An interesting thread is happening on Zillow Advice as a result of a question posed by Peter888:

Am I entitled the learn the reasons why my mortgage application was turned down?

From Corona, CA comes a question posed by Curlyhead in Zillow Advice:

What would I need to qualify to get a second loan for an investment home?

Some lenders have chimed in with their views, as well as agents. Thoughts?

I recently was asked this question and thought it would be a good blog post.

The technical answer is yes, however you need to be careful if you decide to fire your contractor. 

1st and foremost the contractor you are firing will need to be made whole.  They will need to be paid in full for the work they have completed.  The tricky part is they will have to agree with you that they are being paid in full.

You will have to work with your lender to get the new contractor approved.  You will need to get a homeowner/contractor agreement, W9 and License if required by the state.  If you do not have enough funds remaining in the escrow account to pay the new contractor and keep the original contractor whole, you will need to have additional funds available to complete the project.

It can be done, you just don’t want to do it on a whim!

In Part III of this three part series on Adjustable Rate Mortgages (see Adjustable Rate Mortgages Part I and Adjustable Rate Mortgages, Part II), I will discuss how to calculate the fully indexed rate, which is the new rate of your ARM when it adjusts. Once the initial fixed period of the ARM expires, the mortgage calculates a new interest rate by adding the index of a mortgage to the margin. I will discuss details of both the index and margin in a bit, but let’s remember that this new rate cannot exceed the caps of the ARM, which were discussed in Part II.

To calculate the new interest rate of an ARM, you simply add two variables together and round up to the nearest .125% interest rate.  These two variables are the loan’s index and margin. 

MARGIN

The Margin is a fixed number determined at the beginning of the loan.  This figure never changes.  For example, most conventional Fannie Mae and Freddie Mac ARM’s use a margin of 2.25%.  On FHA and VA ARM’s, the margin usually ranges from 1.75%-2.25%.

INDEX

The index is a market rate that adjusts to market conditions.  The value of an index may not change for months or it can change every day depending on the nature of the index.  Researching the history of each index will help you understand the risk associated with a particular ARM.  Here is a list of the common indexes used for Adjustable Rate Mortgages

6-Month LIBOR (London Inter-Bank Offered Rate)

This index isn’t used as often anymore.  The 6-month LIBOR was a popular index used for many conventional/subprime mortgages.  It may still be used today but isn’t as common as other indexes.

1-year LIBOR

The 1-year LIBOR is the most popular index used today for conventional mortgages.  Most Fannie Mae and Freddie Mac mortgages use the 1-year LIBOR as the index.  The 1-year LIBOR is also used for FHA and VA ARM’s at times.

1-year CMT (Constant Maturity Treasury)

The 1-year CMT is an index primarily used for government backed ARM’s like FHA or VA ARM’s.  Since FHA and VA use both the 1-year CMT and the 1-year LIBOR, it’s important to evaluate which index is associated with every loan FHA or VA loan quote you receive.

Prime Rate

The US Prime Rate is directly affected by the Fed Funds rate you may see mentioned in news articles.  It is the only index that moves exactly to the amount the Fed Funds Rate.  The Prime Rate is always 3% higher than the Fed Funds Rate.   At the time of this posting, the Fed Funds Rate is currently at .25% and the US Prime Rate is at 3.25% respectively.  This index is most commonly used for Home Equity Lines of Credit and some adjustable rate credit cards.

HOW DIFFERENT TWO ADJUSTABLE RATE LOANS CAN BE

Studying the fixed rate period, caps, margin and index of an ARM will help you better understand the total risk associated with a particular adjustable rate loan.  To best illustrate the risk factors of adjustable rate mortgages, I will give an example of two mortgages (Mortgage A and Mortgage B). They appear similar at first glance but are very different after a closer look.

Mortgage A- This is what lenders called a traditional sub-prime adjustable rate loan.  Here are the details:

5.5% initial rate

2 year fixed initial period/ adjusts every 6 months after

6-month LIBOR Index

5/2/5 Caps

5% margin

Mortgage B- This is a traditional FHA 3/1 ARM.  Here are the details:

5.5% initial rate

3- year fixed initial period/ adjusts every 12 months after

1-year CMT Index

1/1/5 cap’s

1.75% margin

At first glance, you will notice the initial interest rates are the same.  Mortgage A is scheduled to be fixed for 2 years vs. 3 years for Mortgage B.  Already B is looking a little safer since the rate will not adjust for a full year after Mortgage A. However, the real difference takes place when we compare the caps, margin and index.

