Jamie,
Did he give you any info regarding percentage of people who qualified for loan from a lender, but did not qualify for a loan by this budget calculation?
-DR

Good article. People needed to hear things like this years ago. Most mortgage lenders are reputable, however, some saw issues with people getting mortgages and did/said nothing. There is a big difference between being qualified for an amount and being able to afford an amount. People overextended themselves because a person trying to sell them something said they could. Then a water heater went up, A/C or roof needed replacing, lost their income, etc and they were up a creek.

Darwin, I didn't think to ask him that question, alas.

Very good post. It is so nice to see people advising caution and practicality to buyers. Very sound advice.

@JohnScottSmith

This is an interesting business concept but the mortgage industry has gotten so vanilla and homogenized I'm not sure of its present day value. Everything is fully income documented, the liar loans/stated income are gone. Everything is fully amortizing, the interest only loans are gone. Everything ultimately goes to Fannie, Freddie, FHA, or VA, all the Wall St/Subprime type outfits are gone. Almost everything is fixed rate, very, few borrowers even consider adjustable.

It's good advice to establish your own budget and not necessarily use your max approval amount, but I'm not sure if it's advice worth paying for. It's akin to charging someone to tell them to get 3 different Good Faith Estimates all produced on the same day.

What is the charge for this?

Tom makes some excellent points. I agree that there are many factors first time home buyers don't take into consideration when buying a home. A loan officer will approve you for the highest loan amount possible. Why? Well, it is their job to do so and to earn the highest commission possible. You think commissions are fixed or based on the loan amount?

I have also advocated that loans be approved based on net earnings and not gross income. All borrowers should be required to provide their 1040 tax returns so the underwriter can see additional expenses that may not show up on the credit report. Who knows what write off's there may be without seeing the entire picture. There are just too many unexpected expenses, especially repairs when buying a home first time home buyers may not be aware of.

Disposable income is a beautiful thing. Unfortunately, getting into debt is the new American way. Many people sacrifice savings for current consumption. It should be the exact opposite. People should be saving now to consume later. A good measure to see how affordable that house really is should be a 10% savings rate after expenses. If you make a combined income of 80k a year, then you should have at least $800 left over to put in the bank every month. I would even say you should have more, but most people will think that is too much.

Like Josh said, there are very few loan products out there today. Fraud from lenders is going to be very difficult to pass through as every file is more scrutinized than ever before. I can see how compliance with locking in the rate and proper disclosure can be much help. Maybe reviewing the GFE to see if the charges are excessive will save them some money? As long as the company explains to the client the difference between YSP and SRP, then I do not have a problem with it. There is much confusion over the two since brokers disclose the exact dollar amount they earn while the bank does not.

Tom is right. Qualifying and being able to make payments are two different things. When I have purchased a house, the price point was determined by the payment I was comfortable making. I used that to calculate the mortgage amount. I then added the down payment and subtracted the closing costs. That was the amount I thought that I could afford. If all buyers used this method, there would not be so many foreclosures.

Hello this is Tom Champion from Mortgage Loan Inspection. My schedule hasn't allowed me to give a timely reply to some of the questions in this blog so I'm going to try in single post.

Jamie, thank you for your excellent questions and posting my comments to your blog.

Darwin Rules:
You asked an excellent question. Our clients’ main concerns are being taken advantage of and a need for an independent lending profession to guide them through the approval / closing process. We are no different than their other fee based professionals like their accountant, attorney or home inspector.

The Lender will include all debts on the credit report except the 30 day account like utilities, cell, etc. in their qualifying ratios. In some cases we have seen debt payments for family loans or school tuition that don't appear which we include in the budget.

So far individuals already short or with limited cash at the end of month are not looking to purchase a more expensive home.

Josh:
I will agree the number of loan products has been reduced as well as about 50+% of the mortgage Originators. I find almost all mortgage Originators are honest individuals however fraud and deception still exists. My grandfather once told me "lock doors only keep an honest person honest, a thief will find a way in." :-)

Your final question was cost, $295.00 prequal to closing.

Frank Rizzo:
Thank you for your kind comments.

Now let’s address a few issues that a Lender might try.

First item up is the credit score, borrowers need to know where their score is placed in the matrix for a possible add on in price. How easy is it to tell a borrower their score requires a 1/4 point add on to price when it's actually not required.

