ADDING CO-BORROWERS TO A LOAN

                                                                              happyherald.com
  Today's topic concerns adding a co-borrower to a loan. It is a question that comes up fairly frequently, particularly when one party has credit that isn't good enough to qualify for a mortgage loan.

  There are a couple of types of co-borrowing situations. The most common is a husband and wife who are buying a home together.  Typically they are buying the home for a residence.  As long as credit, income and debt ratios are within scope this type of loan will be processed and approved as a matter of course.

  The questions I receive about co-borrowing are typically when someone attempts to qualify for mortgage financing and discovers one of two things:
1) His or her credit isn't good enough to qualify
2) His or her income isn't enough to qualify for what they wish to buy

                                                           gspitp.activerain.com
 I will tackle the second question first- and the decision that must be made has everything to do with the rules set forth by FHA and Fannie Mae.  Often parents wish to assist their children by co-signing for a mortgage loan-particularly if income or debt ratio is an issue.  In this scenario, we are assuming good credit on the part of both parties.  There are two options and the choice has to do with down payment.  Fannie Mae the overseer of conventional lending does not recognize a co-borrower that is not going to occupy a property. Therefore, if someone wants to use a conventional mortgage to purchase a property for their child the property is defined as an investment property-even if the child is living there, in title, and paying the mortgage on their own.  An investment property requires a minimum of 20% down payment.  Lending fees and or interest rates are higher for an investment property than a primary property as well.  So this may not be a palatable or feasible option.  (And if you are thinking you will say that both parties are living in the property when that is not the case-think again. Not telling the truth about occupancy is loan fraud, which is a federal offense and the penalties are severe.)

 That leaves us with the second option which is the FHA option.  FHA does have an exception for a non-occupying co-borrower.  So the student or under employed child is allowed to have a parent or relative that can co-sign on the loan with the minimal down payment of 3.5%.  Both incomes and debts will be computed into the debt ratio to determine affordability but this is a very common method of a parent helping a child obtain their first home. Both credit reports will reflect the mortgage so keep in mind that Johnny has to pay his mortgage or mom's credit rating will be affected too. If Johnny decides not to pay at all the lender will come looking for the co-borrower. The co-borrower owns the house just as much as the child does.

  Scenario number one is the one that I receive the most calls on.  Someone has poor credit but has a parent, friend, boyfriend etc. who is willing to co-sign.  First and foremost, let me say this- it is not a sound financial decision for someone with good credit to co-sign for a loan for anyone with poor credit. Sound harsh?  I am a big believer that past is prologue-which is not to say that someone may have a run of bad luck that affects their credit, and they will get the ship righted eventually.  But only too often, the person with poor credit goes down with the ship taking the good credit co-signer with them. Fortunately or unfortunately, depending on your point of view, lending uses the lower of the two borrower's credit scores to determine loan eligibility. So a borrower with an exceptional credit score is of no help to a borrower with an ineligible credit score. Ineligible carries the day.

  As I have often stated, the best thing that someone with low credit scores can do is, be patient, and work on the credit piece. Good credit is a habit.  We are always happy to give someone with credit question guidance on how to improve their scores.

TIME TO REDUCE THE TERM OF YOUR MORTGAGE

  How do you feel about paying on your mortgage until you are old as Methuselah?

 

                                                               poetryrapgenius.com

  Maybe you hadn't thought about it.  You have always been paying for where you live-first rent, then a house payment and if you bought your house pre-2008, you may have refinanced to get a lower rate while your kids went to college or took some cash out of the ole homestead to pay off some debt.  None of which is bad. That was then, this is now and things are looking up.  Employment is improving, homes are once again appreciating, and best of all interest rates are still low.

  So perhaps there is a reason to look more than a day ahead-let's say, look into that crystal ball-fifteen, twenty years into the future.

                                                                               pintrest.com


What do you see?  Sandy beaches and Pina Coladas?  

                                                               asia.com

Or may you were thinking you would prefer to travel the world...

                                                                        airlinestaff.com

 Or maybe just not having to make a mortgage payment floats your boat.

