Are You Preapproved for an Interest Only Mortgage?

July 20, 2007 by Leave a Comment

Istock_000002694919small

You better double check with your Mortgage Professional.  As of Sunday, July 22, 2007 underwriting guidelines are tightening up for interest only conventional (loan amounts $417,000 and lower) mortgages.

  • Fixed Rate Mortgages (ex. 30 year fixed with 10 year interest only payments) will be based on the full PITI payment using the Note Rate.  (If there is a temporary buy down, the qualifying is still based on the Note Rate).
  • Interest Only ARMs:  Qualifying is based on the full principal and interest payment (PITI) at the fully indexed rate (index + margin).
  • Negative Am. (deferred interest) ARMs:  Qualifying will be based on the full PITI at the fully indexed rate amortized over the full repayment term using the loan amount based on the amortization cap.   (I am not a fan of Option ARMs and I have never provided one to any of my clients.  For some people, they have probably been very successful tools…most of my clients, once they understood how the mortgage works, would opt for an interest only ARM instead of this mortgage).

So what does this mean?

Previous Guidelines:  If a buyer was preapproved using a 5/1 Interest Only LIBOR ARM based on an interest rate of 6.125% (note: this is NOT a rate quote and is only for purpose of illustrating the guideline changes) earlier this week qualified for a payment in the amount of $2041 (plus taxes and insurance), they could borrow $400,000.

New Guidelines:  The current index for LIBOR is 5.4 plus the margin of 2.375% for this particle loan program = a fully indexed rate of 7.775% for the same ARM mentioned above.   Qualifying the borrower for a $2041 payment based on a 30 year amortization at 7.775% means the borrower now qualifies for a loan amount of $284,200.

This will obviously have a dramatic impact on purchases and refinancing out of interest only products.   This is still very new and we’ll see if non-conforming products follow suit.

Here’s what you need to do:

  1. Agents:  Contact your Mortgage Professional today to see if you have clients who are preapproved for conventional financing with any interest only payments.   Confirm your buyer is still qualified.  (Your LO may need to check Fannie Mae guidelines).
  2. Buyers/Borrowers:  If you’re using interest only products with loan amounts of $417,000 or less, contact your Mortgage Professional to verify you are still approved.
  3. Buyers:  Now more than ever, it’s crucial that you meet with a Mortgage Professional prior to buying a home to become preapproved.   With mortgage programs and underwriting “tightening”, there will be less options compared to just a few months ago.
  4. Buyers/Borrowers:  Having solid credit is also more important.   You should review your credit a couple times a year.  If your scores are below 680, work on improving your credit.
  5. Borrowers who currently have ARMs:  Do not wait until just before your ARM is about to adjust if you are considering retaining your home.   Contact your Mortgage Professional six months in advance to review your credit in case you need to make adjustments and/or repairs.

This is not the time to be hiding or not dealing with your mortgage…guidelines are changing quickly and you need to be proactive and responsible with your largest investment.   If you need help, find a qualified Mortgage Professional such as a Certified Mortgage Planning Specialist, who has been acquired additional training and education or get a referral from someone you trust and respect.

Filed Under: Adjustable Rate Mortgage (ARM), Interest Rates, Mortgage, Refinance, Residential Purchase

Ben Bernanke Bits

July 20, 2007 by Leave a Comment

Benb

I have been glued to the television watching two days of testimony from Fed Chairman Ben Bernanke to the House and Senate.   Maybe I’m a mortgage nerd, I find this amazing.   

I’m convinced a majority of our elected officials are there just to grandstand and don’t have a clue about their personal mortgages!   Many of our representatives are treating Mr. Bernanke as if he personally doled out inappropriate subprime mortgages in an abusive fashion.    Other random tid-bits that I found interesting from the Q&A sessions are:

  • Bernanke mentions the "wealth effect" that home ownership provides Americans. 
  • The lower third of Americans have less than $500 in savings.   It is crucial to have at least 3 months of gross income in savings in the event of an illness, unemployment, etc.   
  • Bernanke stated that home owners with ARMs (adjustable rate mortgages) should call their lenders well in advance prior to their rate/payment adjusting.   I recommend calling at least six months prior to a scheduled rate increase to have your credit reviewed in the event corrections or repairs need to make sure you’re in the best position to refinance.
  • Suitability was defined by Bernanke as being more about affordability and the ability to repay a mortgage and less about selecting the right program out of the dozens or so available for a borrower.
  • Many borrowers took out mortgages without understanding the terms. 

I watched as much of the two day testimony as possible…ah, I’m glad I’m not Ben!