Let’s Compare Them

In Mortgage A, the value of the 6-month LIBOR is 4.5963% in January 2008.  To calculate the new rate, we will add this figure to the margin of 5%. 

4.5963% + 5% = 9.5963%

We then round up to the nearest .125%, which is 9.625%.  If your adjustable rate loan was similar to Mortgage A and was set to first adjust on January 2008, the above figures would apply to you.

The initial interest rate adjustment is 5%, which means we cannot exceed 5% above the initial rate.  Below is our cap rate

5.5% (initial rate) + 5% (Initial cap)= 10.5%

This means our “Fully Indexed” rate is less than the cap rate.  In this scenario, your new rate would be 9.625%

Let’s do a similar scenario using Mortgage B.  In January of 2008, the 1-year CMT was at 2.71%.  To calculate the new rate, we will add this figure to the margin of 1.75%.

2.71% + 1.75% = 4.46%

Like Mortgage A, we will round up to the nearest .125% which is 4.5%.  If your adjustable rate loan was like Mortgage B, then this new rate would apply to you.

For Mortgage B, the Initial cap is 1%.  This keeps the rate from moving more than 1%.  If the Index were higher, your max rate on the first adjustment would be the following:

5.5% (initial rate) + 1% (Initial cap) = 6.5%

As you can see, Mortgage B is substantially safer than Mortgage A.  The rate is fixed one year longer than Mortgage A. If Mortgage B were to adjust the same time as Mortgage A the rate would’ve gone down 1% versus going up 4.125%.  In the scenario that both indexes were high enough for each loan to reach the cap rate for the initial adjustment, the increase for Mortgage B is only 1% vs 5% for Mortgage A.

Conclusion

Deciding if an Adjustable Rate Loan is right for you should only be done after you’ve evaluated all of the coherent risks associated with each available mortgage.  I hope this three part series was educational.  You can also read more from a book published by the Federal Reserve titled the “Consumer’s Handbook on Adjustable Rate Mortgages” (called the CHARM booklet for short).

Link to Understanding Adjustable Rate Mortgages Part I

Link to Understanding Adjustable Rate Mortgages Part II

It’s easy to get pulled in by skillful pitches from people in the “loan rescue” business. They promise quick and easy solutions to borrowers who are having trouble keeping up with their mortgage payments or whose home value is now below what they owe on their mortgage. The only thing these “rescuers” need from you is some money up front. DO NOT PAY THEM A CENT! Some outfits just take your money and disappear. Even those who may help you with the process are simply providing services you can get for FREE from others, such as FICO and its partner organizations. You can contact us by visiting: http://www.myFICO.com. And I’ll repeat: there is NO CHARGE EVER for the help you’ll get there.

Incidentally, the Federal government is considering making it ILLEGAL to charge upfront for loan rescue services. Nearly two dozen states have already passed laws that prohibit upfront fees.

Now a word about “credit repair” companies. I’ve been asked about these since my last two blog postings on How to Boost Your Credit Score. As those posts stated, there are NO QUICK FIXES to a credit score. So don’t be fooled into using a “credit repair” service. Credit counseling, however, is available at no cost from organizations like our partner, the nonprofit Homeownership Preservation Foundation. You can get in touch with them here: https://www.mortgagereliefonline.com/About_Us.aspx.

By the way, even correcting an error in your credit report can take a month or two to cycle through the system and up your score. But you can get that report for free and easily check it yourself. Find out how to do this (for no charge) at http://www.myfico.com/crediteducation/questions/free-credit-report.aspx.

Well the results of the FHA audit are in and they’re NOT good.

A while back I wrote a blog regarding the dire matter at hand explaining how FHA works and what to expect in the near future.

Well, after the audit, FHA’s current Capital Reserve came back at 0.53% when in fact they are SUPPOSED to be at 2% as mandated by Congress. This money (kind of like an emergency fund if you will) is used to cover “anticipated losses” for the near future.

The Federal House of Administration also holds what is called a Financing Account. Now THIS is used to cover “Actual Losses”.

At the moment, both of these accounts hold about $31 billion, or about 4.5% of the Congressionally mandated 2%.

So what does all this jargon mean and is it good or bad?

Well, both.

