First Stop 4 Home Loans

In putting your pre-approval puzzle together, we look at things other than just credit.  Though credit is such a big, anchoring piece, it’s also important to know about piece #2 — Employment.

Years ago, we had loans available for just about anyone — people who didn’t have jobs, those that didn’t claim any income and even those that didn’t have both!  These loans were called no-income verification loans and for the most part, they just depended on the credit and asset merits of the borrower.  Of course, there were even loans where we didn’t verify assets either.  Buying a house with none of these things verified was truly crazy!!!!

Today, this is NOT the case.  You need to have a job, preferably a stable one AND you need to have a history of working.  Getting out of high school and being on a job for 2 months isn’t an acceptable duration any longer. 

Lenders are looking for a 24 month history of employment, at a minimum.  This history doesn’t have to be on the same job, though it does make your file stronger if this is the case. 

Recently, many people have hit hard times with layoffs and down-sizing.  As an example, maybe  the last 2 years of employment history are spotty – just working 1 1/2 years, then 3 months laid off looking for work and finally starting back up.  Due to this, we will go back further than 2 years to create that necessary 24 months history.

What about college graduates just getting started in the workforce?  If the student had a history of working while going to school, we may have that 24 month history already.  But many times, being a student IS their main job.  In this case, we will look at the schooling as history; but more than that, we want to correlate their schooling (degree or classes they took) with the field they just started in.  In this case, we may not need the full 24 month”work” history.

Back to the recent graduate — what if they can’t find a job in their field of study and have to settle for something else?  First, kudos for finding and accepting work.  That’s great.  In this case, though, we will need to see at least 6 months on the job to show there is some history after their “job” as a student.  As with many things in the loan process, we will look at each scenario on a case-by-case basis.

This leads me to stay-at-home parents.  This is a GREAT thing to be able to spend time with your kids.  Believe me, I know the drill.  If however, you decided to take that time with the kids, whether it be 6 months or 5 years, and get back into the workforce, then we need to show a history of not only working prior to the time off, but also at least 6 months back on the job.  Depending on how long the sabatical was, we may need longer than 6 months — another case-by-case situation.

Then, there is the part-time work moving to full-time work.  This would be seen similarily to the above, in that we may want to see at least 6 months on the full-time job to show a history and the ability to work full-time.

Nutshell — working is a good thing and a necessary one in order to get a home loan.  But it’s not just about working, as you can see, it’s also about duration.  These tips will be true for any person on the loan in which we want to use income.

And speaking of income — that is the 3rd piece to the pre-approval puzzle that I will discuss in my next blog.  Anything I can do to make the process more understandable for YOU is my ultimate goal!

Did you hear about AIG being bailed out by the government?  Okay, this is really old news; but it reminds us of the “horrible” acronym tied to some conventional loans … PMI.  I’m hear to tell you that this three-letter word isn’t such a bad thing. 

Private Mortgage Insurance, known as PMI, is just that, insurance.  It’s not insurance you “choose” to purchase or shop around for and it isn’t coverage for you or for making payments on your mortgage in case you die.  It’s insurance for the lender/investor to protect their investment — your loan — in case you default.  On conventional loans, PMI is required, in most cases, if you have a down payment of less than 20%.  I say “most cases” because some lenders will do financing without PMI, but there is typically an interest rate premium paid for avoiding this.

For most, PMI respresents a portion of your PITI payment (Principal, Interest, Taxes and Insurance (both homeowner’s and PMI).  There are other options though, such as LPMI, which is Lender-Paid Mortgage Insurance.  The rate is usually  higher to cover the premium so you don’t have PMI in your payment.  There is also  BPMI  – Borrower-Paid Mortgage Insurance.  In this scenario, the borrower pays for the upfront amount at closing.  This is also done to avoid having PMI as part of the house payment.  Either way, PMI is being purchased to cover this loss.

And so you know, PMI doesn’t cover the whole loss.  Coverage requirements are dictated by your down payment amount.  According to Fannie Mae or Freddie Mac guidelines, if you had 15% down, the coverage would be around 12% of the loan.  Alternatively, if the down payment is less, like 5% down, the coverage requirement will increase to 25-30%.  For example, if the loan is $100,000 with 5% down, you would be required to have 25% coverage or $25,000.  In case of default, the PMI company pays the lender $25,000.  That’s a lot of money.  No wonder AIG took a fall, or a few.  They were one of the PMI companies that chose to insure higher risk loans — and I’m not talking about less down loans, but those that had other risks as well, such as lower credit scores or recent major derogatory items like bankruptcy.

