The VA does an amazing job of keeping veterans in their homes.

Nearly three-quarters of the VA borrowers who defaulted in fiscal year 2009 avoided foreclosure thanks to the agency’s policies and procedures.

But the Department of Veterans Affairs also operates a unique program that helps veterans who are trying to sell their homes in a difficult real estate market.

Home values have fallen drastically in some parts of the country, leaving some service members with a significant chasm between what they can sell their home for and what they still owe on their mortgage loan.

The VA’s Compromise Sale program helps veterans who have seen their home values collapse recoup and rebound. Through this program, service members can receive a “compromise claim” from the VA that essentially covers that gap between the sale price and their outstanding loan balance.

There’s an array of conditions that need to be met for service members interested in a compromise sale. Among them:

• Sellers must document financial hardship
• No second liens can exist
• There must be a purchase agreement in place before a compromise application is filed
• The pending sale must be a better deal financially for the government than a foreclosure

Homeowners will need to furnish a current appraisal. They’ll also need to prepare for a reduced entitlement, at least until the VA is reimbursed for the sale.

Veterans can learn more about the Compromise Sale program by contacting the VA at 1-800-933-5499. The agency’s regional loan center in Houston also maintains a helpful page on Compromise Sales.

Image: Eric Beato

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.

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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.

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.

Safe Mortgage — A Simple Definition:

As part of the Frank-Dodd financial reform bill that passed earlier this year, mortgage lenders will be required to hold 5% of the risk of a loan that is packaged up into a mortgage-backed-security. When the law was passed, there was an exemption for certain loans called “qualified residential mortgages” from the rule that requires lenders to hold 5% of the risk.

Currently there is a discussion of what qualifies as a “qualified residential mortgage” and a decision on what exactly qualifies as a qualified residential mortgage is sometimes also referred to as a “safe mortgage” because the lender can lend money on a safe mortgage and not be required to retain 5% of the risk.

Safe Mortgage — An Expanded Definition:

Should you really care what the decision is as to what mortgages can be determined to be safe mortgages?

Probably.

Simply put, whatever mortgage products are determined to meet the qualified residential mortgage exemption are most likely to be the ones that lenders focus on providing and possibly may become the only mortgage products that lenders will provide over time.

The most probable types of loans that will require a lender to retain 5% of the risk include loans that:

There is also a big “maybe” group of mortgage products that are up for debate as to whether or not lenders will be required to hold 5% of the risk including adjustable rate mortgages and interest only mortgages.

Regardless of what mortgage products are determined to be safe mortgages – one thing that is likely to happen as a result of the Frank-Dodd act passed is that whatever mortgage products that are defined to not meet the qualified residential mortgage exemption are not very, well …

safe.

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!

Agency — A Simple Definition:

When buying a house using a Realtor, the Realtor has an “agency” relationship with you and is bound by certain legal items that also include ethics/fiduciary responsibility items.  When choosing a mortgage lender, there is not currently a set of laws that establish an agency relationship with your loan officer – which essentially means buyer beware when choosing a lender.

Agency — An Expanded Definition:

Even though there is a nationwide mortgage licensing effort making its way through the states, there is still nothing in place that establishes an agency relationship between home buyer and loan officer.  At best, your relationship with a loan officer can be guided by the fiduciary duty / moral set of guidelines that your loan officer will get you the best possible deal for your situation.  This fiduciary responsibility of the loan officer has quite a bit of wiggle room and you will most likely find that what is right for one lender may differ for another lender.

When choosing a lender – no matter what lender you select – it is important to remember that they work for the bank and have the bank’s interest in mind when helping you select your loan.  Don’t be confused that your loan officer has the same agency type of relationship with you as your Realtor — they don’t.

For many, this is an irrelevant question. Most clients I meet with are able to qualify for much more than they want to afford, and they are placing budget limits on themselves rather than having the lender hold the limit over their head.

Yet, some are in a situation where the amount of home they can qualify to purchase just doesn’t meet enough of the items on the wish list, or even the must-have list for that matter. For them, patience is required, and maybe some good advice as well.

There are a few variables we’ve discussed in the last few posts that I can exploit to help folks in this situation increase their home-price approval amount.

First, it almost always works to pay off debt. If you have a car loan of $12,000 and your payment is $325 per month, work extra hard to pay off the loan early and then start putting that money aside for your next car purchase. If your qualification maxed out at a $150,000 home with the car loan, then you would be qualified to purchase a $200,000 home if you had no car payment. The same goes for credit cards, student loans, and any other kind of debt you have. Eliminating it before buying a home is not only fiscally responsible, but it will also give you more buying options.

The second idea is to save more money. The larger your down payment, the lower your monthly payment. For every $1000 you put down, your monthly payment goes down by around $6 per month. That doesn’t seem like a lot, but it adds up. There is also the benefit of being able to avoid paying mortgage insurance. If you can save an extra 5 or 10%, you may be able to not only save the $40 to $70 per month in the payment, but avoid a $100 PMI payment as well. This in turn can raise the amount of home you qualify for.

Look for a home that needs repairs or one offered at a deep discount. More home does not need to mean a more expensive home. Many homes in all kinds of neighborhoods need some work, but have a lot of square footage. Buying a home that is in short sale or that is owned by a bank can be very frustrating because of the waiting game required. But the payoff in the end can be huge.

I am assisting a client right now that I met last October when he made an offer on a home that was in short sale. He was strung along until May just to find out that the home was finally being foreclosed upon and that the bank would have to fully take it over before it could be sold. He waited another month and when it came on the market he made another offer. His offer was not taken, but another was. He still waited, though, because the accepted offer still needed to be approved. This offer was finally declined, and the house went back on the market again. Another offer made and this time it’s looking more promising. Meanwhile he paid off some debt and saved a little more money.

He’s glad he waited. Patience in this case will win this buyer a very nice home that was sold in 2006 for over $600,000. He will get it for around $250,000.

Patience is the key here. Pay off debt. Work to understand the market and find a good deal. Save more money. All of these things require patience, potentially the one key ingredient missing in the past few years.

Image Use: (gemb1 per this)