The new FHA program includes [...]]]> There’s a few major problems in the new FHA Short Payoff  refinance that has been added to the “Making Home Affordable” family of solutions.  I’ll later take the time to write the full details of this issue, but I need to get this message out over the next couple of days.

The new FHA program includes new FHA guidelines that no longer allow an unlimited Combined-Loan-To-Value on FHA loans.  This is a HUGE problem.  Let me explain.

In the past, FHA didn’t cap how much a homeowner owed on their house if the homeowner wanted to refinance the first mortgage as long as the new loan was within the 97.15%-97.75% of the home value.  For instance, let’s assume a home buyer bought a $200k home with 20% down and ended with a $160k mortgage.  The house appreciated to a value of $220k and the homeowner took a home equity loan of $50k for home improvements, making their new combined loan amounts $210k.  Then the market declined and the new value is $170k, making the homeowner underwater on their home loans by $40k.

FHA would still allow this homeowner to refinance the first mortgage even though the second mortgage brought the home value to over 100% since paying off the $160k still had was within the 97.75% FHA limit.

$170k appraised value x 97.75% FHA LTV limit= $166,175…enough to pay off the $160k first mortgage owed.

The homeowner would still have their equity loan but this gives them an option to refinance their first mortgage, which may have a high rate or may be an adjustable rate mortgage set to adjust soon.  The new FHA guidelines will not allow the value of the two loans exceed 100% UNLESS the 2nd mortgage company is willing to write down the balance.

Short payoff refinances  sound good, but lenders often don’t want to take less than what’s owed.  The old FHA guidelines actually helps more homeowners because more homeowners have 2nd mortgages where a short payoffs wouldn’t be considered.  In fact, current FHA guidelines DO NOT PROHIBIT SHORT PAYOFFS so the new guidelines are only stricter than the old guides!  How is this supposed to HELP homeowners?  The guidelines are tigher and it’s now a part of the Making Home Affordable program?  I’m still scratching my head on this one.

To stay on track, there is a VERY important message I need to get sent to every homeowner in America with a second mortgage.  APPLY FOR A FHA LOAN AND GET A CASE NUMBER ORDERED NOW!  Why?  FHA will allow you to close under old or new guidelines if your case # was ordered before the deadline for the guideline changes.  Right now, that date is September 7th, 2010, less than one week away!  Even if you don’t qualify for a loan right now, credit is too low, equity is less than 97.75% right now, STILL GET YOUR CASE #.  By ordering it now, you can always revisit this option in case your credit is improved or equity position has improved down the road.  FHA doesn’t cancel case #’s and consumers who have a case # ordered are grandfathered into the old guidelines.  This allows above 100% combined loan-to-value and still allows you to explore the short payoff options that are available. 

If you talk to the right lender, you should be able to get this done in one day and for free.  Again, all homeowners who have 2nd mortgages and may consider refinancing at some point, please get a FHA case # ordered in the next couple of days.  Details can be read on this announcement letter from FHA:

http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/10-23ml.pdf

Landlords also believe that many of government programs, such as [...]]]> Many people who own investment properties don’t believe they can refinance their rentals due to equity (or lack thereof) .  Since rental property loans require 25% equity on a traditional Fannie Mae or Freddie Mac loan, I understand why so many landlords do not attempt to refinance.

Landlords also believe that many of government programs, such as HARP (Home Affordable Refinance Program) offered exclusively for homeowners are not for investment properties.  Well, I have some news for you landlords, not only can you do a HARP refinance on a rental property, they are PERFECT for rental properties.  Let me explain.

When HARP was first released, it had similar risk-based pricing that regular conventional loans had.  Many homeowners were discouraged to find out they qualified for HARP but the new higher credit requirements for conventional loans made these loans too expensive.  Homeowners would hear about 4.5% 30 year interest rates but were often offered 6%+ rates.

The government then implemented an adjustment cap to help homeowners who had these lower credit requirements.  This cap was equivalent to about .5% to the homeowners interest rate, meaning if 30 year fixed HARP loans were at 4.5%, everybody who qualified for HARP would only pay 5% or less depending on their qualifications.  It was a noble cause to make sure all homeowners could get a decent rate.

