Wednesday, March 10th, 2010 at
3:20 am
Bad credit mortgage applications are subject to strict rules that are enforced by the mortgage industry regulator – the Financial Services Authority. The regulator regularly investigates whether the bad credit mortgage rules are being adhered to by mortgage brokers by way of test samples and mystery customers.
Test samples often show irregularities by mortgage brokers in relation to bad credit mortgage applications meaning that not all brokers are following the rules correctly. The regulations have been designed to stamp out mis-selling with the intention of protecting the pubic from unscrupulous mortgage brokers.
One of the most common ways in which mortgage advisors have been helping their clients to secure loans is by advising them to exaggerate their income. This practice involves inflating your income on a mortgage application to make it look like you earn more money than you actually do. The purpose of this activity is to secure a larger home loan than you otherwise would and therefore buy a larger or more expensive property.
One of the main reasons for a mortgage broker choosing to engage in such an activity is to win business from people who would otherwise not be able to obtain a bad credit mortgage. A broker who helps clients to fudge their numbers will quickly earn a reputation and will receive recommendations from existing clients. Such a practice is not only dangerous because the borrower may be securing a loan that they cannot actually afford, it is also fraudulent. This can earn both the mortgage broker and their client time in prison.
Another reason is that the procuration fees paid to brokers by lenders and packagers can be a lot higher for bad credit mortgage products than standard home loans. Brokers who are out to make a quick buck will therefore target borrowers who don’t fulfill the lenders’ criteria for clean credit products and do anything possible to ensure that the application is successful.
Mortgage brokers are now required to supply their bad credit mortgage customers with an Initial Disclosure Document (IDD) and a Key Facts Illustration (KFI). These documents detail the services the mortgage broker provides and also gives personalised information about costs and risks of products. The documents form part of the Financial Services Authority’s initiative to improve customer understanding of bad credit mortgage products.
Despite the increased regulation, some mortgage brokers still engage in fraudulent activities. However, the public should be aware that this type of broker is a minority within the mortgage industry as a whole. Examples of dishonest brokers have been emerging in the press quite regularly thanks to thorough investigations by the Financial Services Authority.
Some brokers have even been charged with falsifying their incomes on their own mortgage applications. This is usually done with buy-to-let mortgages so the broker can buy more investment property than they otherwise would. Advisors who are caught out by the FSA are usually banned from conducting mortgage business in the UK for life and their clients may also face criminal charges if enough evidence is available for the police to prosecute.
By: michael sterios
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Wednesday, March 3rd, 2010 at
5:09 am
You like to shop. You know you do. It’s nothing to be ashamed of. You like to get out there bedecked in your fashionable hot pants and flip flops, scout the malls and markets, and find the best deals there are. Shopping takes a great deal of time and effort but you’re perfectly happy to do it anyway. If only you put half as much heart in searching for the best mortgage deals there are! You would never end up with an unscrupulous bad credit mortgage broker.
The Sweet and Sour of It
Bad credit mortgage brokers don’t offer mortgages themselves. If they say that they do, they’re probably lying, so go run as fast as you can in the other direction. Bad credit mortgage brokers are basically middlemen who specialize in matchmaking financially-challenged borrowers to money-wise lenders. Bad credit mortgage brokers earn money on commission and are often independent, smooth-talking sales people. They are often licensed to work. Licenses, however, are very easy to obtain. Well and good for the bad credit mortgage brokers who deserve them, but how about the dodgy characters? Not all bad credit mortgage brokers have your best interest at heart. Because they’re paid on a commission basis, they may push for certain deals that are not exactly right for you. That’s why you should be extra careful in choosing a bad credit mortgage broker. The right one can make your life easier. The wrong one could make your life a living hell.
A Lender for the Legwork
Searching for the right mortgage lender can be hard and boring work. Bad credit mortgage brokers can do the work for you and more. They are always privy to the best mortgage deals available and can work out really good deals for you. This is because most bad credit mortgage brokers, especially those who have been in the business for a long time, have built relationships with the lenders. Also, if you have an undesirable credit rating, these brokers can even find lenders that would take you – not out of the goodness of their hearts but because that’s what they specialize in: poor credit.
A’shopping You Go
Shop for the perfect bad credit mortgage broker the way you would a pair of shoes or a new La-Z-Boy. Don’t put all your eggs in one basket. Talk to a number of bad credit mortgage brokers and compare what they have to offer. You can ask for references. Make sure that their promises are put in writing. Always pay close attention to the fine print. Check the accuracy of the information given to you. All fees – hidden or otherwise – should be disclosed prior to committing to anything, and make sure you know what all these fees are for. You can take note of the quotes given to you by bad credit mortgage brokers and call the lender directly to verify the information. It’s not tacky to be a stickler for details. You’re only safeguarding your undertaking and it is perfectly reasonable to do so. Remember, once contracts are signed, there is not turning back.
