“How Much Income Do I Need to Buy a House in Santa Barbara?”

Here’s my “rule of thumb”: People can qualify for a loan which is between 4 and 5 times their gross income. I’ve been doing loans for almost 20 years and I use this simple formula throughout the day. It’s really easy. No silly 40% income-to-debt ratios. No PITI calculations!

Here’s an example:

Let’s assume you have 2 people earning $45,000/year each ($90,000 total). The maximum mortgage would be 4.5 X $90,000 = $405,000! There, that’s it. Wasn’t that easy?

At this stage, you simply put the amount of money that you’ve saved (yes, you need to save money!) on top of this loan amount and you’ll have the approximate purchase price. So, let’s assume you have $45,000 for the downpayment, here are the numbers:

4.5 X $90,000 = $405,000 + $45,000 = New home price of $450,000.

Now, there are a many variables which will make the above formula NOT work. High credit card debt, numerous educational loans and car loans are examples of how someone’s debt load can really affect your ability to buy a new home. Also, Fannie Mae and Freddie Mac have strict rules regarding income so my “rule of thumb” is overly simplistic but it will give you a general idea.

You can use my formula in reverse if you ask: “How much income do I need to buy that $600,000 house?”

Assume a 10% downpayment of $60,000. Here are the numbers:

$600,000 - $60,000 = $540,000 (new mortgage amount)/4.5 (my rule of thumb) = $120,000 income per year. So, you need about $120,000 of annual income to buy a $600,000 house with 10% down.

If you have a lot of monthly debt payments, you’ll need to use the lower end of my “rule of thumb”. The qualifying usually falls between 4 and 5 but use the lower range if you have a lot of debt.

There you go…. You now have the “secret” formula for figuring what you can afford in a new house. As I said above, there are many different elements to qualifying so this only a “ball park” estimate. It’s best to sit down with a mortgage professional so they can run some numbers specific to your situation.

Ken Doss
Community West Bank
Santa Barbara, CA

kdoss@communitywestbank.com

BEWARE – Disputed credit items are a “show stopper”!

We just had a transaction where Fannie Mae declined a file because of a “disputed” item on a credit report!

The Fannie Mae computer model (aka: DU) is now calling-out items on the credit report which have been classified as “Disputed”. You may say, “So why is this such a big deal? This account was settled years ago?”…. Ha! Don’t be so quick to discount this as a minor issue.

Just this last week, I had 2 loan applications where this actually happened and it caused serious problems. One application was a purchase and they will NOT be able to close their transaction. It’s a bummer for the agent since she spent so much time with these clients. I just hate to see agents who are 100% commission waste time on something that could have been avoided!

Here’s what happened……

For the most part, every loan application is submitted through the Fannie Mae or Freddie Mac underwriting software programs. These programs analyze the consumer’s credit scores, income, job history, etc., etc. Of course, one of the main elements of this analysis is a consumer’s credit score. When a consumer reports an account as “disputed”, then the credit bureaus set aside this item from the credit score calculations. The theory is that if the consumer says there is a problem with this account, then obviously it needs to be expunged from the scores. Great idea?!

Not so fast… this is where things get “tricky”. Fannie/Freddie say, “OK. Let’s just have the bureaus finalize this issue and move-on.” To get the bureaus to do this is like getting your brother in-law to admit he drinks too much! It can be a very thorny process.

In my recent transaction, these Borrowers had an erroneous $75 bill from a radiologist back in 2008. This bill went to collection and now was being reported by a collection agency. To get this cleared off of ALL three bureaus, we needed to get a letter from the radiologist AND then the collection agency! This is a very lengthy process and most consumers are not aware of the potential time delay.

So what do most people do, when they think they are wrongly charged for something? File a DISPUTE! “I’ll show those idiots!” Well, you might have just lost the opportunity to buy a property.

There is a solution but it takes a seasoned financial person to help (vs. a salesman!).

AGENTS: Before you start investing a lot of time with your prospects, get them to a good Loan Officer. This doesn’t mean you let the consumer randomly get some easy approval letter. You need to have them get “signed-off” by a real pro.

CONSUMERS: Some buyers (actually most) just want to get a quick/easy pre-approval letter. That’s like thinking that if you don’t floss your teeth that it won’t matter. As we all know, that will come back to “haunt” you later. Spend quality time on this issue. Be mentally ready to unload ALL of your income/asset paperwork. Help the Loan Officer give you a complete financial check-up. No one likes this process but a helpful consumer goes a long way in getting the pre-approval done properly.

