mortgages category archives

Consider the following three things when deciding whether or not to lock in your mortgage interest rate:

1. Lock in your rate as soon as you know you have a good deal in front of you, and you know roughly when you can close (30 to 60 days should be the longest lock period).
2. Lock it in with a lender who has the option of a “float down” if possible. If rates get better, you can participate in a portion of that improvement.
3. Lock it in with a lender who has a liberal rate-lock extension policy. No rate-lock extensions are free. Some even expire beyond the ability to extend. Make sure, whenever possible, that you work with a lender who will allow you to extend your lock if for some reason your deal takes a little longer to close than anticipated.
4. Don’t think about it very long. The rates go up a whole bunch faster than they come down. If the above is to your liking, lock!

No one can time the market. If I get one question more than any other these days it’s “what is going to happen in the next few months with interest rates?”

No one knows – plain and simple. If anyone tells you what will happen to interest rates in the future, consider not working with them – they think they know things they could not possibly know.

We do know what moves rates. We can even know anecdotally (after the fact) what did move rates. But then, we also know who won the Super Bowl – on Monday morning. We even know why, almost exactly why.

But, we never know what will happen to them.

Lock in your interest rate with the above options as soon as you are able to.

Image Use: (SMJJP per this)

The top mortgage lender in the country has called for borrowers to come up with 30% down if they want to avoid higher mortgage rates and more restrictive lending tied to the “risk retention” requirements related to the Dodd‐Frank Wall Street Reform and Consumer Protection Act of 2010.

Essentially, the government wants to ensure that banks and lenders who write higher-risk mortgages actually retain some of that risk (5% to be exact), instead of selling it off to investors and wiping their hands clean of it.

After all, this originate-to-distribute model was arguably how we got into this mortgage crisis to begin with.

However, since the legislation was introduced, banks and industry players have come up with a number of ways to be exempt from this new rule, including:

“requiring documentation of income and assets, setting debt-to-income ratio standards, and restricting things like prepayment penalties, balloon payments, and negative amortization.

But Wells wants to take it one step further and ask that both those purchasing and those refinancing have 30 percent down payment/home equity.

Critics (including most other banks and lenders) believe this will lead to a large pool of loans subject to the five percent risk retention rule, greatly increasing mortgage rates.

In fact, the MBA believes rates could be as much as three percentage points higher on loans subject to the rule.

FHA loan lending would also increase because it’s not subject to the risk retention rule, putting more strain on taxpayers.”

Wells Fargo argued that half of mortgages already carry a 30% down payment, but critics believe the move could shut out smaller lenders and increase market share for the top banks, who already have plenty.

If down payment requirements/mortgage rates do rise, it could throw a wrench in the housing recovery everyone’s hoping will get underway this year and next.

(photo: thetruthabout)

The Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (called the SAFE Mortgage Licensing Act of 2008) is being made the rule of the lending land even as we speak. Are you safer as a result?

The SAFE Act of 2008 is a form of legislation that has been batted around in Washington for years now. Lawmakers have long been frustrated with the payment of commissions to mortgage loan officers that are based on the cost of the loan to the consumer. In other words, the more lucrative the loan is for the bank (costlier to the consumer), the more money the sales person makes when the loan closes.

The question I’m posing for consumers today is this: Are you safer as a result of the SAFE Act? It’s a fair question. Let me give a little more information and perspective.

In overly simplified categories, the SAFE Act changed the mortgage industry in two main ways. First, it required its loan originators (the sales end of the business) to be licensed by the federal government. And second, it changed the way these sales persons could be compensated for the loans they originate.

First – licensing. Licensing is a good thing. Getting into this business today is supposedly not as easy because entrants are required to pass a test and a background check. Convicted felons, for example, will not pass. The relevant question however, is do all loan officers need to be licensed? The answer is no.

The reason for this is that banks and credit unions are exempt from the licensing requirement. Did you know that more than 80% of mortgage loan volume is done through a bank or credit union? That means, odds are, your loan officer today is not likely to be an “safer” than before the SAFE Act.

I am not one who normally agrees with the government, but I think that licensing loan officers is a great idea and was long over due. It should simply apply to all who are involved, rather than to just some.

The second change since the SAFE act has to do with how these loan officers are compensated. Stay tuned for my next post on that one.

Image Use: (gemb1 per this)

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’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)

Home Mortgage Interest Deduction -

Wikipedia defines it this way – A home mortgage interest deduction allows taxpayers who own their homes to reduce their taxable income by the interest paid on the loan which is secured by their principal residence.

