The Current Value of a Preapproval Letter

April 1, 2008 by Leave a Comment

Fellow Rain City Guide Contributor, Tim Kane wrote an interesting post while I was on vacation asking if preapproval letters are worth their ink in our current market.  Truth be told, this was a valid question prior to our current market conditions and has been for years.   The true worth of the preapproval letter prior to the mortgage "melt down" was based on the merit of the loan originator who was preparing the letter.   I’ve addressed this issue before here and here.   Anyone can type a letter or issue a fancy certificate; has the borrower really submitted supporting documents verify their income, employment and assets required per underwriting (i.e. the borrower has been credit underwritten)?   

The fact is, in today’s current mortgage climate, where loan programs are terminated, guidelines tightened, private mortgage insurance restricted and geographical areas are being deemed soft: a preapproval letter is not any sort of guarantee that a home buyer will be able to close on a proposed home purchase.   

So why bother with preapproval letters?  Here is the current value of a true preapproval letter:

  • It demonstrates that the buyer has completed loan application and is preapproved at that moment for a specific product.   
  • There is a level of commitment that a buyer has if they have provided all of their documentation to a lender over one who has not taken the steps to become preapproved.
  • You know who the loan originator and lender is that the buyer is working with.   I’ve recommended before, and especially do now, that Selling and Listing Agents give the Loan Originator a friendly phone call to introduce yourself…allowing you to see if the LO passes "the smell test".

What can you do if preapproval letters are worth less than they were before?

  • I recommend that all buyers with a credit score below 700 and/or using less than 20% down have a "Plan B" for their mortgage scenario.   Consider "what if" the mortgage scenario they are current approved for is terminated with no notice from the lender or if the area they are buying a home in is considered soft?  Is your Loan Originator able to offer FHA or VA financing?  Note:  FHA and VA jumbos are quite attractive.
  • Home buyers should start even earlier in the home buying process (six months to a year is fine).  A Mortgage Professional can help improve credit scores and provide advise on how work on where they may need more strength to be on the best position possible to buy a home.
  • Allow more time for preapprovals from lenders.  Underwriting (and appraisals) are taking more time in this climate.   Everything is being reviewed under a microscope.
  • Review your current preapproval with your Loan Originator.  There have been recent pullbacks with private mortgage insurance (including LPMI, Fannie Flex and Freddie Mac higher LTV products).
  • Home Buyers should discuss with their Real Estate Agent (not the Listing Agent) the "what ifs" of losing their financing and how it may impact their earnest money deposit.
  • Listing Agents should have their preferred Mortgage Professional review the preapproval letter should their be any doubt regarding the letter in question.  The preferred Mortgage Professional can at the very least provide some valid questions for the Listing Agent to ask the loan originator and Selling Agent.

This market demands that you select a Mortgage Professional based on ability, expertise, commitment and available products.   Trying to get the lowest rate in a market where rates change up to 3 to 5 times per day is insanity.  A true Mortgage Professional will provide you with the most competitve rate available considering your current mortgage plan. 

Filed Under: Current Affairs, Mortgage, Mortgage Insurance, Residential Purchase

Private Mortgage Insurance helps Home Owners at Risk

March 19, 2008 by Leave a Comment

Yesterday I attended the "Fannie Mae Back to Basics Road Show".  I was really hoping to get some clarity and "insider nitty gritty" but left feeling a bit underwhelmed.  The information that was covered was (I guess as the title says) the "basics" which every Loan Originator SHOULD KNOW and Fannie Mae guideline changes which have all ready been announced and I’ve all ready written about. 

I did learn something new, however…and it’s really a big "duh".   There was a panel of reps from various private mortgage insurance companies who were covering their many guideline changes as well.   One rep brought up the point that private mortgage insurance companies actually work with home owners who are facing foreclosure (of course the home owner must currently have pmi in order to have this assistance).  Private mortgage insurance may be required when a mortgage has a greater loan to value than 80%.  It protects the lender against loss (such as foreclosure).   It only makes sense (this is my personal "duh" part) that a pmi company would want to try to avoid a loss (an insured mortgage going into foreclosure).   Private mortgage insurance companies have loss mitigation departments, including mortgage loan counselors, to help home owners who have pmi and are in trouble with their mortgage payments.

