Any underwriter can tell you that one of the three “C’s” in making a decision stands for “Collateral”. Yes, the property is important. Properties have, for the most part, been appreciating in the last year or two, but problems still pop up with appraisals.
It is important for LOs and borrowers to know that comments on listings in the MLS can impact future home values in the area. "Puffing" listings to get more shows has been around in real estate sales as long as the weekend open house, and helps the seller feel better about the property, but unfortunately the practice does more harm than good.
By over-stating, or dressing up the condition of a property, agents are impacting future values and home sales: appraisers who do not view active listings, but instead review MLS data and comments, do not know how truthful the comments may be. As a result many homes that sell for near the lower end of the market due to condition of the property but are listed with remarks of ‘gorgeous throughout, remodeled kitchen and baths, re-carpeted’ create a comparable for appraisers for many months of a low price sale for a high condition property.
In other words, many low value appraisals are the result of the information provided to the appraiser by real estate agents in their MLS comments. A good loan officer, and Realtor, when viewing listings will often suspect when there is a great disconnect between the agent comments in the MLS and the reality of a home's condition. A good loan officer will often contact the listing agent and ask them to amend their comments to more accurately reflect the condition, or suggest leaving the comments regarding condition blank. Instead of "gorgeous throughout" say "great opportunity for new homeowners" or "easy to show and priced well for the market."
Famed bank robber Willie Sutton told a reporter he robbed banks “because that’s where the money is.” Today, he’d conduct wire transfer scams, because that’s one of the easiest ways to currently steal money. Unlike checks or other forms of payment, once a wire transfer goes through, there’s no way to stop or recall the remittance.
Increasingly, hackers are penetrating the real estate industry, making off with funds meant for home buying. Here’s how it works: The buyer receives an email, purportedly from their realtor, lawyer or title company, instructing them to wire settlement money to a certain account. The buyer complies, but the money is actually going to the hacker, deposited in an overseas account and gone for good. Victims have lost hundreds of thousands of dollars, ending up ruined financially.
Real Estate Wire Transfer Fraud
If you’re in the process of buying a home, your real estate agent and/or the title company have all the pertinent information regarding your closing date. The hacker breaks into those email accounts, and takes note of individual sale details. He or she learns the name of the seller, buyer and all parties – lender, title company, escrow provider and attorney – involved in the transaction. These hackers are good, and their work is convincing and sophisticated. From viewing the agent’s or other's email accounts, they soon learn to sound like them online. These are not the hackers of past decades with poor spelling and communication skills. Their emails appear to come from the genuine source, and only careful examination reveals they are actually “dummy” accounts.
When the closing date approaches, the hacker moves in for the kill, emailing the buyer to make the wire transfer to a different account. There’s always some excuse about why this is necessary and urgent, perhaps due to some “last minute circumstances” or “technical problems.” If the buyer complies, they are out of luck. The money is gone – and so is the dream of home ownership.
Report Suspicious Activity
If you do receive an email requesting a wire transfer, report it to the bank immediately. Notify whoever reportedly sent the email that their account has been hacked. Contact the Federal Trade Commission and let officials know of this wire transfer scam.
Preventing Wire Transfer Fraud
A hacker can’t steal information that’s not online. That’s the simplest, most effective way to prevent becoming a victim of these thieves. When you need to send personal information to parties involved with the home purchase, do so via courier or phone, or stop by the office. From the outset of any home buying venture, the real estate agent and title company representative should make it clear –in writing – that no email request to wire money will take place. Real estate agents should have informational material available for all clients warning of the wire transfer fraud scam.
Keep Your Computer Secure
It’s never been more important to maintain good computer security, whether in a professional or personal capacity. Change passwords often, don’t open attachments unless you are sure they are legitimate and use up-to-date, high-quality security software. Life on the internet means staying one step ahead of the hackers, and that’s not going to change.
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Sometimes lenders are asked about the “secondary” markets by borrowers. It is a legitimate question, especially as the existence of a secondary market for home loans leads to lower rates for borrowers, and also helps why Fannie Mae and Freddie Mac exist.
Let’s start with a simple example. Let’s say a person (“Joe”) has $1,000 in savings. Joe is approached by his brother who wants to borrow $1,000. They have a good relationship, the brother is a good credit risk, a deal is struck and the $1,000 is loaned out by Joe.
