Mortgage Types category archives

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’

If you’re 62 or older and in the market for a reverse mortgage, take notice.

The almighty Consumer Reports sent out a stark warning about the home loans earlier this week, calling them both “very risky” if homeowners didn’t understand the complicated terms and a “last resort for seniors who want to stay in their homes and have no other alternatives to supplement their income.”

Not very good press for the loans, which were recently touted by none other than the Fonz.

Per The Truth About Mortgage:

The publication noted that many marketers of reverse mortgages, otherwise known as Home Equity Conversion Mortgages (HECMs), engage is “questionable sales tactics” and make misleading claims to minimize the associated risk of these types of loans.

The report also found that many mortgage lenders that sell reverse mortgages cross-promote products that homeowners may not need, including long term care insurance and annuities.

Senior citizens also happen to be very susceptible to misleading marketing, so the danger is two-fold.

The report called for better oversight of the reverse mortgage market along with new consumer protections for borrowers.

Reverse mortgages allow homeowners aged 62 or older to pull equity (cash) out of their owner-occupied homes without taking on a monthly mortgage payment.

However, borrowers still have to pay for taxes and insurance, and failure to do so has led to a rise in foreclosures – in fact, as of March, a staggering 20,631 reverse mortgage loans were in default.

If you think a reverse mortgage may be right for you, be sure to do plenty of research and consult a mortgage professional first to avoid any potential pitfalls.

(photo: zzzack)

Down payment assistance programs are still widely available in my State of California but you wouldn’t know it unless you really looked.  As a company that makes a concerted effort to use these programs, I can speak from experience and hopefully help improve your chances of getting accurate information about the assistance that might be available to you.

Down payment assistance programs many times seem like urban legend, you’ve heard they exist or at lead did exist at some point but finding a lender that aggressively promotes these programs is sometimes difficult.

The top 3 reasons why your lender doesn’t want you to get down payment assistance

1. 1.  Only specific “approved” lenders are allowed to process down payment programs.
2. 2.  Compensation to the lender is dictated by the down payment assistance program.
3. 3.  Down payment assistance programs require specialized knowledge.

Let’s start with number 1 – Not always, but many times a lender has to be specially approved to offer down payment assistance programs.  I have many times encountered situations where a home buyer was told (lied to) that no down payment assistance was available because the lender they were speaking to did not want to lose the opportunity to get the business.

I guess there’s no surprise that commission only lender types would do and say almost anything to earn your business – but withholding information that would benefit you, the buyer, at the expense of the sales person is a deception of the worst sort.

Number 2 is another fun topic - Most down payment assistance programs are designed typically to help low to moderate income home buyers afford to purchase their first home.

In addition to the many other guidelines and restrictions associated with these programs is the compensation the lender is allowed to receive.

A lender’s compensation on these programs should not deter the lender from offering the program, but unfortunately it sometimes does.

Number 3 is actually a pretty important factor that is not any fault or a knock on the lender.

Down payment assistance program guidelines change quite often vstate ary significantly from one program to another.  It’s almost a full time job trying to keep up on all the different qualifying guidelines, restrictions and requirements – not to mention the fact that many times the money available for these programs is very limited and does not last very long.

Down payment assistance IS AVAILABLE, but expect to do most of the homework yourself.

4 Tips and Tricks for finding down payment assistance programs

1. Start looking on the City or County website.  These Government sites are usually pretty cluttered and difficult to find information.  The most common place I find down payment assistance programs is under “Departments” and then look for “Housing” or “Community Services”.  These programs can be buried pretty deep in the site because they are only offered for a short time while funding is available.  Don’t forget to check your State website for State-wide programs as well – State programs most often are perpetually funded and easier to qualify for.
2. Look for the approved lender list, or the lender guidelines.  Many times the lender does not have to require special approval and the only restriction is that the first mortgage loan meets requirements (usually 30 year, fixed rate).
3. Read the qualifying guidelines.  Most down payment assistance programs have the underwriting / qualifying guidelines on the site.  If there are restrictions or requirements in additional to normal qualifying guidelines (which there almost always are) it will be documented somewhere on the program site.  Look for downloadable PDF’s and links to qualifying guidelines.
4. Once you find a lender you want to work with, ask for a list of references from buyers that have used the program.  Just because a lender is on a list does not mean that they have used the program.  I run into this quite often.  Ask for references, make sure the lender is familiar with the processes and procedures for applying for and receiving the assistance.

I will leave you with this.  Down payment assistance programs require a little bit more time and homework from everyone involved.

Have the expectation that you will have to do most of the homework yourself and you will be better for the effort.  If you are familiar with the program guidelines and availability of the program before you contact a lender, you are protected from being misinformed or misled which will save you time, money and sanity!

