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Understanding HVCC And How It Affects You – Part Two

In our last post, we talked about a common real estate scam wherein Realtors, Loan Officers and Appraisers would collude together to convince a home buyer that the house they were purchasing was worth more than it actually is. In today’s post, we’re going to talk about the changes that were made in 2009 to put an end to this scheme.

There were two major changes that came about in 2009 regarding appraisals and the appraisal process. One is known as AIC, or Appraiser Independence Certification, and the other is known as HVCC, referencing the Home Valuation Code of Conduct. Both of these serve the same major ideal:

The Appraiser on a mortgage transaction needs to be completely independent. This seemingly simple sentence does have an impact on you in the home buying process.

The way that this idea manifests is through prohibiting communication. The intention is to maintain “appraiser independence” throughout the entire valuation process. We talked about a common scheme in the last post, but even without a scheme involved, the argument being made was that there is an implied pressure on the appraisers to bring in higher values. The argument was that so long as a Loan Officer has the ability to choose who he orders appraisals from, then individual appraisers would have a constant implied pressure to bring in good values, because if they didn’t, then Loan Officers would naturally migrate to different appraisers who did bring in higher values.

So, the idea of AIC was manifested in the rules of the HVCC. Beginning in 2009, all direct communication with the appraisal from the Loan Officer became prohibited behavior, carrying steep fines and the potential of license censure, and all communication other than the scheduling of property inspections with the appraiser from the Realtor also became prohibited behavior! They went on to say that neither the Loan Officer, the Realtor, or the buyer are allowed to choose who the appraiser actually is!

So, how do you order an appraisal if no one is allowed to choose who to order it from and then no one is allowed to talk to them afterwards?

Well, overnight, a new industry emerged, known as AMCs, or appraisal management companies. In our next post, we will talk about how these work and how this will affect you in buying your next home!

How to go about income proof if your income comes from Retirement and or Social Security?

203K Loans, FHA, FHA 203K, Home Loan, Refinance, Renovation, USDA, VA

In yesterday’s post, we talked about the three items that you will always need to document in regard to your income. To recap, we always need to show the underwriter the following:

Proof that you have a history of receiving this income
Proof that you are currently receiving this income
Proof of the likelihood that you will continue to receive this income

Last time, we talked about the steps to show this for a salaried employee. Today we’re going to take a look at how to go about this if your income comes from Retirement and or Social Security.

So, first up, we need to prove that you have a history of receiving this income. What we need to gather up here is actually very similar to the needs of a salaried employee. Instead of needed the prior two years’ worth of W2 forms, we will need to get the last two years 1099 forms. These are very similar to W2 forms, in that they break down your total amount of money received. You will have received a copy of these from your retirement and the Social Security Administration at the end of each year. If you don’t still have copies of these then you will need to reach out to your retirement provider or to the Social Security Administration and request copies.

In order to prove that you are currently receiving the income, we will need to get your prior two months’ worth of bank statements to show that the benefit amount is being deposited to your account. This is pretty easy, because on all loan types, we have to get bank statements in order to document your current assets, so we get to kill two birds with the same stone .

Finally, in order to prove the likelihood that you will continue to receive this income, we’ll need to get a copy of your most recent yearly Award letter. This is a document that is sent you by either your retirement provider of the Social Security Administration at the beginning of each year that spells out the amount that you can expect to receive for the upcoming year.

Overall, this process is a little bit easier than documenting income for a salaried employee, but there are still hoops that you have to jump through. Here at the Heights, we think that the more you are prepared and educated for what you can expect, the easier it is to achieve what is needed. So, in that spirit, in the next post we will take a look at some more complicated income types to document!

What documentation are you going to need to prove your income if you are paid by W2?

203K Loans, FHA, FHA 203K, Home Loan, Refinance, Renovation, USDA, VA

On most mortgage transactions there will be uniform requirements for what kind of documents you will need to provide to the underwriter. Here at the Heights, we are of the belief that the more you are prepared for what is going to be required, the easier and smoother the mortgage process will be for you.

