THE PERILS OF THE HOME MORTGAGE PROCESS

The following applies to mortgages called “jumbo” or over the standard Fannie Mae size that you hear adds for such as “rocket mortgages”.

If you are in a position of considering a refinance to help you purchase a home you most likely know someone who has gone through this process already. If you have then you probably know that refinancing (especially with a “jumbo” mortgage’) is going to be painful. In this blog I am going to give you some details that many don’t learn about until they are knee deep in the process.  I am hoping that I can pass on this information to forewarn you of the difficulties you may encounter so that you may be able to prevent them.

This process, unfortunately, can be costly and you may start to feel like you have no control.

Five realities that become apparent once you enter into the process:

  1. The system is structured to favor the wealthy.  The more money you have, the easier it will be to get a mortgage and the lower your interest rate will be.
  2. As with any commission based field, the lending agents will make big promises to entice you but may not be able to follow through on the offers they have made. Once you are embedded in the process the pitfalls that raise your costs will become apparent, but only one at a time.
  3. The process is somewhat unpredictable and there is no roadmap as to the next steps required.
  4. You will be paying for expenses along the way, such as appraisals.  So have some cash available.
  5. Most likely there will be a need to put in cash at closing.  You will not be able to anticipate how high these costs are so be prepared to pay more than what you were originally told.

This is an arduous and frustrating process thus it is important to know as much as you can so you will be prepared for a long process that can be quite difficult to navigate. There are a few things you will probably not have a lot of control over that will affect you directly. 

For example:

  • Your credit scores, (which determine the interest rate): Typically the fewer credit cards and loans you have the better your score will be. However, if you don’t have at least 3 credit lines, and you don’t use them, your score will be lower than if you actively use credit.
    • Be on guard that your loan sales agent or broker does not seek too many sources of funding which will individually run a credit check on you.  Apparently two or three close together is not too harmful, but beyond that any further checks will cause your credit score to  drop like the ball at Times Square at New Years.
  • Appraisals of your property: These can vary widely and rise and fall with the mood of the housing market.  In addition you will not be able to choose the appraiser, the loan officer will assign you one of their choice.  This could result in an appraiser from out of the region where you live which can result in them being significantly off in their perception of value.
  • Let’s say that you are assigned an appraiser that puts your house at “market Value” or gives an assessment that seems reasonable to you; unfortunately you are not out of the woods yet. There will be a second appraisal done called a “desk appraisal”. This in an appraisal done by someone who has not seen your home but they set guidelines for the secondary market. The lenders do this because they intend on selling your loan about twice down the line and they are the ones that give a value of your property.
  • Cash needed at closing:  Not all expenses may fit into the loan, so you will have to come up with cash for taxes and a long list of costs at closing.  You will not know this amount until a few days prior to needing it.

Percentage rate for interest on your loan directly affects your monthly payment amount.  Every strike against you such as your credit score, or the amount of reserves you have affect this rate.

What I found disturbing is that I could not get a roadmap as to the steps involved in this process, and the amount of time each will take.  It seems there is always a rush because there is a constant set of surprising discoveries along the way.

It is important to remember (albeit frustrating) that when you are applying for these loans you are at the mercy of the lender. They are able to handle these loans however they like. The housing crash in 2007 made banks rethink how they give home loans. The end result was creating this process that leaves the lender in power and the lendee in a position where they have no control. 

It is my hope that you will not experience all of these roadblocks during your mortgage process and that you use a broker that will make you feel like they are invested in you. Hopefully some of these thoughts above result in an outcome where you end up with a decent mortgage on your great property. 

Once you have completed the mortgage loan process and have the amount of money you need to make improvements on your home you will have the power back in your hands and can start the process of hiring a team to help you with renovations. Please refer to my older blogs for tips and advice on how to make the rest of your renovation or home improvement process organized, easy and puts you in charge. 

