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New Rules Give Buyers More Protection at Closing

By Kenneth R. Harney, Texas Association of Mortgage Brokers
Saturday, July 18, 2009

If you’re applying for a loan to purchase a primary or secondary home, or planning to refinance, you should be aware of a little-publicized new set of federal consumer-protection rules that takes effect July 30.

Among other key changes, the new Federal Reserve guidelines require lenders to give you initial disclosures of your mortgage costs within three business days of your loan application. If you don’t get them, you can pull the plug..

The rule also prohibits lenders from collecting any fees, except a reasonable charge for checking your credit, until you have been given the loan-cost disclosures. This means no more out-of-pocket, upfront application charges until you have received the truth-in-lending disclosures and an annual percentage rate (APR) calculation of those loan costs.

Since many mortgage brokers and lenders traditionally have collected fees covering appraisal, credit and various other charges at the time of application — sometimes amounting to hundreds of dollars — this will be a significant change in procedure for the lending industry.

The rule also prohibits quickie closings on loans by requiring a seven-day waiting period after applicants are handed their early disclosures or the disclosures are mailed. You will now have up to a week to think about the transaction and decide whether it’s right for you. Final truth-in-lending disclosures are due three business days before closing.

Here’s an even more sweeping change for applications on or after July 30: The new Fed rules require lenders to deliver a copy of the real estate appraisal to you three business days before the scheduled closing on the loan.

In the past, even though federal regulations guaranteed that consumers could request and obtain a copy of the appraisal, lenders and home buyers frequently ignored that right. In fact, many consumers had no knowledge of this right because no one in the home purchase, financing or settlement process told them about it.

Now, the timing of the loan closing itself — which is the financial ballgame for loan officers, real estate agents, and title and escrow officials — will be dependent upon your receipt of the appraisal in advance. The exception will be that the three-day rule can be waived if you don’t think receiving the appraisal is necessary.

Another significant change under the new rules: If the APR on the early truth-in-lending disclosure increases by more than one-eighth of a percentage point (0.125), the lender will be required to “redisclose” — provide you a corrected version and allow you an additional seven business days to consider the transaction before settlement.

What might cause the APR to increase following the initial, early disclosure? Lots of things. If you allowed your initial rate on the loan to float with the market but rates increased, you would need to get an amended truth-in-lending disclosure. Or if the lender got inaccurate estimates of costs from a third-party participant in the transaction such as the settlement or escrow company. Or if unexpected, 11th-hour junk fees materialize.

All of these events, which have been frequent sources of consumer complaints this decade, could force the lender to redisclose loan costs and set back timing for the settlement.

What are some of the likely repercussions of the Fed’s new mandates? First, the traditional approach of aiming in advance for a date-certain settlement target for home loan transactions almost certainly will be affected. Actual closing dates will be more closely tied to lenders’ and settlement agents’ accurate estimates and their ability to deliver disclosures and appraisals by the required dates. For example, if appraisers are backlogged and can’t produce valuation reports quickly enough, settlements will have to be postponed.

Second, the purposes of the rules are to afford consumers better access to and more time to consider key elements of what, for most people, are major financial transactions. There might be fewer instances of last-minute closing-date surprises on fees, where buyers are slammed with hundreds of dollars of charges they never expected. But nobody can say that for sure.

Finally, the rules may well trigger new waves of litigation if lenders and their business partners are not scrupulous in their compliance. There is an aggressive segment of the legal profession that specializes in going after banks and mortgage companies for truth-in-lending violations. Don’t be surprised if you hear of lawsuits seeking cancellation of mortgage deals because timing deadlines were not met or appraisals were not received.

As David Berenbaum, executive vice president of the National Community Reinvestment Coalition, put it in an e-mail comment: “Consumer advocates will closely monitor” compliance with the new Fed regulations, and the lending industry can expect “civil litigation against bad actors.”

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The Truth About Today’s Market

“For most folks, no news is good news; for the press, good news is not news.” – Gloria Borger

You hear the bad news everywhere you turn. It’s on the television, the Internet, the radio and in print headlines. What you don’t hear is the good news about the real estate market.

Bad news sells newspapers and gets high television ratings; therefore, the media has no reason to report the upside of today’s real estate market to the average American. This is where I come in. For example, did you know that approximately 30 percent of homeowners own their home free and clear?

