Mortgage Ripoffs and Money Savers

An Industry Insider Explains How to Save Thousands on Your Mortgage or Re-Finance

Carolyn Warren

• Publisher: Wiley
• Year: 2011
• Print ISBN: 9780470097830
• eBook ISBN: 9781118039106
• Edition: 1
• Topic: Business
• Subtopic: Real Estate
• Index: Business

Mortgage Rip-offs and Money Savers reveals how the mortgage industry cheats borrowers out of billions in extra costs every year. Mortgage industry insider Carolyn Warren taps her decade of experience with lenders to expose the tricks, lies, and dirty little secrets they don't want you to know. With her expert guidance, borrowers will save tens of thousands when they avoid the traps so many consumers fall into. Having this inside information is the only way borrowers can truly get the best possible deal. This book presents that knowledge in an interesting and easy format that anyone can understand. Readers won't be victims of the mortgage industry with this invaluable resource in hand. Instead, they'll get the best possible rates, avoid bogus fees, and get the great deal they deserve.

PART I

EIGHT-STEP GUIDE TO GETTING THE BEST RATE AND PROTECTING YOURSELF FROM MOST COMMON SCAMS

CHAPTER 1

Step 1: Boost Your Credit Rating and Prequalify

Unless you just won the lottery, you need a good credit rating. Without it, you’ll be at the mercy of higher rates, bigger fees, and fewer options. Or worse, you could find yourself sitting on the curb with all your belongings piled up next to you, and nowhere to go. That’s exactly what happened to a family I’ll call the Happys. The Happys were so happy they’d found their dream home, they made an offer, signed an agreement, and gave notice to their landlord. They weren’t worried about a thing—not even their credit—because they had a prequalification letter for financing in hand. They were happy, too, because the builder was going to get the home finished just before Mrs. Happy was due to have her baby. But, alas, their financing hit a snag when the lurid details of their credit came to light. Consequently, their prequalification could not be turned into an approval. Frantic, they went online and shopped every lender imaginable, but no one would grant them a loan.

“Why won’t anybody take a chance on us?” wailed Mrs. Happy. “We’re good people, and I’m about to have a baby!”

What she failed to realize was that the mortgage business is not about taking a chance on good people. You can be a saint from heaven and still get denied if your credit report is ugly as hell. The mortgage business is all about making money for its investors, and these investors want to invest their money, not gamble with it.

“Perhaps your landlord can let you stay longer while you clean up your credit?” I asked, being one of a long line of loan officers she’d come begging to.

Mortgage companies have to pay their investors. They can’t afford to gamble on people with good intentions and a poor payback history.

“No, he’s already rented it out to someone else for next month. We have no choice but to get out, and we have absolutely nowhere to go. I’ve got my entire house packed in boxes, ready to move, but I can’t seem to find a loan. I didn’t think our credit was that big a deal.” Ignorance about credit does not equal bliss.

Last I heard, the Happy family was anything but, as they were forced to move three states away to bunk up with the wife’s dad. You might think this story is ludicrous, but it’s true, and some version of it happens to someone every day. That’s why you must take care of your credit as your first step; otherwise, your prequalification letter won’t be worth the ink it took to print, and you could find out what it means to be homeless.

NOTE

If you know your credit is outstanding, you can skip ahead to the shaded box titled, “Look Who’s Selling Your Credit behind Your Back!” You’ll want to know about this slimy practice and what you can do to prevent it from happening to you.

What Credit Score Do You Need to Buy a Home?

If you want a conventional loan with the lowest rate, you need a score of 620 to pass lenders’ automated underwriting programs (defined below). I’ll explain how this works and mention some exceptions. If you don’t need this information, skip ahead to “How Lenders Rate Credit.”

Lenders pull a trimerged credit report that contains data from the three credit bureaus (Equifax, Experian, and TransUnion) with a credit score for each. Your numeric scre comes from a complex algorithm based on at least 40 components from the information in your credit file. It’s an industry-specific score that’s been created just for mortgages. The purpose of the score is to predict how risky it will be for a lender to extend you credit.

Mortgage companies go by the middle score. If your scores are 560, 589, and 650, your score is considered to be 589, for example. Other rating factors include the following:

• Lenders do not average your scores together.

• Each person has his or her own score; married couples do not share a score.

• Your scores will vary with each bureau, because not all creditors report to all three bureaus.

The loan officer or a loan processor inputs your application into a specific lender’s computerized underwriting program. This program, called automated underwriting or desktop underwriting (DU), reads the information, looks at your credit, and spits out a verdict lickety-split, as follows:

• Accept. This means you’re approved as long as a live underwriter looks over your paperwork and agrees that the figures you’ve provided match your pay stubs and other information. The program also provides a list of the documentation that is required for the final approval, which is done by a real underwriter.

