THE USDA 100% LOAN

  Today I want to talk about one of the most popular loans in Indiana-the USDA Rural Development Loan. Sounds like you are buying a side of beef, doesn't it?  In actuality this is a loan that is administered and funded by the United States Department of Agriculture.  The purpose of the loan is to enhance residential development in rural areas. First things first, let's talk about the criteria for the loan as not everyone qualifies.

Income Limitations:  This loan is for individuals or families of modest means, so there are income caps.

For a family of 4, the income cap is $74,740, for families of 5 or more the allotted income can not exceed $98,650.  The income caps cover the total household income whether or not all income earners are on the loan.  There is no limit for loan amount other than the normal debt ratios that are required for underwriting the loan.

Geographic Location:  Rural Development loans are for areas in which the population density is lower than a typical city situation.  If I am given an address I can check to be sure that the property in question is eligible for the loan.  Sometimes an eligible property is located across the street from a property that is ineligible.

Credit: A minimum credit score of 640 is recommended.

This is not a loan for farms or farmettes.  I know, the name would suggest that it is a loan with agriculture in mind-but it works best for single family homes in small towns or rural areas that do not have farm buildings or farm acreage. You can obtain up to five acres with your home, but the land must be judged to be non agricultural in nature-i.e., it can't be used as income producing.  That would include tillable land, barns that could be used to store farm machinery or to house livestock. And the barns can't be worth more than 8% of the total sale price of the property.  To this end, we have had situations in which sellers have had to disassemble horse stalls, take down fencing, and modify barn doors so machinery would not fit.  In other words-this is really not a loan for that farmstead that one has always dreamed of.  In addition, this loan does not like the suggestion that income may be produced from the improvements on the property at all-so no workshops either.  The purpose of the loan is for residential living.

  As I mentioned before, this is a loan for folks of modest means-so no luxury items such as swimming pools or hot tubs.  And the borrower must be in a position in which they can not qualify for conventional financing.  So while having a little in a savings account is good-having a large amount of money that can be used for down payment purposes is not good.  If the borrower can qualify for a conventional loan USDA will decline the loan.

  So-setting all those exceptions aside-this is a great loan.  It is a thirty year fixed rate loan, but it does have a 2% funding fee that rolls into the loan, similar to the way VA works.  There is also a small amount of mortgage insurance that remains on the loan (much like FHA) for the life of the loan. This money is to protect the program against defaults. It is underwritten to HUD rules, so the same condition features that are required for FHA are required for this loan, such as five years life on the roof, 100 AMP electrical service, no peeling paint on the home if  it was built prior to 1978, no termites etc.

  As far as costs to the consumer go, normally USDA buyers as a part of their negotiations, request closing costs to be paid by the seller.  Barring that the closing costs are similar to any loan.  Typically $2500 to $3000 depending on the price of the home. If the property appraises for more than the sales price the closing costs up to the amount of the appraised value can be rolled into the loan-but since no one can count on an appraisal amount it is best to have arrangements for the closing costs made prior to the appraisal.

  The inspections that are required are the same as all government loans: termite, and well and septic if applicable.

  In Indiana this is a very popular loan.  In fact, the only downside of the loan is the time it takes to process it.  The loan is submitted to the lender for approval which normally takes about three weeks.  During this period the home will be appraised, the borrower will be credit approved, and the title will be examined.  Once those things are acceptable to the lender underwriting the loan, it is sent to the USDA state office for review.  This is where things slow down. During the winter months, one can expect that USDA will sign off on the loan within about four or five days.  However, once the spring months roll around it can take anywhere from twenty to fifty business days to process the file. This is due to recent cutbacks in the federal government and the increased popularity of this loan product.  So what I would say is if you have the ability to obtain the 3.5% for an FHA loan and want a quick closing-take that route.  However, if you are patient and can find a seller to work within the time frame, this may be the loan that works best for you.  If you are prepared to wait up to 90 days to close during the busy spring and summer months when the housing market is in full swing, it will be worth the wait.
 
 

MORTGAGE INSURANCE

  Here is topic everyone loves to hate-mortgage insurance.  While mortgage insurance may seem to be an unnecessary expense on a monthly mortgage payment-let's take a look at what mortgage insurance is, and what it does.

  Back in the old days-the really old days-if you wanted to purchase a home, the banks required you to put 20% of the purchase price down. That is a lot of money for a young family to save.  So at some point someone got the brilliant idea of insuring the lender for the portion of the loan between 80% and 100% of the value of the property, thereby removing risk and allowing borrowers to put less money down. Fantastic!

  In essence-what you are paying in mortgage insurance allows you to put less than 20% down on a home. I kind of look at it as paying your 20% over the long term-well, you will pay more than your 20% overall but how long will it take to save that 20%? How much rent do your pour down the drain waiting to save the 20%.  How much in tax deduction do you lose?

  The only other option to mortgage insurance or putting 20% down is to obtain a second mortgage for 10% of the down payment.  So you as the buyer would have 10% of your own money and 10% of borrowed funds to supply the down payment. So if you are thinking of purchasing a $100,000 home you will need $10,000 of your own.  If we compute what you will pay in mortgage insurance by putting 5% down, the mortgage insurance will be retired in 114 payments costing you $8032. (at $70.46 per month)  If you save a another 5% for down payment and obtain a second mortgage for 10% of the down payment at $53.68 per month (180 month term at 5%) you will spend $9662 assuming you don't retire the second mortgage early. Hmmm. Maybe mortgage insurance isn't such a bad thing after all.

  I prefer to look at mortgage insurance as a method of saying "yes" to borrowers rather than a ball and chain they drag along every month when they make their house payment. The added expense is annoying but without it, there would be a lot of people who might never be able to buy a home.

10 COMMON MISCONCEPTONS ABOUT LENDING

  Today I want to address some common beliefs about mortgage loans that are not true.  There are many people who delay applying for a mortgage because they believe an outdated or false idea that they think disqualifies them for a mortgage loan.

1) I have had a bankruptcy-therefore I can't obtain a mortgage. 
    People who have had bankruptcies in their past are absolutely eligible for a mortgage as long as it has
   been a minimum of two years since the discharge of the bankruptcy (Chapter 13's are normally 1 year) and they have re-established credit.  In the case of a foreclosure the wait is three years from the date that the sheriff's deed was issued.

