Category Archives: Industry Talk

Loan Originator Feels Entitled to Overage and Asks for Jillayne’s Advice

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This is a good representation of the emails and blog comments I receive daily over at the NAMF website on the topic of loan originator compensation:

Dear Jillayne, I read your article because I am trying to determine when the loan originator compensation limits will go into effect and what I’m going to do if this acutally happens. As an LO for 10 years, I take great pride in being a member of the lending industry and in my opinion, I have provided an invaluable service to my customers over that period.  I will also admit to having earned the ocassional “overage” in a transaction.  I did not price my loans to make overage, however if the par price paid less than 1% (as often happened because of the rate sheet) I felt I was entitled to do it.

I do take issue with you on the amount of work that an LO does to earn their compensation, a competent LO not only takes the 1003 loan application, I take an appropriate amount of time on the front end of the transaction to thoroughly explain the loan process. I tell customers exactly what they can anticipate.  I then take a complete application and discuss what documentation will be required and why. I spend at least 2 hours reviewing every disclosure, state and federal, that they are signing.  I then collect all documentation, prepare the loan package, sort the package to a stacking order, order title, order appraisal, register the loan and submit to processing.  I get the conditions which I discuss with the processor, and then collect the conditions and submit for final approval.
 
My company has just announced that they are discontinuing payment of all overage effective January 1, 2011.  Regardless of your opinion on overage, it is a significant component of any LO’s income.  While we can debate whether it should or should not be, the fact of the matter is, it is!  The companies are not going to increase my compensation to account for that loss in income, and I find myself having to generate 50 or 75% more sources to find loans.  How would you approach that change in your income?

Dear Entitled to Overage,

We exchanged two emails in which I asked you how many hours you spend, on average per file and I also asked for your average loan amount.  E2O, you said you spend an average of 15 hours originating each loan and your average loan amount is $175,000.  Let’s do the math.  I’m going to estimate that in today’s competitive market, a loan originator would be hard pressed to get away with earning more than a 1 percent loan amount with a 1 percent overage

Let’s pause and quickly educate readers on overage income: This means marking up the wholesale interest rate and selling the consumer a higher interest rate at retail rates. The lender funding the loan, who is very happy that you’ve sold a much higher rate, rewards the loan originator by paying them a percentage of the loan amount at closing.  Mortgage broker LOs disclose ALL their compensation on line 1 of the Good Faith Estimate.  Mortgage banker LOs do not have to disclose this overage income as of today. However, two rules at the federal level will change this come April 1, 2011: The Federal Reserve Board Rule and Dodd-Frank Wall St Reform.  More on LO Compensation limits in a future blog post.

So E2O, I’m going to estimate low. Let’s say you currently feel entitled to make 2 percent of the loan amount as your fee for working 15 hours.  That’s $3500. Let’s divide $3500 by 15 hours.  That comes out to $234 per hour.  Please help me understand how a position that does not require a high school diploma is worth $234/hour?  If a person making this kind of hourly wage works a full, 40 week, that means this same person is grossing $486,720 per year.  No wonder loan origination attracted so many people who were only in it for the money.  LOs could work as little as 10 hours a week and make a comfortable living.

Let’s get back to your question. You’re saying that your company is going to take away your ability to earn the hidden “overage” income immediately and you’d like my advice on how to approach that change in income. 

First of all, I highly doubt that you’re working a full 40 hours per week.  If indeed you were actually working that hard, you’d have more business sources than you’d know what to do with so my first suggestion is to honestly reflect back on how many hours you actually spend working on the job of origination.  Subtract the hours spent going to the gym, talking sports with the guys over coffees or beers, subtract the hours spent on Mortgage Grapevine and the right wing political conspiracy blogs or Huff Po or wherever you’re currently wasting time and look at the bare bones number of hours spent talking with past clients, getting off your butt and into Realtor offices drumming up business.  My first suggestion is to work harder.  Don’t like that? Go find another job in another field that will pay you $233/hour.

Second suggestion: Ask yourself how much you love mortgage lending.  If you’re only in mortgage lending for the money ONLY, then my second suggestion is to leave the industry. That’s right, get out of mortgage lending and go do something that you really love.  Life is short (and life is long. It’s a paradox.)… life is too short to spend it in the mad, mad, mad world of mortgage lending unless you love what you’re doing so much that you wouldn’t dream of spending life any other way. This is the choice in attitude it’s going to take to get you through 2011 and beyond. 

