LENDER PAID MORTGAGE INSURANCE

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  Lender paid mortgage insurance? The lender pays the mortgage insurance? That sounds awesome! Sign me up.

  As you may have been told time and time again, there is no such thing as a free lunch.  That is true in this case as well - - but...it is worth the time and the space to discuss how lender paid mortgage insurance works and to note, that many times it is less expensive than traditional mortgage insurance.

  First, what is lender paid mortgage insurance?  As you may or may not know mortgage insurance is an invention of the lending industry that allows borrowers to put less than 20% down on home purchase transactions, thereby allowing more people to become home owners.  I don't know if any of you have noticed, particularly if you have kids, but saving money is becoming more and more difficult all the time.  For a young family or a young couple starting out, the ability to save 20% for a down payment is about as feasible as flying to the moon in many cases.  So the ever creative folks in the banking and insurance industries came up with the idea that the borrower could pay a monthly premium that insures the lender for the amount of money between 80% and 100% of the value of the property so that if for any reason there is a default, they can recover some or all of that shortfall.

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  With government loans what amount to mortgage insurance may be referred to as a funding fee in the case of USDA and VA, or an upfront MIP (mortgage insurance premium) in the case of FHA. Both USDA and FHA also have monthly fees that are included in the payment.  The main difference between the government monthly fees and conventional mortgage insurance is that the government monthly fees remain on the loan for the life of the loan, whereas with conventional products the mortgage insurance will fall off when the loan to value is at 78%.

  So, the loan product that we will be addressing today is the conventional mortgage - - the 5%, 10%, and 15% down loan.  Lender paid mortgage insurance takes the place of traditional mortgage insurance in your payment. 

Back to the old adage about the free lunch.  It's not that lenders are picking up your mortgage insurance because you have a nice face or because you are a lovely person.  Lenders pick up the mortgage insurance because in actuality you are paying for it - - in the interest rate.

  What! I pay for it in a higher rate??? Yes you do. But, that isn't all bad.  When I advise buyers between lender paid mortgage insurance and traditional mortgage insurance I take a look at several factors:

1) How long they plan to be in the home

2) Credit score

3) How much is being put down

4) total loan amount

Let's take a look at a couple of examples: 

Example A:  Borrower plans to be in the home no more than 7 years, has a credit score of 735, is putting 10% down on a $140,000 30 year fixed rate mortgage.  Let's do some math.

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 There we go, much better.

The interest rate today for the LPMI at the characteristics listed above would be 4.375%
The interest rate if one was using traditional mortgage insurance would be 4.25%
The difference in the principal and interest payment is $11.00 per month-so for the seven year period the total cost of the difference between the two payments would be $924.00 So that is the cost of the LPMI scenario.

If you used the traditional MI the payment per month would be $51.33 in mortgage insurance. Over the same 7 year period the cost to the borrower would be $4,311.72  Hmmm - - that is enough to take a look at LPMI isn't it?   The advantage to the borrower decreases as time goes on as the traditional mortgage insurance will drop off the loan eventually-but for the first seven years it is a really good deal.

Lets look at another scenario:  Borrower plans to be in the home at least 15 years. His credit score is 680 and his loan amount is $95,000. He is putting 5% down. How does that work out for him?

His interest rate due to a lower credit score and loan amount will be 4.75% on the LPMI.  If he was to obtain traditional mortgage insurance his interest rate would be 4.375%.  The difference in his monthly principal and interest payment is $21.00 - - but - -  when you add in the mortgage insurance of $70.46 per month and compute it until it drops off in eleven years there is a cost of $9300.  The cost of the difference between the two principal and interest payments for the fifteen years he plans to remain in the home is $3780.00. Still a better deal than keeping the traditional mortgage insurance until his equity allows it to drop off. If he kept the mortgage for 30 years, the difference in the principal and interest payment would only total $7560.

  As we head into spring and higher interest rates, these calculations may change but it is worth running the scenario to see what benefits the borrower the most.

Lender paid mortgage insurance, not such a bad deal after all.

GETTING IN YOUR OWN WAY

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These are excerpts from phone calls that I receive:

"Don't tell me to open any credit cards, I pay cash for everything."

"I'm a first time buyer.  I want to buy a fixer upper."

"I don't believe in banks."

"I'm only a couple of months behind in my rent."

"No, I don't want to trade in my truck."

"I found a house that isn't listed with a real estate agent. What do I do now?"

"I know how to do this.  I have been researching buying a house on the internet and I watch HGTV."

