Monthly Archives: December 2016

Receive Greater Scrutiny

Much has been written — and rightly so — about the plight of homeowners who have made energy-conserving improvements to their homes using financing provided through a PACE (Property Assessed Clean Energy) program. Frequently, the loans are not understood by the borrowers, and they may represent a loan burden for which the borrower would not traditionally qualify.

What has been needed is adequate disclosure requirements in the PACE loan programs. As hard as it is to imagine, in what many might consider an over-regulated universe, PACE loans — loans based on home equity and secured by senior liens — have had no regulatory body overseeing their originations and no disclosure requirements explaining how they worked.

As a result of Assembly Bill 2693 (Dababneh), which the Governor signed Sept. 25, 2016, and became effective January 1, 2017, California should see some significant changes in this regard.

First of all, AB 2693 imposes specific disclosure requirements on the purveyors of PACE loans. Added to California Streets and Highway Code [don’t ask me why it is there] is section 5898.17. It contains a form for disclosure that covers almost two full pages. It includes the following:

  1. Costs of the products obtained, including labor and installation.
  2. Financing costs, including application fees, prepaid interest, and other costs totaled as Amount Financed.
  3. Annual percentage rate, simple interest rate, total amount of principal, interest, and administrative fees.
  4. Total amount you will have paid over the life of the financing.
  5. Other costs, such as appraisal fees, bond-related costs, annual administrative fees, estimated closing costs, credit reporting fees, and recording fees.
  6. Total financing costs and closing costs, and cash estimated to close.
  7. For purposes of comparison with any other financing: the total the borrower will have paid in principal, interest, and financing costs.

To be sure, the legislation does not require that the exact disclosure format, as spelled out in the Code, be used. It allows that “a substantially equivalent document that displays the same information in a substantially similar form” may be used. Who will want to develop their own form?

Also included in the legislation is a buyer’s right to cancel. It is spelled out that the property owner shall receive the following document (or one substantially similar):

“You are entering into a contractual assessment with [loan provider] for financing that will result in a lien on the property at [address]. You may cancel the transaction, without cost, on or before midnight on the third business day after whichever of the following events occurs last:

(1) The date on which you signed the contractual assessment.
(2) TThe date you received your Financing Estimate and Disclosure.
(3) TThe date you received this notice of your right to cancel.”

It goes on to explain that, if the loan provider has already recorded the debt, he must within twenty days “take the steps necessary to reflect the fact that, if recorded, the lien on your property has been discharged and removed from the tax rolls…”

There is, then, yet another form for providing notice of cancellation to the lender.

So, there you have it. With these new regulations in place, there shouldn’t be any more problem with consumer misunderstanding of PACE loans, right? Well, maybe.

We note that there is still no regulatory body overseeing those who are selling these loans; and we wonder how much training the loan agents are receiving. Remember, there is nothing going on here like obtaining an MLO (mortgage loan originator) license endorsement. There is no licensing, no certification, nor any oversight by an entity like the Bureau of Real Estate. Suppose, for example, that the right to cancel is not explained to the consumer. “Who you gonna’ call?”

Financing Down Payments and Renovations

Whether you’re a professional property developer or a single homeowner, financing your property ambitions comes above all else. Even professional property developers with a proven system of acquiring and renovating homes, condominiums and business properties can run into financing issues.

We’ve examined the benefits of financing a higher down payment, purchasing renovations and the cash financing options available for those of you looking to buy and upgrade your home.

Banks and lenders want low risk scenarios and that ultimately comes down to meeting the required down payment for your mortgage deal, and they’ll give you a better deal if you offer a lower risk scenario. Paying an increased down payment comes with a number of fantastic benefits for your financial future. Here’s a few key benefits, according to Investopedia;

Reduced Mortgage Payments – Because you’ve put more cash up front, your monthly payments will be smaller and more manageable

Lower Interest Rates – Lenders will give you a far improved rate since you’re deemed a lower risk. Expect interest rates to lower significantly upon 20% down payment.

No Mortgage Insurance Fees – If you can’t afford a significant deposit, most mortgage deals will require you to take out mortgage insurance, which will add another 0.5 – 1% interest on top of your existing deal.

Ability to Ride Out Financial Crises – When it comes to a financial crisis, those in most danger of ruin are the ones who have taken out the maximum loan available on the lowest down payment. They have a high interest rate deal and may even face foreclosure.

Why Save For Renovations?

Renovations and upgrades obviously provide that wonderful ability of allowing you to transform your new home into your own dream living space. But aside from that, they can also allow you to significantly improve your home’s resale value. Investopedia strongly advise making wise additions to your homethat will ultimately boost your bottom line.