Third suggestion: If indeed you really, truly are worth $233/hour then go ahead and charge that! Charge your clients a 2 percent loan origination fee on line 1 of the Good Faith Estimate and when they shop around and find a lower interest rate and lower loan fee, explain to your clients the reason why you are worth that amount.

Fourth suggestion: Accept that you’re not worth $233 an hour.  Why? Because if you were, you wouldn’t be asking for help.  Banning overage income is going to separate the men from the boys and the women from the girls.  Loan originators: You never were worth $233 an hour as a brand new, unexperienced loan originator.  All it takes to get a license is a 20 hour prelicensing class, passing a background check and a national and state licensing exam, and to not have any felony convictions in the past 7 years. And if an LO wants to work at a depository bank, NONE of that is required!  No loan originator is now or was ever worth $233/hour when they are first licensed.  Maybe an extremely experienced LO with, say, 25 years experience (which means they entered the industry before the subprime lending era) is worth that much.  Why? Because he/she can originate a loan IN LESS THAN 15 HOURS.  That 25 year veteran knows his/her products, knows FHA/VA/USDA, knows the FHA 203K Program which will be highly used as soon as more REOs hit the market. That 25 year veteran has seen the rise and fall of the Savings and Loan crisis, has seen many refi booms, has lived through countless underwriting guideline changes, as lived through the same amount of federal law changes, and has the experience, maturity, and knowledge to help a wide variety of clients.  This loan originator is very valuable.  A brand new LO was never worth $233/hour and one of the big mistakes company owners made was to recruite people through greed to be LOs.

Fifth suggestion: Now that you’ve accepted that no green LO is or was ever worth $233/hour reset your own worth. If it seriously takes you 15 hours to originate a loan, I’d say that you don’t know as much as you think you know (this is very common for LOs who were hired during the subprime era) or you need to learn how to work more efficiently and spend more of your time procuring new clients.  Don’t like Realtors? The majority of LOs who were birthed in subprime boiler rooms despise all Realtors because Realtors tend to hold LOs accountable.  So if you don’t like Realtors and you don’t want to work harder to procure more clients…..

E20, my sixth suggestion is to accept that your value to your company is much less than you think it is. Reset your lifestyle and spending patterns to match your worth to your company and client, or prepare to work harder and smarter in 2011 and beyond.

I suppose there’s another option. You could open your own bank or mortgage bank.  Now you get to keep the profits for yourself.  As I look around the mortgage lending industry I see many faces of company owners who started out as loan originators and worked their way up the ladder to the point where it was time to start their own company.  This is always an option for any of us…who want to work that hard.

Perhaps You Should Lock Your Rate Today

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If you are “floating” a conventional rate right now,  you might want to contact your mortgage originator to discuss whether or not you should lock today.  Typically, I don’t like to make bold predictions with mortgage rates as there are too many factors that impact their direction and traders may  not always react consistently to these factors… but today I can tell you quite confidently that Monday’s conforming rate will cost more from many wholesale lenders.

Fannie Mae and Freddie Mac are revising their price adjustments (LLPA) on mortgages with a term greater than 15 years.   This will go into effect on loans they purchase April 1, 2011 or later.  However, this means that wholesale lenders need to make their adjustments well in advance so that by the time Fannie or Freddie buys the loan from them, the wholesale lender isn’t stuck with that price hit…not to mention, if they sell the loans prior to the April Fools increase, they’ve made some extra coin.  

The adjustments range from 0 – 0.5% in fee depending on credit score and loan-to-value.   For example, someone locking today with a credit score of 740 and a loan to value of 80% or higher does not have a base price adjustment.   With the new LLPA, this person has a price adjustment of 0.25% in fee.   On a $400,000 loan amount, this boils down to $1,000 in fee and may or may not make a difference in rate (typically 1% in fee = 0.25% in rate) depending on how pricing is at that moment.  

Someone with a 680-699 mid-credit score and a loan to value over 80% will see an increase of 0.5% to fee for their conforming mortgage rate.   0.5% in fee tends to pencil out to a 0.125-0.25% higher interest rate or the borrower can pay 0.5% more in fee (discount) to buy their rate down.   

