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If you haven’t heard, FHA announced on February 14th that it is raising the annual mortgage insurance premiums, also known as the FHA monthly mortgage insurance. These changes are mentioned in Mortgagee Letter 11-10 and become effective on or after April 18th, 2011. The new change is 25 bps more.

I have already heard that some of you think this will hurt the housing market and our economic recovery. Why the changes? HUD wants to strengthen the FHA’s Mutual Mortgage Insurance Fund, known as the MMIF. Think about it this way. If FHA doesn’t become pro-active now and FHA disappears in the future, then where do you think we would be regarding financing options. 

Keep in mind that Fannie Mae has a pricing change that goes into effect on April 1st, 2011.  Pricing Hikes for Conventional Loans in April 2011  That many lenders and investors have already made this change to their pricing.  Also, there is no change to the Upfront Mortgage Insurance Premium of 1 percent for FHA loans, just the monthly premiums have been changed.

Old verse New Monthly Mortgage Insurance Changes

This chart is from Mortgagee Letter 11-10 – Annual Mortgage Insurance Premium Changes -

As you can see by the red arrow, indicating that this goes into effect on April 18th, not April 4th.  So what does this all mean to those refinancing or buying new homes with a FHA mortgage?

This is based on a $250,000 sales price and the end result is that it would cost the buyer $50.26 more in their total monthly mortgage payment. You can also look at it from the flip side when qualifying buyers. This could lower the new buyers purchasing power by about $9,000. Meaning, instead of the $250,000 purchase price in the example, they can now afford a $241,000 home.

This new change is for your primary 1 to 4 unit properties. This change does not affect Title 1 loans, the HECM loan (reverse mortgages – which I am writing about tomorrow), the HOPE loan, and a few other types of FHA loans. This can also be found in the new FHA mortgagee letter 11-10.

There are also new changes to how one would have to request a FHA case number, cancellations of FHA case numbers, and a few other issues. These changes can also be found in the new FHA mortgagee letter 11-10.

Here is a quick breakdown of different purchase prices just to give you an idea how much more your mortgage payment will increase because of the new FHA monthly mortgage insurance change. In simple math, your mortgage payment will go up $10 per month for every $50,000.

New Conventional mortgage changes on the horizon for 2011. In most cases, conventional loans will become more expensive come April 1st, 2011.  There will be pricing adjustments in the form of points and not to the rate. Now, the interest rates could actually change if the pricing hits are incorporated into the interest rates. It just depends on which avenue you take, pay the extra costs upfront or take a higher interest rate.

These new pricing changes have to do with the borrower’s credit scores and the percentage of the down payment. The new pricing hits will be any where from 25 bps to 50 bps. This means on a $200,000 loan amount, it could cost you an additional $500 to $1,000 or the interest rate could increase any where from 1/8 to 1/4 percent in interest rate. This is all dependent on the actual spread between the interest rates.

Chart – The chart below goes into effect on April 1st, 2011. (Click To Enlarge)

Link to the Chart and more information  - Keep in mind, there are some loan officers that were making FHA loans sound more expensive after the new mortgage insurance changes in October of 2010.  Even before these pricing changes take place in 2011, in many cases, FHA loans are cheaper. I do many comparisons between FHA loans and conventional loans. What one needs to understand are the borrowers future goals, their credit scores, and their down payment. All of this needs to be taken into consideration to properly make the right decision and not based on what others blurt out. In many cases, if you are putting down less than 10 percent and have credit scores under 680, FHA loans are usually cheaper all the way around.  Some of this has to do with the increase in private mortgage insurance, PMI, when it comes to the credit scores. Many PMI companies won’t do less than 10 percent down if the borrowers credit score is below 680. These are all factors that aren’t usually talked about.  This is where you need to speak to a qualified loan officer that understands all of the differences.  So when shopping for mortgages, the borrower shouldn’t always be concerned about the best interest rate, but hoping that they are working with an upfront and competent loan officer that will actually close the loan and not on false promises.

If you are some sort of Veteran, VA loans can be an excellent way to purchase your new home.  What is great is that if you are buying a home that could be upgraded in regards to energy savers, you can certainly do this with your VA loan. It is called a VA energy efficient mortgages. Congress started a pilot program in 1992 demonstrating the use of energy efficient mortgages, known as EEM’s. And the Veterans Administration added this to their arsenal of VA loans.