• Review. This means the computer isn’t certain and wants a live underwriter to make the call. If you get a “review,” your loan will go in line and may take a few days to get the verdict. So if you’re wondering, “Why is it taking so long for me to get an approval when my neighbor got one in an hour?” this could be the reason.

• Denied. If the computer turns down your application, your loan off icer may appeal the decision or go to a different wholesale lender. (If your loan officer works for a bank or direct lender, then he or she has only that lender’s own loans to pick from and can’t shop around for you like a broker can.)

NOTE: EXCEPTIONS

Nonconforming (or subprime) lenders don’t follow these rules, because they have different investors and their own guidelines. They’ll accept credit scores lower than 620. One lender takes your highest credit score (rather than the middle one) with a 10 percent minimum down payment and a higher interest rate.

The credit score is an index of risk. It is an unbiased indicator of whether a consumer will repay a loan on time. Scores range between 400 and 850, approximately.

If your score is 620-plus, lenders will look to see if you have any other factors that could cause a denial, such as a recent bankruptcy, foreclosure, judgment, or tax lien. It’s something of a pass/fail system with computerized underwriting (called automated underwriting or desktop underwriting). Whether your score is 620 or 720, you pass, and that means you are eligible for the best interest rate of the day. The conventional 30-year fixed-rate loans don’t have a better interest rate for people with higher scores, as long as automated underwriting gives you an “accept.”

NOTE

If you’re getting a Stated Income loan or other nonconforming loan, then your score will make a difference in your interest rate, up to about 720. This is called risk-based lending.

If your score is 720 or higher, you can take your choice of the loan smorgasbord. If your score is 800 or higher, you’ll have loan officers exclaiming over you and treating you like a rock star.

Here’s a general guideline of how lenders rate credit scores:

720–higher	A	Take your choice of loans at the lowest cost, including risk-based loans such as Stated Income and Interest Only.
620–719	A-	You qualify for conforming, conventional loans. You’ll pay slightly more for risk-based loans.
600–619	B	You may take a Federal Housing Administration / Veterans Administration (FHA/VA) loan or even a zero-down loan with desktop underwriting.
575–599	C	You can qualify for a subprime loan, but your interest rate will be significantly higher. Expect a prepayment penalty.
500–559	D	Most lenders will deny your loan; but there are a few “hard money” subprime lenders who will approve a loan if you have a sufficient down payment. Mortgage brokers have access to these wholesale lenders.
490–499	D-	Only the rare subprime lender will approve a loan for someone with a score below 500, and a large down payment will be required—usually 25 to 50 percent. Other conditions will apply, as well.

Additional Notes about How Lenders Rate Credit

Tax Liens and Judgments. Public records (liens and judgments) must be paid off prior to or through closing the loan. For example, if you have an IRS tax lien that shows up on your credit, it will have to be paid before your home loan can record and fund. This is because the tax lien would be in “first position” on the title to your property and the mortgage would be secondary. A mortgage company cannot take a second position to a tax lien or a judgment because that would put them in financial jeopardy.

Consumer Credit Counseling. Many lenders regard being in a debt-consolidation program—such as Consumer Credit Counseling, Solutions, and other similar nonprofit organizations—equal with being in a Chapter 13 bankruptcy, because they look at it as a self-made debt reorganization bankruptcy. Most lenders will require that you complete and be out of the debt counseling program before they will approve your home loan. Some require a length of time to pass for the reestablishment of good credit thereafter.

It is my opinion that there are two better solutions for burdensome debt: (1) negotiate payments and settlements with the creditors yourself, or (2) file a Chapter 7 bankruptcy and get the ordeal over with in a few months rather than draw it out for years. (Again, this is my personal opinion. Consult an attorney for legal advice.)

Collections and Charge-Offs. Just because a credit card company writes off a bad debt and stops harassing you, doesn’t mean everything is okay now and you can ignore it. Often, an unpaid debt is “charged off,” and then sold to a collection company.

A collection company buys a bundle of bad debts for pennies on the dollar. Then it goes to work to collect. It may add on its own fees and may continue to charge interest, causing your balance to rise higher and higher as time goes on. Even if you don’t agree that you owe payment to this third party, if it’s on your credit report, it’s a factor in calculating your score and getting a mortgage. (Read how to handle collections and charge-offs on page 11, under “N...

Table of contents

• Title Page
• Copyright Page
• Dedication
• Acknowledgments
• Introduction
• PART I - EIGHT-STEP GUIDE TO GETTING THE BEST RATE AND PROTECTING YOURSELF FROM ...
• PART II - TIPS FOR HOMEOWNERS WHO ARE REFINANCING
• PART III - SPECIAL TOPICS AND UNIQUE SITUATIONS
• INDEX