  These are all prime examples of people getting in their own way if the goal is to purchase a home. If you are a regular reader of this blog you probably have guessed that obtaining a mortgage and closing on a home isn't a piece of cake.  Things have changed since 2008.  Your success in working through a home purchase process without it turning into a nightmare will most likely depend on the lender and the real estate professional you choose to help guide you through.  The first thing you need to understand is: If this was easy there would be no real estate companies.  Let me take each of the above statements that I have heard from well meaning, but very ill informed consumers and speak to each one.

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  You may not like credit cards, you may prefer to pay cash for everything. If that is the case, then you need to be able to purchase your home using cash. Don't have an extra 100K kicking around? Oh, well, then. You are going to need credit.  You see if you are going to ask someone to loan you thousands of dollars, they want a realistic assessment of your ability and willingness to pay back the loan.  So, if you have no credit and you see yourself purchasing a home in the future, you need to establish credit.  In past blogs I have explained how to do that. You will need consumer credit i.e. credit cards, an installment loan or two and possibly some history with student loans.  And it is best if you have a 12 month history. Opening a couple of cards for a month or two really isn't enough to show a solid picture of how you manage and pay credit.

 

 

 

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  Ah, the attraction of the fixer upper.  Unless a borrower has carpentry, electrical, plumbing, and roofing skills a fixer upper  is not a good purchase for the first time buyer.  Many people are attracted by the low prices on some of these properties, thinking they can obtain a twenty or thirty thousand dollar loan, move in, and repair at leisure. The fact is that these home are almost always purchased using cash.  Why? Because of lending restrictions that have come out of the Great Recession.  Typically, in order to finance such a low mortgage amount, lenders are in violation of the stipulation put on the amount fees that can be legally charged.  Often just the normal cost of getting a loan done puts a lender in violation of federal limits and that is before the lender makes a dime.  I don't know about you, but I like to be paid for the work I do.  The second issue with fixer uppers is that they often are barely habitable if at all. A buyer's intention to fix a place up isn't a guarantee that will occur and often the same folks who are most interested in these homes because of the price, have little or no money to install such items as hot water heaters, furnaces, repair roofs etc.

 

  If it is just repainting and buying new carpet or eventually updating the kitchen - that is an entirely different matter.

 

 

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  I understand your concern about the health of the banking industry.  But the banking industry is doing just fine.  If you want a mortgage loan then you have to have a bank account and the money in that bank account all has to be documented. I.E. money coming into it has to be from documented sources like your pay checks, or the US Treasury.  Large deposits of cash are not allowed in mortgage transactions. (Thank you very much 9/11 terrorists.) This is not subject to discussion or debate, it is federal law. So if you want to dump the 15K you have had buried in the back yard for the past five years and use it on a house, you can have the discussion with the FBI. Sadly, they are watching.

 

  If you have paid your rent late in the last 12 months, you can just about forget about a mortgage until you have a 12 month on time payment history.  Lenders come to the conclusion that if you aren't paying where you live on time now, you probably won't pay them on time either.

 

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  People love their trucks, that is a fact.  However, the decision you made a couple of years ago to buy the ultimate truck may backfire when it comes to buying a home because often expensive trucks create a problem when it comes to debt ratio. If your truck is eating up one third of your gross income, adding a house payment into the mix may be problematic.  Often when I ask buyers if they would consider selling or refinancing the truck so they can buy a house, the reaction is less than positive.  Then all I can say is that the truck better have two bedrooms and a bath because that is as close to a house as those folks are going to get. If you think you may want to purchase a home, be careful of the vehicle payments.

 

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  Our internet age has taught us that information is at our finger tips and we can learn anything we need to know from cyber space.  Articles abound regarding how easy it is to save money by ditching the real estate professional, cutting out the middle man and buying a home from someone who is selling it without the aid of a real estate agency. (And we all know that everything you read on the internet is true - - right?)

 

  I am not going to say this never works. It works 5% of the time. There you go, the percentages are not greatly in your favor of success-and I wouldn't suggest a do it yourself job EVER, if you are a first time home buyer.  This will probably be the biggest financial transaction of your life - why would you trust it to a few on line articles and a complete amateur (you) when it comes to purchasing a home.  Sellers who sell homes without agent assistance do so for any number of reasons, but you can be sure, saving you money is not one of them.  What you don't know can hurt you.  While I will certainly accept a loan application from  a buyer who has made his own real estate deal, I also am not a real estate agent so I am not the go to person to advise you about your deal.  When you buy without an agent, you are the agent which means, YOU are responsible for writing and executing the purchase agreement, YOU are responsible for negotiating terms, closing costs, further conditions and inspection addendums.  YOU are required to perform certain functions within the confines of the time frames required by the purchase agreement and YOU are the person who is in charge of solving any issues that come up with the transaction or the seller during the process.  What kinds of problems can occur you ask?  Let's begin with title issues. There will be a title search to determine any blots on title, unpaid liens, taxes etc. If there are, then what?  Or perhaps the seller moves out before the transaction closes and the basement floods. Whose job is it to clean up and repair? How do you work that through?  Maybe a tree branch falls through the roof right before closing.  All these things have happened in situations I have first hand knowledge of.  Fortunately there were realtors involved to work through the repairs and solve any issues. In the instances where there wasn't an agent, the transaction died.  Any monetary loss such as appraisals that had been done, inspections etc. were born by the buyer. The fact is that every real estate transaction has at least a couple of problems that occur. Many times the buyer and seller are totally unaware of what they are. This is due to the fact that professionals are handling their deal.  Real Estate agents pay quite a bit of money on education and licensing so they know how to steer through anything that might be thrown at them during the sale process.  As a buyer, in most instances this expertise is available at no cost to you. Why wouldn't you use it?

