It Pays to Shop Around for a Mortgage Lender

QUESTION: My wife and I are not sure if we can afford to buy a home. We saw a newspaper ad from a local savings and loan inviting prospective home buyers to attend a seminar. At the end of the program, which included speakers from the S&L;, a local realtor, an insurance agent and a professional property inspector, the attendees were invited to apply for a free mortgage loan evaluation and a reduction of loan fees for borrowers who qualified.

About a week after we mailed in our loan application, a loan officer called to tell us that we could not qualify for a mortgage on a home in the price range we had indicated because the loan payments would take 32% of our income.

My wife was very upset because she wants to buy a home badly. We have excellent credit, our only debt is our auto loan, we pay our credit cards in full every month and we have saved almost $25,000 for a down payment. Is there any way you see we can buy a home?

ANSWER: Yes. Thankfully, all mortgage lenders are not the same. It is too bad that S&L; went to the expense of holding its first-time home buyers program and then rejected well-qualified borrowers like you.

Many mortgage lenders would love to loan you money to buy a home. However, the S&L; where you applied apparently sells most of its loans in the secondary mortgage market to tough loan buyers such as Fannie Mae and Freddie Mac.

Unfortunately, if you don’t meet Fannie’s or Freddie’s strict loan standards you don’t get the mortgage because the originating lender needs to sell its loans to raise cash to make more loans.

For example, Fannie Mae and Freddie Mac want home loans where the payments take up to only 28% of the borrower’s gross income.

But many other mortgage lenders are more flexible. Some lenders will approve your loan even if your payments take up to 35%, 40% and even 50% of your income if you have good credit and good income. These are “portfolio lenders.” They keep their mortgages instead of selling them, so they can be more flexible than lenders who must sell their loans.

Shop around. Talk with other S&Ls;, banks and mortgage brokers. Explain your situation. You will find many lenders eager to approve your home loan.

The Customary Sales Commission for Land

Q: I recently inherited about 40 acres of rural land. As I have no use for it, I want to sell. I contacted a realtor in a nearby town who said he would list the land for sale, but he wants a 10% sales commission. Don’t you find this is outrageous?

A: No. Ten percent has been the customary sales commission for vacant land for many years. It seems to be a quite reasonable rate considering the work and time often required to sell vacant land. I wouldn’t be surprised if the realtor insists on a six-month listing because he knows land sales can take considerable time and sales effort.

When Extra Mortgage Payment Is Smart Idea

Q: Over a year ago you said home mortgage borrowers should obtain an amortization schedule of their loan and, whenever possible, pay the next month’s principal payment to “jump ahead” on the schedule to save the interest and shorten the mortgage life.

Although my extra principal payment, in addition to my regular monthly mortgage payment, has been increasing gradually each month, I have been following your suggestion and I have cut about one year off my mortgage’s term so far. But it occurred to me that since my loan’s interest rate is 9.25%, I could probably do better putting my extra principal payment into a money market account that pays around 10%. What do you think?

A: On the surface it looks like making extra mortgage payments is not wise because you have a higher yield alternative available, the 10% you can earn on your money is before income taxes. But, after paying a 28% tax, your net yield is only about 7%.

I vote for continuing to make an extra principal payment each month. If you keep up this “jump ahead” payment program, you can cut your 30-year mortgage down to 15 years and save thousands of dollars of interest.

Extra Advantage of Small Down Payment

Q: I have been following with great interest the debate you are having with some old-fashioned readers who think a big down payment on a home is wise. But, I agree with you that a small down payment is smarter.

However, not for the reason you give, namely the 1987 Tax Act’s allowance of home mortgage interest for acquisition mortgages. As a real estate agent I am seeing many homes come up for sale with assumable adjustable-rate mortgages. The bigger the mortgage, the easier it is to sell the house. Why don’t you emphasize this additional reason for making a small down payment and obtaining a big mortgage?