However, this is what makes HARP perfect for landlords.  HARP doesn’t have special guidelines for rental properties, meaning lenders who offer 105% of a homeowners value on a primary residence usually offer the same limit on investment properties!  Also, the .5% cap for HARP loans applies to all HARP loans.  This means landlords can refinance their investment properties at .5% above the best HARP rates regardless of credit, property type or equity!  This is, of course, as long as they are still within HARP guidelines.  I believe it’s probably an oversight, as I doubt the purpose of this cap was to offer amazing rates to property investors.

Today, I helped a homeowner who had two rental properties lock interest rates for their house and their two rentals. The rates we locked were 4.5% (owner-occupied 4.6% APR), 4.875% (Fannie Mae backed rental 4.995% APR) and 4.875% (Freddie Mac backed rental 5.007% APR).  None of the properties had more than 10% equity and one of the rentals was near 100% of the value!  What was the client’s credentials?  Well, if the credentials weren’t perfect, he may have had to pay a higher rate on his primary residence but it would’ve bared no change to his rental property rates.  Crazy, isn’t it?

If you have a rental property you’re trying to refinance, check to see if it’s owned by Fannie Mae or Freddie Mac.  If it is an d you’re paying more than 5.5%, then call your loan officer and lower that rate.  How often does the government help you improve your cash flow?
Related Posts:

Home Owners Guide to HARP

HAMP and HARP Don’t Mix- Don’t Ask for a Modification if you want a HARP Refinance

I find that most consumers who are concerned with their credit feel that a credit blemish from years ago will keep them [...]]]> It’s scary applying for a home loan.  The commitment to buy a home is stressful enough.  Adding the fear of being turned down for a home loan can be too much for a consumer.

I find that most consumers who are concerned with their credit feel that a credit blemish from years ago will keep them from homeownership forever.  That couldn’t be farther from the truth.  Loan guidelines for a federally backed FHA mortgage only requires 3 years from a foreclosure, 2 years from a chapter 7 bankruptcy and 1 day on a chapter 13 bankruptcy discharge!  What does that mean?   It means that regardless of your credit past, you can probably qualify for a home loan in just a few years.  Often consumers will qualify and not even know it. 

The key to building your credit after a financial catastrophe is creating credit activity immediately.  The most common mistake I see people make is they never re-establish credit following their financial fallout.  If your credit was horrible after a bankruptcy and you never opened a new credit account, it will remain horrible.  Most consumers think that there is no way to build credit because they will not qualify for a loan, which makes sense.  However, there is a way.

Here are some basic ways to build credit when your credit score is low:

• Open a Secured Credit Card-
  • You can open a $100 credit limit card if you deposit $100 to the lender.  You can often get these from any bank or credit union.  The lender is willing to issue the card regardless of your credit because it’s secured by your cash deposit. 
• Open an Unsecured Credit Card or Installment loan
  • After you’ve had a secured credit card for 6-12 months, you should establish enough credit to open an unsecured card.  The rates you’ll be offered will be fairly high, so try to pay the balances off during the grace period.  Avoid cards with annual fees if possible.  You can also then apply for an auto loan if you need one.
• Keep Your Credit Cards in Good Standing and Avoid Paying Unnecessary Finance Charges
  • Keeping your credit card in good standing includes paying your bills on time.  It also requires you to keep your balances low.  Never let your balances exceed 25% of your limit.  That may seem low, but keep it there and your score will remain high.  As your score builds, you can request higher limits.  You can then lend up to 25% of your new balance.  Also try to pay the balances off during the grace period to avoid interest charges.  I often tell clients to treat the new card like a debit card.  When you make a purchase, use your receipt and transfer that much money from your checking account immediately. 
• Monitor Your Credit and Dispute Incorrect Items
  • Most credit reports are inaccurate.  The last thing you need pulling down your credit is an account that doesn’t even belong to you.  Check your credit regularly with a monitoring system and dispute items that are incorrect.  You can also pull a free credit report on www.annualcreditreport.com.  This is very important for people who have gone through  a bankruptcy because creditors often do not update account information following a bankruptcy. 
• Pay Your Collections Early
  • When a collection has been on your credit for too long, it sometimes temporarily LOWERS your score when you pay a collection off.  Eventually, it will benefit your credit to have it paid, so pay the collection as soon as possible.  If you’re thinking of paying off a collection and are near qualifying, look to see when the last time that collection agency reported the debt.  If they haven’t reported any updates for a year or longer, you will likely want to hold off on paying that account in case.  It’s best to pay the collections before they report on credit.  If you’re score is far too low to qualify, pay them all.  Letting the collection balance linger can be bad juju.  The collection agency can sell the debt to another.  You can end up having multiple collections on your report for the same debt.  Not good.

