Let’s look at some figures using a loan amount of $150,000 (these estimates do NOT include taxes, insurance, mortgage insurance or dues):

• Rate:  3.75%**
• Principal and interest:  $695
• Total interest over 30 years:  $100,042

Compare this to the rate prior to 4 PM today …

• Rate:  4.25%**
• Principal and interest:  $738
• Total interest over 30 years:  $115647

So, the monthy savings is just $43/month, which means $516 a year.  Okay, so not really a HUGE difference; BUT, check out the 30 year savings in interest — over $15,000.  That’s just crazy!  You could take that $43/mo and add another $6000 or so to your purchase price.  That may be worth it just to get into another price bracket.

So what about the zero down payment program?  That rate came down too — also by 1/2%  — from 5% to 4.5%**  Remember, this program’s primary benefit, other than NO down payment, is that there is no private mortgage insurance (PMI).  A regular 30 year right now is about 4.5% or less without using a first time program.  Well, if you had less than 20% down, you would be required to have PMI.  On the above $150,000 loan the PMI would be about $65 in  your payment, eating away at what you could afford.

We are in some crazy times right now, but I cannot say it enough — NOW IS THE TIME to buy a home.  There hasn’t been, and will probably never be, another time in our lifetime to have so many benefits — low rates, low home prices and many special first time buyer programs just waiting to help you get into your first home.  Let me be the one to do that too!

*Rates are subject to change without notice.  This is not an offer to enter into an agreement.  **Assuming 5 days of interest on a $150,000 loan amount, the APR for these rates are 3.899%, 4.403% and 4.656% respectively

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.

Thankfully, MN Housing realized there was a huge need to bring this back to the first time buyer.  Currently, the most minimum down payment you can do is an FHA loan — 3.5% down.  Conventional financing does allow for 3% down, but the private mortgage insurance is higher.  Due to this, and the fact that MN Housing offers a lower rate on FHA, the payment is lower than a conventional MN Housing loan. 

Now, we finally have a conventional alternative where the payment IS less than FHA!!!  Here are the parameters to the program:

• NO down payment
• NO monthly mortgage insurance
• Must be first time homebuyer
• Maximum household income 1-4 person $83,900
• One unit home, townhome or condo
• Minimum credit score 680
• Seller can pay up to 3% of the sale price toward your closing costs or pre-paids
• Minimum investment of YOUR money — $1000
• Must attend the Homestretch class

Let’s look at an example comparing FHA to this new program.

In the scenario above, you could actually increase your purchasing power by about $4000, which may not seem like a lot, but could get you up to a different price point.  This program has so many positives.  Let’s hope it can help you afford the home you’ve been wanting to buy!

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.

To repeat, many people are taking advantage of this program not just for the rate, but the opportunity to get down payment assistance.  The Dakota County program offers three tiers of assistance depending on household income.  Household income is defined as income brought in by all people in the home over age 18 and includes such income as bank interest, child support/alimony, side jobs, etc.  Even if the income can’t be used for qualifying (i.e. overtime that has been received for less than two years), it is still figured into the limits for first time buyer programs.  Here are the down-payment tiers:

Household          10%                         5%                      2.5%
Size                  Income Limit      Income Limit    Income Limit

1                           $29,400                $45,100              $84,000
2                           $33,600                $51,550              $84,000
3                           $37,800                $58,000             $92,400
4                           $42,000                $64,400             $92,400
5                           $45,400                $69,600             $92,400
6                           $48,750                $74,750            $92,400
7                          $52,100                 $79,900            $92,400
8                           $55,450                 $85,050           $92,400

Max assistance for the 10% limit is $10,000 and max for the 5% limit is $7500.

So what do the numbers mean? Let’s reference the middle column. Let’s say you have 3 people in your household. That means your total household income must be under $58,000 — one cent over and you go to the next column. In this scenario, you qualify for down payment assistance equal to 5% of the base loan amount, with a max of $7500. The first time buyer assistance is a second mortgage that is placed against your home when you close. It is an interest-free and payment-free loan. If you received $7500, you would pay back $7500 either when you refinance your loan or sell your home.