2) I should pay off and close all my credit accounts to get ready for a mortgage.
    You absolutely should NOT pay off your accounts.  Mortgage lending as a general rule requires three
    credit accounts open and reporting for twelve months to qualify for a mortgage loan.  There are
   exceptions depending on the type of mortgage, but three credit lines paid on time for year normally
   provide a buyer with a good credit score and enough credit history to obtain mortgage financing.

3) I am a little short of cash this month.  If I don't pay my mortgage I can double up next month and it 
    will be okay.
   Besides the fact that you should never pay late for where you live, paying your mortgage late will
  disproportionately drop your credit score and make it impossible to refinance your current mortgage or
  allow you to buy a new home for a period of one year.  If you have to pay something late-make it a credit
  card or some other type of loan.

4) The lender quoted me an interest rate-so that is the rate I will get.
    As we have discussed in other entries, an interest rate is predicated on several different factors, the
   most important of which is the fact that interest rates change daily and sometimes more than once a day.

5)  I just started a new job.  It will be at least two years until I can buy a home.
     Not true at all.  Typically there needs to be job history in order to obtain a mortgage but if you just
     graduated from college and got a job in what you studied, the time spent in school counts as job time.
   Additionally, if you moved from one job to another in the same field there is no problem with a new
   position if all probationary periods have been completed.  A switch from nursing to landscaping might raise
   an eyebrow-but other factors come into play such as did you improve your income situation? Do you have any previous job history in landscaping?. How long were you at your old job? Did you receive
  any education for the new job?  Also moving from part time to full time with the same company is viewed
  favorably.

6) When I add in my overtime I can buy a lot more house.
     If you have worked at your job for two or more years you can add in the overtime-otherwise straight
   time is what is calculated to qualify  for a mortgage.  Likewise, if a spouse or significant other does not
   qualify credit wise for a mortgage, their income can not be computed for qualifying purposes.

7) I need to have 20% to put down in order to buy a home.
    This is also not true at all.  FHA requires 3.5% down.  Two other government programs VA and USDA        no downpayment. If you wish to use conventional financing 5% down is what is normally required though
    there are some programs that work with 3% assuming other qualifiers are met.

8) I can roll my closing costs and/or repair items into my mortgage loan.
     Normally, no, you can't.  There are a couple of specific instances where this is allowed-the FHA 203K 
     repair loan or the closing costs can be rolled into the USDA loan assuming the house appraises for more
    than the sale price-but the exceptions are few and far between.

9)  I have bad credit, so I will need a co-signer on my mortgage.  
     If you have bad credit no co-signer on earth can help you get a loan. Credit qualifying is done using the
    lowest middle score of the two borrowers.  If yours doesn't qualify you for the loan-your application will
   be denied.

10) I was turned down at my bank, therefore I can't get a mortgage loan.
      Sometimes that is true, but many times it isn't. Banks often go for the low hanging fruit-i.e. the best 
    qualified borrowers, asset and credit wise.  And, banks don't always have a full array of loan products
   at their disposal.  So if you qualify for an FHA loan but not a conventional loan and your bank doesn't 
   offer the FHA product-you may be declined.  But that doesn't mean you don't qualify for a mortgage.
  That just means that you don't meet the bank's criteria. Check out your local mortgage broker-brokers
  have several lenders and products at their disposal.  They may have a mortgage that works for you.
 

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THE FHA LOAN

    Government loans are increasing in popularity every day.  VA, FHA, and USDA often can accommodate a more diverse credit profile than a conventional mortgage which requires higher credit scores and down payment investment.  FHA is the government loan that is most commonly used across the United States for several reasons:

Credit Score:  FHA guidelines will allow credit scores below 600-however these loans are very difficult to close as the bar for approval is quite high for the sub 600 credit score borrower. Added to that, is the fact that most lenders don't accept credit scores this low so finding a home for a 600 or less credit score is difficult.  However, for those who have credit scores 640 and above, FHA may be a great choice.

Down Payment Requirement:  The FHA loan requires a minimum down payment of 3.5%. And-that down payment may be a gift from a family member. FHA also allows a non occupying co-borrower without creating an investment property type situation.  A parent can co-borrow with a child or family member.  Credit is not the issue in this situation-both borrower and co-borrower must have qualifying credit scores.  However, this configuration of ownership is often used if there is a debt ratio issue or the child is just starting out on a new job or even is currently in college. Since the non occupying party is on the mortgage, they must have the ability and accept the responsibility of paying the mortgage should the borrower default on payments.  The loan is structured so that both borrower's income and debts are combined to create the financial profile.

Seasoning on Derogatory Credit:  As with any government loan, FHA requires two years to have passed since a bankruptcy discharged.  If a foreclosure was a part of the bankruptcy, then the borrower won't be eligible for a new mortgage until three years have elapsed from the time of the sheriff's sale on the previous home.  The same applies in the case of a short sale. A borrower is not eligible until three years from the closing date of that sale and there can be no deficiency judgement filed on the part of the previous lender that the borrower still owes. (Usually in the event of a short sale, there is no deficiency judgement in which the previous bank attempts to retrieve the shortage on the original mortgage, but I have seen it happen.)

Interest Rates and Loan Terms:  FHA is a fixed rate loan and you can obtain an FHA loan for 30, 25, or 15 years just as you are able to obtain conventional financing.  The interest rates are a function of the financial markets but are often lower than conventional financing.

So What's the Downside? Why Doesn't Everyone Get One of These Loans?  Ah yes, why not indeed? Because of the mortgage insurance.  FHA mortgage insurance is significantly higher than the mortgage insurance on a conventional loan. FHA has an upfront mortgage insurance of 1.750% that rolls into the mortgage. On a hundred thousand dollar mortgage that would be $1750.00 that is added to the mortgage. And...that's not all-FHA has a 1.350%  ($112.50 per month on the 100K mortgage) monthly mortgage that remains on the loan for the life of the loan.  The only way to get out from under FHA mortgage insurance is to refinance into a conventional product when the credit picture improves.  The reason the mortgage insurance is so high is due to the huge number of FHA foreclosures from 2008 on. Many FHA borrowers had flocked to FHA because of the low down payment requirements but these same folks were the most at risk when the economy crashed and resulted in massive job loss. So the mortgage insurance is insuring against risk to the FHA system in the future.

