgment. Borrowers who want lower monthly payments at first can benefit from an ARM. For example, a medical student who is making less money now than they know they’ll make in the future could benefit from an ARM. They will pay a smaller monthly payment at the beginning, but then pay more later. If a borrower chooses an ARM, they usually will have a choice between an amortizing ARM and an interest-only ARM. An amortizing ARM is the most common type. With this type of mortgage, the lender calculates a monthly payment that will pay off the entire mortgage balance within the term of the loan (usually 30 years). However, since ARM loans don’t have a fixed interest rate, the payments most likely will fluctuate over that time period, likely getting higher and higher with each passing year (there usually is a top limit negotiated at the time of the loan).

For example, a $100,000 amortizing ARM loan would involve payments of about $278 per month for 360 months (30 years). The borrower would be obligated to pay that $278 plus interest each month. For the first few years interest will be low, but then eventually get higher and higher. Conversely, an interest-only ARM is less common. This type of loan puts interest payments in a preset first term of the mortgage, with the actual loaned money (the principal) paid off after that term. Using the example above, during the first five years of an interest- only ARM loan for $100,000, the borrower is only paying interest payments on that $100,000, not the $278 towards the principal. Once that term is up, the next 25 years of payments go towards the principal $100,000. In other words, the borrower spends the first five years making comparatively small monthly payments on interest only, and then the next 25 years paying much larger monthly payments towards the principal. Generally, interest-only loans are only recommended to borrowers who are incredibly responsible with their money and expect to be able to pay the loan off in full faster than the 30-year term. Otherwise, borrowers usually find themselves trapped in a mortgage they can’t afford a few years down the line.

TYPES OF MORTGAGE INSURANCE

Once a borrower decides between a Fixed-Rate Mortgage, an amortizing adjustable-rate mortgage, or an interest-only adjustable-rate mortgage, they must decide on the insurance for the mortgage. There are two types of mortgage loans when it comes to insurance: conventional loans and government-insured loans. The difference between the two types is incredibly simple:

government-insured loans come with insurance backed in some way by the federal government, and conventional loans are not insured or guaranteed in any way by the government. Some typical government-insured loan types are the Federal Housing Administration (FHA) program, the Veterans Affairs (VA) program, and the United States Department of Agriculture (USDA) program. There are others and borrowers should be encouraged to search for programs that could benefit them, depending on their situation. In a conventional loan where there is no government backing, borrowers are usually required to make a larger down payment than they would with a government-insured loan. The borrower’s credit score also needs to be in better standing for the lender to approve the mortgage.

TYPES OF MORTGAGE SIZE

The size of a mortgage is split into two categories: conforming and jumbo. A conforming loan is one that conforms to the underwriting guidelines of Fannie Mae or Freddie Mac, the two government- controlled real estate investment corporations. Their guidelines can get complicated, but generally all you need to know is that mortgages need to be less than a certain amount of money in order to conform to the guidelines. The amount of money that determines conformity changes from time-to-time, most recently in 2017. A jumbo loan, as you might have guessed, is one that is larger than the conforming price set by Fannie Mae or Freddie Mac. These loans are for enough money that they present a considerable risk to the lender, and therefore are harder for borrowers to obtain.

In case this isn’t clear, let’s assume that this year the Fannie Mae and Freddie Mac conforming limits are both the same at $500,000. A conforming loan will be anything below $500,000 and a jumbo loan will be anything above $500,000. However, due to the cost-of-living being different across the country, certain areas have higher conforming loan limits than others. Therefore conforming and jumbo loans will be different depending on your area. Most real estate agents will only deal with home prices that fall below the conforming price, so this will rarely come up with your clients. However, the difference between obtaining a conforming loan and obtaining a jumbo loan is significant, so it’s important to understand the terms when dealing with lenders. Now you know about the mortgage options on the table. Let’s talk a bit about the people involved in making the mortgage a reality.

THE PLAYERS INVOLVED IN THE LENDING PROCESS

After the prospective buyer decides they want to buy, they will need to select a lender. As a real estate agent, you will likely be asked for advice on the topic. At the end of this chapter, we’ll give you some tips on that. But for now, let’s assume that the borrower has already determined the lender they would like to use. The first person engaged in the lending process is referred to as the loan officer. The loan officer is the project coordinator, overseeing the transfer of information between your client (the prospective buyer) and their organization’s processing and underwriting departments. It is likely that the loan officer will be in direct contact with the borrower from the beginning of the mortgage process all the way through until closing.