But you’re a good risk, make your payments on time — why are you being penalized for the bad eggs?  Valid question, but it all plays into historical data.  And history shows that people with less down payment are more likely to default.  When you have “less skin in the game” and things go South, you’re more apt to walk away than try to salvage the equity you have.  I equate this to car insurance.  If you’re male and 21, you’re car insurance is higher than a 21-year old female.  Why?  They have more accidents, thus, a higher risk.  So, the premiums are higher.  And insurance is all about risk.

So why would PMI be a good thing?  I have a few reasons, kindly provided by MGIC, one of the PMI companies we use.  All of the companies that provide this type of insurance offer similar rates, but they may have different guidelines or requirements that make one better than the other.

• It’s affordable.  Okay, so why is this a good reason?  Recently, FHA  increased their monthly mortgage insurance premiums, making them 1 1/2-2x higher than conventional.  And, they charge an upfront premium that’s rolled into your loan.  This is not to say FHA isn’t a good loan.  More, it may make more sense to use conventinonal financing if you have the credit to do so.  Most people use FHA due to lower scores (doesn’t equate to “bad”) , like under 660.
• It’s not forever.  Not the best argument because FHA mortgage insurance isn’t either.  BUT, as long as you pay the PMI for two years, have on-time mortgage payments AND can show you have 20% equity via a new appraisal, you can discontinue it.  FHA, on the other hand, requires you to have the mortgage insurance for at least five years and you must have 22% equity of the ORIGINAL PURCHASE PRICE, which doesn’t take into account appreciation. 

Oh, and another way to avoid PMI altogether is to do a “piggy-back” loan or second loan.  You would put 10% down, get a second loan for your other 10%, which would make up your 20% down, thus avoiding the PMI.  Your payment would be a little less than having PMI, but there are other challenges getting the second loan.  Doable, but not for everyone.

Nutshell — PMI isn’t all bad.  If it weren’t for PMI, we couldn’t do 3% down — or less than 20% for that matter.  Do you have that much saved?  I don’t and that’s another blog for another day.

Are you currently pre-approved wth FHA financing?  For many, this is the way to go — minimum down payment (3.5%), lower acceptable credit scores (620) and higher allowable seller paid costs (6% of the sale price which will be lowered soon to 3%).  One thing that always frustrates FHA borrowers is the Up-Front Mortgage Insurance Premium (UFMIP) and the monthly mortgage insurance.  Why is FHA charging twice for the same thing?  Let me explain.

First, it’s good to know that FHA is self-insured.  So, if you default on your loan, they provide insurance for the investor.  Whereas on a conventional loan, you pay Private Mortgage Insurance (PMI) to insure the lender in case of default.  The PMI is provided from an outside company and is required on all loans with less than 20% down.  (Of course, if you qualify, you may be able to get  the new MN Housing program that DOESN’T require PMI or a down payment!)

FHA requires the UFMIP on all loans and a monthly amount on all loans regardless of your down payment situation — minimum down of 3.5% or 50% down — you’ll still have it.  One thing many people don’t know is what ELSE the FHA insurance covers.  Let’s say you lose your job and are having a tough time making your house payment.  Like most, you don’t want to lose your home.  FHA’s insurance covers job-loss protection.  FHA may pay up to 12 months of your house payment to save your home and keep your payments on time with your lender.  Those payments will be added on to your loan on the back end.

Right now, the UFMIP is 2.25% of the loan amount.  In all of the deals I do, this is rolled into the loan, not paid out of pocket.  This will raise your payment because your loan amount increases.  The monthly amount is .55% of the loan amount, divided by 12 to get the monthly figure.

Here is what you need to know:  any new case numbers* assigned ON or AFTER 10/4/10 will have different UFMIP and monthly MIP.  Good news is the UFMIP will DECREASE to 1% of the loan amount vs. the current 2.25%.  This is a good change.  The annual premium, or monthly amount, will be INCREASING to .90% of the loan amount — almost double what it was at before.  So what, right?  Well, let’s look at the numbers.

