Mortgage Blog

When a married couple purchases a house with the help of a mortgage, they become subject to a wide range of legal rules and custom-based practices at every stage of the process. This article will summarize some of the major issues that arise.

Qualifying For a Standard Mortgage

If both of the parties have incomes, these can be combined in meeting underwriting rules that set ceilings on the ratio of housing expense to income. This means that they can afford a larger mortgage together than either can afford separately, and can therefore purchase a more costly home together.

But this is subject to an important proviso: both parties must have acceptable credit scores. When incomes are combined, lenders use the lower of the two credit scores. If the lower score is too low to qualify, only the income of the partner with an acceptable score can be used.

Moral: Before you pop the question, check his (her) credit score as well as her (his) income.

"I purchased a home from builder XYZ for $320,000, and have a $10,666 Realtor rebate coming back to me. (2/3 of 5% of $320,000). The builder had me sign a paper that says the Realtor rebate can only be used to pay settlement costs. In addition, if I use XYZ's lender, the lender will pay $5,000 toward my settlement costs.

I can't imagine that my settlement costs will add to the $15,666 credit that I have. What happens to the excess? Will the builder take it off the purchase price?"

Rebate of the Realtor's Commission

The rebate of the Realtor's commission can only be used as a credit against closing costs. If the rebate is not fully needed for that purpose, the Realtor will keep it – it will not be taken off the purchase price.

Why is the builder willing to charge you $320K and pay $10K of your costs, but is not willing to reduce the price to $310K? While they cost the builder the same amount on your transaction, they have different implications for other transactions. By defining the price reduction as a rebate, the builder retains flexibility to adjust prices on a case-by-case basis, as circumstances dictate. These circumstances include differences between individual buyers – some must be persuaded to buy, while others don't. It also includes possible changes in the market over time. If demand picks up and sales increase, the rebate may no longer be necessary to stimulate sales.

With rising interest rates lurking on the horizon, some consumers with homes they plan to sell within the next 5 years or so are asking questions about whether or not they can transfer their low-rate mortgage to a purchaser of their house. These are some of the common ones.

Q: What is an assumption?

A: It is a transfer of responsibility for repaying a mortgage from the seller of the house that secures the mortgage to the purchaser of that house. The purchaser assumes all the obligations under the mortgage, just as if the loan had been made to her.

Q: Does my current mortgage contract allow a purchaser to assume my existing low-rate mortgage?

A: If your mortgage is an FHA or VA, the answer is "yes", subject to the agency's approval of the buyer's qualifications. If your mortgage is conventional, the general answer is "no", you must get the lender's permission for an assumption, and if they agree it will be at the current market rate.

Payday loans appear to be growing in importance. The spam folder in my email register now seems to have as many solicitations for payday loans as for home mortgage loans. The internet is a more cost-effective way of marketing payday loans than the traditional storefront. In addition, a number of banks have entered the market in recent years with "deposit advances" which are essentially the same as payday loans.

Payday loans including deposit advances are small loans generally in the $150-$400 range, repayable in a few weeks when the borrower is due to receive a paycheck or some other scheduled payment. The loan is designed to tide the borrower over until the payment is received. The cost of a loan is usually $15 to $20 for each $100 borrowed, regardless of whether repayment is due in one week, two weeks, or 4 weeks.

Payday loans are convenient, quick, and readily available without a credit assessment. To assure repayment, borrowers provide lenders with direct access to their deposit account; in effect, borrowers authorize lenders to repay themselves from the borrower's account.

Under Federal law, every home mortgage borrower must be provided with a Good Faith Estimate of Settlement Costs (GFE) within 3 days of receipt of the borrower's application. The GFE was administered for many years by HUD, which made substantial improvements to it in 2010. Shortly thereafter, responsibility shifted to the Consumer Financial Protection Bureau (CFPB) where it now resides.

The GFE describes the loan and its major features, including the interest rate, upfront lender fees, and fees of third parties such as title insurers and appraisers. Because of its complete itemization of all costs to the borrower, mortgage shoppers often ask me whether or not the GFE can be used to shop for the best deal? They have been encouraged to think that it can be so used by both HUD and CFPB. In its current Q and A for consumers, for example, CFPB states that the GFE "will help you compare offers."

If this were true, the GFE would be an invaluable tool for borrowers. Unfortunately, it has never been true and it isn't true today, even with the recent improvements.