Energy efficient loans can be very effective, unless you are having an energy efficient home built.  If you have an older home, it probably won’t be up to current standards, which could cost you hundreds of dollars monthly.

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Explaining how Energy Efficient Mortgages work for VA loans?

On Va loans, it can be increased up to $6,000 in energy costs without the approval by the VA, as long as the lender thinks the improvements are reasonable. If the costs are over $6,000, it must be supported by an increased valuation in an equal amount.  Here are the different levels of increases.

Directly from the VA handbook, the mortgage may be increased :

• up to $3,000 based solely on the documented costs
• up to $6,000 provided the increase in monthly mortgage payment does not exceed the likely reduction in monthly utility costs, or
• more than $6,000 subject to a value determination by the VA.

The buyer may wish to contact a person or a firm to show such energy improvements. As I mentioned in my FHA post, you can also contact your local utility company for these services.

Acceptable energy efficient improvements, but are not limited to :

• solar heating and cooling systems
• caulking and weather stripping
• furnace efficiency modifications limited to replacing burners, boilers, or furnaces designed to reduce the firing rate or to achieve a reduction in the amount of fuel consumed as a result of increased combustion efficiency, devices for modifying flue openings which will increase the efficiency of the heating system, and electrical or mechanical furnace ignition systems which replace standing gas pilot lights
• clock thermostats
• new or additional ceiling, attic, wall and floor insulation
• water heater insulation
• storm windows and or doors, including thermal windows and or doors
• heat pumps
• vapor barriers

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Reminder : There are special and certain tax credits both nationally and locally. For tax purposes, there is a $1,500 tax credit until the end of the year. Not sure if the government is going to extend this. There are also state credits and sometimes credits given by your utility companies. Just be careful though, because sometimes you have to use those they recommend when doing the energy inspection report.

Keep in mind, the VA energy efficient loans are a little different than FHA energy efficient loans when calculating what the amount of energy costs that are allowed to be financed. And these EEM’s for VA loans can be used for both purchasing a new home or refinancing your current home.

Please consult Part 1 for the chart, giving you an idea of your monthly savings if you add $6,000 of costs onto your mortgage regarding the energy efficient mortgages.

Energy Efficient Mortgage Series

Energy Efficient Mortgages – EEM loans – Part 1 of 2 – FHA loans going ‘Green’

Energy Efficient Mortgages – EEM loans – Part 2 of 2 – VA loans going ‘Green’

Energy Efficient Mortgages have not been used or talked about much, because many loan officers and or lenders don’t know much about them. One could easily associate this type of mortgage with a FHA 203-k loan. But that would be a very bad assumption, because there isn’t much more to an energy efficient mortgage, than to a regular FHA mortgage, as opposed to the paperwork and understanding that goes into a 203-k loan.

Saving money monthly is the key to any mortgage program, especially when it comes to an Energy Efficient Mortgage, also known as EEM loans.  Unless you are having a new home built that could be an energy efficient home, in many cases, the older home probably won’t be up to the current standards, which could cost you hundreds of dollars monthly.

Quick history about EEM’s -  Congress started a pilot program in 1992 demonstrating the use of energy efficient mortgages, known as EEM’s. (Energy Efficient Mortgages) EEM’s recognize that reducing utility expenses will allow a homeowner to pay a higher mortgage payment to cover the cost of the energy improvements that were financed into the mortgage. A good reason behind the EEM’s program is that it offers homeowners who couldn’t initially afford the cost of these energy saving improvements out of pocket, giving them the chance to finance them. These loans can be both done when purchasing a new home or when refinancing. FHA has adopted this into their financing options which allows a borrower to :

• save money monthly
• incorporate the improvement costs into the mortgage
• these improvements are installed after the loan closes
• this program allows you to use normal FHA guidelines with FHA mortgages

How does the Energy Efficient Mortgage program work?

The maximum amount of the portion of the EEM for energy improvements is the lesser of 5% of:

• the value of the property
• 115% of the median area price of a single family dwelling
• 150% of the conforming Freddie Mac limit.

