Ask The Expert
Ask The Expert
Is My Lender Pulling a Bait and Switch?
Dear Liz,
I have been watching mortgage rates in California, where I live, for some time. I wanted to refinance when they were at their lowest. Well, the best mortgage rates are very low, and I checked with my bank and the mortgage quote was almost a full percent higher than what was advertised! The loan officer said it was due to "add-ons." Should lenders have to advertise their rates including the add-ons? This seems like a bait an switch tactic, which I thought was illegal.
Why Advertised Mortgage Rates Don't Always Hold Up
There's a reason that stockbrokers don't advertise prices of companies' shares in newspapers. It would be pointless because the price of shares moves constantly depending on supply and demand. No one with any understanding of financial markets expects it to be different--hence the moving ticker-tapes across the bottom of the screens on the cable financial and news channels.
Today's mortgage rates move in a similar way. They are based on the prices of mortgage-backed securities (MBS). These are publicly traded securities backed by hundreds of thousands of mortgages. Their pricing pretty much tracks that of bonds. Because they are securities, traded just like shares of company stock, their pricing fluctuates in a similar manner. So mortgage quotes are often good for only a few hours.
So, Why Do Mortgage Lenders Bother Advertising?
Mortgage advertising is a holdover from an earlier tradition. In the not-too-distant past, advertised rates were good for a week, or at least a few days. Mortgage lenders weren't facing the stiff competition they do today, so they usually had some wiggle room built into the pricing. They don't have that luxury anymore. But people still expect them to advertise rates, so they do. Just note the fine print: Rates are subject to change without notice.
Mortgage Quotes and Risk-based Pricing: Get Used to It
Another relatively new development in mortgage quotes is risk-based pricing. When you bought your house, this probably wasn't in effect. Typically, prime mortgage applicants were either approved or declined, period. Approved applicants got the same rates. Today, even prime borrowers get mortgage rate adjustments based on their credit-worthiness. This is similar to the grading used in sub-prime lending. So, while a borrower with a 760 credit score, buying a single family residence, and putting 25% down gets the sweet mortgage rate advertised online, the one with a 619 score, refinancing a condo, and taking cash out to 85% of the property value pays more--seven points added to the fees, or more than one percent to the interest rate.
There Are Alternatives
First, get several mortgage quotes. Have loan officers run the numbers for you and get pricing for both FHA and conventional loans. FHA home loans have no pricing adjustments. The other thing you can do is work on your credit, reducing account balances and paying on time. Even a few points of improvement can make a huge difference. Ask the loan agent how much you'd save if you increased your score by 20 or 40 points. The difference between 679 and 680, for example, at an 85% loan-to-value condo with a cash-out refinance is 1.25%. On a $200,000 mortgage, that single point is worth $2,500 to you!
Recently Asked...
Can I buy a home by taking over someone's mortgage?
I found a company that will sell me a list of homes that can be bought by taking over someone's mortgage. I have some credit and income issues so this would be very helpful to me. Is this a legitimate way to buy a home? Do mortgage lenders let buyers take over the payments if the seller is behind on the payments?
Taking over mortgage payments: the due-on-sale clause
Most mortgages funded in the last 10 years or so contain what's called an acceleration or due-on-sale clause. That means if the property changes hands, the entire mortgage becomes due immediately. Lenders don't want to find themselves in business with someone who may not meet their underwriting standards. While some government home loans like FHA mortgages may be assumed, unless the mortgage is over 20 years old, the buyer must qualify for the loan like anyone else.
How some people get around the due-on-sale clause
Some sellers will advertise an assumable mortgage with no qualifying, or that they'll allow the buyer to take over their mortgage payments. They try to circumvent the clause by transferring the property but not "selling" it. That dodge might mean calling the transfer a lease option, an installent sale, a land contract, a land trust or a wrap-around mortgage. These schemes are not illegal or fraudulent unless you conceal the transfer from the lender.