Get Educated – Be Empowered

My previous blog suggested that the Homepath Renovation loan can be a better option than a 203K streamline.  Which I still believe but wanted to go into more detail on the costs associated with the two programs. 

The actual closing costs between the 2 programs are pretty similar so to break down those costs may be a bit overkill so I will focus on the major differences.

Downpayment:  FHA requires a 3.5% down payment while the Homepath Renovation loan only requires a 3% down payment.

Interest rate: You will almost always find that and FHA 203(K) loan will have a lower rate compared to Homepath.  However that lower rate comes at a cost.  The 203(K) loan requires 1% upfront mortgage mortgage insurance to be charged.  That fee is typically financed into your loan amount.  Your loan amount will be higher.

In the example I provided (Total Cost Analysis),  the FHA loan amount is increased by $3,008 and your monthly payments are based on the higher loan amount.   In Addition, (using the same Example) the fha loan also requires monthly mortgage insurance of $225.67 per month.  Mortgage insurance is dropped on an FHA loan when the loan balance reaches 78% of the original loan to value.  Mortgage insurance will remain on the example I provided for roughly 124 monthly payments ($27,983.08), unless the borrower pays additional to principle.

The homepath loan would require the consumer to pay 2.125% in points, which will add an additionl $6,393.85 to the closing costs associated with the homepath loan.  If you do not have enough in assets to cover this additional costs then the 203(K) loan will be your better option.  If you do have the assets the home path loan may be the better option.

Difference in Principle Balance

The first difference you need to account for is your principle balance.  Initially your loan balance will be $1,414.45 higher with the FHA loan (meaning you have less equity in the home with an FHA loan than a homepath loan).  The difference in the loan balances will get closer with each payment because of the difference in the rates.  You will be making a bigger principle payment with the 203K loan (but you have a higher loan amount).  The balance will be roughly the same after the 42nd payment.

Read the rest of this entry »

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’

Since FHA decreased the UFMIP (up front mortgage insurance) premium and increased the Monthly MI (mortgage insurance) premium, I have seen an uptick in the number of Homepath renovation loans I am originating and I thought I would share why.

Whenever you make a comparison between loan programs you have to start with some Assumptions or a scenario:

Purchase Price:                    $200,000

Cost of Renovation:            $30,000 (if the cost of Renovation exceeds $30,000 no need to compare Homepath is not an Option)

Fico Score:                              660 (if your Fico score is less than 660 no need to compare Homepath is not an Option)

Property Type:                     Single Family or Condo (If the condo is non-warrant-able and cannot be FHA Approved no need to Compare FHA is not an Option)

Max Financing:                     FHA 96.5% LTV and Homepath 97%

What is the Difference in the rates? 

Homepath:With the above scenario I would have to charge 5.25% with 2.125% in points.  The homepath program has a number of loan level price adjustments that total 5.375% in points which include: 1.25% for loan to value and FICO score, 3.625% for No MI, .50% for 97% Loan to Value.  Those adjustments can be paid in cash as additional closing costs or paid by the lender by charging a higher rate.  The highest rate on my rate sheet today is 5.25% and that will allow me to pay 3.25% of the 5.375% in LLPAs leaving 2.125% that will need to be charged as points.

FHA 203(K) Streamline: With the above scenario I would be charging a rate of 4.75% with 0 points.  FHA does require UFMIP of 1% that is typically added to your loan amount in addition to requiring an additional .5% down payment. 

So…The real difference is about .50% in a rate and .625% in  points!  the monthly payment is about $100 less per month with the Homepath loan than the 203K streamline.  Closing costs and paperwork between the two programs are pretty similar.

Take a look at this Total Cost Analysis that I prepared comparing the two programs.

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.

If there is one component that predicts more than any other whether a home owner will continue making payments when times get tough, it’s this one.

At some point in the process of struggling to make mortgage payments home owners will consciously remind themselves whether or not they put any of their own money into the deal way back when they purchased the home.

If the answer is no – then they will (statistically speaking) be more likely to walk away from the home when times are tough. But if the home owner either put money down or paid the mortgage down more quickly for a time, then they will feel tied to the home because they put their own money into it.

The other issue that is directly related to the down payment is whether or not there is equity in the home in the future. In this kind of market, even folks who put $40,000 down on a $200,000 home purchase three years ago still may not have any equity in the home today. That is hard to swallow all by itself; but if they had put nothing down they would definitely be more upside down than if they had.

Lenders know these stats. They understand the feelings. They’ve . . . .  been to the puppet show already and seen the strings. They like down payments – that’s all there is to it.