From MGIC’s website:

Helping you maintain your dream of homeownership is our commitment here at MGIC. As the mortgage insurer of your mortgage loan, we work closely with your lender to resolve delinquencies, which could result in losses for MGIC, the lender and you.

If you are having difficulties meeting your monthly mortgage payment and you have private mortgage insurance, contact your mortgage company AND the private mortgage insurance company who insured your mortgage.

Here are some links (I’ll update with more pmi resources as I locate them).

MGIC Home Owners Assistance

PMI Home Preservation

Filed Under: Mortgage Insurance

Second Mortgages and “Low Down” Mortgages

February 28, 2008 by Leave a Comment

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.

Filed Under: FHA, First Time Home Buyer, Home Equity Loans & Second Mortgages, Mortgage Insurance, Residential Purchase

MGIC declares Pierce County a “Restricted Market”

February 15, 2008 by 6 Comments

Mortgage Guaranty Insurance Corporation, a private mortgage insurance company, has included Pierce County as a "restricted market" limiting the loan to value to 95% for what they will insure effective March 3, 2008.

Private mortgage insurance is used when a borrower has less than 20% down and are not using a second mortgage to bridge the gap between the down payment and 80% loan to value.   MGIC is just one of the big players in the private mortgage insurance industry.

From MGIC’s site:

MGIC has designated a number of Core-Based Statistical Areas (CBSA) as "Restricted Markets." A CBSA is the official term for a functional region based around an urban center of at least 10,000 people, based on standards published by the Office of Management and Budget. Loans secured by properties in these areas must follow MGIC’s Restricted Markets underwriting guidelines.

In determining whether to place a market on the restricted markets list, MGIC uses both external and internal information sources including OFHEO Home Price Indices, National Association of Realtors change in median home prices, Moody’s Ecomony.com home price projections and MGIC’s own proprietary business mix and performance data.

Here are other MGIC guidelines for restricted markets:

  • LTVs of 90.01%-95% require a minimum credit score of 680.
  • LTVs of 90% or less require a minimum credit score of 620.
  • The maximum LTV for condominiums is 90%

MGIC will not insure the following in a restricted market:

  • LTVs greater than 95%
  • Investment properties
  • Cash out refinances

It’s important to note that MGIC is not the only private mortgage insurance company.   Other pmi companies are also restricting their guidelines.   Effective March 1, 2008, PMI Mortgage Insurance Company will no longer insure mortgages with a loan to value of 97.01% or higher anywhere.   

These changes will also impact LMPI (lender paid mortgage insurance) programs where the private mortgage insurance is financed into the rate as well as Fannie Flex programs depending on where your lender is able to obtain private mortgage insurance.   As of this moment, 1:40 p.m. on February 15, I still have Flex 100 with LPMI.   

The mortgage industry continues to tighten their guidelines as well.  In fact, earlier this week, Washington Mutual declared most zip codes (including Seattle, Bellevue) in Washington state as "soft" reducing the amount they will lend by 5% of the total allowed loan to value.

This is a great case for using FHA mortgages if the current loan limit works for your mortgage needs.

If you are buying a home in Pierce County and are planning on putting less than 10% down, please contact your Mortgage Professional.

Update 5:37 pm 2/15/2007:  You may want to read Kenneth R Harney’s article on MGIC. 

Filed Under: FHA, Investment Property, Mortgage Insurance

Should You Refi?

January 30, 2008 by 2 Comments

EDITORS NOTE: This post was written back in 2008 and mortgage rates have obviously changed 🙂  If you would like a mortgage rate quote based on current rates for your home located in Washington state, click here.

Last week I did a quick alert on the 30 year fixed hitting high 4’s-low 5s and I received an excellent comment from Sandy:

“…With all the costs and everything of refinancing, how much lower do rates need to be than what you currently have, before it makes sense to think about refinancing? I am just curious, as we have a 30yr fixed loan that is in the low 5s.”