Homebuyers who are putting less than 20% down payment with credit scores below 740 should make sure their mortgage professional is approved to originate FHA loans as they are well worth the consideration.   As always, I strongly recommend getting started with the preapproval process early so that you can work on improving credit, if needed, as one digit lower may ding your mortgage rate.

If you or your mortgage professional are convinced that rates will be going down, then you may not want to lock.  They will just need to go down low enough to compensate for the increase to conforming price adjustments (LLPA) which will be factored into the pricing of conforming rates.

13 Reasons Why 30% of LOs Fail the National Loan Originator Exam

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The first time “pass” rate of the national loan originator exam has fallen to 69 percent.  This is an indication that the test is not too easy.  A high pass rate means an exam is too easy.  A low pass rate means an exam is too hard.  The numbers that tell a different story are the repeat test takers.  Test candidates who fail the LO exam the first time and retake the exam pass the exam only 44 percent of the time.  The SAFE Mortgage Licensing Act is working the way it was intended.

This blog post is for loan originators seeking help who are trying to pass the test the second, or third time.  Test candidates must wait 30 days between tests and if they fail after their third attempt, they have to wait 6 months before taking the test again.  I know it sounds unfair, but in all seriousness, not everyone is going to be able to pass this exam. The six month cooling off time is like a forced reflection period for a candidate to either get serious in addressing their repeated fails or get serious about studying.  The SAFE Mortgage Licensing Act of 2008 is only the beginning.  Over the next decade loan originators will slowly transform from being less like retail salespeople and more like professionals. The loan originator exam will never be as easy as it was in 2010.

I teach the SAFE Pre-Licensing course for new to newer loan originators which is a 20 hour course. I also teach an exam prep course for experienced loan originators and have had the opportunity to interact with hundreds of loan originator students. In this blog post I’d like to share some reasons why folks are not passing the exam so those who need help can identify their challenges and meet or reset their goals.  The following reasons are numbered for conversation sake and do not appear in any particular order.

1. One reason why people are not passing the loan originator exam is the same reason why people all over the world don’t pass comprehensive exams: Not enough studying. A 20 Hour pre-licensing course is definitely not enough time to teach and learn all the complex knowledge required to pass the national LO exam.  20 hours could be three, 7-hour days or two, 10-hour days.  Take a look at the test content outline.  There’s NO WAY an average human, who has never been in the mortgage lending industry, is going to be able to learn let alone understand, memorize and apply this content with only 20 hours of education.  One reason the number of classroom hours was set at 20 may have been because during 2010 there were a huge number of experienced LOs who worked at non-depository lenders who needed this course. Two days is plenty of time to spend with an experienced originator but not someone brand new.  In the future, expect the pre-licensing hours to be expanded to a full week of education. Until then, some students will have to spend way more time outside of the classroom studying on their own.

NMLS Resource Center2. “There’s no good study material available”
NMLS-approved course providers are not allowed to take the test only for the purpose of telling everyone what’s on the test.  In fact, we agree to NOT do this.  If we’re caught doing this we lose our ability to teach NMLS approved courses! If you think about it, if it were that easy to cheat on the exam then why bother with the SAFE Act? Why not just give anyone who wants a license a license and not test them.  The Nationwide Mortgage Licensing System (NMLS) does not provide a study guide book. Instead they encourage test takers to seek out study material from course providers….however, slow down a bit and you’ll see right inside the test content outline, NMLS TELLS YOU WHERE THE TEST QUESTIONS COME FROM. Look at page 3 of this pdf.  Those who are seeking good study material don’t have to pay to get it.  It’s all available for free. However, that means you’ll have to actually read it. More about reading soon.

3. Wanting the answers/not wanting to study
Loan originators ask their compliance person for the answer when they have a question about Fannie Mae, RESPA, disclosure requirements, etc.  So in attacking this exam, LOs expect to call a course provider and have that course provider hand them a set of 100 questions that will be on the exam. And by the way, anyone who claims to “have THE 100 questions you MUST know” is probably wrong. Any list of questions floating around out there will eventually make their way to NMLS and I’m sure they’ll pull those questions. Okay, so maybe you don’t expect the answers but you expect someone to sell you a book that tells you what will be on the exam.  That book doesn’t exist either.  What about a book that summarizes the test content outline?  Yes there are books available and I think those books would be very helpful for some folks but no book will tell you the exact test questions you’re going to get! Relying only on a book is a mistake.