The following day Joe is approached by his sister, an equally good risk, who wants to borrow $500. In spite of wanting to help, and earn interest, Joe has no money to lend, so must say “no” to his sister, and in fact must say no to every other opportunity to lend money out until his brother pays him back. If someone approached Joe, however, and offered to “buy” the first loan from him, and pay him $1,001, two things would happen. First, Joe’s brother would start sending his payments to the buyer of the loan. But second, and more importantly, Joe would make $1 and have $1,000 to lend out to his sister or other good credit risks.
This is exactly what happens with many lenders: they make a loan, and then sell the loan to a buyer (who commences collecting the monthly payments), and turn around and make more loans to other good credit risks. In many cases the buyer of the loans are Freddie Mac or Fannie Mae, or large banks who then begin collecting the monthly payments from the borrower. And lenders have the ability to do what they do best: offer good financing rates to their clients.
Often lenders are asked by buyers, “How much should my down payment be?” There are two sides to the question, with the buyer usually wanting as little as possible and the lender wanting as much as possible. Generally the two meet in the middle, and with good reasons.
Many buyers are limited as to how much down payment they need for a transaction due to the limit on how much money they have. Other buyers have more flexibility with down payment from the minimum required for the mortgage program for which they are applying to putting 30% or more into the purchase. The more money that is put into the down payment, the lower the mortgage rate. An aversion to debt, to monthly payments, to paying interest is not uncommon-especially following the mortgage and housing market collapses several years ago.
But “cash is king” and getting cash out of a bank account, or many different types of investment accounts, is a lot easier and cheaper than converting home equity into cash at a later date. To access equity from a home the owner either needs to obtain a second mortgage or HELOC that has transaction fees and a either a higher fixed rate or an adjustable rate, fund a cash out refinance of the primary mortgage which has transaction fees and possibly a higher rate than what a rate would be in today's market or sell the home.
There are plenty of other questions to answer. Does the borrower have a definite need for a large sum of cash in the near or medium future? Children attending college? Planned major remodeling project on the new home after moving in? Opportunity to buy into ownership or partnership at one’s business? With the new housing payment and expenses what will be the buyer’s ability to put aside money for savings, investments, retirement? Will this ability be severely impacted by a higher mortgage payment and retaining a large sum of money in those accounts you currently have? How long does the borrower intend to be in the property?
It is important to consider all of the "what-ifs" and do the math on those what-if propositions. Maximizing your down payment may be the best option for the borrower and their family, but it may not be depending on goals and objectives in the future.
There are plenty of people around with a lot of money in the bank. Unfortunately, many of them are older and already own houses whereas their kids don’t. There is a common myth that a parent cannot give their child a gift for the down payment for more than $14,000 without gift tax consequences, or that a gift must be spread out over several years.
Experienced originators know that this is not the case. Many first time homebuyers receive help from their families and many parents want to help their kids buy a home. Each parent can give their child $14,000, for example, each tax year for a total maximum of $28,000 per year from parents without having to pay a gift tax. This is helpful to know, because in some locations $14,000 may barely be enough to cover closing costs!
Lenders know that the IRS watches transactions like home purchases to make sure that all requirements of the tax code are met, but it does not require a donor (or the one receiving the gift) to pay a gift tax if the amount is over $14,000 in a tax year. It says that a gift tax return must be filed if more than $14,000 is given by any one parent to any one child in any one tax year but no tax is due. Unless the gifts given in a lifetime exceed $5.34 million, no gift tax is due. The one receiving the gift has no tax consequences. Be sure to consult your accountant for details.
But lenders have rules regarding gifts. In general, a borrower may receive a gift from a close relative to help him or her cover the down payment and closing costs. The gift amount is limitless when the down payment equals at least 20%. If the down payment is less than 20 percent, the borrower must have at least 5% of the sales price in his own money. An exception exists for FHA loans where all of the money needed to cover the down payment and closing costs may come as a gift from a close relative.
And gifts must be carefully documented, complete with a letter from the donor stating the gift does not have to be repaid and a paper trail of that gift to prove that the donor had the money to donate and that the borrower received the money from the relative.
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