 

 

 

  Okay-these two guys, while entertaining aren't the answer to all things real estate.  For one thing, they practice in Toronto.  Toronto is in another country, folks.  Not our country.  Based on my real estate knowledge, I can conclude they know a lot.  But to translate what they know about their market to your local market from another country can be a huge stretch.  Real Estate is a very local proposition. Local customs vary as do property values.  Watching the Property Brothers or House Hunters doesn't give you inside information on how to negotiate or shop for a home. These are television shows. They are subject to editing and assessment by the producers as to what will make good t.v. (Otherwise The Property Brothers wouldn't continually have a supply of buyers who don't seem to watch the show and know that everything will be fine in the end.)

 

  Nor can the internet give you all the answers you need when it comes to shopping for a mortgage or looking for a home. Many properties don't hit the internet because Realtors talk to each other.  They have their own internet sites that they can preview upcoming listings. So what you see on Zillow and other big internet sites isn't all there is.  And as far as mortgages go-unless you are a mortgage professional and you know how the mortgage industry prices mortgage money and how it all works, don't take the information you read for mortgage offers seriously.  Again - mortgage rates and terms are local in nature and are based on a several factors: loan size, credit score, and loan type.  Develop relationships with the real estate professionals, mortgage and agents, in your area.  Work with people you trust to make this most important purchase.  Obtaining a mortgage and buying a home isn't the same as ordering sweats from Nike.  It just isn't.



VETERANS DAY 2014

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  Today is Veterans Day. Around the country federal and state offices are closed as are banks, the mail service and other offices to honor those who served and sacrificed for the ideals set out by the Declaration of Independence and the US Constitution.  An important aspect of remembering our Veterans and their service is to ensure they have access to the services they so richly deserve that are available to them.  Availability of information is key, so to those ends the subject of today's blog is the VA loan.

  I have written on the topic of  VA loans before but it never hurts to reiterate that this is a great mortgage for a veteran.  There is a lot of misinformation floating around out there - - that the loan is hard to close, or that the property condition stipulations are rigid, or that the interest rate is high.  None of these things is true.  I have often met with Veterans and compared the VA loan side by side with the conventional loan that was offered them by a competing lender and every time, the Vet has chosen the VA product.

  Here are the features of this loan:

100% financing -- no down payment

Veterans, Reservists, and National Guard personnel are eligible (there are time of service guidelines on each type of military service)

No monthly mortgage insurance is charged

Interest rates run roughly .25% lower than conventional mortgage rates

30 year fixed 15 year fixed rates available

Repeat use of eligibility is allowed

It is possible in certain circumstances to own two VA financed homes at the same time

Between the several VA investors we work with we can assist veterans with credit scores from 580 on up.

Don't let anyone tell you that the VA loan isn't the best mortgage for a veteran.  Check it out for yourself and see if you agree!

PROTECTING CONSUMERS- -RESPA

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  Wait, wait, don't turn the guard dogs loose! Your personal property is not at risk. The type of protection I am referring to is consumer protection provided by the Federal Government using its regulatory powers.  Bah! We don't need no stinkin' regulation you might say. Maybe yes, maybe no. Today we are talking about a huge regulatory ruling with regard to lending, RESPA. Perhaps you might want to rethink the regulation stinks position once you are aware of what RESPA does.

  To begin with, RESPA is alphabet soup for the Real Estate Settlement and Procedures Act.  What it does is:

1)  Provide consumers better and more consistent information about the costs of their mortgage so they can better shop for settlement services

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2) Eliminates kick backs and referral fees that increase the cost of settlement services.

  So let's talk about consistent information first.  Every borrower is entitled to a Good Faith Estimate when they are shopping for a loan.  Lenders are free to offer a worksheet of estimated closing costs but are not necessarily held to the worksheet.  That gives the consumer a basic idea of what the loan will cost but it does not necessarily pertain to a specific loan.  Lenders are required to give the borrower a specific Good Faith Estimate when it is determined there is information enough to constitute a loan application.  What information constitutes a loan application? Does this mean that in order to get a true idea of what my loan will cost I have to actually have turned in all the documents for a loan file?  What if I want to shop around?