4. “I know the material, I just can’t pass the test.”
It’s possible you don’t know the material. Re-read numbers 1-3. Or perhaps you have test anxiety.

5. Test Anxiety
I  have met several LOs who are have a high degree of test anxiety that goes way beyond normal nervousness.  Yes, passing the test is important. In their mind, people with high test anxiety go from “not passing” to “living in a van down by the river” in one heartbeat.  Test candidates get themselves all worked up so they can’t eat, sleep, think, or do anything let alone actually learn and understand the test content.  There’s lots of tips and ideas that have been written about dealing with test anxiety and even a little self-quiz you can take here.  One thing the experts agree on is that a person with high test anxiety isn’t going to be able to learn much while studying.  If you want to pass the LO exam, you must deal with your anxiety first and foremost before taking any exam prep classes.  There is no time in anyone’s classroom to give personalized psychological counseling.  Besides, most of the instructors teaching classes whether they’re live or online specialize in mortgage lending not test anxiety. Your challenge is different. Know thyself….pass the test.  Maybe your anxiety comes from not wanting to be honest with yourself about a possible learning disability.

6. Maybe you have an undiagnosed learning disability.  As I’ve mentioned in other articles, back in the 1970s there were no para-educators available to follow kids around giving rambuncious kids extra support. Instead students survived in other ways. Humans listen and talk at a much faster and higher rate than we read and write.  Some LOs are high functioning talkers but low functioning readers.  Some people are dyslexic or have other bona fide learning disabilities that they know about but don’t want to deal with the stigma associated with being labeled.  Well if you want to pass the LO test this might be that point in your life where you finally are going to have to come out of the closet and get some help.  Repeated on purpose: Most of the instructors teaching classes whether they’re live or online specialize in mortgage lending and not learning disabilities. Ask your primary care physician for a referral to a doctor or counselor who specializes in diagnosing learning disabilities in adults.  The Nationwide Mortgage Licensing System will make reasonable accomodations for people with documented learning disabilities.  See page 14 of the MLO Testing Handbook for more details.

7. Subprime LOs who fell out of the industry during 2008 and are trying to re-enter the business are having a very, very hard time passing this test.  The main reason is because they think they already know how to originate and don’t want to spend the time studying or don’t think they have to study so they repeatedly fail the test. Anyone who entered the industry around 2002, left the industry in 2007 or 2008 and only originated subprime received very little compliance training if any. 2011 is a radically different world compared with 2007. If you still think stated income loans should come back, if you still believe that a pay option ARM is “the right product for the right person” and if you think it’s unfair that people can’t use seller downpayment assistance programs please do not re-enter the industry.

8. “The test contains trick questions!”
Actually, the test doesn’t have any trick questions.  Test writers try very hard NOT to write trick questions. The reason the test question sound tricky is because LOs are not use to looking up answers and reading the statute.  Instead they ask their boss or the compliance person, their processor or the person sitting next to them for the answer and move on.  People use language differently in different parts of the U.S.  Teaching a class in Oklahoma or Idaho is vastly different compared with teaching in Seattle or Virginia.  Test writers can’t use spoken language and coloquialisms from different parts of the U.S. when writing test questions for an exam to be delivered in all 50 states. The only fair way to write test questions is to copy and paste directly from the law.  That’s why the test questions sound and look “tricky” but really the trick is on you. If LOs would simply study directly from the law, the test questions would look very, very familiar. Re-read number 2.

9. You’re ESL
English language learners are my best students. Why? Because they are typically more emotionally mature, know good and well that they have to listen, ask lots of questions, and study over and over again to pass this test.  ESL LOs…you WILL pass the test. Read more here.

10. The test has too many “situational” questions
So you know RESPA. You know TILA.  You’re scoring high on all your practice exams but the test isn’t going to be as easy as just knowing that you have to send out early disclosures within 3 days of the application.  Instead the test will contain situational questions that will require you to understand how and also why TILA and RESPA interact with each other. This requires you to look at a test question and understand what information you DON’T need and cast it aside. Only then will you be able to understand what content the test writer is testing you on.  This means memorizing test questions is a bad way to study. Instead you’re better off studying the laws and rules that govern mortgage lending.  Mortgage loan origination is all situational. These are highly appropriate questions for the exam and I hope we see more in the future.

