This is a mortgage blog.

It's purpose is to educate consumers and real estate professionals about home mortgages.

April 22, 2014

How are appraisal values determined on a home?

What really affects value when it comes to a home appraisal?

I hear the following statement a few times a day, "My neighbor's house is listed for X and mine is bigger, so my house must be worth Y." Replace X and Y with values that make sense in your neighborhood and you've probably heard it too. For this reason, I am going to go over the basics of how a residential appraiser calculates home value. 

*This is not how commercial properties are valued, but that's another subject for another blog.

Recent comparable sales are everything. 

Residential appraisals are based on the three most comparable recent sales ("comps"). More than 3 comps may be used, but typically the three most comparable are given the majority of the weight. A common mistake homeowners make is comparing their home with another that is listed for sale pending sale, but not actually sold. Just because someone lists a home for $1,000,000, doesn't mean that it's worth that much or that someone would pay that amount for it. Pending sales and listed homes may be added to an appraisal report for a little extra support, but they cannot be used as a true comp unless they are closed and ownership has changed hands.

Appraisers usually try to stay within 1 mile for distance and 6 months for age, but this is not always possible. When it isn't possible, the best available comps are used. In large metropolitan areas, it isn't very difficult to meet these standards, but in rural or sparsely populated areas, exceptions must be made.

The best available comps.

Another common mistake people will make in estimating their own home's value is ignoring comps that are lower (whether consciously or subconsciously). An appraiser can't simply ignore comparable sales if they don't support the purchase price or estimated value for a refinance. They have to take into account any home that is similar to the subject property and use the best available. Its easy to search through recent sales and pick and choose a home here or there that would support a home's higher value, but the lenders who approve loans have access to the same recent sales information as everyone else. If the best comps are ignored, the lender will choose not to use the appraisal or cut the value, making it all but useless. Appraisers who do this repeatedly will get themselves blacklisted from lenders and will probably be out of business shortly thereafter.

Making adjustments for the differences.

Now we know what appraisers generally use to determine value, how do they come up with the exact figure? An appraiser will line up the subject property and the three or four closest comparable sales and then make adjustments for positive and negative attributes. For instance, if the subject property has more square footage than one of the comps, that property will be adjusted downward.  Other attributes that may cause increases and decreases in the home comparisons are # of bedrooms, # of bathrooms, lot location, home age, build quality, views, lot size, garage size, upgrades, swimming pools, guest houses, fireplaces and on and on. Many of these items are quantifiable such as number of bedrooms and bathrooms. Others are more subjective like views and lot location. After putting all of these variables together for each comparable property versus the subject property, the appraiser comes up with adjusted values for the comps based on the sales price plus or minus the adjustments. It is then just a matter of looking at the adjusted values and coming up with a final value estimation for the subject property.

Preparing the report.

The amount of time spent actually inspecting the property is only a fraction of the overall time required to complete an appraisal report. An appraiser will usually research a property before visiting the site to get a feel for recent sales and the local market. The appraiser will then visit the property to inspect it and take pictures and measurements. After this inspection, the information gathered about the comps is revisited with a better understanding of the subject property and the actual appraisal report is prepared and delivered. 

I hope this gives you a better understanding of the appraisal process.

Thanks for reading my blog!

Website: Mortgages in Arizona

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April 17, 2014

What documents are required to get a mortgage?

What documents will I need to provide to get a home loan?