The loan officer should be licensed with the National Mortgage Licensing System (NMLS). The loan officer’s licensing status can be verified with the NMLS at www.nmlsconsumeraccess.org. The site is incredibly simple: you enter in a loan officer’s name, address, and other important information, and the system tells you if they are on the level. It will let you know if they are an active registrant in the federal database, if they are authorized to conduct business, and, if so, what organizations they are authorized to represent. It goes without saying that if you start working with a loan officer who is not up-to-date on their NMLS certifications, you and your clients should not work with them. This could not only cause serious delays in the mortgage process, but could put you and your clients into considerable financial danger. Once the borrower has found an NMLS-certified loan officer, the preliminary discussions of the loan can begin. This is the first step in the loan process we discussed earlier: Origination. Once all loan disclosures are executed and all income and assets data are provided, the transaction moves into the second phase, which is Processing. The loan processor works with the loan officer to handle the loan’s documentation and tasks. For example, they are in charge of ordering the appraisal, doing title work, verifying income and deposits, checking the debt-to-income (DTI) ratio, and a multitude of other loan-related items. Once the loan processor assembles the loan package, they submit it to the underwriting department, beginning the third stage of the loan process: Underwriting. As stated earlier, underwriting is the process of poring through the submitted information from the buyer and making sure it jibes with the requirements of the loan organization. The underwriter will focus on matching the

applicant’s income, assets, credit information, property title, and home appraisal to the lender’s lending guidelines. If everything meets the organization’s requirements, a loan is offered and a closing date set. If something doesn’t look right or there is some sort of issue, the loan is denied. Granted, the terms of a mortgage loan may have as many as 100 conditions to be met. After all, most mortgages are for fairly large sums of money, and lenders don’t want to be haphazard with their finances. With that in mind, the underwriter and loan processor may not be individual people, but rather teams of people. Sometimes the entire processing and underwriting departments of a lending organization are working on one particular loan. With that many players in the game, you can see the importance of working with a solid, well-versed loan officer.

ORIGINATION: PRE-QUALIFICATION OR PRE-APPROVAL

The first step in the lending origination process is a pre- qualification letter sent to a buyer from a lending organization. The next step is a pre-approval letter. You might be confused. There is an important difference between a pre-qualification letter and a pre-approval letter. A pre- qualification letter is when the lender simply checks the buyer’s credit and asks some basic questions such as:

• “How much do you earn?” • “Where do you work?” • “Have you filed your tax returns?”

Assuming that the buyer answers the questions with satisfactory

information, a pre-qualification letter is written. At this stage of the process, there is no verification of the buyer’s information. The buyer can say they make millions of dollars per year and, assuming they have good credit, be “pre-qualified” for a multi- million dollar house. With the drafting of a pre-approval letter, the lender actually goes through and verifies the prospective buyer’s income, down payment, down payment source, and ensures tax returns have been filed if the prospective buyer is a self-employed borrower. With a pre-approval letter, the lender is asserting that it has verified more information besides just the buyer’s credit. They verify the buyer has a good income, a solid job, or, if self- employed, has been self-employed for a long enough period to qualify for some of the lending programs that are on the market. That’s why, as the real estate agent, you want your client to have a pre-approval declaration or letter before really beginning the loan process with a lender, not just a pre-qualification letter. As far as I’m concerned, a pre-qualification letter for your buyer is simply the first step in the loan process and not enough to start building a loan package. Some lenders will prey on the fact that you (and borrowers!) don’t know the difference between these two types of letters. A professional lender will not assume that a pre-qualification letter is good enough to begin the loan process. I work with my customers to achieve pre-approval status before discussing anything further. As you might know, after the housing crash we had some years ago starting around 2008, banks are now more stringent about loans. As such, a pre-qualification letter is simply not good enough to get a mortgage from a professional organization in today’s marketplace. Any lender who tells you otherwise is not a

lender you want to work with.

You need a rock-solid preapproval letter.