11. Part Timers
The national LO test sets a bar and asks people who want to originate to show proof of knowledge of a body of information. Loan origination is no longer a sales job. It’s transforming into a profession. It’s really hard to be a part time doctor, lawyer, engineer, dentist, CPA unless that person is entering semi-retirement. The knowledge, skill set, and industry changes are too wide and deep and the consequences of screwing up are too high.  Welcome to mortgage lending in 2011.  You must be on your game full time or no one will want to hire you. And those companies that do hire part timers are going to have huge liability issues supervising you in 2011 and beyond.  Commit to origination as a profession. Now start over and re-read items 1-3. Part timers have a high opinion of their knowledge of mortgage lending and are sometimes too proud to want to hear that they need more basic education on the entire mortgage lending process.

12. Lack of Basic Education
The SAFE Mortgage Licensing Act does not require a high school diploma or equivalent to become a licensed loan originator. Instead, those without a diploma simply must have proof of three years of experience in the mortgage lending industry.  Subsequently, the national LO exam will be that barrier to entry for folks who may have a learning disability or folks who may not have the ability to think, reason, and understand above a 9th grade level. Some of the math questions on the exam will require a basic understanding of 9th grade algebra. Some of the questions will require the ability to understand how two federal laws relate to each other and to the consumer.  Some people only have the ability to understand one federal law at a time.  Mortgage loan origination today requires the ability to multi-think all day long.  My recommendation: Finish high school first.  The discipline required to obtain a GED will be good practice for studying for the LO exam.

13. Learning Style Not Matched with Study Choice
Visual, auditory, tactile, whole body, emotional…These are all learning styles and passing the test means knowing how you best learn. Learning requires understanding. If you can teach another person something, this is a good sign that you know that concept and will be able to select the correct answer on an exam.  Some people have to see pictures. Other students need to hear the content.  Sometimes instructors tell stories about legal cases. Stories evoke emotion which triggers long term memory.  Sometimes students learn best if they get their whole body involved in the learning process. Everyone is different. Choose a course provider that understands learning styles and find one that matches your particular style.  In my experience, most students have a mixed style so find an instructor/course provider that mixes it up for you. One student had me on the phone grilling me with questions about my course for at least 15 minutes. We figured out that we’d be a good match for each other. She attended my course and passed the test the next day.  Don’t be afraid to call course providers and ask lots of questions.

Every test candidate is different. Some people listen at a higher/faster rate than they can read and write. Some people need to simply read through 400 sample test questions and that’s all they’ll need.  Some people have undiagnosed learning disabilities.  If you’ve taken the LO exam and failed, re-evaluate your learning style, the time you’ve spent studying and any of these other ideas and try again.  If you still cannot pass the exam ask yourself how much you love the mortgage lending industry because there are other positions available in lending that do not require an LO license.  And remember, you can always go work at a depository bank.  Bank LOs do not have to pass the exam…..yet.  Someday they will.

I Don’t Need No Stinking “Database”

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The Christmas Season is here, and I have had a chat or two with some of my colleagues around the Country regarding why we in the Real Estate Industry should strike the word LEAD from our vocablulary. Wrap the word “LEAD” up in a box with the word “DEAL” and set the box on fire before the New Decade begins.

I had a very startling conversation with an agent who not only had no friends who were past clients, but referred ALL family and friends OUT, and refused to work with family and friends. That is such an opposite experience to mine. I still get calls from past clients and family around the Country, who will not buy or sell a house without consulting with me first.

Seriously. If you are not “good enough” for your own friends and family, if you are not the “go to person” for your friends and family with real estate needs, why should anyone else hire you to help them and their friends and family? Why would you have on your business card “Call Me For ALL Of Your Real Estate Needs” and then tell friends and family to call someone else??? Maybe I just don’t “get it”.

client friends
Twenty years ago when I started in this business, someone said to me “make a friend, and then help your friend buy/sell a house”. I have always tried to apply that, and clearly never forgot it. A real estate broker should apply the top level of care when assisting a friend or relative in the purchase or sale of a house, and then apply that same level of care to all clients. It’s what keeps you “on top of your game”.

Many articles have been written on “How To Choose a Real Estate Agent”. Truth is your real estate agent will likely know (and need to know) MUCH more about you to assist you well, than your family and friends know about you.

If you can’t envision your agent as someone you might call over the years AFTER you buy a house to ask about most anything home related, you likely should not have chosen that agent in the first place.