Not all mortgage lenders are the same, but most follow the same minimum credit guidelines.  If you want to buy a home, shoot to achieve these goals on your credit:

• Try to achieve a minimum 620 credit score for two of your three credit scores.  This is the industry standard for obtaining a FHA loan, which only requires 3.5% down.
• Pay off all liens and judgments immediately.  You will not be able to buy a house if you have outstanding judgments or liens.
• Keep at least 3 credit accounts open at all times.  If a credit card company ever makes you mad, DO NOT CLOSE IT!  Just cut up the card and pretend it doesn’t exist.  Closing accounts is bad for your credit.  Mortgage lenders may also require at least 3 open credit accounts to qualify for a home loan.
• If you’re had a bankruptcy or foreclosure, it’s very important that you show you can pay your bills on time following the event.  Many lenders will turn you down for a home loan if you’ve had late payments following a bankruptcy or foreclosure.

If it’s possible, look for a loan officer who’s goal is to help you obtain homeownership regardless of where you stand now.  I tell all my clients that if they’re serious about buying a home, they will eventually get there if they follow the right advice.  Find someone who’s educated enough to give you the advice needed and is willing to work with you along the way.

 Thankfully, the second mortgage companies have become much more lenient and willing to play ball. Companies are typically going to be okay with subordinating their loan if the homeowner is working on a HARP refinance on their [...]]]> The most difficult hurdles to overcome when helping HARP loan clients are typically placed by the homeowner’s existing lenders.

 Thankfully, the second mortgage companies have become much more lenient and willing to play ball. Companies are typically going to be okay with subordinating their loan if the homeowner is working on a HARP refinance on their first mortgage.  I’ll explain what this means, but it hasn’t always been the case.

If a homeowner qualifies for a HARP refinance on their first mortgage and they also have a second mortgage, they need permission from the second mortgage company to refinance.  This is called “subordination”.  Many of the lenders who hold the second mortgages were not approving subordinations on HARP loans when the program was introduced.

I’m happy to say that almost every major bank is now approving subordination agreements if the person refinancing is seeking HARP loan. I have personally seen Bank of America, Wells Fargo, Chase, Citi, Flagstar and many other banks or lenders approve subordinations over the past 4 months.  In fact, it has become so common that I expected all lenders to approve these subordination requests.

I was shocked to recently learn that Key Bank, one of the nation’s largest bank-based financial services companies, has a policy against subordinating. My understanding is that Key Bank will not subordinate a second mortgage above 100% value, or if the home value has decreased since the second mortgage was originated.  This has major implications for homeowners, and it’s a slap in the face to the government officials who fought to put the HARP loan into effect. The whole purpose of HARP is to benefit homeowners who have paid their mortgage on time and who need to refinance. We are talking about responsible homeowners whose tax dollars helped pay for this program. We are talking about responsible homeowners who need a fair refinance.  One of the most frustrating elements in this is that HARP refinances not only help the homeowners, but it actually IMPROVES the position of the second mortgage company.  There is no good reason for Key Bank, or for any other lender to not approve a subordination request on a HARP loan.

Let me illustrate a little further with an example. Let’s suppose I have a client who has a Fannie Mae 5/1 ARM.  They have a Key Bank home equity loan.  The adjustable rate loan is set to adjust in a few months and the customer wants to refinance to a lower, 30 year fixed loan which they’re qualified for under HARP guidelines.  They would be lowering their rate by over 1% and moving to a 30 year fixed.  Given the current circumstances, the homeowners would be lowering their payment and protecting themselves from a potential payment increase.  It is my understanding that Key Bank will not subordinate their second mortgage when all we’re trying to do is to fix the rate and lower the payment!  The alternative is probably that after the adjustment, the homeowner is forced into higher payment that he or she probably can’t afford and may be forced to let the home go. This appears to be bad business in every way possible.  They run the very real risk of damaging the borrower by limiting his or her ability to refinance.  Additionally, putting the borrower in financial distress will likely place a bank’s own equity in the home at risk. 

