The changes to seller concessions will have a large impact. Concessions include what the seller is contributing to the buyer in the transaction. A [...]]]> In January, the Department of Housing and Urban Development (HUD) announced the first major changes to FHA financing for the year changing the maximum seller concessions from 6% to 3%  early summer 2010.

The changes to seller concessions will have a large impact. Concessions include what the seller is contributing to the buyer in the transaction. A common concession is a credit from the seller to cover the buyer’s closing costs. A 3% limit on seller concessions is enough to cover closing costs on a purchase of around $250,000, but with a purchase price of anything less than $250,000 the buyer will be forced to pay some closing costs out-of-pocket. This will be a pain-point for many FHA borrowers in the months to come.

The change in concessions will also impact new construction transactions. Upgrades on a new home will be considered a seller concession if the purchase and sale clearly states that there was an increase in price for these upgrades. For example, supposing a buyer plans to purchase a new home at $295,000. In this transaction, the builder/seller is offering to pay the buyer’s closing costs up to $9,000, and the buyer is putting $20,000 down. The buyer’s loan officer arranges a loan with closing costs of approximately $8,000 for a $275,000 loan. In this instance, $275,000 x 3%= $8,250 — the buyer is okay.

However, as this is new construction and the buyer is purchasing from the builder, the buyer negotiates upgrades valued at $5,000. In this instance, the Purchase and Sale contract itemizes: upgraded flooring valued at $3000.00, and upgraded counter tops valued at $2000.00. In the underwriting process, the underwriter will likely consider these upgrades seller concessions. This additional $5,000 will be counted against the 3% limit. After a down payment of $20,000, your loan amount would be $280,000.  If you’ve been following the math, you will note that 3% x $280,000 = $8,400. The original $8,000 in closing costs, plus the $5,000 in upgrades will exceed the 3% limit. The loan no longer qualifies under FHA guidelines.

Another example of how this could affect a transaction?  Let’s suppose a buyer is shopping for a condo.  The seller is offering to pay for all the closing costs and Homeowner Association Dues for 1-year.  Both are considered a seller concession, so if the two figures total to over 3%, this purchase also would not qualify under FHA guidelines

If the seller is paying for something in behalf of the buyer, it is likely a “concession.”  Home buyers should be careful of any potential concessions offered if they’re planning on using FHA financing.

Why is HUD doing this?  The answer is simple, to protect home values.  Since buyers often need sellers to pay for their closing costs, HUD is trying to protect sales prices from being inflated to include these concessions.  Though a valiant cause, it doesn’t make sense to squeeze the little guy out.  FHA is now a perfect loan program for buyers in the higher income range and a small down payment.  This is not what FHA was intended for.  Here is an excerpt from HUD’s mission statement:

The Department of Housing and Urban Development (HUD) is committed to helping communities across America identify and overcome regulatory barriers that impede the availability of affordable housing. READ ENTIRE MISSION STATEMENT

Keep reading to learn more about the other changes mortgage guidelines and new rules as they come about.

Let me start off by saying that I do not have anything against 30 year fixed loans.  They have [...]]]> When a consumer calls me for mortgage rates, 90% of the time they’re looking for a 30 year fixed mortgage.  I can almost guess immediately what mortgage the customer is going to ask for before they finish their sentence.

Let me start off by saying that I do not have anything against 30 year fixed loans.  They have a relatively low payment with little risk.  However, I truly believe there is a better loan out there.  It’s a loan that helps homeowners reach financial freedom faster.  If it were the standard, more homeowners would be debt free, house values couldn’t be inflated too easily and we likely would not be in the recession we’re in.  So, what is this magical loan that is so special?  So special that I risk being ridiculed by every industry expert for going against the grain?  Well, the answer is simpler than you may imagine…the 15 year fixed mortgage.

I’m going to share something with you that may make me sound like an oxymoron being that I’m a mortgage loan officer.  I want all of my clients to one day own their own house free of a loan.  I believe that owning your house free and clear of debt, along with being debt free as a whole, is the heart of financial freedom.

The average retiree on social security receives $1,000.  That’s $2,000 a month for a married couple.  Let me ask you something.  Could you live off of $2,000 a month?  If you said “No”, rethink your answer.  If you owed your house free and clear and didn’t have any debt, could you live off of $2,000 a month?  You probably could.  