For the time being, the Veterans Administration and the USDA both over programs that allow a home buyer who qualifies to buy a home with no money down. FHA is next in line – they will allow for a down payment as low as 3.5%. Conventional lenders (Fannie Mae and Freddie Mac) will require a minimum of 5% down and in some markets – like Michigan for the past few years – they will prefer or even require 10% down.

I tend to look at this issue from two angles, and in this priority order:

First, is the person who wants to own a home ready to be a home owner? Are they responsible with money? Do they owe a lot of money on credit cards? That would suggest that they don’t live within their means. Do they have a savings account balance or are they living paycheck to paycheck? It’s wise to determine the answers to the above questions before moving ahead with home ownership.

Secondly, and after we’ve determined we have a buyer who will likely be successful as a home owner, we ask about which loan program they qualify for. There is no magic in putting in a down payment. If you didn’t have a down payment, you can still be a successful homeowner. We just want to make sure you’re ready for this.

Image: (alancleaver_2000 per this)

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

Ever hear of the Law of Unintended Consequences?  It states that when Congress passes a law to fix one problem, it will create five more.  Government, being by and large populated with people that have not had jobs in the industries they regulate, is the poster child for “oh, I didn’t think of that.”  With that preamble, here is a recap of the latest financial reform bill, the Dodd/Frank Wall Street Reform and Consumer Protection Act.

Credit Scores: Good: You are entitled, and have been for years, to a free credit report from each of the three credit bureaus every year.  You get these at www.annualcreditreport.com.  Now, though, if you’re denied for a loan, the denying company has to tell you what your credit scores were.

Bad: Seriously, we still can’t get our scores before we get denied for a loan?  What was the point of this change?

Mortgage qualifying: Good: Um.  Well, from my perspective, there isn’t anything to put here.

Bad: All sorts of things.  If you’re self-employed, you better start paying a lot more tax, or you’ll never get a home loan again.  Stated income loans are now illegal.  Banks are now required, except in narrow circumstances, to retain 5% of the mortgage loans they make, which means there will be less capital to lend and banks will make fewer mortgage loans.  It also means that FHA loans will continue to ratchet up their market share, since FHA loans are exempt from these requirements.  Eventually, the government will own practically all the mortgage loans in the US.  Lending in Utah, where I’m based, as well as every other state, will get increasingly difficult for both brokers and borrowers, with fewer loan options and less competition among lenders.

Mortgage broker regulation: Good: Well, theoretically, if you make it so that loan officers can’t get paid based on the kind of loan they sell or the interest rate on the loan, that should lead to better deals for consumers.

Bad: Except that in the real world, the lenders are the ones that get paid, and they still do.  Now, though, instead of the money going to the loan officers, the banks get to keep it.  If you think this leads to reduced interest rates, you belong in Congress.  Coming January 1, watch for flat-fee pricing from lenders, where the closing costs will be a flat percentage of the loan.  A higher percentage than is currently normal, I shouldn’t have to tell you.  Lending will consolidate further until only the biggest banks are left.  That should make things muuuuch better.

Credit Card regulation: Good: Retailers now cannot require you to buy more than $10 of goods if you want to use your credit card.  The Fed gets the power to regulate what percentages banks, but NOT card issuers (Visa, Mastercard) can charge on purchases.

Bad: Retailers already had agreements with Visa and Mastercard requiring them to accept the card for any amount.  Now they don’t have to do that.  Transaction percentages were already usually below 2%; now they will be wherever the Fed sets them, most likely higher.  But because of the threat of the Fed and the loss of control over those fees, banks will respond by chopping out freebies (like free checking) and raising overdraft fees (seen that already, haven’t you?), and bringing back the annual fees for credit cards.

Creation of the Consumer Financial Protection Bureau: Good: There will be thousands of new federal government jobs, alleviating some unemployment.

Bad: Financial rules for mortgages, banks, credit cards, car and student loans, and everything else will now be made by unelected bureaucrats in Washington, rather than by Congress, your state representatives, or, Heaven forbid, the companies that actually have to make a living in finance.  We get a whole new government bureau for the purpose of promulgating these rules.  Because as we were all aware, we don’t have enough of them already, and the ones we do have are doing such a splendid job.

I could go on to discuss such things as the creation of the new Office of Minority and Women Inclusion, which I’m sure you would agree is an integral part of any Wall Street reform, but you get the idea.  Overall, the good is that if you are totally ignorant of even the most basic financial concepts, you may continue to be so and it will be less likely that you’ll accidentally do something stupid.  The bad is that if you are smart and do your homework, your life just got more complicated and less rewarding.  Again.  Continuing the trend toward crushing the entire population into a narrow band of mediocrity in the name of “protecting” us, Congress has served up another heaping plate of mystery meat in this bill.