PROCESSING: A SOLID LOAN ESTIMATE

As a real estate agent, you will sometimes be asked by buyers for advice on the mortgage process. You should tell prospective borrowers that once they have their sights set on a property and have their pre-approval letter in hand, their next step should be to obtain a solid loan estimate for the property. The loan estimate lists loan terms and settlement charges to be paid if the borrower decides to go forward with working with any particular lender. It is not a pre-approval nor is it a pre- qualification. It is more of a “This is what we will likely offer you when you start the loan process and are approved for the loan.” The loan estimate used to be called a “good faith estimate.” It’s called a loan estimate today, and it is basically an upfront quote of all the different costs, fees, interest rates, etc., that the buyer can expect to pay if they proceed with a loan from that lender. It explains which charges can change before settlement and which charges must remain the same. It usually also contains a chart that compares multiple mortgage loans and settlement costs, making it easier for the borrower to shop for the best loan. In the loan estimate phase, the various fees that are associated with getting a loan to buy a property are compiled. It is going to have estimated appraisal fees, inspection fees, and estimated closing fees. For example, if the buyer pays the title insurance, (which they do in some areas), then an estimate for the title insurance cost is prepared and factored that into the loan estimate.

The loan estimate is designed to give the borrower important information while they shop for a loan. Borrowers are encouraged to shop around to multiple lenders to determine which company offers the best deal for their needs. There’s usually a length of time stated in the estimate that the buyer can use to shop and decide. After that time period is up, the loan estimate will be invalid and a new estimate will have to be obtained. The loan estimate may be provided by a mortgage broker or the lender. When a borrower obtains a loan estimate, it shows the lender that the borrower has at least some interest in working with them. However, when the borrower is given a loan estimate, loan originators are only permitted to charge for the cost of a credit report and are not permitted to charge for appraisal, inspection, or other similar settlement services.

PROCESSING: INTENT TO PROCEED

When the borrower is done shopping around and has decided which lender they would like to work with, they bring the loan estimate to the lending establishment and start the next step. Working with the real estate agent and lender’s loan officer, the buyer signs all loan disclosures, the loan estimate, and signs off on an important document called the “intent to proceed.” The intent to proceed evidences that the buyer is interested in moving forward with obtaining a loan from that particular lender. It does not commit the prospective buyer to get a loan from that lender, it simply states that the buyer has signaled intent to proceed with the lender’s loan process under the terms described in the loan estimate.

Think of the intent to proceed as someone raising their hand at

an auction. It doesn’t mean they are going to buy, it just means they are interested in buying. It’s just that in this case, they have to sign something instead of simply raising their hand.

PROCESSING: RATE LOCK

Once that paperwork is done, in most cases the next step is for the lender’s licensed loan officer to lock in the rate. By that I mean that the loan officer commits that the lender will give the borrower a certain interest rate on the loan. The world of loans and mortgages is fast-paced, and interest rates can change at any time. A rate lock is important because it guarantees that a mortgage lender will give a buyer a certain interest rate, at a certain price, for a specific time. Exactly when the lender locks in the rate is going to vary. Some lenders lock it in at this point, some wait until a later time in the process. A rate lock protects the borrower from rising interest rates in the period between sales agreement execution and closing (often a month). If the buyer locks in a rate of 3.25%, they will only have to pay 3.25% interest even if rates rise while going through the loan application process. A rate lock is commonly good for 30, 45, or 60 days, though that time period can be shorter or longer. After that period expires, the buyer is no longer guaranteed the locked-in rate unless the lender agrees to extend it. Therefore, arranging a prompt closing is crucial. I once heard a story from a fellow lender about a woman who wanted to buy a home. She went through the pre-approval process and got a loan estimate. She then discussed rates with the lender and seemed satisfied with the terms.

