Dirty Rotten Scoundrels...

Also known as mortgage brokers...

I found an interesting article online discussing mortgage brokers on cnnmoney.com today. Here is an overview.

"A good one (mortgage broker) can save you time & thousands of dollars over the life of a loan."

"It's up to you to understand the loans you're being offered and the fees involved."

Key Questions:

Do I need a broker?
-Do you understand mortgage products? 30 fixed, 2/28, 3/27, IO
-Do you know where rates are right now? 30 fixed, short term
Brokers can help. They have access to wholesale rate sheets from many banks & have the time to shop rates. Afterall, its their job.

Who can I trust?
Find out the following:
-How much does the broker stand to make on your loan?
-How will the broker make money (Fees &/or yield spread premium)
-If you don't feel comfortable, talk to another broker!

Am I getting a fair deal?
-$0 application fees. ONLY appraisal ($350) & credit ($13 - $25) should be charged in advance. That being said, these fees should not be required to complete an application.
-What are the pros & cons of at least 3 different types of loans
-Understand terms of loan (rate, fixed or adjustable, prepay, margin, rate cap, etc)
-The broker should be able to guarantee fees once the loan is locked.
-Request paperwork (a copy of the HUD-1) before closing & compare them with the good faith estimate

http://money.cnn.com/2007/07/24/real_estate/salesman_factor.moneymag/index.htm

Happy Dance!

On the 15th, Tanna & I sold our first investment property. We bought at the right price, didn't overdue the rehab process and successfully sold the property for a property in a very difficult real estate market. We put $8,000 into the property and made almost $10,000 in profits. Tell me where else anyone can see that kind of return on their money?

It was a peice of cake... Or not.

I will say that I just passed real estate investing 101. However, it was NOT easy. It was one of the most challenging and rewarding tasks that I've ever taken on.

I feel like a giant gorilla just climbed down off of my shoulders...

Some advice for those of you considering real estate investments:

• It won't sell tomorrow. Plan on hanging onto the property for 5 years. That being said, do enough updating so the property can be rented out. Wait until the market starts to take off before 'flipping' the property & putting it on the market.
• How long is your snorkel? Know your worst case scenario. If the property goes vacant or unexpected expenses pop up what is going to happen? Will you find yourself calling relatives and friends to stay out of foreclosure? Don't get in over your head!
• Get past appreciation. You make money buying at the right price and cash flowing. If you are banking on appreciation, you're going to need to hold onto the property for a long, long time.
• Get the right loan product. The right loan will help you meet your goals and maximize the return on your investment. There is no 'one size fits all' loan. Get the right loan for your needs.

I'm not an investment expert (yet). I believe that I am on my way. Wishing you all phenomenal returns on your real estate investments in 2008.

What To Do?

"Matt, we're buying our first home in June. How do we get the whole process started?"

Congratulations!
Buying a home (especially your first) is an extremely exciting time. Many times, it is a roller coaster process as you find the perfect home, make an offer and obtain financing.

1. Establish a Budget & Get Preapproved. I would run numbers based upon a 6.5% interest rate. Rates are lower than that right now, but we're still 6 months out. Establishing and remaining within your budget is vital! When you are preapproved, find out when your rate will be locked.
2. Find a Realtor. Typically, references are the best resources. Know anyone who has purchased a home recently and had a great experience? Make sure that your Realtor treats this purchase as an investment.
3. Start shopping. Take notes to remember each property. As you narrow down your choices, have your Realtor pull some comparable sales in the neighborhood to make sure that you're getting into a sound investment.

“Should we put money down? If so, how much?”
I'm not a financial investor and won't pretend to be one. However, some basic financial principles need to be applied.

I would start with 3% down in order to qualify for FHA financing. You'll obtain great rates & will lower your mortgage insurance premiums. The more money you put down, the lower your mortgage insurance payments. However, mortgage insurance is only required on homes whose financing exceeds 80% of the value. For that reason, I would not recommend putting more than 20% down as it will not improve your financing. Conservative investments offer returns that exceed the 6 – 7 % mortgage rates so reducing your principle may not always be the wisest investment.

There is one big problem when you pay down your mortgage. Liquidity. Once additional payments have been made, your monthly payments do not change. Should you run short on cash, the bank will not float your payments for 30, 60, or 90 days, they will begin foreclosure proceedings. Ugh.

Always have a plan for a worst case scenario. If you do decide to put additional money towards principle, obtain a HELOC first. This line of credit will provide the necessary liquidity while allowing you to accelerate the pay off. This is a win, win. You have access to your equity & you will reduce the amount of time you are exposed to the interest rate, thereby reducing your effective interest rate!

Hope this helps! Happy home buying!

Solutions....

Heads up... This post doesn't present a warm and fuzzy outlook filled with easy solutions. Most problems aren't solved the easy way.

First of all, let's start with solutions that are flat out wrong.

1 - Wall Street. Just take a peek at Citi & Countrywide stock prices. Tell me how bad any investor wants back in.

2 - Expanded Underwriting.
1. The reason this entire mess exists is a lack of underwriting standards. Essentially, people who do not qualify for loans received them.
Wall Street learned its lesson. It's done.
So should the government jump in and take on all of these bad loans? NO WAY!
I completely agree with the government expanding FHA standards to some extent. For example, people who were never late on their mortgage prior to the rate adjusting deserve to refinance. However, everyone does not deserve to get bailed out!

So what is the answer?

TIME! There is a ton of inventory on the market. There are too many builders. There are too many borrowers who simply can not afford their home. There is a lot of downward pressure on the housing market. We are not in a short term market. It's a buy and hold market.

My advice to you.

Get off of craigslist. Start working with a qualified Realtor. Make them show you some comparable sales. You can get a great deal. Buy the cheapest house in the best neighborhood and reap the rewards!

Hold Your Horses!

Reminder: We want our clients to be informed & educated!
The fed cut short term rates by a half point last week. That means lower interest rates for real estate finance, right? Not so fast! Rates for a 30 year fixed actually inched up slightly over the last week. Check out this article from bankrate.com to learn a bit more.
http://bankrate.com/brm/news/mortgages/20070920_rate_cut_affect_mortgages_a1.asp
History says that the chances of rates following after a rate cut are close to 50/50!
“There is zero causation between mortgage rates and the Fed reducing its target for the federal funds rate,” says Dan Dowling, president of United Mortgage Capital Group.
Why?
· Mortgage rates fluctuate based upon investor predictions concerning long-term inflation.
· Mortgage rates react to market forces. For example, prior to the short term rate cut, rates had dropped from 6.82% to 6.32% over the past 8 weeks!

Mortgage Broker Licensing!

Colorado is one of the last states to implement licensing standards for mortgage brokers.

Members of the mortgage industry are somewhat split concerning licensing.

My opinion - Licensing is great for our industry. It provides accountability. It will eliminate uneducated and unqualified brokers.

That being said, regulation will not transform every broker into a vehicle working for the borrower's interests. Always work with a trustworthy reputable broker who can provide references!

Check out http://www.dora.state.co.us/real-estate/mortgage/legislation.htm