Could you get away with this? Maybe
If you take over payments from someone who is in default (and bring the account current) on an underwater home, the lender may breathe a sigh or relief and let you continue. But what if (when) property values or mortgage rates increase? In that case, you'd be in what's called "technical default" and the lender could choose to enforce the due-on-sale clause, meaning you'd have to pay off the entire balance immediately or lose the home. Unless you can get the lender to approve the transfer of the property and the obligation to you, you're taking a risk.
Concealing the transfer is a felony
If you try to avoid the technical default scenario by concealing the transfer, you're begging for trouble. A wrap-around mortgage, for example, involves the seller continuing to pay the old mortgage lender while you pay the seller. No transfer documents are recorded with the county.
The list is probably bogus
Unfortunately, the list being advertised is likely just a list of homes with FHA financing. You'd still have to apply and qualify with the current lender to take over such a loan, so don't waste your money.
Foreclosure sale: can you pay cash and then refinance?
I bought a home at a foreclosure sale with cash borrowed from my business. I need to put as much money back in as I can, and I need to do this as soon as possible. How soon after buying a home can I refinance it and get my cash back?
There are actually a few issues here; some need to be considered before others. So here we go:
- Is the property a home for you to live in, a vacation place or a rental? This determines what sort of refinance products you'll be able to choose from. For investment property or a second home, you'll need to refinance with conventional (non-government) mortgage lenders, and you'll be able to cash out a maximum of 75% of the purchase price. If the house is a primary residence, you may be able to refinance up to 85% with FHA or up to 90% with a VA refinance mortgage (eligibility guidelines apply).
- Do you want fast cash or more cash? If eligible for an FHA cash-out refinance, you can put up to 85% of the home's purchase price back in your pocket, but you'll need to own the property for at least six months before you're allowed to do it. With Fannie Mae's Delayed Financing Rule, however, you'd be able to refinance immediately and get up to 70% of your money back.
- What if the home's value has increased? In general, if you refinance within a year of buying a home, mortgage lenders base your loan amount on the lower of the purchase price or the appraised value. So even though you got a 15% discount by buying on the courthouse steps and paying cash, you won't get to pull that extra equity out when you refinance quickly. If you want to maximize your refinance proceeds, wait a year, and your loan is based on the home's appraised value.
This is a hot issue with investors these days because the best deals are generally unavailable to those who need to line up home loans. Investors need to recover as much of that cash as quickly as possible, so that they can turn around and buy more property.
Frequently Asked Questions (FAQ's)
I'm finally ready to buy my first home. How will the current economy affect my mortgage rates?
That depends on how much cash you're willing to pay up front and how well you've managed your money over the past few years. According to many experts, mortgage lenders have" rolled back" to the policies and protocols they used decades ago.
Hoping to avoid the kind of lending that led to the subprime mortgage crisis, most lenders
require higher down payments and higher credit scores from borrowers than they did only a few years ago.
If your credit has a few dings in it, don't worry. Be prepared to lock in something higher than today's best mortgagerates, and be prepared to pay extra origination fees in addition to your down payment. While you won't find many private lenderswilling to finance more than 80--90% of your home's value, investigate FHA and other community homebuyer options. You can use a stable employment history and community connections to find a fair financing deal.
Although I've made every mortgage payment on time for the past five years, our whole neighborhood has lost value and I'm upside down on my home loan. What should I do?
In certain cases, you might not have to do anything. If you locked in a solid mortgage rate during a previous period of low interest, keep making your payments. As real estate values normalize over time, you'll eventually regain home equity.
However, if your credit score is better now than it was when you originated your home loan, you may want to lock in today's best mortgage rates. Or you may qualify for a government-backed plan that can help your mortgage lender process a refinance. FHA, Freddie Mac, and Fannie Mae all have special money-saving programs. If your mortgage is backed or held by these entities and you meet some other qualifying criteria, you can cut the amount of interest you'll pay over the life of your loan.
