Recently I closed a transaction in which the lender was a total flake.  (The buyer did not find this lender by referral of his Realtor, but instead was induced by the lure of a rebate.) The sale closed almost 2 weeks late because the flaky lender dropped the ball, repeatedly. Needless to say, this caused aggravation but also extra costs.

But there was a saving grace: she and her office were both local.  The buyer’s agent was able to drive over to that flaky lender’s office, and when the lender herself wasn’t in, the buyer’s agent was able to speak with the manager – face to face. And that helped a lot.

Never underestimate the importance of getting a lender who is both local and highly referred – preferably by your agent.  Why? Because you might only have one transaction but that agent or Realtor might be the source of many. The lender will literally try harder since a bad experience will cause referrals to stop but a good one will cause them to flow.

I have found this true even at the handyman level. If I call a handyman once a year, he may not be super interested in doing an outstanding job for me.  But if he thinks I’ll have a lot of jobs for him, that’s another story.

About half the time, my buyers come to the table with their own lenders, people I don’t know at all. Sometimes it’s OK and sometimes it’s a disaster.  But when they work with the lenders I suggest, there’s seldom a big problem, if even a small one. If you are working with a good Realtor, there’s a lot to be said for asking him or her for a list of lenders who are trusted and choosing one of them.  In my experience, the odds are better for a favorable outcome if you do.

Buying a Silicon Valley home? Understand that unless you are buying “all cash“, you will need to show your real estate purchase agreement to your lender, and your lender may want to see inspections, reports or disclosures based on what you’ve written in that paperwork.  And then the bank, credit union or lending institution may ask for repairs prior to close of escrow, even in an “As Is” sale.

This happened to my buyers a few months back.  They were buying  their first home using an FHA backed loan.  In the offer, we indicated that we would be having a few inspections (home, pest, roof, pool). Because financing with FHA backed loans is a tougher road, the lender did, indeed, require certain work to be done prior to close of escrow.  It was supposed to be an As Is sale so the buyers ended up paying for work to be done in order to close (and the seller allowed us to reduce the price somewhat).  Luckily they were all improvements that my clients intended to make anyway – but it was inconvenient and stressful to have to rush to have the work done, and of course this did cause delays.  (We did discuss not having the inspections listed in the offer, but my clients very much wanted them in it.)

For this issue, does it matter which contract you use, PRDS or CAR?

If you are planning to purchase a Los Gatos, Saratoga or San Jose area home, most likely you and your real estate agent will use either the newest PRDS contract (Peninsula Regional Data Service, employed from Los Gatos to San Francisco) or the CAR contract (California Association of Realtors form which is used throughout the state of CA).

There are many differences  between the CAR and PRDS contracts, but both of them have a place for listing at least some of the disclosures which are to be expected and whether or not the buyer intends to order a termite or pest inspection.  The CAR form also has a place for listing any other inspections the buyer intends to have done.  (Below find part of the section which lists inspections – too wide to fully reproduce here, unfortunately.)

One of the nice things about the CAR contract is that it is very clear as to who’s ordering and paying for what.  Nowhere in the paperwork, though, does it state that unless an inspection or disclosure is named, it cannot be ordered later.  So what is becoming common practice “in the field” is to simply not mention these disclosures or inspections in the offer.

Is that lender fraud? Might be – I will leave that to our attorneys to say for sure. Most of the mortgage people I talk with suggest that we simply leave things out to keep the situation uncomplicated. (I wonder if others in the bank feel the same way?)

The difficulty comes when buyers want to buy and sellers want to sell but the house, or pool, or some other element isn’t 100% perfect… If the bank sees the inspections reports and disclosures, it will of course show that the 50 year old house isn’t “like new”.  The bank doesn’t like that.  In more than a few cases, lenders essentially don’t permit an As Is sale.  In these cases, the banks, credit unions or other lending institutions start rewriting the obligations on buyers and sellers.  Maybe the buyer wants to do the repair differently after close of escrow – perhaps with alternate materials, but now is forced into paying for whatever is fast just so that escrow can close.