  FHA is an excellent loan for those that don't have a large down payment saved or are recovering and rebuilding their credit from the fallout of the past few years.  If you go to your bank and are turned down for an FHA loan because your credit isn't high enough-keep in mind that any lender can put their own credit requirements on the loan. I know of a lender that will not do an FHA loan unless the borrower has a 720 credit score.  In that case the borrower might a well use a conventional mortgage. If your credit score is 640 or above that score alone should qualify you for the loan. But keep in mind there are other qualifications besides the credit score such as the number of credit lines that are open and reporting on your credit report, adverse credit since a bankruptcy or foreclosure etc. I encourage anyone who has been turned down by a bank or credit union to check with a broker about and FHA loan-it is quite possible that you qualify.

OVERAGES OR HOW THE INTEREST RATE CAN WORK FOR YOU

  Today I am pulling back the curtain on a subject your bank may or may not want you to know-how we know what interest rate to offer the consumer and what this rate can do for you.  Many of you may understand that more than one interest rate is available on any given day.  In previous posts we have discussed how credit score, type of loan, and amount of the loan may impact your rate up or down.  Some of you have heard the words "discount points" being tossed around and understand that if a borrower pays a discount point they normally will get a lower rate. (A discount point being 1% of the loan amount-so one point on a $100,000 loan would be a $1000 added to the closing costs. The 1% does not correspond with a 1% reduction in rate-for instance discount point on a conventional loan at 4.6250% would bring the rate down to 4.25%.)

   The first thing that the consumer needs to understand is that interest rates have credits to the consumer attached to them. So again, using 4.625% as an example, there is a credit of 1.388% (of the loan amount) attached to it.  4.25% has a negative credit of .988%-meaning the borrower would have to pay the .988% (or $988.00, assuming the same $100,000 loan) to receive that interest rate. There are other rates in between 4.25% and 4.625% with varying credits or negative credits. But let's examine the 4.625%  and the 1.388% available credit. What happens to that $1,388.00?

  The Federal government says that Mortgage brokers must disclose this credit-known as an overage to the consumer. So now you know that there is a 1.388% credit if the 4.625% interest rate is chosen. On our $100,000 loan that is $1,388.00.  Had you gone to your bank chances are you would not know about that credit. You see Federal law says mortgage brokers have to disclose the overage-but banks have the choice-they may or may not disclose the overage.  And now here's the BIG DEAL to you as the consumer-Mortgage brokers are required by Federal Law to GIVE THAT CREDIT TO THE BORROWER to assist in paying for the costs of their loan. The banks however have the choice of giving the overage to the consumer, or keeping it to add to either the bottom line of the bank or the salary of the loan originator. That practice and how it is implemented varies from bank to bank.

  So normally when I look at pricing a loan I will say- Mr. Consumer...I can give you XYZ interest rate and I can pay $ABC towards your closing costs or I can give you a lower rate and you may have to pay a little bit more for your closing costs. That way you have the choice. With the bank-you may have the choice-or then again, you may receive the same XYZ rate I am offering and not receive the benefit of the overage towards your costs because it goes into the pocket of the originator or the profit margin of the bank. It's all perfectly legal-but it is a huge difference between banks and mortgage brokers.

  The point is, your bank may be giving you a great deal-but they don't have to.  When you read about a loan with no closing costs-this is what they are talking about-using the overage to pay your costs. It's not that the bank is so incredibly generous. Banks are in business to make money-as are we-we just show you where the differences are.

  Mortgage brokers have been given a black eye by the banks for a long time-but the facts are we can normally compete with any bank on rate and closing costs-the only difference is we have to disclose what we are doing. They don't. 

ESTABLISHING CREDIT

  Many potential borrowers-particularly young people graduate from high school or college, land that good job, and decide it would be a good idea to buy a house.  I commend that line of thinking.  Buying a home is the single best way to build net worth in the United States today.  However, many people right out of school haven't established enough credit to buy a home. Likewise there is a whole group of people who were brought up to believe if you can't pay for it, don't buy it-and those folks too, have no credit scores- and if they wish to use a mortgage to purchase a home will need one.

  Credit is king in the mortgage world.  The way to establish credit is to borrow money and have those accounts reported to the credit reporting repositories that track payments, how much credit someone uses vs how much is available to them, credit inquires, and delinquencies in payments.

  So the question remains-if you have no credit, how do you establish credit? The ideal method of establishing credit is to open a credit card or two with your children as they graduate from high school to assist them in learning to manage credit.  This does require some monitoring on the part of the parent to be sure that the student doesn't blow through their credit limit or miss payments.  Another method of helping children establish credit is making the student a co-borrower on an established credit account of the parent. That way the student benefits from the established history of the parent as the account(s) begin reporting on the child's credit report. I would suggest using a card that is not at it's credit limit, with a low payment as the payments will go into the student's debt ratio, even though they aren't the sole owner of the card. Making your child an authorized user doesn't do a lot for credit scoring as being an authorized user doesn't make you responsible for the account. The purpose is to establish how borrowers manage their credit, not whether or not someone allows them to use the credit account.  And the down side of being an authorized user is that you have no responsibility to the account but the payment will still be considered in the debt ratio.

  But, let's say no credit was established using the above method.  The former student is now on their own and needs to build a credit score.  If the person has a job that pays enough for a small car payment that is a good place to begin. However-please note the use of the word "small" car payment.  One huge mistake I often see is a young person who buys a truck or vehicle with a $500+ payment.  In this type of a situation the borrower may be able to make the car payment just fine on their income but can they add in a house payment? Then there may be a problem.  With house payments in our area available at $500 per month, it is my opinion that the vehicle better have two bedrooms and a bath if the payment is going to be that high. So if a young person is making $2000 per month which would not be unusual for an entry level job, a $500 car payment plus a $500 house payment would put them minimally, if they had no other consumer credit payments, at a 50% debt ratio which is to high in most cases for mortgage lending.

  Let's assume that the potential borrower has a small car payment that they have been paying on for awhile-the next step to take would be to apply for credit at a merchant that the borrower uses frequently, such as a gas card or big box grocery store.  I have had borrowers of mine have good luck using that approach.  Once that card is attained, then obtaining another is easier.

  The third method of acquiring credit when one has none, is to open a secured credit card or a secured loan. I would advise a combination of the two.  A secured card or loan is obtained by giving a bank that offers them an amount of money to hold in reserve as security to open the card. Typically the amount would be $500 or $750. 