Eliminating MORTGAGE INTEREST DEDUCTION which has been around since 1894 could be a fatal blow to the fragile Housing market

Let me ask you a question and please answer as honestly as you can.

Would you swim in a pool of hungry sharks? Would you stand in front of a charging bull? Would you jump from a bridge into shallow water? Would you play chicken with a freight train headed directly at you? You must be thinking these are trick questions huh? Follow along please….

Hypothetical here –> Let’s say the President put you in charge of ending the housing crisis. Would you eliminate the mortgage interest deduction allowed by the IRS since 1894?

Now that is a crazy thought isn’t it? Who in their right mind would want to eliminate the biggest deduction come tax time for millions of American Homeowners. Not to mention the effect it would have on a fragile housing sector where many experts predict foreclosures to rise, where property values continue to decline and strategic defaulters are no longer stereotyped. Come now,  who in the world would consider eliminating the mortgage interest deduction?

Why Would Home Prices Keep Declining?

Proposals from a White House commission to dramatically slash the federal budget deficit include ELIMINATING MORTGAGE INTEREST DEDUCTION. And to make matters worse, other cost cutting recommendations include Cuts in Social Security Benefits and Defense Spending.

The mortgage interest deduction is the largest tax break for millions of American Homeowners, reducing their tax bill by hundred or even thousands of dollars. And how do you think the housing market is taking this? The National Association of Realtors claims “the Mortgage Interest Deduction (MID)  is vital to the stability of the American housing market and economy”. To read the full press release from the NAR – click here. Bob Toll, Chairman of the National Association of Home Builders, calls the proposal “selfish“. Toll also thinks the odds of the proposal getting passed are “zero to negative five”. NAHB has launched a website which they say separates the myths about the MID from reality.

As a Mortgage Banker in Maryland, a State where property values in many parts of the state have taken a big hit, I believe eliminating this tax deduction to be similar as standing in front of a charging freight train. I realize recent statistics point to upward ticks in the economy but let me tell you something. Take it from someone who pulls credit, looks at income and has their finger on the pulse of home values every single day. If the housing market is getting any better, (I don’t really see it nor believe it), the overall health of housing values could be categorized as “fragile” at best.

The engine that drove home sales not too long ago, the housing Tax Credit for New Homebuyers, seems to be a complete 180 degree turn around from the proposed MID. I can understand why NAR and NAHB are up in arms regarding eliminating the Mortgage Interest Deduction.

Share your thoughts about the proposal and let us know how a change would effect you.

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 »

In the mortgage industry as in many industry there are words tossed around like school house chatter which have a clarity of meaning to insiders yet are somewhat foreign to the clients being served. Most home buyers and owners who are refinancing assume if they are getting a loan from LMNOP Mortgage that is their mortgage company for the entire time they have that loan.

Not so fast.

During the application period you will be asked to sign the “Servicing Disclosure Statement” which in essence is telling you whether or not your loan will be serviced by the lender or broker originating your loan. (Image)

What is “servicing”?

The lender who originates your loan may or may not accept and manage your payments.  Smaller lenders may not have the staffing power to do so and larger lenders may like the reduced risk of having a third party company handle mortgage payments, collections and even foreclosure proceedings as required.

The servicer and the lender will enter an agreement about the payments. Generally the servicer will pay your mortgage payment on the 1st of the month to the lender. They actually will pay multiple mortgage payments at once using electronic transfer of funds.  The servicer makes a small gamble that you will either pay early or pay late enough that the servicer’s late fee comes into play. The servicer will pay the lender a reduced cost for the mortgage payment and keep all of the late fee.

When the mortgage and real estate industry began to collapse the servicers were not ready to handle the huge volume of foreclosures, short sales and inexperienced negotiators which cause a huge backlog and resulted in several short sale opportunities being lost, homes being foreclosed on much later than they normally would have and loan modifications being delayed by weeks or months.

The originating lender is not required to tell you to whom they will be selling/transferring the servicing of your loan. They are required only to indicate the likelihood of your loan and/or servicing being transferred or retained.

A “one touch” file is a loan package submitted to the underwriter that includes every piece of documentation required for them to stamp the folder with three words every loan officer wants to hear – Clear To Close. – Baseball has home runs, football has touchdowns. Loan officers have one touch files. This is the goal top originators strive for when submitting a file for underwriting approval. Let’s take a quick look at how a loan package flows from start to finish.