What causes “a client” to move to the right of the Venn Diagram, vs someone bounced back to the left, to only be spoken with if and when they need to buy or sell a house again? What would cause a Past Client, or even a Vendor, to not pass through to the “friend” side of the diagram, and become merely a name and address in a DATABASE to “drip” on?

Back to Christmas. Each morning I wake up to new emails from past clients, wishing Kim and I the best in the New Year. Emails asking how we are doing, and sending warm holiday greetings. Yesterday a gift box arrived from a “past client” who bought a house in 2009, thanking me for helping them with something home related in 2010. Something I did as his friend and “real estate agent for life”, vs something that ended up in a commission for me.

So no…I Don’t Need No Stinking Database”…unless you want to call my Christmas Card List “a database”.

Merry Christmas and Happy New Decade to you and yours!

Have Lunch with Brian Stevens Tomorrow (12/23) in Bellevue

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We are planning a “tweet-up” (meet up) for Brian Stevens of Think Big Work Small tomorrow (12/23) around lunch time in the Bellevue area.   If you attended last year’s RE Barcamp at the Seattle Center,  you may have had the chance to meet Brian and Frank.   These guys have been an asset to the lending and real estate community and they were both recently recognized on Inman’s Top 100 list.Brian

I will update this post as soon as I have the nitty-gritty…since this is on short notice, I wanted to get the word out to all of his fans.

Do you have an idea of a good spot for lunch tomorrow that can handle a crowd and has decent parking (wishful thinking…) for this gathering?  Please let me know!

UPDATE 12/22 10:00 a.m.:  Looks like the event will be at Rockbottom in Bellevue tomorrow, December 23, 2010, starting at 11:00 a.m. – 1:30 pm.

Parking is free or validated and Rockbottom Brewery is away from the mall.  🙂

Real Estate – “Proceeding in Good Faith”

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contract
Real Estate Transactions have long depended on the underlying principle of “Proceeding in Good Faith”. It’s not something that we talk about much, as it is something we pretty much take for granted.

I raise this issue today as Craig has mentioned it a few times this year in his posts and comments, and most recently the other day in his post regarding “Good Faith Home Inspection Negotiations”.

Before we can discuss how “Proceeding in Good Faith” applies to the Home Inspection specifically, we need to discuss how “Proceeding in Good Faith” applies to all real estate transactions, generally. When we are talking about this principle in real estate, we are talking about the Buyer and the Seller who are the “Parties To” the transaction. It is not about agents except to the extent that they represent someone who is acting and proceeding in good faith. Consequently the presence or absence of real estate agents in the transaction neither heightens nor diminishes the importance of the good faith process.

Good Faith BEGINS with a seller who wants to sell and a buyer who wants to buy. One would think this is always the case, but it is not. NO ONE can PROCEED “in good faith” if these two things are not present from the getgo.

While it may be hard for some to believe, not everyone who has their home listed for sale has the intent of actually selling it (at the price at which it will actually sell), and not everyone who makes a written offer actually has the intent of buying (that particular house). Who is and who is not Proceeding in Good Faith…well, that gets a little complicated.

Buyer Says: “What’s wrong with this seller? Is he REALLY going to Let This Sale Fall Apart over a $150 fix to a leak under the sink?”

Seller Says: “Well it’s a good thing that buyer DIDN”T buy my house, He oviously did NOT want it, if he was willing to walk away from it over a $150 fix to a leak under a sink! Anyone who is not willing to fix a leak under a sink shouldn’t be a Home OWNER Period!”

Craig, in his post linked in this one says: ” As a general rule, I think “good faith

2011 FHA and VA Loan Limits for Seattle

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FHA loan limits for homes located in King, Pierce and Snohomish Counties will remain the same until September 30, 2011.

  • 1 Unit – $567,500
  • 2 Unit – $726,500
  • 3 Unit – $878,150
  • 4 Unit – $1,091,350

I have the FHA loan limits for other counties in Washington posted here.   FHA still allows 3.5% down payment, which can be gifted (or loaned) by family; 5% down will provide slightly improved mortgage insurance rates.   FHA insured loans may be assumable which may be a huge benefit for future home sellers when they are able to offer today’s rate in a higher rate environment.

VA Loan Limt effective January 1, 2011 through September 30, 2011 for King, Snohomish and Pierce Counties is $500,000.   This is a slight increase from $481,250 in 2010.  Here is a list of VA loan limits for all counties in Washington.