It’s not a simple problem, it’s complex.  Just as every house or condo is unique, so too are the issues that come with them.  If it were a simple matter that every house had to have a pest clearance, we could easily manage that.  But in fact it’s not so straightforward.  In response, agents and home buyers are leaving more and more blanks in the contract.  Personally, I’m not comfortable with it.  I present the situation to my clients, they talk with their banker or mortgage broker, and they decide what to do.  I think we could have a better solution, though. Don’t you?

News flash – in case you didn’t know, the current “jumbo conforming” loan rate in Santa Clara County of $729,750 is about to be repositioned (to speak euphemistically) to $625,500. This is all over October 1st, but many banks will stop lending at these rates long before that, perhaps prior to September 1st.

What does that mean to YOU, a San Jose or Silicon Valley home buyer, seller, investor or owner?

For many properties, there will be no change.  But if your property’s value is such that a 20% down purchase (a normal situation) has the loan between $625,500 and $729,750,there’s about to be a painful change.  How painful? About one half of one percent.

Right now a $700,000 loan is a jumbo conforming (good rate: 4.5%).  Under the new limits, it’s a jumbo (good rate: 5%).  The hike means, concretely, $210 per month for that $700,000 loan amount, or about $75,000 over the life of the loan.  That’s some serious dough.

This change probably WON’T impact homes priced lower than $625,000 or greater than $912,187.  But we may be seeing some pressure and price compression in the zone between.  It’s also likely that there will be some pressure to sell but also to buy before this change happens.

When money becomes more expensive, prices usually fall.  But this is an odd situation since not all price points are impacted.  For buyers with large down payments or who purchase their house “all cash”, it’s no difference to them – but it might be a huge difference to sellers.

My best guess: investors will make good use of this opportunity at a vulnerable point in the market.

If you are in the market to buy a Silicon Valley home, you’ve probably noticed that about 1/3 of all real estate listings are distressed sales. Of those, most are short sales but some are REOs or “Real Estate Owned” by a bank or lending institution.  Most Silicon Valley REO listings, and even a few that aren’t bank owned, have comments from the listing agent insisting that the buyer be pre-approved from a direct lender. Some will go so far as to insist that it be Wells, Chase, B of A or some other institution. Or even that the buyer be pre-approved via that listing agent’s hand-picked lender.

Why all the fuss about direct lenders? Isn’t a pre-approval from a mortgage broker just as good? Isn’t that asking a bit much to tell buyers who gets to see their financial info?

Pre-Approval versus Pre-Qualification

Typically, in my experience, when a bank or credit union (both are direct lenders) issue a pre-approval letter, it’s only after the buyer has actually submitted everything (pay stubs, taxes, bank account names etc.) and the info has been verified by the bank, submitted to underwriting and OK’d for a window of maybe 90 days to complete the sale. When they say a consumer is pre-approved, they mean it (the vast majority of the time).  In other words, direct lenders usually don’t write fake pre-approval letters.

Mortgage brokers sometimes do.  (Not the better ones, of course.) What they have in hand may really be enough for only a pre-qualification (or “pre-qual”), not an actual pre-approval.  But sometimes mortgage brokers will issue a pre-approval letter.  We Realtors know that this is not an uncommon problem, and many of us don’t trust a letter from such a lender if the loan agent is an unknown person to us for that reason. With mortgage brokers there’s a crisis of credibility and that’s Problem # 1. (This is not always the case, of course. Many mortgage brokers are very careful and thorough so I am not saying that they are all terrible!)

The next issue to point out is that with mortgage brokers, the process will often be slower because another party is inserted into the mix.  Your loan agent might be great, but she or he still has to submit the paperwork to an institution that actually has the money to lend.  There’s a little less control because the folks with the money are one step further removed.  It’s an indirect lending situation, and that’s Problem #2.

It’s only fair to add something here, though, and that’s that there are plusses to a mortgage broker that make them more attractive to buyers and for these reasons, I usually do suggest that my clients work with a mortgage broker whom I trust.  Here are the big strengths: First, they can shop not just one lender, but multiple lenders.  If your loan gets rejected by one, there are other sources for the loan at hand.  Secondly, because mortgage brokers have multiple lenders available, they can shop for better pricing more effectively than mortgage bankers usually can.  Disclaimer: you still have to watch the fees, so check the APR. For cost-conscious buyers, this may be the best way to go financially.

