Finding That Down Payment-Did You Turn Over the Couch Cushions?

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As we begin 2016 I, like many of you am curious about what this year holds for interest rates and the housing market. Depending on which prognosticator you read, interest rates will either go up, or they will stay the same. (Why didn't I think of saying that? I could be making the big bucks like those guys.) Anyway, I take that to mean it's anyone's guess. However, one thing that I did glean from the paid seers, is that one issue that remains is the decrease in first time home buyers.

Back in the days of the housing boom, first time home buyers made up a little over 40% of the home buying market. Last year's first time home buyers came in nationally at a bit over 30%. Various reasons have been cited for this change - student loan debt, slow economic recovery, more new buyers living at home. All are probably valid points, but the one thing that all the experts seem to agree on is the inability of potential first time home buyers to obtain down payment funds.

There is good news on this front. It is not new news, but many people still aren't up to speed on he subject. There are two mortgage loans that do not require a down payment: VA and USDA. These two loans do not work for everyone-obviously if you have never served in the military you aren't VA eligible and USDA has income and geographic limitations. Yet there are other possibilities that don't require a King's Ransom as a down payment.

In Indiana, the Indiana Bond program offered by The Indiana Housing and Community Development Authority offers down payment assistance for qualified FHA buyers. This may be an excellent choice for those who need down payment assistance and qualify credit wise as well as income wise.

There are also some excellent low down payment choices. FHA has a 3.5% down payment requirement. The 3.5% can be a gift from a family member if the borrower doesn't have the funds for down payment. FHA also allows non occupying co-borrowers if for any reason the borrower's income isn't enough to qualify to purchase a home. In the case of a co-borrower both the borrower and co-borrower must qualify for the loan credit wise. I have had several questions lately about borrowers who want to use a co-borrower because their own credit isn't enough to qualify-in all cases if one has a co-borrower both borrowers must have eligible credit.
Conventional lending also has a 3% down mortgage that is available for borrowers who qualify conventionally. Down payment can be a gift in this case as well.

So depending on what a first time home buyer wishes to buy (or a second or third time buyer for that matter) there are options that shouldn't break the bank. Don't assume that you can't buy a home because you don't have 20% to put down. This is something that every renter should consider if they intend to be in a specific geographic area for any length of time.

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Let's begin the new year right with a word about regulation. I know-what a bore. But I think a short discussion of Federal Regulation on lending might be instructive. The National Association of Realtors projects 2016 as the best year for real estate since 2006. Many folks will be new to the market and many will be re-entering a market that is light years different than when they originally bought their homes and obtained mortgage financing.

One might argue that regulations gum up the works, and they certainly can slow things down, that's for sure. However, given the recent recession that was in a large part caused by an over inflated real estate market and the selling of fraudulent mortgage bonds, I would have to say as much as regulations make the process more difficult, they were needed.

So how do these federal requirements affect you, the consumer? Let's begin with the Patriot Act. While on the surface of it, that doesn't look like a law that would affect mortgage lending, it affects banking, specifically deposits. The Patriot Act requires that when a consumer is engaged in any activity that involves the Federal Banking system - which includes mortgages -that all large deposits are sourced. In other words, the origination of the deposit has to be documented. What is considered a "large" deposit? The Federal government has left it up to individual lenders to define a large deposit. I have seen lenders that cite any deposit over $99 as a "large" or in the case of our company that uses 50% of the borrower's gross monthly income which is much more generous. So while tracking down that $5000 gift Granny gave you for Christmas may seem like a hassle, we aren't doing it because we are trying to make your life more complicated - we are doing it because we have to. (This act also covers money laundering and lending fraud as well as is a monitor of terrorist activities.)

Then there are the Qualifying Mortgage Regulations that came into play a couple years ago. This set of regulations determine the rules we have to use to be sure mortgages meet a certain set of guidelines with the borrower's ability to pay back the mortgage. Those rules also determine how much we can charge to do the mortgage which in turn determines how big a mortgage we can do. (This is why it is very difficult to find anyone who can work with you on a $30,000 or $35,000 mortgage-we can't close it without breaking federal law on the amount we can make on a mortgage-basic fees put us in non compliant situation.)

The Dodd/Frank Financial Reform Act establishes how we disclose fees to our clients with strict timelines on when these fees must be expressed. This year's TRID (or TILA-RESPA Integrated Disclosure) further refined Dodd/Frank and sets wating periods prior to closing once the final closing disclosure has been delivered to the borrower. Dodd/Frank also set out requirements for how appraisal are handled - the requirements being that the information and appraisals be managed by third party companies in order to remove lending influences on appraisers.

The TRID waiting period has been one that most consumers have difficulty understanding. The idea is to allow borrowers to see the final fees with enough time to question them prior to closing without feeling pressured to close. In reality many buyers want to dispense with the waiting period and get to the closing table and get the keys to the new house. This is a case of the Federal Government protecting people who may not think they need protection.

Whether you like the idea or not, the role of your lender is to work as efficiently as they can to get you to the table as soon as they can within the law. Some things just are what they are, and it is better not to try to fight it. For every day that a borrower delays getting information to a lender that the lender needs to close a loan within the permeters of federal law , the borrower is only getting in the way of closing as quickly as possible. While none of us may care for having the process tinkered with, none of us is going to find a way around law either, so we might as well work with it to achieve a good result for all our buyers and sellers.

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The countdown has begun until the end of 2015, but there are a couple of things going on with regard to your mortgage. The most important of these for Indiana residents if you purchased a home or refinanced a home in 2015 is to call your county auditor's office and check to be sure that any new property tax exemptions that need to be filed by December 31st are recorded. If you refinanced, the homestead will still be in place, but there is also a mortgage exemption that has to be recorded if you changed lenders.

The second thing you want to be looking for (actually at some point in January) is the 1099 form for the interest paid on your mortgage loan. When you get it put it in your tax prep file so you can be sure to take advantage of the tax deduction.

Similarly, if you paid points on a purchase or refinance or any pre-paid interest, you will want to dig out your closing statement. These items are tax deductible as well. There may be some other fees that you are allowed to deduct but I will defer to any accountants in the crowd for that advice.

The third item you will want to keep an eye open for is your escrow account reconciliation. Typically most lenders reconcile escrow accounts towards the end of the year. This will tell you when your home owner's insurance, mortgage insurance, and property taxes are paid out. In the case of mortgage insurance you will need the total paid out, because in 2015 a portion of your mortgage insurance may be tax deductible as well as the interest you paid on your loan.

And here you thought you were done with the paper work required for buying a house. True, there is more to do towards the end of the year, but it will pay for itself in tax savings.

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.