We’ve all been programmed to think a 30 year loan is the holy grail of mortgages, but mortgages are just a fancy term for “loan.”  What else in life would you buy using a 30 year loan?  Would you take out a 30 student loan?  How about a 30 year car loan?  How about a 30 year loan on a boat (and I’m not talking a yacht)?  Of course not.  However, we’re happy to purchase a home and stretch out the payments as long as possible. 

15 year fixed mortgages save interest by having a lower rate than 30 year loans and by shortening the loan term.  How much does it save you?  More than you may think.

Let’s assume you’re offered a 5% 30 year loan and a 4.5% 15 year loan at $200k.  A $200k 5%-30 year loan has a total of $186,513 in interest charges.  A $200k 4.5% 15-year loan has a total of $75,397 in interest charges.  That’s a difference of over $111,000 in interest!  The 30 year has almost exactly 2.5 times more interest collected over the life of the loan.

So why don’t more consumers take a 15 year mortgage?  I’ve heard every reason under the sun as to why.  Here are the most common ones I hear:

• “I can’t afford the payments”
• “I don’t plan on living in this home forever”
• “I’ll make extra principal payments on my own”
• I can earn more money by investing rather than” putting it in my home’s equity”

Are these good reasons?  Sometimes yes, but usually not. 

It’s true that a 15 year loan does have a higher payment and that making extra principal payments does save money, but the reality is consumers usually pay what shows up on their statement.   Does it make sense to always get a 7 year car loan and pay extra in principal?  Sure it does, but we still usually opt for shorter loans.  Why?  Is it because we don’t want to pay for that car long after the value has decreased below the loan amount?  Is it because you don’t want to pay for that car forever?  Of couse this is why.  Yet somehow we’ve known this and have accepted shorter automobile loans but not with home loans.  Why?  I can tell you why, because we’ve been programmed to look for a 30 year loans. 

The reality is our home is often the most valuable thing we’ll ever own.  We are given the freedom to use that value in any way we want, so we use it by getting a long loan to keep the payments low.  No bank would ever give you a 30 year loan on a car because they know it would be worth virtually nothing by the end of the loan, but does that mean we shoud take a 30 year loan on a house just because it’s available?

Our fear of a high monthly budget drives us to shoot for a smaller payment.  Ask any used car salesperson and they’ll tell you it’s not about the trade-in value or sales price, it’s about getting the person a payment they’re comfortable with.  A sleezy salesman can use that tactic to get you into an overpriced car, but we’re using the same tactic on ourselves when we buy a home. 

We make adjustments to our lives to compensate for expenses.  Auto repairs, kids college tuition, medical bills or the unexpected addition to the family are all things we deal with, yet we find our way to adjust.  Start with a higher payment on your house and you’ll likely find a way to adjust when life throws you a financial curveball.

I know there’s at least one more group of homeowners who are still shaking their head.  They’re asking me, “What if I will never own this house free and clear because I know I’ll be moving before the loan is paid off.  How can you say a 15 year loan is still right for me?”  My answer, “Would you rather owe $5,000 on a 10,000 car when you trade it in or owe $10,000 on a $10,ooo car when you trade it in?”  Whether or not you pay it off is besides the point.  If you had a 15 year loan and sold your home before paying it off, you would owe much less on your home thus allowing you to put more money down on your next home.  Guess what else that does for you?  The larger down payment makes a 15 year loan on your new home affordable!  Now you’re 15 years away from owning your dream home free and clear instead of 30 years.  Suddenly the idea of going into retirement owning your home outright goes from a wish to a reality.

 I’m not here to tell you that you should immediately refinance your home or halt shopping for a home until you can afford a 15 year loan, but I do want you to consider this before you jump into a home loan you haven’t put much thought into.  Ultimately, it is your money and nobody is going to make that payment other than you, so you have to do what you’re comfortable with.  However, before you make your decision, ask yourself if you’re really comfortable throwing away that much money and delaying your financial freedom for another 15 years.  The higher payment may not sound that bad after all.

HUD (The Department of Housing and Urban Development) [...]]]> The answer to this question varies depending on the loan program a buyer is looking at, but most buyers who have past credit problems rely on FHA loans as their fastest track back to homeownership.  This is due to FHA’s lenient credit guidelines compared to conventional loan programs.