Scenario:

• Purchase price $200,000
• Rate at 4.5% over 30 years
• 3.5% down or 96.5% LTV

Old MIP Scenario

• Loan with UFMIP is $197342
• UFMIP that is included in above loan amount is $4342
• Monthly MIP is $88
• Principal and interest is $991

NEW MIP Scenario

• Loan with UFMIP is $194930
• UFMIP included above is $1930
• Monthly MIP is $145
• Principal and interest is $988

Difference?  Payment is $54/month HIGHER with the new plan.  That means, in real terms, you can afford about $7500 LESS in purchasing power.  Sure, that’s the downside.  But, if you stick with your home for 7 years, you will actually “wash” the difference.  Though FHA will get more of your money upfront (vs being rolled into the loan), you will have MORE equity at that time than with the original plan).  And, stay in your home 10 years, the MONTHLY amount should drop off assuming you’ve reached 22% equity in your home based off your original purchase price.

The moral of the story — buy as soon as you can if you’re using FHA.  $7500 in buying power is HUGE!  Most of you will just stay in your home for 5-7 years if it’s your first home so the “wash” really doesn’t matter.  And who really wants a payment that is over $50/mo more?  Not me.

So, when’s the time?  Now!  Why is it now?  To save on your monthly payment and BUY more home!

*case number:   the number assigned by FHA for your property purchase.  It follows the address and is how an appraisal is ordered.

Kind of a silly question, right?  Most people think refinancing makes sense whenever the rate is lower.  I would concur, but the question is, how much lower does the rate need to be to make sense?

General rule of thumb — rate should be at least 1% lower, but usually 1 1/2% lower is the best financial move.  But why?  The rate is lower, so you’re saving money; seems to be a no-brainer, right?  Here’s the deal.  A refinance costs the same as purchasing a home.  Though you can do a no-cost refinance, you’re still paying for it by paying a higher rate. 

No-cost means the lender costs are covered by the rate.  You still have title company charges, county fees, as well as the initial deposit for your taxes and insurance escrow.  The good news is you may essentially get reimbursed for all or a portion of the initial deposit when you receive a check from your old mortgage company with the balance of your previous escrow account.  This happens about 3-4 weeks after your refinance closing.

When looking to refinance, it’s best to get a copy of a good faith estimate or cost analysis to really determine if this financial move is a reality.  Many loan officers will give you the payment to entice you to do business with them.  The payment is absolutely an important piece to consider.  It’s what drove you to consider this, right??  It someone tells you what you want to hear, you just may lock that rate.

You need to know more which is why you need the estimate.  Here are some questions to consider.

• How much are the lender’s costs?
• How much are your yearly savings?
• How long do you intend to stay in your home?
• Do you have more than one loan against the home?
• Will your home value support a refinance?

These are just a few questions to ponder.  It’s my goal to tell it like it is — if a refinance makes sense, then I am all for helping you out.  If it’s not, then let’s talk about what may make sense — paying extra, going to a shorter term or just staying put.  Just know, your financial well-being is my top priority.  It doesn’t benefit me to give you bad advice.

Believe me; I ask myself this daily.  You hear that you need 20% down to get financing or sterling credit.  And though these are GREAT attributes, they aren’t a guarantee that you will get a mortgage OR that you won’t have to go through a few hurdles.  It used to be so easy to get financing.  It wasn’t that we just handed money out to anyone, though there were people who did and look where that got us.  It’s not just them; it’s the lenders that accepted high risk buyers and did deals that should have never been done.  This is neither here nor there.  Right now, we need to focus on what the rules or guidelines are NOW, not what they used to be.  Those days are gone my friends.

Let’s start with the simplest issue I see today and the piece that has had the most changes — CREDIT.  Let’s talk about credit scores first.  Way back when, credit scores mattered; but they weren’t as much of a guage as they are now.  What I mean by that is we were able to create credit for people if they had lower scores or if they had NO scores.  It may have been acceptable to help someone who had lower scores, let’s say 560, if we could show clean credit on alternative sources such as insurance, utilities, rent, cell bills, etc — this is how we “created” credit.  And, if there was a clean credit history in the last 12 months, this deal could have probably worked.  Now, the line is drawn.  For the most part, you will need scores AND the middle of the 3 scores (most of us have a score from each bureau – Experian, Equifax and TransUnion) must be at least 620 or higher.  This is NOW.  I am guessing in the next few months, or sooner, most investors will be at 640, as some have already taken that leap.