  Once  a borrower has three credit lines open-a car loan, a secured loan and a credit card for instance, it is important to make the payments on time for a period of twelve months. This creates a history of payments. When that is combined with twelve months of on time rental payments-voila! There will be a credit score and most likely a good one. Student loans also report on credit, so if a student loan has been in repayment for twelve months that is also a good source of credit. A large amount of student loan debt is another issue and can effect a borrower's buying power, but that is a subject for a different time.

  It is important to note that utility bills, insurance payments, rent payments, medical or dental payments do not go on the credit report unless they turn up as collections or judgments. A medical credit card can be established so those balances and payments report on credit.

  Please understand that I am not advocating that a person run out and run up balances on credit cards-use them sparingly but regularly.  The balance can be paid off every month, but use them again the next month so the card remains active.  Within a year the credit should be established and the borrower will be ready credit wise to purchase a home.

REFINANCING

  Have you refinanced yet?  Interest rates have been low for quite some time now, however, not everyone pays attention to interest rates the way I do on a daily basis. (Hard to understand, I know.)  Anyway-I would like to remind everyone that we are in an abnormal situation with regard to rates.  I know many people are accustomed to interest rates in the 4's as that has been the norm since 2008-but in reality the normal range of rates is between 6.5% to 7.5%.   I also know that there are still quite a few people who own mortgages that are pre-2008 and at these higher rates.  The good news is that there is still time to get your home refinanced before rates begin to go up for good.

  There are several types of refinance programs that are worth mentioning:

1) FHA streamline refinance-if your FHA loan closed before May 31, 2009 you would be eligible for what is known as a streamline refinance with reduced mortgage insurance. The streamline refers to the fact that the only credit qualification required is a middle credit score of 640, and a 12 month on time payment history of your mortgage.  You will not have to obtain a new appraisal and your current balance will remain the same. FHA requires a 5% decrease in your monthly payment to approve this loan-but if you have an interest rate over 5.5% this may be a good way to reduce your payment at very little cost to you.

2) VA IRRL-The VA interest rate reduction loan is just the ticket for a veteran that wants to decrease his payment. Many lenders require a credit score of 640 on VA loans, so the borrower must keep that in mind.  Closing costs can be rolled into the new loan and credit qualification is not required.  If the veteran wishes to take cash out of a refinance transaction to pay bills or for other projects the IRRL will allow a mortgage up to 90% of the value of property. The refinance can go up to 100% of the value of the property if the loan is to reduce the rate only.

3) Conventional refinances- if you have a conventional loan and have some equity attached to your property you may want to see if you qualify for a refinance call DU+.  In many cases no new appraisal is required assuming sales in your area bear out the new loan amount of your home.  You may roll closing costs into your loan, however you can only pay off the existing balance of your old loan if you want to avoid a new appraisal.  Another conventional product HARP can be used to refinance under water properties-however-it can only be used to refinance a first mortgage.  Typically if you wish to roll a second mortgage into a new first mortgage there is no shortcut. You will have to do a full blown credit qualifying refinance which means appraisal and all supporting documents will have to go with the file. In some cases it makes sense to move from an FHA loan to a conventional loan if credit and loan to value considerations are met.

4)  It is important for folks who have the financial ability to consider reducing the term of their loan.  Since rates are low, if you can turn that 30 year loan into a fifteen year loan you will save many thousands of dollars in interest.  In some cases, due to the low interest rates I have been able to reduce the term of a mortgage and the payment has not been much more than the original 30 year loan. For folks who will be empty nesters soon, this may be the way to add equity quickly to their home.

5)  Since the mortgage meltdown, there has not been much of an appetite for adjustable rate mortgages (ARMS).  However, I would be remiss if I didn't mention that for those who have a good idea of how much longer they are going to be in their homes (and again I am speaking to folks who know they will sell due to change in family size, or job change within a few years) an ARM may be the right product for you. Each case has to be assessed on and individual basis but with ARMS that are fixed for periods of 3,5 and 7 years-this could be a product that is at a lower rate and poses no risk assuming it will be paid off in a finite period.

  When looking at the advisability of refinancing a home loan each situation is different.  It is important that the consumer know what it is that he has to gain when considering the product.  My best advice? If it makes sense, what are you waiting for?  Do it before rates go up.

CLOSING COSTS

  Today's word is actually two words...closing costs.  What exactly are closing costs?  Isn't it enough that the lender is going to make all that money on the interest rate??? They have to charge closing costs too?

  We have already learned that lenders are risk adverse.  The truth about closing costs is that what they really are is fees to pay for services that decrease risk.  Let's begin at the beginning and go over what they are and what they are for:

The administration/underwriting/processing fee:  This is a fee that the lender charges to underwrite the loan. The underwriter reads through all the financial and credit information and issues an opinion on whether or not the loan meets the criteria for the mortgage application. (The approval)  Some lenders are doing away with this fee in light of Federal regulations with regard to high cost loans.  We work with one lender that does not charge this fee at all.) But normally the cost of this fee can run from $395-$995 depending on the lender.

Third Party Fees that are required to approve the loan: These would include fees such as the appraisal fee to establish value, credit report fee, electronic underwriting fee, and if your bank charges the lender to verify bank accounts or your employer charges to verify employment you can expect to see these fees as well.  All are legitimate third party fees that must be invoiced. Typically these fees will run about $550 in total.

 The next section of fees that are a part of any loan are the title company fees.  The title company researches the property for any imperfections in title or liens or judgments on title that might have to be paid prior to closing so that the title can pass free and clear to you, the buyer.  The title company also will close the transaction legally, being sure that all funds are dispersed as per Federal Law.  The cost for closing a real estate purchase transaction normally runs about $350-$400.  The title company also issues a title insurance policy to cover any unforeseen defects in title so you as the new owner are not at risk if Uncle Fred who disappeared in Alaska in 1953 turns up saying he owns a share of the property.  A title search will also be conducted on both buyer and seller to be sure once again no liens or judgements exist that can impact title. Your portion of this cost is $100.  The seller (in Indiana) pays for the title insurance policy and their own lien search.

  Then there are the recording fees to record your deed and mortgage and tax exemptions plus the deed transfer. These fees vary county to county but $100 should cover it in most cases.