Some loans will require more or less documentation, but these are the basic documents required by the majority of lenders on average mortgage transactions: 

Employed borrowers: 

  • Two most recent years of W-2 forms 
  • Two most recent years of federal tax returns, personal (all pages)
  • Most recent 30 days of pay stubs 
  • Current mortgage statement (if refinance) 
  • Purchase contract and copy of earnest money check (if purchase) 
  • Two months statements for any asset accounts (checking, savings, 401k, IRA, etc.) 
  • Homeowner's Insurance agent's name and number
  • Copy of driver's license or passport

Self-employed borrowers: 

  • Two most recent years of federal tax returns, personal and business (all pages)
  • Year-to-date profit and loss statement 
  • Current mortgage statement (if refinance) 
  • Purchase contract and copy of earnest money check (if purchase) 
  • Two months statements for any asset accounts (checking, savings, 401k, IRA, etc.) 
  • Homeowner's Insurance agent's name and number 
  • Copy of driver's license or passport

Retired borrowers: 

  • Two most recent years of federal tax returns, personal (all pages)
  • Social Security award letter (if applicable)
  • Pension award letter (if applicable)
  • Current mortgage statement (if refinance) 
  • Purchase contract and copy of earnest money check (if purchase) 
  • Two months statements for any asset accounts (checking, savings, 401k, IRA, etc.) 
  • Homeowner's Insurance agent's name and number 
  • Copy of driver's license or passport

Special cases require special documents:

Not all borrowers have the same documentation required, because not all borrowers are the same. Here are some documents that may be required under certain conditions:

  • Bankruptcy - Whether chapter 7 or 13, bankruptcy discharge paperwork is required if the bankruptcy is less than 7 years old.
  • Child support - If child support is being paid or received, a copy of the divorce decree or agreement in place is required.
  • Alimony/Spousal support - If present, alimony/spousal support that is paid or received must be supported by the divorce decree.
  • Gift funds - If any portion of the borrower's assets are a gift, a gift letter and supporting documentation is required. 
  • Other real estate owned - If any bororwer owns other real property, mortgage, insurance and tax documents are required for each proeprty owned. 
  • Rental income - If a borrower rents out an investment property, a copy of the current lease is required. 
  • Letters of explanation - A letter of explanation may be required in certain situations. It is simply a signed, dated letter from the borrower explaining a situation in detail to the underwriter. 

These documents will differ in certain situations and the underwriter (the person who approves a loan) may require additional documentation, but this is a general guideline for what will be required.  If any of the terminology is unclear or you have any specific questions, please do not hesitate to contact me for more info. 

Thanks for reading my blog!

Website: Mortgage Rates in Arizona

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April 16, 2014

How to shop for mortgage interest rates.

Many people reading this article may not have much experience comparing interest rates and lenders and may be avoiding shopping for a mortgage out of anxiety. Here are some dos and don'ts from someone who works in the mortgage industry to help you navigate the experience:

Don't fill out multiple loan applications.

You don't need to complete a full mortgage application to receive an interest rate and fee quote. Some companies will train their employees to get an application to further the sales process before telling you what they can offer. The reality is that they can accurately quote you rates and fees without a credit report or loan application (assuming you provide them with enough information). It is important to note that the rate quote will be based on the information you provide. The home value, credit score or some other piece of information may change things later, but at this stage you are comparing lenders and the reality is that the best lender for you at a credit score of 740 is probably still the best lender for you if your score turns out to be 680.  

Do provide the lender with all the details.

Calling a handful of lenders and asking them what "the rate is" does neither you or the lender any good. Mortgage quotes are based on multiple factors, all of which can change the rate and fees you qualify for. If a lender is asking you something basic about your situation or the property, answer to the best of your ability. It will only make the quote you receive that much more accurate. In other words, if you are hiding the fact that the home has renters to receive a better quote, it will come out during the process and the lender can hardly be blamed for not following through on the pricing offered under false pretenses. 

Do provide the same information to all lenders.

This may sound basic, but make sure that any lenders you receive rate and fee quotes from are basing their loan quotes on the same loan scenario. I have spoken with borrowers many times who have said that another lender was offering a better deal, only to find out they have given them a different home value, credit score or some other vital piece of information has changed. It only makes sense, if you tell one lender the home value is x and you tell another that your home is worth y, they are not using the same information to determine the rate and fees you qualify for.

Do compare lenders on the same day.

