Navigating the Mortgage Maze: An Interactive, High-Tech Guide To Financing Your Home
207
Navigating the Mortgage Maze: An Interactive, High-Tech Guide To Financing Your Home
207eBook
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Overview
Navigating the Mortgage Maze is a 1996 guide to financing a home.
Savvy, streetwise advice to help with your calculations! Securing a mortgage to purchase a home can be one of life's most nerve-racking experiences. Navigating the Mortgage Maze is your ultimate road map through the twists and turns of the mortgage process. Bolstered by a wealth of entertaining and instructive stories and tips, veteran mortgage professional Andrew Turnauer guides you every step of the way in acquiring a mortgage, bringing his years of experience to bear on such issues as:
- assessing your financial situation and buying power
- selecting the proper loan configuration
- prequalifying for loans
- selecting a lender or mortgage broker
- improving your credit rating
- maximizing your collateral, capacity, and character
- minimizing the paperwork
Product Details
| ISBN-13: | 9781466881808 |
|---|---|
| Publisher: | Holt, Henry & Company, Inc. |
| Publication date: | 09/23/2014 |
| Sold by: | Macmillan |
| Format: | eBook |
| Pages: | 207 |
| File size: | 2 MB |
About the Author
Read an Excerpt
Navigating the Mortgage Maze
An Interactive, High-Tech Guide to Financing Your Home
By Andrew E. Turnauer Jr.
Henry Holt and Company
Copyright © 1996 Andrew E. Turnauer, Jr.All rights reserved.
ISBN: 978-1-4668-8180-8
CHAPTER 1
An Aerial View of the Mortgage Maze
There is a mortgage package for virtually everyone. An aerial view of the Mortgage Maze explains the process so that even if you're a square peg, you will find a square hole where you fit comfortably.
The Straight Road to Home Ownership
Imagine a world where everyone pays bills on time and saves ten percent of all wages. In that fantastic world, buying a home would be a simple five-step process.
1. Figure out how much you can afford (prequalifying).
2. Search for a desirable house in your price range.
3. Apply for a loan.
4. Negotiate with the lender and the property owner to get the best prices and terms.
5. Close the deal.
Even though the path to home-buying in this world of twisted and complex financial arrangements is a maze, it is shaped by that same five-step process. This book will get you from one step to the next efficiently. It will help you take the straightest path possible.
Does Everyone Go Through This?
John Turner wanted a mortgage. With a one million dollar trust fund and a steady job as Executive Director of a community service organization, he assumed "No problem." Then John discovered the Mortgage Maze — a twisted road from desire for a house to home ownership.
If you've ever been turned down for a mortgage or had difficulty getting one, you know what John faced. And you can join the crowd. The Mortgage Maze has abrupt turns, bumps, deadends, and tolls. Yet, for many people, ownership makes a house a home. So the trek has a grand purpose and great rewards.
Years ago, lenders used common sense as their main criterion for loan qualification; personal knowledge of wages and honorable qualities meant instant success. Conversely, personal knowledge of a terminal illness or family scandal could have meant instant failure. Now, the lender's decision is based on an objective system of rating and grading in which the "four C's" — credit, collateral, capacity, and character — have become the "three-and-a-half C's." In other words, your assets and liabilities affect your borrowing status far more than the qualitative assessment of your stability or character. And the numbers that were guidelines for a local banker on the loan application are now standards for acceptance or rejection.
Categorically, the loan process has grown less and less personal. There is computerized underwriting, credit scoring, and appraisal — all done in an instant. And the most frustrating part is that so much weight is given to a snapshot of your finances today. If you don't fulfill the lender's requirements at this moment, your application is spit out of the system. So, if the rules say that John Turner is a high-risk borrower because he has all his money in one bank, he may have a few more turns and obstacles to steer around before he gets out of the Mortgage Maze.
Why the shift in the mortgage process to such severe objectivity? In brief, some lenders were mortgage-rich. They had too many loans with the associated risks and interest income. Others were mortgage-poor. For example, a bank in California might have originated lots of mortgages, while one in the Midwest might have done only a handful for farm properties. It became evident that if a heavily committed bank could "sell" mortgages to another one, then the first bank would have more money for additional loans and the second would have a heftier portfolio of them, creating a higher return on assets (ROA). In general, selling a mortgage means the lender gets the amount of the loan, but transfers the risk and interest-earning potential to another lender.
Initially, the transfer involved a couple of bankers getting together with their cigars and a portfolio to set parameters. The buying banker might say, "I'll take all the purchase money loans made with a 20 percent or higher down payment." Then, before signing an agreement, the two bankers would drive past the properties to inspect the collateral.
In 1984, Farmer's Savings Bank used this kind of transaction as the basis for a business scheme that revolutionized the way home loans moved from the originating source, that is, from the primary market to the secondary market. Teams of Farmer's underwriters flew all over the country, inspecting property, underwriting, and buying loans. By 1985, this little bank based just outside of Sacramento, California had amassed huge mortgage portfolios, and had become the largest seller of loans to the Federal National Mortgage Association, called Fannie Mae.
