How to get your personal bailout

December 15, 2008 by Leave a Comment

Kenneth R. Harney had a great article syndicated in the Seattle Times this weekend “Be Ready for Your Own Little Bailout“.

Perhaps my favorite part:

“So what do you do if you’re already well along in your shopping, you’ve found a house at a great price, and you’re ready to apply for a mortgage at 5.5 percent but don’t want to miss out on potentially lower rates?

Ask your broker or loan officer whether you can lock in today’s rate but still have the ability to move down should cheaper money become available to you.

Not all lenders can accommodate such requests. Some brokers offer 60-day locks with that option; others may charge you.”

By the way, this applies to refinances too.  Do check with your loan originator before you commit to a lock what their lock policies are.

Another reason to lock in lower rates now with a lender who has the ablity to provide you a lower rate, should they drop further, is the plan that Obama’s team is considering.  From Bloomberg:

“While Paulson’s team is only exploring an initiative for new purchases, the incoming administration wants to go beyond that and address the record surge of foreclosures. Some industry lobbyists have urged the inclusion of refinancing for existing homeowners, up to one-fifth of whose loans are bigger than the value of their properties, estimates show….

“It’s a much more efficient use of the government’s balance sheet to do this as a purchase program” only, said Nicholas Strand, a mortgage analyst at Barclays Capital Inc. in New York. He estimated the cost of a plan to buy 4.5 percent loans for new purchases at about $300 to $400 billion. Adding the refinance option could cost up to $3 trillion, he said”.

If you benefit from restructuring your mortgage with today’s low rates, you may want to consider securing (locking) a rate now with a lender who has the ability of providing a lower rate should it become available prior to closing…if it happens.

 

Filed Under: Economy, Interest Rates

Game plan for preparing to buy a home when you’re credit score is low

October 28, 2008 by 2 Comments

I don’t blame anyone for wanting to own a home.  Sometimes when I meet with clients and review their current scenario, a game plan needs to be created so they can work on getting themselves into a better position to buy a home.  The last thing anyone wants is to cram themselves into a mortgage they cannot afford or to commit to a long term payment when they don’t have a great track record of making payments on time. Some times a plan may take 6 months or a year or longer before someone is ready to buy a home.

I have someone with low credit scores who wants to buy a home.   She knows she will probably be a candidate for FHA financing because she has little down payment and her credit.  Although FHA is not as persnickety about credits scores as conventional financing, they scrutinize credit history: especially the last 12 months.

This person has a few late payments this year, the last one being as recent as August.  FHA financing is most likely out of the question for her until August next year assuming she does not make any other late payments between now and then. She can work on her credit for the next 10-12 months (until she has 12 months since her last late payment).   She doesn’t have any collections but she does have a few small accounts that are “maxed out”. 

  • Credit card “A” with a balance of $477 and a limit of $500.
  • Credit card “B” with a balance of $323 and a limit of $300.
  • Credit card “C” with a balance of $215 and a limit of $300.
  1. The first thing she should do is focus on getting card “B” under the limit of $300.  She’s getting whammo’d with her credit scores for being extended beyond what her credit limit is with this account (in addition to being maxed out).   She should at least pay it down enough to make sure that her interest fees won’t keep popping her over her limit.
  2. Next she should select one of her two smallest cards to pay down to at least just below 50% of her card limit.   Card “C” would only take about $65 to bring her debt down to 50% of the line limit (300 x 50% = $150).
  3. Then pay down the next card to at least 50% of the limit.  “Card B” will take $150 (assuming she’s paid the extra $23 that has pushed her over the limit) to be at 50% of the credit line limit.
  4. Credit card “A” will take a little extra cash at $227. (500 limit x 50% = $250.  477 – 250 = 227).

She needs to keep her credit below 50% of the credit line at the very minimum.  I know I said FHA is not as picky as conventional.  However, you do want your credit scores above 600 in order to receive better pricing (620 and higher is even better).

Not only will this help her with qualifying for FHA financing, she’s probably also paying higher insurance rates due to her current credit scores. 

She has a decent income and no savings.   She needs to use this time of working on her credit to also build up her reserves.  Not only for what the lender will require (3.5% minimum down payment for FHA as of January 1, 2009); but for her sake should her income change or issues arise, she should have a minimum of 6 months worth of living expenses saved (FHA does not require this, I’m suggesting it).

She has been considering homes priced around $275,000.  FHA’s minimum required investment for this home next year will be $9,625.  The seller can pay the remaining closing costs and prepaids as long as she has met the above requirement (which can be a gift or loan from family members)–this would need to be negotiated in the purchase and sale agreement. 

The proposed mortgage payment would be around $2,000 (including taxes, home owners insurance and mortgage insurance).  This is $700 more per month than what she is currently paying for rent.  Once she has corrected her credit, she should practice making a $2000 mortgage payment by paying the difference ($700) into a savings account that she leaves untouched for her down payment and to hopefully create a savings cushion.  $12,000 in savings would be ideal (6 months of mortgage payment) but not required.   If she has no savings, it will take her just over a year to pay $700 per month to come up with the down payment (9625 divided by 700 = 13.75).  Another 17 months to have a savings cushion of $12,000. 

I know this isn’t instant gratification.  It is developing responsible financial habits.  There are expenses to owning a home beyond renting.  One of my last homes required a new roof just months after moving in to the tune of $15,000.  Savings has always been important and it’s even more true in our current economy.

She’s all ready moving in the right direction by contacting a Mortgage Professional who is interested in her long term financial well-being and is willing to help her create a game plan.

Check out my related article:  Getting on Track to Buy Your First Home. 