  The very last piece of the closing cost puzzle is escrow accounts.  Remember we spoke of escrow accounts in an earlier post.  This is money that goes to seed your accounts so that you will have enough money in them to pay your real estate taxes and your home owner's insurance when they come due. The amount for these is going to depend on the cost of the home owner's insurance which can vary for all kinds of reasons such as credit score, size of mortgage, property location, amenities covered and deductible. Of course property taxes can vary wildly.  And-how much taken for the escrow account depends on when taxes are due next.

  The last item legitimately considered a closing cost is one year of home owner's insurance paid up front. This will cover your home for the first year. Meanwhile your escrow account will be used to save for next year's premium payment by payment.

 Some government loans require inspections such as termite and well and septic tests. These are really inspection fees and are paid prior to closing.  The whole house inspection is not a closing cost and is paid at the time of the inspection.

  Normally the total for closing costs is $2500-$3000 depending on insurance and escrows. The lender fees and title company fees are pretty well fixed.

  It is a rule of thumb that closing costs can't be rolled into a new mortgage. You have to come with them yourself or it is not unusual to negotiate for all or some of these costs in your sales contract and have the seller pay them.  In any event, they are a lending fact of life and are not likely to disappear any time in the near future.

INTEREST RATES

 Often I receive phone calls with regard to what my interest rate is on any given day.  Normally I give a range of where the rate might be.  The reason for this is not because I want to be evasive but there are several factors that go into an interest rate.

1) As many people know interest rates are not set.  They fluctuate depending on what is happening in the financial markets on a daily basis.  What interest rates represent is the cost of money as a commodity.  In other words, money for sale. The cost of the money changes from day to day or even hour to hour.  There are times when rates are stable and we don't see much difference from day to day. But if the markets are volatile, interest rates will be too. I have seen interest rates change five times either up or down in one day. The bottom line is-if you like the rate and the payment-take it.

2) Loan Amount: Typically speaking, if the loan amount is low, the rate may be a bit higher.  Let's think about that for a moment.  The investor makes their money off the interest on the money. A lower loan amount is going to generate less money.  Therefore, as in any business there are profit margins to be maintained-so the rate may be a little higher to increase profitability. 

3) Type of loan:  Whether the loan is conventional, USDA, FHA or VA may make a difference to your interest rate.  Lately the government loans have had lower interest rates than conventional lending.  I have seen times when that was reversed as well.  Often FHA and VA are the same and more often than not USDA is at the same rate as the other two government loans.

4) Loan to Value:  How much money is put down is a factor as well. Lending is all about risk taking.  A borrower is deemed a better risk if they have more skin in the game so to speak-more to lose-so a loan in which the borrower is putting 20% of their own money into the transaction may have a better rate than one in which the borrower is putting 5% down.

5) Credit Score:  Once again, keeping in mind that lending is about risk taking-lenders know that if a borrower has a lower credit score-something negative has probably happened-whether it is an inconsistent pattern of bill paying, little established credit, or something earth shaking such as a job loss etc. that created the issue.  In any event, the higher the credit score, the better the interest rate as the investor feels more secure in the fact that the money will be repaid.

6)Cash Out: In certain refinance transaction the borrower takes cash out of the equity in the home to pay other bills or finance another endeavor. Once again the borrower is withdrawing some of their stake in the property so the lender may charge a higher rate as the risk of non payment or slow payment has increased.

7) Term of Rate Lock:  Typically interest rates are locked for 30 days.  45 and 60 day locks are also available, but often at a bit higher interest rate.  When a borrower locks an interest rate they are essentially promising to "buy" the money at a particular price.  The investor then guarantees that price for a period of time.  If the transaction doesn't close within that time period and the rate lock expires, the borrower must go back and re-buy the money. In many cases the rate lock can be extended until the transaction can be closed-sometimes there is an additional cost to the borrower. It is dependent on the lender and what the financial markets are doing at the time.  The address of a particular property and an estimated closing date are required to lock an interest rate.  I also want to be relatively certain that I will be the originator of the loan prior to making that rate lock. When I lock and don't have "pull through" on  the loan it creates a situation in which the investor has lost money by tying it up for a transaction that isn't going to happen. There is a consequence all the way down the line.

  So when asked to quote an interest rate and I appear to be slightly wishy-washy, it isn't because I don't want to give a firm quote-but as you can see there are many variables to what the interest rate may eventually be.  Until I know all the variables it is almost impossible for me to be accurate-and-that accuracy is normally only good until the end of the business day.

Your Escrow Account

    When I talk to soon to be first time home buyers I normally ask what monthly payment feels comfortable.  Typically they have been on various websites figuring principal and interest payments so they have an idea of what they think the payment will buy.  I always ask if they have included property taxes and insurance in their payment comfort level. The responses are about 50/50 whether or not they have considered taxes and insurance. Using current interest rates a payment of $575 principal and interest will buy you a home priced around $115,000 using a conventional loan.  So if you were just factoring in the principal and interest payment and you felt $575 was a comfortable monthly mortgage payment you would conclude that $115,000 would be a price range that would work for you.  However, if I told you that the payment on that home would more likely be $760 once you factor in the taxes, insurance and mortgage insurance that price might not be so attractive.

  Unless a borrower is putting at a minimum 10% down, the lender will require what is known as an escrow-which consists of 1/12th of your property taxes and 1/12th of homeowner's insurance and a certain percentage of what is known as mortgage insurance in your payment.

  Two things a lender always wants paid on time are property taxes and hazard insurance.  The reason the lender wants property taxes paid is that any unpaid taxes represent a lien on the property that will be paid prior to the lender being paid in the event of a sale or foreclosure.  It should go without saying why the lender wants the hazard insurance paid since the lender has the biggest financial stake in the property, they have no interest in taking the chance that the insurance will lapse.  So the system of taking the insurance in your monthly mortgage payments insures that it will be paid on time.

  Monthly mortgage insurance is placed on any mortgage in which the buyer has less than a 20% equity stake in the home. In other words, the value of the property must be 20% higher than the mortgage if mortgage insurance is to be avoided.  Mortgage insurance in reality is there to protect the lender for the portion of the mortgage between 80% and 100% of the value of the property in case of default or a short sale.  A lot of buyers feel that mortgage insurance is nothing more than a fee they are tossing down a rat hole every month. I prefer to look at it this way-mortgage insurance is essentially a way of putting 20% down over a lengthy period of time-normally about eleven years before that 20% equity is reached. At that point on a conventional loan the mortgage insurance will come off automatically.  While it does seem as if it inflates the payment unnecessarily, it does allow people to purchase homes without having to save the 20% to put down.