Qualified veterans can do 100% financing up to $500,000.   If a sales price is above $500,000, the veterans down payment is 25% of the difference between the loan amount and sales price.   

For example, if a veteran purchases home in Bellevue with a sales price of $600,000; their down payment is $25,000.   600,000 – 500,000 = 100,000.  100,000 x 25% = $25,000.   

Any seller should include buyers who are using FHA or VA for financing or they are seriously limiting their potential for selling their home.

Why the Lender may “reduce” Your Gross Income

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Gross Income is sometimes a subjective factor, modified at The Underwriter’s discretion. Most often that is the case whenever ANY part of the borrowers Gross Income is derived from overtime, bonus or commission, or the entire Gross Income is based on hourly wages vs salaried wages.

EVERY AGENT should understand these BASICS, as WE often know our clients longer and better than the lender who is giving you a pre-approval letter to attach to the buyer’s offer. At a minimum, every agent should know that if their client is not purely “on salary”, there may be some bumps along the way that may turn a preapproval into a loan denial.

Even if the lender did a full preapproval process, The Underwriter may require the employer to make a written statement regarding future bonus or commission or overtime income, that the employer will not put in writing. That can happen in any case, and sometimes a few days before closing, no matter how careful the loan originator was in gathering information prior to producing the preapproval letter.

AGENTS should know when the preapproval MAY be based on the “wrong facts”, especially when you are getting a preapproval letter with short notice, and the lender knows the client for 15 minutes prior to giving the agent what they need to get the offer submitted quickly. Fully delegating this responsibility to the lender is inappropriate. An agent should know when to give the lender a “heads up” that $100,000 may indeed be “current” gross income, BUT it is likely that The Underwriter at the end of the day WILL NOT count ALL of that $100,000!

Getting a mortgage is not an “entitlement”…it is a business decision. Below are examples of how Lenders have historically “viewed” Gross Income calculations in most cases. But know that The Underwriter has the discretion to modify “as needed” based on inconsistencies.

First let’s look at the basic chart I made for the purpose of further discussion:
gross income

Column One: Salaried Income is almost always counted at current “face” value. Even if you just got a significant raise just prior to making an offer on the house, the lender will usually count it all. They will require at least one and often two paystubs at the NEW amount as proof that the raise is in effect, and ALL of the monies have to be salary vs hourly or bonus or commission based.

Column Two: If your wages are based on an hourly amount, RARELY will the Lender count it at its current annual amount based on today’s hourly wage. I don’t necessarily agree that hourly based wage earners should be treated differently than salaried ones, but I don’t make “the rules”.

If your hourly rate increased from $16 an hour to $24 an hour over the last two years, you normally need A FULL TWO YEAR HISTORY of earnings at the new hourly amount of $24, for the Lender to use that as your Gross Income. If you earned $16 an hour in 2009 and $19 an hour in 2010 and you WILL BE making $24 an hour in 2011, the Lender will usually average your annual wages of 2009 and 2010 and count your income at only $16 + $19 divided by two at ONLY $17.50 an hour vs the $24 that you are now making. Terrible, but true. They actually average your total earnings (not including overtime) for the two years, vs the hourly number.

HUGELY important for an agent and a lender to know if your wages are based on an hourly amount before issuing a preapproval letter.

Again, I really don’t think that it is fair, as I have had clients with an over 20 year history with the same employer (Boeing) whose income was stated on an hourly vs salaried basis. Why that counts as “lesser” in the eyes of lenders, I don’t know. Just is, in MOST if not all cases.

I also included an odd example in Column Two of The Underwriter deciding that if your income reduced by 20% that maybe that will happen again in the future. Once The Underwriter is in “their discretion” territory, there really is a lot of room for The Underwriter to do pretty much whatever they deem necessary to be comfortable with approving the loan. If there is a declining income vs an increasing income…expect problems and delays and be prepared for a potentially very bumpy ride to the “approved and funded” day.

Column Three: Bonus income is calculated the same as hourly income…a two year average. So if your income is part salary and part bonus, the safest way to proceed is based on the salaried portion only, especially if the bonus income is a small amount. If you do want to include the bonus income, you need to know that not only will the lender require a consistent history of bonus income, BUT may require your employer to put in writing that they expect that level of bonus to continue for X period of time into the future.