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Eligibility Requirements

• Properties that are eligible are One to Four unit existing and new construction properties.
• Borrowers are approved through the normal FHA mortgage guidelines for obtaining a mortgage.
• The cost of the energy-efficient improvements that may be eligible for financing into the mortgage is the lesser of 5 percent of the property’s value, depending on 3 different equations. Please refer to these changes above.
• To be eligible for this mortgage, the energy efficient-improvements must be cost effective, meaning that the total cost of improvements is less than the total present value of the energy saved.
• The cost of the energy improvements and the energy savings must be determined by a home energy rating report which is done by a home energy rating system (HERS) or energy consultant. The HERS report usually costs from $250 to $350 and can be paid by the seller, the buyer, or sometimes included into the mortgage.
• The energy improvements are installed after the loan closes. The money is placed into an escrow account and is released once an inspection verifies the improvements are completed and that the savings will be achieved.
• Because of this program, the final loan amount can exceed the maximum mortgage limit by the amount of the energy-efficient improvements. Here is a list of the FHA max mortgage limits.

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EXAMPLE :

***I am not using a particular credit score and all closing costs are the same for either loan example.***

As you can see, it’s not a huge savings, but it does add up. Just in 1 year you saved $1,135.20. And the cost of the energy improvements that were added onto your mortgage now become a tax write-off.

**** My examples in the cost of improvements and your monthly bills, will vary depending on several different factors, such as age of air conditioner or heating, lighting fixtures, etc, etc. And also depending on what you pay per month. I only used these figures as examples.****

Reminder : There are special and certain tax credits both nationally and locally. For tax purposes, there is a $1,500 tax credit until the end of the year. Not sure if the government is going to extend this. There are also state credits and sometimes credits given by your utility companies. Just be careful though, because sometimes you have to use those they recommend when doing the energy inspection report.

Here is a link to a list of the past mortgagee letters for everything about Energy Efficient Mortgages.  FHA Energy Efficient Mortgages – Mortgagee Letters

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Energy Efficient Mortgage Series

Energy Efficient Mortgages – EEM loans – Part 1 of 2 – FHA loans going ‘Green’

Energy Efficient Mortgages – EEM loans – Part 2 of 2 – VA loans going ‘Green’

Why would someone have two FHA loans at the same time? Here are the reasons and the exceptions that may allow someone to have 2 concurrent FHA Loans.

• Increase in family size – There must be an increase in family size in which their current house can’t support the new family member(s). You will have to prove the increase. Also, you must have 25 percent equity in your current home or pay it down to 75% LTV (loan-to-value).  An FHA approved appraiser must be used to determine such new value.
• Relocation – If the borrower is relocating and it is established that they aren’t in reasonable distance from their current property. Keeping in mind that reasonable can be defined differently from any lender.

Note – If that borrower(s) returns back to the same area, they are not required to re-establish residency in that property in order to have another FHA insured mortgage.

• Vacating a jointly owned property – A borrower my leave a property and be eligible for another FHA loan if the co-borrower is to stay in the same property that is being vacated.

A good example of this is because of a divorce and that the vacating spouse needs to buy a new home.

• Non-Occupying co-borrower – If someone previousily co-signed for a family member or relative while using a FHA loan.  This type of FHA loan is called a non-occupant co-borrower loan. This borrower would still be eligible to purchase their own home using a FHA mortgage.

Without meeting any of these requirements, a potential borrower would not be approved for a second FHA insured loan.

Good news for the housing market. Both the House and the Senate passed H.R. 3081 the other day. This extension allows Fannie, Freddie, and FHA to loan in High Cost areas without charging extremely high rates, formerly known as jumbo or super jumbo mortgages.

What this means is that the normal conforming loan limits for Fannie, Freddie, and FHA remain at $417,000. Loans over $417,000 would fall into the next category, which many just call Jumbo loans. With this new extension, loans can still be sold on the secondary market up to $729,750 with the loan guarantee and insurance programs to continue backing these loans in markets with the highest cost of living. Without the extension, these loan amounts would fall under such terms as true non-conforming loan limits which in recent years have come with a much higher cost to the borrower. The conforming loan amount of $417,000 would also have reverted back to the 2009 limits. The impact of that would mean a $400,000 loan would have been more expensive and sometimes not allowed by FHA depending on the state and the county limits.

Conclusion: In a struggling economy, this opens up borrower access to affordable long term fixed rates. This cap of $729,750 is extended to September 30th, 2011. Without going through, it would have expired at the end of this year, and resulted in increased interest rates. How much of an increase?