Its bad because if Congress MANDATES you to hold a minimum amount in your “savings account”, and you don’t, it is jeopardizing the integrity of the actual program itself. What makes you think that you don’t have to follow the order from above and what kind of image does this portray to the general public? If a government agency isn’t following the rules, why should YOU?

The rule is put into place for a reason. A Senator didn’t just finish his brisk run in the park, go to his morning “secret handshake tutorial”, then walk into HUD and say, “Ya, Peter, let’s go ahead and make the reserve requirement 2% today. I’m feeling FRIS-KAY!”

There’s a REASON the Mafia fell apart folks- because they didn’t follow the rules!

What’s next? TPS reports?

On the other hand (and it’s not that big of a hand), between FHA’s Reserve AND Financing Account, they do have enough money to meet the 2% requirement. I guess somehow this is OK and puts everyone’s mind to rest.

Now, what happens when THAT fund diminishes? Is another “Account” going to pop-up when “FHA hits the fan” to smooth over Congress’s approval?

Yes, its good that they HAVE money, but I don’t believe it should be used as an excuse. It’s exactly like maxing out a credit card. “Oh Bruce, don’t worry, we have ANOTHER ONE!”

Tommy’s 2 Cents:

The point of all this to demonstrate that measures need to be taken NOW to ensure that FHA’s Reserve requirement is met. I understand that this account is for “anticipated losses” and there is money somewhere for actual losses, however the rule needs to be followed or else we are all putting in danger a program that has saved EVERYONE’S butts, as it was originally intended to do so. I certainly do not want to be part of the crowd that overlooked this and said, “Oh, it’ll be fine. They have money.” We have overlooked A LOT of things in the past 5 years, and I for one do not want to see another bust.

Please join me in welcoming Colin Robertson as the newest contributor on Mortgages Unzipped.

Colin began his career in the mortgage industry as a loan originator for a wholesale mortgage lender and has since created a number of blogs based on his experience.  His first blog, The Truth About Mortgage, focuses on the consumer home loan process and provides industry-specific news, while The Truth About Credit Cards provides tips and tricks to ensure homeowners have pristine credit when applying for that all-important mortgage.  In his spare time, he enjoys music production, cooking, travel, cycling, and photography.

We look forward to reading your future posts, Colin!

If you’re working with your bank to do a loan modification, be aware the bank might also have your home on a parallel path to foreclosure.

That’s what happened to an Arizona couple who thought their trial loan modification with Chase was approved and they were safe. They were making their payments on time and thought the worse was over — that is, until a foreclosure notice was slapped their front door and the fun began.

Chase says it was their fault and will work with both sides to remedy the situation.

Bottom line: If you are undergoing a loan modification, make sure the bank is not selling your home as a foreclosure, too.

You don’t have to be a first time homeowner to receive the new tax credit.  Great news for everyone looking to purchase a home now! 

• First Time Homeowners can now receive the $8,000 tax credit up until April 30, 2010
• Current Homeowners can qualify now for up to $6,500 tax credit up until April 30, 2010

This is a gift for all wishing to purchase a new or existing home - it doesn’t have to be repaid back.  So for those who are sitting on the fence…no need to wait now!  Prices are low and rates are great!

The $8000 tax credit for first-time home buyers has been extended through April 30, 2010.  It was previously due to expire November 30, 2009.  Not only has it been extended, but it has also been expanded to include more buyers.

Details

• The $8000 tax credit for first-time homebuyers is extended for those who sign a contract by April 30, 2010 and close by June 30, 2010.
• Homebuyers who have lived in their current residence at least five years are now eligible for a new $6500 tax credit on their primary residence.
• Couples earning as much as $225,000 a year and individuals earning up to $125,000 qualify.  This is an increase from $75,000 for individuals and $150,000 for couples.
• Tax credit is limited to homes worth $800,000 or less.
• Those who sell their new home or stop using it as their main residence within three years would have to repay the credit.
• Members of the military who have served outside the U.S. for at least 90 days from Jan. 1, 2009, to May 1, 2010, have an extended deadline of April 30, 2011.

How to get the credit

• Buyers can claim the credit on their federal income tax returns. If the credit exceeds their tax bill, the government will issue a payment.
• Those who want immediate refunds can amend their tax returns for 2008 to claim the credit.

Added bonus

Mortgage rates are at historically-low levels.  Combined with the tax credit, now is a great time to secure a super-low rate on a purchase loan.  Find out what rate you qualify for…anonymously…on Zillow Mortgage Marketplace.