Key Bank has always been a specialty lender for home equity loans.  They have historically offered homeowners some of the best second mortgages available. This tradition continues today. Their rates and fees on second mortgages have been competitive for many years running. As you can imagine, many homeowners have second mortgages with Key Bank.

Seeing that there is minimal upside for Key Bank to have this position on subordinating for HARP refinances, I don’t think Key Bank intends to maintain this position for the long term, but there’s only so much time left for them to correct their position.  Considering that HARP loans have been extended until May of 2011, Key Bank and other lenders with similar positions have a short window of time to do the right thing and help protect their clients, as well as themselves, before the new deadline passes.

UPDATE 6/23/2010

Great news!  I’ve learned that Key Bank WILL approve subordinations on higher loan-to-value but they may not do it as easily as other banks. They will review all requests on a case-by-case scenario.  If the subordination benefits the borrower and does not increase the risk of Key Bank’s position, they will approve it.  I’ve received confirmation they’ve subordinated a 2nd mortgage as high as 190% of the home’s value!!

If you call Key Bank and ask their customer service rep, you likely won’t get the answer you’re looking for.  They’ll tell you the loan-to-value must be the same as the original loan which we all know is not possible if we’re trying to apply for a HARP loan.  However, this is to protect Key Bank’s position and not over promise what they can do for clients. 

When I spoke to Key Bank, they told me anything and everything you can do to support your request that it’s beneficial for both Key Bank and the client will be useful.  Here are some examples:

• If your first mortgage is adjustable and it’s set to adjust soon, they will take your higher consideration on your request.  Include the terms of your old AND new loan on your subordination request so they can see the benefit
• If lowering your payment is needed to prevent hardship, explain so.  Explain how your current payments are difficult to cover, give reasons and examples why and how the lower 1st mortgage payment will fix this problem.  Have the loan officer refinancing your first mortgage show a summary of your debt ratio so Key Bank knows you can’t afford the payments unless they do go down.
• If you don’t have an adjustable rate mortgage that’s about to adjust or some other type of hardship such as a high debt-to-income ratio, then there’s a better chance you won’t get the subordination approved.  Remember that Key Bank wants to agree to subordination agreements that make sense for everybody.  Allowing you to refinance and increase your existing loan amount to cover closing costs does not benefit Key Bank.  I have not tried it, but it sounds like you’ll have a better chance of getting a subordination through if the new loan amount is the same or less than the old one since it doesn’t not affect the position of Key Bank’s loan in any way.
• Key Bank loves new banking relationships, so if you haven’t moved all of your banking to them, offering this on your request may help in getting it approved

We’ll see how this plays out.  That said, it sounds like Key Bank is willing to approve subordination requests to the clients who really need it, which is fantastic.  I cannot commend Key Bank enough for taking this “Make Sense” attitude and helping homeowners in a market where homeowners need all the help they can get.

Related Posts:

http://www.keaneloans.com/2009/12/18/homeowners-guide-to-harp/

http://www.keaneloans.com/2009/07/28/another-flaw-with-the-harp-program/

Disclaimer: The opinions expressed here are the views of the writer and do not necessarily reflect the views and opinions of Cobalt Mortgage.

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.

UPDATE 6/9/2010

A colleague of mine (Ann Liberato, founding partner at Cobalt Mortgage) told me she spoke with someone at HUD and they confirmed the change is still happening but will likely take place in the fall of this year (2010).  We’re not sure why HUD is delaying the change but I hope that it is modified to allow higher concessions for smaller sized transactions.

I spoke with Ken Harney from the Washington Post a couple of weeks ago on this topic.  Ken also wrote an article about the changes to seller concessions for FHA financing:

One of the key attractions of FHA mortgage financing is going, going — but not quite gone. Sellers and buyers who move fast can still make the most of it.