The current market also affords some great opportunities for those looking to purchase a home. First-time homeowners, move-up buyers and investors can all benefit from low home prices, large selection and historically low interest rates.

In addition, the government recently approved a First Time Buyer Tax Credit, up to $8,000, that does not require repayment if the borrower resides in and maintains ownership of the property for at least three years. Regulations do apply and can be reviewed at www.federalhousingtaxcredit.com, or just give me a call and I will be happy to discuss it with you.

Call me to hear more about the good news in today’s housing market. I can’t wait to share it with you.

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Debunking the Myths

Are you aware that a lot of what you know about buying your first home might be wrong? According to a national housing survey conducted by Fannie Mae, there are widespread misconceptions and gaps in consumers’ knowledge of the home-buying process. Here are a few examples:

Forty-four percent of all Texas adults believe they need a 20% downpayment to get into a house. That couldn’t be more wrong. There are programs out there that will allow you to put $500, even $0, down on your first home.
Nearly 40% of Texans believe they need at least five years on the job to qualify for a mortgage. Wrong again! There are many lenders out there willing to qualify consumers with less than two years of employment.

More than 30% of all adults believe they need a perfect credit rating to get into a home. This is also a myth. Lenders today look at more than just your credit score. There are non-traditional methods of analyzing consumers’ credit, and some lenders will even compile a credit profile, varying weight of credit accounts by importance.

The fact is that myths abound in the real estate industry, particularly for consumers who have yet to get their feet wet. Talk to your Texas REALTOR® about what you can do to get into your first home today.

The Texas Association of REALTORS®

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Home Buying Process Chart

I came across this handy chart that lays out different steps that need to take place in the home buying process.  The only thing I would change is perhaps spreading everything out to 45 days instead of 30 days.  Loan underwriting is quite a challenge, even for buyers with good credit and lots of money to put down.  So, 30 days is very aggresive.  But, I think this chart is right on track with the steps involved in finding your new home.

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You Can Get Your Tax Credit Now

You can get your tax credit now By MARTY KRAMER, Consumer columnist
	The U.S. Department of Housing and Urban Development is making it possible to monetize the $8,000 tax credit available to first-time homebuyers. Big whoop, right? What does that even mean?That’s the problem with words like monetize. You hear it, probably have an idea of its definition, but don’t really understand what it means regarding the tax credit. If the tax credit isn’t about money, then what good is it anyway?Here’s the deal. The tax credit was rolled out as exactly that: a credit on your federal income tax (or a payment to you if the credit amount exceeds your tax liability). From the start, Texas REALTORS® and homebuyers asked if there was some way to immediately apply that money to the downpayment of the home rather than wait for a “rebate” on your tax return. The answer was no.“Monetizing the tax credit” is equivalent to changing the answer from no to yes.This is great news if you’re a first-timer looking to purchase a home. HUD has given instructions to lenders about how buyers can use the credit as part of their downpayment of an FHA-insured home. Buyers must still come up with at least a 3.5% downpayment, which can be a gift from a family member, employer, or nonprofit, charitable organization.		You can use the money to increase your downpayment or pay for normal closing costs. HUD also has instructed that any fees associated with monetizing the tax credit not be excessive. The agency defines this as fees of no more than 2.5% of the anticipated credit. So if you qualify for the maximum $8,000 credit, the fees associated with making that money available at closing could be no more than $200.Here’s HUD’s news release on the program. The way it actually works is that FHA-approved mortgagees and other qualified entities can buy your tax credit. You get the money now, the lender charges a reasonable fee, and you get thousands of dollars to apply to your home purchase. There are still some details being worked out before lenders in Texas offer this option. When the program is in place in our state, your Texas REALTOR® will be an excellent resource to help you with this and other aspects of your home purchase. Keep in mind that the tax credit is available only until Nov. 30, 2009. After that, there won’t be anything available for you to monetize.