                                                                lazygamer.netI think I said boat...well...you get the idea.  Whatever you see yourself doing in fifteen or twenty years, it might be easier if your house was paid off.  This may require some sacrifice on your part.  A fifteen year payment is going to be higher than a thirty year payment-we are trying to cram the same amount of money into a smaller increment of time. Obviously, the debt ratios have to work and you have to feel comfortable that you can make the payment. Perhaps reducing to a twenty year payoff is more comfortable.  Let's work some numbers:

Let's say you owe $123,000 on your 30 year mortgage.  You have had your mortgage for five years-so you still have 25 years left to pay on it. Your interest rates is 4.75%. 
Interest left to pay: $109,740

Let's drop that mortgage to a fifteen year mortgage at 4.0%
Interest that will be paid over the life of the loan: $41, 429  YOWZA!

  That is $68,311 in savings-money back in your pocket.  The monthly payment will be right around $942 principal and interest-which is significantly higher than your 30 year loan which is at about $652.  But...if you have the extra $310 per month it makes good sense to keep your money and be free of house payments sooner.  Free to take up hang gliding in Belize.

                 

                                                                 untamedholidays.com

Or tap dancing in Poukipsee.

                                                                                             intrest.com


Whatever floats your boat.
 
 

 

IS IT TIME TO BUY?

                                                                              landlordsuccess.com
  

  That is what you might say when you receive notification from your landlord that your rent is going up.  Nationwide rents are projected to increase this year.  How much depends largely on where you live, but consider supply and demand. If you live where there are less rental properties you can be sure your rent will go up accordingly.  Anecdotally, I am aware of two situations in which the rent is increasing by $100 per month.  These two examples are in two different regions of the country-but in desirable communities. Over the past couple of years it may have been wise to rent-until the housing market began showing that there was once again appreciation and that it would remain relatively stable.  We are there.  Projections for appreciation in housing are at 4% as a national average.  Let's think about that for a minute. It is true that you have to pay to live somewhere.  But most people would rather pay to live somewhere that is making them money than somewhere that is making someone else money.

                                                                   barrielandlords.com

Really- we all need a break about now.  Let's put a pencil to it.  At current increases in appreciation and at current interest rates, someone purchasing a home this year will pay $9092 less in housing expense (including payments and maintenance) than a renter.  Speaking on a national scale a home owner has an average net worth of  $174,500 and a renter $5000.  To be sure those numbers encompass a wide range of economic circumstances-but it is true that the fastest way to accruing wealth in the USA is property ownership.

  For those 35 years old and younger owning a home will double their current net worth.

  For those with a high school diploma home ownership will triple their net worth.

    This is the time of year that many landlords are asking their renters to renew their leases.  Before you sign on the dotted line-ask yourself these questions:

1) Do I have a job that has stability?
2) Have I established a credit history?
3) Am I planning on remaining in the area for at least three to four years?
4) Do I have the ability to save money?
5) Am I willing to undertake the responsibility of taking care of my own property?

  If you can answer "yes" to the above questions chances are you are ready to buy.  But how will you know if it makes financial sense?

Let's do a little rent VS buy analysis:

Your rent = $750 per month - that would be $9000 per year
Your house payment at on a $100,000 home with an interest rate of 4.50% including taxes and insurance would be $675.98 or $8111.76 per year. (Obviously taxes and insurance vary from community to community but this is average for the local Lafayette, IN area)

The total interest that you pay on your loan for a year would be $4750 of which if you are in a 15% tax bracket would be a $712.00 tax deduction and if your property taxes are $75 per month they would total  $900 or a total of the two of $1612-which is what you could deduct from your taxes- so of that $8111.76 total you can subtract $1612 which makes owning a $100,000 home far less expensive than renting a $750 per month apartment. Keep in mind there will be costs that you might not accrue in a rental-plumbing, electric, lawn care-that's now on you-but in the end you will be paying less for a property that is increasing in value. 

  Before you sign that lease again-at least see what buying a home would entail. It is definitely worth it! 

THREE STAGES OF APPROVAL

                                                          screencrush.com
  I don't normally send these guys out to deliver notice of loan approvals, but that is what we are going to talk about today-the different stages of approval.