Sometime this summer, the Federal Housing Administration plans to slash maximum “seller concessions” from 6 percent of the home price to 3 percent. Seller concession rules allow buyers to look to the property seller to pay for some services and taxes connected with the transaction — loan origination and local transfer fees, appraisals, inspections, closing and escrow costs, among others — though not the down payment.  READ MORE

I hope the national attention will persuade HUD to allow higher concessions on smaller transactions.

UPDATE JULY 28TH, 2010

 HUD is closer to changing their concessions from 6% to 3% but is open to hearing comments, according to an article on Mortgage News Daily.  I will be sure to let my voice be heard.  If you would like to have your voice heard as well, please follow the instructions as given from this article.

1. Visit http://www.regulations.gov
2. Scroll down about 1/3rd of the page and you will see a link for “What’s Hot –Most Visited Regulations”
3. Click on that link and you will see a list of pending regulation. Select the notice:  “Federal Housing Administration Risk Management Initiatives:  Reduction of Seller Concessions…”
4. That will take you to a page where the document outlining these changes is available for review.  Towards the top right-hand of the page, you will see a link in light-blue ink that reads “Submit Comment”…click on that link and fill-in your information, and type-in your comment.
5. Hit “submit” and let your voice be heard.

CLICK HERE TO READ MORE

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. 

To clarify one fact about HARP that many homeowners do not know, YOU DO NOT NEED TO USE YOUR CURRENT LENDER TO GET A HARP LOAN.  Shop your HARP loan like any other refinance.  The only exception to that rule is if your current loan has PMI, which can only be refinanced through your current lender at the moment.  Even then, a very small handful of lenders will do a HARP loan with PMI.  Also, HARP is not limited to homeowners only.  You can use HARP on 2nd homes and investment properties as long as the loans are owned by Fannie Mae or Freddie Mac.  In fact, they are actually perfect for investment properties.  You can read more on this topic here.  This contradicts the Making Home Affordable website, which states you may be eligible for HARP if “Own a one- to four-unit home that is your primary residence.”  I can tell you from first hand experience that you can use HARP on 2nd homes and rental properties. 

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.  One EXTREMELY important detail to note is you cannot refinance under HARP if you have already applied for a modification (HAMP-Home Affordable Modification Program.  If you haven’t decided which is better for you, apply for a HARP refinance first.  If your HARP refinance application is turned down, you can proceed with a modification application.  Attempting to modify your loan first will disqualify you from a HARP refinance. 

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 can go as high as 105% of your home value with most HARP lenders and 125% with a few lenders but preferably be at 95% or lower for best pricing.

UPDATED May 29th, 2010- 

There have been two major hurdles on HARP loans that appears to be much easier to overcome.  One, many HARP lenders are now implementing price caps.  What does that mean?  Simply this…it doesn’t matter how bad your refinance situation looks, you’ll never pay more than “X” over the best interest rate that lender has to offer.  Lower credit, condo, investment property or second home, you will not have to pay the huge premiums that HARP loans had last year.  Not all lenders implement a price cap, so it’s important to shop your loan.  Remember when I said you do NOT HAVE TO USE YOUR CURRENT LENDER?  I can’t stress this enough.  Most of the rates/fees I’m seeing from current lenders are much higher.  I have a feeling that most of these lenders know that their current customers check with them first, so they build large premiums in their pricing.  Dont’ pay too much for your loan…be sure to shop it around! 

Two, if you once applied for a HARP loan and was denied because you have a second mortgage that would not allow you to refinance your first mortgage (called a subordination agreement), many lenders have worked with the government and are now allowing subordination.  Below is a list of lenders who I’ve been able to get the subordinations approved with relative ease even though the loan amounts exceeded 100% of the home value: 

• Bank of America
• Wells Fargo
• Chase
• GMAC
• Citibank
• Flagstar
• Everbank
• Key Bank

UPDATED June 17th, 2010- 

It’s important to know that HARP is only eligible for loans that were purchased by Fannie Mae by March 1st, 2009 and May 31st, 2009 for Freddie Mac according to a source.  A colleague of mine (Rhonda Porter at Mortgage Master Services) recently worked with a client who originated a loan LONG before March 1st, 2009 but Fannie Mae did not securitize (or purchase) the loan from the lender until after this date.  This made the loan ineligible for a HARP refinance.  Here is an excerpt of her blog post here: 