A common misconception is that since I have been at the same job for a long time, I shouldn’t need to provide very much information. On the surface, this makes sense, but one thing to remember is that in today’s modern age, there are no longer what was called “make sense underwriters.” You can think of this term as going into a bank in the 1950s and sitting down across from the banker. He knew you from around town and was aware of your character. He didn’t really rely on any lending guidelines, but instead, looked you in the eye and hear you out and made a decision that “made sense” to him.

Unfortunately, these days are long behind us. Now, all lending guidelines are made from on high in Washington, DC. Each year, as part of the Congressional budget talks, each of the lending programs has to fight for its funding, and typically, each year, as a part of that negotiation, more rules are added to the program guidelines. On top of that, these rules have to work for everyone in the country who is utilizing one of these mortgage programs, so the rules have to cover a broad scope.

So, for income, regardless of where you work, whether you work, or how you are paid, you are always going to have to document three things:

Proof that you have a history of receiving this income
Proof that you are currently receiving this income
Proof of the likelihood that you will continue to receive this income

These rules manifest differently depending on the way that you are paid, but for all types of income, it will always come down to these three rules. So, today, we’ll talk about a regular, salaried employee.

In order to prove that you have a history of receiving this kind of income, we will need to get two things. First, we’ll need to gather up your previous two years’ worth of W2 forms that your employer provided to you at the end of each year. If you don’t still have these, you can typically get these from whoever filed your taxes for you, or from your employer themselves. Second, your Loan Officer will need to order a tax transcript from the IRS. This comes from the general idea that the Federal lending programs have, which is “trust, but verify.” This process is easy on you, in that you simply need to sign a form (IRS form 4506T), which will be provided to you by your Loan Officer, which they will then use to order this transcript directly from the IRS.

In order to prove that you are currently receiving this income, we will just need to get your paystubs from the most recent 60 day period. These are pretty straightforward, but bear in mind that there are a lot of things that can appear on paystubs that will trigger different sections of the guidelines, so it is not uncommon to need to get some supplemental documentation to address items that have appeared on your paycheck.

Finally, in order to prove the likelihood of your income continuing, we simply need to get a verification of employment form completed by your employer. This is actually one of the easiest items from the list in terms of simplicity, but it is not uncommon at all for an employer to be less motivated to fill this out quickly than we are, so it is a good idea to let your employer know that this request is coming and that it is important to move quickly on it.

In tomorrow’s post, we’ll move on to talking about how we go about documenting these three things for some more exotic income types.

What Is Home Valuation Code of Conduct (HVCC) – How it affects you – Part One

Home Loan

Buying a new home or refinancing your current home has a lot of steps and a lot of different processes that occur. But, the one that everyone seems to be the most aware of is the appraisal process. In order to get a loan, we need to get an appraisal done by a professional.

Should be about as simple as that, right?

Wrong. In 2009, Congress passed a new set of laws, that collectively are known as the Home Valuation Code of Conduct, or HVCC. In order to understand how this set of rules will affect you, it is helpful to understand what the history of these changes were and what caused the changes in the first place.

For a very long time, going back to even the 1960s, there has been a common scheme in the real estate market that bad actors have used to not only milk customers, but also to commit fraud against the lending institutions themselves. There are a lot of different ways that they scheme itself was actually pulled off, but generally, they all work the same way. A Realtor, a Loan Officer and an Appraiser will all work together to convince both a purchaser of a new home as well as the mortgage investors that a home is worth more than it actually is.

Essentially, the mortgage process is protected by checks and balances. If your Loan Officer is trying to fool you into thinking that the house you are buying is worth more than it is so that they can get a higher loan amount and make a higher commission, this is not going to work because first, the realtor will already have the house listed at a fair market price, and second, in order to close, an appraisal of the house will need to be done, and the appraiser will see that this is too high.