HUD (The Department of Housing and Urban Development) just released updated guidelines on the very topic on December 16th, 2009 in their Mortgagee Letter 09-52.  This mortgagee letter specifically covers FHA guidelines for buyers who have sold their property for less than what they owed.

The new FHA guidelines say a buyer cannot buy for 3 years if they were delinquent on their previous loan leading up to the short sale.  This timeline is identical to FHA guidelines on a foreclosure.

The guidelines do say a homebuyer can buy immediately following a short sale IF they were current on their mortgage and other installment debt payments at the time of their short sale and if the proceeds from the short sale were accepted as a payment in full.  In other words, if you were not late and the bank accepted your sale, you can buy again.

HUD does say that you cannot buy using a FHA loan if the purpose of the short sale and new purchase were done to take advantage of declining market conditions or to purchase a similar or superior property at a reduced price.  In other words, don’t abuse the guidelines to get a better deal.

To sum up the guidelines, you can buy immediately after a short sale but you cannot have been late on your loan and you can’t buy if your short sale was done to benefit from current market conditions.  Which scenarios would this apply to?  Here’s a few that would fit the requirements:

• You are forced to move do to a new job and location.  You have to sell your home and you owe more than it’s worth.
• You cannot afford to keep your home, such as losing your job, and were able to sell your home before becoming late on the home loan payments.  You then buy again when you have a new job and can afford the payments
• You have a balloon payment due and cannot afford the payment.  You sell for less than what you owe due to market conditions and later buy.

This seems like the right time to give homeowners an extensive guide to HARP, including [...]]]> It appears that more homeowners with little-to-no-equity are gaining an interest in refinancing.  More importantly, they’re gaining confidence that there is an option.  This is good news as it appears the Home Affordable Refinance Program (HARP) is gaining both momentum and attention.

This seems like the right time to give homeowners an extensive guide to HARP, including who it best benefits, how to give homeowners the best shot of getting approved as well as other options to low-equity refinancing.

The HARP program was designed to help homeowners who are looking to refinance but have lost some to all of their equity in their home.  It only applies to homeowners who currently have a Fannie Mae or Freddie Mac owned loan, but that does not mean HARP is a homeowners only choice.  In fact, there’s surprisingly several opti0ns available to homeowners that may not have considered, nor did their lender give as an option.  In this post, I will cover who qualifies for a HARP refinance, who best benefits from HARP guidelines, which customers do not qualify for HARP and some alternatives to consider.

WHO IS FANNIE MAE AND FREDDIE MAC, AND HOW DO I FIND OUT IF THEY OWN MY MORTGAGE?

 One topic that is very confusing for homeowners is finding out who really owns their loan.  You think it would be as simple as looking at the name on your mortgage statement, right?  Not so.  In fact, it’s very rare for a loan to be truly owned by the company you make your payments to.  Lenders usually sell their loans to another entity.  They also will collect payments in behalf  of that entity which is called “Servicing.”

Let’s suppose you buy your house using Wells Fargo as your lender.  Wells Fargo then sells your loan to Freddie Mac.  Wells Fargo still collects your payments and passes the payments back to Freddie Mac while collecting a small fee for the service.  In this scenario, your loan is owned by Freddie Mac but Wells Fargo is your servicer. 

There are several steps you can take to find out if Fannie Mae or Freddie Mac owns your loan.  It’s vital to try all options before you give up because not all methods work the first time. 

The first place to check to see if either Fannie Mae or Freddie Mac owns your mortgage is an online property lookup tool

Fannie Mae’s lookup tool:

http://loanlookup.fanniemae.com/loanlookup/

Freddie Mac’s lookup tool:

https://ww3.freddiemac.com/corporate/

If your property does not show up on either of the property lookup tools, you should still call Fannie Mae or Freddie Mac to see if they own your mortgage.  Fannie Mae and Freddie Mac do not always have the exact address saved correctly.  This is why it’s important to call.

