New Conforming Loan Limit Won’t Help Refi’s w/2nds…FHA May Save the Day

Fannie Mae’s underwriting guidelines for the temporary conforming loan limits have been released and it looks like the new loan amounts are not going to be as helpful as many had hoped.   The new guidelines for loan amounts between $417,001 – $567,500 in King, Snohomish and Pierce Counties are far more strict.

The biggest whammy is that if you were hoping to combine your first and second mortgage (or heloc) into one new conforming-jumbo mortgage, you’re out of luck.  Fannie is not allowing any "cash out" refinances.  This means that even if you were just paying off the two mortgages and not receiving a nickle back at closing–it’s not going to fly. 

You must have a minimum of 660 credit scores for a fixed rate purchase for a LTV of 80% or less for a purchase using a fixed or adjustable rate.

Limited cash out refinances are allowed up to 75% loan to value with a minimum 660 credit score.  Limited cash-out means that you are allowed to roll in the closing costs to the refinance and receive no more than $2000 cash back at closing (no second mortgages/helocs can be included in the refinance).

Update:  it appears that Freddie Mac will allow cash out refinances up to a 75% loan to value with a 720 minimum credit score.

Adjustable rate mortgages are qualified at the fully amortized PITI at the higher of the note rate or fully indexed rate (worse case rate). 

Be prepared for a "full doc" mortgage.  There is no "stated income" allowed.   You will also need two months of reserves (PITI) and are limited to a 45% DTI (debt to income) ratio.

You can only have four financed properties, including your principal residence.

On Monday, I believe lenders will finally unveil pricing…which again is said to not be as exciting as consumers had hoped.  I’m hearing that the rates will fall between current Jumbo and conforming.   

Rumor has it that the FHA-jumbo will be more friendly to "jumbo" homeowners…if they can get over paying the upfront MIP (1.5% of your loan amount) and monthly mortgage insurance (0.5% of your loan amount/12 months).   For example, on a $500,000 loan amount, the upfront MIP would be $7500 (typically financed into the loan) plus monthly mortgage insurance in the amount of $208.33…even if you have an 80% loan to value.  We’ll just have to wait and see a couple more days.

Remember, these loan limits only last through December 31, 2008.

More to follow. 

Second Mortgage Subordinations May Cause Huge Delays with Refi’s

If you have a second mortgage (home equity line or fixed term), and you are not going to pay it off during a refinance; it needs to be “subordinated”.   This is because of lien position with your mortgages…who gets to be first.   Lien position is determined by when a document (such as a Deed of Trust) is recorded at the county.   If you have two mortgages and are only refinancing the first mortgage, the second mortgage will need to be “subordinated”.  The subordination agreement is a recorded document with the second mortgage lien holder and the borrower that the second mortgage will go back into second position after the new first mortgage is recorded.   If this document was not recorded, than the old second mortgage would be in “first lien position” and the new refinance would be in “second lien position”.  This boils down to which mortgage has more rights in the event of a foreclosure…everyone wants to be first as the further down the line you are, the higher the odds are that the lien may not be cashed out (again, in a worse case scenario). 

Prior to our current mortgage crisis, a subordination agreement typically was not an issue.  We send a request for subordination along with a copy of the appraisal from the refi.  The second mortgage lien holder would review the request, consider the amount of equity remaining in the property and 9 times out of 10, agree.  This process would take a couple days.

With more banks being concerned about depreciating or soft values, they are now taking much much longer to consider if they will all allow a subordination to take place. In fact, I recently closed a transaction where the bank took over 10 business days (this eats away at your lock) for a borrower with 800 credit scores and a loan to value of just over 50% to subordinate a HELOC that with a zero balance.    An Account Manager from a bank that does a large amount of second mortgage recently sent out this memo:

“UPDATE on SUBORDINATIONS:   Please get your files in early… the subordination dept is running approx 20 business days.  I do not have any contacts for rushes etc.  They are trying to work date sensitive deals, but they have not been able to get caught up…”

Folks…20 business days is a month! 

If you are refinancing and have a second mortgage or HELOC that will not be included in the refinance, make sure your loan originator is aware and that they know how long subordinations are taking so they can lock your rate in appropriately.   A 30 day lock with a 20 day subordination is not going to cut it.  You’ll be looking at having to deal with a lock extension.

If your loan to value is higher, there is a possibility that the subordination may be declined.  Discuss this with your loan originator upfront.  Lenders are looking at any way to protect themselves from additional risk during these historic times.  If your loan amount qualifies and you have enough equity, you just may have to include that second mortgage in your refinance.


Second Mortgages and “Low Down” Mortgages

SunTrust Bank, one of the lenders we work with, is joining the ranks of other lenders who are eliminating or shelving their second mortgage products, including their combos where they have the first and second mortgage (such as an 80/10/10).  Where we once had several options for second mortgages and HELOCs, we are down to just a few.

Another bank that is still offering second mortgages (fixed and HELOCs) are limiting the total loan to value to 80% if your mid-credit score is 680-699.  A 700 credit score will allow you to go up to 85% total loan to value.

We do have another option for second mortgages that will go to a higher loan to value with lower credit scores…you pay the price with rates up to 3 points higher than what the other bank offers (with the lower loan to value).

What are your alternatives if you do not have 20 or 15% down? 