We also need to eliminate the securitization factors of when Fannie or Freddie bought the existing mortgage for it to be eligible for a HARP refi.  I recently had a client where it showed on Fannie Mae’s site that he indeed has a mortgage owned by Fannie Mae–it was not until we received an error message trying to underwrite it through DU (the automated underwriting system) that we called Fannie Mae to discover that the loan had been securitized (purchased by Fannie Mae) one day too late to qualify (March 1, 2009).  This person’s loan closed in December 2008, was sold the the bank and then took months for Fannie Mae to purchase.  This means this upside-down home owner does not qualify to reduce his payment by $250 per month.  Imagine what the $250 a month would do for him and/or the economy.  It gives him some probably needed monthly financial wiggle room and he just might spend a little more which helps our economy too. 

To read more, CLICK HERE 

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 second 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.

UPDATE 9-1-2010 

New FHA guidelines will no longer allow financing with second mortgages exceeding 100% of the home value.  All FHA applications dated after September 7th, 2010 will be subject to these new guidelines.  Read more about how this affects homeowners who are applying for a refinance with a second mortgage here: 

http://www.keaneloans.com/2010/09/01/problem-with-new-fha-short-refinancpayoff-program/ 

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. 

FHA REFINANCE FOR UNDERWATER MORTGAGES-  

FHA just announced that they will be rolling out a new program to help underwater homeowners.  This was announced along with some updates to the HAMP program. 

UPDATE AUG. 6TH, 2010 

HUD released a press release regarding this program: 

FHA LAUNCHES SHORT REFI OPPORTUNITY FOR UNDERWATER HOMEOWNERS
Effort designed to encourage principal write-downs for responsible borrowers

WASHINGTON – In an effort to help responsible homeowners who owe more on their mortgage than the value of their property, the U.S. Department of Housing and Urban Development today provided details on the adjustment to its refinance program which was announced earlier this year that will enable lenders to provide additional refinancing options to homeowners who owe more than their home is worth. Starting September 7, 2010, the Federal Housing Administration (FHA) will offer certain ‘underwater’ non-FHA borrowers who are current on their existing mortgage and whose lenders agree to write off at least ten percent of the unpaid principal balance of the first mortgage, the opportunity to qualify for a new FHA-insured mortgage.

CLICK HERE TO READ MORE 

The actual guidelines for FHA were also released on HUD’s Mortgagee Letter 2010-23.  Lender use mortgagee lenders as their guideline to originate FHA loans, which means that lenders should be approving these mortgages now.  What I found that was interesting is that existing FHA guidelines technically already allowed these types of refinances.  The limit on the second lien mortgage is actually a cap that used to not exist on FHA financing. 

The mortgagee letter does begin to illustrate the benefit the second lien holders will receive for taking reduced payoffs.  The letter indicates each servicer will receive $500 and incentives based on combined-loan-to-value. 

Existing second mortgage lien servicers will be entitled to a one time incentive of $500 for each successful closing. Existing second mortgage lien investors will be entitled to an incentive based on the combined loan to value of the existing lien and all senior liens associated with the mortgage. The actual incentive pay-out schedule and more information on this program will be available at www.hmpadmin.com.

 

  

The announcement states that the program will begin September 7th. 

I’ve studied the material for this new program and surprisingly, it’s not that different than a regular FHA loan.  The difference is the government is giving incentives to the homeowners existing lenders to write down their loan balances, thus allowing the borrower to qualify for a new FHA loan.  Here are the requirements: 

• The new FHA loan can be as high as 97.75% of the homes value
• The homeowners existing loans cannot be a FHA loan
• For the existing lender to qualify for government incentives, the first mortgage must require at least a 10% write-down from the original balance of the first mortgage
• The government is also giving incentives to second lien lenders as well.  They will give them incentives to write-down their balances so the combined value of the first and second mortgage do not exceed115% of the home value.  As you’ve seen from my original posting regarding FHA loans, FHA allows second mortgage companies to have an infinite value over the value of the home as long as the FHA first mortgage is at 97.75% or less.  This is one difference between this program versus a regular FHA loan.
• The refinance is voluntary, so both the homeowner must agree to the refinance terms and the existing lenders must agree to the write-down of their loan balance.
• The homeowner cannot be late on their mortgage payments
• The homeowner must occupy the property
• The minimum credit score for this program is 500 (Though I doubt lenders will fund new FHA loans with a score this low)
• The total house payment, including the payment of a second mortgage, must be no greater than approximately 31% of the homeowners gross income.  Further, the total household debt cannot exceed approximately 50%.  (I love how they use “Approximately” in the definition).