  Well no, you don't have to give your documentation to every lender you are considering. And actually the worksheet that each lender can submit is a pretty good tool to compare costs.  However, to get to the specifics you will need:

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That's right- a pencil.  Or more accurately the acronym:

Property address
Estimated value
Name of borrower
Credit
Income
Loan amount

Get it? PENCIL?? Okay, okay, but it is a handy acronym that a lender can use to determine whether or not they have an actual loan application. Once these six things have been collected, the Federal Government says there is a loan application and the official Good Faith  Estimate must be issued.

  What is so special about the Good Faith Estimate? When a GFE is issued, the lender is locked into the stated costs of services for 10 days from the issuance of the GFE. So whatever fee is charged for underwriting for instance, is what the borrower will pay should they do the loan application within ten days of the time the GFE is issued.  The interest rate too is fixed as a promise for a particular amount of time on the GFE. I normally express my time frame on the interest rate for one business day as the rate can change daily so to promise the rate for more is probably not a smart idea as it might not be available the following day, depending on the volatility of the market place.  If the borrower wants to lock the interest rate at the time, then the locked rate will be disclosed for a period of 30, 45 or 60 days typically.  The expiration date is also shown.

  The exception to the lock-in of these fees are third party fees as the lender doesn't control those, but the borrower needs to have a fairly accurate estimate of what they may be.  So the Federal Government allows a 10% tolerance on fees such as appraisal, credit report, or any fee that is not a specific lender fee, but that the borrower is not allowed to shop for themselves.  There are also fees that the borrower may shop for  themselves such as pest inspection, survey, and title fees.  These fees  have no tolerance built in so that the lender is not responsible for fees they don't control.  An example of this type of fee would be the cost of home owner's insurance.  The lender has to disclose a charge for it as it is a requirement of the loan, but lenders aren't in the insurance business so they have no control over the policy you ultimately select.

  The lender has three business days to disclose the information on the GFE and have the borrower sign off on the disclosure.  Once the borrower commits to a specific lender, the lender is held to the disclosed fees or the tolerance level of third party fees.

  So that covers point one - - the borrower can obtain information upfront on the cost of their loan prior to making a commitment to a specific lender if they choose.

  Let's talk about point 2.  The purpose of point 2 is to prevent fees and interest rates to be tied to the use of third party companies such as insurance companies, title companies, or any other ancillary service in the lending process. It used to be that a lender could do this and the borrower might end up paying a higher fee. It is also illegal for me or my company to pay an insurance company a referral fee for sending me a borrower. Nor can I pay a real estate agent a referral fee, nor can either of these entities pay me for referring business to them.  I am also unable to offer a "special interest rate or discount" by encouraging my borrower to use a specific ancillary service.  So while I may make suggestions for outside  real estate services, it is because I know those entities will do a good job, not because there is financial gain in it for me or my company.

  The other thing I can't do is pay for any fee on behalf of the borrower with regard to the mortgage loan.  Sometimes the ability to do that would be handy.  Such as in the case of a property that requires two appraisals for one reason or another. It would be a nice gesture to be able to offset the cost of that somewhat for the borrower, but it is illegal.  Which is why if someone is unhappy with our service for any reason we cannot buy ourselves back into their good graces.  Every once in while I run into a borrower who feels that for whatever reason, if I or my company paid for some fees on their behalf, that would make everything better in their loan process. Whether it might make it better or not, it is illegal.  Fortunately, this is a rare occurrence so it doesn't come up often.

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    The last thing we can no longer do is offer inducements, such as the lovely television pictured above if you choose us to work on your mortgage loan.  I can't offer to buy you dinner, pay for your appraisal, give you a gift certificate towards landscaping-none of it.  I can't offer you anything of value that might make you choose me and my company over another company - other than I think we do a pretty darn good job and offer great rates and closing costs. That's it.

 

  So there you go, a crash course in what the Federal Government is doing to keep you from being overcharged or pushed into using companies you would prefer not to use.  Not a bad thing, really.