In these economic times it is The Underwriter’s Discretion regarding how much to count OVERTIME and/or BONUS income. They may decide not to count it at all unless your employer is willing to guarantee that extra income for several years out from now.

Column Four: There is no Column Four BUT if there were a Column Four it would be for people whose ENTIRE income is commission based. Also in Column Four would be people whose entire income comes from a business venture.

Also, regardless of income source, if you are applying for a JUMBO loan…well, just about anything can happen. The number of hoops one may have to jump through to get a JUMBO loan are many and varied and change from lender to lender and from one minute to the next.

Likely the biggest snafu that can happen unexpectedly is when someone owns a rental property. Maybe one of the Lending Professionals can help with this in the comment section of the post. Suffice it to say that the Lender does not look at rental income the same way that someone who owns a rental does…not at all. They only count 75% of the rent as income, while counting all of the mortgage payment on the rental property as an expense. So if you think that $2,000 rent wipes away the $2,000 mortgage payment and is “a wash”…not so. So if you own a rental property, make sure you make that fact known BEFORE getting a preapproval letter and before making an offer on a house.

Last but not least is you cannot count the Rental Income of a property you are buying as a rental. Yes, we know you will be getting rent, but that rent is not counted AT ALL because you have no HISTORY of rental income from that property at time of purchase. Two or three years from now you can count that rental income when doing a refinance, but at time of purchase…you have to qualify to buy it without considering the income you will derive from it.

Some day when you are wondering why EVERY escrow that had a preapproval does not close…you may want to come back and read this again.

You Should Not Be Buying a House If You Don’t Get This

“Good faith” negotiations and the Inspection Contingency

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One of my great challenges as I build my RE broker practice is learning how to develop positive working relationships with other brokers. I’ll admit, a broker is a different animal than a lawyer. I think the difference flows from the fact that brokers to a certain extent are on the “same team” while lawyers are not. Brokers need each other to keep their clients on track towards closing, or neither broker gets paid. Lawyers, in contrast, get paid whether the deal closes or not. Transactional attorneys are not adversarial per se — at least not the good ones — but they retain their own self interest independent of opposing counsel. I think an absence of this “mutual interest” can foster a degree of conflict between brokers.

Since I don’t have that mutual interest with the opposing broker, I’ve tried to come up with a “work around,” some style that is consistent with what is expected of a broker. In that vein, it has been my understanding and experience to date that everybody expects the parties to negotiate in “good faith.” That term is of course extremely slippery and not susceptible to an easy definition. Its sorta like porn — hard to describe, but you know it when you see it. As a general rule, I think “good faith” requires the parties to negotiate realistically with the understanding that each side is genuinely interested in consumating the transaction on terms that are fair to all. If one side fails to live up to this standard, then the other side will perceive that they are not negotiating in good faith.

To date I’ve operated under the assumption that if I can faciliate good faith negotiations, then I’ll keep to a minimum any conflict between me and the other broker. What does that require in the context of the inspection contingency? Once the inspection has been performed and the defects noted, is that an opportunity to essentially renegotiate the price? Or should the negotiations focus strictly on the specific defects, their respective importance (e.g. safety issue vs. cosmetic), and the costs to repair? Or is even that too aggressive?

Any insight would be greatly appreciated. I just love “RCG University”…

Give Warmth – Got Coat?

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The Give Warmth project starts today, December 16th, and coats can be dropped off through Wednesday December 22nd.

The “Give Warmth” project will help to insure that needy families will have proper attire for this particularly wet and harsh Seattle Area winter. Can you say La Nina!?!

1) The coats DO NOT have to be new! Used coats in good condition are welcome and appreciated.

2) Coats brought to the drop-off points will be given to and distributed by Friends of Youth in Redmond

3) Give Warmth – Coats for Christmas drop off points are at Carolann Joy Salon in Redmond AND at Cafe Ladro in its newest location in Bellevue

More details regarding drop off locations and times are in the video and the links.

What I like THE MOST about this particular Holiday Giving Event, is this one does not require YOU to spend ANY MONEY to help others this Christmas. New coats are great, but used ones in good shape are appreciated just as much as new ones!

Who doesn’t have a coat or two that wasn’t worn much and is not being used? A great low or NO cost idea for neighbors helping neighbors.

Thank you everyone, and Happy Holidays!