Reference Fact Sheet here 

They key to this program is that the government is INCENTIVIZING lenders to write-down their loans.  What does this really mean?  The lender writes off the balance of the loan exceeding 97.75% of the homes value and the government will give them money to help recoup the losses.  It’s for homeowners who have paid their mortgage on time, so it’s right in-line with HARP clients.  There are two major differences.  When a homeowner refinances on this program, they will owe less on their house thanks to Uncle Sam.  Also, they can refinance to a low 30-year fixed rate regardless of what kind of loan they have.   This may end up being the solution for homeowners who have loans with mortgage insurance. 

There are many details that still need to be answered.  FHA currently has loan limits depending on the county.  Will these loan limits remain?  My guess is they will, so be sure to check your local FHA loan limit here.  They have not said who can originate these loans yet either.  I hope that they have learned from their mistakes with HARP and allow any lender to originate the new loan.  HARP loans with mortgage insurance required homeowners to work with their existing lender, yet none of the major banks who participated in HARP have begun refinancing homes with mortgage insurance. 

If this program is available to all FHA lenders, this has the potential to be a big success.  However, there are many obstacles to overcome.  First, every lender will need ample time to service the write-down requests and the origination of the new loans.  At the time of this update, HARP has available for approximately a year, yet many lenders are still giving homeowners difficulty.  If this program has an expiration date of anything less than 2 years, it will have little impact on our housing market.  Except, of course, if the government extends it (that tends to be norm these days). 

This brings up two questions.  When will lenders start offering this program and what incentives are given to the lender from the government?  The “Frequently Asked Questions”of this program state the program will be rolled out immediately and will hopefully be in affect this fall.  I will be researching to find out what the incentives are for the lender.  If the incentves are minimal, this program will fail.  If the incentives are too large, it raises the question, “Who’s paying for this?”  I believe all of us can answer that question. 

For lenders, it sounds like we’ll be wearing two hats.  Originating a new FHA loan and negotiating a principal balance write-down with the current lenders.  I’m interested in seeing how this plays out. 

Be sure to revisit this blog post for any updates. 

FHA REFINANCE UPDATE 6/9/2010 

I confirmed with HUD (The Department of Urban and Housing Development) that FHA will insure these refinances regardless of the new lender.  This means consumers can competitively shop a FHA refinance for a reduced balance payoff.  The program is fairly straight forward and easy enough that we should see some success.  That said, HARP is a very straight forward program but I hear horror stories almost daily, so like HARP, I don’t expect all lenders to execute these well. 

The unique twist to these refinances that will hold up many refinances from closing is the negotiations with the existing lenders.  Lenders and loan officers are having a hard enough time closing the loans.  Negotiating an existing lender to take a lesser amount opens up the chance for increased liability and error.  I believe the most successful lenders will likely be working with attorneys who will handle these negotiations similar to loan modifications and short sales.  I’ve already begun speaking with attorneys who specialize in these services to see what they’re opinion is of this program.  Stay tuned for updates. 

Although FHA guidelines allow for these refinances, many lenders will not close these loans.  If you’re looking for a refinance of this type, be sure to find a lender who can do this loan first, then see if there’s a loan officer at the firm who has experience with these transactions.  They’re new, so don’t expect great results if you’re an early adopter.  I will provide updates of my experiences and post lists of lenders and loan types I’ve had success with.  Follow this post in the future for these updates. 

For FHA to insure a refinance with a short payoff, the borrower must prove 

• There is insufficient equity in the home based on it’s current appraised value AND/OR
• The borrower has experienced a reduction in income and does not have the capacity to repay the existing indebtedness against the property.

Unlike short sales and loan modifications, the borrower will not be asked to slow pay their mortgage  to qualify.  FHA allows a couple of late payments but nothing more than 2x 30-day late payments in the last year and the loan cannot currently be late.