Per Congress’ mandate, FHA needs to keep their Mutual Mortgage Insurance Fund alive in order to continually insure loans.  And when I say alive, I mean they need at least a 2% reserve threshold.  Last year, FHA increased their annual mortgage insurance (MI) and decreased the Up Front Mortgage Insurance (UFMIP) in an effort to build the reserves back up.  After recent review, FHA realized another increase is needed with BOTH the annual MI and the UFMIP.

Starting with case numbers assigned April 1, 2012 or after, the new numbers will look like this:

• Monthly MI will go from 1.15% to 1.25% (of the loan size)
• The UFMIP will go from 1% to 1.75% (of the loan size)

In layman’s terms, what does this mean to you, the buyer??  Not a ton, BUT it will affect your payment.  On a $125,000 loan, your payment will go up about $15/mo with the combination of the UFMIP increase and monthly mortgage insurance increase.  Again, not a ton, but when you’re buying your first home, EVERY little bit makes a difference.

In order to get in under the old percentages, you’d need a purchase offer accepted prior to April 1 so your loan officer can get a case number assigned from FHA.  It’s something that can usually be done the same day, but I don’t suggest waiting until the last minute to get the offer accepted if you really are adverse to the payment increase. 

FHA will still continue to be a great option for home financing.  There is no doubt about it.  And for some people, or based on the shape of the home, FHA will be the ONLY option.  Alternatively, if you have good credit and meet conventional guidelines, you may want to consider conventional financing as this option will absolutely have a lower house payment.  Again, it’s all about what you qualify for in terms of credit and if the home needs work or not.  Sometimes, conventional financing isn’t an option.

To find out more about YOUR options, what first time programs you’re eligible for or to find out what you qualify for, please don’t hesitate to give me a call.  My goal is to educate on the options and help you make the right financial decision … even if that decision is to not buy anything at all.

Current guidelines allow up to 125% of the home’s value to be financed on just the first loan.  Many folks owe more than this.  The word on the street is that on November 15th, we will have new guidelines for this program, known as HARP (Home Affordable Refinance Program), allowing people above that 125% to refinance.  The details won’t be released until then, so we don’t know the exact parameters of the new program.

There are a few advantages for those with Fannie Mae-owned loans — such as the possibility of NOT needing an appraisal, not needing private mortgage insurance (PMI) if the loan currently doesn’t have it and not having to escrow for taxes and insurance if you currently don’t do that either.  With Freddie Mac, the advantages are the same, BUT, Freddie Mac’s program does require an appraisal. 

Important criteria for the current program:

• You must be current on your mortgage payments (no more than 30-days late in the last 12 months)
• Your home value has DEcreased (pretty typical in today’s market)
• Your first mortgage doesn’t exceed 125% of the current market value (known as loan-to-value or LTV)

Second loans, known as subordinate financing, CANNOT be paid off under this program, even if you used that second loan to purchase the home.  Any subordinate financing would stay in place and be re-subordinated (meaning subordinated again, but this time as second lien position to the NEW first loan). 

There is NO limit as to the COMBINED loan-to-value (CLTV) under this program.  This means that as long as the first loan is under the 125% LTV, the seconds can go above that.  Just know that the lender who has the second loan may NOT be willing to subordinate to the new first loan, which is where we find a lot of these refinances stopping short of closing.  Many second mortgage loan companies prefer to keep BOTH the first and second loans UNDER 90% LTV, which would be impossible for most people attempting this program. 

The occupancy type can be owner occupied as your primary residence, a second home OR even an investment property.  Pricing may be higher for a non-owner occupied home, so keep that in mind.

If you feel this may benefit you now or if you think the new guidelines may help, please let me know.  I would be happy to assist.  At a bare minimum, the following information would be required to process your loan:

• a recent paystub
• 2010 W2
• 2010 federal taxes
• recent month bank statement, all pages
• copy of your mortgage note you received at your closing

Though this option is out there and may be available, not everyone qualifies.  Feel free to contact me to determine your eligibility!

Let’s start with how much you need, which will depend on the program you’re doing and the loan amount.  In general, on an FHA loan, you need 3.5% of the sale price for down payment and approximately another 4% of the sale price for closing costs.  This number may seem high, but closing costs make up a lot of different things — lender charges associated with originating your loan, appraisal, credit report, funds to start your escrow account, 1-year upfront homeowner’s insurance, title company charges, county charges and possibly a broker commission fee charged by your Realtor.