Example : Right now, on a FHA loan, you are looking at about an extra 1.5 points more for any loan over $417,950 to $729,750. If you didn’t want to pay the extra 1.5 points, the rate would be about another 1/2 percent higher. In many cases, the higher the loan amount, the more points or rates would drop. Why? It’s called “profit margin”. If we were to keep the playing field leveled, the same profit for each loan, then as mentioned, the cost of the rate should decrease some.

Without the extension, rates could climb through the roof and the guidelines could become additionally strict. I base this opinion from 2007 when we didn’t have these loan limits extended. It was a much larger risk on the secondary market for private investors. Another impact was the fact that there was no funding from the government to back such risks and higher loan limits. In 2007 and 2008, the rates on such loan amounts in these higher rate ranges were about 1.25% to 1.75% higher. This could have definitely made the process of home ownership more cumbersome for the average person living in high cost areas such as New York City, San Francisco, and similar markets.

For such loan limits, here are some links:

• FHA maximum mortgage loan limits
• Loan limits for Fannie and Freddie

Shopping for interest rates can be confusing at times, especially when you hear different opinions from different experts.

The most common advice? Shop interest rates. Shop and compare the APR (annual percentage rate). Shop fees.  So which is it?

Let’s define both Interest Rate and Apr. – This comes from Wikipedia -

Interest Rate – “is the rate at which interest is paid by a borrower for the use of money that they borrower from a lender.”

APR – “is a finance charge expressed as an annual rate.”  In simple terms, it’s the cost of your credit expressed as an annual rate.

The APR rate will usually be higher than your note rate, which is your interest rate. Why is this?  Because the APR includes certain fees which are calculated into the actual rate. The problem with this is that so many people tell you to use the APR as your measuring tool when shopping with other lenders. But not every lender calculates APR the same. Each lender by law is required to send you a Truth in Lending disclosure which shows you the APR.

Keep in mind, your note rate is what is used to calculate your monthly mortgage payment, not the APR rate.

So why can comparing one lender’s APR with another be misleading or incorrect?  Because some lenders can leave some fees out that aren’t mandatory. The rules are not clearly defined.  Sound confusing?

So, what fees are included in the APR?

These fees are generally included :

• Points – both origination and discount
• Underwriting, loan processing, and document prep fees
• commitment fee
• attorney and or title closing fees
• PMI (private mortgage insurance) or MIP for FHA (Mortgage insurance premium)
• Prepaid interest – Interest that is paid from the time that you close to the end of the month. The problem here is that some lenders put 1 day or 5 days down on your good faith estimate. Even if they don’t know your closing date.

Sometimes included :

• Application fee
• Tax related service fee

Generally not included :

• Appraisal fee
• Credit report fee
• Title fee
• Recording fees

Conclusion : What is the overall function of the APR? It’s supposed to measure the ‘true cost’ of the loan. Its supposes to create fairness and a level playing field amongst other lenders. In my opinion, it’s why comparing the APR could be a negative thing.

Another issue about the APR is that it’s based on the length of that mortgage. If you are applying for a 30 year mortgage, it will be based on 365 months. Keeping in mind that the average person moves out of their house in 6.7 years and/or would refinance their mortgage in 4 to 7 years. Overall, it’s extremely rare that someone would keep that same mortgage for the full length.

My opinion? Use the TIL (Truth in Lending) disclosure as a helpful tool to ask questions as to why it might be higher or lower than another companies’ disclosure.  How would do this? By breaking down the lenders’ true costs and compare the interest rate.  I would advise learning to shop your interest rate and mortgage properly.

Photo Credit: RambergMediaImages

Shopping for interest rates and for mortgages in general is usually characterized as an easy process, even for those with previous experience. The truth is, it can become increasingly difficult when trying to sift through answers from several loan officers. You might find you’re often second-guessing yourself and wondering who’s right and who’s wrong.

What are shoppers searching for? Most want the best mortgage interest rate. They also want excellent customer service along with it. What did our parents tell us in our youth? ”You get what you pay for”. Mortgage servicing is not different. It’s important to remember that extensive knowledge, experience, top-notch customer service, education, and being upfront may come with a small price. That price could be a rate of 1/8 percent higher. It could be a difference of around $6 to $23 a month, depending on your loan amount. Question : Should you be rolling the dice for the best rate? Gambling away important facets of the biggest purchase of your life may not be worth the risk/reward. Let’s examine a scenario of rate shopping:

Picking your lender. Let’s assume you are talking to three different loan officers. We’ll label them A, B, and C.  A has the best rate by a 1/4 of a percent on a FHA 5/1 adjustable and the lender fees from all three are relatively the same.  But B explained in detail on how the adjustable rate worked now and later.  B also gave you food for thought on what it might be like when refinancing in the near future. B realized that you were buying a home that was $40,000 under value and took the time to ask about your goals and your future. During the discussion B noted that you made reference to refinancing in less than 5 years.  You were saving $154 a month with the adjustable rate and figured in 4 years that you would be at a 80% LTV (loan to value ratio), so you wouldn’t have monthly mortgage insurance.