Remember….. “An informed consumer is a happy consumer!”

Ken Doss
Community West Bank
Santa Barbara, CA
805/692-4382
kdoss@communitywestbank.com

"Catch Me if You Can!” - A Loan Officer's Motto?

We caught a loan officer trying to trick a consumer into a loan! Protect yourself and see how it’s done.

This last week, I was helping a past client here in Santa Barbara to determine if a quote from a major lender was competitive. I couldn’t do the loan since her property was a rented condominium with special HOA concerns. I suggested that she consider her current lender because they may waive rules pertaining to the HOA.

Here’s an ugly but, unfortunately, all too common series of events where the lender was trying to “trick” a consumer into selecting a loan. If you can learn from the below, maybe you can avoid the same situation. If this was Sixty Minutes, the person being interviewed would have their face is in the shadows with a garbled voice!

Here’s what happened……

The original email had a rate that was somewhat on the high side. This loan officer was most likely “fishing” to see if someone would respond to such a high rate.

In the second round of emails, the rate magically dropped about .375% but the spreadsheet didn’t show any points, I told my past client, “Ask them if this is a ‘zero point’ loan?” Hmmm….. I was guessing that there must be points but they simply “forgot” to put this on the spreadsheet.

Did this loan “professional” sense that they had a “fish on the hook?” The updated spreadsheet (3rdemail) now stated the points. What happened? How did this cost now magically appear? Why wasn’t this in the initial email? At this juncture, I started to take a closer look at the quote and it didn’t seem too bad. My bank had better rates/points but the existing lender might be the only option anyway (i.e., rental/HOA). It wasn’t the best but it was close.

I’ve been a Loan Officer for almost 20 years and have closed over 1,000 escrows. Even with all of this experience, I almost missed an important item! Just as I was getting ready to hit the “send” button to tell my past client “close enough”, I noticed something! I said to myself, “What a minute. This doesn’t look right.” I realized that the manner in-which the spreadsheet was formatted (Lots of numbers. Easy to get lost) made one assume there wasn’t any 3rd party costs. So I said to my past client, “Ask them to confirm that these are the only costs. No 3rd party items such as appraisal, escrow/title, credit, flood, recording, etc., etc.”

Well this question sure did get an interesting “curt” response! Did you ever see the crime movie, “Catch Me If You Can!” with DiCapio? Well, we caught them “red-handed”. This loan officer said something like, “Of course there are other fees. I mentioned that in our phone conversation.” Ha!.. Initially, the loan officer sends out some high rate just to see what may happen. Then, they “forgot” the points. Lastly, they deliberately didn’t show the 3rdparty costs. You’ve got to be kidding me!! I told my past client, “We caught them. They are done. I’ll introduce to you a friend of mine who is a great loan professional here in Santa Barbara.”

Here’s what everyone needs to think about….. It is very difficult to get the “best deal”. “Shopping” for a mortgage should be easier. There are so many “tricks” that it really makes it almost impossible. Here’s the solution: Go with a local lender who was recommended by a friend, CPA, Realtor or attorney. There are very good and honest loan professionals in every community.

Remember… some banks can “shop” the rates for you through multiple sources. Brokers do the same type of shopping but their processing can be a little more burdensome. Caution, the smooth processing of a loan application can vary. To insure a timely closing, select a veteran loan officer who has attention to detail!

“Shoppers” beware… call a friend!

Ken Doss
Community West Bank
Santa Barbara, CA
805-692-4382
kdoss@communitywestbank.com

Why is a 2nd credit report @ the closing such a big deal?

Basically, you are re-underwriting a file by doing something like this. As we all know, a Buyer’s credit report is a major element of any loan package. If Fannie/Freddie are going to require underwriters to analyze a major piece of a loan file at the end of a transaction, you will start seeing major “train wrecks” at the conclusion of some transactions.

Can you imagine? What if Mr. and Mrs. Buyer have already sold their other house and are now preparing to move into the new property? Now all of the sudden, the lender calls to say there is some new debt now appearing on the Buyer’s newly run credit report and there is a problem! OUCH!

Even if new debt is legitimate (i.e., business trip, appliances, etc.), it doesn’t matter. If the new debt amount is over a certain percentage, back into underwriting you go! There is going to be definite delays if not flat-out declines by some lenders. Therefore, the days of “Mr. and Mrs. Jones we don’t need anything else…we are finished.” are long gone.