You would think this is a simple question with a simple answer.  There’s much more to it.  Here are some things to consider if you considering refinancing your mortgage:

How long do you plan on staying in your home?   There are cost to the mortgage even if you’re getting a “no cost mortgage” where the hard costs are actually financed into the interest rate.   If you cannot break even on the cost before you plan on selling or refinancing again (low 4’s to high 5’s would be unlikely), then refinancing for the purpose of reducing your rate may not make sense.

Do you have an Adjustable Rate Mortgage?  If you’re going to retain your property longer than the remaining fixed term on the ARM (adjustable rate mortgage), you may want to consider refinancing into a fixed mortgage.

Do you have private mortgage insurance or a second mortgage?   Sometimes if someone has pmi or a piggy back second mortgage, refinancing may make sense if the can restructure the existing mortgages into one and if the blended rate of their existing mortgages are higher than what the new mortgage would provide.

Do you have a Jumbo mortgage?  Depending on what your mortgage balance is and your current rate, it may make sense to restructure your mortgage into a conforming mortgage.  This can be done by paying down the mortgage at closing or using a second mortgage, such as a HELOC or fixed second.

Would you like access to your home equity?   Refinancing can provide cash for home improvements, college tuition, debt consolidation, or what ever else you wish to do with your equity.   Most cash out refinances are priced higher than a rate term refinance.

Are you getting a divorce or separation?  If you have a mortgage with another person and the relationship is dissolving; you will need to refinance in order to remove the one who’s not staying in the home from the mortgage.   Divorce decrees and Quit Claim Deeds do not remove someone’s liability from the mortgage.  Plus, it’s a huge risk for the person who is no longer staying in the home.   Refinancing to remove an ex-spouse from the mortgage and to cash out their equity is not priced as a “cash out” refinance–it’s treated as a rate term refi.

Are you concerned about your home value declining?  Refinances are priced based on loan to value and there are underwriting guidelines that limit how high a loan to value may be.  In “declining markets” lenders have additional restrictions on loan to value lending limits.

Here are some quick “Do’s and Don’ts” for your refinance:

  • Do get a good faith estimate from your Mortgage Professional.  If you have not heard from your Mortgage Professional since you closed your loan or over the past few months, you might need a new one (they could be out of the business).
  • Do not rely on a simple “rate quote” without knowing the costs involved.
  • Do complete a loan application and provide the information your Mortgage Professional needs to lock in your interest rate.
  • Do not try to “play the market” and get the lowest rate…it’s far too volatile in this climate.   If the rate makes sense, lock it!

Must reads:

Picking your next mortgage by rate shopping?   You might as well be playing liars poker.

I’m happy to adopt your ARM.  No refi required.

 

Filed Under: Debt Restructuring, Jumbo/Non-Conforming, Mortgage, Mortgage Insurance, Refinance

Private Mortgage Insurance deduction extended through 2010

December 27, 2007 by Leave a Comment

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Included in the Mortgage Forgiveness Debt Relief Act that President Bush signed just before Christmas is the continuance of being able to deduct private and FHA mortgage insurance if you meet certain criteria through 2010. 

  • The mortgage must be used for "acquisition indebtedness" which means for purchasing your home or a refinance doing substantial improvements.  This also includes refinancing the mortgage you used to purchase your home, however the amount is based on what the original loan amount was when you purchased your home.
  • The deduction applies to "qualified residences" which is your primary residence and a second home that is not a rental.
  • Adjusted gross incomes up to $109,000 qualify for the deduction.  Adjusted gross incomes of $100,000 or less are allowed to deduct 100% of the allowed pmi.  AGI’s of 100,000.01 – $109,000 are on a sliding schedule (the higher the income, the lower the deduction).
  • You must itemize your taxes in order to obtain the deduction (you need to do this in order to claim your mortgage interest deduction as well).

Consumers should meet with their Mortgage Professional to help them consider all options before selecting a mortgage. 

Filed Under: FHA, Legislation, Mortgage Insurance
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