  In previous posts I have discussed the importance of visiting your lender prior to beginning your house hunt to ensure that you are looking in the right price range as well as able to actually become approved for a loan. (And I am not speaking to first time home buyers only-if you are a trade-up buyer, this is important to you too.) This makes good sense as you won't be wasting your time looking at homes you can't buy.  However, there are different types of approvals-3 in fact- and I want to go through the specifics of each one.

  The least invasive is the pre-qualification.  In this situation a borrower sits down with a lender and tells the lender how much income they make, what the debts are, and what they think the credit score is.  Based on the information that is relayed to the lender, information can be extrapolated on what can be purchased and what type of loan would be used.  This type of approval is in a word, worthless.  Even the most sophisticated borrower doesn't know all the rules regarding credit, income, loan programs and how debt ratios are regarded. It doesn't mean that what they tell the lender is necessarily wrong, but even if one of those items is inaccurate or a salient point is overlooked, the approval may be meaningless.  I once had a borrower that came to me convinced that she qualified for a loan that was income sensitive. There was a cap on how much she could make and still qualify for the loan.  She was sure she fit under the cap.  Which if her past two years income was all that was taken into account she would have.  However, in the case of this particular loan, the previous year's income as well as current year to date income was averaged together.  When that happened her income exceeded the limit.  Generally speaking I will not issue a pre-approval letter based upon this type of a conversation.  Which leads me to the next stage of approval:

    The pre-approval.   In this scenario credit is checked  and I normally ask for at least one pay stub with year to date income.  Depending on the situation I may ask for W2's or tax returns as well. I also ask questions about job time, down payment funds, as well as rental or current mortgage information. This way for the most part I am able to compute actual income, see actual debts and credit scores and know work history and how a borrower is paid.  As I have mentioned before-consumer credit reports pulled by the buyer do not necessarily mirror or reflect the credit scores that may be pulled by a mortgage credit report,so for pre-approval purposes a mortgage report must be viewed.  I will issue a pre-approval letter that is generic in nature-the borrower is pre-approved subject to: (and her lies the rub) all underwriting conditions, acceptable appraisal, clear title work, and final authorization by the investor. So my pre-approval does contain escape clauses. The reason for that is I haven't seen the documentation that the underwriter is going to see.  A pre-approval with little documentation still isn't iron clad by any stretch of the imagination.

  So what's next,  Batman?

                                                              screencrush.com Holy Caped Crusader-let's go for the real deal! A fully underwritten credit approval.

  Most lenders do not offer this-as it happens- we do.  And I fully recommend this approach to home buying. What I am talking about is filling out a loan application and submitting the application and all the documentation that is collected for loan approval and submitting it to the lender for underwriting.  Once approved all that is left to collect is the appraisal and the title work once a home is found and put under contract.  This is a powerful position to be in for the buyer-particularly at the height of the buying season when there are hot spots in particular neighborhoods and price ranges. Being fully credit approved means there is no guess work about whether or not someone will be approved for the loan. They are already approved. Approving the property is the only remaining item on the agenda.  This relieves a mountain of stress in an already stressful situation. Do yourself a favor if you are buying a home this year and turn your offer in to this:   

                                                                    businessinsider.comYou will be very glad you did.

ESCROW ACCOUNTS

                                                                   mattmbrown.com

  Let's cover a sexy topic today...your escrow account.  For folks new to home buying, an escrow account is a fund that the mortgage lender keeps to pay your insurance and taxes when they are due. The money for the fund comes from monthly mortgage payments as 1/12th of the buyer's taxes and insurance costs are added to the payment every month and deposited into the escrow account to be used as the bills come due.  Each year the accounts are adjusted up or down depending on changes in the taxes and home owner's insurance. If your mortgage loan has monthly mortgage insurance due to the fact that less than 20% is contributed in dwon payment funds that monthly amount will also be added to the payment and be placed in the escrow account to be paid out as mortgage insurance premiums come due.