A: Shame on me for failing to point out that homes with large assumable mortgages are easiest to sell for top dollar. Because mortgage money has tightened up recently, assumable mortgages are again becoming important. Thanks for sharing this extra advantage of small down payments.

Title Insurance Vital With Family Deals

Q: Two years ago my dad sold his house to my wife and me. We took over his VA mortgage. About four months ago his ex-wife (my stepmother) reappeared after a long absence to say she still owns half of our house. Our deed was signed by only my dad (who died about a year ago), and I presumed he had settled with his ex-wife when they divorced about four years ago. What should I do?

A: If you obtained an owner’s title insurance policy then you have nothing to worry about because the title insurer must settle with your stepmother if she has a legitimate title claim.

However, as often happens in family realty transfers, I suspect you made the major mistake of not obtaining an owner’s title policy. If that is your situation, please consult a real estate attorney, but be prepared to pay your stepmother for her quitclaim deed to the house.

Are VA and FHA Loans a Good Deal?

Q: You rarely mention VA and FHA mortgages. My husband and I want to buy a home, but we need help. He is a qualified veteran who earns a good income. I have a part-time job as a grocery check-out clerk. What do you think of VA and FHA mortgages?

A: I rarely receive questions about FHA and VA mortgages, so I presume everyone knows all about them. No-down payment VA mortgages are excellent for qualified veterans. But, the drawback is that $144,000 is the maximum for most VA mortgages. In many communities this is far too low.

FHA mortgages require down payments of less than 5%, but the maximum FHA loan in high-cost areas is only $101,250. While this is sufficient for many towns, it is not enough for most major cities.

If a VA or FHA mortgage meets your home finance needs, I highly recommend these fixed-rate mortgages. But, these loans appeal to fewer borrowers as home prices rise.

Why Retirees Should Buy Rather Than Rent

Q: My wife and I just sold our big old home for an obscenely large profit. We will use that “over 55 rule” $125,000 tax exemption to shelter most of our profit from tax. For the summer we will live in our northern Minnesota vacation cabin. But, when winter comes we plan to head for either Florida or Arizona. However, we are undecided if we should rent or buy a small house or perhaps a condo. What do you recommend for two “snow birds” in their 70s?

A: Don’t be in a hurry to decide. During the summer, talk to friends and get their recommendations about warm weather retirement havens. Then spend next fall and winter checking them out.

For the first year, I recommend renting to try out your new location. A lease with option to buy would be ideal. Because you have many years left, I suggest you aim toward buying because then you lock in your basic housing costs and are not subject to escalating rents.

Obligations of Rental Agents to Owners

Q: My husband and I are stationed with the Army in Germany. But, we still own our U.S. home where we expect to return someday. In the meantime, a realtor manages it. She charges us 10% of the gross rent, which we think is very high.

The last tenant she rented to turned out to be a deadbeat who, we later learned, was evicted from her previous rental, was on welfare, didn’t pay the rent and badly damaged the house before our agent evicted her. We lost four months’ rent and had to pay more than $4,000 to repair the house, so it can be rented. Do you think the realtor is liable to us for these costs?

A: If the rental agent did not carefully check the tenant’s background, such as verifying rental experience with the previous landlords, checking income and qualifying the tenant, then she may be liable to you for damages.

Managing property is not an easy job and even experienced landlords, including myself, sometimes make mistakes by renting to bad tenants. If you can’t work out a settlement with the rental agent, you may want to consult a real estate attorney.

Why Adjustable Rates Are on the Increase

Q: I am a puzzled real estate agent. In the last few weeks several real estate mortgage lenders raised their adjustable-rate loan rates to more than 10%. This doesn’t make sense to me or my associates who also are perplexed. When I talked to the loan agents they claimed they didn’t know why the ARM rates rose so fast. What is really happening?

A: The major adjustable-rate mortgage lenders are savings and loan associations. In recent weeks these lenders have suffered huge deposit withdrawals because many depositors are worried about the safety of their money, since the FSLIC (Federal Savings and Loan Insurance Corp.) is insolvent. To meet very heavy withdrawals, and to maintain liquidity, many S&Ls; have cut back on mortgage lending by raising mortgage interest rates to make them unattractive to borrowers.