Rates can change by the hour, so if you are comparing a quote from one lender on Monday to a quote from another lender on Friday, you are comparing apples to oranges. Try to set aside a block of time one day to do some rate shopping for the most accurate results. Once you have compared lenders at any given time, the difference between them will likely remain similar regardless of whether rates go up or down before you lock. 

Do ignore tax, insurance and title figures.

If you receive a Good Faith Estimate, ignore the insurance, tax and title figures because these are not typically dependent on the financing you choose. The property taxes are what they are, no matter who you choose for your mortgage. Your homeowner's insurance premium is determined by the company and coverage you choose. The title charges on a purchase are determined by the title company on the contract, not by the lender on the loan. It is important to note that on refinances, borrowers often choose the title company recommended by the lender, but they are not required to do so and are free to shop for those services if they wish. The title, insurance, and tax figures on a Good Faith Estimate are simply there for you to get a rough idea of your closing figures, not for comparison shopping. 

Don't assume lowest is always best.

Obviously, if you feel comfortable with two lenders and you believe they can both deliver on the mortgage they have quoted, you should probably choose the lower of the two. However, many factors go into a mortgage and not all mortgage professionals or companies are created equal. Sometimes you may have to ask yourself if it is worth the stress and possibly not closing on time to get the lowest possible estimate. If it takes 35 days to close and the lowest rate lender locked you for 30 days, who pays for the lock extension and at what cost? If it is you, was that really the best deal? If the lowest rate lender has the strictest guidelines, will you get approved or will you have to spend money on appraisals and inspections to find out? 

Wrapping up: 

In order to get the best results when interest rate shopping, obtain quotes in writing for your unique situation from a number of different lenders on the same day. Compare only the lender charges and the rates on the same loan program. Once you have compared and researched, choose a lender you believe will deliver as promised and move forward with the confidence that you have done everything possible to obtain the best loan. 

Thanks for reading my blog!

Website: Mortgage Rates in Arizona

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April 15, 2014

What are the steps involved in the home mortgage process?

Every home mortgage process is a little different, but nearly all loans follow this same timeline of events.

Here is a quick overview of the steps nearly all loans will follow before the mortgage officially closes. 
  1. The Application: In order to begin the loan process, a prospective borrower must first fill out an application.  There are three typical methods to complete this portion of the loan process; an online application, a face-to-face interview or a phone interview. Most of the information contained in the application is something a borrower would know off the top of their head, but some things require extra research.  
  2. The Documentation Stage: In order to close a mortgage quickly and efficiently, it is imperative that the borrower follows up the application with the supporting documentation. Any delay by the borrower in gathering documents at this stage delays the entire loan process. The list of documents required varies greatly depending the circumstances of the borrower. Some mortgage professionals will collect only the bare necessities at this stage of the process to push the loan forward, while others proactively request everything they know will eventually be required at some point in the process. I personally believe it is best to provide as many relevant documents as possible upfront to lower the possibility of last minute issues or rushes.
  3. The Appraisal & Title Work: The next step in the process is to order and schedule the home appraisal and title reports. On a home purchase, the borrower is rarely involved at this stage beyond providing payment information for the appraisal. On a home refinance, the borrower works with the appraisal professional to schedule a time to inspect the home. The appraisal can be one of the more time consuming portions of the process, so it important to schedule it as quickly as possible. The title work is also ordered by your mortgage professional or his/her team during this step of the process. Borrowers are usually not involved in the title report step unless an urgent issue arises on the preliminary report.  
  4. The Loan Approval: When the loan is ready, it is packaged up and submitted to the underwriter. The underwriter may or may not work for the same company as the mortgage professional depending on the type of company he/she works for. The underwriter is the person who approves, suspends, or denies the home loan. Many loans that reach this step are eventually approved because experienced mortgage professionals only submit loans they believe will be approved. There are two types of loan approvals: 
    • Conditional approval means that the underwriter requires a few more items to fully approve the loan. Assuming those conditions are met, the loan is acceptable. The conditional loan approval may require items from the borrower, title company, appraiser, or processor. Please see my article here regarding the roles each person plays in the process. 
    • Final Approval (referred to as "cleared to close") means that all the conditions have been satisfied and the loan is ready for the next step.
  5. The Loan Documents: Once the loan is finally approved, the loan documents are transmitted to the title company. This typically happens by email, so it is almost instantaneous. The title company then prepares the preliminary settlement statement (known as the HUD statement) and sends a copy back to the lender for approval.  
  6. The Signing: Once the lender has approved the HUD, it is time to schedule the signing of the final paperwork, including the new note and mortgage. Up until this point in the process, nothing a borrower has signed is a binding lien on the property. The fees at the signing are no longer estimates, they are actual closing figures. After the signing, the loan documents are transmitted to the lender. For a purchase, upon receiving the executed closing documents, the lender releases the money to complete the transaction. For certain refinance loans, this will begin the three day right of rescission period, in which the borrower has three days to look over the documents. After this three day period, the loan will be completed.
  7. The Funding: This is the day everyone has been waiting for. Once the lender has released the funds, the title company disburses them to all parties per the settlement statement. For purchase loans, this is when you finally receive the keys to your new house and the seller receives any monies due to them. For refinance loans, this is the date that existing liens or debts are paid off and/or the borrower receives any cash back.

