The Low Down on Fannie Mae Flex

March 28, 2007 by 2 Comments

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Update: This is a classic example of the trouble with writing about mortgage programs…some are no longer available. When researching about mortgages on the internet, please be sure to check the date of the article.

With many of the zero down options tightening up, it's time to return to the mortgage programs that were popular a few years ago before the 80/20s were all the craze.   One such program worth considering is the Fannie Mae Flex (97 and 100).   This is truly a low down program offering either a minimum $500 borrower contribution or 3% flexible contribution.   

The Fannie Mae Flex allows for flexible sources of funds for closing costs and prepaids:

  • Borrowers own funds (including loans against a 401(k) account or cash-valued life insurance policy.
  • Gift or unsecured loan from a relative.
  • Grant from non-profit or employer.
  • Interested party contributions (to be applied to closing costs and prepaids) such as a Builder or Real Estate Agent.

The Flex program utilizes automated underwriting so minimum credit scores, reserves and qualifying ratios are determined by Desktop Underwriter. 

There are no income limitations, such as with My Community programs.   The program is limited to conforming loan limits (currently $417,000 for a single family dwelling).   

There is private mortgage insurance with this program.   However, with a credit score of 620 or higher, a borrower may qualify for LPMI (Lender Paid Mortgage Insurance).   The rate with LPMI may or may not pencil out, depending on the credit score and loan to value.   Also, private mortgage insurance is tax deductible this year if you meet income limitations.

Sorry folks, this program will not work for manufactured homes.

Currently, I'm helping a couple buy their first home with this program.   They are utilizing a gift from their parents for the down payment and the real estate company they are working with rebates part of the commission which will cover their closing costs (including a 1% discount towards their interest rate).   The couple will not have to dip too deep into their savings or 401(k).   The current interest rate for the 30 year fixed rate is in the low 6%s with a loan to value of 97%.   They will pretty much be getting into their first  home with the earnest money investment of approx. $2,500 (special thanks to Mom and Dad).

Here's a quick re-cap of the Fannie Mae Flex program:

  • Low down payment
  • Higher debt to income ratios allowed
  • Forgiving of credit scores

Remember, always check with your Mortgage Planner to see which strategy for your home financing best suites your personal needs.

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

Would You Like Your Mortgage Blended, Shaken or Stirred?

March 27, 2007 by 4 Comments

Mpj028975400001Many home owners have two mortgages on their properties.  A first mortgage and a second mortgage that may either be fixed or a home equity line of credit.    Do you know what your effective rate is?   Basically, this is if you factor in what your paying on both mortgages, and then figured out what your interest rate is on your payment.

Here’s how to determine what your “blended rate” is:

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Filed Under: Interest Rates, Mortgage, Refinance Tagged With: , , ,

Don’t Refi Your Second Mortgage…Yet

March 20, 2007 by 4 Comments

Mpj040717200001This is the advice that I just gave one my clients who closed a loan with me in 2005 with (gasp) New Century Mortgage.   She was going through a transition in her life and she is not a "subprime" borrower, but a divorce can create subprime situation. What was her nasty rate that I provided her via New Century?   Here is her scenario:

  • 100% LTV using two mortgages (80/20).
  • 1st Mortgage is a 3 year fixed 5 year interest only with a rate in the mid 5% range with a three year prepayment penalty (not optional to waive).
  • 2nd Mortgage is a 30/15 in the mid 9% range.

Yesterday I sent out an email to my entire database of clients to provide information about the subprime mortgage industry.   Since her mortgage is with New Century, she was naturally concerned and called me.     While talking to her, she told me that she is in the process of refinancing her second mortgage to a 10 year fixed rate mortgage.    She just wants to lower the rate and pay it off–great intentions! 

Here’s the possible problem.   When you refinance two mortgages, if the second mortgage is not a "purchase money second mortgage" (the original mortgages from purchasing  your home) it is then priced as a "cash out refinance" even if at that transaction, no cash is received by the borrower.   This can really impact pricing on the first mortgage when it’s time to refinance.   

