Category Archives: Mortgages

Garbage can charges morph into loan origination fee

I’ve had several buy closings in the last few weeks and it’s surprising  to see how much closing costs have increased since the new Good Faith Estimate (GFE) rules began in January 2010.

It used to be that all lenders charged several “garbage can charges” (my cracker barrel, semi-derogatory  term for excessive closing costs) on the RESPA.

In the old days, common charges were a tax service fee of $70, flood plain check fee of $29 and some sort of document preparation fee of $200 or so.  Standard, non-gouging garbage can charges usually added up to about $300.  There were exceptions to this and many times we would see ridiculous add-ons like “table funding fee” and “loan administration fee” from $300 to $1200.00.

When the new GFE law started, all the garbage can charges were bundled into one “Loan Origination Charge” on line 803 of the RESPA closing statement.  The charges are no longer broken down separately, but  all appear as one lump sum. Buyers have no control over title charges and the other costs on the RESPA. Line 803 is really the only item that a buyer can control.  But,  Line 803 costs have risen over the last year, mostly because buyers don’t questions the cost. Here is a summary of what I have seen over my last few closings:

1. Buy of Rolling Meadows foreclosure                  Origination charge  $1749.00

2. By owner buy of Palatine condo                           Origination charge $1295.00

3. Buy of Northbrook home                                        Orgination charge $1580.00

4. Buy of Carpentersville foreclosure                      Origination charge $3131.00

5. Buy of Palatine home                                                 Origination charge $650.00

If I were buying a home, I don’t think I would pay more than about $600 for origination fees. I have no idea why origination charges have become so inflated.  The average of the above five closings is  over $1600.00 and I think that is way too high.  There is no reason or purpose for these charges other than extra income for the lender. (Note: If your lender is a mortgage broker, there is a complex interplay of the “yield spread” paid to a mortgage broker from the underlying lender into the line 803 costs, but in the risk of boring you to tears, I’m not going to torture you with an explanation of that here. But, it’s not the yield spread that is making these costs higher.)

Closing number 4 above is a case of  classic  overcharging with a whopping  $3131.00 origination fee. I always suggest that clients send me the GFE to review before they go ahead with the loan.  My clients did not send it to me in that case. The first time I saw it was at the closing. The loan officer told them it was his “standard charge on an FHA mortgage.”  Being trusting souls, they agreed to the overcharge and the lender made an extra $2k.  FHA places  no limit on how much can be charged for an origination charge. It is strictly up to the lender to charge what they want on an FHA and it is negotiable.

So if you are refinancing or buying, beware of the origination charge and try not to pay more than $600.00.


Getting a mortgage after bk, short sale or foreclosure

It is possible to get a new mortgage after a short sale, bankruptcy or foreclosure, but it takes awhile.

The chart above tells how long it takes, after each of these events occurs, to get a new mortgage.

The first column labeled FNMA is a standard Fannie Mae, conventional mortgage, and this generally requires a 10% downpayment. The second column labeled FNMA 20% is a mortgage with 20% down. The third column is an FHA mortgage, which requires only 3.5% down, and is the current favorite these days with first-time buyers, because it requires credit of about 610 FICO and is otherwise easier to qualify for compared to conventional financing.

Most clients get FHA mortgages after a bankruptcy, which is only a 2 year wait.

The waiting periods are one thing to consider when deciding how to handle a underwater real estate and whether a strategic default is worth it or not.

FHA mortgages get more expensive

On October 4, FHA mortgages get a little less expensive upfront, but a lot more expensive in the long-run.

FHA mortgages are the only game in town for first-time buyers. Most first-time buyers obtain FHA mortgages.

Until now the FHA premium (called MIP) paid by the buyer at closing was 2.25% of the loan amount. From here forward, it will be reduced to 1%. That’s good and will reduce initial closing costs.

With an FHA mortgage, in addition to the upfront MIP payment, the buyer also pays a monthly MIP premium that’s included in the monthly payment. This payment will increase.

It used to be .55% of the loan amount (this is the yearly amount, divide by 12 for the monthly payment).  Now it will be .9%, almost twice as much.

Buyers should not automatically assume an FHA is best. This increased FHA expense means that buyers should carefully examine FHA vs. conventional mortgages because a 5% down conventional mortgage will be much cheaper than an FHA.

Check your Cook Co. 09 tax exemptions online

If you bought a home in 2009, refinanced your mortgage in 2009 or recorded a deed into your living trust in 2009 please be sure to check to make sure that the county didn’t take away your homeowner’s exemption.  This video,  Tax Exemptions , explains that the county was yanking the homeowner’s exemptions of homeowners who refinanced. If that is the case, you must apply for a certificate of error to replace the exemption for 2009.

The Cook County Assessor’s website will now tell you if your 2009 exemptions (senior, senior freeze, homeowner’s and long-term occupant) are in place. Just click this link and enter the PIN for your property.

Generally,  homeowner’s do not need to re-apply for the homeowner’s exemption every year, unless the property was sold the prior year (or one of the other activities above happened). The senior freeze must be applied for every year.

