You may have noticed on the evening news and the local papers all the bad press about mortgages lately. Specifically sub-prime, negative amortized ARMs a.k.a. payment option plans (which I am opposed to for 99% of the population), 100% financing and interest-only ARMs…to name a few. Many sub prime lenders are restating their earnings and are suffering losses. Some are closing their doors and the remaining are changing their underwriting guidelines. It use to be very easy to obtain 100% financing with a credit score of 600…some lenders would even consider 580. Now, the benchmark is 620. Throughout history, lenders change underwriting guidelines based on market conditions.
Your ARM May Not Be Broken
February 26, 2007 by Leave a Comment
How Strong Are Your Legs?
February 25, 2007 by 1 Comment
A borrower in a mortgage transaction is kind of viewed like a chair with four legs. The legs on the chair provide strength to the base or seat of the chair. If one leg is shorter than the others, the chair is still strong, but may wobble a bit. Shorten two legs and the chair becomes less stable. Three week legs and the chair is just waiting to tip over on you.
So how strong are the legs of your chair?
Consider each of these items as one leg in your chair.
- Employment. Having a minimum 2 year history in your line of work (this can include education). Employment gaps that don’t make sense to an underwriter, may cause issues with getting your mortgage approved. A lender wants to know that you are going to be able to keep your job and therefore, make your mortgage payments on time.
- Income. If paid salary and regular hours, this can be pretty easy to compute. When your hours vary, the income needs to be averaged. Also, if you’re paid bonuses or commission and going for the best interest rate (not stated income or no income verified), then your bonuses and commissions are typically averaged for the past two years. Debt-to-income ratios are crucial for qualifying for mortgages. A $500 car payment equals $50,000 less home that you can purchase.
- Savings and assets. There are many zero down loans, even if you are considering that route, it is in your best interest to have at least three months of your future mortgage payments in savings after all closing costs are paid. The more money you can put down towards a home, the better your interest rate will be.
- Credit Scores. Having scores above 680 are a worthy goal. A score 700 or more is even better! Pay your accounts on time. Keep your balances below 30% of the credit limit for the best scores. Take care of your credit and it will take care of you. Credit is reflective. If your credit score is on the low end, meet with a Mortgage Planner to help you develop a plan to improve your score.
All of these factors impact how a borrower qualifies for a mortgage. The more strong legs you have reduces the risk to the lender, which in turn means a better interest rate for you!
The Cart Before The Horse
February 22, 2007 by 2 Comments
Note: I was contacted by the fine folks at DFI with corrected information to this post regarding continuing education. My corrections are either striked out or bold.
This week has been a bit crazy with mid-winter break…our three kids all have different break schedules so our family is home instead of vacationing somewhere. This has provided me with a great opportunity to attend classes and seminars, which typically take a bit of coordinating with getting the kids to schools (they go to three different schools due to their ages).
Anyhow, on Monday, I went to a seminar by Dustin Luther. Dustin is the creator of Rain City Guide, a blog that I contribute to that has been a force in the Seattle Blogosphere for years. This was actually my first time meeting Dustin! And, the seminar was great. I learned about Web 2.0–how the consumer is directing the web instead of the web attracting the consumer. It was fascinating. He is truly genuine.
Yesterday, I took my first clock hour course to retain my State of Washington Loan Originator License. It kind of feels strange to take a course before passing an exam that is not yet available (hence the cart and horse photo…I was going for the cart before the horse…but it was taking too much time to find the right photo). I am assuming I’ll pass the exam once it’s available (or I will be adding a post with a photo of egg on my face).
The course is required for all Licensed Loan Originators during their first year of being licensed and is on ethics. This one was taught by NAMB. I wish it would have been an exam on ethics, instead this was a class or open discussion. I typically do not attend "lender functions". When I took the CMPS exam, I really enjoyed networking with the professionals who cared so much to fly from all over the nation to take the three day exam (25% did not pass the first test). I was very proud to be a Loan Originator (or what ever title you wish to call me) in the company of those fellow lenders.
At today’s class, I was fortunate to sit with two other fellows who I feel also have very high standards and ethics. And I do believe overall, the room was filled with the same caliber of people who truly care about serving their client’s best interest before there own. I mean, they are there spending their time BEFORE taking the exam. (You must pass the exam to retain your license…you can re-take the exam for $125 a pop). the cost for the exam will be determined by the exam provider and is anticipated to be around $50 -$60. DFI also recommends that BEFORE a loan originator spends their time and money on continuing education classes, they check DFI’s website to make sure the professional organization or individual course are approved for loan originators or mortgage brokers continuing education.
What was interesting to me is that when you survey a room full of people, ethics can become a bit blurry. I left the four hour class with my certificate…I have one more class and an exam to go before all of the criteria is met to REALLY be a Licensed Loan Originator.
