The Mortgage Assistant

I had some clients refinancing their home who asked, what’s a subordination?  This particular couple (names of banks have been changed) had a primary through Wells Fargo and a second line of credit with OnPoint. I explained that if they were to declare bankruptcy or their home was to foreclose, the first entitled to compensation would be Wells Fargo, with OnPoint  second in line.

When a first lien is paid off (in this case Wells Fargo), as happens with refinances, the second automatically becomes the first, which means that the second must be convinced to stay the second and allow a new lender to take first; that new lender being Equity Home Mortgage or the bank that is doing the refi.

That’s a subordination; essentially asking OnPoint nicely, will you stay second and allow us to take first so that our mutual client can have a lower mortgage payment and therefore a better life? And usually they say yes because it really doesn’t benefit them to say no. After all, (in this fictional example), if the client stays with Wells Fargo, OnPoint will still be in second lien position…

Banks usually charge $200 to $250 to subordinate. This same couple asked “So this $200 “fee” is for remaining subordinated?” I explained that the $200 fee is technically a Processing fee because of the man hours involved. The bank that’s doing the refinance mails the second a bunch of required paperwork that the second analyzes to determine whether the refinance benefits the client. Another example of man hours involved is that when the second approves the subordination, they draft a Subordination Agreement which they then send to the Title Company.

Subordinations can delay closing and extend interest rate locks because of their long processing times, often 15 business days. A lot of times, a request for subordination can’t be made until the appraisal is in because that’s part of the paperwork that’s forwarded for analysis.

If you’re looking for an experienced mortgage team in Oregon, we are happy to help. Call 503-288-9284 and ask for our Senior Originator, Julee Felsman or send inquiries to LaurenSands@EquityHome.com.

Often times when customers receive the GFE in the mail as part of the disclosure packet, they’re confused why costs on the GFE don’t apear to match the closing cost worksheet.  GFE’s are meant to be an accurate portrayal  of costs associated in obtaining a mortgage. However, it’s not nearly as detailed as the closing cost estimate (the c.c. estimate is reflective of the HUD-1, the itemized receipt of costs paid in association with the mortgage. The HUD-1 is received at close).

Here is a GFE and HUD Estimate.

You’ll see a hand written # next to each cost on the HUD Estimate/Closing Cost Worksheet. That # is the line on the GFE that particular cost is included in. This will help you cross reference the closing cost estimate with the GFE that way you can confirm the #s match. Let’s go through a few costs using the HUD estimate as our base.

The first line on the HUD is the origination fee, what we pay to the person that gets us the loan, the ‘Loan Originator,’ typically 1% of the loan amount. There is a hand-written #1 next to it. That means that this cost is shown on line 1 of the GFE “Our Origination Charge.” You will see that line 1 is on the 2nd page of the GFE as are the subsequent lines.

Also included in line 1 of the GFE (as you can see by the #1 written next to these costs on the closing cost worksheet), are the processing fee and tax service fee. This particular estimate includes an ‘escrow waiver fee,’ which is included in line 1 of the GFE as well. You will not find as escrow waiver fee on most loans.

Skipping ahead to another example of how to cross reference these two estimates, section 4 of the GFE is ‘Title Services and Lender’s Title Insurance.’ On the closing cost worksheet, you will see that the ‘settlement fee,’ ‘title endorsements,’ ‘courier fee,’ ‘reconveyance fee’ (only in the case of refis), ‘lender’s title insurance’ and ‘owner’s title insurance’ (only on purchases), are all included in section 4 of the GFE. They are all title costs.

On the closing cost worksheet, each cost is itemized. On the GFE, costs are lumped together.

It is my hope that this article will create educated consumers. If you are looking to buy a home in Oregon state or if you have any questions, I can be reached on the ‘contacts’ page. Feel free to leave a comment.

Much like getting a car checked out by a mechanic before buying it can save you from thousands of dollars in heartbreak, paying for early-issue title insurance when you buy a flipped property can save tens of thousands of dollars. The purpose is to protect against contractor’s liens against the property from workers who were not paid; a blight in new construction and  flipped homes.

Since it’s required by the lender on new construction if the house is sold by the developer within 75 days of the Notice of Completion date, buyers are forced to pay the fee and therefore, forced to be protected by insurance against contractor’s liens. On a home flip, it’s not required by the lender; your agent(s) may not know to recommend it. They also won’t want to worry you out of a transaction or discuss costs that are unnecessary; most consumers don’t want to pay more on a transaction (that’s already costing thousands in closing costs).

To estimate the cost of title insurance in Multnomah County, take $2 and multiply it by the # of thousands in the loan amount minus $100, for example $200,000 would be 200 X 2 – 100 for $300.