If you’re looking in Dakota County for your first home, definitely check out this program.  All lenders are not created equally with first time programs.  Lenders must be approved to do this financing.  Obviously, I can help!  It’s time to take advantage of all you have to gain as a first time buyer in this market!

*Rates are subject to change.

Currently, I am telling all clients that there will be NO reason for them to refinance.  It won’t make financial sense; their rate is just too low.  As a homeowner, you may get solicitations to refinance because mortgages are public record.  Thing is, the lender doesn’t know your specifics, nor do they have your best interest in mind.  My current clients, from the last year or so,  know I won’t call them to refinance since I DO care whether they do the right thing.

So when does it make sense?  One general rule of thumb is the new rate should be more than 1% lower than your current rate.  This isn’t true for all people though.  If what you owe is less than $150,000, you may need the rate to be closer to 1 1/2% – 2% lower.  And if your loan is less than $100,000, I would say it almost never makes sense to refinance.  You’re better off making principal payments.

Why though?  Since you’re taking out a new loan, you will have origination charges along with all the fees involved with a new loan — title company fees, setting up your escrow account and county fees.  Sure, you may hear that there are no closing cost refinances, but I am here to say nothing is free.  Your charges are either added to your loan, covered with a higher interest rate or being paid out of pocket by you or a combination thereof.  It’s time to run numbers!

To get a true sense if a refinance is a sound financial decision, you’ll want to gather the following information:

• approximate value of your home (tax assessed values are actually higher than current values)
• your current loan balance(s) on any first, second or home equity lines of credit
• your current loan rate(s)
• annual property taxes
• annual homeowner’s insurance if a single family home
• current principal and interest payment
• your goals — reduce rate, take cash out, etc.
• type of loan, i.e. fixed rate, term or ARM
• occupancy of the home, i.e. owner occupied, second home or investment property

These will enable me to run figures and determine the “payback” time frame.  I recently had a past client do a refinance.  They were saving $200/month.  That’s a lot of money!  Their costs were about $4400 which covered lender fees, title charges and county charges.  Setting up the escrow is not figured into this equation.  Escrows are pre-paid expenses that cover future payments of taxes and insurance.  My client would pay for these regardless of refinancing or not. 

Anyway, the calculation I run is based on the savings per year – $2400 – divided by the costs of $4400.  He’s going to re-coup these fees in 1.8 years, so under two.  This is the second rule of thumb.  If it takes longer than two years to recoup the costs, then refinancing may not be the right move.  Now, going to a shorter term or going from an Adjustable Rate Mortgage (ARM) to a fixed may make sense even if the time-frame to recoup is higher.  Biggest question here … how long will you be in the home?  Though we never really know the answer, it will certainly help guide the financial soundness of the refinance.

For those of you with second loans or home values close to or  than what you owe, refinancing may just NOT be an option, regardless of the savings.  Long and short — “maybe” is the answer to the title question.  It’s not right for everyone.  And when you work with me, I will make sure you know whether it’s right for you or not.  I would rather give you the straight scoop than have you upset that you did something you should not have.  

Send me the answers to the bulleted items above.  Let’s see if refinancing IS right for you!!

Late Wednesday night (June 30th), the Senate took the lead of the House of Representatives and passed the Homebuyer Assistance and Improvement Act which extends the CLOSING date for those eligible to receive the federal tax credit under the American Recovery and Reinvestment Act.  This is part of the bill that was presented.  You can see other details of this bill here.

First time buyers, those who haven’t owned a home in the last three years, as well as current owners who have owned a primary residency 5 of the last 8 years, were eligible for a tax credit if they purchased a primary residence — up to $8000 or $6500 respectively.  The guidelines required buyers to have a signed purchase by April 30th and CLOSE on the home by June 3oth.