However, she did not get a rate lock because she was in a hurry and didn’t want to go through the process at that time. She came back to the lender three months later to finish going through the loan origination process. However, she was shocked to find that the interest rate the lender offered had increased significantly since her last meeting. The lender had to politely but firmly explain to her that without a rate lock, there was nothing she could do. The woman ended up signing for the loan under the new, higher interest rate. All because she couldn’t spend the time to lock in that rate when she had the chance. And really, it’s not that woman’s fault she missed out on a better interest rate. These loan processing steps are complex, with many variations on the moving parts. That’s why having an excellent lender’s loan officer is paramount to a buyer’s understanding and satisfaction with the process. The loan officer must make time to explain the documents in detail and be of great service to the buyer. The loan officer has the obligation of knowing in detail and explaining the lender’s loan programs and requirements. That’s why, as a real estate agent, you don’t want to hand off your clients to just any old loan officer. Find the ones who will treat your client well and walk them carefully through the steps. It could mean the difference between your client saving thousands of dollars...or losing thousands of dollars.

PROCESSING: THE APPRAISAL

One of the most crucial steps in the lending process is the lender’s appraisal of the property. This is where the lender will determine

whether or not the house is worth the amount of money they are going to lend to the borrower. Let me warn you up front: the appraisal process can be a wild ride. The lender orders the appraisal. It could take a week, two weeks, or even three to get the appraisal back. This is usually not because of the lender, but because appraisal companies utilize a more complicated system than in the past. It used to be that an appraiser would stop by your house and walk through it for an hour or so. Now things are much more complicated. The reason for the complication is because the lender has to protect its investment. It is investing in both the home as a financial asset and in the borrower as a client. A smart lender will not loan hundreds-of-thousands of dollars to someone without properly vetting every single aspect of the borrower and the property. While this long appraisal process is happening, a good loan officer or lender will not wait for the appraisal to come back. The good loan officer moves ahead, completing as much of the loan package as possible and submitting it to underwriting. We’ll go over underwriting in the next subsection, but it’s important to note that your loan officer should not be sitting around waiting during the appraisal. There is plenty to do! When the appraisal comes back, you’ll want to review it. As the buyer’s real estate agent, you will want to make sure there are not any issues. You need to ensure the value is good and that the property was appraised appropriately. Make sure the appraisal does not require any repairs pre-sale. Should the property not appraise as expected, the loan officer will notify the real estate agents involved in the loan. The agents, the

buyer, and the seller, must then work out a compromise or cancel the contract. If the appraisal results in pre-sale repairs being necessary, the loan officer will notify the agents. At that point, perhaps the buyer’s agent will negotiate having the seller do the repairs for the house in order for it to appraise at the appropriate value. Or, possibly, the price of the home could be adjusted to take into account the repairs the buyer will have to pay for. If not, again the contract can be canceled. Check for any other issues. For example, sometimes the appraiser may note that the property is in a flood zone. If that’s the case, and the contract and the MLS sheet do not indicate that, then the agent will have to address that issue with both the buyer and the seller and work it out. The buyer may choose to get flood insurance or the seller may reduce the price. They may arrive at some sort of a compromise. If not, the deal falls apart. Unfortunately, I have seen deals fall apart for flood insurance. I’ve also seen cases where the house is incorrectly placed in a flood zone, and the seller disputes that fact with the appraiser. Sometimes the appraiser changes the appraisal to take the flood zone statute off so the closing can move forward. I’ve also seen the appraiser refuse. This is the final step of the processing phase, and it is without a doubt the step where the most loans dissolve. Appraisals can be tough on both buyers and sellers. Buyers usually want the house to be as cheap as possible, so they are always looking for ways to bring the price down. Meanwhile, sellers usually have lived in the home for a long time and “feel” like it has more value than it actually does, at least according to

the appraisal. When the buyer is pushing to drop the price and the seller is pushing to raise it, things can get complicated. This doesn’t even take into account the surprises that both buyers and sellers get when the appraisal comes back. I mentioned how something like flood zones can surprise both buyers and sellers, but it happens the other way as well. One appraiser I know saw a house that had a wine cellar hidden behind a false door in the basement. Inside were about three dozen bottles of very old wine, valued at thousands of dollars each. The buyer and the seller then had to decide who got the wine and whether that should factor into the home’s price!

Like I said, the appraisal step is a wild ride.

UNDERWRITING: LOAN UNDERWRITING CONDITIONS

Addressing all underwriting conditions is a crucial part of getting a loan to the closing phase. The borrower must provide everything to the lender that the underwriting department requires. It is not uncommon at this stage to have the underwriter come back with requests for information that up until that point the borrower never knew they had to hand over. This is what happened to the real estate agent in Florida whose deal took 10 extra days when it was discovered crucial information was missing from the loan application. This is yet another reason why a terrific loan officer is necessary for a successful mortgage. You want someone who will shepherd your buyer to answer all necessary questions as quickly as possible, so you can keep the loan moving forward. Everyone wants to stay on track for the closing date that everybody is aiming for.