Fannie Mae, which is federally chartered but shareholder-owned, has a mission to provide financial products and services that make it more affordable for Americans to own homes. It does this through the secondary mortgage market by buying mortgages from banks to replenish their cash for more mortgages — the same principle the mortgage-rich and mortgage-poor banks used to strengthen their positions. The fact that Fannie Mae, like a lot of banks, is shareholder-owned is critical to understanding what happened next.
The success of Farmer's Bank, short-lived as it was, fired up the secondary mortgage business so much that more banks wanted a piece of the action. Fannie Mae knew that in order for the secondary market to continue to be efficient and reliable, lending guidelines had to be more tightly and automatically enforced. The alternative meant putting its investors at risk.
In short, the current exacting mortgage process reflects the lending institution's need to protect its investors. In time and dollars, borrowers pay the cost of protecting the secondary mortgage market. What does this mean for you? First, your mortgage lender has no face and no personality when it comes to making judgments about your credit, collateral, and capacity. You don't have to worry about offending him or her, because your lender is an "it" in dealing with dollars and percentages. You won't be any more persuasive if you try to color the truth about your finances. Second, your mortgage lender has a face and personality when it comes to making judgments about your character. When the subjective aspects of your loan application come into play, you must confront either the opportunity or the frustration of dealing with someone whose opinion of your stability counts. Third, even though the mortgage process is, by nature, convoluted, it is possible to move straight through it.
Keep these thoughts in mind as we enter the Mortgage Maze and show you how to get from desire to home ownership.
How Do You Pick a House That Will Be A Home?
This book focuses on the financial aspects of buying a home, that is, Steps 1, 3, 4, and 5 which include prequalifying, applying for a loan, negotiating, and closing. Nevertheless, since there are numerous references to collateral throughout the text, it is important to address Step 2, selecting a property.
To launch the discussion, here is a bit of heresy:
In the Maze Master's opinion ...
A single-family, owner-occupied home is not an investment. It is your home — a roof over your head.
Don't begin the mortgage process with illusions that dramatic appreciation of your house will make up for any belt-tightening you did to get it. Select your property using logical criteria.
One most logical criterion is to buy a house that is more likely to appreciate than depreciate. This subject is a whole book in itself. However, if you buy the least expensive house in a desirable neighborhood and add value through improvements, you are more likely to see financial gains than if you buy the best house in the same neighborhood. The increase in value through sweat equity is the only guaranteed gain possible in a flat market.
The Neighborhood
"Where can I afford to live?" is the first question you must ask. After you have a general idea, do a needs assessment that points to appropriate neighborhoods for you. Then drive through selected areas at various times of the day and days of the week. Seek answers to questions about proximity to certain things, as well as features of the property itself. Is the neighborhood close to the people and activities you care about? Or is it too close to things you want to stay away from! Some aspects of the issues to address might include the following: friends, in-laws, work, school, shopping, gym, church, highway, trains, and planes.
In assessing the features of the neighborhood, it is helpful to have a real estate agent who knows the area. "For sale" signs in the area, as well as a few phone calls, should quickly reveal which realty company handles the bulk of transactions in your target neighborhood. Get a full-time agent who is currently working on sales in that area and find out something about the people, the pets, and the parties on Saturday night. Find out everything that's important to you through the agent and also from looking around. Among the features you might consider are parking for guests, traffic flow and noise, a neighborhood watch, street lighting, placement of fire hydrants or power lines, drainage patterns, sewer system, and water supply.
The Property
Next, do a needs assessment that ensures that you have sound reasons for liking a particular property. According to most real estate agents and mortgage brokers, somewhere between 5 and 15 percent of home buys are on impulse. In other words, there are a lot of hardworking people out there who become so enamored with a Jacuzzi in the master bathroom or a spectacular view that they sink their life's savings into the wrong house!
The needs assessment involves questions about your future, as well as your current schedule and lifestyle. If, within the next five years, you anticipate dramatic shifts in either, consider how the property will accommodate you.
• Will you have more children, or, will your children be going from a nearby daycare center to a school ten miles away?
• Is your health steady? Would stairs be a blessing or a trauma for you?
• Maybe your mother's health is failing, and you need to be prepared to bring her to your home. If she is in a wheelchair, will the house allow easy access and mobility from room to room?
• Will you ever work at home?
• Does the house allow for the level of privacy you want?
When you are forced to make a change in residence because of circumstances that are somewhat predictable — like a pregnancy or extended visits from a parent — you face deadlines and pressure that might have been avoided.
Who Should Be on Your Team?