Your mortgage is not a joke. It deserves as much attention as picking new eyeliner because if you don’t like it, you can’t just give it your teenage niece.
By: Rony Walker
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Friday, February 26th, 2010 at
2:59 pm
If you have used your IRA, or other self directed retirement plan, to purchase an investment property the mortgage loan you obtain must be NON-RECOURSE. What does this mean? A traditional loan provides for “recourse” to the borrower. In other words, if, for whatever reason, you don’t make the mortgage payment the lender reserves the right to come after you, -personally – for the balance of the loan.
The IRS will not allow you to personally guarantee a loan made in the name of your IRA. Therefore, all IRA mortgages must have no recourse, that is, be “NON”- RECOURSE to you. In simple English – the cash flow from the property must be sufficient to cover the mortgage payment and all expenses because the lender can not come after you for any shortfalls.
IRA property mortgages are not resold into the secondary market through the usual network of mortgage bankers, mortgage brokers and banks.
IRA property mortgages fall under the category of commercial loans. With a traditional mortgage the lender may look at the rent and cash flow on the property, but the majority of their decision to give you a mortgage is based on your personal credit, personal income and your current debt load. Here, the property takes a back seat to your personal ability to repay the loan.
With commercial loans you, your credit and your income take the back seat. The property’s cash flow is the major consideration. In fact, your credit and income may never even be addressed. So how does a lender underwrite an IRA mortgage? The same way and methods they apply to apartment buildings, strip malls and office buildings. The lender will want to verify the ability of a property to generate sufficient cash to pay the mortgage, taxes and operating expenses.
This is a two step process. First, the lender will look at certified copies of leases and operating expenses that have been obtained from seller. The lender may also ask for certified copies of the sellers tax returns. The lender will develop a picture of what typical annual operating expenses will be for the property. If there is a question of “authenticity”, rents may even be verified directly with the tenants. Once income and expenses are determined, credits and debits are applied to come up with a net operating income- NOI – figure.
Being the conservative group that they are, the banker will then order an appraisal on the property. The appraiser will determine the value of the property based upon two approaches. First is the usual “Market” Approach which looks at recent resale of comparable properties. Most investors are familiar with this appraisal method.
What is different is the second approach called the “income approach”. Here the appraiser lets the lender know what the income and expenses are in the market, for properties that are similar to the property that the lender is being asked to mortgage. This is why IRA mortgages have higher appraisal fees – because substantially more work is being asked of the appraiser.
The lender then analyzes both sets of figures, from the seller and from the appraiser, and will then calculate their own NOI. So far the procedure is pretty straightforward. Here the numbers “are doing the talking”.
Lenders, always conservative beings, will want a cushion in the expenses to cover the “extraordinary” expenses should they become more “ordinary”. By this I mean… This “cushion” is given the name DSCR – Debt Service Coverage Ratio. Depending upon how quickly a property could be sold in the event of default or foreclosure, the lender will make sure that the “cushion” is larger, rather than smaller. A property like a strip mall which could take months to sell would typically have a 25% cushion. In other words, a 10 to 25% cushion is left in the available cash after expenses and before the lender calculates the maximum mortgage for the property. You now know what a Debt Service Coverage Ration of 1.10 to 1.25 is. The .10 to .25 is the cushion. Let’s see a quick calculation.
A six flat is being sold for $300,000, has a net operating income of $1908.00/ month. The lender uses a DSCR of 1.20 for a multi-family building. The net operating income (NOI) of $1908/month is divided by 1.20 which leaves you with a figure of $1590. This is the maximum Principal and Interest – P&I) - that can be applied and still meet expenses and “the cushion”.
Using a 25 year amortization Interest rate of 7% The maximum mortgage (PV) is $224,950.00
Again, the numbers, in the above scenario, are “doing all the talking”. This property would require the IRA to use $75,050 (25%) as a down payment.
So, here you have it. A peek behind the banker’s curtain in determining mortgage qualifications for IRA owned properties.
Steve Miszkowicz is the President & Managing Member of Chicago Trust Administration Services LLC
www.chicagotrustadministration.com
©2008 by Chicago Trust Administration Services LLC, all rights reserved
By: Steven Miszkowicz
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