Fannie Mae’s phone number:

1-800-732-6643 or 1-800-7-FANNIE

Freddie  Mac’s phone number:

1-800-373-3343 or 1-800-Freddie

If you don’t have luck there, contact your current servicer and see if they know if you have a Fannie Mae or Freddie Mac loan.  Lastly, you can have the mortgage company you’re applying a HARP loan from run an automated approval through Fannie Mae’s Desktop Underwriter or Freddie Mac’s Loan Prospector software and it may indicate if the property qualifies for a HARP loan. 

MY LOAN IS A FANNIE MAE OR FREDDIE MAC LOAN. NOW WHAT?

 First, find out if your current loan has mortgage insurance.  As it stands now, HARP guidelines require that you work only with your current servicer if your loan has mortgage insurance.  However I have not heard of one servicer who will do this loan.  This topic was covered in my blog post, “Another Flaw With the HARP Program.”

HARP guidelines say a homeowner can finance up to 125% of their home value.  Most lenders are still following the original guidelines of 105% but a couple of lenders are beginning to finance up to 125%.  Both of these limits are for a first mortgage.  Currently, HARP guidelines do not have a limit to how high your combined-loan-to-value (CLTV) is which means if you have more than one loan, the total amount you owe against your house is not considered in the qualifications of a HARP loan as long as the first mortgage is in the 125% allowable range.

Even though Fannie Mae and Freddie Mac both allow above 100% financing, please note that the loan pricing is more expensive.  HARP loan pricing is best suited for 95% combined-loan-to-value or less meaning you’ll get your best rates and fees if you have at least 5% equity between all loans owed against the house.  Pricing is increased between 95.01-97% and increased again for anything above 97.01%.  This means you’ll want to be very careful of how much you borrower on your house if your loan amount is near the value of your home.   If your current Fannie Mae or Freddie Mac loan does not have mortgage insurance, you will not be required to get mortgage insurance on your new HARP loan.  This is one of the major benefits of doing a HARP refinance.

These programs are also very credit score driven.  Best pricing is for homeowners with a 720 credit score or higher. You can answer a quick 4 question eligibility test on the HARP website here.

Here is a quick summary of the HARP loan requirements:

•  your loan will need to be owned by Fannie Mae or Freddie Mac
•  your current loan should not have mortgage insurance (you can contact your current servicer per guidelines but I have not heard of one servicer who will do this yet).
•  you should have very high to excellent credit 
• you can go as high as 105% of your home value with most HARP lenders and 125% with a few lenders but preferrably be at 95% or lower. 

I hate to say it, but that’s a pretty tight box.  Don’t take it for granted if you fit all these guidelines as many hit 2 or 3 of the bullet points above but not all 4. 

 I NEED OTHER OPTIONS.  WHAT ELSE IS OUT THERE?

 Surprisingly, there are some great options available if you do not qualify for a HARP loan or you don’t like the pricing. 

A great alternative for the general public is FHA.  FHA allows up to 97.15-97.75%(depending on your area) of the home to be financed.  What makes FHA special is they do not have a limit for combined loans AND there are no negative pricing adjustments if the 2nd mortgage exceeds 100% like HARP loans.  Let’s suppose you have one loan at 95% of the home value and a second mortgage equal to 15% of the home value.  The two loans together equal 110% of the home value.  You then can pay off just the first mortgage with a FHA loan and keep the second mortgage above 100% of your value.  More importantly, FHA has much lower credit score requirements, the previous loan does not need to be a Fannie Mae or Freddie Mac loan and it doesn’t matter if the loan being paid off has mortgage insurance.  The only caveat is that all FHA 30 year loans require mortgage insurance. 

My favorite option using FHA  is their 15 year mortgage.  FHA allows a homeowner to finance up to 90% of their home on a FHA 15 year loan with NO MORTGAGE INSURANCE.  The same guidelines regarding combined value and credit apply as above.

Let’s say I have a homeowner who is interested in a 15 year fixed loan and no equity.  They have a loan equal to 85% of their home value and a second mortgage equal to 25% of their home value for a total value of 110%.  They can refinance on a FHA 15 year loan and payoff the first mortgage and keep the remaining second mortgage.  They do not pay mortgage insurance on the first mortgage and there are no pricing adjustments for the 2nd mortgage exceeding 100%.  Yes, 15 year loans have a higher payment since the pay off is faster, but between the lower rate of a 15 year loan and the removal of mortgage insurance, much of the payment increase is covered.  Plus this loan will pay down the borrower’s balance faster helping the homeowner gain their lost equity back.