  But wait, you say.  I am perfectly capable of paying my own taxes and insurance without the lender holding my money hostage until the time those bills are due.  If you are putting 20% down you will be able to waive having an escrow account.  In some cases with some lenders you can do that if you put 10% down.  However, an escrow account is the way that most people end up paying their taxes and insurance.

  Having an escrow account is not good or bad.  The good part is that when those bills are due the debts are paid and there is no big bill that you weren't anticipating that comes in at an inopportune time.  But you also don't have access to the money.

 But why do lenders even bother with the escrow account?  Why does it matter?  To answer that question we have to take a look at who has invested in your home.  You may have put 5% or 10% down on your home when you made your purchase. How much did your lender contribute? A couple of dollars more would be a safe guess.  What is important to the lender is that those two bills are paid on time.  Lenders don't want the insurance to lapse because it is their lien they are protecting. If your home burns down, the lender wants to be paid back.  As for property taxes, if they aren't paid, property taxes are one of the few liens that can move into first position to be paid over a lender's lien on title.  The lender is protecting their interest in the property by requiring the escrow account.
 
  By Federal Law an escrow account can't contain more than a three months cushion for upcoming bills. Because Indiana pays taxes a year in arrears, if a buyer buys a home that is new construction, the taxes that will be paid in the first year the homeowner owns the property are on the lot or land only. (Remember, the year before the house was built there was only ground-so that is what is taxed.) This is a significantly smaller amount than once it is assessed with the home on the land.  If the lender only escrows the taxes for the land, when the full taxes hit including the house, the escrow account will be not be able to cover the tax bill and the home owner will notified that they have to make up the shortfall in the escrow account. To prevent this, lenders often add an estimated tax payment rather than the payment for just the land so there won't be a huge financial shock to the borrower when the full tax bill comes due.  But because of the Federal Regulation regarding how much the lender can keep in the escrow account, often the escrow account exceeds its limits before the higher tax bill comes due. The excess money has to be refunded to the home owner-which if he/she is wise-they put away for the day when the property taxes are fully assessed because the escrow account won't have enough money to pay the taxes. Eventually the round robin of tax money is balanced out-but it is an interesting road getting there.

                                                                 taxrates.com

  If you decide to refinance your home, a new escrow account will be established with your new lender.  (The possible exception may be that if you refinance with the same lender your escrow account might transfer to the new loan, however with the servicing of so many loans being sold, the chances of your loan being with the same lender are probably not high.) About three weeks after you close on your new loan the contents of your current escrow account will be refunded to you.  This is the same if you sell your home and purchase a new one.  The payoff of the old loan is the trigger that results in the escrow refund.

POSITIVE CREDIT

                                                          cignafinancial.com

 These days it seems you can't get anywhere without good credit.  I am not sure about the entry requirements for Heaven, but I am sure of the entry requirements for mortgages.  Previously I have talked about negative credit, what can be done about negative credit, and the types of negative credit that can keep you out of the home ownership club.  Today I want to speak about positive credit, what it is, what lenders are looking for on a credit report and how to keep it that way.

  Positive credit isn't a credit report full of paid off and closed accounts.  We have already established that closed accounts don't do anything for your credit score.  What will burnish your credit score are open and active consumer credit lines. 

 Many people are confused about what actually reports on a credit report.  Your utility and rent payments do not make your credit report.  Student loans, personal loans from a bank or financial institution, mortgages, auto loans, and open credit cards are the items that report on the credit. The only time rent and utilities report is once they have gone bad and are reporting as judgments or collections-no one wants those items reporting that way.

   The other fact is that to maximize your credit you will need three of the above types of credit open and reporting for 12 months-and by reporting I mean reporting as on time payments. This doesn't mean that you can't obtain mortgage financing if you only have two open accounts-particularly if there are some old closed ones that reported on time on your credit history-but it makes it more difficult.  If you have less than three or they are newer accounts, rent payments become critical and you may have to back those up with cancelled checks.