We take great care to examine all disclosures for compliance not only at the time of our client's application to their lender also 24 hours prior to closing. Our clients sign authorizations forms for us to talk directly to the lender, selling agent and Title Company. None of this he said, she said.

You also touched on one of the most important points, locking the loan. When our client agrees with their Lender on rate and price and request the loan to be locked we want them to have it in writing ASAP. This Float/Lock Agreement should clearly state loan programs, interest rate, price (points) and durations (numbers of days).

Let's say for discussion the mortgage Originator get busy after sending a signed email or fax of the Float/Lock Agreement and forget to lock the loan. Suddenly the MBS market sells off and now the mortgage Originator is 1 point underwater on the loan instead of a 1 point SRP, yes we do explain this to the client. Instead of the Originator paying the 1 point shortage he tells our client their loan was rejected without sending it to underwriting so he doesn't have to pay the shortage. Can this or does this happen? The answer is yes and we will catch it.

If rate turn up dramatically in a 24-48 hour period this will happen more than will be realized to many potential mortgage borrowers.

Frank, I didn't address your comment about the bank/broker situation. I do think personally it's fair to say there isn't a level playing field.

I hope my comments answered your questions and hopefully raised some new ones like appraisal coming in under sales price. :-)

On a corporate level we still see games being played throughout the county between lender and borrowers our goals are to inform and educate our clients of its effect to their home purchase.

So I decided to look more into the Mortgage Loan Inspection program. What did I find in 5 min?

http://www.mortgageloaninspection.com/index.htm

1) I hate their logo... looks like organizations that want to rip you off. Which doesn't mean they want to rip me off, but it does mean they probably didn't pretest it.
2) There is an error in the PDF brochure posted online. There are also no prices in the brochure.
3) When I called to tell them about the error and get an idea of what their services cost, the person on the other end of the line couldn't hear me... some kind of technical problem I assume.

So what do I conclude? That the industry is very new and not yet professional enough to have a lot of credibiltiy with banks. Also that I'm much better off working with a good, free counselor, with my bank, and with a real estate lawyer if need be.

Mike I can't do anything about the logo it was copyrighted in 2004 when Mortgage Loan Inspection opened for business.

Our phone system has been upgraded in the last few weeks due a huge increase in call volume. We continue to have problems with dropped calls and poor sound quality. We apologize for your experience. You can also use email to contact me which is on the website.

I agree you could work with a free housing counselor. I would schedule that appointment as well as the follow up appointments quickly due to their high volume of work in the foreclosure area.

Working directly your bank or lender is the option everyone has taken since since mortgage origination started. As long as you understand all of the documents for compliance and trust their advice you will do well. Just remember they have a vested financial interest in lending you as much money as possible, they don't make the payment. If you fail to make the payment the current lender will simply take your home which is now happening to 1 in 10 homeowners in America. All you lose is the down payment, closing cost money and any equity since the purchase.

Your suggestion of using a real estate attorney is excellent. Be prepared to spend over $100 per hour for their work. At a $100 per hour you have three hours with your attorney to cover our fee. Knowing the number of hours we spend with a borrower I would budget for more than three hours.

On your point about being a possible rip-off. How can our client get ripped off when we do all of advising, comparing lender GFE, reviewing lender's application documents, the final
Settlement Sheet prior to being paid our $295 fee.

I suggest the only party to this transaction that has the possibility of being ripped off, to use your words, is Mortgage Loan Inspection. Fortunately that hasn't been the case because our clients see value in our service well beyond the $295 fee.

We wish you well in your next home purchase

As usual, everyone goes right after the "evil" loan officer as the culprit just trying to jack consumers for commissions. As a professional, licensed loan officer, who pays all the exhorbitant and often redundant fees, takes all courses, continuing ed, and state and national exams, I can say we are not all bad.

I always let my clients know what they qualify for based on Federal Guidelines and then examine their personal debt situation with them to make sure the loan fits their "life plan" as well as the objectives stated by them for getting the loan.

It might surprise all of the lender-bashers out there that in many cases, borrowers get upset, testy and even threaten to take their business elsewhere when told it might not be wise to borrow the maximum. They will go where someone will lend them what they are looking for.

There needs to be accountability all the way around the settlement table: Realtor/Borrower/Lender/Attorney.