  In any event, these monies make up what is known as the escrow account.  Your escrow account is a non interest bearing account in which the money is set aside on a monthly basis to pay your property taxes, your insurance, and your mortgage insurance when those items are due on an annual or semi annual basis.  In many ways this enforced savings plan means that you won't have to slap your forehead when that unexpected insurance bill shows up. Federal law stipulates how much extra money can be in your escrow account at all times.  So once in awhile you will receive a check back from your lending servicer that is an escrow overage-meaning the escrow account had accrued too much money. Typically this happens in the cases of new construction when the taxes aren't fully assessed so too much money is taken in to cover taxes. It is more likely that your escrow account will come up a bit short due to increases in taxes or insurance.  A small cushion is allowed to cover cost increases, but every once in while it isn't enough.  You tax or insurance bill will be paid, however, the lender will then normally give you the option of making up the difference in the shortfall in one payment or a series of higher mortgage payments to catch up.

 

THE APRAISAL

  About a week to ten days into your loan process an appraisal will be ordered to verify the sale price that you are paying for the home you are buying.  Let me clear a couple of things up about appraisals:

1) The appraisal is not a whole house inspection.  A whole house inspection is performed to uncover any defects in the property that could be dangerous or costly to repair.  The whole house inspection serves as a method of acquainting a home owner with the property he/she is buying and any issues they may expect that would need to be repaired.  The appraisal is primarily for the purpose of establishing the value of the property.  Most loans do have minimal condition criteria that the appraiser needs to take note of-USDA,FHA, and VA loans require a 100amp breaker box for instance, to comply with the loan. However, the appraiser is not an inspector in the sense that they are looking for problems or issues with the home.

2) The appraisal fee is a part of closing costs-however, even if the seller is paying closing costs on behalf of the buyer this fee falls to the buyer to pay as it is paid in advance of the appraiser performing his job. Regardless of the outcome of the appraisal the appraiser has to be paid.  The cost of the appraisal is credited to the buyer at closing. With any real estate transaction, the buyer puts his appraisal money at risk.  The money is non refundable.

3) If the seller has a recent appraisal that they had done in advance of selling their property you might want to consider it a marker of where the value of the property is, however that same appraisal can not be used for your purchase.  Appraisals have to be in the name of the lender that is underwriting the loan. It is also possible that a different appraiser may have a different value depending on what has sold since the first appraisal was done or the use of different comparable properties.

4) Neither the lender  nor the buyer has the option of choosing a specific appraiser.  That changed with the mortgage loan fiasco.  Lenders now have to order appraisals from appraiser pools known as appraisal management companies (AMC's).  Each lender has one or more AMC and all appraisal orders are sent to the AMC.  The appraisers affiliated with each AMC can choose to pick up the appraisal and perform the  inspection and report. Then the report is sent back through the AMC to the lender and the buyer. The lender is not allowed to have any contact with the appraiser. While appeal processes exist for appraisals that seem to be off the mark, it is up to the individual appraiser to choose to change the report or not.  In my experience, there is not much chance that anything will be changed on the report with regard to value or properties used to support the value of the home being purchased.

5) The value of a home is determined by comparing the subject property to other homes in a similar geographic area that have sold recently-normally 90 days is the optimum length of time for these sales.  Each home that has been sold can have the sale price adjusted for the amenities it has or does not have compared to the subject property. From those calculations the appraiser will determine a market value.  There is also a value placed on the property for the cost to build it new.  However, the sales comparison value is the one that is used for lending purposes.  If the property appraises for less than the sale price buyer and seller will have to go back to the negotiating table to see if they can reconcile the new price.  If not, the transaction can not move forward unless the borrower has the funds to make up the difference between the appraised value and the sale price. This happens very seldom as most people don't care to overpay for a home and opt to withdraw from the transaction.

6) The appraiser may note some condition issues that require repair prior to closing the transaction. We see these requirements even on conventional lending.  Lenders don't want to carry a lien on a property that has condition issues no matter how much money the buyer puts down.

  The best advice on value that you can receive on a property that you are considering is from your buyer's agent.  Your real estate agent can do a comparable market analysis to see if recent sales in the neighborhood will support the seller's price.  If there is a question about that you may choose to move on to another property. (Another very good reason to work with a real estate agent-particularly with for sale by owners who may have priced their home based on emotion rather than concrete evidence of its true value.)

  The appraisal is the step in the loan process that can take the longest as there is a finite number of appraisers. Some loans such as FHA and VA require the services of appraisers who are specifically trained in appraising for those programs. If the market is busy as in the spring and early summer getting the appraisal back can take longer. But most of the time the appraisal is back in a week from the time of the inspection.

  The appraisal-an important part of the loan process-having an overview of how it all works should help ease the stress until that report is back and the transaction can move forward.

GIFTING FOR DOWN PAYMENTS

  Another issue that has become a bit pricklier as lending goes is the use of gift money for down payments.  A brief stroll down memory lane might be in order before I go into depth on the subject of gift money.

  Pre-2008 a borrower could come up with money from pretty much anywhere for the down payment. They could ask someone, anyone, to write a "gift letter" and have the money accepted as a part of the down payment for a mortgage.  What this acceptance did was open the door for some very egregious practices-such as taking cash advances on credit cards, opening high interest rate signature loans, accepeting seller contributions, or obtaining money from other questionable sources. With the collapse of the housing market, overvalued homes, and all that came with it, the Federal Government along with it Fannie Mae, Freddie Mac, and FHA began the process of looking more carefully at where the money for down payments originated.

   Tthe new rules of the road were changed so that the money for down payments had to be traceable and that  included gifts. 

First: the rules pertaining to who may give a gift has been tightened up.  The donor has to have a proven relationship to the borrower-so family members, afianced couples, as long as they have bank accounts and addresses in common, are acceptable donors for gifts.  The relationship has to be verifiable-in some cases where names have changed due to marriage, we have had to go so far as to obtain marriage licenses and birth certificates to prove the relationship.