Recently at Rain City Guide…
February 19, 2007 by Leave a Comment
I have been meaning to highlight post over at Rain City Guide on a more regular basis…I’m slipping! Here are a few I thought you might benefit from reading (or just click on over and check them all out).
Earlier this month, Jillayne tackled why you should not shop interest rates by APR. This is a must read if you are a "rate shopper".
There have been a couple post forecasting the future of our local real estate marketing, including this one from Ardell and Jon featured two posts that inspired reactions from the "Bubble Bloggers".
If you’re considering buying home at a new construction site, then Ardell’s post is a good read for you regarding dealing with site agents and when lots are released.
Yours truly added two post to RCG dealing with zero down buyers and the future for subprime borrowers.
Enjoy!
Prepayment Penalties: Foul or Fair?
February 18, 2007 by 12 Comments
A prepayment penalty is a fine charged to a borrower if they payoff their mortgage before a certain time period (typically 2-3 years). The fine is commonly 6 months interest (just shy of six months mortgage payments less your monthly taxes and insurance) and may vary.
Most often, the prepayment penalty is "hard", meaning that it will be assessed whether someone is refinancing or selling their home prior to the time period being met. Sometimes, the prepay may be a "soft" penalty and is forgiven in the case of a person selling their home, but charged if the borrower is refinancing.
For example, on a $200,000 loan amount with 6% interest, a prepayment penalty based on 6 months interest would be $6,000. It’s expensive. It may be a tax deduction since it is prepaid mortgage interest, however, if you’re paying if off for a refinance, it is also taking away home equity.
Some times, prepayment penalties are required for the certain mortgage program. This is most often the case with subprime mortgages. This has potential to cause a dicey situation if a subprime borrower has 100% financing, like an 80/20 with an adjustable rate mortgage, and the borrower does not work on improving their credit before the prepayment is over and the ARM adjust. Subprime loans are becoming tougher to qualify for and some subprime lenders have closed their doors.
If the borrower has good credit and equity or a down payment, then the prepayment penalty should be optional and the borrower’s choice. The prepayment penalty may be used to lower the mortgage interest rate. If this is the case, the Loan Originator should show the borrower the difference between the two rates and payments and fully explain the terms of the prepay. If the "a paper" borrower is not receiving the benefit of the choice between having or not having a prepayment penalty, then it could very well be lining the pockets of the loan originator. If your loan originator is telling you that you must have a prepayment penalty, and you have great credit PLEASE GET A SECOND OPINION.
Prepayment penalties need to be disclosed to the borrower up front. This should not be a surprise to a borrower at signing. Review your Federal Truth in Lending statement that accompanies your Good Faith Estimate. There will be a sentence with a box stating:
Prepayment: If you pay off your loan early, you ( X ) may ( ) will not have to pay a penalty.
If the "may" box is checked, you have a prepayment penalty on the proposed loan scenario. If the loan originator did not disclose this to you upfront, contact them to find out if and why there is a penalty.
The Good Faith Estimate and Federal Truth in Lending are required to be provided to you from the loan originator within 3 days of providing you a rate quote. At signing, you will also receive a disclosure regarding the prepayment penalty.
Whenever a prepayment penalty is optional, even if it is to lower a borrower’s interest rate, I am opposed to them. You never know when life will happen and you need to sell your home or if mortgage interest rates improve and you want to take advantage of the lower rate. With some programs, such as subprime loans, the prepayment penalty may be required. If this is your scenario, ask the loan originator if the prepayment penalty can be "cashed out" or reduced upfront.
Regardless of your situation, your loan originator should fully explain all of your options to you. Should you decide to obtain a second opinion from a Mortgage Planner, simple provide them with your credit scores, loan-to-value (sales price or value of the home and the loan amount), documentation (is it easy to document your income and assets or do you need a no-income verifier type of loan), and program type. You may also consider providing the lender with a copy of your good faith estimate to review from the first loan originator. The lender who provides you a second opinion should not have to re-pull your credit at this stage.
It’s your money, your assets, your home and your responsibility to make sure you understand (ask questions…don’t be shy) your mortgage scenario. Prepayment penalties are fair IF you understand how and why you have one with your mortgage. If it’s helping someone with an iffy credit past (assuming the new home owner is now responsible with their credit, debts and cash flow) become a home owner, then I’m all for it. If it’s to increase the commission of a loan originator, it’s FOUL.
Bridge Loans
February 16, 2007 by Leave a Comment
Lately, I have received more inquires about bridge loans. Bridge loans are used when someone wants to make an offer on their next home non-contingent on the sale of their current residence BUT they need the equity from their property for part of the down payment on their new home.