According to US News Money, these are the renovations and replacements that will bring the greatest % return on investment;

Renovations that bring the greatest percentage return on investment:

  • Entry door replacement: 96.6%
  • Deck addition (wood): 87.4%
  • Attic bedroom: 84.3%
  • Garage door replacement: 83.7%
  • Minor kitchen remodel: 82.7%

Renovations that yield the smallest return:

  • Home office remodel: 48.9%
  • Sunroom addition: 51.7%
  • Bathroom addition: 60.1%
  • Backup power generation: 67.5%
  • Master suite addition: 67.5%

Financing Options

So now you understand some of the reasons for actually spending more cash on your home! But if you don’t have a large disposable income, you may need to find a means of financing your purchases.

Saving – Of course, the glaringly obvious method for saving a down payment isn’t so straight forward. That’s especially true if you’ve got student debt, rental payments and bills to pay, with very little disposable income to go towards your downpayment. The internet is a wonderful place however, and fortunately there’s a number of down payment saving strategiesto help you!

Help from your parents & family – It’s the go to option for many first time home buyers. Loving parents are willing and often able to give you that extra boost in disposable income necessary to make that all important down payment on your first home. Even if you can agree a repayment plan with them, that’s going to be far more favourable than turning to a personal loan for financial assistance.

Personal loans – There’s a number of reasonable options for taking out a personal loan – Peer-to-peer lending platforms, car title loans (see how car title loans work) and credit cards are just some of your options for accessing cash.

Tap your IRA – There’s an exemption for withdrawing up to $10,000from your IRA for the purpose funding your first home. It’s an initiative you should consider if you’ve got money built up!

Hustle – Whether it’s getting a second job or selling off your unwanted possessions on Ebay and Craigslist, there’s nothing like a bit of hustle to increase your bank balance and put you in a more financially secure situation.

Which One Is Right for You

When you’re ready to get a mortgage, you face a dizzying array of choices: Fixed rate or variable? Points or no points? Mortgage broker or mortgage lender?

That last decision – mortgage broker or mortgage lender – involves a simple but easily misunderstood distinction.

Simply put, a mortgage broker is an independent professional who can shop around to find deals from a variety of lenders. A mortgage lender is represented by a loan officer who can speak only for that institution’s product line.

What does that mean for the borrower? As a practical matter, a mortgage broker can present you loan packages from multiple lenders – for instance, Wells Fargo, Chase and Quicken Loans. The loan officer from Wells Fargo, on the other hand, can pitch only Wells Fargo mortgages.

The advantages of dealing with a lender include reliability and reputation. With a broker, you have greater flexibility. Based on your financial profile, the broker may also line you up with a lender where you’re most likely to qualify for the loan.

When in doubt, comparison shop

So, which one should you use? There’s no clear answer, says Eric Tyson, author of Personal Finance for Dummies and co-author of Mortgages for Dummies.

“I’ve seen people be happy using either option,” Tyson says. “The important thing is to shop around.”

Tyson suggests soliciting loan packages from a mortgage broker and a couple of mortgage lenders, then judging which proposal offers the best deal based on rates and fees.

In the end, whether to use a mortgage broker or mortgage lender depends in part on your finances. If you have stellar credit and steady income and you’re shopping for a plain-vanilla loan, mortgage rates and loan fees are unlikely to vary much from one lender to the next.

If, on the other hand, you have spotty credit, you’re self-employed or you have an otherwise-tricky profile as a borrower, you may find the number of mortgage lenders willing to do business with you is more limited. In that case, it can be more convenient to use a mortgage broker. After all, they make a living from their knowledge of various loan products.

Laws offer protection

Unfortunately, the image of both mortgage brokers and mortgage lenders was tarred by a minority of unethical practitioners who built an unsavory reputation for themselves during the housing bubble. The movie The Big Short, based on author Michael Lewis’s expose on the U.S. mortgage meltdown of 2005, portrayed greedy mortgage brokers going so far as to target exotic dancers with bad loans. In another example, The Miami Herald reported in 2008 that thousands of convicted criminals were given mortgage broker licenses by the state of Florida. Not to be outdone, many mortgage lenders offered a menu of high-fee, high-risk loans.

Those excesses have largely gone away, however. The Consumer Financial Protection Bureau, created in 2010 to ride herd on the mortgage industry, released guidelines in 2014 that included a ban on “steering” – that is, on financial incentives for loan officers to push you into a loan you can’t afford. Lenders have stopped offering some of the risky loans that drove the housing bubble, and mortgage lenders and brokers operate under heightened levels of scrutiny and disclosure.

Tipping the negotiation in your favor

Whether you opt for a mortgage broker or a mortgage lender, the paperwork burden will be similar. Both will run a credit check, and both will ask for tax returns, pay stubs, bank balances and other information required for the lender’s underwriting process.