To read his prepared testiomony, click here.

Filed Under: Mortgage

Rescuing Homebuyers from Lending Tree

July 16, 2007 by 4 Comments

Wonderwoman

I have a couple of clients who did not feel like “winners” having banks compete for them via Lending Tree.  Recently, I helped a family by closing their purchase in 5 days…the lender they obtained from Lending Tree did not perform after having their loan for over 30 days.   Here are a few nice words from my new clients:

[Read more…]

Filed Under: Interest Rates, Mortgage, Residential Purchase, Testimonials Tagged With: ,

How Returning an Overdue Library Book Declined a Mortgage Loan

July 10, 2007 by 5 Comments

Librarian

Okay…it’s not just the overdue library book…we have a few other factors involved with this scenario.   In February I began working with buyer who was contemplating buying his first home, a condo to be exact.   We were able to offer a preapproval based on:

  • mid-credit score of 705
  • 100% LTV Fannie Mae My Community with LPMI (Lender Paid Mortgage Insurance)
  • 5 year fixed 10 year interest only payments (he qualified for fully amortized but opted to have flexibility with his payments)

The buyer, we’ll call him “Joe”, makes an offer on a condo that is in the process of going through a conversion.   The builder also has a “preferred lender” and will only provide a seller credit to the buyer if the buyer uses their lender.   Joe elects to stay with me because the builder’s lender cannot offer the same product and payment options, even though the seller credit was significant. 

Here’s all the scoop:

Joe had an old collection on his credit report from a library book that was overdue.  We had loan approval so I advised Joe to not pay it off until after closing.   Paying off collections lowers your credit score: the credit scoring system recognizes it as new activity on a collection.    Joe finds the book a few months into the transaction and returns it to the public library and paid his overdue collection.   It’s a noble action and would have been perfectly fine…had he done it after closing.

Joe also wanted to make sure he was getting the best deal and decided to continue shopping lenders even though we were locked and approved with his mortgage.  Shop, shop, shop…he did…and the lenders ran his credit report over and over again.   30 inquires over a couple of months HURTS your credit scores.

The condo conversion took months to complete (it was suppose to be done in early May and it won’t be finished until later this month)…so Joe’s credit report expired.   Typically, credit reports are valid for 120 days.   This is when we made the discovery that Joe’s credit score had dropped 40 points.   Forty points may not sound like a lot to you, however…zero down financing is very sensative to credit scores.  There is a tremendous difference between 660 and 700 with regards to your credit score…especially when you’re looking at 100% financing (zero down).   

Joe is a great candidate for FHA financing, however the condo (being a conversion) is not.   Zero down financing with a 660 mid score is not a pretty option.

Lessons (if you’re getting ready to buy or refinance a home…if you’re not, a different strategy may better suit you):

  1. Don’t pay off collections prior to closing UNLESS it is required by the underwriter.   (Pay them off after closing and be sure to get a documentation that they are paid).
  2. To have the best credit score, try to have 3 established accounts that you use at least every 30 days.  This could just be charging a tank of gas and then paying it off every month.   When revolving accounts go “unactive” for a couple months, they are considered “closed” by the scoring system which does not help your score. 
  3. Keep your credit balances below 30% of the available credit line.
  4. If you’re going to shop your Mortgage Professional, don’t let other LOs pull your credit.   You all ready have your scores and that is all the information a LO needs for a rate quote.
  5. Your documentation (such as credit reports, paystubs, etc.) are only valid for a certain time period.   With longer transactions,  be aware that your credit report may be re-pulled and/or employment may be re-verified.
  6. Return your library books before they become overdue.
Filed Under: Credit Scores and Reporting, First Time Home Buyer, Mortgage, Residential Purchase Tagged With: ,

My Community is now more expensive

June 28, 2007 by 2 Comments

Earlier this month, Fannie Mae changed the pricing on their My Community program across the board to all lenders by 1% increase to fee.    If you’re using a My Community program and you’re transaction is not yet closed, you may want to check with your Loan Originator to make sure your lock is still valid.

[Read more…]

Filed Under: Adjustable Rate Mortgage (ARM), Mortgage, Residential Purchase

Buying a home contingent

June 11, 2007 by 2 Comments

Mpj030902900001

I’m noticing more contingent offers lately.  This is when someone makes an offer to purchase their next home and the offer is contingent on the successful closing of their current residence.   Contingent transactions may occur for several reasons:

  • The net proceeds (equity) of the former house may be needed for the down payment on the new home.
  • The buyer may not qualify (or want) to risk having two mortgage payments while waiting for the former house to sell and close.
  • The equity in the former house may not be enough to facilitate a bridge loan.

