Articles about Mortgages

With historically low interest rates, owners of Federal Housing Administration (FHA) mortgages may be wondering why there’s a lot of talk about streamline refinances.

An FHA streamline refers to a refinance of an existing FHA loan into another one, with streamline, or limited, documentation.

The requirements are pretty straightforward in that you must have lived in the property for at least six months and must have been current on all FHA mortgage payments for at least 12 months, regardless of where you have lived.

The main difference between a streamline refinance and either a traditional FHA refinance or an FHA purchase transaction is that in certain circumstances no appraisal is required on a streamline, regardless of the current market value of your home.

That being said, the new mortgage amount may not exceed the unpaid balance on the original mortgage.

This means that no closing costs may be rolled into the loan.

If you have a property that you had originally purchased with an FHA mortgage and have since moved into another one, making the original home an investment property, you may use only the no-appraisal option, meaning that you would be required to pay out of pocket for the closing costs.

Streamlines are referred to as rate and term, or no-cash-out, refinances, in that no cash may ever be taken out of the property, regardless of the original loan amount, or the balance, regardless of which appraisal option is used.

The interest rate on a streamline refinance mortgage must be better than on the loan that it is replacing.

Each type of lender has different minimums on credit scores, most of them higher than what the FHA requires.

However, it’s a good bet to assume borrowers will need a credit score of at least 640 to get an FHA streamline refinance done.

There are an abundance of properties on the market these days that may be in some form of distress and available for purchase.

Following are some tips and information that will take the uncertainty out of purchasing and financing such a property:

Short Sale

A short sale is a property where the lender is willing to sell it for less money than is owed on it by the existing owner.

This is often due to the owner being unable to make payments. The property may or may not be in foreclosure.

Foreclosure

A foreclosure is a legal process by which the lender takes back the property from the owner.

These situations often offer amazing opportunities to purchase a home, but setting your expectations appropriately will help make the process go more smoothly.

First, these properties almost always take longer than traditional sales to complete, as the original lender is involved in the mix. Expect 60-plus days on these.

Depending on the volume of distressed properties that the lender is dealing with, even getting an answer to an initial offer may take several weeks to several months. Lenders often receive multiple offers on each property, which all need to be considered before a decision is made.

Financing a distressed property is similar to financing a nondistressed one.

You will want to have a real estate agent representing you in the transaction, and you’ll want a real estate attorney who regularly handles these types of transactions. There are many twists and turns in the process, and questions may come up that are outside the scope of what a real estate agent or a mortgage professional is qualified to answer.

These days, with more conservative mortgage-lending guidelines in place, it’s important to have a good credit score. People with the best scores qualify for the best rates and, in turn, they have the lowest payments. Following is some information on how credit works with respect to obtaining home financing:

The three credit bureaus – TransUnion, Equifax and Experian – use scoring models to rank you from a credit perspective.  They pull information from places such as credit card companies and car loan companies to determine how much debt you have and how well you’re able to manage that debt.

Two of the biggest factors in determining credit scores are recent payment history and the ratios of your credit card balances to your credit line.

Your recent payment history includes not only the immediate past but also several years back, and it has a significant impact on your credit score.

If you can prove that you are able to make all of your payments on time, as in less than 30 days after the due date, lenders are more likely to offer you a mortgage – and one at a competitive rate – than someone who is unable to make smaller payments.

Ideally, you want to keep low balances on your credit cards. The credit bureaus also look at tradelines, as they are called, that have balances close to, or over, the limit. Too many lines like this may give a lender the impression that you are overextended.

Homeowners are always looking for ways to pay off their mortgages early and, in the process, save money on interest.

Adding even small amounts of extra principal each month can add up to huge savings over time.

Although prepayment penalties are less common these days, and illegal in many states, if you have one in effect or think you do, check your loan documentation or consult with your mortgage professional before making any prepayments.

So what are your options?