   The type of credit that gives you the biggest bang for your buck is revolving credit-i.e. credit cards.  Let's say you have one credit card, your old standby, that has a lower interest rate, that you use frequently.  It has a three thousand dollar credit limit of which you have accessed $2500.  You make all your payments on time of course.  Your credit score will improve significantly if you add two more cards and spread that $2500 balance out among those cards.  Anytime a credit card is charged up close to the credit limit, even if the creditor will allow you to go over the limit, it hurts rather than helps. To get the best credit scoring keep your balances at 33% of your total credit limit.

  A variety of credit helps you as well. A student loan, two credit cards, an auto loan-mix it up for your scores to climb.

  Often consumer credit websites don't use the same computer models for scoring as a site used for scoring mortgages.  These consumer sites offer "educational" credit scores which may not go into the depth that mortgage websites use for scoring. This of course may encourage consumers to apply for products for which they are not qualified.  The Consumer Financial Protection Bureau has begun the complex task of looking at credit scoring models-there are 49 different possibilities-in order to try to make credit scoring more consistent and accurate.

  Another concern that I hear often is fear of having credit pulled too often.  There are different levels of too often.  If you have decided that you want to shop a number different companies for your mortgage loan, unless your credit is on the bubble of  qualifying, a couple of mortgage credit pulls shouldn't affect it other than a point or two. If however, you have decided to try to obtain a mortgage, buy a new car, and open several credit cards all within the same 90 day window-then your scores will suffer.  I would not advise having your credit pulled randomly, but if you go to a mortgage company or bank then decide to comparison shop, having another company pull your scores should not significantly hurt them.

  Since 2009 credit is king.  It is not only about your scores but what types of credit and length of time of reporting that makes the difference.  If  want to maximize your credit scores remember the following:

1) Use a minimum of three credit lines on a regular basis
2) Keep your credit balances to no more than 50% of the limit
3) Pay your bills on time. Once you pay 31 days late you will be reported as late
4) Student loans are Federal Debt-paying those late has a larger impact on scoring than paying a credit card
    late
5) Pay your rent on time-even though it doesn't report on credit most lenders ask for a rent verification as part of the lending process.  If your landlord reports even one late payment-it may not hurt your credit but it will kill your ability to be approved for a mortgage loan.

NEW MORTGAGE RULES AND WHAT THEY MEAN TO YOU

                                                        dsnews.com

 Youwsa! That got your attention doesn't it?  I would suppose that the average consumer doesn't keep up on the mortgage news, but if you are one who does, you may be aware of new mortgage rules that the Consumer Financial Protection Bureau has put in place effective today that put more controls on lenders and mortgage servicers.

  The new rules fall under a heading called Qualified Mortgages or QM.  The purpose of this new rule is to guard against the risky lending practices that collapsed the economy several years ago. This new rules have been tossed about as meaning that it is going to be more difficult for consumers to obtain mortgage financing. 
While it is true that it will be more difficult for lenders to offer products for people who may not qualify for loans such as FHA, VA, USDA and conventional loans-100% of the people I obtain mortgage financing for fit into one of those four loans.
 
 The rules state that the lender must show that the borrower has demonstrated an ability to repay the loan by obtaining proof of income from pay stubs, tax returns, or W2's.  Check that one off-that has been a requirement of the loans we have been closing since 2009.

                                                             www.accountingchaos.com

  The new rule requires that total debt ratio ( the percentage of consumer debt plus house payment) cannot exceed 43%-in loans other than the above four categories-FHA,VA.USDA, and conventional. The fine print says that if one uses one of those four loans nothing of consequence has changed. Often FHA loans are underwritten with debt ratios that exceed 43% if there are other compensating factors in the loan profile. In fact with FHA some lenders have lowered the minimum credit score required to qualify. 

  What the new rules ensure is that as the housing market recovers the same bad practices that blew it apart don't return. I think it is safe to say we will not see a rerun of no income/no asset loans or interest only products.  Balloon payments are a part of the past as are pre-payment penalties.

  Another important fact to note-these new rules do not affect down payments.  Down payments are the same as they have always been. ~0~ on USDA and VA, 3.5% on FHA, and 5% on conventional.

  The consumer should see no change in underwriting standards as they have existed for the past year or two. So don't let all the media chatter worry you-it's all good.