Still referring to credit, you now need at least THREE tradelines (an item of credit on your credit report) AND they each must have 12 months’ history.  Plus, these lines need to be current.  Let’s say you haven’t done anything with your credit for a few years because you worked abroad.  You may have great credit scores because, before you left, you did a good job managing your credit.  Unfortunately, most, if not all, of your tradelines will be older in terms of the last active date.  This is one of the things that’s catching people and making it so they can’t get a loan.  It’s a shame really because you can tell they’re good at making payments and are responsible.  Thing is, the score isn’t a true representation of their credit since it doesn’t have current information reporting.  There is one exception to this rule, as of now.  The 3 main first time buyer programs, CityLiving, Dakota County Bond and MN Housing, in conjunction with an FHA loan, will allow less than 3 tradelines and less than the 12 month history.  If there is a score, it must still be over 620, however.  With the first time programs, we would work on creating credit and we WOULD need to find 3 items of credit to have added to our credit report — again, car insurance, utilities, layaway plans, healthclub memberships, utilities, etc., are all items we can use to create your history.  And by the way, this will NOT help your score as we do this on our credit report we pulled.  This does not get reported to the credit bureaus.

Another fun credit change that is COMING, and fast — Fannie Mae is requiring that lenders verify the borrower’s credit prior to closing.  It’s under the new Loan Quality Initiative.   Some Minnesota lenders have already put this in motion.  The interpretation of pulling credit prior to closing is within 48 hours of closing.  So, in my article, “Things Not to Do”, you learned that while in the loan process, don’t open new accounts or close accounts.  Well, this just became CRUCIAL to follow.  If you open a new account, just have a creditor check your credit for a possible new account, increase balances on what you owe, or anything … your approved, ready-to-go-to-closing loan could be un-approved.  For instance, the credit pull or increase in balances, could have dropped your score under what your approval requires.  Or, the new debt now makes it so your ratios are too high for qualifying.  If you want to deal with stress or the possibility of not closing on a home, then feel free to mess with your credit.  My advice is far different and will be quite bold.  If you want your loan to stay approved, DO NOT, under any circumstances, open new credit, consider opening new credit so your credit has to be pulled by another lender or increase your balances on your current debts.  This could make or break whether you close on your home or not.  There is no first time buyer exception to this either, so my advice stands in all circumstances — Just Don’t!

What else is making it hard to get financing?  How about qualifying ratios?  This is how a lender determines what you qualify for.  We use your gross monthly income and run some calculations.  In most cases, the “debt ratio” is the most common one for us to look at.  We want to make sure your new house payment PLUS all other obligations, does not exceed the program guidelines.  Essentially, for most loans, that means not spending more than 45% of your income toward the new housepayment and your other debts.  PMI companies (private mortgage insurance) have put their guidelines on this too.  Many PMI companies require a ratio of 41% or less.  Even though you may have an approval through an automated underwriting system, the PMI company could trump it and disapprove your loan due to excessive ratios.  I can remember the “days” when we saw ratios at 65%.  Now, was that a good underwriting decision?  Maybe, maybe not.  For an underwriter to make this call, the borrower must have excessive compensating factors, such as plenty of money left over after closing, good credit scores as well as good job stability.

This is a small sampling of the changes in the loan industry.  They are a few of the guideline changes that have impacted much of the business I do.  So, in answer to the blog’s title question … yes, many people can get loans.  No, you don’t need 20% down and sterling credit.  Fortunately, FHA is a great loan requiring only 3.5% down and more leniency with credit.  FHA also allows us to go a little higher in ratios and doesn’t limit us to the 45%.  I am not saying we can go over that just willy nilly.  That’s not the case.  We can go a little higher if, and only if, there are good compensating factors.  And I bet you didn’t know this (well, unless you read the blog), City Living and Dakota Bond programs ONLY allow FHA loans or VA, no conventional.  And don’t forget FHA and their guidelines in regards to disputed accounts.  This just adds another item on the checklist of things we have to watch for in order to make sure you can get approved for a loan.

Enough already, huh?  That’s all I have to say.  There are just too many variables that if it’s something YOU can control, you should.  You may want to check out our office blog titled Pain in the Assets – this goes over another important piece to your loan puzzle.  With all that can go wrong in the loan process now due to guideline changes, title issues or bank issues, we need all the humor we can get, so hopefully you like our article.  I’d love to do your loan right the first time by educating you BEFORE things become an issue.