Did you notice that I recommended getting a "full-time real estate agent" earlier in the chapter? Here is another recommendation: choose a full-time mortgage broker. The mortgage broker is a person who will represent you to the lender for the purchase of the home and the origination of the mortgage. In selecting a broker, who earns a fee for processing your loan documents and guiding you toward the best loan for your situation, you want to keep two statistics in mind: Eighty percent of the real estate transactions are handled by 20 percent of the professionals, and 20 percent of that elite group completes most of the transactions. The field is littered with part-timers who do not have the skills or knowledge to bring many deals to closure. You do not want them on your team. You do want the top 20 percent of the elite, the 20 percent who know the following:
• Property values in and characteristics of the neighborhoods they "work";
• The consistency of different lenders in their calculation of annual percentage rate (APR) and loan processing;
• How to skillfully match the type of mortgage to the buyer;
• Industry trends; and
• Reliable title and escrow companies, appraisers, and inspectors.
When you're ready to do business, find these people through your real estate agent or experienced home buyers and ask them tough questions about their fees. Case studies and tips throughout the book will point to other issues that you will want to address with prospective agents, brokers and lenders, as well as guidelines on evaluating their responses. The one quality all members of your team must have, no matter what their answers, is that of good listening.
Understand everything fully up front. You have a right to know every detail, so ask for explanations. If you feel like the fog is rolling in because your agent or broker responds in mortgage jargon, say, "Put it in plain talk, please," followed by, "Put it in plain talk, or else" if that doesn't get the desired result.
You are about to make the biggest, or one of the biggest, purchases of your life. The amount you spend should be comfortable for you, the place you select should meet all your major needs, and the people with whom you do business should pay attention to what you say. These principles are fundamental to getting through the Mortgage Maze with ease.
CHAPTER 2A Strong Start: Look Good on Paper
A strong start through the Mortgage Maze means looking good on paper to the lender. Certain critical financial information will affect your ability to get a loan. You will discover what data goes in, what stays out, and how to substantiate the facts and figures that lenders use to determine if you qualify for a loan. This chapter guides you through the QualifyR software exercises that help you gain real control over the qualifying process. QualifyR makes it easy to run a self-evaluation using a wide range of variables that fit your personal situation. You will know what you can afford, even if lenders say otherwise.
Why Self-Qualify?
The actions taken by Fannie Mae and its secondary marketing businesses to protect their investors have since sent lenders and borrowers into shock. As of 1995, Fannie Mae's brother, Freddie Mac (Federal Home Loan Mortgage Corporation) disapproved nearly half of all loans already underwritten when it subjected them to the scrutiny of a computerized loan-origination system. That means that either or all of three underwriting sources — a lender, a broker and a mortgage insurance underwriter — missed red flags in half the loan packages they approved. The rejected borrowers who still wanted a mortgage, had to struggle through the loan process again to accommodate Freddie Mac's computers in Washington, D.C.
You can do a lot to avert this detour. A self-qualification, or a self-assessment of your income and debt, will help you collect, examine and weigh all the financial facts that determine your borrowing status.
Prequalification or Pre-Disqualification?
Many people think they can accomplish self-qualification by going through a prequalification process with a lender. Consider the loan professional who takes a prospective borrower through prequalification. They are trained and paid to think systematically. Paradoxically, that same systematic approach often misses critical information and gives you a distorted view of your borrowing power.
Filling out blocks and blanks sequentially is a systematic effort. Your ability to buy a home, however, is the information in those blocks and blanks combined together. If you self-qualify prior to exposing yourself to the lender's forms, you can construct an accurate picture of yourself as a borrower. You'll know what the loan application should say about you, so you'll be keenly aware of how the data in the different blocks and blanks reinforce or detract from your position. Later, if a lender disagrees with your self-assessment, you have a right to suspect that the lender or the lender's computer is wrong.
Real estate and loan professionals are also trained to think realistically. Part of their job is keep your eyes trained on the obstacles in the Mortgage Maze. If you're aiming for a dream house, the first leg of your trip should be one that puts your eyes on the vista, not the obstacles. You want a high-ground view of all the possibilities. You don't want someone to put blinders on you, then watch you stumble down a rocky road.
(Continues...)
Excerpted from Navigating the Mortgage Maze by Andrew E. Turnauer Jr.. Copyright © 1996 Andrew E. Turnauer, Jr.. Excerpted by permission of Henry Holt and Company.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.
Table of Contents
Contents
Title Page,Copyright Notice,
Dedication,
Acknowledgments,
Introduction,
Chapter 1 An Aerial View of the Mortgage Maze,
Chapter 2 A Strong Start: Look Good on Paper,
Chapter 3 A Smooth Road: Keep the Records Clean,
Chapter 4 Gaining Speed: Create More Financial Leverage,
Chapter 5 The First Big Intersection: Select A Mortgage Type,
Chapter 6 Pit Stop: Packaging Your Parts for the Lender,
Chapter 7 A Bigger Intersection: Select a Lender,
Chapter 8 A Detour: Turn Rejection into an Opportunity,
Chapter 9 Right Around the Corner: Manage the Closing,
Chapter 10 The Virtual Mortgage Maze: A Digital Drive-Through,
The Maze Master's Glossary of Mortgage Terms,
Appendices,
Index,
Copyright,