CLOSING: CLEAR TO CLOSE

Once you’ve addressed and resolved all the underwriting conditions, the underwriter will issue a “clear to close.” As one would expect, that means you are ready to finalize the deal. At this point, the lender will put together the closing disclosure and provide that to the buyer. The buyer must sign it, and then, according to federal law, there is a three-day wait after the paperwork is signed. If your goal is to close by a certain date, make sure you get the closing disclosure signed at least three days before closing, so you can close on time. Then comes the closing, the moment everyone has been waiting for. The buyer, seller, Realtors®, and maybe an attorney, all sign the final paperwork. The deal is closed and the keys to the home are handed over to the buyer. The closing date is usually negotiated during the offer phase of a home sale. When making an offer, the buyer will include a prospective closing date. Depending on the seller’s circumstances, it may be acceptable or may be countered with other terms. Work with your client closely and don’t choose a closing date casually. The right date can ensure a smooth transaction and reduce closing costs, while the wrong date puts home buyers at risk of not closing on time.

Some advice and tips:

• Give yourself enough time. Don’t set a short closing date unless the client is paying cash. As you can see, there are many steps to a home purchase. It takes time for the loan

process. A short closing date might predate final loan approval. • Avoid closing at the end of the month, if possible. This is the busiest time. Unexpected issues are better dealt with if title officers and lenders are readily available. • Make your closing align with the actual move from your client’s old residence to the new house. Ideally, the move should be from one to the other without a hotel stay in- between. This is better for your client and reflects favorably on you and your skills as an agent. • Mortgage payments are almost always due on the first day of the month with the payment applying to the preceding month. As example, if your client closes in July, the first payment (for August) is due on the 1st of September. However, interest is due for the month of July from the date of closing. If the close is early in the month, say on the 10th, the buyer would have to pay for 21 days, while if closing on the 25th, they would have to pay six days of interest. If money is tight, closing toward the end of the month will reduce immediate out-of-pocket expense. If you schedule a closing and fail to complete it on that day, there are consequences. Your client will face increased closing costs the following month, in addition to any penalty for the delay. Although sellers may work with buyers if the transaction does not close on time, failure to close opens the door to the seller canceling the sale. This happens when it’s a seller’s market, and the seller may have taken backup offers that are potentially better. Closing can be held in any agreed location. Most happen at an attorney’s office, or at the lender’s or title company’s offices.

REAL ESTATE AGENT'S LENDER RECOMMENDATION

You’ve just read the loan process from beginning to end. You know what the process entails and hopefully are thinking of ways to better help your clients navigate the treacherous waters of the four lending phases. Keep in mind, that you will likely be asked by your clients to help with this process. Often, a real estate agent will offer to help a buyer obtain a mortgage or recommend a specific loan officer, lender, mortgage broker, or settlement/closing agent. In an article appearing in Mortgage News Daily in 2012, it was reported that real estate agents have “a significant role in determining who writes their customers’ mortgages.” This was based on the results of a study, Key Factors in the Referral of Homebuyers to Mortgage Originators , conducted by Inside Mortgage Finance that showed homebuyers rely on their real estate agent’s recommendation of a specific lender in ~33% of mortgage-financed home purchases in the U.S. The study arrived at this calculation through a survey of 1,800 real estate agents. Agents surveyed reported recommending a mortgage provider in ~60% of buyer-side transactions. The survey showed that their recommendations were accepted by homebuyers in about ~58% of transactions. This means that real estate agents influence 34% of mortgage-financed home purchases. Agents ranked factors that determined which mortgage providers they recommend. The top-ranked factor was “reliable pre-approval letters.” However, this also ranked first on their list of significant problems with mortgage financing.