Huh? What dispute? The one I am having with my roommate or with my parents about buying a home? You may have many disputes going on in your life. The one I am referring to is a dispute you started yesterday or 10 years ago with a creditor.

If you’ve been one to check your credit or maybe have had some issues in the past, you may have seen erroneous “tradelines” on your credit report.  A tradeline is an item of credit — car loan, credit card, mortgage, student loan,etc.  Now, if I were you I would be all over that like a bee to honey.  I’d contact the creditor and “dispute” the inaccurate information.  Wouldn’t you?  The whole goal is to get the right things reporting on your report, not items that don’t reflect your score and ability to pay on time.  True.  BUT one little catch.  Though you’re trying to BETTER your credit situation, you are actually making it harder to get financing.

Seriously?  Helping your credit/disputing an account = tough time getting a loan.  Tough to follow that logic,huh?  FHA is the most popular loan right now and the most lenient when it comes to credit scoring, as well as only requiring 3.5% down.  However, they have this little guideline that has been creating BIG issues for folks getting home loans.  The deal is, if you have disputed an account on your report, regardless of what the dispute consists of, your loan guidelines just got stricter.  Yes, your loan qualifications got tighter because you were trying to help your score improve.  Does that make sense?  Nope, not to me, but lately, many of the “rules” and changes have caused me to scratch my head quite often.

So, what changes with your underwriting guidelines?  For one, your loan must be manually underwritten.  90% of my loans are run through and approved through AUS (automated underwriting system).  Information about you in … decision on a loan for you out.  Slick and easy.  Your file is still processed, verified and still gets in front of an underwriter for the final stamp of approval.  In a manual underwrite, it doesn’t matter what the loan decision is through the AUS.  It’s no longer eligible for this to move to the underwriter faster and with more assurances of getting  your final approval.  It now has to be reviewed in depth and documented in depth in order for an underwriter to make a decision.

The rules to follow:

• Your ratios cannot exceed 31/43%.  This means you cannot spend over 31% of your GROSS monthly income toward your house payment, OR over 43% of your gross monthly income toward your house payment and other monthly debts.  This is concrete; no wiggle room here.  We will use the lesser payment for qualifying when choosing the payment you can be approved for.
• We must get traditional VOE’s and VOD’s (verification of employment and deposits)  So, even though you provided me with W2′s and paystubs, as well as bank statements, we must still get this information from a 3rd party.  No fun especially since some banks and some employers charge a fee to give us that information.  Unbelievable.
• We must do a VOR which is a verification of rent.  Important that we confirm you make rent payments on time.  Don’t worry if you’re not renting and with family; this won’t hurt your chances of getting a loan.
• The biggest one — you must have 2 months of reserves.  In layman’s terms, that means after closing, you need 2 months of your PITI payment leftover.  This can include retirement.  Here’s the thing.  Most first time buyers have a hard enough time coming up with their down payment or minimum investment depending on the first time program the buyer uses.  Now you’re saying we need money left over?  Yup and it hurts.

So how do you combat this?  Well, there may be a way to work on getting the dispute removed.  For instance, you could contact the creditor and tell them you don’t want to dispute the account any longer.  About 30 days after you call, we can re-pull credit to make sure the verbiage “account in dispute” has been removed.  It’s not an ideal situation, BUT, it would allow for a faster decision, more leniency on what you qualify for and NO requirement to have money leftover after you close, though there is nothing wrong with that!

The moral of this story — don’t wait to find a house to make an offer to find out you might have to wait due to this rule.  Make sure you’re getting pre-approved with a lender that knows these guidelines and looks for them when reviewing your report.  Also, there are people I can refer you to with regard to credit restoration if you’re in that boat.  Let me help you get ready for the biggest purchase of your life.  Knowledge is power and the more you know and can prepare for now will save a lot of headaches and stress when you do buy.  I think you’ll have enough of that just from doing something new!

You may have heard that it’s getting harder and harder to qualify for a loan.  It’s true.  Though things have lightened up a bit, some old rules have come back into play, as well as new rules are being enforced more than ever.  For the most part, I am referring to FHA financing below as they are the most lenient when it comes to qualifying for a home.  More than 95% of my clients use this loan type due to this, the lower down payment requirement and the ability to receive a gift.

These days, what do you need to know with regards to credit requirements?