Bridge loans can be a great tool in a hot market where sellers are in the position to be extra picky, when multiple offers are a possibility or perhaps the seller is simply not in a position to accept an offer contingent on your property selling. A buyer wants to put forth the best offer if they really want the property for their next home. With a bridge loan, there are no monthly mortgage payments and the interest that accrues is paid off at the closing of the buyer’s listed home.
Mortgage and some real estate companies offer bridge loans, as does our mortgage company. The guidelines and terms may vary from company to company so if you are considering a bridge loan, please make sure your Mortgage Planner clearly explains the terms to you. The terms that I am discussing in this post are those of Mortgage Master (with that said, our company may make exceptions as well).
Bridge loans lend a portion of the equity of the property that is listed with a real estate agent. For example, if you have a home listed for $400,000 with a $200,000 mortgage balance, we would lend up to $120,000 (400,000 x 80% less the mortgage of 200,000). The $120,000 would be used for down payment on the next home. Different lenders have different ways of factoring how much they will lend for a bridge loan.
With a bridge loan, a deed of trust would be recorded against the current residence listed for sale. The $120,000 bridge loan plus interest would be paid off once the property is sold along with the current mortgage in the amount of $200,000.
A home buyer considering a bridge loan should discuss this with their Mortgage Planner and Real Estate Agent. The buyer will need to be approved factoring in mortgage payments for their current residence, the new home AND the bridge loan (interest only payments, even though no payments are due).
A possible down side to a bridge loan is if the home buyer’s property that is listed does not sale right away or if they have a sale that fails for what ever reason. It is quite possible a buyer could be stuck with 2 mortgage payments. There is usually a gap of one month before the payment on the new home is due. However, it also takes time for closing to take place once an offer is made on the buyer’s former property.
Bridge loans are intended to be short term financing (6 months). If you are considering a bridge loan, you may want to discuss market conditions with your real estate agent and make sure that your listing is “priced to sell” so you’re not in a position to become strapped with two mortgage payments for too long.
If you are interested in buying or refinancing a home located anywhere in Washington state, please contact me! Click here for a no-hassle mortgage quote.
Why Is My Payoff Higher Than The Principal Balance?
February 12, 2007 by 2 Comments
I am often asked this question during a refinance from homeowners. Your mortgage payment is paid in arrears. For example, your February payment is paying January’s interest. Remember when you bought or refinanced your home and the loan originator stated “you’re going to skip one month’s payment” or “you won’t have another payment due until the following month after closing”? Well this is where that payment essentially catches up with you. (Technically, it’s not “that” payment, you’re just always paying the previous month’s interest).
Should I Buy or Rent?
February 11, 2007 by 2 Comments
I received an email this week from Samantha asking if she should buy a home now or continue renting. Here is her basic information:
- Gross annual income $85,000
- Current rent payments $1350
- Purchase price for home she’s considering: $399,000
- 10% down payment (from 401k and savings)
- 38 years old
- Average to good credit
Based on the information Samantha provided me, she easily qualified to purchase the home she was interested in. She only planned on staying in the home for 4-5 years and wanted the lowest payment possible, so I provided her with a Good Faith Estimate based on using a 5 year fixed 10 year interest only product with a note rate of 5.75% (APR 5.854%). Her total mortgage payment, including estimated taxes and insurance would be $2,278.
Here’s where it gets more interesting for people who don’t own a home yet…when you factor in Samantha’s income tax bracket, her effective payment (factoring in what she will be able to claim on her income taxes in a full calendar year) is actually $1,633.
$1,633 IS MORE ($263 more to be exact) than her current rent in the amount of $1,350. However, if you consider a conservative appreciation on her potential new home in the amount of 5% annually…the picture changes dramatically for creating wealth.
In 3 years, Samantha will pay $50,793 in rent with nothing to gain. As a homeowner, after taxes she will pay $58,700 BUT her home will be valued (again, very using a very conservative figure of 5% appreciation) at $461,892; providing her with $103,956 in equity…in just 3 years.
So what if Samantha decided to rent and invest the difference of the after tax mortgage payment and rent in the amount of $263 into an interest bearing account (I’m sticking with 5% interest)? In three years, after investing $263 per month, she would have just over $10,000. And how likely is it that someone would actually be disciplined to do that?
You can guess my answer to Samantha. BUY! In three years, she could decide to sell the home and would have more of a down payment for a next home. If she opts to rent, her $10,000 would make a significant difference in a down payment. Her $399,000 home she wants to buy now would then cost $461,892. She would still have 10% down based on the appreciation (assuming her savings and 401k performs well) …only now the house and the mortgage payment cost more and she would not have the $103,956 in equity. Not to mention the emotional values of owning your own home and the freedom it provides.
Names in this post were changed to protect the innocent. Do you have a question about your mortgage? Drop me a line, I’m happy to address it (and I’ll change your name should I decide to use your question for a post).
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