I understand that they use these 80/20 loans to avoid paying PMI, but can someone take a look at this preapproval letter and let me know if it is ok.

Any help, any things I need to watch out for?


Loan Number ******

$190,000.00
Purchase Price

Dear Mr*********:

We are pleased to inform you that on January 03, 2007 your application for a mortgage loan was APPROVED, subject to the
following terms and conditions:

1.
Amount of 1st Loan: $152,000.00 @ 7.625%
2.
Term of 1st Loan: 360 months.
3.
Maximum simple interest rate at market rate.
4.
Repayment: This loan shall be repaid in 360 consecutive monthly installments. Estimated payments of principal and interest in the
amount of $1,075.85
5.
Amount of 2nd Loan: $38,000.00 @ 11.2%
6.
Term of 2nd Loan: 360 months.
7.
Maximum simple interest rate at market rate. (floating)
8.
Repayment: This loan shall be repaid in 180 consecutive months. The maximum monthly payment intallments of principle and
interest $367.64 .
9.
These loans shall be closed on or before 5:00 p.m. on April 2, 2007 If these loans are not closed on or before this date, THIS
APPROVAL SHALL EXPIRE WITHOUT FURTHER NOTICE. All interest rates are subject to change until locked and confirmed
with an Interest Rate Lock in Agreement. Extension request will be considered on a case by case basis and upon approval,
and may be subject to rate and fee changes.
10.
OUR AGREEMENT TO MAKE THIS LOAN IS SUBJECT to your fulfillment to our satisfaction of the provisions outlined below,
which are preceeded by parenthesis marked with a (x).
(x) a.
You must provide us with at least TEN days prior written notice of the time and place of settlement and one copy of a current
title certificate, or a binder or report; together with copies of all agreements, easements, restrictions and documents referred
to herein.
(x) b.
The loan must be evidenced by a Note and must be secured by a first Mortgage or Deed of Trust on the
Premises indicated above. The Note and Mortgage or Deed of Trust must be signed by borrower(s).
(x) c.
Notification that all construction, repairs or inspections on the Premises, according to the Plans and
Specifications approved by us, have been completed to our satisfaction.
(x) d.
Ten days prior to settlement, we must be provided with the original counterpart of a paid fire insurance policy, including
extended coverage(s), for a term of at least one year, insuring the Premises from the day of settlement for for an amount
equal to the loan. A Company satisfactory must write the policy to : ****** Mortgage ISAOA, and we must receive
evidence of payment in full of the policy premium for at least one year.
(x) e.
We will also require, ten days prior to settlement, a Title insurance policy on an ALTA form, insuring us as the holder of a
first lien on the premises, issued by a title company satisfactory to us, subject only to such exceptions as we may approve,
in an amount equal to the Loan. The policy must insure that the buildings are entirely within the Premises' and that you
have a free and unobstructed use over all streets, alleys and driveways from the Premises.
(x) f.
Fees and Charges: You must make advance deposits in amount required for any lienable taxes, water rents, sewer
rents;and any interest adjustments on the Loan. WE ARE NOT RESPONSIBLE FOR INTERIM TAX BILLS.
(x) g.
Late Charge: In the event any payment required is received more than fifteen days after the due date, the undersigned
agrees to pay a late charge of 5% of the amount overdue, which charge if not paid immediately may be deducted from
escrow sums.
11.
Prepayment Penalty: 2 years
12.
This Mortgage Approval is NOT contingent on the sale of, or proceeds from a current residence.
13.
The documents executed in connection with this transaction cover all after-acquired property and also stand as security for future
advances, the terms for which are described in all documents. TRANSFER of ownership or control of the mortgage without our
consent will be an event of default.
14. Customer must maintain current credit status.
15. We reserve the right to add or waive conditions at our sole discretion at any time prior to recordation.
The Following Conditions will be contingent prior to the loan closing:

-Preliminary Title Report / Policy With All Searches
-Approved Attorney / Closing Protection Letter
-Hazard Insurance Policy With Paid Receipt
-Wiring Instructions
-Tax Information
-Satisfactory Appraisal of Subject Property
-Customer Must Maintain Current Credit, Income, Assets, and Employment Status

Looks like a more or less standard prequal letter with all the millions of protection clauses for the lender. Basically says they need title work, escrow work, and insurance info before they close.
The borrower's rate isn't locked so that can always change and put the buyer in a tiff. With a rate that high though looks like they must have bad credit or undocumentable income, assets or employment. And they plan to do 100% financing.

Actually that is a loan commitment, not a pre-approval. That is why there are so many conditions.

This loan has been run through underwriting. This is the list provided by underwriting- probably automated.

You are good to go.

Ok, maybe you can clarify what this means. In the letter it states:

Maximum simple interest rate at market rate. for loan #1

Maxium simple interest rate at market rate (floating).

Those rates that are on your approval are the maximum rates that your borrower is qualified for but the rate is floating, not locked. It is up to the LO to lock when the market is at a rate that the borrower is ok with. If they float too long and the market goes above those rates they may not qualify or have to wait for the market to come down. The market is pretty steady right now so if I were the LO I would be advising to lock.

I would advise the LO to lock in the rate immediately following the appraisal (or as soon as possible following). If all of the conditions/documentation are met to determine rate, I would lock it in asap; especially considering that YSP varies depending on locked in rate amounts. Also, a lender may not provide that same rebate i.e. "after January 30th."

So the difference between today and tomorrow, may add up to a .5 difference in the rebate the LO recieves. On a purchase loan of $500K; that's $2,500.00 in rebate LOST!

Also, realizing that the rates do change constantly and the one of the worse deal killers is a customer saying:
"Why didn't you lock in the rate that you quoted me on the phone, I'm going down the street to blah blah for a cheaper rate..etc..etc"

"5.
Amount of 2nd Loan: $38,000.00 @ 11.2%
6.
Term of 2nd Loan: 360 months.
7.
Maximum simple interest rate at market rate. (floating)
8.
Repayment: This loan shall be repaid in 180 consecutive months. The maximum monthly payment intallments of principle and
interest $367.64 . "

Unless the borrower has marginal credit those rates are way to high.

If the credit score is 680 or above both rates are way to high.

Also, if you want to prepay within 2 years there is a penalty. What is it? This is not all "normal". Also you have (apparently) 30 year amortization on a 15 year loan for the 2nd. The 2nd (with a cap on payment and a floating rate) might result in negative amortization. Which index is being used.

You need to compare with at least 2 more lenders before locking yourself in to this loan.
By the way this is a credit approval subject to an appraisal...not a commitment. Someone should be asking questions.