In the same vein, it works the other ways as well. If an appraisal is over-valued, the realtor will see this and call it out, and it will be moot because the purchase price will still be set at the true market value. The Loan Officer will run the appraisal through a compliance check and see that the value doesn’t correspond with the computer’s algorithm.

If an agent tries to list the house for considerably more than it is worth, well, the same thing will occur. The appraisal will still come back at a considerably lower value. And, even if it doesn’t, the Loan Officer’s AVM (automatic value modifier) will kick back a red flag and the borrower will be protected.

But, what would happen if all three of these people were working together?

Commonly, the scheme works because all three of these parties will own the property in question together. Typically, this is hidden from you, as the property will be owned by a trust or an LLC, and it would take a lot of digging to be able to determine that the owners are in fact the professionals that you are working with. The realtor will let you know that the value of the home is X, but “hey – don’t just trust me – you should definitely get the opinion of your Loan Officer.”

The Loan Officer lets you know that this seems to be in line with the values of other homes in the area, but hey, they are not an appraiser, so you really should rely on the results of a professional in this field. Here is the appraisal company that we use…

Then the appraisal comes back and Loan Officer and behold, the home is worth just what the agent told you!

Only years later when you try to sell or refinance your mortgage do you find out that the home you bought is worth nothing close to what you actually still owe.

You should now have a pretty good understanding of Home Valuation Code of Conduct and how important “independence” is in the appraisal process. In the next post, we’ll move on and talk about what Congress did to combat this scheme and how it will actually affect you.

Understanding What A Down Payment Actually Is

FHA, Home Loan, USDA

In our ongoing series of commonly heard questions here at the Heights, today we’re going to talk about a small distinction that is commonly misunderstood. On your loan, there are a lot of different things that come together as costs and fees, and a lot of times the differences between them are hard to distinguish. It is not uncommon for bad actors to use this difficulty as a selling point against you. But, being armed with the proper understanding of how these costs work and where they come from is one of the strongest defenses against this.

Today we’re going to talk about your “down payment” on the loan. This term is a very slippery one, in that for most people, “down payment” equates to the idea of a “deposit.” This is not the case. In fact, in the lending world, the term isn’t actually even used! Instead, the term is known as “Minimum Required Contribution.”

In order to understand this, we’re going to have to dig in to a little bit of history. Bear with me. It will be worth it 😉 For a very long time, if you wanted to purchase a home and use a mortgage to pay for it, you would have to first come up with a minimum of 20% of the purchase price in your own funds, as the most that any bank would be willing to lend on a home was 80% of the purchase price. Why was this?

Well, when the FHA loan program was created in 1934, the Federal Government began tracking a whole lot of statistics relating to the housing market. One of the things that began being tracked was the amount that homes sell for at Sherriff’s sale after they had been foreclosed upon. Very quickly, a trend emerged, and they noticed that with very small variance, almost all homes that were foreclosed ended up selling for only 80% of what they were actually worth at the time.

What is very interesting is that since that time, they have continued to track this figure, and there has never been a year where it has varied more than 5% from that 80% mark since the inception of the tracking in 1934! We have read a lot of theories for why this is, but the data itself only confirms that this is the case; not why.

It is due to this very figure that the banks of old would never lend above 80% of a home’s value. If you think about it, this makes pretty good sense too. If the banks know that they risk losing the value of the collateral (the home you are buying) by 20%, then why would they take the risk of lending more than that?

Well, the reason why they would was invented in the mid 1980’s. This invention was (and still is) known as Private Mortgage Insurance, or PMI. This was an invention not by mortgage companies, but instead by insurance companies. Their idea was that they would insure the banks against the potential of lost funds from a foreclosure. The way that this works is that they provide insurance on any funds lent above that special 80% threshold, and if the home does go to foreclosure, the lenders will get recouped for their loss.

With this invention, the lender market opened up for MUCH lower down payments, and that trend has continued to this day. It has, in fact, become so commonplace that the Federal Entitlement Programs (USDA, VA, FHA) have even followed suit!