The tens of thousands of dollars in heartache that could be caused by a contractor placing a lien against your home is well worth the cost of insurance and should be bought on any flipped home.

A flipper buys a home in various levels of dis-repair and puts equity in by renovating. All of those repairs cost a lot of money. If they can’t pay the contractor the 50k they owe, that’s not going to stop them from trying to sell the house. Afterall, they’re in a desperate position…

To learn more about early issue title insurance, see my earlier blog entry.

The most common condition I see is the requirement to source and document all large (and sometimes small) non-payroll deposits in your bank statements. This is typically endured by the self-employed, small business owner. Small business owners tend to deposit their paychecks into personal rather than business accounts.

The consequences of having to source and document all non-payroll deposits are also endured by those who deposit gift funds into their account from a relative, in cash, rather than a tracable source like a check. In the case of a check, you can source the deposit by looking at the check. With cash, there is no way to source it; which means it could be a second loan on the property, a type of fraud called a silent second.

For deposits on the bank statement that don’t say ‘payroll’ or ‘salary,’ we have to get copies of checks. If the deposit was cash, it cannot be counted towards your assets. For example, if a relative gifts a $20,000 cash gift for the down payment on your house and then you deposit that cash into the bank, we will not be able to use that cash towards your down payment or closing costs. Which means that even if we could put you in a different loan program that requires less of a down payment, there may not be any money left to use.

In this instance, if you have $5,000 more cash in the bank (after subtracting the $20,000 gift from your assets meaning you have $25,000 in the bank currently; but since we had to subtract the $20,000 from what we can use, that only leaves you with $5,000), that could be barely enough to cover closing costs.

Even if we can place a person in a different loan program in the above situation, there will be inevitable delays and likely the borrower will miss out on the house they’re trying to purchase.

Gifting requirements, and the fact that cash cannot be sourced, are a big deal because the lender wants to know that cash deposits are not a loan. Gift letters specifically state, that the gift is not a loan. Another loan could create financial liability for the lender because of the potential for a lien to be placed on the home ahead of theirs. And the more debt a person has, the more likely they are to fall behind on their payments, causing foreclosure.

The risk profile is much hire when the borrower is not personally invested. It’s easier to walk away if one has nothing to lose. It’s the same concept as a landlord who asks a tenant for a security deposit. This creates a personal investment for the tenant in the future of that property.

Bottom line: don’t make cash deposits. Ask Julee Felsman what she personally advises. Our company exercises ’direct underwriting.’ We can call the individual underwriting your file and ask them what they need to see, making it possible to tailor each file for success. Since Julee has been with Equity Mortgage for 15 years, she knows what to do about it.

If you are paid in cash for legal services or commodities (meaning that you report the income on your taxes, in addition to the other implications of legal), such as rent; you may be able to make it into a cashier’s check before depositing it; enabling it to be traced and sourced.

Make the check out to yourself and fill in the source, such as ‘Rent’ or ‘Birthday Gift Mom’ in the second line where you usually write what the check is paying for. In this case you’re writing what you were paid cash for. If you found yourself in this situation with our company, you would definitely want to ask our Senior Originator, Julee Felsman, before taking any action.

One of the questions we often get, usually a few weeks after a loan funds, is where do I make my first payment? At Equity Home Mortgage, you make your first payment to ‘UAMC doing business as Eagle Home Mortgage.’ Equity Home Mortgage is a JV with Eagle and Remax.

You will find payment instructions in the packet of closing documents given to you at signing. The individual document is entitled ”Payment Letter to Borrower.” There will be payment coupons that you can send in.

In the first two months of home ownership, make sure you promptly open all junk mail because you will receive payment instructions for both the first and second payments. The first letter will be from UAMC/ Eagle Home Mortgage.

The second letter will be from your new servicer. The servicer is who you will remit payment to until a refinance changes your management company. They don’t own your loan, they simply handle the monies and services associated with it.

In the beginning of the loan process, you will receive a disclosure that will state whether your loan is going to be sold on the secondary market. Most loans are sold. Loans that are kept by the lender who originates it are called ‘portfolio’ loans.

The secondary market for loans was created as a way to make it feasible for people to loan such large amounts of money for relatively low yields because it offered another way to create profit.

Investors buy the loans from the lender as mortgage backed securities which are sold on the stock market. Somewhere, an investor is receiving the interest on your loan. Part of it is paid to the servicer of course, for handling the duties involved for the life of the loan.

Your new servicer is who you will make your second payment to and who you will make the rest of your payments to until you refinance, which will likely change the servicer of your loan.