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The Process of Building a Custom Home: Part I

The Process of Building a Custom Home: Part I

The Process of Building a Custom Home: Part I

The process of building one-of-a-kind custom structures contains many pitfalls that can derail the project. There are too many bad experiences due to budgets being overrun and delayed completion. However, with the proper controls and an informed plan, building a home can be a series of predictable, controlled activities from the start of design all the way through to an enjoyable first night at your new home. The key is to form the right team to work for you, including the owner’s project manager.

This Custom Home Building series is a Q&A to answer many of your preliminary questions about selecting a designer and builder, setting a budget, and creating a construction timetable. These are true wherever you build, and I’ve included some details specific to homes in the San Francisco Bay Area.

Developing a Budget and Making Sure it Sticks

Which should I pick first, the designer or the builder?

Create a team to work on your behalf. First hire an owner’s project manager (OPM), that you trust and feel comfortable with. That person will become your trusted ally to help you choose the design team and building team best suited for your particular wants and needs.

Should I hire a design-build firm?

In places where design styles are similar, and sites are not too challenging, this can be a good option. Subdivisions where homes are fairly similar to each other tend to be (but are not always) easier for this option.

A team that includes an architect and a separate builder is more prevalent where design styles are varied, architecture is more adventurous, and/or building sites are more challenging. This is often the case for homes in Tiburon, Belvedere, Sausalito, and also along the coast in Big Sur, where building sites are more complex.

Start with budget before design

The wants and dreams of the owners and the design of the architect will soon bump up against the budget limit. This is where you want to give your OPM the authority to be the “guardian of the budget.” The earlier your OPM is given a contributing role as part of the team, the more influence he can have on the cost outcome. Make it his role to compare the design evolutions against the budget. A thorough “get real” meeting with the entire team should take place and the budget total should be agreed upon.

All projects are driven by cost considerations, whether it is a $250 per foot residence or a $1500 per foot castle.

The earlier costs are identified and a realistic target budget established, the better the chance for a smooth process. Initially, square foot costs can be useful as a guideline for the cost. However, line item budgets eventually need to be developed. After all, you don’t compare the price of a Mercedes to a mid-grade Chevy by comparing the cost per pound!

  • Between 80 and 90 % of the project cost is determined by the complexity of the design. The OPM will ensure the design is developing within a realistic budget.
  • Typical factors in a real budget
  • The challenges and nature of the building site
  • The size in square feet of the envisioned structure
  • The cost of the design including all outside consultants such as engineers
  • The choice of products such as windows
  • The complexity of the structure
  • The amount of heroic engineering
  • The envisioned quality of finish (using other homes and photos as samples helps)
  • The builder’s fee
  • Site costs, such as landscaping and bringing in utilities
  • Permits and hook-up fees for utilities

Ask for a written set of guidelines prepared by the OPM that includes clear responsibilities and accountability for each member of the team, including the owners, leading to a guarantee of a realistic cost that is within the previously agreed upon budget.

Construction project manager owners representative marin - 49

Are the horror stories true that many projects are way over budget?

It is true that a huge percentage of dream home designs are significantly over the desired budget. Perhaps as many as 70% of designs are over budget, often by as much as 30% in cost. Even in luxury homes, budgets are a big consideration.

Usually, when the budget is missed, the next step is a harrowing process of “chopping things out” of the desired design, as well as compromising with a lower level of quality in products and finishes.

The trouble is, once the dream is visualized it is hard to imagine doing without. What typically happens is these items find their way back into the project as change orders during construction, which is much more costly in time and money.

Sustainable home features

The “chop” stage is, unfortunately, where green building features usually get eliminated, though that doesn’t need to be the case. It is possible to have a green home and stay within budget if the plans are well coordinated from the start to include energy and water efficiency designs and features.

It’s also short-sighted to eliminate eco home designs, because they often pay for themselves over time. An integrated approach to design and material selection can result in fewer materials consumed, higher performance over time, and stunning design.
How do I avoid the mess of losing synergy between designer and builder?
A key ingredient in pre-construction is value engineering–researching alternative methods and products that attain the design intent. This is one of the OPM’s primary functions.

Overall, hiring people who will act as a team and making them accountable is the most important choice you will make and can preempt most troubling scenarios.

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