• Your credit score must be 620 or higher.  The line is drawn in the sand on this one — higher requirements for conventional financing.
• You must have THREE tradelines* with at least 12 months history.**
• If you have ANY disputed accounts, we MUST manually underwriter your file, per FHA.***
• Judgments and liens must be paid in full prior to or at closing.
• With FHA, collections do NOT have to be paid off.
• With FHA, student loan payments DON’T have to be counted in the ratios for qualifying IF they are deferred and we can get proof they won’t start until at least 12 months after your first payment is due.

For the most part, these are the main things to know about credit these days.  So you know, first time buyer programs aren’t programs that allow anybody, such as people with bad credit, get a loan.  You first have to qualify for a mainstream loan, like FHA, VA or Conventional.  Once you’ve passed their muster, then we look to see what first time programs meet your situation in terms of income, household size and location.

And some tips for dealing with your credit?  If you want to buy a home, you need to watch a few things:

• Make your payments on time — period.
• Bring your credit card balances down to 50% or less of the available credit.
• Don’t apply for new credit or have your credit pulled.
• Don’t consolidate credit cards.
• Definitely don’t close accounts, whether you use them or not.
• Don’t pay off collection accounts unless your loan officer advises you to (if you pay off an old account, it could negatively affect your score)

Certainly, if you have any questions, don’t hesitate to contact me.  It’s best to talk about what you want to do with your credit PRIOR to doing it.  Easier to “fix” a potential problem before it happens.  Once it’s done, it’s done.

*Tradeline is an item of credit on your credit report.  It can be a credit card, house payment, car payment, student loan or another type of installment debt.  Collections and derogatory credit don’t qualify as a tradeline.

**Some first time buyer programs defer to FHA standard rules and don’t require the 3 tradeline minimum or 12 month history.  Check with a first time buyer expert (like myself ) to see what you can do if you don’t meet these parameters.

***Most loans are run through an automated system to get an answer and all still get seen by an underwriter for final approval.  However, if there is a disputed account, the automated system isn’t acceptable and an underwriter MUST look at the file and stick to standard FHA guidelines.

More changes are coming on the heels of all this market upheaval.  Yesterday, Freddie Mac announced that starting sometime this September, they will stop purchasing and securitizing interest-only loans.  For most people these days, this information isn’t really relevant.  I seriously can’t remember the last time I did an interest-only loan.  Interest-only loans were very popular three to four years ago.  They allowed a buyer to qualify for a loan that they wouldn’t have otherwise qualified for.  Certainly, there are other reasons for this type of loan, but this was one of the main reasons a person would do an interest-only mortgage.

Suppose before I go any further, I should explain what these are and why I think they, Freddie Mac, are choosing to do this.  An interest-only loan is just that, interest-only.  There is a period of the loan, usually 5, 7 or 10 years in which all you pay is interest on the mortgage.  As I said earlier, this allowed people to qualify for a larger loan, hence, more of a house.  Typically, these types of loans carry a slightly higher rate, approximately .125%-.25% , due to the higher risk involved.  I will talk about risk in a minute.  Let’s look at how this interest-only loan “piqued the interest” of many borrowers.

Suppose you’re looking to do a $350,000 loan (for most of you reading this, this probably isn’t your price range).  Figuring a rate of 5% on a 30 year fixed rate, the principal and interest would be $1879.  In most cases, you’d add your monthly taxes and homeowner’s insurance to this equation.   Of this amount, for the first few years anyway, you’re making a dent in your principal of approximately $400/month.  The rest of that payment, the interest, is the cost of your loan — about $1450.  As you can see, saving $400/mo is a pretty sweet deal.  Gosh, who wouldn’t do this type of loan?  In this scenario, I’m not increasing the rate like I should just to make it more of an apple-to-apple example.  If you live in the house 4 years, you’ve saved about $24,000.  That’s huge.  

What you’ve really done is avoided paying off $24,000 of your loan.  Now what happens after the 5, 7 or 10 year period?  This is where the risk comes in.  Your loan would re-amortize for the remaining term using the amount you owe.  So, five years later, you still owe $350,000.  Now, your payment goes from $1450 to $2046, almost a $600/mo jump.  I don’t know about you, but I wouldn’t be able to handle this increase.  And hey, look where the market is today — people having to handle increases in payments due to these loans, as well as adjustable rate mortgages.  Unemployment is up; home values are down … your whole premise for doing this loan was the fact that values were increasing.  So, at the end of that time period, you could easily sell your home and still make out, or just refinance to a fixed rate.  Not so much right now.