The following numbers show the savings that can result:

A $100,000 loan, fixed for 30 years with a 5.5% interest rate, excluding property taxes, homeowners insurance and mortgage insurance, will have a monthly payment of $567.79.

If the loan were to be paid off in 30 years (360 months), you will have made payments totaling $204,404.40.

One Extra Payment per Year, Over 12 Months

Adding another $47.32 ($567.79 divided by 12) as principal to your payment each month will take roughly five years off of the end of the mortgage.

You would make 298 payments of $615.11 and one payment of $574.66, for a total investment of $183,877.34 – a savings of just over $20,500 compared to the 30-year counterpart.

One Extra Payment per Year, Once per Year

If you were to pay one full extra payment every 12th month, starting at the end of the first year, you will have paid $184,637.26 – a savings of just over $19,700 compared to the 30-year counterpart.

Pay It Off in 15 Years

Payments of $817.08 per month for 15 years will pay off the loan as well, the total expense being $147,074.40 – a staggering $57,330 less than the 30-year counterpart.

You may be wondering exactly what information your lender will ask for when you apply for a mortgage to either purchase or refinance a home. Following is a primer on some of the basics:

Income and Assets: Lenders are looking for 30 days of pay stubs, regardless of how often you get paid, plus the last two years of W-2 forms. Tax returns would be even better. If you’ve had more than one employer, be sure to get contact information for each, as lenders will need to verify your employment for the last two years.

Savings Proof: Proof of all checking, savings and retirement accounts will be needed. If you are scanning or faxing statements, be sure to include all pages of statements, even blank ones. Lenders are sticklers about seeing everything.

Residence History: First-time homebuyers, specifically those who have rented from landlords, will need to provide contact information for those landlords. If the landlord cannot be located, copies of canceled checks going back at least 12 months will likely be required.

Property Insurance Information: All lenders require that properties on which they lend money have property insurance. Make sure you have the name and phone number of the insurer you plan to use.

For Refinances: If you are refinancing, have a copy of the mortgage or mortgages that you have on the current property. Lenders need to be contacted both for payoff information and to verify that you are current on your payments with them.

Prequalified and preapproved are two common terms you hear when it comes to getting a mortgage.

But it’s important to know they are very different things.

Prequalification

A prequalification takes 15 to 30 minutes and involves a few quick questions.

You typically do this before you look for a home.

At this point, the lender takes your word that everything you state is correct and will verify it at a later date.

A credit check is run, then all the information provided is put through an automated underwriting system, which will provide a preliminary status.

At the end of the process you’ll have an idea of how much money you can borrow, and often you will be issued a prequalification letter that states that a credit check has been run and, based on the information provided but not yet verified, you qualified for a specific dollar amount.

Real estate agents will often ask for prequalification letters in the same amount of an offer they intend to submit on a property.

Sellers, knowing that a buyer can afford much more than they are asking for a property, will be less likely to negotiate downward or offer concessions.

Preapproval

A preapproval letter is much more involved.

It will only be issued after all the paperwork is received by the lender.  This includes so much more than income and assets, such as the sales contract, the title to the property and an appraisal, most of which are sought after a contract is submitted and accepted by the sellers.

Lenders issue a conditional commitment letter between the contract date

Federal Housing Administration (FHA) and conventional financing loans are undoubtedly the most common ways of getting money to purchase a home.

FHA Loans

An FHA loan is for you if you are either asset- or credit-challenged, or both, as the minimum down payment is just 3.5%. Very few lenders, however, will fund FHA loans to buyers without a minimum credit score of 640.

According to the website LoansGuide.org, an FHA loan doesn’t require a minimum monthly income, but it does require the buyer to have no delinquent federal debts and to have steady employment.

The drawback to an FHA loan is that mortgage insurance premiums are much higher than with conventional loans.

Conventional Loans

Conventional loans are typically for borrowers who have more money to put down on a home and have better credit scores.