Another alternative that many consumers don’t seem to be aware of is the loan agent or lender who is both a mortgage broker and a mortgage banker.  How does this work?  Your lender takes all your info and completes the package.  At the end of the transaction your lender’s company funds the loan (they are the bank, so a direct lender for the transaction).  But it’s set up so that your loan will be sold after close of escrow and they’ll have money to do it over again with another consumer.  So your ultimate lender may be one of the big guys or someone you never heard of.  The plus to home buyers is that there’s the benefit of the direct lender and the shopping ability of a mortgage broker.  These folks are very rigorous and precise with their paperwork because they do not want to keep your loan forever.

If you are a Silicon Valley home buyer, or want to be one, it is not a bad idea to keep your eye out for a few lenders to whom you might want to turn if the situation requires it.  Let’s say you have a great lender at Wells Fargo but the listing agent requires a pre-approval from Chase.  Don’t hurriedly walk into a local branch and just grab the first warm body you find to do your loan pre-approval!  That is no way to pick someone who will be so key to your success.  Slow down and hire more carefully.   Get recommendations.  Most real estate agents know lots of loan agents and we can share with you the names of good people at a variety of banks (there’s no kickback or referral fee, fyi). We ALSO know the names of many great & trustworthy mortgage brokers, too.  Just ask!

Finally, I want to add that I see a growing trend of listing agents even in regular sales wanting more control and access to buyers’ financial info.  Counter offers are coming back with demands that my buyers be pre-approved by the listing agent’s lender (often a direct lender, but not always). Recently I got a counter like that which added a “kick out clause” if the sellers didn’t like what the listing agent’s lender said about the buyers!  Our lending climate has been very difficult the last few years and too many real estate sales have been derailed by bad loan situations.

Do you have to show the other Realtor your credit report, taxes etc.?  No, in most cases you don’t.  Some of them are very pushy, though, and if you really want the house, townhouse or condo you may have to meet with their lender or give them more information to prove that you are financially capable of completing the transaction.  Often you can or perhaps should give them “proof of funds”, meaning proof that you have the downpayment or the full payment if it’s an all-cash offer (do black out your home address and account number, though) and they will feel more comfortable that you are truly qualified. 

A pre-approval from a direct lender may also increase your odds of being taken seriously.  That doesn’t mean you have to use the direct lender, only that you’ve really been vetted.  If you want to purchase property in the San Jose area, it’s a good idea to be ready to engage a direct lender at a major bank should the listing agent require it for offer acceptance.

If you’re working with a mortgage broker, add another step to strengthen your case: have him or her phone your agent and the listing agent.  This will very likely smooth over any potential unease that exists if your lender and the listing agent don’t already know each other.  A conversation can do a lot to help.

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Note to readers/commenters: please limit your comments so that they are not so long that they should be a blog post themselves.  Blog protocol is to keep comments brief and concise.  I allowed a couple of readers to make long comments (more than 200 or 400 words) but reserve the right to edit longer comments for brevity or to not publish them at all, particularly if it’s a second (or third) comment by the same person and both (all) are long.

If the excessively long c0mments continue I will probably close commenting altogether on this post.  Thank you for your understanding.

If you are like many Americans and are “underwater” with your home – that is, owing more than it’s worth – you may be considering whether or not a short sale or loan modification is for you.

Realtors cannot (should not) advise you whether a short sale is in your best interest. You have many choices and should go over them with tax and legal professionals.

One thing to consider before trying a short sale or attempting a loan modification, though, is the veracity of your original loan application.  Some home buyers here in Silicon Valley submitted loan apps that were for “no doc” loans or “stated income” loans.  If what you stated then does not line up with what you submit now, you could find yourself in a load of hot water.

Unhappy lenders are using short sale and loan modification applications as a reason to audit your original loan application.  If you fudged or misrepresented anything back when you applied for financing, you may find yourself the unhappy recipient of a loan fraud lawsuit now.

Your mother was right: honesty is the best policy.  If your loan papers were truthful, you should have nothing to fear by an audit. If you think they fall short, be sure to weigh that in when you factor what is your best course of action now.

Being an FHA home buyer in Silicon Valley is a challenge right now, especially if you want what everyone else wants: a nicely updated and remodeled home in a good area with no “issues”. (Issues meaning things like high voltage lines, busy roads, flood plains, or being too close to stores or spots not everyone wants to be near.)