My opinion is all based on risk.  Too many loans have gone bad.  With the market not improving, it’s leaving people upside-down in their mortgages, no options but to let the house go or negotiate with the bank to sell on a short sale.  Short sales aren’t any easier to deal with than foreclosures.  Banks see the risk in these types of transactions too — if the seller is looking to do a short sale, then it’s just a foreclosure waiting to happen.  It just may be best to “bite the bullet” now when they can get the home sold and avoid the costs to foreclose on a home.  Quick definition for short sale:  seller can only sell house for going market, which is less than what they owe on the home.  They negotiate with their lender to accept an offer “short” of what is owed on the loan.

Okay, so I got off the subject a bit.  In a nutshell, there is good reason for Freddie Mac to say “whoa” to doing interest-only loans.  They are just a high risk in today’s market.  My guess is lenders will stop doing these with Freddie Mac before it’s “official”.  Here’s the bummer about this — first, there could be a high potential that Fannie Mae follows suit on this leaving interest-only loans non-saleable.  But honestly, there are some situations and buyers that these loans work REALLY well for — someone who is transferred often for work.  Thought process here is why invest principal into a home you’ll only be in a few years?  Also great for those who are making income that isn’t really usable for qualifying, such as tips, commissions, bonus — income that requires a two-year history to use and the borrower doesn’t have that.  If you know you have or will have that income, an increase in payment may not be an issue at all.   Some people are very savvy about investments.  Why not do this type of loan to “arbitrage” and use the savings to build up other investments.  And last, there are a lot of retired people that this is a great way to have a lower payment since they’re on a fixed income.  Eventually the home will transfer to other family members.  No need to really care about whether they paid off their loan or not.

Needless to say, it’s a great way to avoid risk for Freddie, and who knows, they may bring it back in the future.  I just don’t know if I agree that taking it away completely is the answer since it really has and can help many people.  That’s my 2 cents on this upcoming change to the world of mortgages!

The last few years have been plagued with first time buyer programs.  This is a very good thing.  In 2008, the first time buyer tax credit was first introduced.  It was quite a bit different than the tax credit now.  “Back then” the program wouldn’t let the buyer take advantage of the federal tax credit AND a first time home buyer program, such as one with a lower rate or down payment assistance. 

Then the second credit was introduced in 2009.  Every year, it’s been getting better.  In 2009, the two programs could be combined which gave buyers the best of both worlds.  Money for purchasing and money to help after the fact.  Thousands of people took advantage of this credit and quite a few of them “took advantage” of the credit — meaning, people cheated the system — there weren’t enough stop guards in the system.  I even heard someone had their child apply for the credit.  Hmmm, think you need to be 18 to buy a home.  In any case, people scrambled to take advantage of the credit by closing on their home prior to December 1.  First time buyers were coming out of the woodwork.  It was a mad rush to buy, close and amend the 2008 taxes to get the money. 

Psych!  Guess you really didn’t have to buy and close by the end of November.  Hail to the government; they extended the credit.  Not only that, they made it current homeowner “friendly”.  The new rule, as you probably know, is you must have a signed/accepted purchase agreement by April 30th and must close on the house by June 30th.  The credit is equal to 10% of the sale price or $8000, whichever is less, for a first time buyer.  The current homeowner can qualify as long as they have owned their primary residence for a consecutive five of the last eight years.  Similar situation — 10% of the sale price or $6500, lesser of the two. 

Here is what you NEED to know.  We all like to get our refunds as quickly as possible!  Who wouldn’t?   So, e-filing is the way to go.  And many people have done that.  First, you can amend your 2009 taxes anytime after you close on the home.  You’ll need to file a 1040x (form for amending) and the 5405 (form for the credit).  The urgent piece of information is you CANNOT e-file.  Here is information from the Minnesota Homeownership Center:

“Because of the documentation requirements for claiming the credit, taxpayers who claim the credit on their 2009 tax return must file a paper — not electronic — return and attach Form 5405, First-Time Homebuyer Credit and Repayment of the Credit”

So, thanks to people falsifying taxes and taking advantage of free money, you’ll have to do the lengthy step of filing by paper.  And timing on these refunds?  I have heard anywhere from 14-16 weeks.  It doesn’t help that it’s tax time.  Oh and thoughts about whether they’ll extend the tax credit.  I really don’t think so.  But, hey, I could be wrong.  If they do extend it, you can count on a new blog!