That is the basic flow of mortgage loans. The process may appear daunting, but many of the steps are done behind the scenes by the professionals involved in the transaction without borrowers having to worry about them. The more research a consumer does upfront finding true professionals, the quicker and smoother everything is throughout the process. 

Please feel free to contact me with any questions you may have regarding the loan process. 

Thanks for reading my blog!

Website: Mortgage Rates in Arizona

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March 13, 2014

Are Realtors and real estate agents giving away business?

Most likely, yes. I'm going to throw some numbers out that should really make you sit up in your chair and take notice. 

Homebuyer info graphicRegardless of whether you are a multi-million dollar superstar or you started in real estate yesterday, this is something to think about:

  • 88% of homebuyers would use their agent again or recommend them to others. (1)
  • 12% of homebuyers actually use an agent they have previously used. (1)
  • The average American household moves every 5 years. (2)

Read through those figures again and honestly think about the amount of referrals or repeat customers you typically generate from your past clients.

Why are those numbers so important?

They are important because if you are not actively staying in front of your previous clients, you are actively giving away business. It is estimated that it costs 4-10 times as much to gain a new client than it does to retain a client. (3) I have seen people estimate in various places online that as many 70-80% of homeowners forget their real estate agent's name within two years of owning their home. I can't seem to find anything verifying or contradicting these figures, but from anecdotal evidence, I think they may be close.

Don't you love it when a past client calls to buy or sell a home with you again? Wouldn't you like to get more of those calls?

It is important to stay in front of past clients while still providing them with value. Emailing everyone in your database to ask them for business every week probably won't cut it. You need an effective mix of media presentations at appropriate times. Mailed cards, emails, informational videos, and phone calls are all excellent tools when used judiciously and when they provide something of value to the customer.

There's some good news if you are a real estate agent here in Arizona. I already have a system in place to help you retain more of your previous clients. The best part is - you don't have to do anything! I'll keep both of our names in front of homebuyers with co-branded items during the home-shopping process, the loan process and for years after the purchase has closed. You've spent time and money to find homebuyers, let me put your customer retention on auto-pilot while you work on your business.

If you are not located here in Arizona, it is probably time to think about a system to keep more of your hard-earned business (if you don't have one already). Lenders are great partners to help split the effort and cost that are required to put that plan into action. I have a vast network of mortgage professionals throughout the country. Simply reach out to me and I'll be glad to refer you to a great lender in your area.

As always, thanks for reading my blog and don't hesitate to contact me with any questions!

Website: Arizona Mortgages

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(1) NAR 2013 Profile of Home Buyers and Sellers

(2) Census Info

(3) Cost of customer acquisition vs customer retention