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12 Tips to Prevent Home Foreclosure

1. Protect your credit score.
2. Beware of offers that sound too good to be true – they probably are.
3. Become an educated consumer. Talk to your Texas REALTOR® about predatory lending practices – what they mean and how to keep from being a victim.
4. Don’t buy more house than you can afford right now.
5. Think twice about non-traditional loans, such as interest-only and adjustable-rate mortgages (ARMs). Fixed-rate mortgages are just that – fixed.
6. When purchasing a new home, look beyond the monthly mortgage. Other costs to consider include property taxes, homeowner’s insurance, utilities, maintenance, and, depending on the neighborhood, homeowners’ association fees.
7. Don’t sign a blank document or anything you don’t understand.
8. Know and understand the terms of your mortgage.
9. Don’t let anyone persuade you to “pad” your income to qualify for a loan.
10. If you’re having trouble making your monthly mortgage payment, don’t hide from your lender. Work with your mortgage lender to find out what your options are.
11. Work with your Texas REALTOR® to find a reputable lender and a loan product that works for you.
12. Call the foreclosure prevention hotline, 888/995-HOPE (4673), or visit www.995HOPE.org. Sponsored by the non-profit Homeownership Preservation Foundation, these consumer services are free.

Texas Association of REALTORS®

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First Time Homebuyer Credit

Tax Credit for Homebuyers

First-time homebuyers who purchase homes from the start of the year until the end of November 2009 may be eligible for the lower of an $8,000 or 10% of the value of the home tax credit. Remember a tax credit is very different than a tax deduction – a tax credit is equivalent to money in your hand, as opposed to a tax deduction which only reduces your taxable income.

The tax credit starts phasing out for couples with incomes above $150,000 and single filers with incomes above $75,000. Buyers will have to repay the credit if they sell their homes within three years.

Tax Credit Versus Tax Deduction

It’s important to remember that the $8,000 tax credit is just that… a tax credit. The benefit of a tax credit is that it’s a dollar-for-dollar tax reduction, rather than a reduction in a tax liability that would only save you $1,000 to $1,500 when all was said and done. So, if a homebuyer were to owe $8,000 in income taxes and would qualify for the $8,000 tax credit, they would owe nothing.

Better still, the tax credit is refundable, which means the homebuyer can receive a check for the credit if he or she has little income tax liability. For example, if a homebuyer is liable for $4,000 in income tax, he can offset that $4,000 with half of the tax credit… and still receive a check for the remaining $4,000!

Phaseout Examples

According to the plan, the tax credit starts phasing out for couples with incomes above $150,000 and single filers with incomes above $75,000.

To break down what this phaseout means to homebuyers who are over those amounts, the National Association of Homebuilders (NAHB) offers the following examples:

Example 1: Assume that a married couple has a modified adjusted gross income of $160,000. The applicable phaseout to qualify for the tax credit is $150,000, and the couple is $10,000 over this amount. Dividing $10,000 by $20,000 yields 0.5. When you subtract 0.5 from 1.0, the result is 0.5. To determine the amount of the partial first-time homebuyer tax credit that is available to this couple, multiply $8,000 by 0.5. The result is $4,000.

Example 2: Assume that an individual homebuyer has a modified adjusted gross income of $88,000. The buyer’s income exceeds $75,000 by $13,000. Dividing $13,000 by $20,000 yields 0.65. When you subtract 0.65 from 1.0, the result is 0.35. Multiplying $8,000 by 0.35 shows that the buyer is eligible for a partial tax credit of $2.800.

 

For those tracking the math in the examples above, you may be wondering where the “$20,000″ came from—that is, why you divide “$10,000 by $20,000″ in the first example and “$13,000 by $20,000″ in the second example. Here’s where the $20,000 comes into play:

The tax credit amount is reduced for buyers with a modified adjusted gross income (MAGI) of more than $75,000 for single taxpayers and $150,000 for married taxpayers filing a joint return. The tax credit amount is reduced to zero for taxpayers with MAGI of more than $95,000 (single) or $170,000 (married) and is reduced proportionally for taxpayers with MAGIs between these amounts.

In other words:

• $170,000 – $150,000 = the $20,000 in the first example
• $95,000 – $75,000 = the $20,000 in the second example

Remember, these are general examples. You should always consult your tax advisor for information relating to your specific circumstances.

Homes that Qualify

The tax credit is applicable to any home that will be used as a principal residence. Based on that guideline, qualifying homes include single-family detached homes, as well as attached homes such as townhouses and condominiums. In addition, manufactured or homes and houseboats used for principal residence also qualify.