 

 

 

 

YOU HAVE THE QUESTIONS - - WE HAVE THE ANSWERS

  Today's post deals with the answers to questions everyone wants to know; the answers that have been keeping you up nights with anticipation!  What? The mortgage business isn't that exciting you say? You don't lose sleep over it?  When you are in the middle of the process you might lose sleep over it, at least I do from time to time. In any event, every once in awhile it is good to take a few minutes to answer questions that those of us in the industry take for granted without realizing that most people don't speak the language of mortgages during their waking hours.  So here we go:

1) What is the difference between the interest rate and APR?  I often have folks call and ask what our APR is.  What I think they really want to know is the interest rate, as that dictates the monthly payment, but they may have read somewhere that it is all about the APR and that is the number that is meaningful.  The truth is, it is meaningful but as a comparative number when stacking up the total cost of a loan. The interest rate is strictly the cost of the money that is borrowed for the loan.  The APR is a number based on a formula that takes into account some of the finance costs such as discount points, mortgage insurance and a few other fees and expresses the total as a percent annualized over 12 months.  The APR then can be used to compare various loan products against each other to determine the overall best deal. However, the key to this is to understand the products that are being compared.  If, for instance you are comparing three 5% down conventional mortgages at three different lenders you will obtain a fair comparison.  If however, one lender throws a different kind of loan in the mix-let's say an FHA mortgage that has a higher mortgage insurance cost, lower interest rate and down payment which results in a higher loan amount, you will obtain a higher APR-but it may be the best loan for your situation due to the fact that you only have 3.5% to put down rather than 5%. So the numbers show the most advantageous financial situation, but they may not show the best situation for you.

2) Now that you mention it...what are points? 

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Um, no, that isn't quite what I had in mind.

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Ah...no, that's not it either.  When I say "points" I am not speaking of score keeping or finger pointing. I am speaking of discount points, which is a fee you pay to reduce your interest rate.  Points are a percent of your mortgage amount. So today, if you wanted a rate of 3.65% rather than 3.75% on an FHA loan, you would be charged .100 points. If you were talking about a $95,000 loan, the cost of that would be $95.00.  I have had some folks think that if they pay 1% in points that would reduce their interest rate by 1%.  It doesn't work that way. Today on that same FHA loan, the 1% in points or $950.00 would take the interest rate down to 3.375%, so the decrease in rate for the $950.00 would be .375% reduction in rate.  Though that .375% reduction would actually save $7313.00 over the thirty years of the loan. So not a bad return for an investment of $950.00  Again, whether or not it makes sense to buy points is an individual decision based on how much money you have available, how long you intend to be in the house or whether you are receiving seller concessions or seller paid closing costs in your transaction.

Which brings me around to...

3) What exactly are closing costs?  Closing costs are the fees that are charged to bring the loan to a legal conclusion that results in transferring the property from one party to another plus the cost of processing the loan.  The fees that are most often referred to when someone speaks of closing costs are: discount points if any,  appraisal fee, credit report fee, underwriting fee, title company fees to under write a clear title, close the loan as well as provide the buyer a title insurance policy, various legal transfer fees, home owner's insurance, interest from the day of closing to the end of the month as well additional monies collected to set up the escrow account so taxes and insurance can be paid on behalf of the buyer in the future.  Depending on the type of loan, these costs can range from about $2500 to $3500.  It is always important to ask what the total closing costs are including title fees and escrows because lenders will often relay the lender fees only, which are only about half of the fees involved. Never ask "what are your closing costs?" That is a sure invitation to obtain only the lender specific fees. 

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4) Why is the payment the lender quoted me different than the payment I figured on the mortgage loan calculator I found online?  Every website you visit will have a mortgage calculator available.  You can punch in an interest rate and a loan amount to get a payment.  However, interest rates change daily, so the rate you used and the rate the bank is quoting may be different, and the bank may be putting 1/12th of the taxes and insurance, plus mortgage insurance into their quote.  The government loans also have an upfront mortgage insurance or funding fee factor that changes the loan amounts. For instance, FHA has a 3.5% down payment. So if you are purchasing a $100,000 home, what they refer to as your base loan will be $96,500 (Purchase price less 3.5% or $3500 for down payment) but then FHA has an upfront mortgage insurance factor of 1.75% which gets added back into the loan amount which equals a total loan of $98, 188.  You may be able to get a ball park figure from an online calculator but don't plan on that payment being your actual number.

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5) The rates are awesome When can I lock it in?  Do you have a property under contract?  That is the first criteria for a mortgage loan lock. There has to be an address to attach it to. Depending on the type of loan, you can lock anywhere from 15 days to 60 days, though typically a mortgage loan transaction takes about 30 days.  If you know that the seller can't be out of the property for 40 or 45 days you might choose a 45 day option.  There can be charges for extending a lock or relocking a loan so it is important to know exactly when the transaction should close.