Your down payment can come from logical sources like your own money, a gift from a family member or even down payment assistance available to some first time buyers.  Money for closing costs can come from these sources too, plus in most cases, the seller can pay for some or all of your costs, depending on the program.  They cannot cover any of your down payment.

Let’s say you’ll be using your own money — which is very commendable.  Lenders will require the last 60 days of bank statements to prove you have the funds necessary for closing and down payment.  Funds can come from many different account types – savings, checking, money market, roth IRA, stocks, bonds, mutual funds, 401K accounts and possibly more.

The big thing to know is that CASH on hand or deposited is NOT acceptable in a mortgage transaction.  Cash cannot be verified or traced, so it’s unacceptable as an asset.  Any deposits made into your bank accounts on the statements you provide for your loan, and those going forward, will be scrutinized in terms of deposits and overdrafts.  It’s important to only deposit your work income while in the mortgage process.  Check out the other things NOT to do in the process.

Taking a loan against an asset is also acceptable for down payment, though the payment, in most cases, will have to be used as a debt in qualifying.  Loans against another home, car or your retirement are typical places you could finance the costs or down payment.  An unsecured loan or draw against a credit card is NOT acceptable.

Assets are important, but not crucial at the time of pre-approval.  For instance, some of my borrowers save during the process.  Though they may not have the funds at our first meeting, they will within a month or so prior to closing.  As I mentioned, gifts are acceptable sources of assets too as long as they are from a family member.  There is a method to the madness for verifying these assets, so please seek advice from your loan officer PRIOR to getting any funds from family.

The take-away from this is that you will need money for down payment and closing costs; however, the amount you need will vary on the program and if you’re eligible for special assistance and/or if the seller agrees to assist with costs.  The other big take away — DON’T make deposits that aren’t from your employment or they will be questioned.  It’s better to be above-board with your loan officer about your intentions rather than finding out at the last minute you have an issue with your loan due to unverifiable assets.

Your pre-approval puzzle is solved now that you have all four things in place.  The glue that will hold it all together is choosing the right loan officer who will help you make sure the pieces are where they need to be.  Of course, it would be my pleasure to serve as your glue, but with anything, you need to find a person you trust and are comfortable with.  Good luck!!!

*You must be a Veteran to qualify for a VA loan.  Zero-down is par for the program, but there are still closing costs that either need to be paid by the Veteran, a gift from family or the seller.

Long gone are the days we could do those crazy no-income verification loans.  In order to figure  out what you qualify for, there needs to be income.  We can’t just write a guesstimate down on the application or use a number that “looks good” from the tax return.  And just so I am clear here, doing this was NEVER okay, but many people in my industry took some pretty dangerous liberties.  Need I say more??

Income comes in MANY forms — the most common is employment.  This is the most logical place I will look.  But some income is sneaky and not-so-identifiable.  Such as investment income.  Many people have assets that earn interest or dividends on a yearly basis.  If the same assets have earned income for the last two years, we can use these as income.

Could we count rent from your sister for income?  The easy answer is no since a lot of things have to fall in place to use this. Most importantly, will she be living with you in the new home and will she continue to rent??  If yes, then the question — can this income be documented with canceled checks from her to you for the rent and did you claim it on your taxes as income with a preferable two-year history???  If so, then there is a good chance we can.

How about the second job you got so you can save more money for down payment?  Easy answer … maybe.  Again, more questions.  Have you been working two jobs for the last two years?  (we sure like the two-year history thing in lending, don’t we??)  This is really the most important question.  If the answer is yes, then more than likely we can.  We’ll look at the hours you put in at both and may have to do some averaging to determine the actual numbers we can use for qualifying.  If, however, you started the job a year ago or 6 months ago to save for down payment, then no, we can’t use it for qualifying.  It is still a good thing and will still help you during this process!!!

How about self-employment or commission income??  You’ll love this … need a two-year history to use these types of income.  And so you know, lenders use the income you reported to the IRS, meaning we use the NET income (or loss for some) after you write-off expenses.  A few things can be added back, but without a lesson on tax returns and lending, this is the easiest thing to remember …. NET.

The two-year history holds true if you want to use tips, bonuses, overtime or even seasonal employment. Tips, by the way, actually have to be claimed to use — so either they show up on your paychecks or your taxes and if they don’t we can’t use them.   Oh, and speaking of seasonal employment, we can even use UN-employment income for qualifying if you work seasonally and have the two-year history of receiving both.