Agents ranked “returns phone calls and emails” and “reliable in

meeting a closing date” almost as high as “reliable pre-approvals in recommending a lender.” Remarkably, “competitive rates” ranked fifth. While a prospective buyer’s financial information is confidential and generally not disclosed to the real estate agent, exceptions are clearly made when it comes to clients discussing loans with a trusted agent. As seen with the data above, real estate agents are often looked to by clients to recommend lenders. A real estate agent may know lenders whom they have worked with before and thus know that they are competent and effective. And, very importantly, the real estate agent knows which lenders will get the “to-do” list done — on time. You do not want to be swayed by advertised “low interest rates” only to be surprised the day before the scheduled closing time with unwelcome news about loan processing needs or issues with the appraisal. What working with a good lender means is that the closing is not delayed due to some issue with the lender.

In other words, sometimes you get what you pay for.

As a real estate agent, you know most of this. These are likely the factors related to why you recommend certain lenders:

• They offer reasonable rates and fair fees. • They get to closing smoothly without problems.

An agent will recommend lenders due to their reputation for timely performance and for excellent communication with buyers throughout the loan process, especially when unexpected problems may occur. Realtor® Paula Pitts of Pensacola, Florida blogged on this issue. “We recommend lenders because they have proven capability to process loans in a timely manner and work through unwelcome 28

surprises early in the process. We recommend certain reputable lenders because we have experienced their quality delivery of services in the past and expect they will deliver quality service to our clients again and again.” Real Estate Agent Marcia Kramarz, CDPE, LMC, CBR, Medway, MA, Re/Max Executive Realty, RE/MAX International Inc., responded to the post with her own lender “horror story.” “You can say that again! I just finished a close that had seven time extensions! It’s true that the first 3 were due to inspection issues — but the last four were due to delays associated with the financial commitment. It was not a lender that I knew and it’s not a lender I would want to work with in the future, and it’s because we were down to the wire each time we needed to ask for more time. So much better when I am working with MY trusted professionals.” That’s what you want: you want to have your own trusted professionals to whom you turn when you have a client who needs a mortgage. I’m going to give you some tips in the upcoming chapters on how to know which lenders are good and which are bad. Most importantly, I’m going to tell you how to get the good ones to work with you...and stay working with you.

CHAPTER 4

Honest Pre-Approvals A lesson we previously discussed is worth repeating here: it is a necessity in real estate transactions that pre-approvals are both honest and appropriate. In the Key Factors in the Referral of Homebuyers to Mortgage Originators study discussed in the previous chapter, real estate agents ranked factors that determined which mortgage providers they would recommend to a client. The top-ranked factor was “reliable pre-approval letters.” However, this also ranked first on their list of significant problems within the mortgage industry. That may seem confusing but here’s what it means: agents most want lenders to give reliable pre-approval letters, and most of the time they don’t get them. Good lenders and loan officers start with a reliable pre-approval from their lending institution. This is the number one element that separates the good lenders from the bad. This is because the most important part of what a good lender does is give you an honest and accurate assessment that lets you know whether or not your buyer can really afford to buy the house they’re gunning for. This is what differentiates my lending practices from the hundreds of other loan officers in my area. I don’t make up stories or over-promise. My intention is to give you a straight answer to the most important question in a real estate transaction, namely 31

“Are the buyer, seller, agent, and lender, all going to get what they want from this loan?” The last thing I want is to fluff you up with a bunch of hollow promises only to put your real estate buyer-client into a cheaper house or into the one they want but at exorbitant terms. I don’t sell you a bill of goods that doesn’t exist. I’ll give you an honest assessment of the buyer’s odds of getting approved for a loan. I’ll let you know if I think your buyer can obtain a loan through my sources on desirable terms — and I’ll let you know if they can’t. If there’s anything shaky in what I see, I’ll let you know about it and say it loud and clear: “Hey, I think I can get the loan, but I’m not 100% sure.” That way you can make an honest and educated decision on whether or not to show that buyer a multitude of houses. After all, why show a bunch of houses to a client if you know they will not be able to afford any of those properties? This will save you time and give you the ability to prioritize your efforts on the clients who are financially sound enough to buy the houses they are seeking. The best way for me to tell you this information is through a pre-approval letter. Once again, when I say “pre-approval” I don’t mean “pre-qualification.” Remember that there is a big difference between these two types of letters! A pre-qualification is simply checking a buyer’s credit and asking a series of questions. The buyer can answer those questions however they like, as a pre-qualification doesn’t involve verification of those answers. In other words, a pre-qualification is a glorified credit check, which tells you very little about the chances of a buyer getting the loan they want.