It also didn’t matter that B asked you which loan program you were planning to use in 4 years when you decided to refinance.  You stated, “I am going to use the FHA loan again.”   B responded with the fact you would still have monthly mortgage insurance for 5 years, no matter what, even if you had 20 percent equity or more when refinancing on a FHA loan. It becomes apparent to you that A did not take that into consideration and the lack of detail could be considerably more expensive.

The shopping process continues. B calls you up three days later, letting you know that interest rates had gone up by 1/8 of a percent.  B is now 3/8′s of a percent higher than A.  B asks you if A has gotten a hold of you in the last three days to make you aware of this. You reply, “no”.  And there had been a few times when you would try calling or e-mailing A, but it took a few days for them to get back to you.

Decision Time. You decide to go with A because A’s interest rate was a whole 3/8′s of a percent cheaper now and A never told you that rates changed. Even though you were so pleased on how B educated you, shared specific tips with you, and that B was always available for you, you went with A.

Loan Application time. A provides documents to sign. Immediately you notice that the rate has increased 1/8 of a percent. A explains it in a way that sounds plausible. You sign and start the application process by providing your documents along with a $400 appraisal check post dated 3 days (due to new lending laws). Note: A didn’t bring up lock in policies and got you to float.

During the Loan Processing. You try contacting A to follow up with the interest rate and see how the loan process is progressing.  At times you would get an e-mail saying that all is fine and rates are good. In some cases this would be 2 to 3 days later.  You begin to lament the fact that during shopping process, A was much more accessible.

Fast forward to settlement day. You get to the closing table and find out that you need an extra $500 because your escrows are short. You recall A saying that they always provide worst case scenarios, erring to the high side to avoid surprises. Unfortunately the process ends with the surprise and takes you right back to the second guessing stage. This time it’s too late to realize that B’s exceptional service at 1/8 higher, may have actually saved you money in the long run.

Shopping Tips.

• Itemized fee worksheets (aka the old good faith estimate) Get all cost sheets with interest rates the same day from everyone that you speak to. If you find someone new a few days later, you need to go back and ask them all for updates. Same if one tells you that rates have changed, good or bad. Note: It’s not mandatory that a loan officer give you any type of fee sheet, cost sheet, or GFE (good faith estimate). Don’t say yes to anyone until they can show you all costs and rate spelled out on a piece of paper. Just be aware that it’s often not worth the paper that it’s written on.

• Lock vs Float – Make sure the loan officer explains the different procedures to you upfront. Make sure the loan officer understands your closing/settlement date. If you don’t have one, make sure you ask all the loan officers how long that rate would be good for when shopping. The longer the lock period, the more expensive the interest rate.

• Credit scores – If you won’t allow the loan officer to pull your credit, make sure each one has a copy of your credit report.  There is more to it than just your credit score and your total debts.

• Be leery of specific ads or individuals that use such terms as “best interest rates”, “cheapest rates”, “lowest rates than anywhere else”, etc, etc

• Be leery of those that state, “I guarantee”, “I promise”, “no problem”, “I am very honest”, “to be honest with you”, etc, etc. – Not that these are bad phrases all of the time, but if used often in a short period of time, could be a red flag.

Additional Tips : Don’t focus strictly on interest rate. And don’t shop based on the APR, because the APR has it’s own rules, and lenders can manipulate the APR. Just a fact.  Mostly shop interest rate and total lender’s fees when just comparing “cost sheet sheets”, “itemized fee worksheets”, “good faith estimates”. And never hesitate to ask a question. It’s not a cliche, there really are no dumb questions. A good loan officer will encourage you at the onset of your relationship to ask questions and be available as much as possible.

Final Note: What happened to C? Well it seems that C was hard to get a hold of and took days to get back with answers to your question. Even though C’s rate was the same as A’s, You weren’t interested.

Flickr Photo Credit: (Pre Edit) grendelkhan