  Secondly, the money can't just turn up in the borrower's bank account. It must be proven that the donor has the money to give.  This is one of the most controversial parts of the new law.  The money for the gift must be verified in the bank account of the donor prior to dispersal of the gift money. Many donors are resistant to this part of the process.  What business is it of the lender to check where the money is stashed?  Federal Finance Reform makes it the lender's business.  Unfortunately for those of us who wouldn't know a terrorist if one sat down next to us on the bus, banks are now the first defense against money laundering. (If you will recall, the 9/11 high jackers had large sums of cash rolling through their bank accounts-threfore banks are required to look at all large sums of money used in various banking transactions-mortgage lending being one of them.) However, proof of the assets can be easily achieved by producing a copy of the donor's bank statement showing the money available before the actual check or transfer is/was made.

 Third-a copy of the check or wire transfer slip may also be required. 

Fourth-the lender will want to see a deposit for exactly the same amount as the aforementioned check or transfer go into the borrower's account.  A "gift letter" which is actually a form that is produced by the loan originator's software will have to be filled out and signed by both the donor and the receiver.  The gifting process isn't exceptionally difficult if it is done correctly from the beginning. Here is where we run into trouble:

  If the donor has cash sitting in the sock drawer and gives the cash to the borrower, the money may not be used.  Unsubstantiated cash into a bank account cannot be used as funds to close a loan. Who says so? Uncle Sam says so and lenders are required to adhere to Federal Law. 

  If you are using a conventional loan to purchase your home 5% of the down payment must be the borrower's own funds.  Any other funds towards the down payment can be a gift. (As of this writing the rules is 3% of the borrower's own funds, however that rule is due to change to 5% within a month or two.)

  With an FHA loan all of the down payment or the entire 3.5% can be gift funds from a family member.  In certain circumstances, a borrower can buy a property from a family member and have the 3.5% gifted as a gift of equity-but that is a bit of a different animal and other rules apply also.

  VA loans and USDA loans do not require down payment funds.  However, it is important to note that even these loans have upfront costs attached to them such as inspections of various types, the appraisal, and so forth.  If a family member is gifting you the money for your appraisal for instance, once again it is important that you document the gift in the same manner as down payment gifting.

  A gift from a family member is an excellent method of obtaining down payment funds for the purchase of a house. Many families are supportive of their children purchasing a home.  Home ownership is a proven method of building net worth. It also builds stability and community.  So don't be afraid to use a gift to buy a home-just follow the rules and it will be easy.

FINANCING REPAIRS

  One of the worst things that can happen to a house is to stand empty.  Without anyone to keep an eye on the condition of a property small defects that could be repaired inexpensively become large defects costing significant amounts of money to remedy.  This is the fate of the millions of foreclosed homes that litter the real estate landscape.  Forclosure is a process that takes months to complete.  At some point in that process the homeowner leaves or is forced to leave, essentially abandoning the care and maintenance of the property.  The banking institutions, having taken millions of homes into an unwanted inventory have no interest in keeping the homes cared for or maintained. One point to always remember whether the home has been sitting empty due to foreclosure or any other reason-there will be problems that present themselves that would not occur in an an occupied property. Burst pipes, leaking roofs, mildew, wood devouring insects, or theft of the copper in the water supply lines are all common defects in vacant homes.

  But, there are good buys to be had if you are willing to deal with the issues that come with these homes-particularly if you are paying cash and have cash on hand to fix the problems.  This blog isn't about cash.  This blog is about mortgages and finding a roadmap through what has become a confusing process.  So-you have found a good buy on a foreclosed property but there is a little problem-the prior owner took the kitchen cabinets and counter tops with them. You don't have fifteen or twenty thousand in the bank to take care of the repairs and...even if you did...the lender from whom you wish to obtain financing isn't going to let  you close on a property that is missing 80% of the kitchen.  And guess what else?  Even if you have the money to add what is missing, the bank that owns the property won't allow you to repair the property to meet your lender's requirements prior to closing.  And...the lender who owns the property won't fix it either.  Wait...let's review:  My bank who is financing my mortgage won't close on the property unless there are cabinets, countertop, and a sink in the kitchen.  Even if I ask Aunt Matilda to give me money to repair the kitchen so it meets my bank's requirements to close, the bank that owns the house won't allow me to repair the problems before closing, and the bank that owns the property won't repair it so they can sell it?  Is that right? Do we have a circular firing squad going on? Yep, Sparky, you got it.

  How does the bank that owns the house ever expect to sell it? Don't they know that most people have to obtain mortgages to buy a house?  They do.  They just aren't into rehab. What to do? What to do?  Look for the cavalry-the US cavalry to be specific.  As it happens, HUD using the FHA loan does have a solution.  It is called the 203K loan.  (Took me awhile before I realized it wasn't a retirment plan too.) It is a mortgage loan that will allow you to finance the repairs into the loan and hold the repair money in escrow so you can repair the house after you close.  It's just that simple...well sort of...but it works.

  There are more than a few rules that cover this loan.  You will need the standard 3.5% down payment that FHA requires-and in this case it has to be your money-no gifts from interested parents or relatives. But to soften that blow, the down payment is on the house without the repair money in the loan.  So if you are buying a $60,000 property and expecting to put $25,000 into repairs, your down payment would be 3.5% of the $60,000 not the $85,000. The house does have to appraise at  repaired value that is at or exceeds the cost of the purchase price and the repairs.  And, no sweat equity. You will need a bonafide contractor with an internet or yellow page presence, not your cousin Eddy who weilds a pretty mean paint brush.  (Even if cousin Eddy is a bonafide contractor, the rules of the loan do  not allow family members to be your contractor.)  Also the money can't be used for structural repairs.  So this loan won't work to repair floating foundations, room additions, truss repair or to shore up sagging floor joists.  It will replace windows, faulty furnaces and air conditoning, reshingle roofs, buy appliances, or repair exisitng structures such as screen porches or decks.  It won't build new decks or screen porches.  And, there is a cap on the loan-$35,000.

  So if your dream home is missing the furnace or has broken pipes, be sure to ask about the FHA 203K loan.  Not every FHA lender has the product as many choose not to deal with it, but with the right buyer and the right property it is a terrific product.

WHAT DID YOU SAY I HAVE TO DO FIRST?

  Without a doubt, the most anticipated part of buying a new home is the search.  Many people think that the sequence of events leading up to a home purchase is to drive by one you think you would like to see, call the realtor listed on the sign to make an appointment and if you like it, buy it, or if you don't like it, drive around some more until you find another one you like.
 