On the subject of real estate taxes, there is a seminar at 7:30 pm on March 31 at the Village of Palatine Council Chambers on “How to Appeal your Real Estate Taxes Before the Board of Review” that may be worthwhile if you feel (like everyone) that you are over taxed.

New HUD-1 form released

Anyone that participates in real estate closings is dreading the new HUD-1 form that is required beginning 1/1/10.

The new HUD-1 form (this is the closing statement that shows all of the sellers and buyers costs and their “bottom lines”) includes a third page that references the good faith estimate given to the buyer by the lender.  It directly compares the figures from the good faith estimate with the final, actual figure.

It’s a step in the right direction, but it strikes me as complete overkill.  Predatory, overcharging lenders were a problem 4 years ago, not now.


Drama queen: The mortgage contingency clause

All real estate contracts, except for cash deals, have a mortgage contingency. The mortgage contingency is the drama queen of the real estate contract. It brings out the worst in both seller and buyer and it confuses and frustrates everyone.

A mortgage contingency is a condition in the contract on the buyer  being approved for financing by a certain time at a certain interest rate. The contract usually says: “This contract is contingent on the Buyer getting an 80% mortgage for 6 per cent by December 31.” If the buyer is not approved, by December 31, the buyer’s attorney sends a request to extend the mortgage contingency. If the buyer does not obtain financing or if the seller does not grant the extension, the buyer can declare the contract to be dead and all earnest money will be refunded to the Buyer.

Most real estate deals have about 3 mortgage extension requests. Some out-of-control contracts have up to 20 extension requests. I call these deals, “draggers.”  A dragger is not fun for anyone. The worst situation in the world for seller and buyer is to have a real estate deal evolve into a dragger with 10 mortgage contingency extensions, only to have the buyer denied for financing at the last minute. Not fun.

Mortgage Contingency from Buyer’s perspective: All buyers think that they are approved for financing about 5 seconds after they sign the real estate contract, but the truth is that it takes about 30 days for a full, unconditional approval. Mortgage brokers often tell clients “You’re approved,” when they pre-qualify the buyer and this starts the confusion. Of course, what the mortgage broker means is that Mr. Buyer appears to have the credit score and income that he might qualify for financing.

A full mortgage approval requires: An appraisal of the property, verification of all of the buyer’s accounts, a credit check, submission of the loan to underwriting and the clearing of all conditions. When a loan comes out of underwriting, there are always many conditions on the loan approval. Typically, mortgage contingency extensions are requested until all of the conditions are cleared. The holy grail of mortgage approval is the “clear to close.”  Extensions are no longer needed once the loan is clear to close, which means that all conditions have been cleared.

Buyers don’t like mortgage contingency extensions because a mortgage contingency extension request implies that:  a. The closing will be delayed. b. The extension request casts an aura that the buyer is some kind of slacker who can’t get a mortgage.

However, the buyer really won’t like it when he or she is denied financing and then can’t get their earnest money back because the mortgage contingency expired.

From Seller’s perspective: The seller signs a contract and then gets roughed up by the buyer on the inspection. Mr. Seller bites the bullet and gives a $2k credit on the inspection, but then has to put up with 4 mortgage contingency extension requests from the buyer. With each extension request, the seller gets more frustrated because he feels he is stuck with an inferior buyer that will not qualify for financing.

Sellers often believe that the buyer’s earnest money is the sellers  (to keep) if the closing does not happen on time. Not really. The buyer’s earnest money will be returned, not given to the seller, if the contract is terminated while the mortgage contingency is still in force.

The best way to handle a mortgage contingency is to give at least 30 days to obtain financing. Too many contracts allow for only 10 to 14 days for the buyer to get financing and that means that there will be several mortgage extension requests. Other than allowing 30 days initially for the buyer’s financing, the parties just have to sit tight and realize that most closings will occur, some will close late, and there will always be two or three mortgage contingency extensions making both parties upset.

Condo mortgages tougher than ever


It’s harder than ever to get a mortgage to buy a condo.

Last week,  a client had trouble obtaining a mortgage because the condo association reserves were less than 10% of the operating budget.  The condo association had just paid for a large repair to the roof and it tapped the reserves. The association was not aware that by doing so they came close to killing the contract for the buyer (the hard-working mortgage broker was able to get an exception to this and it closed).

Earlier this year, Fannie Mae made added the following requirements to condo mortgages:

  1. No more than 15% of the condo owners can be delinquent in paying dues.
  2. No more than 10% of units can be owned by a single entity.
  3. If you put down less than 25%, the interest rate on the loan will be increased  by 3/4%.
  4. Buyers have to get a “contents” insurance policy (used to be optional).
  5. 10% of the budget must be in the reserve fund.

On top of that,  condo appraisals  are regularly coming in short of the purchase price.  Appraisers are using comparable sales from the last three months, rather than from the last year.  Any comparable sale more than three months old is discounted heavily and that drags down the appraised value.

Buyers should be aware of the Fannie Mae rules and should ask for the condo budget before they make an offer.