Something I want to point out here relative to first time buyer programs — these special programs have MAX income limits for qualifying.  Even if we can’t use all of your income for qualifying because it’s less than two years or for some other reason, we MUST still use it in calculating income for the program.  Federal guidelines require us to use ALL household income, regardless of it’s source or history.

Let’s say your spouse isn’t on the loan due to credit issues.  Though we aren’t using ANYTHING about their situation on the loan, we still MUST calculate their income for the first time programs.  And if you receive child or spousal support, we must use it under the program guidelines.  If you choose, you could also use this in qualifying for a loan; but there needs to be a history of receiving this income (which that history varies on the program you’re doing); it needs to be on-time and we must document it will continue for at least three years.

Are you a fan of the races or playing a mean hand of poker?  Gambling winnings could be counted as income if consistently received for the past two years!  Rental income from investment properties you own can be used as income.  Payments of pension, social security or disability could be used as income — have to meet not only the two-year rule, but we also need to show the income will continue for at least three more years, just like child or spousal support.

I am sure there are many income situations I haven’t listed and maybe some that are so obvious, they aren’t coming to the top of my head.  The main gist to remember is the “power of two” — having that two-year history.  Not all sources of income require this, but most do, so it’s a good rule of thumb.

As always, I am happy to go over your income situation to determine if we can use it when helping you qualify for a loan.  Next piece to our puzzle — assets — gotta have ‘em!

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!

Ranking #1 is Credit.  You’ve probably seen the ads for credit scores or credit monitoring companies on TV.  It’s good to have a pulse on your score, but there is so much more that goes into determining “credit worthiness” in the eyes of a lender.

Lenders are looking for a few things now in terms of credit, such as history, how many accounts you have, what your payments look like and how recent your history is.  It used to be, which seems like FOREVER ago, that the score “spoke for itself.”  If you had over 680*, you were golden.  Typically, no more questions were asked and no other checks were done.  Not so much anymore

As a starting point, there is a minimum credit score that is required by investors and the first time buyer programs — 620.  Typically, people have three scores, one from each credit bureau.  We need the middle of the three to be at least 620 or higher and we will always use the LOWER of the middle scores if there is more than one borrower on the application.

Along with the score requirement, investors are looking for history of current credit.  We want to see at least three items of current credit on your report.  Current credit is something reporting to the credit bureau in the last 12-24 months AND where there is at least a 12-month history, preferrably, history with on-time payments. 

Here’s the deal — you could have an 80o score, which is awesome, but if you only have one current item, let’s say a credit card you use for gas and all your other credit hasn’t reported since 2008, then your loan financing options may be limited.  Strange, but true.  Technically, if current items aren’t reporting, then that 800 score you have really isn’t accurate.  It’s a dated score because nothing is causing it to be that good any longer.

A few other things can skew your score, such as authorized user accounts and disputed accounts.  Remember that card that Mom and Dad put you on when you were in college?  It’s not yours and shouldn’t be on your report.  It’s not being calculated in the score since it’s not your responsibility to pay, BUT, it could be throwing off our automated loan decision.  Thus, these need to be removed from your report if found during the pre-approval process.

Disputed accounts — most people don’t even remember “disputing” an account.  It could be as simple as calling up your creditor and stating you weren’t late back in May or you shouldn’t have been charged a late fee because you paid the balance in full.  At that point, you disputed the account.  Same thing applies here — it’s not affecting your score AND if this account happens to be in good standing, it’s also not giving you bonus points in your score.  So, in these cases, the accounts aren’t removed,  BUT, the dispute verbiage needs to go away.  

And, though I haven’t said this because it seems obvious, we are also looking for clean credit.  Everyone has a boo-boo here and there — it happens.  We want to make sure your report isn’t litered with bandages and if there are issues, why?  Sometimes, it’s getting beyond a certain time-frame (i.e. 2 years after the discharge date of a bankruptcy) or having a full 12-months of on-time payments since having some credit issues.  Believe it or not, MOST credit issues can get better with TIME.  But time takes time and we don’t always have the patience to wait.