If you’re in the loan process right now, your head is probably spinning with all the new information.  Throw in there a lot of references to insurance — insurance for the home (aka hazard insurance), for the mortgage company (aka PMI or MI) and title insurance.  Oh, and to confuse the matter more, you can actually purchase mortgage insurance on your loan (in case something happens to you, the loan will be paid).  What the heck is the deal with all these insurances and what is really protecting you?

I am so glad you asked.  Let’s just start with some explanatory definitions, then I will get to the meat of this.  Homeowner’s Insurance is insurance that covers your home and the contents in case of a catastrophe or burglary.  As lenders, your house is our collateral.  If something should happen to it, we want to make sure you have enough coverage to replace your home.  This is a policy you purchase with your current insurance agent or one I could refer you to. 

If you were to buy a townhome or condo, you may not need this type of insurance.  In most instances the homeowner’s association covers that with the owner’s association dues.  There are some changes that have occurred with investors in regards to requiring a separate policy.  If the association’s insurance policy only covers “studs out”, then you would need to buy a special policy called a HO-6 — basically, this will cover the “studs in”, which means, all your personal belongings along with cupboards, fixtures and appliances.  If the association does have the extra coverage, it is still advisable for you to get the HO-6 policy (just won’t be as expensive) to cover your personal belongings.  In this instance, proof of this would NOT be required at closing.

How about the “dreaded” Private Mortgage Insurance (PMI) on conventional loans or Up-Front Mortgage Insurance (UFMIP) with FHA?  First of all, it’s not something to dread; it’s reality.  And in this day and time with all the private mortgage insurance companies that had to pay on claims due to foreclosure, it will never go away.  In a positive light, it allows you to do a minimum down program.  Anyway, the purpose for mortgage insurance is to insure the lender in case of default.  You remember AIG???  Who couldn’t forget the insurance  company that was bailed out … a few times, right?  They insured a lot of the high risk loans that were done in the past years.  No wonder it’s harder to get this type of insurance.  Only in the last few months have the PMI companies “let loose” a little to do 3% loans.  UFMIP is for FHA loans.  FHA is self-insured.  They have an up-front amount that is financed into your loan amount, as well as a monthly amount for insurance — which is lower than conventional insurance. 

Last, at least the last I intend to address, is Title Insurance.  This is the CHEAPEST insurance you will ever purchase.  There are two types of title insurance — lender’s and owner’s.  The lender’s policy is required to be purchased to insure the lender that they are in first lien position.  One of the title company’s jobs is to search public records at the county to check for any liens.  The title company can only find what is correctly recorded.  You have the  option to purchase a  policy for yourself, called an owner’s policy.  This protects YOU in the event any liens were to appear against the property that you didn’t incur.  For instance, let’s say that a few owners ago, a new roof was put on the home and the owners didn’t pay the contractor.  In order for the contractor to make sure he gets paid, he placed a lien against the home YOU’RE purchasing.  If recorded correctly, the title company will find this and require the seller to pay it off to give you free and clear title.  If, however, someone made a mistake at the county, then it may not show up.  Bummer deal is liens follow the address, NOT the person who incurred them.  Five years later you decide to sell and wah-la, a $5000 lien appears.  Hmmm — what to do?  You have a few options — pay it (cheerfully I’m sure :-D ), go to court to fight it or … drum roll please … at closing when you purchased your home, you purchased owner’s title insurance.  With this insurance, you pay ONCE, at closing, and it covers you for the ENTIRE time you own your home.  This insurance depends on the loan amount and sale price, but for first time buyers, it won’t be much more than $200 or so.  Paying just $200 to save $4000.  No brainer.  The two real estate attorneys I trust would NEVER let their clients close without it.  They spend way too much time fighting in court for other clients that don’t have the insurance.  Unpaid work is just an example of a type of lien, but there are more “opportunities” to have to use it — heirs to a property, divorce situation, many things that may put a  person in title to the home YOU own. 

The long and short — there are many types of insurance during this process.  The only one you have the CHOICE to purchase is the owner’s title insurance.  It’s a necessary, but cheap, evil and well worth the investment.  Just do it!