However, a new money source has recently entered the home loan lending game. They are called banks. All of a sudden, many banks are eager to make home loans because they see the high yields not available elsewhere and the outstanding security to protect the loans.

This shift in home mortgage lending from S&Ls; to banks will be disruptive, but in the long run, I think it is a good trend to have more lenders in the marketplace.

Can Previous Owner Restrict Property Sale?

Q: Can a home builder restrict the future sale of a home? My wife and I bought a new home. The builder made us sign a contract with him that we promise not to sell the home for two years, but if we do, then 50% of the profit goes to the builder. Is this legally enforceable?

A: I doubt it. Such an arrangement appears to be an illegal restraint.

Home builders often discourage speculation in new housing developments. The reason is they don’t want speculators who don’t plan to occupy the homes to buy them while under construction and then try to profitably resell when the houses are completed. Such behavior can upset the prices of homes the builder has left to sell. Please consult a real estate attorney for details.

Six-Month Home Sale Listing Is Too Long

Q: We are getting ready to sell our home. So far, we have interviewed two real estate agents. One wanted a 90-day listing, but the other, who sells the most homes in our neighborhood, insists on a six-month listing. Do you think we should sign such a long listing?

A: No, no, no. A six-month listing is far too long. I worry about any real estate agent who can’t sell a home within 90 days. However, if a 90-day listing should expire with your home unsold, but the agent is doing a good job, you can renew the listing for an additional 30 days. But, if the agent is doing a poor job, then you are not stuck with a lazy agent for six months.

Pretend Family Loan Is Among Strangers

Q: My son wants to borrow $25,000 from me to pay for a new swimming pool at his home. He said he would have to pay the bank 14% interest, but I will loan to him at 10%, which is what I could earn at my bank. However, I am worried about his wife who, I think, might be considering a divorce. What security should I get for repayment of my loan as I need the income for my retirement?

A: Pretend your loan to your son and his wife is a business transaction. That means you should receive a note and mortgage or deed of trust. Then if your son and his wife should get a divorce, your second mortgage on their house will protect you. Ask a real estate attorney to explain further.

Don’t Let Buyer Move In Before Sale Closes

Q: We sold our home to a nice young couple. They are awaiting final approval on their VA mortgage. The real estate broker and the mortgage agent assure us it is just a matter of time until their VA loan is approved. In the meantime, they want to move into our vacant house, so they can save motel charges. What precautions should we take?

A: I rarely use the word never, but this is one situation where I must advise never let a home buyer move into the house before the sale closes. Too many things can go wrong.

If the VA mortgage is not approved you could have a nightmare getting the buyers out of your house. Also, they might cause irreparable damage. I have heard so many horror stories about what went wrong when buyers moved in before the home sale closing which never happened.

Keep an Eye Out for ‘Equity Skimmers’

Q: I think you should warn condo renters about “equity skimmers.” I rent a condo where the owner has been accepting my rent, but he hasn’t been paying the mortgage company, which is now foreclosing. As a result, I will have to move out because the owner hasn’t been paying the monthly condo fees either. Is there anything I can do, other than move, to recover my expenses?

A: Thank you for sharing your situation, which can happen to renters of any type of property, but it happens mostly with condos. I’ll bet your landlord bought the condo for little or nothing down by offering to take over the previous owner’s mortgage. Then he rented the condo to you for whatever he could get and never made any mortgage payments.

Interestingly, he may have no legal liability to the mortgage lender if he never assumed the mortgage obligation. The previous owner may be liable for any deficiency loss suffered by the lender.

If you want to buy the condo, contact the foreclosing mortgage lender to see if you can work out a nothing-down deal. Otherwise, it may be wise to move out, so you don’t get caught in the middle between the condo owner’s association and the mortgage lender.