The problem was that many of these home purchases were being held up buy a multitude of things — the banks that own the homes, the banks that are considering a short sale for the sellers and even title and mortgage companies.  The argument was that the buyer was not at fault for this delay if they had the signed agreement by April 30th so they shouldn’t be penalized.  Low and behold, buyers now have until September 30th to close on their house to still get the federal tax credit!!

So, if you are one of those people that thought you missed out on the credit because something was preventing you from closing on your home prior to June 30th, yesterday, then you can breathe a sigh of relief!  Good luck with your process and enjoy this awesome gift from the government!

Let’s start with what you need to do BEFORE you start househunting — get pre-approved with a reputable and reliable lender.  A pre-approval means you’ve completed an application with a lender, had credit pulled, provided supporting documentation and your loan has been through an automated underwriting system and/or been seen by an underwriter.  If these things DON’T happen, you’re NOT pre-approved.  There are many things that the lender looks at when determining your qualifications. 

In order to determine the accuracy of your application, we must gather supporting documentation — hence, having you “pull it together”.  The list applies to anyone on the loan application and not all items on this list will pertain to everyone. 

-most recent TWO paystubs

-last TWO years W2s*

-last TWO years federal taxes, all schedules*

-most recent month bank statement, showing beginning and ending balance, all pages

-most recent quarterly statement for any accounts not monthly, i.e. retirement, stocks or bonds, all pages

-any court papers such as decrees or bankruptcy documentation

*If you intend on using a first time buyer program, you will need the last THREE years W2s and federal taxes.  This proves to us and the first time buyer powers-that-be  that you have not owned a home in the last 3 years which is the criteria to be considered a first time buyer.

I know what you’re thinking … along the way I may ask for more, including your first born, right?  People have stories and some are quite good.  My goal is to get everything I need upfront so there aren’t last minute dashes to find other paperwork.  Also, if other things enter your situation for buying, we need to address them with … more paperwork, i.e. a gift from family or document a large deposit into your account.  If you want to avoid some of the pitfalls that can cause havoc in your loan process, check out this great article written by my manager.  She makes a very boring thing, like what not to do while in the process, very funny.

Moral of this story — pull it together to support your application information.  If other documentation is requested, please provide that in a timely manner.  The sooner we have your paperwork, the better.  And before I forget, I am NOT perfect.  I make mistakes and sometimes miss things.  So forgive me if I ask for something you gave/emailed me.  I have so many conversations in a day and receive my share of emails.  I try to keep it all straight, but sometimes, it’s just better to ask again.  No double guessing.   The past few months have been fun as I am working with three ladies that all have the same first name!  Mama Mia!  So, forgive me now.  And most importantly, just know that you WILL be given the best service and communication around.

Will this Close?

Another thing you can expect with a foreclosure is an “as-is” addendum.  This means that you are buying the house without a seller’s disclosure and in most instances, the bank won’t fix anything if there are any issues with your inspection or appraisal.  Oh, and speaking of inspections … just because it’s sold as-is does not mean you can’t get one or make your offer contingent on one.  It’s still highly recommended.  Let me give credit to some banks out there.  Some WILL do repairs which can be beneficial to you.  Also, just because it’s bank-owned doesn’t mean you can’t ask the bank to cover some or all of your costs.  A good Realtor will be able to advise you on this aspect of your purchase agreement.

The reason a bank completes an as-is addendum, is they have no knowledge of the home.  They’ve never lived there and I’d be shocked if anyone from the bank has even been to the house.  So, if there was previous water damage, storm damage or anything that may negatively affect the home, they won’t know about it.  Typically, there is no personal property offered in these deals.  For instance, if the kitchen still has the appliances, they cannot guarantee they will be in the home when it transfers to you.  If they happen to be there when you move in — woohoo — extra bonus!