Now, you may be thinking, ”I have NO credit and no score, so now what?”  Thankfully, we may have a solution if y0u meet the guidelines of the first time buyer programs.  We can use alternative credit, so credit that isn’t normally on a credit report — i.e. rent, utilities, phone, cell, Netflix, health club, tanning salon, War of the Worlds gaming (yes, this works!) etc.  Again, we need to see a 12-month history with on-time payments for at least three items.  These won’t go on your report and won’t get you a score, but at least you may still be able to buy a home!

So credit — really, it’s the biggest piece to the puzzle these days since the “crash” of the mortgage world.  But, it’s just ONE piece and there are a few more to come — next up, Employment.

 *scores range from 350-850 – the higher the better

But, buying a home “just because” the rates are low isn’t a good reason to purchase and some people, frankly, aren’t cut out to be home-owners.  You need to know the time is right for YOU!

The chart below demonstrates where rates have been.  Current 30 year fixed rates are at least 1% LOWER than the low years or 2009 and 2010.  Take that to the bank!

What about the first time buyer programs?  Yup, their rates are soooo low, it’s crazy.   Here is a summary of the most common programs and the rates for the 30-year fixed:
-Dakota County - for homes in Dakota County – 3.75% with up to $10,000 in assistance*
-City Living - for homes in the CITIES of Minneapolis and St. Paul – 3.99% with up to $10,000** or 2.5% of the loan amount toward assistance
-MN Housing – ALL of Minnesota – 3.625% with no assistance or 4% with $4500 in assistance*

Yippee — great rates — what does that mean to you, other than bragging rights over your parents’ rate when they bought their first home?? It means more buying power. For example — let’s say you qualify for a $1500 PITI payment (principal, interest, taxes and insurance), of which $1200 is just the principal and interest. With a rate of 4%, you’d be looking at financing about $250,000 — if the rate were 1% higher, your buying power drops by $25,000.

A better way to look at this … buy a home that’s $25,000 less and have a lower payment by about $130. THAT sounds like a better idea, especially since home prices are in YOUR favor.

NUTSHELL — if now IS the time for YOU to buy, then by all means take the plunge. Make sure you’re working with a lender with experience (like my 17 years) and one that knows and practices the first time buyer programs (in my sleep!). I am here and happy to help!

*Assistance and qualification for program is based on total household income and possibly other parameters set by the program
**Special program with St. Paul based on total household income, as well foreclosure status

Why is this relevant to anything, other than my fanaticism?  It’s ALL about the details with loans, so it’s hugely relevant.  With so many changes in guidelines and requirements by investors, you need to make sure you’re working with a loan officer that not only pays attention to the details, but KNOWS them.

In her case, we were meeting to sign paperwork after she had an accepted purchase agreement.  There is a lot of paperwork with first time buyer programs, not to mention nuiances that make understanding the programs a little difficult — even for me, a veteran loan officer.

I’ve had discussions with clients that didn’t have a clue what they signed when applying for a loan with another loan officer, why it was relevant or what the possible penalties would be for buying with a first time program.  These are all very important details ANY client should be told.

When you’re spending the most money EVER on one item, it’s crucial to work with the right person — someone who knows the programs, the current guidelines (which seriously change daily) and have a true desire to educate and be honest.

Aligning yourself with someone who sees crooked pictures — knows, foresees and attends to the details — will ensure you have a good experience in this not-so-straight mortgage world.

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.

MN Housing, a program that is well known throughout the Minnesota area, has got a few programs. One of their programs offers no assistance, BUT, a low rate of 4.125%* That is incredible!  And, if you want, or qualify for, down payment assistance, you could be looking at 4.5%. All of these rates are subject to change, are 30-year fixed terms and have NO pre-payment penalty!  Keep in mind, they do have a recapture tax, which all subsidized bond programs have.  Don’t let this scare you though … most people don’t have to worry about this when they sell.

Another great change occured with the City Living Program. This is the program availalbe to homes in the cities of Minneapolis and St. Paul. They reduced their rate to 4.25% AND increased their down payment assistance from 2% of the loan amount up to 2.5%! Plus, you may be eligible for funds in certain neighborhoods making the pot even sweeeter!

The Dakota County program also dropped their rate — so 4.35%. They offer 3 different tiers of assistance depending on your household income. And speaking of household income — all the programs have adjusted these limits down just a tad, so please inquire if you’re interested in pursuing one of the programs.

Remember, you’re only a first time buyer once and if you can take advantage of a special program to reduce your rate and possibly help with costs, do it!!!
*Assumes an FHA or VA loan