Second, military veteran’s should find out if they can finance their new refinance with a VA(Veteran’s Affairs) loan. In October of 2008, the department of Veterans Affairs opened up the guidelines for veteran’s to allow them to refinance higher loan amounts and up to 100% of their home value when paying off an existing non-VA loan. This is a huge improvement to previous guidelines which only allowed up to 90% of the home value with a maximum loan amount of $144,000. However, the VA does not allow the loans to exceed 100% of the value under any circumstances. If you have two loans and they equal above the value of your home, you cannot do a VA loan.

To recap, here is a summary of when you would want to consider government loan programs:

• For veteran’s who owe up to 100% but not over 100% of their value, VA is a great loan option
• Homeowners who owe up to 97% of their first mortgage and have a 2nd mortgage above 97% should consider a FHA loan.  If the homeowner’s first mortgage is not a Fannie Mae or Freddie Mac loan, FHA will likely be their only option.
• Any homeowner who has little equity and does not have a loan owned by Fannie Mae or Freddie Mac should consider a FHA loan.
• FHA 15 year loans do not require mortgage insurance as long as the FHA loan is at 90% of the home value or less REGARDLESS of the 2nd mortgage balance and combined loan-to-value.

MORE OPTIONS?

For the most part, homeowners are limited to the loan products above.  However, that does not mean they do not have other options.  Whether a homeowner needs a little more equity to qualify for any of the loan options above or to improve their loan pricing, they may consider getting another loan somewhere else to cover the cost.

One suggestion I’ve given clients that has helped is getting a 401k loan.  401k loans are loans taken against a  person’s retirement plan.  It’s not a withdrawal of retirement funds, so the person does not pay tax or penalty costs for the loan.  In many cases, the interest the person pays on a 401k loan is actually used to fund their retirement account which means they’re paying interest to themselves.

On a Fannie Mae HARP refinance (DU Refi Plus), the additional cost from a 95% loan-to-value loan to a 97.01+% loan is a 1.75% fee.  This means if your appraisal shows you have 2.99% equity or less, you have to pay a 1.75% fee or higher rate compared to someone that had 5% equity.  If you could get a small 401k loan to cover the difference, it may be worth your while.  On a $200,000 loan amount, a 1.75% fee is $3,500!  Borrowing $4,000 (2%) more in equity that you will pay yourself back to save a $3,500 fee you will never get back is a great money-saving solution.

UPDATE

If you are looking to do a HARP refinance and currently have a fixed mortgage through Freddie Mac, you cannot do an Open Access Freddie Mac HARP refinance to an adjustable rate.  You can only refinance to another fixed loan.

UPDATE

The HARP program was set to expire on June 10th, 2010.  The program was extended and now is set to expire on June 30th, 2011, approximately one year later.  News of this extension can be found here.

If an owner cannot afford to pay their Fannie Mae backed mortgage, they can deed the property to Fannie Mae and rent it back at market rate.  The homeowner can obtain a lease up to 12 months and either sign a new [...]]]> Earlier this month Fannie Mae announced the release fo their “Deed for Lease program.

If an owner cannot afford to pay their Fannie Mae backed mortgage, they can deed the property to Fannie Mae and rent it back at market rate.  The homeowner can obtain a lease up to 12 months and either sign a new lease or go month to month after the initial lease expires. 

All in all, this isn’t a bad idea.  This is a good alternative for homeowners who do not want to be kicked out of their house if they’re on the verge of foreclosure.  However, it isn’t a permanent solution.  Fannie Mae is not in the property management business.  They will sell the property as soon as they can, which means the homeowner should be prepared to move when the initial lease is up.

For homeowners who have had extremely bad credit hits and will not be able to buy a home for several years (such as large liens or a recent bankruptcy), this program should only be used to buy time since Fannie Mae will be looking to obtain a buyer later.  For homeowners who have only had a few late payments or a bankruptcy at least a year old, this could be a perfect solution. Homeowners could potentially use this as a “Lease-Option-to-Own” program on their own house.  They rent the house at market rent rates and re-establish their credit.  If they are capable of qualifying for a home purchase by the time the lease is up, they can try to buy the house back from Fannie Mae.  If the market price for the home is less than what they previously owed, they may even end up owing less on the house than they did when they were the original owner.