There is a way to avoid some of these problems! There is hope in the crazy new mortgage world we all live in! Unfortunately, here’s the tricky part: you need to have a proactive loan officer. Many loan officers deliberately try to make the loan process overly simplistic. Consumers/Realtors (not all but a significant number) love it when they “feel” like they are given a mortgage without much of an inquiry (example: getting a pre-approval by submitting only minimal documents). So, many loan officers try to address tough issues after the transaction has progressed past “the point of no return”. Or they think, “Let’s just wait and see. Maybe this won’t even come-up so why concern the consumer?” Can you say, “Let’s put our head in the sand”?

Consumers (and true real estate professionals) really DO want to know what’s happening. Most consumers LOVE a professional who is smart, educated and proactive. There are ways to prepare the consumer how this 2nd credit report issue works. The loan officer can give the consumer the “dos and don’ts” as it pertains to increased consumer debt during the escrow period.

You need to find a loan officer who can focus on the “details” of a Borrower’s situation. A lot of loan officers are “salesmen” and are REALLY good at persuading people. This is fine but the mortgage industry is changing more towards the need of a finance person vs. a salesman.

Also, you might want to do a little homework on how many files these loan officers are trying to handle. Believe me. I have been doing this for almost 20 years and have closed over 1,000 escrows. The days of the easy loan files (“stated income” era) are gone. A loan officer cannot focus on the subtleties of how to be proactive if they are trying to handle 20 loans at the same time. It can’t be done! Sure they can hire a “team” but you are not getting the talent of the “key” finance person.

Here is something funny which popped into my head….Can you imagine getting a phone call, “Mrs. Buyer, I’m going to put “my head in the sand” regarding your 2nd credit report. Is that OK with you?”. Ha, ha. Of course this sounds crazy but this approach is done all of the time in my industry.

So, beware. Please find yourself a professional loan officer (and Realtor) who will be proactive and can give you the personal attention you deserve. Remember, the purchase of a house is one of the biggest transactions that you will ever do!

Ken Doss
Community West Bank
Santa Barbara, CA
805/692-4382

"What about a biweekly payment option?"

I had a Borrower from Santa Barbara ask…. "What about a biweekly payment option?"

I’m sure there are some appropriate biweekly mortgages. I personally haven’t seen one in a longtime. Here is why you should be very careful regarding these offers….

1) Most of the time (if not all), the payment sent in the middle of the month is held in a “suspense” account (earning interest that you don’t get). When the mortgage company receives the 2nd payment (2 weeks later), your loan balance is reduced and the monthly amortization (principal reduction) calculations are completed. I don’t know of any mortgage company that actually makes the calculation more than once per month.

2) Also, you’re really making 1 extra payment per year under this program! When you send a payment every 2 weeks, you’re giving the mortgage company 26 checks per year or the equivalent to 13 monthly payments. It’s simply 1 extra payment per year. They just make it sound so much better.

3) The last concern (there are more but I won’t go into it) is that some of these programs charge you a fee for this service. You send-in the extra money and they make the payment for you.

Here’s a better idea: Make some extra payments on your own. Twice a year, send an extra one-half payment. This will create a faster pay-off without paying a fee and using a 3rd party. Keep control of your money and do it yourself!

Ken Doss
Senior Loan Consultant
Community West Bank
1501 State St.
Santa Barbara, CA 93105
805/692-4382

Santa Barbara - How to select a mortgage lender?

A client in Santa Barbara asked me the other day, "What's a correspondent lender and why is it important?"

There are significant differences between the various types of lenders. Here was my answer:

A correspondent lender is somewhere between a direct lender (better underwriting) and a broker (shop for rates). They are becoming more common in the industry. Yes, Community West Bank is a correspondent lender! See below for more insight!

At my bank, our underwriters (in Goleta) have signing authority for 6 different major institutions (i.e., BofA, Chase, etc.). Also, we fund these mortgages with our bank’s money. Approximately 10 days after the closing, they are “purchased” by one of these institutions. VERY similar to a “direct lender” but we have 6 different underwriting guidelines to pick from. With all of those different programs, there usually is a way to get an approval.

Now regarding the “shopping” for the best rate…. Daily, we look at our various “lending partners” and see which of them has the best rate. The nice part is that we don’t really care which lender. We just the consumer to get the best rate.

There you have it! When a consumer says, “I want to go with someone out-of-town because they can shop the rate. You have a solution for them so the file can stay with a local lender!”

Ken Doss
Community West Bank
Santa Barbara, CA
805/692-4382