Loans start by completing all the fields in the 1003 (the loan application). Experienced loan officers realize there will be need for further investigation. Additional questions allow originators to better assess a client’s situation and go a long way toward preventing issues with the loan later in the process. Let’s look at a few examples. Payroll deductions such as 401K loans, child support or even tax liens not disclosed at loan application can increase debt ratio and kill a loan. Consumers do not always disclose these deductions, however, they always get discovered. Whether or not someone else will be on the title is often something that doesn’t get asked. Do you own other properties? Do you owe the IRS any money? Do you pay alimony or child support? Are you obligated to any other debts not disclosed in your credit report? Have you filed a bankruptcy? These are questions required for a complete loan application but often overlooked.

The next step in the loan process is to gather documentation. Most often this is done by the loan originator. Sometimes this task is is done by a loan assistant or processor. The documentation process is critical in determining how smoothly the loan will flow to closing. One important thing to remember when it comes to underwriting and exceptions in the mortgage world of 2010. There are no exceptions. Complete loan files contain the same documentation all the time even if underwriting findings don’t ask for it. Pay stubs covering the most recent 30 days. W 2′s for the most recent two years. Tax returns for all self employed (business returns to be included). Most recent statements covering three months of all assets you declared on the loan application, 401K, savings, stocks etc. Documentation of any loans against a 401K to include monthly payment and balance owed. Child support agreement. Divorce or separation papers. The loan originator should attempt to probe with questions to be certain the need for additional documentation is met. Seasoned loan originators understand the importance of additional documentation. Establishing value via com parables and appraisals are critical. In the case of refinancing, home valuation can be a quick deal killer. It is also important to make sure credit bureau reports are up-to-date. Payoffs for all liens must be ordered as well as any subordination agreements.

Now the loan is ready to be prepared for submittal to underwriting. It really is a team effort at this point. If a processor has to stop to gather additional loan documents the loan originator failed to obtain, the loans waiting in line to be processed come to a screeching halt. Inefficiency extends the time it takes to close a loan.

Underwriting guidelines are pretty much cut and dried these days. If there is a guideline for it, documentation must be there to back it up. Most lenders order a 4506T from the IRS. This is a copy of tax transcripts and the document that shows any additional loss or income other than shown on the loan application. In other words, if you did not disclose any business income or loss it will be discovered at this point and your loan file will be subject to re underwriting once new income figures are adjusted. Not only that. it sends red flag signals to the underwriter reviewing the loan. The way in which vesting is on the title is now required to precisely match the mortgage clause on the insurance binder. The underwriter checks for this as well.

The one touch file becomes reality when conditions come back from the underwriter stamped “clear to close“. Often the most completely assembled files come back with conditions (stips) that may not have been flagged during application or processing.

If you find that your loan officer and/or processor submitted and received a one touch file on your deal, give them a thumbs up as they have achieved the ultimate mark of efficiency in the loan process.

Buyer beware is a term that is as old and familiar as it’s Latin origin Caveat emptor.

There is a term that is used over the past few years to describe the evil-doers that led unsuspecting consumers to foreclosure without any regard for the lives that they would destroy: That term is Predatory Lending.

A predator does not randomly choose it’s prey – it carefully positions itself in the path (or environment) of the prey and sits, waits for a sign of weakness – then it POUNCES!

A predator will not pick the strongest and fastest as it’s prey. An experienced predator will give up quickly on any prey that looks like it will put up a fight or resist.

Buyer beware implies that there are boogie men out there that will spring out of the shadows and take down unsuspecting victims.

This is absolutely not the case with home buyers and predatory lenders. You can easily protect yourself from predatory lenders.

3 Ways To Not Be Prey

1. Do your research online first – The very fact that you are reading this now pushes you outside the reach of most predators. A lender that has your best interest in mind will make available to you the answers to most of your questions online. Once a lender has educated and empowered you online, go to step 2 and listen for consistency between published and in-person information.
2. Ask questions – Predators will give up easily on you if you ask too many questions. Remember, a predator is looking for easy prey. If you are constantly asking questions, they will tire and eventually stop returning your calls and emails. A lender that stops returning yours calls has decided that they do not get paid enough to waste their time helping you to make informed decisions.
3. Ask questions about the answers – When you get an answer to your question, question the answer. A common tactic of predators is to tell you exactly the answer you were looking for. Upon further analysis, this type of quick exactly what you wanted to hear type of answer should pull the “to good to be true” alarm in your head…listen closely and trust your instinct.

Buyer Be Empowered

Education is predator repellant. As an educated buyer, you will ask more important questions and you will make more informed decisions.

You are now Empowered!