This leads to our final question: If lenders can get insurance against lost equity on foreclosures, then why is any money needed at all? It’s a good question, and it all comes down to what, exactly, PMI will cover and what it will not. The simplest way to say it is that PMI is insurance ONLY for lost equity. So, if the lender gives $90,000 loan on a $100,000 house and that loan later goes to foreclosure, it is reasonable to assume that the home will sell for somewhere around $80,000. The lender is out $10,000 in equity as a result of this. But, they will then be able to recoup that loss from the PMI on the loan, so everything should be ok, right?

Wrong. The problem here is that despite being recouped the equity, there will still be a sizable amount of money that the lender will lose throughout this process. For example, they will have to pay a fee (typically 3%) to the Sherriff to conduct the auction. There will be title costs to first transfer the title into their name, and then again to transfer it to whomever wins the auction. There are a lot of legal actions that go along with a foreclosure, and all of these have costs associated with them. These are just some examples, but there are many, many small costs that the lender will incur.

So, where this leaves us is that PMI has loosened the risk of lending above 80%, but has not eliminated all of the costs that will occur. So, each lending institution has to determine how much risk they are willing to contribute, and how much risk that they will require you to inherit yourself.

On top of that, they commonly want to know that you are invested in the home as opposed to just moving along to your next place for housing, so to use a catchphrase, they want to make sure that you “have some skin in the game” to help minimize the risk that you will go to foreclosure.

On the surface, this may seem like a small distinction between “down payment” and “minimum required contribution,” but this actually manifest in a lot of big ways throughout the loan process. If you want to learn more, we are here to help, and we take educating our borrowers as being our core mission. Reach out to us here and we will be very happy to show you how you can utilize this distinction to your benefit!

What to Expect from Your FHA Appraisal

FHA, Home Loan

One off the questions that we get a lot here at the Heights is what exactly is the appraisal looking for? On the surface, this seems like a pretty simple question. The FHA appraisal is an assessment of what the value of the home is! But, it doesn’t take very long at all to see that there is actually a bit more going on with the appraisal than just that.

A more comprehensive, although still simple, explanation of what the appraisal is doing is that the appraiser is confirming the value of the home for the underwriter and is also making sure that the house doesn’t need any major repairs.

But, as we dig a bit deeper, there’s a bit more to that second part than meets the eye. The idea that the appraiser is confirming whether or not repairs are needed is also a little bit too simple. What the appraiser is actually doing is confirming many of the minor details of the home and then confirming that the home, as it stands today, confirms to the Department of Housing and Urban Development’s most recent handbook for guidelines on minimum required property conditions.

Ok, that was a mouthful. But, what does it actually mean? Well, each year, HUD updates their property handbook. Some years they remove some guidelines, but most years, there are more things for an appraiser to what out for. You can see a copy of the handbook here: https://www.hud.gov/program_offices/housing/sfh/handbook_4000-1

Basically, the appraiser has three jobs:

First – do research on the property to determine important points about the home
The appraiser is going to do research on the types of features, number of rooms, where the water is supplied to, whether the property is on public sewage or connected to a private septic tank, identify additional value-adding features such as fireplaces and garages, etc.
Second – find comparable properties based on his findings that have sold in the area and use them as a basis to develop the value of the property.
Now that the appraisal knows the size and shape of the home, he will find similar homes that have sold in the same are within the prior six months. Then he’ll use these properties to develop a market value of the home for the underwriter to use to determine the final loan amount.
Finally – compare the condition of the home to the HUD handbook
Now the appraiser will inspect the home for condition and compare that to the handbook to see if anything will need to be repaired before closing, or to see if there is anything that will count the house itself out from qualifying for financing.

A good appraisal will have a lot more information than simply what the home is worth. So much so that it can sometimes be hard to follow along and understand everything that is being communicated. If you have an appraisal that you don’t understand, we are here to help! Reach out to us here and we will happily go over the report page by page with you to make sure that you are fully informed on the new home that you are buying!