A pre-approval letter is where the answers the buyer gave to those pre-qualification questions actually get verified as being true or false. Income verification, down payment qualification, employment history, etc., are all investigated. Honest pre-approvals are the backbone of a successful real estate business. A good lender is going to take the time to pre-approve the buyer, not just pre-qualify them. Always insist that the lenders you work with give a pre-approval letter. It’s the only way to give you the most accurate outlook on the buyer and what they can afford. You can’t get that information if the lender doesn’t dig deep to get the accurate answers necessary to make that judgment.

ATTRIBUTES OF A GOOD LENDER

In addition to honest pre-approval letters, there are a lot of other things a good lender can — and will — do to help make your business easier. A superb lender or lending officer will be available 24/7, within reason. Obviously, no loan officer is going to be too happy to answer a 2:00 AM “just checking on the status” call, but you get the point. A good lender will be available when necessary to help you get your buyer approved. For example, let’s say you’re showing a potential buyer a house at 9:00 PM on a Saturday and it’s clear that the property is going to enter a bidding war situation. In a position like that, you need to get the buyer approved ASAP. You should be working with a lender that you can call at that time so they can take the buyer’s application over the phone and move the process forward. You shouldn’t have to wait until 8:00 AM on Monday morning.

Good lenders never lie about the buyer’s ability to get the loan.

They’re not telling you, “It’s a great deal, a done deal. They’re guaranteed to get a loan,” when there are actually issues. Bad lenders are looking to close a deal — any deal — in order to earn their commission. Bad lenders are hoping to keep your buyers inside their institution in some form or another, even if there’s only a slight possibility that the buyer will qualify for the loan they seek. I realized right away when I first became a lender: if you aren’t sure it’s a done deal, then don’t say it is...ever. I learned that to be a good lender, I needed to go after the solid deals rather than the wobbly ones. Sure, a lot more wobbly deals came across my desk than solid deals, but my reputation wasn’t going to be solidified on those shaky loans. To set myself apart from the bad lenders, I had to work the lucrative “sure bets,” and not whatever fluff dropped in my lap. At the same time, I knew that a great lender doesn’t turn down people who actually can be approved. It’s not like there are two exclusive factions of loan applications: shaky and solid. There’s lots of gray area in both the “shaky” and “solid” camps, and I needed to know the difference between a “too shaky for me” loan, and a “shaky, but worth working” loan. Any lender in the world can get a loan for somebody who is the absolute perfect buyer. Maybe the applicant has a credit score of 800, an amazing W-2 job at a Fortune 500 company, and a million dollars in the bank. Maybe they’re buying an affordable property at below market value, so it’s guaranteed to appraise. The property is perfect, the buyer is perfect, the market is perfect...everything is perfect. A loan officer who just started their first day on the job can close that deal. But, as you well know, that’s not most loans.

On any given workday, most loans are going to have some sort of

challenge. It could be that the lender needs more bank or income documentation, or to know that the applicant has a bit more money in reserve. The lender might need to take a few extra steps to ensure that the buyer is going to be able to afford the house and make the payments. Those aren’t insurmountable obstacles, and that loan shouldn’t automatically get rejected. A good lender is able to get buyers who aren’t perfectly positioned to get a loan on the road to approval. There are many loan programs available to make it easier for consumers to get into the home they like. Here’s a short list of different loan programs that could help a buyer reach approval: • The Federal National Mortgage Association (FNMA) commonly referred to as Fannie Mae. • The Federal Home Loan Mortgage Corporation (FHLMC) commonly referred to as Freddie Mac. • A Federal Housing Administration (FHA) loan. • A Department of Veterans Affairs (VA) loan. • A US Department of Agriculture (USDA) loan. • Government bond programs Sometimes, buyers can get closing cost assistance from locally administered programs, government programs, or private programs. There are many different ways to get someone approved for a loan, even if the buyer is not loan-perfect in all respects. A good lender will work with a buyer to find a program that will help get them approved. It is not your job to know the intricate details of each and every loan assistance program available. That’s the job of the loan 35

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