They require a down payment of between 5% and 20%.

Conventional mortgages typically require two months of asset reserves for mortgage, taxes and property insurance.

There are a number of types of conventional loans – from fixed and adjustable rate to biweekly.

Whatever your situation, talk to your mortgage professional about your options with regard to the two programs. A mortgage professional can help you make the best choice.

With summer well under way, many of you, especially those in areas where the weather is more adverse during the winter months, may be undertaking some of those long-overdue projects around the house.

But the cost of some larger projects like additions or remodels may prevent them from getting done.

The good news is that even with more conservative mortgage lending guidelines, using equity in your home to complete some projects could be a great idea.

Following are a few reasons why.

In the face of credit card interest rates that are at astronomical levels, tapping into a source of funding that can offer much lower rates, and interest that may be tax deductible to boot, makes a lot of sense.

Check with your tax professional for more details about your specific situation.

Home equity products come in two main types: home equity lines of credit and home equity loans.

Home equity loans, the more widely used of the two, are often of the variable-rate type and come in interest-only and amortized versions.

Rates on variable-rate loans are usually based on some economic indicator such as the prime rate.

With prime being at a historical low at this time, borrowing money for projects has never been as inexpensive as it is right now.

Home equity loans usually come with higher rates and require principal repayment each month.

Even though many homeowners may now have less equity in their homes than they used to in years past, they still have a great resource to draw on.

All in all, home equity products are a great way to go, considering some of the benefits that they offer, and should be at least looked into when considering a funding source for your next project.

With all the changes that have affected the mortgage industry over the last few years, it is now easier to get the very best loan for your needs.

When looking to purchase or refinance a home mortgage, the first question you need to ask is: How long do I plan to own the property?

If you are quite certain that you are going to be there only for a set number of years, it would be best to find a loan that will provide you with the best rate for the least cost for that period of time.

After you have decided what your needs are, it is time to go and find a mortgage. New disclosure laws that went into effect at the beginning of this year should help you compare apples to apples as far as information you receive from different lenders.

Lenders have, for some time, been required to disclose to you within three business days of application what they plan on charging you for a mortgage, both in rate and fees. Did you know that the final costs now need to be within certain percentages of the initial estimates or the broker/bank is responsible to make up the difference?

There are, of course, changes in circumstances that can occur as a result of market conditions, such as interest rate changes. You are again covered, though, as the lender is now unable to surprise you with points or fees at the closing table.

Always check with multiple lenders, and have someone you trust who is mortgage-knowledgeable, such as a real estate attorney, review anything you sign.

With the different number of financing options available these days with which to purchase a home, the Federal Housing Administration (FHA) loan may be the right choice for you as it has lower credit score requirements than does its conventional mortgage counterpart.

Following is a comparison of some of the features of both types of loans:

With credit score requirements much higher than they were even one year ago, if you want to go with conventional financing but are below the minimum of 720, you will wind up paying a premium to the lender, and often a hefty one.

If you go the FHA route, the minimum score you are looking at will be around 640.

FHA has lower score requirements, but the individual lenders can and do set their own minimums based on the risk they want to take. Some will go lower than 640 but will undoubtedly charge a premium for this extra risk.

Downpayment and asset reserves are another area where you might fare better with an FHA loan than a conventional one.

The minimum downpayment for FHA is 3.5%, whereas the minimum on conventional is 5%.

Conventional mortgage guidelines call for two months of asset reserves at closing, meaning two months of mortgage payments, including taxes and property insurance.

FHA has no reserve requirements.

If there is one drawback with FHA it is the cost of doing the loan.  Unlike conventional loans, there is a 2.25% up-front mortgage insurance premium.

The good news, though, is that it can be rolled into the loan.

All FHA loans have a monthly mortgage insurance premium, regardless of the downpayment, as do all conventional loans where there is either less than 20% down or less than 20% equity in the property in the case of a refinance.