It also gives Fannie Mae time to prepare the house for sale and keep it from going to the foreclosure auction. This will keep the house from selling for below market price and in turn help boost the real estate market from further declines.

Any homeowner who does not obtain a loan modification should consider this option if it’s available and if they can qualify for a purchase loan by the end of the lease.  You will want to work closely with a mortgage consultant and draw a plan to save for a down payment (if necessary) and build credit during the lease so you’ll qualify, just like consumers who choose to do a lease-option-to-own.

SETTLEMENT COST BOOKLET

This booklet is a mandatory booklet to be sent to all consumers who [...]]]> In the mortgage industry, lenders are required to send clients educational booklets relative to their loan application.  I’ve always found it odd that there isn’t a centralized place for all of these booklets, so I thought I’d post them all here. 

SETTLEMENT COST BOOKLET

This booklet is a mandatory booklet to be sent to all consumers who have applied for a mortgage.  It gives details and descriptions to the different closing costs associated with a mortgage.  DOWNLOAD SETTLEMENT COST BOOKLET 

CHARM BOOKLET (Consumers Handbook on Adjustable Rate Mortgages)

This is a must-read for any consumer considering an adjustable rate mortgage (ARM).  This booklet details when an ARM adjusts, how much it can adjust and what determines the new rate.  DOWNLOAD CHARM BOOKLET

HELOC BOOKLET (Home Equity Line of Credit)

A Home Equity Line of Credit (HELOC) is a form of an adjustable rate loan, but it functions much more like a credit card.  The balance can be drawn upon and paid down like a credit card.  This booklet is very important for anybody considering a HELOC.  DOWNLOAD HELOC BOOKLET

INTEREST-ONLY AND PAYMENT-OPTION LOAN BOOKLET

This booklet is to detail how an interest-only and payment-option mortgage works.  These loans have a coherently higher risk than any other mortgage.  I’m not here to say they are bad mortgages as I believe all loans have a place, but you should definitely understand all the details of an interest-only or payment option loan before taking one.  DOWNLOAD INTEREST-ONLY AND PAY-OPTION BOOKLET

UPDATE

Here is a booklet for Private Mortgage Insurance.  It’s a little dated but still good info.  DOWNLOAD PMI BOOKLET

The changes took effect on November 7th, 2009 which was the day after President Obama signed the bill into law.  This means that any transaction closed AFTER November 7th, 2009 will include all of the [...]]]> Until the end of this month, it’s important that we know the effective date of the Home Buyer Tax Credit (HR 3548) change. 

The changes took effect on November 7th, 2009 which was the day after President Obama signed the bill into law.  This means that any transaction closed AFTER November 7th, 2009 will include all of the changes.  This includes the provisions for Move-Up Buyers and the income limits which were raised from $75,000 single/ $150,000 married to $125,000 single/ $225,000 married. 

Other details of the new bill can be found at the National Association of Realtors announcement.

In the coming days, I will be discussing all of the details.  In the mean time, here are the details I currently have.

The extension and expansion of the [...]]]> It’s official.  President Barack Obama signed the bill that includes an extension and expansion of the popular First-Time-Home-Buyer tax credit. which will now include some move up buyers.

In the coming days, I will be discussing all of the details.  In the mean time, here are the details I currently have.

The extension and expansion of the tax credit was included in an unemployement benefits bill that also includes assistance for businesses (HR 3548). 

• The extension will continue until the end of April to have a COMPLETED CONTRACT.  This means you do not have to close by the end of April, but at least have a mutually accepted contract between the buyer and seller.
• After the transaction has been mutually agreed upon by all parties, the transaction must be closed and finished by the end of June. 
• The tax credit will remain at $8,000 for First-Time-Home-Buyers
• The income limits for the tax credit have been raised to $125,000 for single and $225,000 for married couples, expanding the credit to higher income buyers
• The bill also includes a $6,500 tax credit for Move-Up-Buyers, which I believe includes a provision that the Move-Up-Buyer have lived in their current resident for at least 5 of the last 8 years (I will confirm this later)