Filed Under: Credit Scores and Reporting, Debt Restructuring, Economy, FHA, Financial Planning, First Time Home Buyer, Residential Purchase Tagged With: ,

Declining Home Values: Good for Buyers – Bad for Refi’s

September 16, 2008 by Leave a Comment

Last Wednesday’s Seattle PI featured a front page article by Aubrey Cohen: Home values drop by double digits.   According to data by the NWMLS, the median sales price for houses in August 2008 for Seattle was $464,800; a 7.8% drop from July 2008 of $428,500 and 14.5% drop when compared to the median sales price from August 2007 of $501,000.   King County also dealing with a double digit drop.   The median sales price for houses in King County in August 2008 was $423,950; a 4.7% drop in one month with July 2008 at $445,000 and a 11.2% drop compared to August 2007 at $447,345.

If you’re a home buyer in this market, you’re in the drivers seat…and sitting pretty at that.  Listings are up 18.3% in King County (condos and houses) as compared to August of 2007; giving you plenty of choices.  Sellers are more likely to contribute towards your closing costs and prices are more attractive than recent years.

What if you all ready own a home and you’re considering refinancing?  Even though your home is your castle, the appraiser must use 3 recent sales (over the last 6 months is preferred) of homes similar to yours to come up with an appraised value.  This can be a little tricky with fewer sales AND lower sales prices.   Using the King County figures above and rates I’ve quoted at Mortgage Porter, this is how a refinance could be impacted:

Joe and Suzy purchased their home in King County for $447,345 in August 2007 utilizing a 30 year fixed mortgage at 6.625% with a loan amount of $357,900 (20% down payment).  They are now interested in taking advantage of our lower rates and decide to refinance since rates are close to a full 1% lower with zero points and they’re going to stay in their home for at least the next five years.   They have not paid additional towards their principal and their current balance is now around $354,250 with a principal and interest payment of $2,291.67.

An appraisal reveals that their home, based on what others like theirs have recently sold for, is now worth $423,950.  The best priced rate/term refinance (assuming perfect credit) is an 80% loan to value.  80% of $423,950 is $339,160.  If Joe and Suzy want to drop their rate by one point, they would need to bring in $15,000, not including closing costs if they want to avoid private mortgage insurance.  (Second mortgages are now pretty tough to come by these days).

Joe and Suzy’s home may be worth more than average.  Loan originators do not know what the value will be until we receive the appraisal.  I do have some resources available (such as researching comps via the title company) however, it’s just a rough idea.  Be wary of any loan originator who promises you that your home value will be perfect for a refinance.

Joe and Suzy’s options (if they want to refi) are:

  1. Bring in $15,000 plus closing costs (approx. $2600) to closing to pay down principal to 80% of present value.  Principal and interest payment = $2,033.44 – based on 30 yr at 6.00% at 0 pts (apr 6.063).   A savings of $258 per month, at a cost of $17,600, Joe and Suzy really need to decide if this is the best use of their money.  Based on their monthly savings, they’ll break even in approx. 5 and a half years.   
  2. Private mortgage insurance.  Paying off the entire mortgage balance plus closing costs provides a loan to value of approx. 85%.  Principal, interest and mortgage insurance based on 5.875% at 0.75% pts (apr 6.005) = 2,227.70.  This is a monthly savings of $63.97.  Suzy and Joe do not have to bring in $15,000 to pay down their principal, however it will take almost 7 years to break even on the cost of this refinance. 
  3. Rates with LPMI (lender paid mortgage insurance) are not competitive for this scenario. 
  4. FHA has monthly and upfront mortgage insurance.  Unless their motivations are other than reducing their rate, this is not a valid option for this scenario.

Even if our local market has hit bottom, appraised values will be impacted for several months until home values begin to appreciate.   Appraised values are a reflection of what has sold in the past.  Appraised values may continue to trend lower for refinances. 

Glenn Crellin, director of Washington Center for Real Estate Research at Washington State University states (from Aubrey Cohen’s article) regarding the recent drop in rates from the Fannie/Freddie takeover his expectation is:

"those decline in rates are going to be relatively short term." 

And to those who are trying to get the "bottom" of the market for home prices, he says it’s "nearly impossible".  Let’s face it, we really won’t know where the bottom is until prices are heading back up.

If you are considering refinancing, I do recommend that you contact your mortgage professional soon and "be real" about your home value.  I don’t encourage waiting with median sales price declines at 4.7 (King County) to 7.8 (Seattle) per month as it’s eating away at your equity and refi options. 

If you are considering buying a home, proceed with getting preapproved so you’re ready to make an offer should you find the home you’re looking for.

Related Post:

When Appraisals Come in Low for a Refi

Filed Under: Appraisals, Economy, Refinance, Residential Purchase, Seattle

Hang On…It’s Going to be a Bumpy Ride

January 30, 2007 by Leave a Comment

 

180pxbette_davis_1This week, we’re in for a bumpy ride with mortgage interest rates.   Fueling the fire are several important economic indicators which will begin to hit us on Wednesday and continue through Friday.   

On Wednesday, not only does the FOMC (the Fed) meet, we also have several news releases including the Gross Domestic Product (GPD) and the Chicago PMI (the Business Barometer).   The drama continues on Thursday with the Core PCE (Personal Consumption Expenditure).   We finish Friday with the big daddy…the Jobs Report. 

These factors  help predict inflationary and economic trends and typically have a high impact on mortgage interest rates. 

I just read an excellent blog on The Mortgage Report, by fellow CMPS, Dan Green.  To find our why you should lock before Friday’s job report, click here…

Filed Under: Economy, Interest Rates
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