6) How do I know what my home is worth?  If you are in the buying part of the process an appraisal is one of the items that will be required to satisfy the condition of your loan.  Most homes that are marketed through a Real Estate company have had a market analysis done by the listing agent prior to placing the home on the market. The agent will look at homes that have sold recently and are currently on the market and provide an opinion of value to the seller. A buyer's agent will do the same for you prior to writing an offer so you can feel comfortable with your offer. The appraisal will back up the purchase price in most cases. However, the lender will not close the loan if the home doesn't appraise for the sale price.  So the appraiser is the final word on value.  If you are a seller, you can use your agent's market analysis to get an idea of value or you can pay for an appraisal yourself, though it can't be used as a valuation for the buyer's mortgage loan and it is possible that another appraisal will result in a different valuation.  Appraisal isn't a science. It is subjective and the result depends on the comparable properties chosen.  A couple things to note are that the values you might find on some real estate web sites aren't necessarily accurate as they are based neighborhood averages.  The same can be surmised for the tax assessment value of your home.  The values done by the county assessor are based on a method called "trending" which again is an estimate based upon averages for geographic areas of our county. They may be spot on if the homes that have sold are all very close in size and area.  But they can be way off the mark too if older homes or older subdivisions are factored in.  The last thing to remember with property value is that it changes all the time so any valuation is a snapshot of what is happening in the neighborhood at a specific time. Once six months have elapsed the value may no longer be valid.

  So there are today's answers to most frequently asked questions. I will begin to compile a new list for another time.  It is interesting what people come up with, operators are standing by.

GETTING YOUR FEET WET

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     We all know that in recent years the housing market has been pretty soft.  Folks haven't had much extra income to throw around at new homes, some folks lost the homes they had, and a whole generation of new buyers has been very slow about dipping their toes into the real estate market and buying.  This generation is known as the Millenials.  The Millenials are the Americans born between 1980 and 1995- - those who have come of age in the past few years.  The story is that many, not being able to find a job when they graduated, went home and have been living in Mom's basement for the past five or ten years.

  The good news is that the job market is improving.  Most of the Millenials that I know have found jobs.  So the move out of the basement has begun.  In a typical year up to 46% of home buyers are first time home buyers- - right in the Millenial sweet spot.  But for the past several years the percentage of first time buyers has been low - -around 32-33%.

  But if the calls I have been receiving over the past couple of weeks are an indicator, that ship is beginning to right itself.  And the moment couldn't have come at a better time.  Interest rates will no doubt increase as we round the first of the year and head towards spring.  As the economy begins to pick up stream the Federal Reserve Bank has been kicking out the props that had been holding up the economy such as the treasury bond and mortgage bond buying programs that were keeping interest rates lower.  Obviously if interest rates go up it will affect buying power.  So it would not be out of the question to see a bit of a housing boomlette this winter, made up of people who want to get into the game while the rates are still low.

  Let's try this on for size: your lease is up in a couple of months and your landlord just announced that the rent was going up once again, so now, it seems might be a good time to buy a home.  You have a decent job a couple of grand in the bank, now's the time right?

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  Not so fast - - you have left out a big piece of the equation - - credit.  In my conversations with Millenials I am finding out that many, in fact most, haven't established much credit; often none.  While no credit isn't bad, it also won't help with obtaining mortgage financing. Let's think about that for a minute.  If you have no credit, there is no track record of how you pay your bills. (The cell phone family plan account isn't enough and unfortunately, after all the spasms and pain lending has just gone through, Mom vouching for your good character isn't enough either.)  A mortgage on a home is a fair chunk of change. Lenders want to have some kind of a record that you are good at paying back what you owe.
  
 If you are thinking about buying your first home you need to be thinking about having enough credit for a long enough period of time to compute a credit score.  If you have student loans, that's great - -you may have all the credit lines you need when they go into repayment.  However, this is important to remember:  student loans are federal debt.  If you get behind or default on federal debt you won't be able to get a home mortgage. If you were fortunate enough to get through school without student loans and have no credit you will need to establish some.  That is easier said than done - - it is sort of like job experience : You need experience to get a job, but you can't get experience unless you have a job.  So you need credit to get a mortgage, but you can't get credit unless you already have some. Capische?

  There are solutions for that (you knew there would be, right?) and they involve a bit of cash up front and or help from mom and dad.  Your rent, electric or other utility payments don't report on your credit report unless you are skipping them. Then they show up as collections-which isn't good. So while they hurt you if you don't pay them they don't do much for credit if you do.  What you need is at least two consumer credit lines on your credit report.  A consumer credit line consists of vehicle payments, credit cards, installment loans or bank loans.