  • Seller financing for a second mortgage (private deed of trust subject to approval with underwriting).
  • Private mortgage insurance.  Upfront, monthly or lender paid.
  • FHA insured mortgages (subject to loan limits which will be changing soon)
  • VA insured mortgages

If you are currently preapproved to purchase a home and you are using an 80/10/10 or 80/15/5, I urge you to contact your Mortgage Professional to confirm your preapproval is still valid and to develop a "Plan B" for your home purchase strategy.   Some private mortgage insurance companies are also pulling back on higher loan to value mortgages (this includes lpmi and Fannie Flex); if you’re using less than 10% down with a pmi scenario–check with your Mortgage Professional for "Plan B" as well.

Home Equity Loans Offer Protection from Financial Uncertainty

While on vacation last week, I took advantage of being "unplugged" and read the Seattle Times.   On the last Sunday of 2007, they featured an article on How You Can Ride Out a Recession by Teresa Dixon Murray.   Teresa offers 17 easy suggestions on how to protect yourself during uncertain economic times with her top tip being:

1. If you own a house, get a home-equity line today.

It won’t cost you money unless you use the credit line. But this way, you will have access to money if you lose your job or hit an emergency. If you wait until you’ve been laid off to apply for the credit line, "good luck trying to get a loan if you’re unemployed," said Les Szarka, president of Szarka Financial Management in North Olmsted, Ohio.

I’m sometimes hesitant to broadly recommend HELOCs to clients.  Actually, I feel this way about all mortgage programs, selecting a mortgage properly requires evaluating your current needs and future financial goals.   HELOCs can be trouble when used improperly and a valuable tool when used with the right strategy (this is true for any mortgage). 

One of the best reasons to have a home equity line of credit is for protection in the event of unexpected circumstances such as loss of employment or health.  And as the article mentions, to provide a safety net during uncertain times with our economy.  A HELOC is best used when you’re not using them (was that a Yogi-ism?) but you must obtain one while you’re employed, with good credit and home equity.   If you lose your job or are temporarily off work due to health issues and/or your miss a payment due to being off work or ill, you will find it difficult to qualify for a home equity loan when you need it the most.   Imagine being in need of cash, having decent equity in your home and having a lender tell you, "sorry you don’t qualify" or having to opt for a hard money loan. 

There are a couple other reasons to consider a home equity loan today instead of tomorrow or next week:

Guidelines are tightening.   Most home equity loans are limiting the loan to value they will lend on and are raising credit score requirements.    Combine this with possibility of properties losing value and the amount of your possible credit line may be limited.

For example, if you home is valued at $400,000 today and you have a $300,000 mortgage currently against the property, your credit line may be limited to $60,000.  If your home depreciates 5% to $380,000; your available credit line may be limited to $42,000.   During these historic times, it’s also possible for the lender to reduce your credit line on the HELOC or to close it due to inactivity.

Review your options with your trusted Mortgage Professional (who will hopefully refer you to a bank or credit union if their rates are not competitive with this product…some are…some are not).

Home Equity Loans

Today I received an email from one of my clients regarding home equity loans, also known as a HELOC.  Here’s part of their question:

"We keep getting info regarding a home equity loan. We want to know what a home equity loan is and if that is something for us?"

Home equity loans can be an excellent financial tool when used properly.   They can also be dangerous if not managed correctly.   Typically, home equity loans feature interest only payment which are on the balance used on the loan.   The rate is based on current prime and has a lifetime cap of 18%.  A home equity loan will adjust whenever the prime rate adjust (unless the rate has been fixed).  They operate very similar to a credit card. 

The rate may vary based on loan to value (equity), credit score, the level of documentation (full doc or low doc) and occupancy (owner vs. rental).    The rate is prime plus or minus what ever factor is determined based on the above criteria (margin).  For example, it could be prime plus 0, or prime plus 1, prime minus 1, etc.   Prime is currently 8.25%.   There is a draw period and when that time is up (typically 10 or 15 years) the balance at that time is due in full.

Situations where home equity loans are best used are when you’re not using them.  For example, if you have a home equity loan attached to your home and you do not intend on using it.   It’s there in case of an emergency, such as loss of employment or medical need.   They are also great if you’re anticipating having cash to pay it down (and you’re not planning on investing the cash or using it elsewhere) since your mortgage payment is based on the balance.  We used a home equity loan for the purchase of our current home.  We are paying it off in chunks and intend to keep it open even once it is paid.   Home equity loans creates liquidity and provides flexibility with you equity and cash flow.  I prefer the home equity loans where  you have the option of fixing your rate (however, if you’re in a market where the rates are going down, you may not want to fix it).

When home owners use home equity loans like a maxed out credit card and tap out significant amounts of their equity and it’s a pattern to pay off debt; a  home equity loan can be a recipe for trouble.   A home equity loan, with the wrong plan or with borrowers who cannot resist relying on it, can quickly gobble up your equity.

Fixed rate second mortgages are other possible mortgage options to the home equity loan.  The advantage to the fixed rate is that…the rate is fixed.  And, you know what your payment will be month to month.   However, if you are planning on making a lump mortgage payment, unless the lender is willing to re-amortize the mortgage, you’re stuck with your existing mortgage payment.

A refinance of your first mortgage may also be worth considering depending how long you plan on retaining the mortgage and what your blended rate would be with having two mortgages.

When the prime rate was lower, HELOCs were very popular.  And, once prime began to climb, many borrowers refinanced out after realizing what their rates were climbing too and how quickly it can happen.

With so many options available, this is why it’s important to work with a professional Mortgage Planner who will consider your options and financial goals.