"Loan to value " is just one of the factors in pricing a rate for a mortgage.   With a cash out refinance, if your loan to value (new loan amount/value of home) is:

  • 70-80% LTV may equal 0.50% to fee (or approx. 0.125 – 0.250% to rate)
  • 80-90% LTV may equal 0.75% to fee (or approx.  0.325 – 0.625% to rate)

Here’s my advise for this client:

Her prepayment penalty will be over next summer and since she does want to stay in her home, I advised not refinance the second mortgage.    The refinance proposal from the credit union does provide a better interest rate and would shorten the term of her second mortgage to a 10 year over a 30 year amortized with a 15 year balloon, and it would increase her mortgage payment over $100 per month.  I suggested that she keep the current second mortgage and apply the $100 extra she’s willing to pay towards the principle of her existing second mortgage.   

Then, next year when her prepayment penalty is over, refinance both mortgages at that time and receive the best rate possible (non-cash out) for her new mortgage.  And reduces her closing costs to one mortgage next year instead of closing a refi for the second mortgage this year and again for refinancing the two mortgages next year.

Alas…something good to come out of contacting my clients about the current subprime scenario!

Filed Under: Adjustable Rate Mortgage (ARM), Debt Restructuring, Refinance, Subprime Lending

The Times…They ARE a Changing

March 8, 2007 by 3 Comments

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For the first time ever in my career, I had to contact a client to tell them that the Good Faith Estimate that I had provided him earlier today is no longer valid.   This is a person who was getting ready to buy a condo utilizing an 80/20 and stated income.  His mid credit score is above 750.

I received an email just after 7:00 p.m. tonight from Greenpoint Mortgage (more of an “alt-a” than a subprime lender) stating that all 80/20 mortgages must be funded by the end of this month.    Regardless of how high the credit score is or even if the loan is “full doc”, Greenpoint, along with many lenders, is pulling in the reigns tight.   

Just another warning to double check your preapprovals if you’re planning on buying zero down, stated income, interest only…even if you’re not considered subprime.

Filed Under: Current Affairs, Mortgage, Refinance, Residential Purchase, Subprime Lending

My First Subprime Client

March 7, 2007 by 2 Comments

Mpj042856200001_2It happened quite on accident back in 2002.  When I began my mortgage practice seven years ago, I was pretty much an "A Paper" lender.  Conventional, FHA and VA loans were my bread and butter.  The thought of doing a subprime loan made me shudder.  I knew they were out there, but I was perfectly happy sticking to my 680 and higher credit score clientele and not diving into the subprime pool.

Then one day, a Realtor, Ima Agent, asked me if I would review her brother and sister-in-law’s good faith estimate since she felt the rate and fees were a bit high.  Ima Agent told me that they had challenging credit in the past and were looking to buy "zero down".   What could I say?  I would at the very least talk with them to see if I could help.   I reviewed their good faith estimate and was surprised at the cost of doing the mortgage.   Most of our loans (to this day) are Correspondent and the closing costs are fairly low.   Brokering to a subprime lender often has Broker Fees around $795 in addition to the regular closing costs.  Of course the rates are higher too since the risk to the lender is greater.

Mr. and Mrs. Buyer are a very nice couple who were recently married and wanted to stop paying rent.   She admitted that he had a troubled past with his credit and that they had been working on improving his (and their) finances.   Their mid credit scores at the time were around 610.   Back then, I would not have known where to go for an 80/20  with a credit score below 700…except the other loan originator they had met with previously had the name of the mortgage lender he was brokering to…BINGO!    I called the lender and priced out their loan.   I was able to provide my clients a much better rate so they elected to leave the other loan originator. 

Here is what the basic guidelines were back in 2002:

  • 600 minimum mid-credit score
  • 100% total loan to value using an 80/20
  • 50% Total Debt to Income Ratio
  • First mortgage is a fixed for 2 years and amortized for 30. 
  • First mortgage has a 2 year prepayment penalty of 6 months interest.
  • Second Mortgage is amortized for 30 years and due in 15.
  • Reserves (taxes and insurance) were OPTIONAL.
  • Funds for closing were not seasoned (no bank statements provided) or sourced.
  • Seller can pay up to 6% of closing costs and prepaids (taxes and escrow).   

I reviewed their credit history with them and we developed a plan on which debts they should focus on eliminating.   They had all ready established a budget since they were working on reducing their credit card debt.  I began to feel more comfortable with helping Mr. and Mrs. Buyer with their subprime financing since I could tell they understood the responsibility of having a mortgage and being a home owner.   Ima Agent found Mr. and Mrs. Buyer their next home and we financed it with the subprime lender.    They were extremely happy in their new home they purchased in March of 2002 in Seattle for $239,500.

