Mr MAD's Mad Money Advise

[MrMAD2]

I decided to start a thread that I'll be adding to occasionally with tidbits of information and insight into the banking world for those of you that may want or need some advise or just simple information.

For background: I used to be a licensed real estate agent in Illinois, I am currently a mortgage banker (residentially) and a mortgage broker (commercially --- although this coming week may change that to a banker/correspondent lender), and I'm an amateur lawyer (law is my hobby, specifically monetary and banking/credit law, though I study all avenues of law).

To begin with, let me start by telling you all something that almost no one else in my position (a mortgage professional) would ever tell a client: Just about every broker or bank loan officer will have you sign a form saying that you will work only with them and if you default that you are liable for their losses. Well, the only way for this to be upheld in court is if they present a lending institution with acceptable terms to you that you reject, and then you go directly to that institution and accept the terms directly, cutting out the other party. Then, only if the first party finds out and can prove that they originated that lending source can you be held liable for lost commission that you agreed to. Basically, until you are at a closing table, documents are signed, and money is wired and changes hands... nothing is really ever final or binding. This is also a true statement about loan terms and conditions. Every lender has a blurb in their commitment papers that state that they reserve the right (or similar lingo) to have the terms change with or without notice. Normally, in residential lending (which is what most people are familiar with and utilize), there must be some kind of written notice, although there is usually a state law that determines the time frame in which that written notice of change must be submitted by (typically 3 business days, though it can be 7 or even 30 in some instances).

Advise: While it is obviously tedious, and most material is repetitious, make sure that you read EVERYTHING that you are signing. If you have a question, ask. If you don't understand the answer, ask for further clarification. If you still don't get an understandable response, consult an attorney. Most states, by the way, prohibit real estate agents from giving any kind of legal advise, interpretations, or even explanations of the law, contracts, or decisions.

More to come in upcoming posts.

[MrMAD2]

It's been a couple weeks, and I apologize for the long delay. So many things at the office keeping me so busy I haven't even played poker in the past two weeks. Working on a 30 million dollar international deal, working on two upcoming hotel closings at an average loan amount of 4.5 million for both purchases and refinances, overhauling residential software and technology, hired several new loan officers and account executives that needed training, and have been hammering out the details to finish the stock purchase for partnership completion. It's been a busy few weeks, but now back to the thread at hand....

Everyone hears conflicting reports about credit, FICO scores, and what it all means and how you can take care of yours. FICO is the credit reporting beureau's way of scoring the risk of an individual based on many factors and determined by millions upon millions of test cases over the past couple decades. The scores range between 350 and 850, and there are three major reporting companies: TransUnion, Experian, and Equifax. A "Tri-merge" credit report is a full report from all three of these agencies with your score from each one. Almost every lender is concentrating on the score in the middle. They normally take out the top and bottom scores and throw them out, though some have a restriction that the bottom score must not be less than X. Typical stepping stones are: 525, 560, 580, 600, 620, 660, 680, 700, 720, and 750. Typically, 600 - 680 is considered what is known as "B/C paper." This is also known as "sub-prime" or "non-conforming" clientele. "A paper" clients are the 680 or 700+ borrowers. A paper clients are accepted by almost any lender or local bank provided their personal DTI (debt to income) ratio isn't too high to be overlooked. These are considered the least risky borrowers. B/C clients are relatively risk free, but either have not had solid credit long enough, or may be starting to slip a little from the better range. Anything below 580 is almost "dead money."

Just because your credit may be above or below these marks doesn't gaurantee anything. The rest of your credit report will be reviewed. Your credit report shows many things: How many open lines of credit you have, how many closed/cancelled/collection lines of credit you have, bankruptcies, late payments, types of payments, recent credit applications, etc. All of these things can be considered by a lender. As a matter of fact, all of these things help determine your scores by the agencies reporting.

Here is the most helpful tip I can give anyone when talking about their credit report. ALWAYS make a payment, even if it is the minimum. ALWAYS make that payment ON TIME. IF you miss making a payment on time, do NOT allow that payment to be made 30 or more days late. IF you make your payment late, but in less than 30 days from the due date, make SURE your creditor does NOT report the payment as more than 30 days late. Late pays are the quickest way to hurting your credit score. While the obvious idea is to make more than a minimum payment, I will get into that later. The key for your score is to not make a payment 30 or more days late. This is the number one way to help keep your score even or increasing that anyone can do.

Get a copy of your credit report whenever it's offered (if you are rejected by any lender or credit agency, you receive a letter offering a copy of your credit report for free... take it). Review your credit report and make sure that everything on it belongs to you. Make sure no one is misreporting to the agencies about your credit lines past or present. If they are, follow steps offered to dispute those issues. Dispute of misrepresentation can lead to having those items removed from your credit report and your score repaired as a result.

General advise for those looking to establish or repair credit and/or for working towards getting your credit in line to buy or refinance a home: Have no less than 3 open lines of credit, no more than 15 open lines of credit. Have no more than 50% of your available balance as outstanding balance in revolving credit (credit cards - standard, store, or other). Do not have multiple institutions requesting copies of your credit report for any reason in a short time (each credit pull reduces your score temporarily to alert potentional lenders that you are seeking credit).

Credit is a very very in depth and confusing issue. I'll talk more about it in upcoming segments as the topic dictates. For now, I'm late for getting in to the office and must go.

[MrMAD2]

The explosion of marketing over the past few years to seduce the public into desiring an Interest Only mortgage is deceiving. First, let me point out that EVERY I.O. loan will, at some point, convert to a conventional "fully amortizing" type of loan payment. If it didn't, the principal of the loan would remain 100% unpaid at the time the term of the loan was up. This would, in essence, create a balloon payment of 100% of the actual loan cost of the house.

For example, if you had a 30 year loan on $100,000 at an interest rate of 6.250% and that rate was an Interest Only program for the full term of the loan, your payment would be $520.84/month. At the end of the 30 years, you would have a final payment due of $100,000!! A conventional 30 year fixed loan would, at the same terms, have a monthly payment of $615.72, of which $94.88 would be paid towards the principal amount ($100,000) each month.

Here is another thing to keep in mind with regard to IO loans. If you don't plan on staying in your current location for more than 5-10 years, then IO is likely not for you. Reason being that you aren't paying down any of that principal. As a result, the only equity you have in your home is what the market in your area appreciates to create in the time you are there. While it may seem like an ok deal to be paying a lower monthly rate, what you are essentially doing is paying rent. Granted, it's not exactly that, but it's close. If you buy a home for $100,000 at zero money down, and after five years, the house is worth $103,000 and you have been on an IO loan for those five years, your equity in the house is only $3,000. If you were on a conventional loan for those five years, you would have $8,692.80 in equity using the same example from above. That's almost triple the equity.

Tip: Do your homework as to ALL available programs that you fit into before accepting an offered program. Know what the pros and cons of each type are so you know your options. Also, always take a step back from yourself and ask yourself how long you TRULY believe you will be living in the house you are looking to buy or refinance before making your decision. The answer to that question will create the best "makes sense" answer.