The Problem with Condominiums and FHA

I need to start by explaining that things aren’t always the way they look.  We tend to think of condos as looking like apartments, with no yard, for example.  We think of townhomes as a two story or more home with neighbors on the sides but no one above or below.  And we think of houses as freestanding buildings with a yard around it.

That’s really how things look.  But how these different types of homes are owned may be another thing altogether.  For FHA home buyer purposes, this makes a huge difference.

Some townhouses and even some houses are not owned the way they look, but are held in condo ownership.   A good example of this is The Villas of Almaden, a beautiful &  gated community at Meridian and Coleman in San Jose’s Almaden Valley. Structurally, many of the buildings are houses – but they ar “condo ownership” and are stored under the condo label in our local MLS. What makes these buildings be condos? Practically speaking, in addition to their own space for their particular unit, the owners also own a percentage of everything else, such as the pool, grassy areas, tennis courts, private roads, etc. They also have a share of the liabilities of the condo community, too. 

If you are an FHA buyer and you want a San Jose area condo (or any home which is held in condo type ownership), you have to make sure the complex is FHA approved. We had the option of getting individual units spot checked until February 1st, but that has now been eliminated. Getting an entire complex approved takes time, perhaps 60 days, and money – and most buyers don’t want or cannot take on that kind of financial liability (and most sellers don’t want it either). Here is the link for the HUD site which will list for you the condo communities which are FHA approved.   So it is important to know if the townhouse you’re looking at is owned like a townhouse or owned like a condominium.  It can be painfully disappointing to think that a home can be bought with FHA backed financing, only to later discover that it can’t due to the type of ownership and lack of approval of the asociation.

Houses Are Simpler, But Not Always Easier for FHA Buyers

If your heart’s desire is to purchase a house in Silicon Valley, or a townhouse (not held in condo ownership) or PUD (planned unit development), at least you don’t have to get the entire neighborhood’s approval, so that one hurdle is cleared.  What you will find, though, is that there is a lot of fear by listing agents, and thus by their seller clients, about taking on an FHA buyer.

With multiple offers, the one(s) with FHA backed financing are usually the first ones eliminated.  (It’s not just due to the FHA, but also due to the fact that usually FHA buyers have very little cash down.  We are finding a lot of appraisal challenges because prices are rising fast.  With more cash down, an appraisal problem is less of an issue.)

Sometimes even with single offers, though, FHA buyers are running into trouble.   In some cases, the MLS will instruct agents, “No FHA Offers“.  In a few of those, it continues, “home cannot pass FHA guidelines” or otherwise indicating that the property needs too many repairs to get past the FHA requirements.  In others, though, the listing agent isn’t so direct and either won’t say that FHA offers will be rejected or simply behaves badly because he or she doesn’t want to work with one.   This is frustrating but is part of the challenge we are finding today.

The Stigmatized FHA Offer

Why are FHA offers viewed so dimly?

• usually there’s very little cash downpayment (hence, any appraisal issues will be a big problem)
• the FHA requires the home’s condition to meet certain standards & if the home needs work, the deal may not close
• FHA backed loans usually take longer to be fully approved and to close
• overall, there simply appears to be much more risk to the seller that the transaction will fall through or need to be renegotiated

There’s quite a bit of variation among FHA offers  in term of the amount of cash involved.   I have seen FHA buyers have downpayments ranging anywhere from 3% to 20% down (some have offered less down and then asked for the sellers to credit them back that amount, trying to do a 100% financed deal).  Why would anyone with 20% down do an FHA backed loan? Because the parameters are less stringent than conventional loans.  So the FHA opportunity is one which can appeal to a lot of buyers who otherwise would not qualify for a conventional loan.    So one mistake that I see with listing agents and sellers is not apprciating that this variation exists among FHA buyers.  They are actually not all the same!  The super small downpayments significantly hurt FHA buyers’ odds of having their offer accepted.  The larger the down, the better your chances are that the seller will be comfortable with your contract.

A huge plus with FHA is that the downpayment can be gifted, partially or in full.  If you are an FHA homebuyer in Santa Clara County and your relatives want to assist you with the downpayment, you’re in luck!  It’s easy to factor that in, and easy to improve your postion if you can up your downpayment amount that way.