  This is a great plan- in a perfect world. Since we don't live in a perfect world, reality often intrudes.  The search for a new home begins prior to ever setting foot into a potential house to purchase.  In order to start the process that leads to home ownership you must start at the beginning.

  What is it that every potential home owner needs to be able to buy a home? The financial wherewithal of course.  If you have enough cash to plunk down on a purchase, you can quit reading now. Go back to your search.  However, most of us require a mortgage loan to buy.  That being the case, it is important to know that you can obtain the money to finance the house and how much money is available to you.

  There is an old saying about buyers-they must be ready, willing, and able.  The world is full of folks who are ready and willing.  the key component is that you are able.  In order to figure that out, you will need to become pre-approved by a lender.  The lender will look at your credit history, your employment history, assets, and income to determine if you have the ability to be approved for a mortgage loan.  The lender will also analyze  what loan product is the best product for your unique financial situation.  It is also important to understand that different types of mortgage lenders are different and what those differences are.

1) Your bank or credit union.  Many people begin here because that is where you have your checking and savings, and it seems like the best and easiest route to the mortgage money.  It may be...then again, it may not.  If you have high credit scores-700 or above-money put away for a down payment, and consistent steady income at a job you have held two years or more your bank will probably approve your mortgage loan.  However, given the economic damage that the recession of 2008 visited upon many people, your bank may tell you they appreciate your asking, but no, they can't offer you a mortgage.

  What would cause them to turn down your loan?  Many things, but chief among them would be an interruption in employment, bankruptcy or foreclosure on a previous property,  or a credit score lower than the 700 mentioned above. The important thing to remember is that your bank is not your only option.

 2)  Many people seek out the services of a mortgage broker.  A mortgage broker has relationships with different lenders.  There is a base set of rules pertaining to mortgage lending that all sources of mortgage money have to adhere, but, lenders can add their own rules onto the base rules which leads to different criteria from different lenders to loan mortgage money.  A broker has access to sources of mortgage money that offer differing rules which means that the chances are greater that you will be successful in obtaining a mortgage loan from a broker.  And don't listen to conventional wisdom that brokers charge more money for their services. They don't. The Federal Government took care of that with the Financial Reform Act. Because underwriting and processing fees differ from lender to lender, brokers are often able to charge a bit less than banks. One other factor that conventional wisdom says about banks is that your loan will stay with your bank.  That doesn't happen much any more.  You may be able to make your payment to the bank that originated the loan but the loan in most cases will be sold to another much larger lender.  That is the way more money is created for more mortgages.

 So your first move when considering the purchase of a home is to go to your mortgage broker and become pre-approved.  Sellers expect offers from pre-approved buyers.  They aren't going to remove their home from the market if they don't have a good idea that your offer will result in a sale and that you can afford the house. Becoming pre-approved means that the broker has looked at your financial ability to obtain mortgage financing and can tell you what price range would be approved, a ball park on what your payment and costs will be, and the type of financing you can expect.  Armed with that information you can move forward to the fun part of your quest for a home, the search.

THIS WAS SO EASY THE LAST TIME!

   I hear this comment fairly frequently from past clients as well as folks that have found their way to my door who have purchased homes previously.
 
 If you bought a home prior to 2008 no doubt it was easier.  2005-2008 was the Wild West for the mortgage loan industry.  Liar Loans, low doc, no doc, and stated asset loans not to mention the really big bad guns of the loan industry-the subprime loan.  During this period of time all someone needed to do to obtain mortgage financing was have a pulse.

  But all good (?) things must come to an end.  Millions of loans went bad due to over priced housing, people who had been able to purchase homes with terrible credit, the influence of Wall Street greed, and just about anyone who wanted to make an easy buck at the expense of the consumer.  When I think about all the highly creative and questionable methods that were used to finance homes and then sold on the secondary market as "A" investments...it is no wonder the whole house of cards came tumbling down. It almost brought the global economy down with it. It was that bad.
 
   The logical consequence of the economic disaster that took place in 2008 was that the Federal Government passed a series of regulatory controls that have put the handcuffs on banks, Wall Street, and mortgage brokers.  These handcuffs don't just fit the big boys-they are attached to all of us down to the local level. (I didn't get rich writing bad mortgage loans-that I can assure you.)

  So what this means is that we now have to question and prove all kinds of things such as where the money comes from that you are using for your down payment. It isn't enough that a big wad of cash was just deposited in your bank account. It is now required that you disclose where the money came from. If your mom gave you a check for the down payment you may or may not be able to use it-there is a methodology to gift funds for loans.  It's not that the bank doesn't want your mom to give you a gift-it's that the bank and the Federal Government want to be sure that the money is hers to give and not borrowed from a credit card, another bank etc. Borrowed money has to be paid back and for the most part it is required that the borrower has some skin in the game so to speak.

  You also have to be able to prove your income. While I know most of you are thinking, "that's a no brainer," since many of the loans that went bad were loans in which income wasn't verified there are now checks in place to be sure that the borrower is employed-such as calling the employer on the day the loan closes-to requesting transcripts for two years of tax returns from the IRS.  The Federal Government now requires lenders to have proof on file that they have done everything possible to ensure that the loans they have approved are to people who have a high likelihood of paying them back.
 
  And since Federal Finance Reform is an equal opportunity law, it applies to everyone-me, you, all of us. So while I understand the pain of those of you are imminently qualified to pay back your loan, who have never missed a payment in your life, we have to do what seems to be a huge amount of overkill.  Not because we like poking around splitting the hairs finely, but because Uncle Sam says so.
 
  I want you to be certain of this fact alone-when you go in to obtain mortgage financing, everything that the loan originator asks you to produce is for a good reason.  The good loan originator will try to be pro-active and obtain documentation prior to the lender requesting it. Why? Because your originator wants to  make the process as easy as possible as they can for you. If we have something in a file already then we don't have to track you down from packing your moving boxes to ask you for it. We know you have a life too which has been complicated by the fact that you are moving your worldly belonging somewhere else. Experience tells us what items we will most likely need. But underwriters are a cagy lot. It is their job to ensure that the loan is watertight and won't be questioned by whatever entity is buying it-so the underwriters often ask for things we hadn't thought of. They are creative that way. But it is also their job to screen out risk.

 In essence, we are now paying for "it was so easy last time".  One would think the pendulum will gradually swing back again.  But thank you for asking.