When working with the banks on these foreclosures, you can expect, in most cases, that the bank will require you to close with a title company they have chosen.  The bank will run all their transactions through this title company for ease and for familiarity.  Typically, the bank will offer to pay your owner’s title policy.  So you know, the bank may require you to close with their chosen company, though by law, you technically CAN choose your own company.  I would highly recommend you get a solid recommendation from your agent or lender.  Many title companies will adjust their fees to compete with the bank’s company.  I deal with title companies all the time and I know who performs and who could use a little work.  Those that can use a little work are not all bad.  There may be delays in getting paperwork or closing scheduled, but it eventually gets done. 

Sometimes, it doesn’t.  Here’s what happened that should have never happened.  A recent transaction I had didn’t close on it’s desired close date and then didn’t close a week later.  It wasn’t the client’s fault.  It wasn’t due to financing — package and funds were there.  It wasn’t due to the Realtors not doing their job — they did all they could.  It ALL had to do with the title company.  This “title company” had no presence in MN.  The people were slow to answer emails and rarely answered phones.  They didn’t meet with clients, but sent a notary — very impersonal.  Not only that, the title work was “outsourced” which made matters worse.

Needless to say, we needed some paperwork, which took a few weeks to get after persistent emails and calls.  We needed the closing to be scheduled so we knew when to date the closing paperwork and the buyers knew when to be available — never was set.  Since we finally had the necessary paperwork, the agents and client set a date; we sent the package and wired funds.  It’s typical for the title company to provide a HUD to the lender for approval.  The HUD is the itemization of the settlement charges.  We spent the morning of the ”rescheduled” closing date burning the phones up to the closer, as well as emailing.  Nothing.  Right after lunch, we requested the wire be sent back since there was no response or HUD.  Low and behold … a response with a request to give them some time as they are working on the HUD.  That was it, the last communication.  I am not sure why an extra week wasn’t enough time.  Come Monday we still didn’t have the wire back. 

Seems pretty bad, huh?  It is unacceptable to have such poor communication.  In the 16 years I have originated loans, I have NEVER experienced such disregard to all the people involved.  If you think the above is bad … the following is worse.  The family moved from their apartment, had their lives in a truck, their kids hours away with family and no place to go expecting to close on the date set in the purchase agreement.   So, that week the buyers had to pay to store their stuff and live in a hotel, with many days of frustration and uncertainty.  Who wants to go through this?  They didn’t deserve this.  The day the funds were at the title company, we waited … and waited … and the return calls never happened nor did the HUD arrive.  The buyers moved on and are now renting month to month.  They had to, had to provide a home for their children and stop waiting for a closing that wasn’t happening.  Why?  Because a title company couldn’t get their ducks in a row, didn’t have the same customer-focus as the others involved and didn’t have the desire to make it happen.

How could this have been prevented?  Bucking the system with the bank and choosing their own title company.  Does this mean everything would have been rosy?  Not necessarily, but it would have meant familiarity by those who matter — the buyers, agents and mortgage company.  It would  have meant the personal touch of having a person to talk to, someone to depend on and someone to sit across from who knows the programs and can explain the paperwork — not just a notary to stamp after each signature — which is how they planned to handle the signing.  These people could have saved hundreds, not to mention all the time lost in work, on the phone and away from their children.  How do they get that back?  How can they be compensated for what they lost?  They can’t and that is a shame.

Working with the right people doesn’t just mean your Realtor and loan officer.  EVERYONE involved in the transaction needs to have the same goals in mind … YOUR goals in mind.  This obviously includes the title company.  As you can see, they can make or break a transaction — a preventable situation.  I am hopeful that this family can get their lives back in order and I truly hope they can trust again to take that magical step of owning their first home.  They actually gave the title company one more shot and … of course, they still didn’t close.   I pray homeownership happens, as everyone deserves to own a home and more importantly, everyone deserves to be treated fairly, like they matter and be given the common courtesy of great communication.

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.