There’s also a lot of variation among the lenders working with FHA home buyers.  Some lenders say that FHA borrowers need 21 days for a loan contingency and 45 days to close.  One Los Gatos mortgage broker says she can do it in 21 days.    The new guidelines for the Good Faith Estimate is slowing everyone down – the question is, how slow does it need to be? The GFE has to be done before an appraisal is even ordered.  That alone stalls things by about 3 more days than before these new guidelines were in place.  The really long time frames do hurt FHA home buyers chances.  If it’s possible to work with an FHA lender who can perform more quickly, it will greatly help the stigma of the FHA offer.

Right now it’s a seller’s market in much of Silicon Valley, which means that it’s hard for buyers to buy in general.  Add to that FHA backed financing and it’s tougher still.  But don’t give up if you’re a buyer & don’t assume the worst if you’re a seller!  FHA buyers are very anxious to get into a home, and their motivation is probably the most important element of all in terms of the likelihood of having a successful close.

Recently I have been involved with multiple offer situations, both on the listing (seller) side and on the buyer side. All of the multiple offer bidding events have involved first time homebuyers and in every case, at least one or some of the offers were presented with FHA backed financing.

Sometimes agents rush when they write up the purchase contract, and the offer is not well done; we call that “sloppy” and it’s not helpful to your position as a would-be homebuyer.  As a buyer, you won’t know which box needs to be checked or which blank filled in, but there are big areas that you can double check to make sure that your offer is “clean”, which will present you in a more favorable light and increase the odds that your offer will be the one the seller and the listing agent will want to work with.

1. If your offer is an FHA offer, make sure that the box on page 1 says so (there are boxes for FHA and VA offers on page one of the California Association of Realtors contract)
2. Make sure that the numbers all add up – the initial deposit, the increase of deposit (if any), the loan amount and balance of cash downpayment should all be listed and should add up to the correct number for your total purchase price.
3. The “loan terms” are supposed to be specified too. What’s the interest rate? Are there any points being paid – and if so, by whom? Blanks in that area are a problem because you have a finance contingency which relies upon everyone knowing those terms. Be specific.
4. It is doubly important – no, triply important – that your offer comes with a soid pre-approval letter.
5. Make sure that you give your agent a check, or a photocopy of the check you’ll use if your offer is accepted.

Once the offer is drafted, your agent should go through it with you so that you understand all the clauses and terms.  Ask your agent to double check everything; it’s better to take a lilttle longer and make sure it’s right than to get it off fast but sloppy.

Recently I’ve seen a few FHA offers from agents who’d rushed and many or all of the items listed above were off. In one case, the agent didn’t even include the loan amount.  In two offers recently, the real estate licensee hadn’t checked the FHA box when the contract was dependent upon it going through as FHA.

Another common mistake with FHA offers: deliberately overpaying at a price so high it cannot possibly appraise.  Some agents do this by accident and others as a strategy. The thought is that if it doesn’t appraise (and it won’t in many cases if you come in 25% over list price), the buyer can back out and the seller will probably have to come down to the appraised level or lose the sale.  It’s a bad game to play and will usually merit being eliminated in multiple offers as nothing more than transparent game-playing.

What else can you do to improve your odds of success if you’re an FHA buyer, besides making sure that the offer isn’t sloppy?

Work with a great loan officer, mortgage broker or mortgage banker. Some lenders are fabulous with FHA financing and can close in 30 days. Others need 45 days. If you are fortunate enough to work with exceptionally good people and your lender can do it in a month instead of six weeks, you’ll be at a huge advantage.

Try to avoid multiple offers.  You will have much higher chance of success if you are not competing against other offers.  If you must go into competition, do everything you can to mitigate the FHA element of your offer. Go the extra mile.  Consider writing a personal note to the seller and seller’s agent about why you want the home.  Include proof of funds.  (For more tips, read my series on competing in multiple offers on my SanJoseRealEstateLosGatosHomes.com blog.)

It’s a tough time to be a homebuyer with FHA financing and unfortunately if there are multiple offers you’ll nearly always lose out to conventional loans (and conventional loans will usually lose to all cash buyers).