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  If you have a goose egg on credit, it is because you have no consumer credit.  The first suggestion I would make is to ask a parent if they might allow you to be added to the card as an "owner" of  a couple of credit cards that they already are using.  Please note, I said owner.  Any child can piggy back onto a parent's credit card as an authorized user. That just means the child can use the card, but that isn't the same as owning the card and having a responsibility to pay the debt. If you are successfully added you do get the benefit of the payback history of your parent. If your parent doesn't like that idea or the card company still won't approve you, you can try applying for a credit card for one or two to places that you shop or buy gas. Use them to buy what you would buy anyway..  If you get the card, great. Using it sparingly, maybe once a month, wait for the bill, pay it off.  Rinse, lather, repeat.  It takes about six months or so to get three good scores which is what you need.  If you are declined for your first set of applications, which would not be unusual you may have to consider obtaining a secure card or two.  In that case you apply for credit, pay a fee, normally five or seven hundred dollars which is kept in reserve by the creditor and you are given a small balance that you use just as I have indicated above.  Whatever type of card you get it is important not to run up a high balance.  Credit card lenders are like any other lender in that they make money off of interest so running a balance is not discouraged.  Where that begins to hurt you is when your balance is approaching your credit limit. So keep all credit balances to one third of your limit and you will have maximum impact on credit.
 
  There is a second group of people who may be getting their second wind about now as well.  The foreclosure crisis hit people between the ages of 40-55 more than any other age group.  Time does its thing, and for those that lost their homes between 2008-2011, enough time has elapsed that most of those sheriff's deeds for foreclosure sales will have been long enough ago for these people to get back into the housing market. Remember-the time frame is three years from the date that the sheriff's deed transferred the home out of your name is the date that you are eligible for an FHA, VA or USDA loan.  It is highly advisable that you have re-established credit since that time.

  Remember, owning a home is the fastest way to net worth. You have to pay to live somewhere. Now may be the time to buy.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 







 





 

 

 

THE TRICKY ISSUE OF EMPLOYMENT

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  Whether you are a line worker at a chocolate factory or program computers from home, with a couple of exceptions, being employed is a requirement of  mortgage lending.  I know that sounds like plain old common sense, but I get questions, lots of questions about employment. I want to take a few minutes today to go into detail and answer some of the more frequent questions I hear about employment.

  To begin with - - the most basic component of this discussion, employment, is required to obtain a mortgage loan with these exceptions:

1) Retirement with retirement income

2) Social security or  disability income

3) investment income

  You will note the one thing these three have in common is an income stream and continuity. Lenders don't gamble on situations where the income stream may dry up a year or two down the road.
If you are someone who has a large amount of money saved or invested and aren't working, obtaining a mortgage through a mortgage lender is unlikely, unless your income is derived from your investments. There are investment companies that do offer secured mortgages based upon the investment portfolio, so if you are one of these folks, contact your financial advisor. I know that sounds unfair, particularly if you have enough money stashed away to buy the house four times over- - but if that is the case paying cash may be a good option.

  Okay, so all the rest of us who aren't independently wealthy need to have a job.  But that leaves quite a bit of room open for discussion as there are various types of employment - - full time, part time, seasonal, temporary, and self employment.  Let's examine each of these in turn to see what the requirements are:

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Full Time Work:  Full time work is considered the gold standard for mortgages.  Typically full time is defined as 35+ hours per week or a salaried position.

Part Time Work:  The number of hours you work on a part time job doesn't really matter as long as you have held that part time job for over two years. That is the only way the income can be counted.  It is the same with seasonal positions-such as snow removal.  There has to be a two year income history.

Temporary Work:  Since the Great Recession there has been a large uptick in temporary workers. Some of the positions are low paying, but many in our area fill vacancies for better paying employers such as Subaru, Wabash National, Caterpillar and others.  In fact, these jobs are often the gateway into these industrial companies.  Most lenders require two years work at a temporary job or company prior to allowing the income as the basis for a mortgage loan.  However one of the niche lenders we use only requires one year at a temp job before the borrower is eligible.  Good to know.

Self Employment:  There is a whole different set of rules for self employed people.  If you are self employed you will need to show two years of tax returns and a profit and loss statement for the current year showing a net profit.  The net profit is typically averaged to obtain the income.  Accountants often show lower profits for tax purposes.  Unfortunately what works for the IRS doesn't always work for lending.  The average of the net profit will have to show enough income to meet the debt ratio for the home purchase.  If you are self employed, have been taking losses, and think you want to do anything with regard to a mortgage loan, you will have to begin preparing two years out.

thisismoney.co.uk

  A couple of other situations also need to be addressed.  One is probationary periods.  Many jobs have a probationary period in which the employer can assess the employee's ability to perform the tasks for the job and has the leeway to terminate the worker should they not meet expectations during the probationary period.  For that reason, mortgage lending requires that all probationary periods for a new job be completed prior to final sign off on a mortgage loan.

