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!
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.
Can I Pay My Own Taxes & Insurance?
February 8, 2007 by 1 Comment
Unless you have 20% or more of equity in your home, chances are you have an escrow account (also referred to impounds or reserves) for your home owners insurance and property taxes. Lenders want to make sure that they reduce risk by requiring taxes and insurance to be included in your monthly mortgage payment. Property taxes are one of the few items that can take precedence over lien position in the event they were to not be paid. Your first mortgage wants to stay just that, a first mortgage (in the event of a worse case scenario, foreclosure).
What is Escrow?
February 2, 2007 by Leave a Comment
One of the first-time home buyers I’m currently working with just called me with a few excellent questions. She and her boyfriend have recently made an offer on their next home, with their agent which was accepted. They now have handsome stack of papers from the escrow company (as if the paperwork from the lender wasn’t enough) that caused some questions.
My Second Home
February 1, 2007 by Leave a Comment
I often tell the story, when I’m meeting with first time homebuyers who are a bit discouraged with today’s home prices, about my first home. We were renting a nice apartment in Kent when a builder had left a flyer on our car promoting that if we could afford $X in rent, then we could afford $X of a brand new house! WOW! I couldn’t believe it…but my wheels were turning.
I began picking up the Homes & Land magazines and before you know it, we had landed with a real estate agent and were looking at homes…with that bright and shiny brand new home in our minds. In reality, we qualified for a 900 square foot older rambler with 3 bedrooms and 1 bathroom…and we pounced on it for about $65,000. In 1989, our interest rate was in the 11% range. My commute out of NE Tacoma to downtown Seattle was horrendous! Even back then.
We lived there about one year and we were experiencing a market similiar to what we have lately in our area. I began to panick that we would be "trapped" in that house forever. Although I was grateful to own a home, it was not where I wanted to raise our future family. My (then) husband and I discussed matters and agreed to wait 5 years to move. The next day, when he was at work, I bought a house…subject to his approval, of course! He wasn’t very happy when I called him at work to tell him what I had done. He forgave me when he learned that our house we had purchased a year ago was worth $90,000!
We bought our second home. This one was new construction in southwest 
Federal Way. The plat was marketed as "The Affordable Street of Dreams". This photo is not of our second home, but is in the neighborhood (Madrona Meadows…there were no Madrona trees in the plat…btw) and is similiar in size and age.
I thought I would provide you with the sales history on our former home in Madrona Meadows (these figures are not for the home in the photo):
- We purchased July 1990 for $124,495
- We sold in April 1993 for $134,900 (approx. 7.5% appreciation over 3 years)
- Sold again in July 2003 for $215,000 (approx. 9% appreciation in 10 years)
- Last sold in March 2006 for $303,000 (approx 14% appreciation in 3 years)
Owning a home can be the best savings plan a person can have. In 16 years, the property more than doubled in value (241%), provided income tax benefits, not to mention shelter! Back in 1990 when we purchased in Madrona Meadows, there was "bubble talk" as well and in our area, we have yet to see real estate take a nose dive. It may simmer or slow down a bit, I certainly would not recommend that potential buyers sit on sidelines waiting for that event. Our local economy is too strong for that to happen anytime soon. In addition, "first time" homes are great purchases because there will always be a market for them.
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