Shortly before their prepayment penalty was over, Mr. and Mrs. Buyer contacted me to restructure their mortgage.   They were excellent borrowers; they paid their mortgages on time as well as their other obligations and did not over extend themselves with credit.    Mr. and Mrs. Buyer with having a mortgage (which helps improve credit score) their credit scores were now in the low 700s.   I was able to provide them a long term mortgage (30 year fixed) for 5.75% and their home had appreciated to $310,000.   

I’m thankful that I took the subprime plunge.   I’ve since been able to help many home buyers who would not have qualified for an FHA or VA mortgage.   Many first time home buyers lack the 3% down or are better off leaving the 3% down in their savings account as a cushion.   

Since my first subprime loan 5 years ago, the guidelines have gone through dramatic changes.   Soon Subprime lenders were promoting 80/20 programs with interest only payments, stated income and credit scores down to 580…yikes!  With these loose guidelines, lenders are now facing record foreclosures and are now tightening their requirements for a subprime loan.    Every day I’m receiving updates from various stating that the minimum credit score for 80/20 financing is now 620 and stated income is disappearing.

I have just added a new category to Mortgage Porter:  the market toughening up, these home owners really need to minding their credit and budget so they don’t wind up in the deep end with no way out of their subprime mortgage after the rate adjust.

Filed Under: Credit Scores and Reporting, Financial Planning, Mortgage, Refinance, Residential Purchase, Subprime Lending

Will someone please change the channel?

February 28, 2007 by 1 Comment

Mpj031638400001I’m watching CNN this morning while I’m getting ready to head into the office (it snowed a few flakes this morning, so being the chicken I am, I’m taking my time before I venture onto the roads)…when I see three commercials within 10 minutes that I found somewhat disturbing.

First commercial:  Ditech…cash out refinance your home with a fixed rate up to 125% of the value!  Well, thank God it’s not an interest only negative amortized ARM!   In light of the increased foreclosures and troubles with subprime lending, I cannot believe I just saw this commercial.   What happens to the borrower who has overextended their home equity and then they lose their job or they need to sale?  Guess what, they can’t.   There’s not ANY equity to pay for closing costs.   Welcome to Foreclosure City.

Next:  Countrywide…offering a no cost loan.  No origination fee, no credit or appraisal fee and no third party (title, escrow, etc.) fees.   This isn’t so upsetting to me (especially after following the Ditech ad).  Anyone can provide a no-cost mortgage.    What the commercial does not tell you is that no cost mortgages do cost a borrower in the monthly mortgage payment by a higher interest rate.  Nothing is free.  Typically, 1% of your loan amount equals 0.25% to interest rate.   If your closing costs amount to $2000 and your loan amount is $200,000, you can increase your rate by 0.25% and have "no closing costs" from any loan originator.  Please always compare good faith estimates by different lenders.   Their commercial was the least offensive–they just happened to be sandwiched between two commercials that got my goat! 

Last:  Freecreditreport.com.   You know the commercial…the friendly redhead young man challenges you to guess his credit score and encourages you to find yours.   This is great advice.   Where this one slips up for me is that it’s URL sounds just like www.annualcreditreport.com in fact, I think freecreditreport.com is a better marketing name than the one created by the big three credit bureaus by order of our government.    Should you not read the disclaimer on freecreditreport.com’s site, you might believe this is the web site the Fed had created for consumers.   However, this is Experian’s site and should you obtain your "free" report, you’ll be signing up for a credit watch service at $12.95 per month.    Not so free after all, is it? 

I just had to vent a bit.  It’s no wonder people get confused about their mortgages and finances with all of the misleading and deceptive advertisements on television, the internet, and coming to our mail boxes at home.   

Bottom line:  Do your research.   Ask questions.  Be responsible.

Filed Under: Credit Scores and Reporting, Mortgage, Predatory Lending, Refinance

Your ARM May Not Be Broken

February 26, 2007 by Leave a Comment

Mpj040739600001_1You 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.

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Filed Under: Adjustable Rate Mortgage (ARM), Credit Scores and Reporting, Financial Planning, Mortgage, Refinance, Residential Purchase, Subprime Lending Tagged With: ,

How Strong Are Your Legs?

February 25, 2007 by 1 Comment

J0384828A 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!

Filed Under: Credit Scores and Reporting, Financial Planning, Interest Rates, Mortgage, Refinance, Residential Purchase Tagged With: , , , , ,
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