  In addition, experience or length of time doing a particular type of work is also examined.  For those who wish to switch jobs prior to or while purchasing a home, it is best if the new position is similar to the old position in nature.  For instance, a person with retail sales experience might want to stay in the sales field rather than taking a job such as teaching that requires a completely different skill set. If that occurs the lender might require six months to a year on the new job.  However, a new graduate who had accepted their first teaching job would be eligible to obtain a mortgage after being on the job thirty days as they no doubt had education immediately prior to accepting the job which counts as experience.  So if you have a new job in your field of study in school, your education counts.

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If you want to obtain a mortgage, job hopping isn't the most convincing activity you could be engaged in, even if you are improving your economic circumstances.  I once closed a loan for someone who had 27 different jobs in a three year span- - that was back in the bad old days of mortgage lending, the Wild West where about anything went.  There is no way I could do that again in today's environment. So my best advice to you is if you really want a home, stick with a job for a period of time. It will be easier to get you approved. Lending likes stability.

  Job offers can be tricky as well.  To begin with, the job in question cannot be close ended. For instance many times positions at Universities or research laboratories are contingent on annual funding.  These days no lender will approve a mortgage that the offer letter states the position is subject for renewal on a yearly basis.  Three years is the standard.  A lender will not close a mortgage based on a job offer alone.  The borrower must be on the job, working and have completed all probationary periods and have received thirty days of paystubs prior to closing.

Last but not least are job gaps.  Job gaps must be documented.  What happened? Was the borrower laid off? Was there a maternity leave? Is the new position in the same line of work as the borrower held prior to the gap?

  Two years of job history will be under the microscope-this doesn't mean that you have to have been working for two years, but it does mean if your work history is for less, you will probably want at least 12 months on the job if you accepted your job after high school graduation. As I mentioned before, post high school education counts as job experience if you are working in your field.

This blog has gone into the basics of employment and how it is applicable to mortgage lending.  There are exceptions to every rule as well as different types of loans and different lenders may vary on employment requirements. However, since employment is an exceptionally important component of a successful loan application, an outline of standard requirements should be helpful.

BACK IN THE SADDLE AGAIN...

 

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  There is an old equestrian expression that relates to being thrown ignominiously from your horse and dumped unceremoniously in the dirt.  And that is you have to get right back up on the horse that threw you - - if you don't you will be afraid to ride again.

  Over the course of the last few years thousands of hard working, good people lost their homes to foreclosure or had to declare bankruptcy as a result of the Great Recession.  This situation created a huge disruption in the housing market and in the lives of many ordinary people who were going about their business try to support a family.  Now that economic conditions are improving I am beginning to see a trickle of folks who are inquiring about the possibility of becoming home owners once again.

  The good news is that mortgage loans are available for those who lost their homes in the housing crisis.  Fannie Mae and Freddie Mac now allow conventional mortgages to those whose foreclosure is four years in the past. And by four years, we are talking about the anniversary date of the sheriff's sale that removed the home owner's name from the deed, rather than the anniversary date of the foreclosure filing.  But FHA, VA and USDA have even better news-their requirement is three years from the date of the sheriff's sale.  The same rules apply for short sales.  With most of the unpleasant housing trauma beginning to recede in the rearview mirror, we are beginning to see some easing by lending so that consumers can once again re-enter the market.  And let's face it, if you have ever owned your own home, it is not likely you enjoy renting. But what about... the dreaded...

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 Credit is still a consideration, that is true. The main question being, besides your current credit score of course, has your credit recovered from the time of the foreclosure?

  Many people make the mistake of not opening any new credit once the worst of their financial situation has passed.  What lending does want to see is that you have been able to re-establish credit and use it responsibly.  This doesn't mean that you have to have opened six or eight credit card accounts.  A couple - - maybe three that have been opened for 12 months or more is ideal.  A couple of years ago that was a requirement along with a mid credit score of 640.  That is no longer the case if you are willing to use FHA or USDA or even VA to purchase your home. Conventional lending still requires significantly higher scores unless you have a large down payment-in which case you can find lenders who will go down to a 620 score. With government loans more than a few lenders are now accepting scores down to 580.  However, judgments must be paid.  Collections and charge-offs incurred in the previous 12 months are frowned up-but old ones may be overlooked.

  The moral to all this is that it is time to come out of the shadows.  It is quite possible that you are in a position to obtain mortgage financing again.  I would suggest however, that you obtain your pre-approval from a broker such as Tippecanoe Mortgage. A mortgage broker will have more lenders at their disposal with varying guidelines for the loans than a bank. If you should go to your bank and get turned down, don't take "NO" for an answer.  Visit your local broker to see if they have a lender that might be able to meet your needs.

  Home ownership is down.  Owning a home has always been one of the hallmarks of the American Dream. Get back on that horse and get going!

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