In fact, I just had an excellent question from one of my clients that is worthy of sharing with you:

“Since our purchase is contingent on sale of existing property, when does the loan actually close and what are our liabilities in the event our home fails to sell?  The only other time I bought a house there wasn’t the issue of selling one so it never came up for me.”

With this scenario, without a bridge loan to tap into the equity of the former home, the loan on the new home will not be able to close until the old home is closed. This is because the proceeds of the old home are needed for the down payment on the new home.   This typically takes place the same day, however, I recommend having the closing take place the day after the day after the old home closes, if possible, to allow for transfer of funds.   This is referred to as a simultaneous closing.   

A bridge loan allows you to close on your new home quicker, without waiting for the old property to sell and close.   Knowing your closing date, also enables you to secure your interest rate by being able to lock your loan.   A home equity loan on the current residence is also a possibility.   However, the advantage with the bridge loan is that there are no monthly payments due (interest is deferred until the home is sold).

Check with your Real Estate Agent to see what your liabilities may be if your home does not sell.   There should be an addendum to the purchase and sale agreement addressing what happens if your home does not sell.    The purchase and sale agreement may also address when the closing date will be on your new home (for example, “x” days after the closing of your old home) and what happens if someone else makes an offer on the home you’re buying “non-contingent” (without having to sell their home to close on the new home)…also referred to as being “bumped”.

People buy homes contingent all the time.   It’s important to have an understanding of the process, what your options are and to have a game plan in the event of a “bump” so you can be ready with your ducks in a row!

UPDATE 2012: We currently do not have bridge loans available as of 4/20/2012.  

If you would like me to review your current scenario to help you be preapproved for your home purchase anywhere in Washington state, please contact me.

Filed Under: Mortgage, Residential Purchase Tagged With: ,

Down Payments…Why less may be more

June 6, 2007 by 2 Comments

It pays to have a plan when you’re determining how much down payment you should use when you’re buying a home.   Often times, when families have sold a home and they have benefited from our local appreciation, they may have a significant amount of funds available (proceeds).   A typical reaction is to invest all of the funds from the house they’ve sold into their new home.   What’s wrong with this?  Nothing really…except if you want or need the cash back out, there’s now a cost and process to extract it (refinance or equity loan).

And consider this…your home equity does not earn any interest.  Zero.  Instead, you could invest the funds that have gone towards your home equity into an interest bearing vehicle advised to you from your qualified financial planner.   

The more money you use for down payment, the more you’re reducing your tax deduction benefit of the acquisition mortgage as you are reducing your mortgage amount.  Your tax deduction on your mortgage is based on when you purchased your home, and obtained your "acquisition mortgage" to finance the purchase.   As you pay the mortgage down, this amount is reduced.   When you refinance, the balance just prior to the refinance is treated as the "acquisition debt" that is allowed to be deduct the interest from.   You are also currently allowed an additional $100,000 in home equity mortgage interest deductions.   You may want to consider having a larger mortgage balance when you purchase to establish a larger tax benefit.

Example, when you purchased your home 10 years ago, your mortgage was $180,000.   You’ve been making on time payments and the balance is now $150,000.  You refinance and have a new mortgage balance of $300,000.   The amount of interest you can deduct is based on a mortgage amount of $250,000 ($150,000 plus the $100,000 home equity allowance).  There may be other compensating factors and I am not a CPA, tax or financial planner.  Always consult with your trusted financial advisers.

Do you have debts (with no tax deduction benefit) that can be eliminated with proceeds?   Often times, the monthly money you free from eliminating a debt (such as credit or car payments) that once went to a payment is more than what the increase in the mortgage payment would be from trading the debt to a mortgage.

Example, if you have a car loan with a balance of $11,000 and a payment of $350, increasing your mortgage amount by $11,000 would provide an increase in your payment $67.73 per month (based on a 30 year fixed payment with a rate of 6.25%).   This frees up $282.27 a month, plus the interest on the mortgage is tax deductible, the auto loan is not.

Is your retirement or the kid’s college tuition funded?   How about the vacation home or investment property you’ve been contemplating?   Will you need some extra dough to make improvements to your new home?

My only point is for you to consider a strategy for your down payment before you automatically roll 100% of it over to your next home.   Plan up front so you don’t need me for a refinance too soon in the future…wait!!  I take it back. 

Filed Under: Mortgage, Residential Purchase

Home Equity Loans

June 3, 2007 by 2 Comments

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.

Filed Under: Home Equity Loans & Second Mortgages, Mortgage
« Previous Page
Next Page »